The idea that freight rail should be regulated like a monopoly is an antiquated view of the market.
A recent study shows freight shipping is more competitive today than when heavy-handed regulations were imposed more than 100 years ago. Despite this, proposals to expand standard carrier requirements would return the industry to public utility-style controls exclusively for freight rail shipping.
Legislation that ignores the competition in the modern freight shipping industry risks repeating the same mistakes that crippled the freight rail industry before 1980.
The Freight Rail Shipping Fair Market Act and Reliable Rail Service Act were recently proposed in Congress and would each increase the Surface Transportation Board’s authority over freight rail providers in ways that will reduce the productivity and safety of freight rail. These bills would expand common carrier regulations, allowing stricter control over what services rail freight providers must offer, the prices for those services and how freight rail equipment is deployed to serve their contracts. This interference with rail operations drives up the cost of shipping and, ultimately, the prices consumers pay for goods.
The bill — proposed in June by senators Tammy Baldwin, D-Wisconsin, and Roger Marshall, R-Kansas — shares much in common with the other two proposals. It would expand the Surface Transportation Board’s authority to direct freight rail employment and equipment. As with similar proposals, this bill will bring back regulations that nearly bankrupted the industry in the 1970s. It is likely to drive up prices for goods and push shippers into rent-seeking to force contract terms on rail companies through the STB instead of reaching mutually beneficial agreements for shipping.
An executive order from the White House suggests increasing the Surface Transportation Board’s control over reciprocal switching agreements, in which one freight rail company must allow another to use its rail lines. This already happens contractually in the market when it benefits both companies. However, forcing rail companies to serve their competitors at bargain prices will increase expenses and ignore potential disruptions to the rail operator’s services. Requiring companies to share their lines also decreases their incentives and investment ability.
One potentially harmful regulatory idea being floated by the Surface Transportation Board is increasing revenue adequacy requirements. This regulation, if implemented, would mandate freight rail companies’ return on investment. Similar regulations called “rate of return,” tried prior to 1980, show these regulations incentivize companies to over-invest as a means to achieve higher profits, often referred to as “gold plating.” Regulators also tend to set artificially lower rates of return. All of this leads to inefficiencies and higher costs.
These regulations led to higher prices, which drove customers to other forms of shipping. That, in turn, led to even higher costs and unprofitable operations. Freight rail shipping was in a death spiral by the 1970s. Companies were losing customers and investments as trucks and other shipping methods grew without the restrictions on the freight rail industry. Rail shipping had already fallen to well below half of all freight transport by 1970. Despite a declining share of the freight shipping market, railroads were still regulated as a monopoly until 1980, when the Staggers Act was passed.
The Staggers Act instituted regulatory reforms, including pricing flexibility. With these reforms came growing investments in freight rail, allowing it to compete with the newer forms of freight transit and ending the string of bankruptcies in the previous decade. Productivity and safety dramatically increased while shipping prices fell.
Regulatory reforms also lead to increased market competition. In the early 1900s, freight rail faced almost no competition. By 1945, its market share had fallen a bit, but rail still carried 69 percent of the freight shipments in the country. In 2020, rail was transporting 27 percent of all U.S. freight, far less than truck-based freight shipping, which accounted for 46 percent of all freight shipments.
With the growth of competition in the freight shipping industry, the justification for public utility-style regulations on rail shipping disappeared. While some rail lines may not face other rail competition for a particular route, every rail line still faces competition from trucks, pipelines and other transportation methods.
Legislation like the Reliable Rail Service Act and the other proposals would drive up the cost of rail transportation, making it less competitive with other freight transport options.
Instead of treating modern freight rail as a monopoly, the Surface Transportation Board and Congress should look for ways to streamline regulations, encourage investments and improve safety. This would ensure that rail freight options are competitively priced. Removing the last vestiges of the monopoly regulations that freight rail once faced would create a stronger freight transport system needed for the 21st century.
