Freight Rail Industry Deregulation Message to the Congress Transmitting Proposed Legislation.

To the Congress of the United States:

Today I am submitting my proposals to deregulate the nation's freight rail industry. This legislation is part of a continuing effort to promote more competition in America's transportation system, and to reduce the burden of federal regulation on the nation's economy. It follows last year's successful laws deregulating air freight and passenger service. Later this spring I will submit proposals addressing motor carriers and intercity passenger buses.

The private freight railroads are the backbone of our industrial and agricultural production. But today the private freight railroad industry faces a crisis, which could have grave consequences for our nation's economy.

Though the railroads still carry more than a third of the nation's freight and most of its bulk commodities such as coal, grain, and chemicals, the industry is in a deep and dangerous decline. Year by year, the percentage of freight carried by the railroads has shrunk, while profits have fallen and costs have soared.

Many factors contribute to these problems:

• Government regulation of virtually every aspect of rail operations has restrained innovative management and efficient pricing.

• Increasing competition from unregulated trucks and barges has eroded rail markets.

• The industry has been slow to adapt to changing freight patterns and unable to rationalize its system.

• Improvements in tabor productivity have not kept pace with the rest of the economy.

A recent study by the Department of Transportation develops the grim consequences of these trends. The study, A Prospectus for Change in the Freight Railroad Industry shows that without major changes in structure and operation, the railroads will be unable to generate the funds needed to sustain themselves. Within a few years, this shortfall of funds could become so severe that it will paralyze the private railroad system and jeopardize its existence.

The facts pointing to these sobering conclusions are overwhelming. Railroad revenues have not met railroad costs, and to survive in a tightly regulated environment railroads have been forced to consume their assets. Deferred maintenance on branch and main lines now totals $5.4 billion, while total industry profits for the year ending September 30, 1978, were only $50.2 million. A sixth of all track in the nation can only be served at restricted speeds, yet even with these restrictions accidents due to track defects have quadrupled in the past ten years. The DOT Prospectus estimates that the capital needed to sustain the freight rail system between now and 1985 will total $42.5 billion; it estimates that the industry itself is capable of generating or borrowing less than $30 billion. These figures do not include the federally-aided Conrail system in the Northeast which is losing $300-$400 million per year. All railroads are caught in the squeeze between tight regulation on the one hand, and increased competition on the other. If the situation is not changed, even some healthy railroads of the South and West will face grave difficulties within a few years.

The solution to the railroads' difficulties is not massive government subsidies or new government intervention. Simply to maintain the current rail system would require $2.5 billion of federal funds each year between now and 1985 with the totals likely to grow larger after that. Investing such large sums of tax dollars to preserve an outmoded system would be highly inflationary and ultimately fruitless.

Deregulation presents the only viable option to either massive increases in federal subsidies to the railroads or increased government intervention in their operation-both of which are highly undesirable. Instead of relying on huge federal subsidies we must seek to create an environment in which the railroads themselves can regain their economic health by aggressively improving their operations and profitability. We must eliminate the outmoded rules that have prevented railroads from managing their operation efficiently, responding to competitive opportunities and utilizing equipment profitably. We must allow the industry the flexibility to set rates at levels that generate a fair return on the investment and that attract traffic lost to unregulated modes. Where continued regulation of market abuse is still necessary, we must insure that ICC decisions are rendered promptly, fairly and consistently.

The legislation that we are proposing results from a full examination of the existing regulatory system for railroads. The legislation would create a far more limited regulatory scheme—one that reflects the railroads' current competitive and financial status, and one that provides incentives for the railroads to cut costs, improve service and productivity, and price services competitively.

Specifically these proposals would:

• Allow railroads to set prices for their services without interference from the government. To prevent sudden dislocations, this rate freedom would be phased in gradually over five years with real rate ceilings allowed to increase by 7 percent per year. At the same time, inflationary general rate increases should be gradually phased out in favor of company-by-company pricing of services.

• Transfer jurisdiction over rail mergers from the ICC to the Justice Department under standard anti-trust laws. There is no reason why railroads that do not compete with each other should be treated differently from other businesses seeking to merge.

• Set new guidelines for ICC approval of rail abandonments. These tests would insure that railroads are not forced to continue to serve money losing lines, but would allow shippers, states or communities to provide subsidies to maintain service.

• Clarify provisions preventing discrimination among shipping communities, ports or connecting carriers. The new rules would continue to prevent abuses without tying railroads to rigid price structures.

• Establish new rules to protect railway employees who may be affected by rail mergers or abandonments.

• Eliminate ICC jurisdiction over many day-to-day aspects of managing the rail system.

The transition period to the new regulatory environment may involve some dislocations and may lead to temporary uncertainty for some shippers, railroads and communities. To the extent possible we shall continue to use existing federal programs enacted by previous Congresses to meet these needs as they arise. In addition, new federal resources will be available to compensate, retrain, and relocate workers who are affected by the restructuring of the system.

These regulatory changes alone will not be enough to fully solve problems of the rail industry. Revitalizing the railroads will take a concerted effort by railroad management and labor, working with shippers and communities. Only a complete overhaul of the nation's rail system leading to higher labor productivity and more efficient use of plant and equipment may be able to reverse current unfavorable trends. The government can assist in that effort but the most important contribution must be made by the industry itself.

Without regulatory changes, however, it is certain that the industry will not be able to pull out of its long decline. Without the changes I am recommending, we will face a catastrophic series of rail bankruptcies, sharply declining service and massive federal expenditures.

Unless we act expeditiously the unfortunate pattern we have seen among eastern railroads will be repeated on a national scale. Bankruptcies, followed by huge federal bailouts will spread to the Midwest and ultimately throughout the country. We can act now, while there is still time to address the crisis in an orderly way; or we can wait and have events dictate drastic solutions.

All of us—railroads, shippers, communities, workers and the public—have a vital interest in solving this rail crisis. I am confident that we can work together to solve it. I urge the Congress to act promptly on this important legislation.

JIMMY CARTER

The White House,

March 23, 1979.