The late Henry G. Manne, a pioneer in melding the academic disciplines of economics and law through a lens favoring free markets and reduced government regulation, gained international acclaim through creation of the Law and Economics Center at Virginia’s George Mason University. Proving genius doesn’t necessarily skip generations, his son, Geoffrey, founded an International Center for Law and Economics in Portland, Ore., with a similar mission to train law professors and judges in economics, and tutor economists in the law.
Unfortunately, the issue brief is so seriously flawed it should be recalled for revision lest opinion leaders and decision makers to whom it is shopped are given a false impression of the actual state of competition in the U.S. rail sector.
The study’s premise is not a problem. Stout argues that the rail regulatory framework—since the Supreme Court’s 2024 decision (Loper Bright Enterprises v. Raimondo) overturning a 1984 ruling (Chevron USA v. Natural Resources Defense Council)—requires updating. The Loper Bright decision upset a four-decade instruction to federal courts that they give deference to the interpretation that expert federal agencies such as the STB give their enabling statutes. Less expert judges now must perform this task (although both Manne centers are striving to improve their abilities).
In this post-Loper Bright era, says the issue brief, “the STB risks running afoul” of congressional instructions “if it continues to apply outdated legal interpretations and fails to acknowledge modern market forces.” If only the issue brief had stayed within those four corners of concern, such as whether the STB should consider product and geographic competition in determining market dominance, or whether the STB should exclude from economic regulation certain commodities or lines of business as part of its implementation of National Transportation Policy.
Stout then would have produced a most interesting and timely study of the intersection of railroad economics and the law. By wandering into areas with which he is not competent, he flubbed the dub, inviting impeachment of the entire issue brief. The most serious flaws are omission and factual error.
Ignored entirely is the impact on competition of scores of railroad mergers since the industry was partially deregulated in 1980 (Staggers Rail Act)—a law that encouraged the STB and its predecessor Interstate Commerce Commission to approve rail merger applications. Yet the 16-page paper mentions the word “merger” not once, even though the author was aware of a pending Union Pacific-Norfolk Southern merger to create the nation’s first U.S. Atlantic-Pacific transcontinental railroad—the largest rail merger transaction ever. Surely mergers and their impact on competition is a fitting subject for an issue brief discussing “the state of competition in the U.S. rail sector.”
By contrast, the Transportation Research Board, in a 2015 congressionally funded study (“Modernizing Freight Rail Regulation”) devoted 10 pages to rail mergers, finding they contributed significantly to the industry’s shedding of uneconomic capacity, creating substantial cost savings—the efficiency gains shared with shippers through (for a time) lower rates and enhanced service.
The issue brief would have been more credible had it acknowledged the tension between TRB’s findings and captive shipper assertions that rail mergers reduced competition and led to substantial rate increases.
Nor does the issue brief discuss TRB’s recommendation that merger approval authority be shifted to the Justice Department’s Antitrust Division, with STB retaining oversight of merger implementation.
Also omitted is a discussion of trends in rail rates relative to costs, given the issue brief’s assumption of rail industry competitiveness amidst captive shipper assertions to the contrary.
More glaring is the issue brief’s errors of fact. It says the STB “too easily” finds railroad market dominance—a required first hurdle in filing a rate complaint—leading to a conclusion of STB bias in favor of shippers. That shippers have filed only two rail rate complaints in the past decade suggests the bias assertion lacks a factual foundation.
The issue brief also describes railroad revenue adequacy—earning enough to cover total operating costs, including depreciation and obsolescence, plus a competitive return on invested capital—as a floor, not a ceiling. Yet the law—the 1980 Staggers Rail Act and the 1995 ICC Termination Act—instruct rail regulators “to maintain reasonable rates where there is an absence of effective competition and where rail rates provide revenue which exceeds the amount necessary to maintain the rail system and to attract capital.” The 1980 law ordered regulators to give “regard to preventing a carrier with adequate revenues from realizing excessive profits on the traffic involved.”
Straying further into areas with which he is not familiar—his academic and professional background is formidable, commendable and inspiring, but in areas other than railroad economics, regulation and law—Stout says STB attention to carrier revenue adequacy “discourages railroads from pursuing efficiency gains or productivity improvements.”
Yet neither the ICC nor its successor STB has ever capped a rail rate based on a finding of revenue adequacy, even though the STB has found most railroads revenue adequate, Wall Street analysts consider the industry revenue adequate since at least 2010 and no railroad has ever told shareholders it is revenue inadequate.
Notably—even though such a rate cap has never been imposed—the agency’s 1985 Coal Rate Guidelines require one be imposed, with limited exceptions, upon a railroad’s becoming revenue adequate. “Our concept is simply that a railroad not use [demand-based] differential pricing to consistently earn, over time, a return on investment above the cost of capital,” the ICC said in 1985.
If revenue adequacy determinations are, as the issue brief suggests, a sword of Damocles hanging above railroads, they have not discouraged—contrary to Stout’s assumption—pursuit by railroads of efficiency and productivity improvements.
The industry largely self-financed its $15 billion investment in Positive Train Control; it implemented Precision Scheduled Railroading; and it invests substantial sums in research, development and testing of new technology at AAR-owned MxV Rail and ENSCO-operated, USDOT-owned Transportation Technology Center in Colorado. Each of these investments has delivered substantial efficiency and productivity improvements. Nor has a lurking revenue adequacy cap on rail rates discouraged UP’s proposed marriage with NS.
An inconvenient fact for those advocating eradication of economic regulation is that privately owned railroads exist and prosper because the law grants them privileges such as that of eminent domain; preemption from intrusive state, local and even some federal regulation; and significant immunity from antitrust statutes.
With those privileges come regulatory requirements to ensure the privileges do not enable market power abuse. The STB must follow the law, and much of Stout’s arguments bypass that requirement—looking at what he believes should be, rather than what is.
Railway Age Capitol Hill Contributing Editor Frank N. Wilner is a former Assistant Vice President, Policy, at the Association of American Railroads and a White House appointed chief of staff at the Surface Transportation Board. Among his eight books is “Railroads & Economic Regulation (An Insider’s Account,” available from Simmons-Boardman Books, 800-228-9670.
