Tech Roundup Episode 15 – Rail Automation and Forced Access

[Music and Narration]

 

Introduction:  Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.

 

Jack Derwin:  Welcome to the Regulatory Transparency Project’s Tech Roundup podcast, part of RTP’s Fourth Branch podcast series. My name is Jack Derwin, and I’m Assistant Director of RTP at The Federalist Society. Today, I’m very excited to be joined by Ian Adams and Ike Brannon to discuss forced access to railroads and rail automation. 

 

Ian is Executive Director of the International Center for Law & Economics, where his work focuses on the impacts of new technologies on law and regulation, with a focus on automation and the future of work, privacy, and insurance. 

 

Ike is President of Capital Policy Analytics, a consulting firm that does research on issues related to public policy and financial markets. To view their full bios, you can visit RegProject.org. As always, all expressions of opinion on today’s podcast are those of our guest speakers. And, with that, I’ll get out of the way. It’s great to have you both with us.

 

Ian Adams:  Thanks so much, Jack. It’s a pleasure to be here. This is Ian Adams. And I’m a member of the RTP Working Group on Emerging Technologies. And, of course, I’m delighted to be joined by Ike Brannon today, who is, I would say, an expert when it comes to railroad economics, and, particularly, an eye toward what the future of regulation, the rail space, might hold. So, Ike, I hope you don’t mind as I barrage you with questions today, because this may be low ceilings for most of our listeners, but is high ceilings when it comes to what the future of transportation looks like in our nation.

 

Ike Brannon:  Shoot away. I’m happy to take your questions. 

 

Ian Adams:  Awesome. Well, just to set the stage here, what we’re going to be covering today has to do with the Surface Transportation Board, which is a federal entity with broad economic regulatory oversight of railroads: in particular, freight rail, including their rates and service, construction, acquisition, mergers, and interchange of traffic among those carriers. Of course, since the early 1980s — since the early 1980s, when the Staggers Act was passed — the STB has stepped back from some of its more onerous approaches to price controls. 

 

But, of late, they’ve considered instituting a new rule on reciprocal switching that would actually see price controls return by another means. And so, recently, a hearing was held on whether to pursue a proposed rule that dates back to 2016, as part of the Biden administration’s larger agenda to re-inject competition into the American economy. So that is just table stakes here. But I want to turn to you, Ike, and just ask, is there a competition problem within the freight rail industry? Is the STB onto something? 

 

Ike Brannon:  I think it depends on how you define competition and how you define the market. If you think that the market is the transportation of goods via railroad, it is true that there are no small number of shippers who ship most of their goods via rail, only have access to one or, sometimes, two railroads that connect directly to where they have their operations. But that’s an artificially constrained definition of the market. 

 

The reality is that most shippers can also ship their goods via rail and some can also ship via water. I think what the Biden administration has done is they’ve chosen the narrowest segment of this in order to get an answer that they and a few of the shipping customers want to hear, that there should be more competition.

 

Ian Adams:  And how would reciprocal switching, the counter-factual here that the STB is putting forward, how would this rule engender greater competition within the sector?

 

Ike Brannon:  So the rule would require a railroad to give access to a competing railroad, onto its tracks. So if one railroad services a factory in Indianapolis, and there is another railroad that has trains that go through Indiana but don’t come within, say, 30 or 40 miles of Indianapolis, they can request a reciprocal switch, which would force the railroad with connections to Indianapolis businesses to take their cars, to pick up cars from the shipper, and deliver them to their competitor. And if they can’t reach a mutually satisfactory price, and they probably wouldn’t be able to, then the STB would decide what that price should be. 

 

Ian Adams:  And so the problem then is addressed by regulation, insofar as the shippers get this windfall in price, as it is selected by regulatory fiat. 

 

Ike Brannon:  Exactly. And it wouldn’t be all shippers. It would be a subset of shippers, of course. Rail sets their prices based on, of course, two things. They also take into account competition from other sectors, from other railroads, or from truck delivery, as well. But, also, they have to think long and hard about how to price things, in order to make sure that they are using their tracks as efficiently as possible. What railroads want to do is they want to make sure that they are using every square inch of their rail lines, which are gigantic investments on their part, as efficiently as possible. 

 

And what railroads have done in the last 40 years, since passage of the Staggers Act, they’ve gotten much better at using it. They’ve spent a lot of time, they have a lot of computer power, a lot of economists and mathematicians and statisticians to think about how to allocate their rail tracks with rail cars, to make sure that they are maximizing their throughput. And part of that computation has to do with pricing. So what they would do with the reciprocal switching rule is they would make it more complicated by basically imposing certain prices, and also by making them have to accommodate people who aren’t really a part of their network. 

 

Ian Adams:  Right. And so the downstream effect sounds like it would be that the networks would become less efficient overall. Shippers might enjoy lower prices, but, from where consumers sit, they don’t necessarily stand to gain. It’s the shippers who stand to gain. 

 

Ike Brannon:  Right. So, prices are set, for the goods that we buy that are shipped by rail, think automobiles, those prices are mainly set by supply and demand. And so it depends on the elasticities of supply and demand, whether, if Ford saves more money because of reciprocal switching, whether people who were going to buy F150 pickup trucks are going to receive any lower prices. 

 

But the other thing is that, in general, shipping costs across the United States would go up because of this. So the productive capacity of our rail lines would fall. So, if you’re doing this, overall costs have to go up. So I think that would mean, unless the rules of supply and demand have been changed on me, that we have to pay more. It’s just how it works out.

 

Ian Adams:  Right. Now, we hear a lot, currently, about supply chain issues, and so we’re talking about the pricing impact of a rule like this. But it also sounds like it could also complicate the resiliency of the supply chain. Complicate is a kind term. It could make our supply chain less resilient, by adding this level of complication.

 

Ike Brannon:  Absolutely. I think that statement is really unobjectionable. Railroads schedule their trains to the other tracks to the minute. And if they’re told that one of their competitors is going to have the right to come in and put their trains in whenever they want, it’s going to make things a lot more complicated, not just for those cars that are being reciprocally switched, but for the rest of the traffic as well. 

 

We have a study that I did with my former colleague, Michael Gorman, who is a professor of logistics and analytics at the University of Dayton, on this very issue on regulation. And one of the things that Mike points out — who worked for nearly a decade in the rail industry — is that switching a rail car is actually quite a complicated process. It’s not just a matter of putting it in spot A, and somebody picking it up and taking it away, that there can be up to 23 different transactions just to hook up one train to an engine and get it to where it needs to go.

 

So this isn’t really a matter of just slipping a couple of trains onto the back of something. To do reciprocal switching, like the STB has put forth in this proposed regulation, it would really increase the complexity of running a rail line.

 

Ian Adams:  And, as you alluded to earlier, these are lines that are scheduled down to the minute. And it’s my understanding that things are only going to become more complex in the future as something called “precision railroading” is entertained. Would you go into what that might entail, and how that could intersect with automation in the sector?

 

Ike Brannon:  Sure. This is actually something else that Mike Gorman and I wrote about a few months ago. So precision scheduling basically transforms railroads into something that looks more like a, I guess you would say, like a subway line. Instead of telling your railroad, telling its customers, “You let us know when you’re ready to have us pick up your rail cars and deliver them, and we’ll make sure we’re there,” they go to their customers, and they say, “Here’s how it’s going to work. We have this schedule. We’re going to swing by your place every 27, 28, 29 hours, something like that, and we’ll take whatever you have at that time. And we can’t accommodate anything else.” 

 

And so it imposes a schedule on shippers that they have to adhere to. So the tradeoff is that, because they can transport more cars this way, ultimately, costs should go down for everybody. There’s been a lot of pushback on precision scheduling from Congress. The Chairman of the House Transportation and Infrastructure Committee has had a couple of hearings. And the big complaint, other than some shippers don’t like it, is that an actual outcome of this is you have much longer trains running. 

 

So, in general, the economics and physics of trains is that the longer a train is, the greater the capacity is of the rail line. It has to do with the physics of how much space you need in between rail lines. And so the Democratic Chair of the House T&I Committee doesn’t like this, in part, because the longer trains you have, the fewer engineers you end up hiring. 

 

Ian Adams:  Wait. But if you’re running a single, longer train, surely that’s better from a, not only an efficiency perspective, but also from an environmental perspective.

 

Ike Brannon:  Well, it’s funny you should say that. The complaints — all the actions that the Democratic Congress and the Biden administration have taken so far have really been to the detriment of the environment. If we’re really concerned about reducing greenhouse gases, what you want to do is move as much goods transport off of trucks and onto railroads, which are an order of magnitude more efficient, in terms of emissions, both of greenhouse gases and smog, which is a more immediate problem for people with asthma and any kind of breathing problems. But, for whatever reason, issues of antitrust appear to trump issues of greenhouse gases, and the environment, too. At least, so far, they have.

 

Ian Adams:  Yeah. It’s a bit of a head-scratcher. It’s this notion that antitrust is suddenly a Swiss Army knife and you can do virtually anything with it. But I want to, Ike, while I have you, make sure I get your thoughts on automation in the sector, and the way in which a reciprocal switching mandate might blunt some of the benefits that could otherwise be enjoyed with automated railroading.

 

Ike Brannon:  That’s something I haven’t thought a lot about, but the one thing I’ll say is that I just find it interesting that the Biden administration really resists anything in this sector that would serve to increase productivity. And I think that the short-term calculus they’re making is, “If we can help the engineer unions create just a few more jobs, that’s going to help us politically in the short run. And it’s how we ran the economy in the 1960s and 1970s, where creating jobs was a good thing.” 

 

And I just think when you’re in an economy with an unemployment rate of four percent and wages are going up faster than they have in quite some time, I think these short-term parochial job interests really are just disingenuous, and people see through them.

 

Ian Adams:  Ike, thank you so much for your time, today. Your recent paper, correct me if I’m wrong, is “Switching to the Wrong Track?” released by the Cato Institute.

 

Ike Brannon:  That’s right. It’s in the magazine that they publish, called Regulation, just out on the newsstands today, March 24.

 

Ian Adams:  Fantastic. Well, thank you again for joining us, for helping us raise the profile of this issue. And we’ll talk to you again soon.

 

Ike Brannon:  Thanks. 

 

Jack Derwin:  Thank you both so much. That was an excellent back and forth. And thank you to our audience for tuning in to this episode of RTP’s Tech Roundup podcast. You can subscribe on any major podcast platform. And check out our website, RegProject.org, or our social media accounts @FedSocRTP, to stay up-to-date. Thank you.

 

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Conclusion:  On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at www.regproject.org.

 

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This has been a FedSoc audio production.

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