Policy and Regulation in the Transportation Industry

Articles on transportation policy and testimony on freight rail regulation

Telecommunications and transportation share important legal and academic pedigrees. The Commerce Clause refers to Article 1, Section 8, Clause 3 of the U.S. Constitution, which gives Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” The US Senate Commerce Committee and the House Energy and Commerce Committee conduct this oversight and policy today. The Interstate Commerce Act of 1887 created an Interstate Commerce Commission (ICC) to oversee the railroad industry, perhaps the first US regulatory agency.  Moreover, the economics of networks, whether freight rail, telecommunications, or utilities, have common regulatory concepts: market definition, competition, barriers to entry, economies of scale, multisided markets, technology, innovation, interconnection, switching, terminal pricing, licensing, and so on.

One political economy interpretation of this development is that 19th century agricultural interests organized to exert power over the railroad industry. The US railroad industry is replete with its own history: its role in driving industrialization and modernization and the pathways it enabled to help settlers expand across the country. Notably there was competition among industry and states for political and economic power. Those industries converged in the regulation of commerce.

For example, a 19th century grain supplier would prefer that the government set the shipping price as close to zero as possible instead of engaging in the market. Companies learned that it could be easier to achieve outcomes through politics rather than to compete in the market. Similarly, regulators found a lucrative business to exchange economic rents for political support.

However short-term wins for any party or industry frequently undermine economic efficiency (the rational, prudent use of scarce resources) and the long-term interest of people in a society. Thus following a few decades of tortured rail rate-regulation, the U.S. did not have adequate rail infrastructure needed to ship munitions for World War I.  New forms of transportation emerged that proved more convenient and flexible than regulated rail, such as trucks. However that is not a justification to undermine or abandon an important infrastructure.

By the 1970s, when the ICC reached its height of over 2,000 employees, Congress began the long overdue process of deregulation. Unsurprisingly, freight railroad investment, safety, and quality surged. Congress continued further deregulation in 1996, and the organization was renamed the Surface Transportation Board (STB).

Over its life, different industrial constituencies have paid tribute to the STB with the hope of getting preferred rates, whether chemicals, lumber, fertilizer, or even corn refiners. On the flip side, other industries choose different solutions to ship their goods, especially energy providers which want to control their distribution by building pipelines. Others use barges/ships, planes, trucks, or drones, or a combination.  Modern market economies and information technology improve parties’ ability to transact reducing the need for a sector-specific regulator, which played a role to provide information and policy anti-competitive behavior.

I testified to the STB on reciprocal switching, an “open access” policy for various privately-owned freight railroads on February 11, 2022.

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