Today, the Competitive Enterprise Institute (CEI) led a group of scholars and advocates from 13 free market organizations urging Congress to exercise close oversight over potential new government price controls on America’s freight railroads. Specifically, we requested congressional railroad overseers to closely monitor an upcoming December 12 and 13 hearing at the Surface Transportation Board on revenue adequacy and the underlying proceedings before the Board.
Revenue adequacy is a relic of the heavy regulation that nearly brought the railroad industry to ruin in the 1970s. In the years following the successful partial deregulation that saved the private railroads from extinction, revenue adequacy was employed as a blunt, inherently inaccurate tool for the purposes of ensuring adequate returns and gauging the health of railroads that were then on life support.
Thanks to partial deregulation, the U.S. freight rail industry was revived and now thrives as the most efficient, expansive freight rail network in the world. But success can be a double-edged sword in Washington, and now the Surface Transportation Board is considering to turn revenue adequacy on its head by transforming it into a new price control mechanism that would set maximum freight rates. This is something Congress never intended and is strongly opposed by leading railroad regulation scholars.
In our letter, we highlight comments submitted in October to the Surface Transportation Board by the authors of a 2015 study for the National Research Council’s Transportation Research Board of the National Academies of Sciences, which was produced at at the request of Congress. These experts raised several concerns with the Surface Transportation Board’s revenue adequacy proposal, including:
- Arbitrary calculations: “The proposal would establish rate increase caps based on the relationship of a shipper’s rates to a benchmark calculated using costs derived from the inherently arbitrary Uniform Rail Costing System (URCS) and arbitrary allocations of profits that exceed the cost of capital.”
- Divorced from economic reality: “We are deeply concerned that this approach creates a rate increase constraint that is divorced both from economic reality and from a well-articulated goal that the proposal is designed to achieve.”
- Contrary to stated intent: “This proposal could move STB rate regulation in the direction of public utility regulation rather than the protection of captive shippers.”
When Congress partially deregulated the railroad industry with the Staggers Act of 1980, the use of highly imperfect revenue adequacy calculations could be justified as a means to measure and ensure the effectiveness of their reforms—the primary aim at the time being saving the private railroad industry from extinction.
While there is a strong case to be made that economic regulation of railroads should be modernized to reflect the fact that the industry is no longer at death’s door, this latest proposal from the Surface Transportation Board threatens the innumerable benefits the liberated freight railroads have generated for American businesses and consumers in the form of more reliable shipping, lower prices, and ongoing innovation. If it wishes to preserve these massive gains to society, Congress should pay close attention to the December 12 and 13 revenue adequacy hearing at the Surface Transportation Board.
Read the full coalition letter here.