Switching to the Wrong Track? Mandated reciprocal switching would reverse many of the gains from the Staggers Act and impose significant costs on the U.S. economy.

• Author: Brannon, Ike
• Position: TRANSPORTATION

Manufacturers that ship goods overland for long distances often find that rail is the most expedient way to do so. Most shippers are serviced by a single set of tracks, which means that if they want to ship their goods by rail, they generally must work with the railroad that owns the tracks.

Some shippers would like the ability to work with other railroads in the hope of lowering their shipping costs. Railroads do give competitors access to their tracks and deliver cars to interchanges where they are transferred to other railroads--if the economics are amenable. Shippers want more such opportunities and have petitioned the Surface Transportation Board (STB) to expand competing railroads' access to incumbents' tracks at a "reasonable" price. Under one proposal, known as "mandatory reciprocal switching," the incumbent railroad would be compelled to pick up cars for a competing railroad and deliver them to an interchange. These rail customers aver that reciprocal switching would increase competition and reduce shipping costs.

However, such a mandate would impose a steep cost on the incumbent railroad. If a railroad must pick up cars and deliver them to a competitor, that would increase its "car handlings," the positioning and coupling or decoupling of train cars. That, in turn, would slow traffic on the incumbent's rail network, reducing its capacity. That would also effectively reduce the total quantity of goods that can be shipped over rail, which would push some freight onto trucks and impose costs on the rest of society via increased road congestion, smog, and greenhouse gas emissions.

Reciprocal switching would also require the STB to adjudicate the prices of switched cars. The ensuing price regulation would effectively necessitate a new regulatory regime for rail, hearkening back to the pre-Staggers Act days of the industry. The return of extensive freight rail regulation could reprise the era of railroad bankruptcies, crumbling rail infrastructure, and costly freight service.

THE RAIL INDUSTRY HAS THRIVED SINCE DEREGULATION

The Staggers Act, which became law in 1980, essentially ended the practice of government setting prices for transactions between shippers and railroads. That allowed railroads to begin investing in their networks with the expectation of earning a reasonable return. It ended an era of bankruptcy and disinvestment that had plagued the industry since the advent of cross-country trucking and the Interstate Highway System.

The law quickly reversed the degradation of the nation's rail infrastructure. In the ensuing decades, the railroads dramatically increased their investments in tracks, cars, and network infrastructure. Today, the United States has the most productive and efficient freight rail networks in the world.

After the Staggers Act, the cost of shipping goods by rail fell steadily. By moving more traffic over a modernized network, railroads could offer lower prices and increase profits at the same time. At the time the act passed, the freight rate per ton mile averaged 2.87C, but by 1985 it began to fall steadily. Twenty years later, it was less than half of its 1980 rates after adjusting for inflation.

Lower prices and increased capacity allowed rail to steal freight business from the trucking industry, which the government also deregulated in 1980 with the Motor Carrier Act. At the time of deregulation, goods could be shipped by rail for almost half the cost of going by truck. Today, shipping goods by rail costs about 20% of shipping by truck. See Figure 1.

RAILROAD SWITCHING ECONOMICS

Railroads do often voluntarily provide their competitors with access to their tracks and customers. This can take many forms, from the incumbent picking up cars from an origin and delivering them to a competitor's interchange or picking up cars from an interchange and delivering them to a terminus, to simply allowing a competitor to use the incumbent's tracks, either as a pass-through or permitting the competitor to service shippers on those tracks.

These "interline" service arrangements are made with railroads' eyes on their finances. Railroads have very high fixed costs--railbeds and tracks are expensive to lay and maintain--and those costs must be covered despite considerable variation in shippers' demand. Given that environment, railroads tend to use differential pricing: shippers that are more inclined to switch to alternative transport modes will be charged a price closer to the railroads' marginal cost, while shippers with limited alternatives--think of goods that are especially difficult or dangerous to move by truck--pay higher prices. The latter shippers still benefit from transacting with the...