Industry News

New Rail Competition Study Rejects Reregulation

November 10, 2008 | 12:00 p.m. CST

A new study for the Surface Transportation Board (STB) on competition in the freight railroad industry says that "both railroads and their customers benefited" from the partial rail deregulation introduced by the Staggers Rail Act of 1980, reports The Association of American Railroads (AAR).

The study also rejected the principal proposals for reregulation of the railroad industry, saying they could harm the industry or would otherwise be inappropriate.

"We're pleased that this independent study has affirmed key economic principles on which the STB has relied for many years in its regulation of the railroad industry," said AAR President and CEO Edward R. Hamberger. "It concludes that most of the reregulation proposals put forth recently would do economic harm both to shippers and carriers."

Hamberger noted that the "industry is still examining the report and will submit comments to the STB in December." Among the study's findings:

• Railroads must earn sufficient revenue to maintain their privately funded rail networks, but their revenues since 1980 generally have not reached the level of revenue sufficiency. Only now are a few railroads reaching that threshold.
• There is little room to provide significant rate relief to certain groups of shippers without requiring rate increases for other shippers or threatening the railroads' financial viability.
• Rate increases during the most recent study period were consistent with changes in railroad costs and productivity and did not evidence any exercise of market power.
• There is no evidence that railroads have used capacity constraints to exercise market power.
• Differential pricing – marking up different services at different levels – is necessary to fund network industries, such as the rail industry, which has unparalleled investment requirements.
• Arbitration may produce undesirable outcomes, particularly if arbitrators are not familiar with the complexities of railroad economics.
• Mandating bottleneck rates could reduce efficiency and result in substantial revenue losses to railroads as well as serve as a disincentive to capital investment.
• Mandated access would result in time-consuming and complicated processes to work out details of access terms and pricing. Any access pricing other than privately negotiated pricing would be inappropriate.

The study also rejected claims by some special interest groups that rail profits are excessive, pointing out that the industry's earnings are similar to those of public utilities. The study was conducted by Christensen Associates, a Wisconsin-based consulting firm.

Union Pacific agrees with the AAR's position. The railroad is evaluating the study's results and plans to comment.