Capital Access at Risk for the Freight Rail Industry

Threats of a regulatory renaissance in the freight rail industry prompted several privately owned railroads to take stance against proposed “revenue adequacy” measures, fearing that revenue caps will affect the industry’s ability to compete for private capital.

Three of the nation’s largest railroads, through a joint petition, are calling on the Surface Transportation Board (STB), the agency tasked with overseeing the freight rail industry, to change the way it measures financial health. The railroads, Norfolk Southern, CN, and Union Pacific, argue that, to fulfill its mandate, the STB uses “flawed and incomplete data” with “tools designed three decades ago.”

A new report by two University of Chicago professors, Kevin Murphy and Mark E. Zmijewski, compared the financial performance of the freight rail industry between 2006 and 2019 with other companies in similar industries listed in the S&P 500 index. Professors Murphy and Zmijewski argue that their methodology provides a more accurate analysis of financial performance, as opposed to the antiquated formulas and methods used by the STB.

Rail Regulation Reform held a press call to brief reporters and interested parties on the merits of Professors Murphy and Zmijewski’s study and call for change in the way the STB assesses the financial performance of railroads. John Gentzel, spokesperson for the campaign, called the STB’s methodology “inadequate” and said it does not “consider the railroad’s ability to compete for capital.”

A major concern for industry leaders is that if the STB institutes a revenue ceiling on the industry, this will severely hinder railroads from competing for capital with unregulated industries able to deliver a higher return on investment (ROI) to its investors. The unprecedented growth of the industry since Congress deregulated it in the 1980s has attracted billions in capital from private investors, which allows freight rail carriers to invest an average of $25 billion annually to maintain and improve America’s railroads.

Both Murphy and Zmijewski, along with the three railroads filed their study and petition with the Surface Transportation Board, should the Board decide to proceed with a proposed rulemaking.