The Milwaukee Road

[jrbernier]

All of this is very interesting. I worked for both the CBQ and the MILW in the late 60's(summer school jobs). I even 'model' the MILW in HO scale. A couple of things I noticed through the 60's and 70's. The MILW's traffic west of Mpls was basically 261/262, and 263/264. Sometimes a 'dead freight' of an 'H & D' extra ran, but traffic was pretty slim. The Milw and NP had a lot more 'mountains to cross' than the GN. When the BN merger happened in 1970, the 'preferred route' was CBQ to St Paul, NP to Fargo, and the GN the rest of the way to Seattle. Only a small portion of the NP around Spokane played into this route. The old NP line died on the vine, as well as the Milw.
Back in the Midwest, the Milw had more crew districts. The BN used 3 crews to go from Chicago to Northtown(Mpls-St Paul). The Milw used 4 crews to get from Chicago to St Paul yard, and then used a 'Twin City Terminal' crew to move the train 10 miles to South Mpls where an 'H&D' crew picked up the train for the run to Montevideo. The Milw still had lots of 'patrols' that ran with a old Alco or SD7, an empty box car, and a caboose. It was joked that they would leave in the morning, find no business and be back home within the hours of service. All that said, I loved to chase Milw locals in Wisconsin and Southern Minnesota. They still ran on published schedules!
I have sometimes thought about combined Milw/NP operations in Montana and Washington - but the bottom line is that the Milw always seemed to have another mountain to cross.....

Jim Bernier

[Anonymous]

Thanks for the inputs - my thoughts are related to a plan for a model railroad - already mostly built (benchwork, mainline)....

- Yard at Ellensburg (or Easton) - the MILW and NP lines between these two towns used as double track. Passing sidings at Cedar Falls, Hyak, Easton and one somewhere on the mountain itself. Mostly rebuilt with concrete ties - perhaps one of the trestles (Hanson Creek) completely rebuilt. I am not sure, but I think a yard at Easton might be more interesting as it would be a slightly more scenic location. Not sure what really existed there before though. Is Ellensburg big enough that BN would not have moved it?

Cedar Falls a MOW/Snowfighting equipment base.

N-scale - in the current era - C44-9W's, etc - no electrification.

Perhaps modernized concreted snowsheds.

Any comments?

[MichaelSol]

QUOTE: Originally posted by carnej1

A question regarding possible upgrading of the C,M,St.P&P electrification. I've read on the Milwaukee Road Historical Association site that General Electric actually offered to completely rebuild the infrastructure in the early 1970's at little or no cost to the railroad. Presumedly this would have been an AC installation comparable to what was done with the NEC in the 70's and would have utilized a fleet pf E60C variants. But according to that source, the value of the copper wire as salvage was considered more important by MILW management. What is the real story on this? Was GE counting on Federal investment ot make this work? It would seem that they wanted top use the project as a test bed, large scale electrification schemes then being hot topic in U.S railroading due to the Energy Crisis. The plan supposedly involved closing the gap, but not extending catenary further East.

There is an interesting history here. In 1971, George Frazier replaced retiring Barry Kirk as Electrical Engineer. Frazier had been hired on by the legendary L.W. Wylie in 1950 and had served under Wylie, Earl Barnes, and H.R. Morgan, three very forward looking electrical engineers. When Frazier was promoted, the Milwaukee Road electrification was at critical point, similar to that faced by Wylie in 1948 when he took over from Reinier Beeuwkes

Frazier began putting together a proposal for augmenting and upgrading the existing electrification. Milwaukee Road Electrification Department was firmly committed to DC electrification. Wylie was experienced on both DC and AC systems. He had served as a consultant on the Tokyo Shinkasen railroad -- the high speed 25 kV AC system opened in 1964. He firmly believed the Milwaukee system was a superior system compared to the French supported AC systems.

Wylie had done a study in 1967, and concluded that investment in new electric locomotives and in solid-state conversion rectifiers at the substations to supplement and enhance the supply capacity of the system, including electrifying the 212-mile "gap" between Avery, Idaho and Othello, Washington, would greatly improve the economics of the operation of the Pacific Extension. The study concluded that in a fully-electrified operation, 40 electric units would have been required to handle the mainline tonnage, while 120 diesel units would have been needed if the electric system were completely scrapped. The study also pointed out that during the lifetime of the electrics, the diesels would have had to be replaced at least once, and that the ongoing operating and maintenance costs of the diesels would always be substantially greater than for the electrics.

Based on the 1967 study, the General Electric Company proposed taking the diesel engine out of diesel locomotives, installing solid-state conversion equipment to convert the overhead 3,400 volt Direct Current to the 600 volt Direct Current of the locomotive traction motors, and equipping them with pantographs for a price comparable with that of new diesels. At nearly the same time, the Electrification Department proposed augmenting the supply system with solid state rectifiers, as the frequency of heavy-tonnage trains in the electrified zones -- 7,500 ton trains were no longer unusual -- were causing scheduling problems as dispatchers struggled to avoid overloading the substations.

In 1971, the General Electric Company formally proposed a method of completing and augmenting the Electrification system. It contemplated extending the system across the "Gap" and for providing additional engines to make the Harlowton-Tacoma run feasible. Recognizing the difficulty in obtaining ordinary kinds of financing with such a project, GE offered to finance the project itself. Milwaukee President Curtis Crippen vetoed the proposal, based on the Milwaukee's increasingly precarious financial situation. He was opposed by some Company engineers who argued that the proposal would undoubtedly help the Company's financial situation by lowering operating costs substantially, and that even if the Company had to default on payments, the system would be "captive" and available for use while other terms were worked out. The cost of a DC upgrade was somewhere between $18 million and $39 million depending on the extent of renovations.

President Crippen vetoed the proposal, over the objections of company engineers [not in the Electrification Dept] who argued that the investment was not only a better one than ordering all new diesels for the increased traffic on Lines West, but that the investment would be "captive" in the event of receivership, which the Milwaukee was looking at even then. The adverse decision was due as much to Crippen's innate conservatism, as to the merits of the idea, which were overwhelmingly favorable.

However, Milwaukee Road's legal department was doing its own investigation, and came up with an entirely separate proposal. This was in 1972. Milwaukee Road Vice President Law Raymond K. Merrill asked one day, in his off-handed style, one of his associates if there was any federal money available to support the electrification. Merrill was one of Milwaukee Road's old-timers, and was apparently aware of Frazier's frustrated efforts at upgrading the Electrification.

The Legal Department found a little known Federal program to encourage electrification of railroads. It had never been used. L.W. Wyie's son, Don, who was in the signals and communications dept., was consulted [I do not know why Frazier was not consulted] and the Federal Railroad Administration brought in. A proposal was formalized that called for 50 locomotives, a completely new overhead, AC, closing the "gap" and even some extensions. Milwaukee lawyers spent several days in Schenectady, New York and in Erie. GE's estimate, including the scrap value of the existing system, was $250 million. The FRA was willing to commit the funds, no funds were to come from the railroad except the salvage proceeds.

However, Milwaukee Road's bankers would have to release their liens on existing equipment, in favor of the new equipment. The lawyer handling the presentation reported to me: the bankers "simply stared at me waiting for some magic word: they had nothing to offer, and the railroad financial officials accompanying me had nothing to say. Impasse seemed at hand." Merrill advised to proceed, that the lien problem could be "solved eventually." GE stood ready to go upon FRA approval. All that was needed was the approval of the Board of Directors. The Milwaukee did not need to commit a single cent to the new system. All that was required was for Chairman Quinn to put the propsal on the agenda.

"I never heard another thing about it. Of course Quinn was by now engaged in private talks with his former bosses at BN about selling the entire railroad to it, first by merger, then by stock sale, which effort consumed most of his time."

Best regards, Michael Sol

[Anonymous]

What might have been. It's just too darn bad. [V]

[Anonymous]

Question for Michael Sol:

If the modernization of the electrification had taken place, and assuming the Milwaukee was still operating today with that same system, do you have any estimates of what the energy use per ton/mile might have been? Assume for a moment that a modern Milwaukee had built a state of the art shuttle train grain loader in Harlowtown (similar to BNSF's in Mocassin), and had completed the electrification of the "gap" between Avery and Othello. What would be the BTU's per ton/mile (or the ton/miles per 1,000 BTU's)for a Harlowtown to Tacoma grain train, say 13,000 tons per train?

[MichaelSol]

QUOTE: Originally posted by futuremodal

Question for Michael Sol:

If the modernization of the electrification had taken place, and assuming the Milwaukee was still operating today with that same system, do you have any estimates of what the energy use per ton/mile might have been? Assume for a moment that a modern Milwaukee had built a state of the art shuttle train grain loader in Harlowtown (similar to BNSF's in Mocassin), and had completed the electrification of the "gap" between Avery and Othello. What would be the BTU's per ton/mile (or the ton/miles per 1,000 BTU's)for a Harlowtown to Tacoma grain train, say 13,000 tons per train?

Electric or Diesel-electric, the amount of energy necessary to move the train would be identical.

After that, it's a little complicated to discuss. The internal combustion engine still doesn't get much better than 36% efficiency or so out of the available energy in fuel. The electrification ran primarily from hydroelectric sources. Under mountain conditions, cold weather, and altitude, older studies by Southern Pacific Railway show that diesel engines can drop to as much as 60% of their rated capacity, or about 22% overall efficiency, whereas the straight electric gains efficiency in colder weather and otherwise suffers no efficiency losses due to altitude, etc. A 3000 hp Milwaukee SD-40-2 might be rated at only 1800 hp under a convergence of adverse conditions, using SP's figures. A 5,500 hp Milwaukee Little Joe would still be rated at 5,500 hp, however its overload capacity, which had been measured as high as 7,000 hp under operating conditions on the Butte Hill, would be extended by cold weather in terms of the amount of time it could safely operate at overload.

And, the Diesel-electric loses operating efficiency with age, whereas the straight electric does not. An additional economic fallout from that is the straight electric maintenance cost curve is relatively flat, whereas for Diesel-electrics used in road service, the maintenance cost curve was relatively steep for the generations prior to the acquisition of the SD-40-2 generation, after which I have seen no figures.

So, from the standpoint of operating efficiency of the motive power, overall there would be some energy efficiency in favor of the straight electrics, but that would be quite a calculation, and require a set hypothetical of weather conditions, age of equipment, etc.

In terms of dollars, it's a little easier to discuss. Under the very favorable Montana Power Company contracts, my off-the-cuff guess is that if Milwaukee Road was operating today, with an electrified gap, six trains per day each way, the power charges would have been on the order of about $5 million per year (1974 dollars) or about $11 million per year in diesel fuel charges (1974), if I am recalling correctly. Of course, 1974 is when everything changed regarding diesel fuel costs, whereas Milwaukee Road had a fixed contract rate at that time, and with adjustments after 1975, for its electric power costs. Today, Milwaukee would be paying about $15-$20 million for electric power costs for a complete system, Harlow to Tacoma, or about $65 to $80 million for diesel fuel costs over the same line. As I say, these are pretty off-the-cuff estimates. I may be a little conservative on the diesel fuel cost estimate. However, this is also specific to the Montana Power Company contract, and not to electric power rates in general that might apply elsewhere, nor would the comparison necessarily apply in the absence of that specific MPC contract.

However, the relative figures are otherwise consistent with prior calculations we have done, and with regard to the actual operating results of 3-4 trains per day each way consistent with 1974 operations. What they show is that while the thermal efficiency would be somewhat in favor of the electric system, the economic efficiency would be very clearly in favor of the electric system. Adding in maintenance costs of the motive power would shift the cost considerations more strongly in favor or the electrics, and financing charges, given the much longer economic service life of the straight electric, would shift the economic efficiency even further in favor of the electrics.

Best regards, Michael Sol

[Anonymous]

Thanks, Michael

Given what we are witnessing with intermodal growth, I would think a Milwaukee today would be handling 15 to 20 trains per day, assuming the physical plant could handle that number.

On the cost of diesel for six trains per day, I would calculate about double the cost you provided, roughly around $160 million per year based on fuel cost of $1.50 per gallon and ton/mile efficiency of around 800 miles per gallon for a 13,000 ton train.

I would offer that there is definately room for a second transcon across the Northern Tier states today e.g. there is no more underutilized rail capacity out there, and if projections regarding the growth in world trade ring true, that need for a second transcon up north will become more apparent. Even with a reduction in profit margins for BNSF due to de facto rail competition, there seems to be more than enough volume available for profitable operations.

[MichaelSol]

Of course, Milwaukee Road was not in a position to be the "second" transcon for that kind of freight. It already dominated the field. By the mid-1970's, Milwaukee Road had in excess of 60% of the Port of Seattle freight -- at one point, 1974, Milwaukee Road carried 76% of all Port of Seattle freight -- and over 50% of the intermodal freight. Port of Seatle testified as to their "special relationship" with Milwaukee Road, dating back half a century. Milwaukee had the TOFC/COFC traffic, it had the Southern Pacific traffic; it had the British Columbia Ry traffic, it had the forest products, enormous grain tonnage, it had the westbound domestic auto traffic. All the kinds of traffic that railroads wanted to build on, Milwaukee had, and BN did not.

During the 1978-79 traffic studies, 62% of shippers on Lines West interviewed said that the one thing that Milwaukee Road exceeded all of its competitors on was "customer service." This was one reason that, in spite of the Trustee's best efforts to downgrade operations and discourage shippers in 1978, most of the large shippers increased use of Milwaukee Road in 1978 over 1977 on Lines West., some (Cargill) as much as doubling their Milwaukee PNW carloadings.

Intermodal was Milwaukee's specialty in the Northwest, it had all the relationships in place and this was Milwaukee's fastest growing traffic segment after coal. It was virtually all transcontinental. Of course, as was predicted at the time, this traffic has continued to grow, even now including a significant export market of ag crops in containers, reversing the troublesome import of revenue containers, and nothing going the other way.

This was something the Planning Department was discussing at the time; what was an ideal operating configuration for Milwaukee transcontinental trains: many short, fast trains, or fewer long, heavy trains. The argument seemed to come down in favor of the short, fast trains, by which Milwaukee Road could distinguish its service given its historically faster route. I don''t think Milwaukee would have been looking at 13,000 ton trains, but probably 3-4,000 ton trains, at least by way of that particular vision.

Best regards, Michael Sol

[Anonymous]

QUOTE: Originally posted by MichaelSol

Of course, Milwaukee Road was not in a position to be the "second" transcon for that kind of freight. It already dominated the field. By the mid-1970's, Milwaukee Road had in excess of 60% of the Port of Seattle freight, and over 50% of the intermodal freight. Port of Seatle testified as to their "special relationship" with Milwaukee Road, dating back half a century. Milwaukee had the TOFC/COFC traffic, it had the Southern Pacific traffic; it had the British Columbia Ry traffic, it had the forest products, enormous grain tonnage, it had the westbound domestic auto traffic. All the kinds of traffic that railroads wanted to build on, Milwaukee had, and BN did not.

During the 1978-79 traffic studies, 62% of shippers on Lines West interviewed said that the one thing that Milwaukee Road exceeded all of its competitors on was "customer service." This was one reason that, in spite of the Trustee's best efforts to downgrade operations and discourage shippers in 1978, most of the large shippers increased use of Milwaukee Road in 1978 over 1977 on Lines West., some (Cargill) as much as doubling their Milwaukee PNW carloadings.

Intermodal was Milwaukee's specialty in the Northwest, it had all the relationships in place and this was Milwaukee's fastest growing traffic segment after coal. It was virtually all transcontinental. Of course, as was predicted at the time, this traffic has continued to grow, even now including a significant export market of ag crops in containers, reversing the troublesome import of revenue containers, and nothing going the other way.

This was something the Planning Department was discussing at the time; what was an ideal operating configuration for Milwaukee transcontinental trains: many short, fast trains, or fewer long, heavy trains. The argument seemed to come down in favor of the short, fast trains, by which Milwaukee Road could distinguish its service given its historically faster route. I don''t think Milwaukee would have been looking at 13,000 ton trains, but probably 3-4,000 ton trains, at least by way of that particular vision.

Best regards, Michael Sol

If the Milwaukee road had the amount of traffic stated, why didn't the railroad's PCE last longer than it did? Did BN contribute to this?

[passengerfan]

As I recall the sole reason the Snoqualmie Pass line was scrapped by the BN was that two of the major bridges on the line were destroyed by slides and the costs of replacement were prohibitive when compared to the costs of reopening Stampede. I believe one of those bridges is where the company photographers took pictures of the Olympian Hiawatha behind a Bi-Polar. This was no small bridge and its loss sealed the fate of the Snoqualmie Pass Line.

[MichaelSol]

QUOTE: Originally posted by Michael27
If the Milwaukee road had the amount of traffic stated, why didn't the railroad's PCE last longer than it did?

Well, that was certainly the good question at the time. The Milwaukee's abandonment petition showed the PCE as profitable, even at a time when the railroad as a whole was losing between $55 million and $77 million, and in spite of incredibly poor equipment cycle times and considerable derailment costs as well. SOMETHING was generating some good money to overcome those exceptional operating costs. That "something" was, of course, a very high quality, long haul tonnage; not as much in gross tons as its competitors, but more so in revenue produced. Milwaukee's PCE had a top of the line traffic mix, and it carried that mix between Portland, Tacoma, and Seattle, on the one hand, and Twin Cities, Chicago, and Louisville on the other hand. Nobody else was carrying that quality of freight that far in the nation.

The Trustee's consultants, when asked to identify the most profitable possible configuration of a reorganized Milwaukee Road, identified the profitable Milwaukee Road as that line from Portland to Seattle, to Twin Cities, Chicago, to Louisville, and not much else. In their view, the Milwaukee Road's earning power was from its transcontinental system and its transcontinental traffic.

Configurations they attempted to project without the PCE showed, in their estimations, little likelihood of ever attaining profitability even with the most optimistic traffic projections.

The Trustee's selection of a "Milwaukee II" attempting to go it alone without the PCE had little probability of success on its own. The Trustee knew that from the traffic studies even though, under oath, he stated a contrary position. He also resigned his position after the consulting study reached his desk. The Milwaukee Road's bankers, experienced railroad banks including Continental Illinois, supported the proposal to retain the PCE.

As one former VP-Operations of the Milwaukee remarked: "railroads were merging attempting to get longer hauls. Railroads made their money from long hauls. Here was Milwaukee, trying to get rid of some of the best long hauls in the country, get rid of its high profit, low expense operation, and save that part of the system that was low profit, high expense. Milwaukee Road was the only railroad in the country arguing that it could make money from short hauls. It never made any sense."

Best regards, Michael Sol

[MichaelSol]

As an addendum, the operating revenues of Lines West in 1977 were $160,227,457 (not including Milwaukee Land Co). The direct operating expenses of Lines West were $104,900,000 (65% operating ratio) [Application to Abandon, Exhibit K]. The operating expenses did not include overhead attributable to Chicago offices and other overhead. The entire cost of mainline rehabilitation west of St. Paul, estimated by an FRA study at $53 million, could have been generated internally in a single year.

Let's rephrase that: the funds necessary to completely rebuild Lines West to Class IV standards were being generated every year after 1970. Of course, had the Company simply put some of that profit into the line each year, the shortfall would have never reached $53 million, they never would have had a deferred maintenance bill at all. Based on the detailed operating cost/revenue breakdown for Lines West provided to the ICC by the Milwaukee for the years 1976, 1977 and 1978, it is a pretty sound estimate that between 1970 and 1978, Milwaukee Road Lines West generated over $400 million in profit, that is, gross revenue in excess of the direct costs of producing that revenue. Ironically, Milwaukee's VP Operations testified that during 1977 and 1978, Milwaukee had turned down an additional $64 million annually, because of the inability to supply equipment to shippers clamoring for service. He blamed that on lack of equipment, even though a cursory glance at the situation showed that the lack of equipment was not due to the size of the car fleet, but rather the long equipment cycle times resulting from slow track speeds.

The conclusion from the VP's testimony was that, for little extra operating cost, Milwaukee had been positioned to nearly double its free cash flow from Lines West, had it simply put some money into the track and reduced the equipment cycle times. The real irony is that by increasing track speeds significantly, operating costs might have actually been reduced, even while carrying the additional traffic. The result: a $224 million revenue stream, with $100 million in direct operating costs. And that would have been in the "bad" years of 1977 and 1978, not during the good years of 1973 and 1974. Not bad for a railroad that "shouldn't have been built in the first place."

The cost to rebuild Lines West was a drop in the bucket compared to the free cash flow generated by Lines West. The bulk of that profit was a direct result of the Burlington Northern merger conditions and some effect from the Monon merger condition.

Even by 1977, when things had declined considerably from the peak operating year of 1974, the PCE remained quite a profit generator for Milwaukee Road. Best regards, Michael Sol

[Anonymous]

Michael,

I seem to remember a book regarding one of the Milwaukee bankruptcies, something to the effect of "......the Nation Pays Again" or a title similar. Do you know to what I am refering? If so, is this book about the Milwaukee situation during the 1970's up to the eventual retrenchment, or is it about an earlier bankruptcy? Do you know if the book is available in print or at a library?

[Anonymous]

Out of print:
The nation pays again: the demise of the Milwaukee Road, 1928-1986
Ploss, Thomas H.
Publisher: [S.l.] : T.H. Ploss, c1986.
ISBN: 0-96137-881-6

The book is available (noncirculating) at our local Wisconsin library. Maybe try near you or used on the web?

Also:
Supplemental memoirs to "The nation pays again"
by Thomas H Ploss
Unknown Binding: 36 pages
Publisher: Our Pub. Co; 1st ed edition (1998)
ASIN: B0006RAHNC

[MichaelSol]

Yes, Dave, as TomTrain points out, there is a book, "The Nation Pays Again," about the 1977 bankruptcy. There's not much financial analysis in that book, but an insider's view of the culture in place at the time and how that culture 1) didn't really seem interested in running a railroad and 2) had its mind made up and didn't want to be bothered by facts. For Milwaukee people, there is some controversial stuff in there. I agreed with some of the stuff in the book, disagreed with some other points, and was appalled at some of the things I learned.

There was an earlier book, on the 1926 Milwaukee receivership proceeding, and the title of the 1977 book is a reprise of that earlier title, "The Investor Pays," by Max Lowenthal (1933). Also a very controversial book in its time, written by an influential "New Deal" adviser.

The book provided a strong impetus for the creation of the Securities and Exchange Commission, and was a big influence on one of the early SEC Commissioners, William O. Douglas, a former Milwaukee Road Vice President who happened to be at the center of the legal/financial maelstrom that resulted in the passing of control of the Milwaukee in 1928 from independent investors to the private banking firm of Kuhn, Loeb & Company. Douglas' experience at Milwaukee colored his attitudes toward corporations for the rest of his life, and after his appointment to the Supreme Court in 1939, is reflected in many of his later Supreme Court opinions.

Lowenthal's experiences with the Milwaukee receivership also reverberated when Lowenthal later practically single-handedly drafted the Transportation Act of 1940 working with Montana Senator Burton K. Wheeler, chairman of the Senate Commerce Committee. Milwaukee's VP Law, Ray Merrill, termed that book a "mere expose." A review of the working documents for the book shows it to be highly selective with facts, misrepresents key elements of PCE construction testimony presented to the ICC, and unfairly characterizes many of the players.

The book is more like a trial brief for the prosecution [Lowenthal was an attorney and, after publication of the book, was appointed Counsel to the Senate Commerce Committee)], rather than a dispassionate examination of the circumstances of the 1926 receivership. Unfortunately, much of what Lowenthal wrote from a purely partisan, and often unsupported, perspective has been cited by subsequent historians as "fact," and this in turn colored, and clouded, the public perception and the political debate regarding the Milwaukee's PCE. Thus are the dangers of reliance on secondary, rather than primary, sources.

The 1977 book is written somewhat from that same kind of perspective, prosecutorial, by a very angry Milwaukee Road attorney.

Best regards, Michael Sol

[arbfbe]

So who did the Board of Directors represent in the 1970's? It sounds like they were a bunch of Neil Bu***ypes who wondered why they were invited to sit on the board since they really didn't know anything about railroading, or in Neil's case banking. Who held the paper on the MILW that allowed them to pack the board with their own representatives or was the stock ownership of the company so dispersed management was able to load it with their mindless friends? Why did the Chicago Milwaukee Corp want out of the railroad business at distress prices?

Thanks for all the good information, Michael.

[MichaelSol]

Hi Alan, that Milwaukee Board wasn't untypical of a board of directors that evolved during the 20th Century. As Gardner Means and A. A. Berle pointed out in their landmark book "The Modern Corporation and Private Property" (1932, p. 124), control of large corporations ultimately lay in the hands of management. One of the byproducts of the development of large industrial organizations was that no single investor could typically own enough stock to influence control of the corporation. Only in a very few circumstances could investor control remain, where families kept a close control of an original ownership, such as the Fords, the McCormicks, the DuPonts, or even the Hill family. These were the exceptions rather than the rule, and time was always against even those ownerships. More recently, Milton Friedman succinctly phrased the problem of modern corporations as being one of "owners that don't manage, and managers that don't own".

Milwaukee, like most railroads, was owned primarily by institutional investors who were notoriously, in that era, passive owners. The Board of Directors represented people selected by management, and put forward for election to the seats. Chairman Quinn owned the most stock of the entire board, at about 3,000 shares. The remainder of the board owned mostly just "qualifying" shares, the 100 shares of stock necessary to take a board seat. When W.L. Smith resigned as a VP of the Burlington Northern and took his board seat at the Milwaukee as the new President of the Company, the Company bought his 100 qualifying shares for him.

So, you are exactly correct; by and large the directors were people who were put on the board, not because of their interest or investment in the railroad, but because they were friends of so-and-so and would like to be a director of a large railroad company, it would look nice on their resume for their country club membership application, and in return they would be friendly to management.

CMC's attitude toward its railroad company was pretty much the same as Illinois Central Industries' attitude toward the ICG, or North Western Industries' attitude toward the CNW. How can we leverage these balance sheets to get out of the industry? Bill Johnson and Stanley Hillman set the pattern with the ICG, and Ben Heineman at North Western, and everyone else was trying to copy what they did, hence the explosion of railroad holding companies. Unfortunately, William J. Quinn was not Bill Johnson, and so when ICG needed a loan to avoid bankruptcy, IC Industries was able to offer such a loan; CMC had no such resources to offer the Milwaukee Road. CMC just never became the kind of diversified, healthy, growing holding company that Johnson and Hillman put together at Illinois Central Industries.

Ironically, the first whiff of a "vision" for the Milwaukee Road as a railroad company came from the outside, Oppenheimer Fund, which accumulated a significant position in CMC stock with the idea that Milwaukee Road was ideally positioned to take advantage of the energy crisis and become a major coal hauler.

Oppenheimer's Chairman speaking: "The railroad provided access to some of the largest coal-producing areas of the West, making it a strategically important target for acquisition for healthy railroads... the Milwaukee Road might be a very valuable property indeed. ... once we acquired a significant position, I traveled to Chicago to meet with the management of the Chicago Milwaukee Corporation, the holding company that owned 96 percent of Milwaukee Road stock. I asked the company's accountants what they felt the railroad and its stock were worth."

"The answer came back promptly and unequivocally: zero. The accountant's considered opinion was that liquidating the company would not yield enough money to pay off its debts, much less leave anything for stockholders."

"Management could not have been more wrong about the company's value. So much for inside information .... without a doubt, the accountants and management were shortsighted, but I suspect something more was at work. The difference might be explained by the collision of world views, each of which was internally consistent."

"Management executives looked to the past in their assessment of the railroad. They saw its wretched history of bankruptcy and losses, the thousands of miles of useless track, and the years of failed attempts at regulatory reform; from this they could only conclude that the Milwaukee Road was a failed railroad that could never be profitable. We looked at the same railroad and saw vast assets in real estate and machinery that could be sold. Where management saw endless regulation, rate restrictions, and union rules, we felt there was a promise of change that would enable the railroad to prosper once again."

"Milwaukee Road eventually proved to be an enormously profitable investment ... [although] it became profitable for reasons very different from the analysis that prompted our original investment."

Best regards, Michael Sol

[arbfbe]

The 60's what a time to watch the RR industry. Railroads are dirty, expensive, unpredictable and generally just nasty things to manage. Just about the time you think things are going to the plan a storm, business downturn or economic upheaval comes along and busts all that great planning work to pieces. Diversifying in to pantyhose has to be easier, at least in the ICG mind. So you loot the railroad via deferred maintainance and use the money to buy nonrelated businesses or suppliers in your industry. Of course the deferred maintainance starts to catch up, derailments increase, costs go up and smooth operations get even harder to achieve. Pretty soon the railroad operations provice the lowest rates of return in your business portfolio. Time to sell, liquidate or merge off the railroad assets. Hey, the nonrailroad companies are so much easier to manage, just set goals and bark orders to those who are really operating the plants and selling the products and services. Those returns go to the holding company and are kept separate from the railroad operation that basically underwrote their success. The pinnacle of this was the BNRR, BN Resources and BNI in the mid 1970's. After acquiring all those diverse companies to buffer the railroad during their business cycles it was determined to "spin off" the railroad and resources companies into separate entities. Just make sure you leave all the debt with the railroad and send out the resources companies debt free, a real darling to the investors. I guess the CM Co just never learned to do it as well as some of the others in the railroad business. It is criminal that so many employees and small investors paid the price of their livelihood to make so much return so for so few at the top of CM Co. Legal criminality but fraud, theft and deception, nonetheless.

Alan.

[Anonymous]

One has to wonder what the rail picture would have looked like today if legislation to reduce regulation had been implemented in 1960, 20 years before Staggers. Would Milwaukee have survived, or would it have been run into the ground by the Hill lines? It sounds as if Milwaukee's mid-level managers were pretty aggressive in recruiting new business. Would Milwaukee have been the dominate Northern Tier line, would it have been absorbed by the Hill lines (assuming ICC/STB approval), or would some other Class I power have made Milwaukee a prize catch?

I'm not so sure that a 1960's Staggers wouldn't have resulted in the same Western U.S. duopoly we have now, since I believe the sole reason for Staggers was to reduce the number of Class I's to increase railroad pricing power, and not to provide a basis of competition among carriers. Whether the Milwaukee PCE corridor would have remained is the question, depending on if an eventual merger partner other than the Hill lines had assumed that asset.

[Anonymous]

Michael,

I saw this on the TRAINS website:

"Subscribe or renew your subscription to Trains magazine before January
25th to assure you'll receive our March 2005 issue featuring
railroading in the 1970s!"

With TRAINS March 2005 issue covering railroading in the 1970's, I thing some of the insights you and Rob1 provided regarding the Milwaukee and the PCE would make for a great article. Would you (or Rob1) consider contacting the TRAINS editor and seeing if they would carry a piece from you regarding the Milwaukee situation during the 1970's?

[MichaelSol]

Thanks Dave, Rob would probably do the best job, but on a national magazine like that, they have already done the markups and the page proofs for a March issue; long past the copy deadline. In this case, the story is still breaking, and when it is all put together, will be an interesting tale, I am sure. Best regards, Michael Sol

[Anonymous]

QUOTE: Originally posted by futuremodal

One has to wonder what the rail picture would have looked like today if legislation to reduce regulation had been implemented in 1960, 20 years before Staggers. Would Milwaukee have survived, or would it have been run into the ground by the Hill lines? It sounds as if Milwaukee's mid-level managers were pretty aggressive in recruiting new business. Would Milwaukee have been the dominate Northern Tier line, would it have been absorbed by the Hill lines (assuming ICC/STB approval), or would some other Class I power have made Milwaukee a prize catch?

I'm not so sure that a 1960's Staggers wouldn't have resulted in the same Western U.S. duopoly we have now, since I believe the sole reason for Staggers was to reduce the number of Class I's to increase railroad pricing power, and not to provide a basis of competition among carriers. Whether the Milwaukee PCE corridor would have remained is the question, depending on if an eventual merger partner other than the Hill lines had assumed that asset.

When rolling back time to the 60s, 70s, or even the 80s, I think it's important to consider the world political situation. China was a cold-war enemy(some in the current administration still feel that way). There was some trade with Japan and Hong Kong, but neither S. Korea or Malaysia were major exporters. I doubt few would have foreseen Chinese exports to Walmart accounting for a good chunk of our trade deficit.

Intermodal container traffic was started by the ocean carriers, not by the railroads. Port facilities for this type of trade is usually the responsibility of the various port authorities, again not the railroads.

[MichaelSol]

QUOTE: Originally posted by up829
Intermodal container traffic was started by the ocean carriers, not by the railroads. Port facilities for this type of trade is usually the responsibility of the various port authorities, again not the railroads.

Milwaukee's intermodal traffic began to rise significantly in the mid-1960s, and this growth accelerated during the 1970s. As one of Milwaukee Road's traffic people, C.K. Dunning, recently stated: "As some of you know, I was involved in MILW's Import/Export COFC business, a traffic segment that was quite important to MILW between PNW Ports and the Midwest and traffic that MILW carried more of than UP and BN combined right up to the bitter end (of Lines West)."

Along with coal, grain, and both import and domestic west bound auto traffic, intermodal was Milwaukee's big growth ticket in the 1970s. All of Milwaukee Road's big items of that era were related to the transcontinental line. Virtually all of Milwaukee Road's total revenue growth, 1970-1977 was from the growth of transcontinental line traffic, including intermodal. The Milwaukee's problem, its Vice President Operations and Maintenance told the ICC, was not from a lack of business -- although carloadings had been falling throughout the Midwest on the Milwaukee from 1966 forward -- but from "an unprecedented demand for services" on the transcontinental line that had continued to build all during the 1970s.

Two of the most vocal opponents to the abandonment of the PCE were the Port of Tacoma and Port of Seattle, both of which argued that Milwaukee was the only railroad that worked with them and had made intermodal possible. Both made extensive presentations of expected future growth, and investment in port facilities which depended, they argued, in large part on the continued existence of the Milwaukee Road.

It was in part because of the unreserved support of these two major West Coast port authorities that NewMil was able to obtain the promise of private financial support and rebuilding for its preservation of the transcontinental line (Portland to Louisville) from SeaFirst and Lazard Freres, at a time when the Trustee could find zero financial backing for any of his proposals, even from Milwaukee's own bankers, who instead supported the NewMil plan to retain the transcontinental line. Best regards, Michael Sol

------------------------------------
A post script, description from a Milwaukee Train Crew member, John Crosby:

Milwaukee Road Seattle yard supplied the railroad with its hottest train, #200, which consisted of the Port of Seattle TOFC/COFC traffic. The Milwaukee pig strip was located near where the containers were unloaded. The Burlington Northern pig strip, by contrast, was at South Seattle, just north of Black River. This was a long drive for each container to go.

And the Milwaukee Road rail operation was more efficient. Seattle Yard engines made up #200's connection merely by doubling Pig 1 and Pig 2 out to the outbound tracks 15, 16, and 17. The car toads worked the cars there, then a Seattle Yard engine (usually an MP 15AC), took the drag out to Black River and usually left it on the 11th Sub Eastward main, for approximately 8pm pickup by 200 from Tacoma. #200 was likely a caboose hop from Tacoma, or perhaps had hot Port of Portland import autos on its train. #200 was probably light enough, under 3,400 tons, to make Hyak without slaves cut in.

The Burlington Northern pigs, by contrast, were worked by a road job called "Crew 10" which doubled out the pigs from South Seattle and hauled them to Balmer Yard at Interbay. At Balmer the pigs were worked up by the car toads. Then Train #4 hauled the pigs to Wenatchee. Thus two road jobs to get the pigs to Wenatchee, which was about 170 miles from South Seattle. The Milwaukee required only one road job to get its pigs 208 miles to Othello (the yard job in question performed plenty of other work besides working #200's connection).

Anyone who doubts that this traffic existed can see it in action on my DVD, shot on #200, 22 June 1978.
-----------------------------------

[Anonymous]

This all fascinates me. I worked on The Milwaukee from 1972, until 1982 in train service on the C&M division. I had left the CNW and Amtrak to go there. I felt the place was in pretty good shape then. By '74, trainmen from our division were being asked if they would like to re-locate to the west coast account the traffic boom. I felt secure there until '77 and the first runors of bankruptcy, which I couldn't believe at the time. There were the usual rumors that BN people were being brought in to ruin us so they would get all the traffic. There was the bright ray of hope in the late '70s when Milwaukee's "Sprint Train" service, dedicated intermodal jobs with inter-divisional crew runs, started. They seemed to run as empty as The Hiawatha of 1970.
Our former neighbor, and family doctor, became the Cheif Surgeon of the Milwaukee. He administered the annual physicals for the top executives. He remarked to me once, "They're all a nice bunch of guys, but not very bright."

Mitch

[Anonymous]

Michael,

I came across a piece you wrote in Northeast Railfan regarding your team's evaluation of the electrification on the PCE:

http://www.northeast.railfan.net/classic/MILWdata5.html

The analysis provided by yourself and Jim is enlightening regarding what was going on during the 1970's.

PS - I apologize if you already provided this link.

[Anonymous]

Mention was made of diversification. This usually leads to disaster. A regulated company wants to get into a line of business that is not regulated where the money they can make is unlimited. This usually is their downfall. The railroad or electric company that is regulated know their business quite well and have an institutional mentality to work in that operating theater. Hocus pocus we now own a completely diferent business which we know nothing about. Think about a rairoad buying a circus. Not much crossover there unless it is Ringling Brothers Barnum and Bailey, which has the red and blue trains. Now they have to work in the competitive world and are no longer protected by the public utility commission. The management of a utility never had to make a risk decision in their corporate life. I we screw up we just put it into the rate base and presto we are covered. In the competitive world this is not the case. You have to eat your mistakes. There are many examples of getting out of your area of expertise and floundering. Think of the once mighty AT&T and look at them today.

[CSSHEGEWISCH]

How well you handle diversification depends a lot on what you do with the management that came with the firm you just bought. When Norfolk Southern set up Triple Crown, it brought in management from North American Van Lines for their trucking industry expertise. Triple Crown is doing quite well in its niche.

A prime example of what can happen in going from a tightly regulated environment to a lightly to non-regulated environment is the airline business. It would appear that twenty years after dereg, the older carriers still haven't got it figured out.

[Anonymous]

For CSS

Agree 100%, however NS in setting up triple crown it was in a similar type of business and there would be some overlap of work skills. NS was very smart to sourround the new operation with experts in that line which is why it is doing so well. The problem comes when a company moves into a completely different line of business in which they do not have any expertise They think they know it all since they bought the comany snd can put their management stamp on it. Sometimes yes sometimes no.

Going back to AT&T several years ago they fought a very tough war to buy NCR to get into the computer business. Computers are very competitive. Just look at how many computer companies are in the grave yard now. Even though AT&T had considerable computer experience they made a mess of NCR. After a few years they sold it for pennys on the dollar. If I were a stockholder in AT&T I would be a little mad. I think the bottom line is that AT&T never was able to get out of the regulated coccoon type of mentality. Their blunders continue: AT&T wireless, cable TV, local dial tone service, and more. They decided to keep the long distance part and let the local exchange part go. See who is the most profitable today (excluding Qwest which is a self inflicted disaster ). When you can get unlimited long distance from the local phone compamies the day for long distance as a stand alone business is doomed.

[Anonymous]

Hope someone printed this topic before parts of it were erased!

[ole1]

For all fans of early Milwaukee Road history you might look for "The Milwaukee Road, Its First Hundred Years" by August Derleth published by Creative Age Press in 1948. I've just finished reading it and it has vast amounts of information about development, finances, politics etc. I even found out that the CM&StP operated a narrow gage line in Iowa from 1880 to 1933. Obviously good stuff for the history junkie.