Railroad deregulation provides a model for liberalizing all network industries. Network industries such as railroads, electricity and telecommunication have two elements: the flows (trains, power, messages) and the grid over which those flows occur (tracks and wires). Advancing consumer welfare requires that both components be intimately coordinated.
However, deregulation of electricity and telecommunication was partial, freeing only the flows. The grids remained under rigid political control. Such partial deregulation makes more difficult the task of coordinating flow and grid operating and investment decisions. Not surprisingly, electricity and telephone deregulation have encountered serious problems. Flows have increased dramatically, but grid managers have lacked both the incentives and the resources to respond. The result: increased congestion and declining service quality.
In contrast, railroads were fully deregulated: Rail managers had every incentive to improve both train service and track management, as well as investment policy. America’s freight rail service has never been better.
Partial deregulation has created unnecessary confusion in too many network industries, but it can be corrected. We have already freed the flows; now we need to free up the grids. Only then will deregulation realize its promise.