Opinion: Swing of the Regulatory Pendulum
The Surface Transportation Board has rejected a request by the Association of American Railroads that it rethink its decision to ignore product and geographic competition in deciding rate reasonableness cases.
This development didn’t make much news, but it is potentially important to both the railroads and trucking because it may signal that the regulatory pendulum is swinging. If the pendulum is swinging, then re-regulation may no longer be unthinkable.
The concepts of product and geographic competition are important to the rate freedom railroads have enjoyed under the Staggers Act of 1980. To understand why, it is important to remember that before the Staggers Act, the railroad industry was in deep financial trouble. Some 20% of the system had been operating in bankruptcy. Stationary trains were falling over as lack of maintenance let roadbeds collapse.
The difference was that deregulation in the latter two industries was intended to benefit shippers — and ultimately, consumers — by promoting competition.
In the case of the railroads, however, deregulation was, plainly and simply, intended to allow railroads to revive their ailing balance sheets by exploiting their captive shippers. Congress knew it and the railroads knew it. And the captive shippers knew and didn’t like it.
So the authors of the Staggers Act added a provision that would allow rates to be challenged on grounds of reasonableness if there were no effective competition for the business.
How much rail-to-rail competition is there to a coal mine or an electric utility? Rarely any.
Is trucking an effective competition? For bulk movement in the thousands of tons over many hundreds of miles, forget about it.
But an electric utility that is served by a particular railroad from a particular mine could buy its coal from another mine served by another railroad. That is geographic competition.
And the utility can always decide, if the coal rates are too high, to convert to oil or natural gas. That is product competition.
Stop laughing; this is serious stuff.
With product and geographic competition removed from consideration, shippers may be able to challenge the reasonableness of many rates on the grounds that they are captive to a railroad.
Maybe it will mean nothing. The STB is still considered by many to be a pretty friendly forum for the railroads. So, even if challenges are entertained, the rates may not be found unreasonable.
But a regulator who doesn’t really regulate is like a vegetarian wolf. Once he’s tasted blood, all bets are off.
With the barriers removed, the potential is there for decisions to begin to go against the railroads. More and more, railroad rates could come under maximum rate regulation, and it could be more difficult for railroads to use revenues derived from captive shippers to cross-subsidize their efforts to compete with trucks. The trucking industry certainly could be excused for viewing this as a positive development.
But if the decision on product and geographic competition really is an early warning that the regulation pendulum is beginning to swing back the other way, the result could be bad for trucking.
We have had two decades of deregulation. After a difficult start while the industry shook itself out, trucking has prospered. In the kind of freight hauling trucking does best, no railroad can touch it. Competition has made trucking leaner, keener and more productive. If the image of the cowboy dodging weigh stations hasn’t been totally erased, it is dimming.
But Congress has a short memory. Even without term limits, turnover on Capitol Hill can be substantial. It is doubtful that many in Congress today were around to understand the different nuances of trucking, airline and railroad deregulation.
A return to the kind of regulation that existed in the past could create every bit as much havoc as did the sudden onset of deregulation in the early 1980s.
The fact is, it might be time to consider some sort of regulation for a railroad industry that has merged itself down to four major systems, not counting the Canadian lines in the United States.
And it is even possible that the railroads wouldn’t fight too hard. The railroads seem to have lost a step or two when it comes to slugging it out in the competitive trenches. A form of rate regulation that truly took their income needs into account would actually insulate them from competition and solve their growth problems, and maybe even their truck-competitive problems.
If railroads embraced regulation, however, they would be sure to try to have it extended to their rubber-wheeled competitors as well — and that would not be a positive development.
Trucking might not fare so well under a return to regulation. For one thing, the competition among truckers is so vigorous that the very concept of a captive shipper is laughable.
The task for those who speak for the trucking industry will be to ensure that, if the regulatory pendulum swings for railroads, it does not also swing for truckers.
