Obama’s policies are still threatening the freight rail industry

Nearly one year after the election, the Trump administration has done a good job of shutting down Obama-era regulatory over-reaches. Still, there are a couple of Obama legacy proceedings still open that, if unchecked, could have consequences on our nation’s infrastructure and economy.

As a prime example, consider the still-open notice of proposed rulemaking proceeding at the Surface Transportation Board (STB) — which was released with just six months remaining in the President Obama’s term — that seeks to expand the concept of “reciprocal switching.”

By way of background, reciprocal switching allows a competing rail carrier to negotiate with another carrier for access to create the illusion that it can offer can offer its own single-line rate across an entire route, even if this competitor does not physically reach a customer. Such voluntary arrangements do occur. Under the largely deregulatory Staggers Act, however, the STB can order switching in certain circumstances.

{mosads}However, the Staggers Act never intended reciprocal switching to function as mandatory access at regulated prices, but rather as a mechanism to remedy blatantly anticompetitive actions by rail companies. As such, for over thirty years the federal government imposed reciprocal switching only if it determined that it was “necessary to remedy or prevent an act that is contrary to the competition policies of [the Staggers Act] or is otherwise anticompetitive.” Given the need to demonstrate anticompetitive activity, only a few requests for reciprocal switching were ever filed, and none were granted, since the federal government first promulgated this standard in 1985.

Still, the STB has proposed to abandon the well-accepted “anticompetitive” standard and replace it a more permissive standard that, in the STB’s view, would “encourage the availability of reciprocal switching where appropriate.”

The problem for the STB is that every major argument it sets forth to justify new price regulation is in reality a compelling reason to maintain the deregulatory approach of the Staggers Act.

First, the STB asserts that given the “dearth” of reciprocal switching cases brought over the past thirty years, it automatically follows that requiring a finding of anticompetitive harm has “effectively operated as a bar to relief rather than a standard under which relief could be granted.” So, under the STB’s logic, the STB does not have to demonstrate a market failure before it can intervene into the market. However, if there is no market failure to remedy, then what is the point of regulation?

Second, the STB argues that it is important to weaken the anticompetitive standard due to the increased concentration of the industry. This argument is puzzling in light of the fact that the board approved such consolidation in order to remedy “decades of inefficiency and serial bankruptcies.” The STB can’t have it both ways. If a more fragmented rail industry can’t turn a profit, then the fact the industry becomes more concentrated does not imply regulatory intervention is required to address market power.

And third, now that the industry has returned to some modicum of financial health (made possible by reduced regulation and the government-approved consolidation mentioned a moment ago), the STB contends that lowering the reciprocal switching standard will allow it to “avoid obsolescence of the board’s regulatory policies.”

However, the obsolescence of regulation is the goal of good policy, indicating that market forces are now adequate to ensure acceptable performance of the industry without regulatory intervention.

So what’s really going on here? When an agency concedes that there is no market failure, the proper response is to forbear from price regulation, not to expand it. Yet, growing the regulatory state in the rail industry — which was almost destroyed by regulation prior to the Staggers Act — is exactly what the STB now seeks to do. It would appear, consistent with the Obama administration’s regulatory playbook, that the STB is trying to implement a new and justified price regulation regime for which “competition” and “reciprocal switching” serve as the thinnest of veils. Why? Because the STB’s regular rate regulation standard, rooted in valid economic and financial concepts, represents a hurdle — and a legitimate one — to direct price regulation.

For many years, the U.S. freight rail industry went through a rough patch. Yet, with the largely deregulatory approach of the Staggers Act, the industry has clawed its way back to financial health. Yet, the Obama administration’s open proceeding threatens to stop this recovery in its proverbial tracks. While the STB is a small agency and not an immediate candidate for the White House’s radar screen, the Trump administration cannot allow this legacy Obama power grab to become the law of the land.

Lawrence J. Spiwak is the president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, a nonprofit organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.