There was a time when railroad tycoons built empires by exploiting government connections to take advantage of the little guy. Today, the tables are turned, and it is large multinational corporations trying to persuade the government to dictate rail industry practices in order to drive shipping rates below market prices. We have seen this before, and last time it nearly drove America’s private railroads to extinction.
After years of government overreach, the nation’s railroad industry was in danger of collapse in the 1970s. A series of high-profile bankruptcies ensued. In the Northeast, this phenomenon was so severe that the federal government created Conrail to take over freight rail operations, as the region faced the prospect of losing meaningful access to service. At the time, the industry even tracked what were called standing derailments, where the roadbed beneath the tracks crumbled away and caused stationary railcars to tip over.
A Democratic-controlled Congress and President Jimmy Carter were brave enough to deregulate railroads in 1980. Since then, the United States has enjoyed a 45 percent decline in average inflation-adjusted rail rates, a 77 percent decline in rail accidents and an 84 percent decline in rail employee injuries. During this period, the railroads have reinvested more than half a trillion dollars of their own funds back into their networks. Standing derailments are a thing of the past, the ICC has since been eliminated—replaced by the more benign Surface Transportation Board (STB)—and Conrail was privatized and later purchased by Norfolk Southern and CSX. Shippers and consumers have all benefited from America’s healthy, profitable railroad industry, the most advanced and extensive in the world by far.
But now some shippers object to paying the market rates necessary to preserve such economic well-being. They claim they pay too much to use the special tracks railroads have built to support their operations and that the railroads have engaged in anticompetitive behavior.
These assertions are baseless, and have been repeatedly rejected by regulators and the majority of Congress. Yet that has not stopped shippers from trying to game the system for their benefit at the expense of consumers and the continued vitality of North American rail carriers.
The shippers portray themselves as puny Davids fighting Goliath for “balance” and “competition.” But these are hardly mom-and-pop shops being crushed by modern day robber barons. The supposed Davids include such powerhouses of American industry as Dow Chemical and Cargill. Although numerous smaller businesses have joined their lobbying efforts, the group is dominated by many of the biggest multinational corporations. What they all have in common is that they prefer not to pay market rates and have convinced the STB to propose a regulation that would give them more opportunity to avoid doing so.
In August, the STB announced a proposed regulation that would eliminate a 30-year-old standard requiring a showing of anticompetitive conduct before regulators would force railroads into reciprocal switching agreements—which means carriers would be required to switch traffic to competitors’ tracks if market rates exceed a regulatory threshold.
Most of the track at issue serves only a handful of shippers and is provided by a single rail carrier. Shippers claim this puts railroads in an unfair, monopolistic market position. But the shippers’ demands for government-imposed prices reductions ignore economic reality.
Building dedicated rail lines to service the needs of just a few shippers is hugely expensive and risky, so rates must naturally be higher for those track segments than for lines in open areas that accommodate heavier and more diverse traffic.
As rail carriers cannot simply uproot track and move it to more profitable locations as market conditions evolve, they face large risks to their investments and must be able to recoup their costs more quickly. This risk-based pricing peaks along the segments that serve only a handful of shipping customers. Ironically, if railroads had been restricted in the past from charging rates that reflect the heightened risk of these low-demand segments, it is unlikely they would have built the track in the first place.
America’s deregulated major railroads now generate more than $270 billion in annual economic activity, directly employ nearly 170,000 workers, and support 1.5 million jobs indirectly, according to a recent Towson University study. It would be a grave mistake for the STB to continue treating these belligerent shippers as legitimate complainants—a mistake the United States cannot afford to make again.
Originally posted at The Hill.