Countering Regulatory Activism on Railroads and Small Business

By SBE Council at 23 January, 2023, 2:54 pm

by Raymond J. Keating –

If you need another example of Congress handing off too much power and discretion to regulators, consider what the Federal Railroad Administration (FRA) has been up to in terms of trying to dictate how U.S. railroads – both big and small – should operate in terms of the size of train crews, as well as where crewmembers should be located on moving trains.

This proposed rule has been proposed, withdrawn and proposed again, changing with the administration that happens to be in power. To its credit, the Small Business Administration’s Office of Advocacy, however, has taken a step above politics, listened to small businesses, and sent a letter/comments to the FRA raising serious concerns.

The Role of Small Business, Regulatory Complexity and Unintended Consequences

As explained by Advocacy, the “rule would establish minimum requirements for the size of train crews depending on the type of operation, including a minimum requirement of two crewmembers (i.e., a certified locomotive engineer and a certified conductor) for all railroad operations, with exceptions for those operations that do not pose significant safety risks to railroad employees, the public, or the environment. The proposed rule would also establish minimum requirements for the location of crewmembers on a moving train and permit special approval procedures to allow railroads to petition FRA to continue ‘legacy operations’ with one-person train crews and allow railroads to petition FRA for approval to “initiate a new train operation” with fewer than two crewmembers.”

Here are several important points raised by Advocacy:

Small Businesses are Dominant in the Industry: “According to information presented by ASLRRA [American Short Line and Regional Railroad Association] at the roundtable and public hearing, there are some 696 short line freight railroads (Class II and III) in the United States, and all meet the SBA definition of a small business.”

No Underlying Data Pointing to One-Person Crews Being “Less Safe:” “There are currently no specific FRA regulations on crew size, but all Class I and many Class II and III railroads operate with a two-person crew. However, many short line railroads operate with one person in the locomotive cab and another in a truck or utility vehicle performing switching and other business and operational tasks, and who may be assigned to multiple trains. FRA has repeatedly acknowledged that it lacks safety data to determine whether one-person crews are less safe than multi-person crews.”

Exceptions are Limited and the Process Complex: “FRA’s proposed rule would require a minimum two-person crew for most railroad operations with both crewmembers located on the train. While there are several exceptions for small railroads, these are limited in scope. FRA also proposes to allow petitions for special approvals for one-person crew legacy operations (existing for more than two years) or to initiate a new train operation with fewer than two crewmembers, although these petitions require the submission of detailed risk assessments and analyses that a number of small businesses at the roundtable and public hearing said cannot in reality ever be satisfied.”

FRA’s Costs of Gaining Special Approvals are Dramatically Under-estimated: “Based on information provided at the roundtable and public hearing, it appears that FRA has significantly understated the cost to and the number of small businesses that would be impacted by the proposed rule.” At another point, it is noted: “ASLRRA’s survey data indicates that there are actually some 420 railroads operating with one crew in the locomotive train operations. If several hundred petitions for special approval would have to be filed, this could dramatically increase the cost to both small entities and the agency to process these petitions.”

Costs Imposed on Small Railroad Will Have Unintended Consequences: “A number of small businesses who spoke at the roundtable and public hearing stated that they have been conducting one-person crew operations for long periods of time with few if any safety incidents. They said that small railroad operate at very small margins and that any increase in costs could lead customers to switch to trucks (i.e., modal shift) that are less safe.”

Huge Barriers for Small Businesses for Petitioning: “These small business representatives said that the risk analyses and assessments required by the proposed petition process would be challenging and they questioned whether any petitions for special approval would ever qualify.”

Unfortunately, none of this is surprising.

The costs of regulations are almost always under-estimated by those seeking to impose such regulations. Indeed, such regulatory entities have incentives to under-estimate such costs, and/or lack the proper knowledge to fully account for costs. Meanwhile, the justification for regulations often turn out to be rather shaky, and in this case, there are no safety justifications for crew mandates.

“No Evidence” to Justify New Regulation

An April 2021 study – “Crew-Related Safety and Characteristic Comparison of European and US Railways” by Oliver Wyman – reported the following:

“We found no evidence that railroads operating with two-person crews are statistically safer than railroads operating with one-person crews. Furthermore, an analysis of this data broken into multiple accident categories found no significant differences in safety statistics based on crew size.”

It also was pointed out:

“In sum, most European rail operations use single-person crews, even though Europe has higher train density, more passenger trains sharing the network with freight trains, and more control transactions per route-kilometer. But European one-person crew operations appear to suffer no reduction in crew-related safety, despite a high level of activity and a busy environment.”

Among others looking at this issue of government-mandated crew sizes for freight railroads, Marc Scribner, a senior transportation policy analyst at the Reason Foundation, wrote:

“During the past decade, federal and state policymakers have pursued minimum crew-size rules for railroads operating in their jurisdictions. Despite the appeals to safety made by proponents of these regulations, the available evidence does not support these claims. In addition, imposing crew-size minimums on economic grounds is likely to backfire by reducing the competitiveness and long-term viability of rail in the broader transportation sector.”

Small Business a Big Player in the Railroad Sector

Indeed, it’s important to understand the state of and role that small businesses play in the railroad sector itself, as well as in a wide array of sectors that rely upon freight railroads in assorted ways. In a May 2022 letter to the Committee on Transportation and Infrastructure, SBE Council explained the realities of this industry:

“It is essential that Congress, the administration and their appointees make decisions with a clear picture of the freight railway sector operating within the larger transportation industry. Make no mistake, the transportation business is highly competitive and dynamic.

 “Railroads not only compete against each other, but also with trucking, barges, pipelines, geographic or locational competition, product substitution, and so on. For good measure, as in most industries, there also is cooperation and complementary work in this sector, perhaps best exemplified by the intermodal freight container, which can move from ship to train to truck without unloading cargo. And then there’s the economic fact of life that future innovations and new competitors remain constant factors across industries in our dynamic economy. Who would have predicted even just a short time ago, for example, that a company like Amazon would create its own distribution network?

 “Competition in all its forms spur railroads, and other players in the transportation business, to be mindful of costs, prices and quality of service. Any businesses that ignore these essential points will find themselves in decline.”

And of course, if government inflicts additional costs, similar warnings prevail in terms of lost competitiveness and decline. SBE Council went on to point out “small businesses are part of key freight rail sectors and are served by freight railroads. Indeed, the sectors directly and indirectly related to and served by railroads are no different than the rest of the U.S. economy, that is, smaller businesses are the majority of firms in each industry.”

The following table makes clear the role that small business plays in the railroad sector and the importance of rail transport to small businesses.

Data Source: U.S. Census Bureau, 2019 latest data. Calculations by SBE Council.

And as already noted, Advocacy also noted the fact that Class II and Class III railroads are all small businesses.

There’s no getting around the fact that when regulators impose increased costs on the railroad industry, they are hitting small businesses directly and indirectly with increased costs, and in turn and eventually, consumers pay for those higher costs in various ways.

Innovations in technology and operations are helping railroads to stay competitive in an increasingly dynamic transportation industry, and that’s good news for the small businesses and consumers who benefit accordingly. Why are government regulators seeking to undermine such innovation and competition with costly regulations that make no sense from any reasonable economic, safety or industry perspective?

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an  Economist.