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The Future History of Net Neutrality

By 30 March 2011 2 Comments

While working on a non-DigSoc project, I ran across this statement from the Association of American Railroads:

The U.S. rail model is of “vertical integration,” in which a railroad generally both owns the track and operates trains over that track. The efficient U.S. model has resulted in huge productivity gains, sharply lower average rail rates, and massive reinvestment by railroads back into their systems.

• In fact, from 1980 through 2009, U.S. freight railroads reinvested more than $460 billion — more than 40 cents out of every revenue dollar — back into their networks.

• The main alternative to the vertical integration model is the “open access” model, in which multiple railroads operate over tracks they do not own. The right-of-way is owned by the government or a government-approved manager.

• When Argentina and Mexico restructured their rail industries, an “open access” regime was initially considered but met with an overwhelmingly negative response from potential investors who were not interested in committing funds to railroads if competitors could appear at any time and capture the economic benefits of those investments. Investors realized that in a capital-intensive industry like railroading, “open access” simply entails too much risk for private investment.

• Investors also recognized that “open access” would make it more difficult to operate a railroad efficiently and profitably due to government interference and a lack of coordination between infrastructure investment decisions and operational goals.

• Where open access has been implemented, additional rail-to-rail competition has been slow to develop and problems have abounded. As Mercer Management Consulting, a firm deeply involved in rail restructurings all over the world, testified at a U.S. Senate hearing, “No country has been successful in implementing [open] access without providing significant and, in some cases, unexpected government subsidy of rail service.”

It may seem that transporting bits is a lot different from transporting coal and machinery, but there are many commonalities among different types of networks, and one of the failures of the net neutrality movement is its lack of interest in learning from experience in other areas.

Abandoned railroad tracks from scmikeburton’s photostream.

2 Comments »

  • Seth Finkelstein said:

    Actually, I think you’ve just given a very strong argument in the net neutrality movement’s favor. You’ve just provided evidence that these sorts of argument are generic from would-be monopolists. You do know the history of railroad companies as monopoly rent-seekers, right? It was quite an issue back in US history.

  • James DeLong (author) said:

    On the one side, the railroads were monopoly rent seekers, and on the other the shippers tried to drive the price down to marginal cost, which meant the railroads could not recover capital cost. Don’t forget that most RRs went bankrupt at one time or another, and that the ICC was created eventually because both the RRs and the shippers wanted it.

    For more on the connections, see my piece a couple of years ago in The American – “Avoiding a Tech Train Wreck.”

    One of my criticisms of my side in the current debate is that it assumes that the regulators of the late 18th/early 19th century period were stupid — they weren’t. They faced real problems and solved them as best they could, but the solutions led to other problems, which required the dereg movement, which in turn creates new problems.

    The pro-reg side of the argument is even more obtuse, though, since it simply ignores the incentives created by every regulatory system.