Jean-Paul Rodrigue (2013), New York:
Routledge, 416 pages.
Rail Deregulation in the United States
Rail deregulation in the United States is a good example of how a
policy shift can produce significant changes in the economic health
of an industry, and how its structure may be changed. In the United
States the rail industry has since its inception been operated by the private sector.
However, because of their importance, their fixedness as well as their
monopoly in several regions, the rail industry became early the object
of public scrutiny and political intervention. The railroads began to
be seen to operate the service in the public interest, and therefore
have been bound by certain government regulations. The policies that
developed over the first 100 years of rail operations were intended
to prevent a monopoly and to maintain open access.
A regulatory board established in 1887, the Interstate Commerce
Commission (ICC), grew in power to control freight rates, oversee
mergers and acquisitions, and regulate competition between the modes
by preventing ownership in different modes. The problem with the railroads
was that they were losing market share by the middle of the 20th Century.
The automobile replaced a lot of short-haul passenger business, and
airlines were beginning to take away passengers on the long-haul market
which used to be dominated by rail. Freight
traffic began to suffer because of competition from trucking. The result
was that whereas in the 1920 the railroads accounted for 75% of all
intercity freight movements, by 1975 this share fell to 35%. The
ICC had set rates deliberately low for farm products and higher rates
for general freight, which was the most susceptible to truck competition. At
the same time the railroad industry had little incentive to modernize
because the ICC had to rule on major changes, and the railroads found
it difficult to obtain approval to close unprofitable track and services.
The railway industry was therefore operating in a highly constrained
environment leaving limited opportunities for innovation.
The need to reform the industry was made necessary because of its
imminent collapse. By 1960 one third of the US rail industry was bankrupt
or close to failure. This forced policy makers to act. However, the
willingness to undertake regulatory reform was enhanced by the conclusions
of several academic studies. Economists demonstrated that the regulatory
boards had been ‘captured’ by the industry itself, with members being
drawn largely from the transport companies themselves. At the same time
the accepted theories concerning the threat of monopoly control over
prices were being challenged by a new theory of contestability. This
theory held that a monopolist would be prevented from charging monopoly
prices if there was a threat that other firms could enter the industry.
The threat of entry would be sufficient to discourage the monopolist
from abusing his market position. The key question was freeing entry
levels. In many regulated industries, the regulators restricted entry.
Thus, the conditions for policy change were thrust on legislators, and
there was a growing acceptance for a solution based on a relaxation
of regulatory control.
The first round of policy change was the Railroad Revitalization
and Regulatory Reform Act of 1976 (sometimes referred to as the
4R Act) which eased regulations on rates, line abandonment, and mergers.
Four years later, when the political tide of deregulation was in full
spate, Congress followed up with the Staggers Rail Act of 1980.
The most important features of the Staggers Act were the granting of
greater pricing freedom, streamlining merger timetables, expediting
the line abandonment process, allowing multi-modal ownership, and permitting
confidential contracts with shippers.
The railroads immediately divested themselves of their unprofitable
passenger business, and began to concentrate on their core freight
activity, the business which was most profitable and least subject
to competition from other modes was bulk freight. Rail traffic became
increasing dominated by flows of coal, grain, and ores, indeed 43% of
all traffic was accounted for by coal shipments in 2003. Larger capacity
cars were brought into service. Although general freight produced higher
revenues per ton it was more subject to competition, and therefore received
Railroads face high fixed costs, being the only mode that has to
build and maintain its own tracks. The high cost of maintaining unprofitable
routes was a major drain on resources. Thus, in the post-Staggers Act
environment, the railroads began abandoning tracks. Over 100,000
miles of track have been
operators increasingly focused on strategic long distance corridors
gateways and inland markets.
Operating costs were reduced significantly by staff reductions.
Contracts with the unions produced agreement to remove the brakemen
from trains, thereby doing away with one third of the personnel required
for train operation and removing the need for cabooses. Other concessions,
such as hours of work and daily distances crews are allowed operate,
have significantly improved productivity.
With the release of regulatory control over rates, the railroads
could begin charging market rates, and because they were allowed
to enter into confidential contracts they had greater flexibility in
negotiating with large volume shippers. This introduced more competition
between the modes and led to lower rates overall.
Because there was a relaxation in controls over entry and exit, the
post deregulation period has been marked by a
in mergers and acquisitions. From 56 Class I railroads in 1975 the
number has been reduced to 7 in 2005, two of which are Canadian. This
has generally helped the industry achieve scale economies that has boosted
their economic performance. The North American rail landscape is
thus characterized by large regional markets.
Finally, the restrictions on intermodal ownership and operation has
led to a revitalization of the general freight business with
alliances with trucking companies to carry their long distance
the first time, intermodal traffic accounted for the majority of rail
revenues in 2003.
Consumers have benefited by lower rates, the railroads have achieved
much higher levels of performance,
and traffic has increased. By 2003 the market share of rail for intercity
freight shipments was 42%, against 35% in 1975. Although revenues have
not grown at the pace of these other parameters, the US railroad industry
has made a profit since deregulation, and seemingly has been rescued