KEY FACTS
- Freight railroads privately invest about $25 billion 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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Adapted for listening and narrated by a real person. Read the full narration at the bottom of this page.
The Surface Transportation Board (STB) regulates freight rail where effective competition is limited. As freight demand is expected to grow significantly in the coming decades, railroads argue that regulation should support—not discourage—the private investment needed to expand capacity, improve safety, enhance service, and reduce emissions.
Unlike other transportation modes, freight railroads fund and maintain their own infrastructure, investing billions annually. The industry supports a modern, market-based regulatory framework that encourages investment and innovation while streamlining regulatory processes.
The success of this approach is reflected in the Staggers Rail Act of 1980, which helped revitalize a struggling industry and has enabled more than $800 billion in private rail investment, creating one of the world’s safest and most efficient freight networks. A strong freight rail system supports economic growth, lower transportation costs, and resilient supply chains.
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 has withdrawn its broad switching proposal and is considering a new service-based approach. Supporters of forced switching seek below-market access to competing railroads, but railroads argue the policy would disrupt network efficiency, increase costs, and amount to backdoor rate regulation.
Railroads design routes and operations to maximize safety, fluidity, and service across the network. Expanding forced switching could reduce efficiency, increase safety risks and emissions, delay freight and passenger service, and weaken railroads’ ability to compete and invest in their infrastructure.
Read the AAR Audio Narration
Understanding Freight Rail Economic Regulation
This is AAR Audio, and you’re listening to Understanding Freight Rail Economic Regulation.
OK, here’s a question.
When you drive down the interstate, who pays to build it?
You do, as a taxpayer.
What about when you land at an airport?
Public dollars helped build much of that infrastructure too.
Now think about freight rail.
The trains.
The tracks.
The bridges, signals, and rail yards.
Freight railroads largely own that entire network.
They build it.
Maintain it.
And invest in it overwhelmingly without relying on taxpayer funding.
In fact, every year, America’s freight railroads privately invest about 25 billion dollars back into their networks.
They train employees.
Replace track.
Modernize bridges.
Purchase new equipment.
Expand capacity.
And deploy new technology.
That private investment is one of the things that makes freight rail different from every other major transportation mode.
It’s also why economic regulation matters.
Freight railroads are one of the most heavily regulated industries in America.
For safety, they operate under the Federal Railroad Administration.
For economic issues, they operate under the Surface Transportation Board, or STB.
The STB is there to regulate only when effective competition is limited.
Its job is to protect customers while helping ensure the rail system works efficiently.
But history shows what happens when economic regulation goes too far.
By the 1970s, decades of heavy regulation had left much of the industry in financial trouble.
Railroads struggled to earn enough revenue to maintain their infrastructure.
It was so bad that trains literally fell off the tracks.
Several major railroads even went bankrupt.
Congress recognized railroads needed to be able to make the money necessary to invest in their networks.
So, in 1980, it passed the Staggers Rail Act.
The law kept economic oversight in place but gave railroads more flexibility to compete, negotiate contracts, and reinvest in their networks.
The turnaround was kind of mind-blowing.
American freight railroads went from an industry going bankrupt to one of the best transportation networks in the world.
Today, freight rail is the safest, most fuel-efficient way to move goods over land.
Railroad employees earn some of the highest wages in America.
And shippers can move more freight for less money than they did in 1981.
For railroads, the lesson is clear.
Balanced regulation works.
It protects customers while allowing the private investment that keeps the network strong.
Another important part of this story is competition.
Railroads compete far more than most people realize.
They compete with each other.
They compete with trucks.
With barges.
With pipelines.
Sometimes they even compete with entirely different products.
A power plant may switch from coal delivered by rail to natural gas delivered by pipeline.
A manufacturer may choose trucks instead of trains.
Or a company may build its next facility where another railroad provides service.
Every one of those decisions creates competition.
And every one of them puts pressure on railroads to earn customers through price and service.
That competition isn’t slowing down.
Trucking companies are investing in automation.
Electric trucks.
And a bunch of other new technologies.
Supply chains continue to evolve.
Customer expectations continue to rise.
Railroads have to keep investing just to stay competitive.
So let’s put all of this another way.
When freight railroads operate under bad regulations, it messes things up for everyone else.
Farmers have a harder time getting crops to market.
Manufacturers have a harder time getting the raw materials they need.
Businesses have a harder time moving products.
Supply chains become less efficient.
And you, as a consumer, can end up paying more.
That’s why regulations really need to be guided by evidence and strike the right balance.
Protect customers.
Encourage competition.
And allow railroads to keep investing in the privately funded network the American economy depends on.
THE BOTTOM LINE
Balanced, market-based economic regulation is essential to a strong, competitive, and privately funded freight rail network. Policies that encourage investment—rather than restrict it—help railroads maintain low rates, improve service, and support a reliable supply chain that benefits the entire U.S. economy.