Open Access for Heavy Haul Railroads: A Questionable Strategy for Social Welfare Gains

Heavy haul freight railroads carrying bulk materials such as coal or iron ore are characterized by several unique challenges relating to investment in construction and maintenance as well as achievement of optimal operating efficiency. This paper examines heavy haul railroads around the world in a comparative context that highlights differences relative to operating parameters, degree of integration with upstream and downstream nodes in the supply chain and regulatory regimes. Emphasis is placed on analysis of the extent and impact of mandated access on heavy haul railroads. The authors find that successful heavy haul railroading requires an intense focus on asset productivity and effective coordination of the supply chain. This leads to a bias for bundled above and below rail operations as well as integration with mine and port operators; where this is not possible, multiple railroad operators must have well-aligned incentives. On the other hand, mandated access appears to yield few benefits beyond lower rates, which are primarily a wealth transfer rather than a social welfare gain. In addition, the costs of coordinating access are material, leading to a neutral result at best, or more likely a loss of social welfare. This suggests that regulation of heavy haul railroads should incentivize coordination and integration, and that mandated access to generate competition does not produce an increase in social welfare. OBJECTIVES AND METHODOLOGY Policy makers have long grappled with introducing competition into natural monopoly industries such as transportation, telecommunications and electricity in order to eliminate excess profits and assure efficient provision of service. Freight railroads presented a particular challenge because far from earning monopoly rents, the industry in North America, Europe and Australia struggled to remain financially viable in the face of competition from other modes, especially trucks. Policy makers in the US were the first to tackle the problem of freight railroad viability. The solution adopted was total economic deregulation. The rationale for the change was that regulation was inhibiting the rail industry from responding to competitive pressures from the trucking industry. With the Staggers Act of 1980, US railroads were free to enter and exit markets, introduce new service offerings, enter into private contracts with shippers, set rates and abandon track. Over the next 25 years, the railroads reduced costs, rationalized capacity,