The Issue Of Railroad Re-Regulation And Demand-Based Prices In Transportation Sector

The main issue that railroads should face is the proposed reciprocal change of the State Board of Transportation (STB), also known as forced access by the Association of American Railroads ("AAR"). According to this, carriers that do not have access to other means of transport may use a competitive rail line without any additional price, what is more, they can be at lower prices than the market rates. This regulation can interrupt rail operations, lead to revenue losses and, in general, increase the cost of railroads. In particular, the forced access regulation could cost the Railways a nearly amount of $ 8 billion per year. Investments in the development of railways are usually carried out by the companies that own the networks. The reciprocal switching would lead these companies to spend on infrastructure developments that can be used by competitors, however, these organizations won´t receive enough returns in exchange. Nowadays, freight railways invest an average amount of money close to $ 26 billion annually in their networks.

In addition, the Institute of Regional Economic Studies at Towson University says that these investments are highly important for the US economy, supporting 1. 5 million jobs across the economy, generating $ 33 billion in taxes and producing $ 274 billion in economic activity in 2014 alone. (Chuck Baker and David Tennent, 2016). Then, this regulatory effort could significantly reduce the capital investment of the railways by reducing the incentive to do so. A previous analysis by the Association of American Railroads found that a similar proposal could affect approximately 7. 5 million cars loads. Other proposals, such as the re-regulation of certain commodities and the introduction of a maximum price for the amount charged by the Railways to the carriers, are also important issues for the industry.

The railroads firmly believe that the operational complexity of railroads will increase, and revenues will suffer if such regulations are finally implemented. This would come despite the fact that the railways face stiff competition from trucks and without any evidence based on facts. The most alarming thing is that these groups of commodities did not request a rule change. The rail supply community plays an integral role in maintaining the safest, most efficient and highly competitive rail freight system in the world. Along with the railroads, suppliers are concerned that the STB has interpreted its reauthorization as a signal that Congress wanted the independent agency to regulate more. (Chuck Baker and David Tennent, 2016). However, some people claim that railroads are, once again, using some monopoly practices for carriers of bulk products such as cereals, coal and chemicals. They claim that the railroads are charging very high prices to shippers for low cost products, making these prices less competitive in the market. This adds to the fact that many of these bulk carriers are captive and do not have various railroad options to ship their products. Against this, the railways claim that they are using their prices as a competitive force in a free market economy and that new regulation would reduce their profits, which would force a consolidation of the industry that would further inhibit capacity and eventually result in higher prices.

Discussion about the solution

The main issue is that a minority of shippers refuse to accept prices based on demand, which is one of the most important parts of the Staggers Act and is now used across the railway industry. Under demand-based prices, different carriers pay different rates according to their level of demand for the rail service. These shippers feel exploited by a monopolist industry which is their only available way of transportation. As a result, they have been struggling with deregulation along the years, demanding a new regulation that they believe would eliminate demand-based pricing.

These shippers in favor of regulation do not see that demand-based prices are beneficial for everyone. If the tariffs are equal, then the shippers with greater elasticity and more available alternatives will abandon the railways. If they leave, so do the contributions they make to the high fixed costs of the railways. In consequence, these fixed costs would have to be paid by the rest of the shippers. As a result, the rates would be higher than they are nowadays, in fact, it is conceivable that reductions in the customer base may result in rates that would be too high for shippers without viable alternatives (Peter Ferrara, 1999). Then, not only would the railroad be left out of business, but so would these remaining shippers. As for the proposal solution, which is the re-regulation of the market, there are many arguments against it:

• History has shown that industry regulation leads to an increase in mergers and consolidations. As a result, competition would be reduced, and this can lead to monopolistic competition.
• The market at the time of regulation was a monopoly only because it was the only method of transportation for long distances and large volumes.
• There is enough documentation and information available to show how a stabilization of the railway industry has been achieved due to motor, pipe and water transporters.
• The economy of scale is produced by increases in traffic, not prices. The regulation aims to promote profit through competition and prevent monopoly.
• In a perfectly monopolistic market there is no close competitor, nor even a substitute for a product or service and the shipper only remains in his position by restricting entry, which is not the case.
• This regulatory effort could significantly reduce the capital investment of the railways by reducing the incentive to do so.

Conclusion

As we can see, the cure can be worst than the problem. When a market has grow as much as railroads did thank to deregulation, and when history says that regulations does not have a good effect on the market, maybe this is not the best solution.