Railroad Network Neutrality and New Technologies

by on August 3, 2006 · 2 comments

I’ve got a new op-ed over at the New York Times in which I compare today’s Internet regulation debate to the big “network neutrality” debate of the 19th Century: whether the federal government should regulate the railroad industry. As I explain, the pro-regulatory side won that debate, creating the Interstate Commerce Committee. And the results were not good: by the 1920s, the ICC was helping the railroads restrict entry and raise prices. In 1935, as a result of railroad and ICC lobbying, Congress gave the ICC authority over the trucking industry. And the surface transportation industry was uncompetitive for the half-century that followed. As a Ralph Nader report put it in 1970, the commission became “primarily a forum at which transportation interests divide up the national transportation market.”

Space constraints prevented me from elaborating very much on the history of the ICC, but there are a lot of striking parallels between the debate of the 1880s and today’s debate. One of the biggest issues was discriminatory pricing. Smaller farmers and merchants complained that the railroads offered larger shippers discounts that put the little guy at a disadvantage. There were even some arguments that railroad monopolies threatened democracy: the railroads tended to give politicians and prominent business leaders free passes on the trains, and there was even an accusation that a railroad refused to ship newsprint to a newspaper that was critical of the railroads.

There’s considerable disagreement among historians about precisely when and to what extent the ICC was captured by industry. The most skeptical of commentators, such as Gabriel Kolko, argues that the railroads were privately happy to have their industry regulated from the start. He notes that the railroads repeatedly formed pools in order to fix prices, but that these always failed when railroads defected and offered secret rebates to their customers. Kolko argues that the railroad magnates hoped to outlaw rebates and compel publication of prices, thereby making pooling agreements easier to enforce.

Historians more sympathetic to the ICC, such as Hoogenboom, contend that the ICC in its first fifteen years was merely ineffectual, due in part to judicial decisions that limited the Commission’s power. None, however, contend that the ICC was a strong or effective regulator of the railroads.

There were several railroad bills passed in the 1900s that gradually strengthened the ICC’s authority. In 1920, when ICC regulations went from mostly ineffectual to downright monopolistic when Congress–concerned that the railroads were over-built and some of them could fail–explicitly authorized the ICC to restrict entry and set minimum rates. Things got even worse in 1935, when the railroads and ICC successfully lobbied for authority to regulate the trucking industry which was undercutting the railroads’ profits.

After 1935, the system remained an explicit cartel for over 40 years, until deregulations came under the Carter and Reagan administrations.

My biggest worry is that something analogous to the 1935 extension of railroad regulations to trucking will happen with any network neutrality rules that get passed. The right thing to do in 1935 would have been to abolish the ICC, since competition from the trucking industry was an effective check on railroad monopoly power, making regulation unnecessary. But by 1935, the railroads were one of the most influential interest groups in Congress and the ICC, whereas the infant trucking industry lacked lobbying muscle.

Had the ICC regulations not already been on the books, it would have been much harder for the railroads to convince Congress to create an entirely new regulatory scheme to limit the trucking industry. But because there was already a regulatory body in place (one that was working side by side with the railroad industry to lobby for increased power) it was a much easier step to simply extend the existing regulations to a new form of transportation. In this sense, the existence of the ICC’s railroad regulations “greased the skids” for extending it to the new, more competitive industry.

At some point, wireless technologies are likely to advance to the point where they become effective competitors to cable and DSL. There’s also likely to be power line-based broadband at some point. When those new competitors come along, the incumbents will be very keen to throw up barriers to entry. Doing so will be much easier if they themselves are already subject to a complex regulatory scheme, which they can advocate extending to the new entrant in the name of “fairness.”

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