C. F. Lynch & Associates

A Step Backward?

By Clifford F. Lynch

DC Velocity, July 2008

For the past 28 years, the U.S. rail industry has operated with minimal regulatory oversight, but that may be about to change. In November, the Surface Transportation Board is scheduled to receive the results of an independent study on competition in the U.S. rail freight industry. The findings could determine the future direction of our national rail policy.

The STB commissioned the study last fall in response to shippers’ complaints about the increasing cost of rail shipping at a time when railroad earnings have reached record highs. These shippers believe that the railroads are earning profits that exceed their cost of capital, and that a return to regulation will somehow restore the equilibrium. The report is expected to shed some light on the situation.

To understand what’s at stake, it helps to know something about the history of U.S. railroads and their regulation and subsequent deregulation.

Back in the early days, when their only competitors were barges, riverboats, and wagons, the rails enjoyed a virtual monopoly in almost every region they served. It soon became apparent that the existing common law was insufficient to control abuses of power. The larger the rails grew, the louder and more numerous the accusations of stock manipulation, predatory pricing, and discrimination.

Although attempts to curb the abuses began in the 1830s, it wasn’t until the late 1880s that Congress finally acted. In 1887, it passed the Act to Regulate Commerce, commonly known as the Interstate Commerce Act, to neutralize the rail carriers’ monopolistic power.

In the early 1960s, however, the pendulum began to swing the other way. On April 5, 1962, in a special address to Congress, President John F. Kennedy made a statement that became the call to arms for deregulation proponents everywhere. "Pressing problems are burdening our national transportation system, jeopardizing the progress and security on which we depend," he said. "A chaotic patchwork of inconsistent and often obsolete legislation and regulation has evolved from a history of specific actions addressed to specific problems of specific industries at specific times. This patchwork does not fully reflect either the dramatic changes in technology of the past half-century or the parallel changes in the structure of competition."

What followed was an 18-year struggle, but in the end, deregulation’s advocates prevailed. On Oct. 14, 1980, President Jimmy Carter signed the Staggers Rail Act into law, removing many rail regulatory restraints and giving the rail carriers more pricing freedom. And it is within this environment that we have operated for the past 28 years.

Although deregulation has gotten mixed reviews, the rails themselves credit Staggers for revitalizing their industry. In the Oct. 24, 2005, edition of its Association of American Railroads Insider newsletter, the Association of American Railroads said: "With the Staggers Act, Congress chose to tackle the root problem: an unresponsive regulatory system that made it virtually impossible for railroads to respond to the disciplines and opportunities of the marketplace. The act was passed and the rail industry has rebounded amazingly."

There are many in the logistics profession – and I happen to be one of them – who agree with the AAR’s 2005 assessment, and also believe that the ability of shippers to implement highly synchronized, customer-responsive logistics systems would not have been possible without deregulation. In our view, efforts to re-regulate the industry would be a step backward.

Railroads are not monopolies, at least in the sense they were in the early years or that our local television cable companies are. There are other options. Whatever the November report says, I hope both shippers and carriers will think long and hard before taking a firm stand on re-regulation.



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