The catalyst that transformed freight rail transport

By Robert E. Gallamore

The government should tread carefully as it ponders regulatory changes to the U.S. freight rail system.

There is history here that Washington — which witnessed the collapse of many private-sector railroads a third of a century ago and bankrolled billions of dollars for their rescue — should well understand. But in case the institutional memory is fogged by the pleadings of self-interested lobbyists, I offer the following capsule diagnosis and prescription.

About a dozen of the nation’s railroads had passed through bankruptcy or government-sponsored reorganization in the 1970s, and much of the nation’s freight rail infrastructure was in shambles when Congress passed the Staggers Rail Act of 1980. This was the defining law allowing partial deregulation of the industry.
Deregulation not only saved U.S. freight railroads from further bankruptcies and liquidation, it became, almost miraculously, the catalyst that transformed them into what they are today, the envy of the world’s transportation systems.

The fundamental achievement of deregulation was that it brought market-based principles to an industry forced into severe inefficiencies by a century of federal and state regulations.

Deregulation allowed customers and railroads to agree on prices and services that satisfied the needs of both and captured these agreements in contracts. Deregulation let railroads and their customers bring the supply and demand for rail service into balance, thus saving billions of dollars of resources. It removed the government from exercising functions and making decisions for which it was not needed — and which had distorted normal private sector business efficiencies for almost a century.

Deregulation enabled productivity to surge, and the lower rates attracted large volumes of new traffic. With the increased cash flows railroads earned, they were able to invest in new capacity as well as update infrastructure and equipment –some $136 billion worth of capital in the period 2000 – 2014 alone.

The new locomotives, track and structures, freight cars, and signaling systems railroads purchased with these funds brought with them new technologies that were stronger, more energy efficient, and safer for employees and the public.

Railroads today move twice the ton-miles they did in 1980 and do it with far fewer resources of all types. However, to accomplish this they have needed to improve the productivity of those resources by over 200 percent during that same period.

That combination of ample cash flows and efficiencies created a transportation powerhouse that helped propel other industries and the gross domestic product to new heights.

For example, deregulated railroads invested in new capacity to handle surging growth in western low-sulfur coal urged by the Clean Air Act and its amendments. They provided the network and resources for moving surging volumes of crude oil to refineries, thus displacing foreign oil and helping lower world oil prices. Rejuvenated railroads are responsible for moving fracking sand, ensuring the success of that key American industry, which is essential to the renaissance in U.S. energy development. Railroads provided the foundation for rapid growth in intermodal containerized trains, which annually takes millions of trucks off the highways and has facilitated remarkable growth in U.S. trade across multiple industries.

Even though the number of rail companies declined, the efficiencies encouraged by deregulation resulted in an industry that is more competitive today than before 1980. Government data show that overall freight charges to shippers in 2013 were slightly over half what they were in 1980, after correcting for inflation.

None of this is to suggest that lawmakers and regulators have had a hands off policy when it comes to rail since deregulation. Congress acted to enable privatization of the government’s ownership of Conrail in 1987, and the Interstate Commerce Commission (ICC) rejected an unwise merger proposal. The ICC’s successor Surface Transportation Board (STB) conditioned several other mergers by requiring “trackage rights” arrangements to preserve two carrier competition in existing markets and create it in some others. Both the ICC and the STB have also provided a forum in which the concerns of rail customers regarding prices and practices can be adjudicated.

Two current strategies of the re-regulators are the most insidious and dangerous, because they are the most difficult to understand and expose to common sense.

The first involves the calculation of railroad cost of capital. The STB calculates this measure annually to determine the returns required by investors to convince them to invest in railroads. There are already flaws in this process, but a shipper-sponsored proposal would make this situation even worse by requiring calculations to be based explicitly on historic, depreciated investment costs rather than on what it would cost today to replace assets. This would be devastating to railroad efforts to renew and expand capacity needed to support America’s future economy.

Second is a minefield of a proposal to expand so-called “reciprocal switching.” This would require a railroad providing the only rail service to certain “captive” shippers to host a competitor on its tracks, or to perform local switching service for its competitor at regulated, below-market rates. It would vastly complicate rail operations, labor agreements, and, perhaps, compromise safety while reducing money needed to expand capacity. Further, if compulsory switching were required without market-based compensation, it would represent an unconstitutional taking of private property.

Thirty-five years after the Staggers Act, the transformational power of deregulation continues to shape and reward our economy, which is why with new regulatory proposals on the table Washington should recognize that sometimes doing less to constrain business is doing more to enable enterprise. Freight rail’s remarkable record is attributable to government having the foresight to stand aside and allow markets to do what they do

A former government policy administrator and nationally recognized expert on railway and intermodal economics, technology, and safety, Gallamore is co-author of American Railroads: Decline and Renaissance in the Twentieth Century, published by Harvard University Press, 2014.