Originally published in the Rapid City Journal, December 2, 2020
Our nation depends on railroads. Railroads keep goods and commodities moving every day, rain or shine. They prevent wear and tear to our highways, are more economical to maintain, and make our roads safer. We should care about railroads and the rail industry now more than ever as our economy continues its shaky recovery, and we must avoid missteps that could (literally) derail the progress we're making. One such concept is being considered by the U.S. Surface Transportation Board (STB). If approved, it could send damaging repercussions through one of the nation's most important transportation networks: railroads.
Since the 1980s, the Surface Transportation Board's regulation of the rail sector has been focused on ensuring competition, fair rates, efficiency, and suitable financial performance. According to many industry experts, this decades-old structure is a product of the Staggers Rail Act of 1980 – a highly significant piece of legislation that saved the rail sector from collapse by sparking strong, healthy competition. The measure ensured that the railroad sector would not be governed by the command-and-control structure of the past.
The Staggers Act just celebrated its 40th anniversary and rail performance has improved steadily over those 40 years. Today's railroads are more efficient than ever, moving freight reliably, safely, and sustainably. The hands-off approach favored by the Staggers Act created robust competition. This has reliably decreased rates and improved financial performance.
The proposal before the STB would undo the progress of the last 40 years by moving away from the free market system that has worked so well and toward the cumbersome oversight of earlier days of regulation under the Interstate Commerce Commission. If successful, the proposal would become a perfect example of unnecessary government involvement through regulation and trying to solve problems that don't really exist. The proposal weakens the rail sector, making it considerably more difficult for them to attract the private investment needed to continue to improve and expand the infrastructure that our economy depends on so heavily.
The proposal would compel the STB to reconsider its use of a financial measurement called revenue adequacy. This limitation is intended to prevent railroads from realizing exorbitant profits at the expense of shippers. This is not an issue today, and it hasn't been for decades.
The new construct would consider revenue adequacy metrics as the upper limit on a railroad's financial performance and would do so on a year-by-year retroactive accounting basis. This is a flawed approach and an inaccurate method to operate a railroad successfully and safely.
Railroads are private companies, and they depend on private investment for the capital needed to maintain, expand, and improve the infrastructure required to meet today's shipping demand. Private investment helps keep rates low and processes efficient. The proposal before the STB would make it much harder for railroads to receive the private investment they need to succeed for shippers by artificially disincentivizing strong financial performance capital.
The use of restrictive regulation to depress financial strength contradicts the competition that has made the industry strong for the last half-century.
A recent study by a pair of economists at the eminent University of Chicago outlines the fundamental problems with the proposal. The economists note railroads' financial performance should be measured relative to the companies they compete with for capital. Investors consider a host of options and make choices driven by an expectation of strong performance and financial returns. If the U.S. government restricts railroads' financial performance (which, again, are private companies), investors will likely opt to spend their money elsewhere.
The driving factor behind the proposal is stated to be with the intent of judicious oversight; however, the analysis shows that railroads' current financial performance is reasonable. Railroads fall below most comparable companies on the S&P 500. Sound management and promise for the future have enabled railroads to compete effectively despite that fact. Still, the STB's proposal would make the prospect of earning investment that much more difficult.
The proposal would be a regression. It fails to consider recent experience and ignores common sense economics.
The proposal should be rejected, and the rail sector should be empowered to continue to build on decades of success.
Senator Jessica Castleberry represents District 35. She serves on the Senate Transportation Committee and will become the Vice Chair during the 96th Legislative Session in 2021.