FREIGHT RAIL ECONOMIC REGULATION KEY FACTS

• Freight railroads privately invest $23B+ a year into their networks.
• They face strong competition and increasing customer demands.
• STB policies should encourage investment, not deter it.

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The Surface Transportation Board (STB) is Congress-mandated to regulate freight railroads in the absence of effective competition. Despite the crucial role of freight railroads, constituting 40% of U.S. long-distance freight volume, there is a projected 30% growth by 2040. The STB is considering regulations that may impede investment.

Railroads, unlike other modes, fully cover infrastructure costs and privately invest billions each year. They focus on increasing safety, improving service, and decreasing emissions. Freight railroads also power our economy, generating $233.4 billion in total economic output in 2023. Additionally, one railroad job supports 3.9 across the nation.

The STB should encourage freight rail investments by conducting cost-benefit analyses for proposed regulations. It should streamline the rate case process and develop a modern regulatory system based on free markets. This system should acknowledge the capital-intensive nature of railroads and support their continued evolution.

Hindsight is 20/20

By the 1970s, strict regulations and competition had pushed U.S. freight rail to the brink. The Staggers Act of 1980 introduced balanced regulation, enabling $810 billion in investments that built a world-class, safe rail network. A strong rail industry means a stronger economy, lower costs, and a reliable supply chain. Preserving the Staggers framework ensures railroads continue to thrive for decades.

Freight Railroads Face Fierce Competition

Railroads fiercely compete in the freight transportation market. They secure their market share through competitive pricing and services. The STB oversees their operations as the economic regulator, ensuring reliability and affordability. Despite modest rate increases covering higher input costs, rail rates and input costs have consistently remained lower than many other economic goods and services over the past 40 years due to regulatory reforms.

The concept of “captive” shippers primarily served by a single railroad is driven by economic considerations rather than regulatory constraints. Access to alternative transportation modes provides additional options for shippers. Regulated rail mergers, with mitigation conditions like trackage rights, haven’t led to captive shippers. Instead, they facilitated the benefits of single-line service, resulting in lower average rail rates.

Rail-to-rail Competition

Railroads are private companies that compete against each other for business. Rail customers often have connections to competing railroads, either directly or in conjunction with a short-haul truck movement. Some rail customers can also build (or credibly threaten to build) a new rail line to a competing railroad.

Other Modal Competition

Most rail customers can also ship via trucks, barges and/or pipelines. Trucks are freight rail’s largest competitor and they use infrastructure subsidized by the federal government. Meanwhile, railroads fully fund their infrastructure. This means the costs trucks offer shippers are artificially deflated. Many experts agree that trucks—not subject to the same type of regulatory scrutiny as railroads—will deploy a combination of autonomous, electric, and platooning vehicles soon. These technological advancements could increase delivery times, improve on-time performance and significantly lower trucks’ labor and fuel costs—making trucks even fiercer competition for railroads.

Product Competition

Product competition refers to the widespread ability of a firm to substitute one product for another in its production process. For example, a utility can generate electricity from natural gas (which railroads do not generally carry) instead of coal (which railroads do carry). Similarly, a fertilizer manufacturer may substitute soda ash moved by rail with caustic soda transported by truck. Therefore, product options can also constrain transportation rates.

Geographic Competition

A rail customer can often get the same product from—or ship the same product to—a different geographic area. For example, taconite is a low-grade iron ore that, when combined with clay, creates pellets that can be transported to steel manufacturers and melted into steel. This clay is available from Wyoming mines, served by one railroad, and from Minnesota mines, served by another. Thus, iron ore producers can pit one railroad against the other for clay deliveries. This is another type of real-world competition, called geographic competition, that also constrains rail rates.

Shipper Competition

Shippers can also generate competition between railroads before they build a manufacturing plant. They do this by negotiating favorable contracts when evaluating potential plant locations. Over the long term, shippers can locate or relocate plants on the lines of different railroads. Shippers often make the business decision to locate their facilities at sites with access to only one railroad. This means other factors, aside from having multiple rail service options, can drive the decision to locate a shipper’s facility.

Future Competition

Technological, regulatory, or structural changes over time will give shippers leverage over railroads. For example, fracking made natural gas much more abundant and less expensive. Consequently, natural gas delivered via pipeline becomes the preferred fuel source for electricity generation, instead of coal delivered by trains. This marketplace disruption constrains the rates railroads can charge for delivering coal to utilities.

STB Reauthorization

The Freight Rail Shipping Fair Market Act would provide the STB with overreaching authority to place unnecessary regulations on freight railroads. Turning the clock back more than 45 years to an unbalanced regulatory framework would put our nation’s rail advantage at risk. In the end, it could diminish the quality of rail service and undermine the efficiency of supply chains.

The proposal lacks justification, eliminates exemptions and increases costs. It interferes with private contractual relationships, substituting them with government mandates. Moreover, it expands government control by extending jurisdiction over private railcar owners.

Forced Switching

The STB withdrew a comprehensive switching proposal. It is now exploring a new service-based approach. Advocates of forced switching aim for below-market rate levels for their traffic, potentially impacting the fluidity of the network and other customers. This form of backdoor rate regulation could hinder U.S. commerce and increase consumer goods costs.

Railroads intentionally concentrate and route traffic to optimize operational efficiencies and network fluidity. Their routing practices, developed over decades, benefit the entire customer base. Forced switching, requiring extensive operations, could compromise the efficiency of the nation’s rail network. Railroads actively compete with trucks, barges, and other market forces. They consistently invest in infrastructure, equipment, training, operations, and technology to enhance their networks. This increases safety and better serves customers.

Increased switching poses safety risks for workers and may lead to higher emissions. Potential delays in freight operations could impact passenger rail services and commuters. A less efficient railroad, influenced by increased switching, becomes less competitive. This causes delays in the transportation of goods across the supply chain.