When It Comes to Railroads, Regulators Ought to Enhance Competition, Not Protect Monopolies

A transportation policy issue under consideration for over a decade now is whether rail carriers should be forced to expand offerings of a service called “reciprocal switching” (RS). Under RS, when rail service customers at the end of a service line may have only one choice of provider, customers would be permitted to hire other carriers. The company owning the line would then carry the shipper’s cargo to a switching point where the intended carrier can haul it the remaining distance. The issue is complex and has sparked significant debate on its merit. The latest development is a new regulation from the Surface Transportation Board (STB) that technically expands RS but does so in an anemic manner that effectively prevents it from being utilized.

Past R Street writing has pointed out that RS would be beneficial economically, and to the overall health of the transportation industry, by enabling competition where it otherwise does not exist. This position is informed by our experience with electricity competition, where eliminating “natural monopolies” in favor of competition has been economically fruitful, even though it requires some measure of government intervention. When it comes to the rail industry, shippers that are at points of rail lines where they are beholden to a single service provider are captive, and the lack of competition means that the rail carrier has a reduced incentive to provide adequate service or lower costs. RS would ameliorate this issue by enabling those shippers to access other rail carriers, bringing forth the benefits of competition. In short, RS is a means to facilitate competition, which is typically a superior alternative to direct regulation of monopoly rates.

Despite the apparent benefits of RS, though, it has been opposed heavily by the rail industry, as well as some right-of-center groups. The primary concern is that RS would require a government intervention that forces rail carriers to incur higher burdens to enable switching options (e.g., if cargo needed to go through an unusual number of switches). Though of course, some of these concerns could be mitigated with guardrails in whatever regulation would arise (e.g., only permitting reciprocal switching within certain distances of switching points)—but the STB took an altogether different approach with its RS regulation.

The new STB policy may expand RS in theory only. The extremely narrow criteria apply to a small share of rail shippers. The design of the rule is that rail shippers that receive consistently bad service can apply for RS, but there are several aspects of the rule that impede its uptake: First, the rule does not apply to service that is under contract. Generally, a shipper that requires rail service will get a better price under contract rather than a standard tariff price, so many, if not most, of the rail service shippers that would benefit from RS are not eligible for it. One reason the STB may have crafted the regulation in this way is because it is unclear if the STB has the authority to regulate contracts the same as it can tariffs, but it should be noted that the Staggers Rail Act of 1980 which partially de-regulated the rail industry explicitly authorizes the regulation of rail contracts by the Interstate Commerce Commission, which is the STB’s predecessor. This means that Congress likely intended for the STB to be able to regulate rail contracts, so that contracts would not be a way to circumvent regulatory requirements.

Second, the regulation requires 12 weeks of consecutive inadequate service. This means that a service provider can offer 11 weeks of inadequate service (defined as an on-time delivery rate of less than 60 percent), one adequate week, and then return to offering inadequate service and the shipper would not be granted RS. This makes it very easy for rail service providers to avoid the RS requirement.

And third, shippers applying for RS must do so by applying through the STB, which means that they must await a decision from the STB and be granted RS, rather than having the option to receive competitive service at any time. The RS rule is new, so it is unclear how easy it will be to petition the STB for relief for inadequate service, but crafting the rule in this way adds another layer of difficulty for rail shippers to receive RS. It also means that if shippers do not expect to be granted relief by the STB, they won’t petition for that relief.

The more appropriate policy framework for the STB to engage in would be to adopt a similar model to what is used in Canada. The Canadian Transportation Agency requires the availability of “interswitching” for all rail shippers that operate within 30 kilometers of an “interchange,” or what would be called a switching station in the United States. Under the Canadian model, competition is the default system, but in the United States monopoly is the default.

The inadequacy of the STB rule, though, is most problematic in that it statutorily establishes an insufficient standard that was long-awaited. It is unlikely that the current STB would have any desire to revisit the issue, and uncertain if a future STB would go through the hard work of reviewing the RS rule to improve it. Even if a future STB does update RS regulation, they will still have to go through a lengthy regulatory process that could once again take years. The effect is that rail shippers cannot expect relief anytime soon.

In the end, competition is good economically, and the rail industry is no exception. As we’ve seen in the electric power sector, natural monopolies are rife with inefficiencies, and to the extent that updated policy can expand competition into markets that otherwise lack it, these are welcome changes. For whatever reason though, the STB just didn’t commit to RS, and instead adopted a milquetoast policy that does more to protect rail carriers than customers.