Reference no: EM132102557

Railroad Reregulation?

Freight railroads were first economically regulated in the United States with the passage of the Act to Regulate Commerce of 1887. This legislation was in response to desires by several states to prevent the railroads from employing monopolistic practices. Railroads are considered natural monopolies because of their large fixed costs and natural barriers to entry into the industry. Monopolistic practices usually take the form of excessive prices and poor service to captive shippers. The 1887 Act was designed to prevent these practices and created the Interstate Commerce Commission to monitor railroad pricing and service activities.

In 1980, the Staggers Act was passed in an attempt to give more pricing freedom and market exit/entry freedom to the railroads. Part of the rationale of this Act was to allow railroads to operate in a more market-oriented environment and to take advantage of value-of-service pricing to increase industry profitability. In 1995, the ICC Termination Act was passed to provide even more freedom in pricing, exit/entry, and service to railroads. This Act also abolished the ICC and created the Surface Transportation Board (STB) to monitor railroad competitive practices.

Between 1996 and 2014, the railroads have enjoyed a resurgence in profitability. Their ability to freely price and to be exempt from antitrust laws allowed railroads to manage capacity more efficiently and expand their markets and products. During this time, railroads dramatically increased their volumes of TOFC and COFC business, becoming a significant business partner to the motor carrier industry in the United States.

However, there had been a push by Congress and a group known as Consumers United for Rail Equity (CURE) to pass legislation to once again economically reregulate the railroad industry and reduce the powers of the STB over rail competitive practices. The major argument for this legislation is that the railroads are once again employing monopolistic practices for shippers of bulk commodities such as grain, coal, and chemicals. The assertion is that railroads are charging excessively high prices to shippers of commodities of low value, thus making these commodities less price-competitive in the market. This is coupled with the assertion that many of these bulk shippers are “captive” and don’t have access to multiple railroads to ship their products. This initiative has sub- sided over the last several years since Congress is hesitant to get into economic regulation again.

However, the federal government has stepped up its regulation of railroad safety as a result of the rapid growth of rail movements of Bakken crude oil across the United States and several derailments of trains carrying Bakken crude. The Rail Safety Improvement Act of 2008 required all railroads in the United States to have Positive Train Control (PTC) installed in all of their locomotives by the end of 2015. Only the BNSF will meet this deadline with the other Class I railroads stating their implementation won’t be complete until the end of 2017. The Association of American Railroads estimates that this implementation will cost the rail industry $8 billion.

In May of 2014, the Department of Transportation issued an emergency order requiring that railroads notify State Emergency Response Commissions of any train carrying 1 million gallons or more (approximately 35 tank cars or more) through their states. Along with this, the Federal Railroad Commission and the Pipeline and Hazardous Material Safety Commission have issued orders concerning the specifications of tank cars carrying Bakken crude. While rail safety should be monitored and regulated by the government, the railroads argue that the scope and timeline for implementing these regulations are placing significant investment requirements on them and will require them to pass on these cost increases to shippers in the form of higher prices, which is what CURE was fighting against with their proposal to economically reregulate the railroads.

CASE QUESTIONS

1. Is there a “mid-point” between safety regulation and the cost to the railroads and ultimately, to shippers? Should the railroad industry have input to the nature and cost of safety regulation imposed on them?

2. Does the probable price increases on the movement of Bakken crude justify economically reregulating the railroads? If so, to what extent?