The Case for Continued Light-Touch Regulation of Freight Railroads

In response to concerns about the lack of competition and the resulting high rail rates, the Biden administration has proposed mandating reciprocal switching, which provides shippers access to competing railroads. The administration also has advocated for final offer rate review as an affordable way for small shippers to challenge rates they perceive to be too high. This paper explores these and related proposals for improving the way the Surface Transportation Board protects shippers from being charged unreasonable freight rates.For railroads to have the capacity to compete with other transportation modes, particularly trucking, and have the incentives to invest and provide a cost effective and environmentally friendly alternative to shipping goods, they must earn adequate profits. Therefore, it is important that regulatory reform continue the light touch of existing rate regulation. Mandated reciprocal switching could raise costs and create uncertainty that might reduce railroad profitability, which discourages investment. However, other changes to regulatory policy, such as final offer arbitration or final offer rate review for a trial period, would likely have little adverse effect on railroad profitability while giving more protection to small shippers from excessive rates than the current rate regulation