October 4, 2017

Rail Regulation Highlights Need for Required Economic Analysis

Patrick McLaughlin

Director of Policy Analytics

Federal regulatory reform remains a key priority for both the Trump administration and Congress. One reform that enjoys some bipartisan support is a requirement that independent regulatory agencies conduct a Regulatory Impact Analysis (RIA) before issuing major regulations.

Independent agencies would incorporate a few basic economic principles into their decision-making process, helping them focus on actions that are more likely to create positive economic outcomes while avoiding misguided actions that could cause more harm than good.

But regulatory reform isn’t a priority for the mere sake of “draining the swamp.” Instead, policymakers increasingly recognize that the accumulation of red tape over the past several decades has created a substantial drag on economic growth and poses substantial barriers to another campaign promise — upgrading America’s infrastructure. 

Wednesday’s House Transportation Committee hearing will focus on the challenges of delivering a 21st-century infrastructure. One of those challenges is a recent rulemaking from the Surface Transportation Board (STB) on so-called “competitive switching” for rail shippers, a textbook case for why an RIA requirement is essential for sensible decisionmaking. 

An RIA provides crucial information necessary to make decisions about whether and how to regulate. A complete RIA includes evidence about the nature and cause of the problem regulators seek to solve, alternative possible solutions and the benefits and costs of these alternatives.

However, the executive order that requires executive branch agencies to perform RIAs for significant rulemakings does not apply to the independent regulatory agencies, including the STB (although legal scholar C. Boyden Gray argues that the RIA requirements could and should be extended by executive order to independent agencies).

The STB regulates freight railroads and is a quintessential independent regulatory agency. It took over the regulatory responsibilities of the Interstate Commerce Commission (ICC), the first independent federal regulatory commission, which was created in 1887 and abolished in 1996.

In January, the STB finished taking public comments on a proposed regulation defining when a shipper can require a railroad to switch the cars carrying the shipper’s freight to another, competing railroad without physical access to the shipper.

This “competitive switching” sounds complicated, but think of it as sending a package via UPS and then requiring that they hand the package off to FedEx at the city limits.

Under current policy, regulators require competitive switching only if the shipper can show that switching is necessary to prevent or remedy some anticompetitive abuse committed by the railroad serving its facilities.

The proposed changes would adopt expansive and open-ended criteria that give the STB wide discretion to decide when to impose competitive switching in response to a shipper’s request.

The board could impose competitive shipping if it is “practicable and in the public interest” — allowing it to consider virtually any factors — or “necessary to provide competitive rail service” — even if the railroad’s rates are reasonable and no anticompetitive abuse has occurred.

Board member Ann Begeman noted in dissenting from much of the proposal that the STB was essentially in the dark about the likely effects: “I firmly believe that what we do here, ultimately, could cause greater harm than good. Or, it may result in nothing more than an empty promise to prospective applicants.”

That kind of uncertainty should alarm both shippers and railroads. A high-quality RIA would have addressed those concerns and examined alternatives that could be more effective or less burdensome. 

Again, a thorough RIA starts by defining and identifying the cause of the problem that regulators seek to solve. In this case, current policy defines the problem as anticompetitive abuse and requires shippers to furnish evidence of this abuse to qualify for competitive switching.

The new STB proposal defines the problem differently; it simply claims that proving anticompetitive abuse is too difficult. Its sole evidence is that there have been very few competitive switching cases brought before regulators since the current policy was adopted in 1985, and shippers have never won a case. But these facts are not sufficient proof.

Perhaps it is too difficult to prove anticompetitive abuse under current policy — or perhaps little anticompetitive abuse has occurred. A thorough RIA would have systematically examined that question to determine whether there is a major problem.

But for the sake of argument, assume that the current policy is so cumbersome that it allows some anticompetitive abuse to occur. The STB appears to have ignored workable alternative solutions that a thorough RIA would have considered.

The most direct and obvious solution would be to provide more specific and direct guidance on what constitutes evidence of anticompetitive abuse. This would give shippers a clearer idea of the kind of evidence needed to win a case.

It could also help deter anticompetitive conduct by warning railroads about the kinds of behavior regulators believe is questionable.

Another solution was proposed in 2015 by a Transportation Research Board committee (on which my colleague Jerry Ellig served). The committee suggested that the STB develop a screening model to identify whether a shipper appears to be paying unusually high rates, and then allow a shipper paying unusually high rates to take its case to an arbitrator. The shipper could ask for competitive switching as a remedy.

More information is needed before moving forward with either of these alternative solutions. All too often, independent regulators fail to undertake this kind of comparison. For this reason, regulatory impact analysis is not just a good idea; it should be the law.