The U.S. Surface Transportation Board (STB) is considering a rule that could increase the economic cost of shipping by rail without providing any benefits. That’s a bad idea.
At issue is a policy called reciprocal switching, where a company shipping something by freight rail obtains access to a competing railroad’s track, equipment and facilities for transport between two points generally served by only one competing railroad. This access is available today under commercially negotiated agreements between railroads.
Some shippers think they would get a better deal if the STB forced railroads to charge less than the negotiated rates. If experiences with similar regulations in telecommunications are any guide, the shippers are wrong. What’s likely to happen instead is a decline in rail service, that will increase shipping costs.
One parallel situation is when the Federal Communications Commission (FCC) and state utility regulators established regulations to implement the Telecommunications Act of 1996 (Act). The Act provided that incumbent telephone companies had to lease portions of their networks to new rivals at regulated prices. Many of us thought the prices should be based on the incumbents’ costs, because this would incentivize the new entrants to build their own networks when the costs of doing so were lower than the incumbents’ costs, or lease network facilities when the reverse was true.
Also, because these regulated prices would be lower than prices the companies would negotiate on their own, we thought this would encourage competition and benefit consumers. We were wrong.
In my academic research following the implementation of the Telecommunications Act of 1996, I was surprised to learn that lower regulated prices resulted in less competition. Or said differently, the closer the regulated prices in a market were to what the companies would be expected to negotiate if left to their own devices, the more rivals entered that market.
Another communications networking policy that has parallels with the proposed mandate for reciprocal switching is net neutrality. Net neutrality is the name for a jumble of policies purportedly aimed at forcing broadband providers to treat all internet traffic the same.
Such regulations appealed to some buyers of broadband, such as Google, but the rules diminished the profitability for broadband providers of investing in higher-quality networks. The FCC under President Obama adopted net neutrality regulations in 2015, but then dropped them in 2017 when President Trump’s appointees took over.
Many other countries adopted heavy-handed broadband regulations, such as net neutrality, and their networks underperformed relative to the U.S. networks, especially when COVID-19 hit in 2020. Research last year examined 32 OECD countries from 2003 to 2019, finding evidence that more intensive regulations exert a direct negative impact on fiber optic investments and an indirect negative impact on numbers of customers subscribing to fiber-based services.
Two other studies in 2020 focused on network performance during the pandemic. They found that U.S. customers fared better than their counterparts in countries that had more stringent regulatory controls.
Using broadband speed tests from Ookla, which provides Internet access performance metrics, one of the studies by a researcher at the Georgetown Center for Business and Public Policy concluded that “U.S. networks generally outperformed their peers” in other countries. The other study from the Phoenix Center for Advanced Legal & Economic Public Policy Studies, also using Ookla data, found that fixed broadband networks in the U.S. remained stable and maintained their speeds. In contrast, more heavily regulated networks experienced speed reductions.
The lesson from telecommunications experience is that negotiated prices result in better service for those who use the networks. Buyers are tempted to believe that they would do better if prices were lowered by regulation, but they fail to anticipate that lower profits for network providers mean less investment and lower performance.
Hopefully, the STB takes these lessons to heart and recognizes that if it ignores economic incentives, rail service will suffer.
