Can anyone explain the principle behind the old DRG&W's "Short, Fast and Frequent" Concept??

[bobwilcox]

If anyone wants to read more about the development of rate regulation suggest they get a copy of Economics of Transportation by Charles D. Locklynn. Pre Staggers is was the standard textbook for freight rates 101. It is out of print but the used dealers hooked up with Amazon and Barnes and Nobel have copies.

Pre Staggers all of your rates had to be in tariffs. Therefore, your rates could not be undully discrimatory. This would often block a rate adjustment and drive traffic to trucks, etc. As an example, Agrico Chemical had an urea plant at Clinto, IA on the CNW. Lets suppose they came to the CNW and said they have been looking at switching all of their urea traffic terminating within 300 miles to truck unless they get a 10% rate reduction. They CNW is ready to make the reduction on Agrico's 100 cars per year but realizes that other shippers move 1,000 car per year into the same market from location too far away for truck competition. The CNW must cut its rates 10% on all 1,100 or face a suspension by the ICC. We refered to this as a collateral effect-the ICC said you could not engage in undue discrimination.

At the time Staggers was being passed we thought contract rates were going to be limited to situations like the above urea case or projects involving shared capital investment such as a spur into a new coal mine. However, the real world arrived for us in the 90 days between the time Staggers was passed and it went into effect. We, the BN and IC were competing for over head traffic from WY to the Northeast via UP-CNW/BN/IC-CHGO-Connections. The receiver told us we could have all of his traffic if we gave him a contract with the best allowance off the tariff. We won! However, if the next three years, in annual rebids, the CNW saw its margin drop from 100% to 0%. This dive to the bottom is only stopping as the traffic lanes fill up.

[MP173]

Mark:

Thanks for the definition of reciprocal switching. Makes sense now.

You are correct on the assumption of variable costs with little fluxuation.



The entire debate about paying for intrastructure is complex and I dont have the data. But, we all pay for the use of highways. Trucking firms pay dearly. Not as much as if they owned their own roads, but fuel taxes are pretty expensive.

The railroads have always complained about the unfair competitive costing nature of air, water, and trucks, but how many railroads have reduced their operating costs with shared trackage? It usually doesnt occur. Why? I think it is control.

I remember the two part series years ago on the River Wars of the Cotton Belt/MoPac on the joint lines running from St. Louis. Infrastructure is critical in any industry for success, particularly transportation.

Do you think the railroads would want any part of O'Hara or any other airport?

ed

[MP173]

***:

What was(is) reciprocal switching?

My view of pricing in transportation, post deregulation was this pretty simple. In the airlines, as well as trucking, and possibly carload railroading, carriers had scheduled runs. For airlines it was a flight, for LTL it was either a peddle run or line haul, for carload freight it was the linehaul manifests between terminals.

For the most part, those were pretty much fixed costs. It costs United Airlines so much to fly from Chicago to where ever each day, ditto for running line haul for the truckers or for the railroads. Even peddle runs, or locals for the rails were somewhat "fixed".

What I saw the LTL truckers do in the 80's was to go for volume, filling those line haul runs, expanding those terminal systems, and providing more service points. What they didnt realize was that "volume was vanity and profit was sanity". All logic in pricing went out the door.

I see that happening in rail with the intermodal, or at least it has occured. Now with the truck driver shortage and fuel pricing, perhaps the rates are more stable. Trains magazine covered this well a couple of years ago with the comparison of carload (high margin traffic) vs intermodal.

Great discussion. As a kid, I would collect anything I could get as far as timetables and Official Guides and even a few tariffs. The thought of railroads moving people or products cross country was and still is very intriguing to me.

One more thing...are today's rates published on websites? It would be interesting to see what "the traffic will yield."

ed

[jeaton]

For *** or anybody else. I have a question about railroad/shipper contracts. Were there any significant diferences in the provisions between contracts and "public rates" or tarriff publications? If not, what was seen as the benefit of contracts. Was it just the confidential element?

Jay

[Anonymous]

Mark, I can barely keep up! But I'll try. Responses to you most recent post:

1. Well stated and I agree with you except your point about mode share shifts. The Southern Railway demonstrated to the industry how to manage the problem: build a competition matirix so that "general rate increases" become "selective rate increases."
The "gospel" across the industry in establishing specific commodity rates was (rightly), "value of service" tempered by competitive reality. Having invested uncounted resources in developing a highly differentiated pricing structure, finely tuned to the market, how could it possibly make sense to wake up one morning and say, "I think I'll increase ALL rates by 12 % this afternoon. All that analysis was mere window dressing." I spent 10 years battling that kind of nonsense.

2. Enforcing pricing discipline: The threat of retaliation was implicit, usually, simply as a function of size and geographic coverage. The bureau processes were highly political in many respects, and all the tools of that trade were regularly used: facts, "facts," logic, persuasion, cajoling, horse-trading, bloc-voting, emotion, precedent, fear-mongering, ... you name it!

3. In a word, interdependence. Most traffic was intra-territorial and a high percentage of that was interline. So, sure, exert your leverage, but don't break the system.

4. Weak railroads were weak for a reason: poor franchise. (The ICC long recognized this and back in the 1920's put together a master merger plan for the nation to "solve" the problem. The Depression and bankruptcies ended that.) I believe the ICC always felt its primary role was to "protect" the public, not individual lines, strong or weak. (Again, I recommend "Enterprise Denied" by Albro Martin. The ICC was the first independent agency created by Congress and it had a long and proud institutional history. Some have suggested that like many agencies, it was captive to the industry it regulated, but if so, that was a development late in its life.)

Rate bureaus "helped" weak lines in that their demise or merger was delayed by the tempered competition fostered by the bureaus. The 1958 Act gave little or no cost relief. (Some have observed that the needed cost relief should have come from changes in the Railway Labor Act.)

5. Reciprocal switching was/is nothing more than a recognition of mutual interest. Pennsy was "there" first in many areas, with good geographic coverage, so why "open" themselves to competition?

6. Yes.

7. State regulation: I should have included that earlier as a significant gain from the Staggers Act, both in regard to rates and abandonment. Railroad presidents complained that the ICC was slow, but the states were often glacial. Staggers essentially took the states out of the business of regulating railroads.

8. Contract rates in trucking: Good question. I believe it is because the market is atomistic; trucking industry assets are very short lived; virtually all costs are variable; and most importantly, those costs are universally known. To know truck costs is to know truck rates. (Back in the '70's I tracked truck rates and learned they reduced to a cost equation: $100 (fixed) + $0.70/mile (variable).) Service was and is the major point of differentiation. Isn't it ironic that before Staggers and the ru***o secret contracts, service was a major point of differentiation in the railroad business!

[kevarc]

State Regulation always confused me also. Prior to the creation of the ICC, I can plainly understand how they could do what they want in THIER state. But after the creation of the ICC and the fleshing out of thier power, they really seemed to have faded into the background. I looked around but have never been satisfied. Though the book "Chessie's Road" did have a lot of information on the State of Virginia's regulators, they really never did make it lear when it began to fade from the scene.

In the past, industries have been quick to go to the federal court system to get state laws/rules/regulations thrown out on inhibiting interstate competition. ( I have another question on this, but I will start a new topic so not to hijack this one.)

Being in the electric business, I see a lot of parallel's between what happened to teh state regulators verses the ICC and today's FERC and state PUC/PSC's. And the State regulators have a lot of the same questions. Where do they stand in today's electric market.

[Anonymous]

MP173:

In my opinion, unpublished, secret rate contracts give enormous leverage to shippers by inviting blind price bidding from competitive railroads. (And remember, just because a shipper is supposedly "captive" doesn't mean that there isn't competition from another railroad with its own "captive" shipper of competing products. Misinformation in the form of supposedly "secret" rates can and has led to strong "cross-country" rate wars.)The result is an almost endless ratcheting down of bids/rates to near the level of variable costs. Long-term contracts at variable cost rate levels will not support reinvestment. Public rates allow market-based pricing to prevail, giving the railroads opportunity to reasonably participate in the economic "rent" generated by their service and thereby, hopefully, live to serve another day.

(I was a pricing officer for a regional railroad from 1970 to 1980, and sat on a rate bureau committee for 6 of those years.)

[MP173]

Further info on Mark's discussion of class rates.

In LTL trucking there were about 15 factors that entered into deciding a commodities "class". However, the largest factors that went into the decision was the weight density and the value of the commodity.

For example, steel was a class 50, the lowest class, as was nails. If I recall correctly, fasteners were class 55. Once you got into plastic articles, it was based on the density of the shpment, in pounds per cubic foot. Anything over 15 pcf was class 70 and it went up to a class 250.

Generally speaking ( really generally), a class 50 was 50% rate of class 100 and class 200 was 2x the class 100. It was a pretty efficient system.


However, remember these were LTL shipments. Truckloads ran on commodity rates, which were much more efficient and based on mileage more than anything else.

ed

[Anonymous]

Mark, your first three points are accurate. (I'm puzzled by your reference to not putting "market share on the table" in the context of general rate increases.)

Switching charges generally had nothing to do with the type of rates for line haul. If an industry was open to reciprocal switching and the origin or destination carrier absorbed, then the shipper paid only the line-haul rate, through or combination. If the industry was closed, then a switch charge would apply inaddition to the applicable line-haul rate(s).

The rate bureaus operated under an explicit grant of antitrust immunity to foster an integrated national railroad network. The immunity was a quid pro quo for very tight governmental service and rate regulation. So, while the railroads could sit in a smoke-filled room and agree to up rates, the ICC had the final say if a shipper complained. But the tempering of excessive competitive zeal was a very real function, as well. Remember history ... the Interstate Commerce Act of 1887 was as much for the benefit of the railroads as it was for the Grangers. The railroads wanted public rates, enforceable by law, with no secret rebates. The rate bureaus fostered rate floors, and a very elaborate process was put in place to vet proposals to reduce rates. Justification was required; bureau staff reviewed and made recommendations for approval or disapproval based on precedent and competitive analysis; controversial proposals went to committees of carriers for debate and vote, often after shipper hearings. Most carriers followed these procedures most of the time, even though each carrier had the unrestrained right of independent action before, during or after these proceedings. Pricing discipline was seen as a distinct virtue.

Clearly, large railroads had the power in the bureaus. And it was exercised, in committee and by independent action if needed. And the power was wielded wisely and unwisely. I mentioned the Southern Railway favorably earlier in the thread, for they did their homework and priced intelligently, by and large. Others seemed almost oblivious to the external world of trucks and barges and logistics.

I continue to be amazed that for the period 1958 to 1980 the railroads had antitrust immunity for rate-making in an atmosphere of substantial deregulation, yet managed collectively to botch pricing. Organizational myopia and inertia were and are potent factors. On second thought, I shouldn't be amazed.

[MP173]

Flashback:

From 1980 thru 1990 I worked in the LTL trucking industry as a Traffic Manager. Our rates at that time were based on tariffs thru various bureaus and we had interline agreements with other truckers.

The concept of combination of rates and joint rates is the same, regardless of railroad or truck. If you had an interline agreement you could publish joint rates. Generally in LTL trucking, the rates were the before mentioned "class rates". If no interline agreement existed, the rates were generally "prepaid, combination of rates" in which the shipper guaranteed the freight charges and single line rates applied to and from the point of interline. The same concept applied with railroads.

Joint rates were considerably cheaper than combination of rates. Actually the joint rate was simply the rate. It assumed one pickup and one delivery into the cost. The pricing matrix for transportation is (was) heavily influenced by the pickup and delivery costs. Thus, a joint rate would actually have only one pickup and one delivery component to the rate.

Combination rates would have the PU and DE components on each rate. Thus, it was always higher, usually considerably higher.

In trucking all of this changed as the industry was deregulated and the "big boys" such as Consolidated Freightways, Yellow, Roadway and the super regionals expanded their coverage.

The actual ratemaking process was an interesting one. I sat on a regional rate bureau most of the decade. In 1981 it was a powerful influence. You literally sat in a smoke filled room with other trucking executives and collectively decided how much you were going to charge shippers. It was pretty wide -eyed stuff for a 26 year old.

By the end of the decade, deregulation had taken hold and it was merely a formality. The rates were agreed on and then each carrier discounted them back to their major shippers.

The mentality at the beginning of the decade was one of rates being published and out in the open for all to see. By the end of the decade most rates were published in individual tariffs and large customers negotiated contract rates which were not available to public scrutiny.

I found it fascinating early on to be surrounded by all of the tariffs. Books and books of rates published, either by class or commidity filled book shelves.

Independent actions allowed carriers to publi***heir own rates, outside the bureau approval. However, in the trucking industry, the IA's would not apply on joint line traffic.

The entire process of rate making and publishing was an interesting proceedure. Quite a bit of our rate making was based on railroad information, for example, instead of mileage, we used what was called "rate bases", which was from railroad mileages.

I left the industry in 1990 to make some money and create a little job security.

***, I have found your discussion of the rate making, ICC, etc. fascinating. What was your background?

Also, I dont quite see the problem with contract rates. I know the pendulum has swung back to visable rates, but havent really heard the reasoning why.

In my sales industry, I DO NOT share pricing or service information with anyone outside my company ( and certainly not with everyone inside). Trust no one!

ed

If this rambles, my apologies, the phone rang several times during this composition...darned customers wont leave me alone!

[StillGrande]

Could someone explain the difference between through rates and combination rates? I have some idea, but it would help my understanding of the answers if I could get that nailed down.

[Anonymous]

Mark, my responses to your questions:

1. Each railroad had total and unrestricted right to set its local rates at any level, subject only to regulatory review for "unreasonableness." (The latter point is not insignificant, but wasn't a huge factor in most situations, given competitive realities.)

2. The "flag-out" applied to the entire through-rate, holding down the rate for all participant lines in the route. Most rates were "through," not combinations.

3. Bear in mind that a universal rate structure was pre-existent. No matter what the commodity, no matter the origin and destination, a rate existed. In fact many rate levels often existed, the highest being so-called "class rates," prescribed by the ICC. Class rates were so high and non-competitive that they moved very little traffic, so that when, for example, a new manufacturer of widgets opened on rail, competitive rates had to be established if traffic was to move by rail. Now to your question.

Assume a rate structure had been in place for several years for our widget maker. The general rate increases had been applied regularly, to the point that the widget maker threatened to buy his own trucks and divert the tonnage to highway. The serving railroad took the threat seriously and proposed lower rates. Assume that all other railroads viewed the threat as empty. The serving railroad could take "independent action" to lower rates on local traffic, but could not force connecting lines to join on through-rates. "High man wins."

Let's now assume, though, that the serving line closely monitored the private truck threat and concluded that the recently proposed 12% general rate increase would divert the traffic. The line announced that the general rate increase would not apply on widgets originating on its line to any destination. The increase would not apply via any local or interline route. "Low man wins."

4. Through rates were pervasive for almost all commodities in and between all territories. There were some anomalies. Grain was one. Some intermodal. The railroad rate stucture was notoriously complex, even with through rates and routes. Combinations compounded the problem, both for shippers and railroad revenue accounting. Talk about "green eyeshades!"

5. Typically, the ICC required junctions/gateways to remain "open" post-merger. This was a bit murky, for it didn't really prescribe the actual rate levels that had to be maintained. "Routing" provisions were an art in their own right, often governed by general routing tariffs. What the ICC prohibited was wholesale cancellation of existing rates and routing via pre-existing junctions and gateways. But it didn't often force a merged carrier to make all new rates apply via the old junctions. So time eroded the protection.

6. Congress wrote the Interstate Commerce Act and the ICC administered it. So far as I know, there never was an explicit part of the Act, nor of ICC policy, that attempted to parcel out market share among railroads. The "public interest" in having railroad service did, however, lead to many policy decisions that preserved service long after normal economic forces would have brought about merger or abandonment. The ICC long viewed its mandate from Congress to be a micro-manager of the railroad industry, ignoring economic reality in its quest to have the "public interest" served. That was the legacy of Teddy Roosevelt. (Read "Enterprise Denied" by Albro Martin, for a full treatment of this issue.)

The Transportation Act of 1958 did not change the ICC's role vis a vis mergers and abandonments, leading to the UP-CRIP debacle, etc. The Staggers Act did change that role, especially with regard to abandonments and the creation of short-lines. In my opinion, this is the great achievement of Staggers.

[SALfan]

Mr. Lewis:
Don't apologize for the subject being arcane and of limited interest. I didn't know any of the stuff you discussed; thanks for an explanation that was simple enough for me to understand (at least I think I understand it). The present is easier to understand if we know how we got to this point.

[Anonymous]

In Re: BN's "Sprint" Intermodal Trains.

These trains were conceived to be truck-competitive in relatively short-haul lanes, with a key objective being the utilization of excess crew, locomotive, track and terminal capacity. To be truck competitive, they had to be operated on consistent, consistently available schedules. This often meant small trains. They were successful on their own terms, i.e., building volume in underutilized lanes. However, truck efficiency held rates below railroad investment level and more investable traffic grew to levels which displaced them.

[Anonymous]

Mark:

In re Point 2: All railroads were members of regional collective rate-making organizations (aka, rate bureaus). Each such organization had "articles of organization and procedure" whereby a railroad could propose to establish rates on any commodity from, to or via points it served. Normally, such proposals would be publicized for review by member lines (and shippers) and a vote. If approved by a majority, the rate would be published in a tariff. If disapproved, nothing happened unless the proposing line took "independent action" to establi***he rate via its line. This "right of independent action" was guaranteed in the articles and could not be stopped by any other line, short of a protest to the ICC, and that seldom succeeded. If the "announced" rate required a second line to complete the route, that line had to "announce" also.

This right was particularly important with regard to rate increases, especially the "general rate increases" (aka, Ex Partes). An entire region (say, the East (aka, Official Territory)) might approve an across-the-board 12% increase on all traffic from, to and within the territory. That approval would be sent to the South (aka, Southern Freight Association or SFA), and the West (aka, Western Railroad Traffic Assiciation, or WRTA) for concurrence. The Southern Railway, a member of SFA, having reviewed its competitive matrix, would conclude that several commodities such as steel between Official Territory and SFA were threated by truck competition, so it would "flag out" of the increase for its routes on those commodities (or perhaps agree to only a 3% increase). The Eastern Lines, then, had only limited concurrence in the change they had proposed and only the limited increase could be published to apply on traffic to and from the Southern. (Because of this type of "independent action," general increase tariffs became very complex.)

In the case of pre-existing rates (and there were always pre-existing rates), "low man wins" was the rule. A rate increase could not be forced on any line. By the same token, no line could force a new, lower rate on a connection, "high man wins" being the rule.

Serious stresses developed in the industry over these issues, and with the Staggers Act, some lines began withdrawing concurrences in through rates, leaving only combination rates. The revenue generated by through rates "divided" between railroads according to agreed to divisions or ICC-prescribed divisions, but combination rates divided "as made." In such cases, each individual line controlled its own rates and revenue, but the poor shipper was left with an even more chaotic rate structure.

In re Point 3: No, I would not say that regulation sought to protect the weak, with one notable exception. After 1958, railroad rate-making was largely deregulated, as a practical matter, and the ICC did not often, if ever, arbitrarily impose a higher rate on an efficient line to protect a weaker one. The exception was typically in merger cases when the ICC would routinely impose conditions on the merging lines requiring them to maintain pre-existing routes with other lines. The effect was more cosmetic than real in most cases, for if the merger provided new, more efficient single-line routes then the newly merged line would successfully market that service. Sure, the dregs were still there, but only for a while.

These matters are arcane, I know, and of limited interest. Yet, there are misperceptions and misunderstandings that reverberate and color current thinking and decisions. For example, I remain convinced that the rush of the newly "deregulated" post-Staggers railroads to embrace "secret" contracts cost the railroad industry, quite literally, billions of dollars in profit. Only now are "public" rates regaining favor in the industry. History is not without its lessons.

[Anonymous]

Some observations on the history of railroad rate regulation/deregulation will sharpen the analysis of several contributors to this thread:

1. The Transportation Act of 1958 ended the strangle-hold of ICC railroad rate regulation that had prevailed since the early 1900's. The "umbrella" theory of rate regulation which held railroad rates arbitrarily above truck and barge rates was ended. (Litigation was required to finally give full effect to the law, perhaps most notably in the "Big John" case which allowed the Southern to undercut barge rates for grain into the Southeast using high-capacity covered hoppers.)

2. The railroads had complete antitrust immunity for setting freight rates until the mid-1970's, and this ended entirely only with the Staggers Act of 1980. Every railroad had the unrestricted right to "independent action" under the antitrust agreement articles to set whatever rates it wished on its own line and for which it could obtain concurrence on interline traffic. In reality, this freedom was tempered because retaliation could, and did, occur. Rate "structures" were viewed as somewhat sacrosanct, and great deliberation went into their establishment and preservation, nearly always through rate-bureau deliberation. This tedious procedure often took months or years, and in some cases could still draw complaints at the ICC. Not the picture of competitive efficiency.

3. However, in light of the above realities it is inaccurate to believe that highly efficient routes were externally constrained in their rate-making to protect the inefficient. In most cases, the UP's, the PRR's, the SOU's of the industry had a "world view" of their own economics and competitive realities that they expressed forcefully in rate bureau and regulatory proceedings.

4. The period from 1967 to 1980 was a crucial one for the rairoad industry in many ways, not the least of these had to do with rate making. The financial results of the railroad industry for the year 1966 were viewed as vindication of the wisdom of the 1958 Act: Record profits, a competitively reinvigorated industry, no longer a "failing" mode. Huzzahs equivalent to those often used to describe the benefits of the Staggers Act blanketed the industry press. Sure, there was the passenger deficit ... and the stirrings of inflation ... and the emerging long-haul trucking industry using the rapidly abuilding interstate highway system ... and the pending Penn Central merger. But all things considered, the future looked promising.

5. Then came the 1967 recession, and as always, recessions were a major negative on railroad finances. Inflation began to stir to the 3-4% level. Stuart Saunders, the unions, the ICC, et al, reached agreement on the Penn Central merger. The stage was set for dramatic rate battles that would last until the Staggers Act was implemented in 1981.

6. In simplest terms, the battles pitted the "rate increasers" vs. the Southern Railway. Starting in 1967, railroad presidents, almost across the board, began pressing their traffic departments to approve in rate bureau proceedings so-called "Ex Parte" general rate increases to be filed with the ICC. These pleadings were couched in terms that held that external economic forces necessitated all rates to be increased by X%.

7. The Southern Railway had a very sophisticated competitive analysis matrix which evaluated all major traffic segments/flows versus truck, barge, commodity and geographic competition. While sympathetic to revenue needs, the Southern viewed any undifferentiated across-the-board rate increase as potentially self-defeating. Because of the above-mentioned right of independent action, the Southern could completely control rate levels on its lines, and it did. Much to the consternation of much of the rest of the industry. Only if profit became unsatisfactory or if competition allowed, would the Southern agree to rate increases on specific traffic segments. The Southern pursued this strategy throughout the 1970's. Not incidentally, the Southern flourished and was named one of the 5 best-managed firms by Forbes magazine in 1975.

8. The Southern Railway to the contrary notwithstanding, railroad presidents engaged in a veritable orgy of general rate increases, led by the majors. Ex Partes 256, 258, 259, 262, 265, 267, 281, ad infinitum, ad nauseum. Compounded, the general level of rates rose over 300% in that 14 year period. Diversion to other modes was in the tens of millions of tons.

9. The Staggers Act has been hailed as saving the industry (again). An ironic reality is that many railroad presidents felt its most important provision was for automatic quarterly rate increases based on increased costs! No more "regulatory lag" in going to the ICC for permission to raise rates across-the-board! History shows that provision to have been of modest import. Rather, rational single-line pricing quickly became the new norm. Something that had be fully available since 1958 ... and practiced by the Southern Railway.

[Anonymous]

See also Trains, July 1972.

[Anonymous]

does the burlington northern's <sprint> train activity fit into this discussion?
running a train with short consist/tonnage to keep something moving? one unit
with 5 cars or less sometimes. will some address this concept pls?
crosstie

[GMS-AU]

Congratulations on well presented debate gentlemen. This is a great read.

[Anonymous]

Mark and Rob-

I enjoyed learning a bit more about the "modern" DRG&W...

LC

[Anonymous]

Bob,

I will respectfully disagree with regards to winners vs losers. First of all, why is it axiomatic in your opinion that the rest of the country would somehow be penalized if captive shippers are freed from their bonds? We need to make this very clear: No one on my side is suggesting a return to pre-Staggars rate regulation (I will again make this allegation, that the 4R's act was only partial deregulation akin to the California partial energy deregulation, with a skewed market as a result), rather we only want the STB to follow the proper protocols and give all regions access to competitive rate setting. It isn't just farmers who suffer, it is captive chemical plants, captive coal fired power plants, captive intermodal terminals, et al, who get screwed by predatory rate setting. The only winners are those areas which manage to avoid becoming captive via STB fiat. Lucky them, but the same could have easily happened to them as has happened to the Northern Tier states. If SP and SF had merged followed by a merger with UP, what would have happened to rail rate payers in LA? That would have left LA screwed, and with their political power you can bet their complaints would have been heard at the STB. Too bad Montana has no real political pull in DC.

Having the STB force agreements which gaurantee competitive access to all regions of the US will not hurt anyone except the bad players in the rail industry. Besides, don't you agree that if one area of the US suffers unnecessarily due to government negligence, it can negatively affect the rest of the country? If Montana farmers can't afford to ship their grain to export markets, doesn't that have a negative effect on the U.S. trade deficit, not to mention income tax reciepts?

Rate regulation of competitive markets is bad, as is rate deregulation of monopolistic markets. Deregulating competitive markets is good, as is belatedly regulating monopolistic markets. That's how a capitalistic society is supposed to function with limited government. Any econ student knows that if you let monopolisitic forces have a free reign over markets (especially those markets where entry by newcomers is extremely difficult), bad things will happen to consumers. Either the government has to re-regulate the monopoly, or it needs to break up the monopoly. The latter is my preferred choice, re-regulation is my last choice, but even that beats allowing monopolisitic practices to continue.

In a truly deregulated rail market, all shippers will have access to rate quotes from at least three (ideally) rail carriers. Even a duopoly can have monopolistic results. We have studied this before in my econ courses, and we concluded that three is the minimum necessary to prevent the occurance of monopolistic tendencies. There is no such thing as a "triopoply" in most cases, as the third party inevitably acts as the odd man out and will make more aggresive marketing decisions, at which point the concept of comparative advantage comes into play. A duopoly will often simply let one be the price leader and the second party will price accordingly without ever needing to conspire. With a third party, the tendency is to have constant market aggression. This is the theory of the third wheel you might have studied in psychology (as in a third person on a date does not fit the situation desired), and it applies as much to economics as it does to sociology.

[kevarc]

ALL captive shippers have been shafted by the RR. That is a fact, no two ways about it. I have a study done for one of our partners in the coal fired plant. We have screwed, blued, and tattooed by the UP. And the same goes for thoses only served by the BNSF. The wording of the STB enabling legislation puts the burden of proof on the shipper and it is a virtual mountain to get over. IIRC, the STB has only found in favor of the shippers twice. Many do not even file with the STB, because of the fee to do so. It is no little $100 filing fee, but can be in the 10 of thousands range.

If you have only a single RR, you can exect to pay, at a minimum, of 30% more.

And the ones who pay? The consumers.

[bobwilcox]

Dave - I think when the federal government looked at railroad and motor carrier deregulation around 1980 they decided rate regulation of transportation by government had been a failure for the last 30 years. They thought dereg would help create many more winners than losers. I think the last 25 years has proved them correct.

Some of the losers were a very small number of captive shippers when you look at the entire universe of freight shippers.
Farmers on the Northern Plains may well be in that group of losers but why should the rest of the country be penalized? Especially for an industry that has wandered so far from a market forces with various forms of government aid over the last 70 years. Why should the railroads be expected to pick up the tab for another government program for farmers? If government aid is appropriate let the government pay it directly.

[Anonymous]

QUOTE: Originally posted by M.W. Hemphill

Greyhounds: Your analysis of the effects of regulation on the Rio Grande and Union Pacific is unlikely to inspire disagreement from any reasonable person I have met. However, depending on who I am, I can think of broad benefits of economic regulation of transportation. While arguments can be waged that it cost the U.S. economy this or that, that's not relevant to the person who Does Not Care what happens to the U.S. economy. Specifically, regulation was hugely beneficial for small shippers and anyone interested in transportation to or from a small town or to a location off the main routes of commerce. It gave the one-car-a week coal mine the same rate as a thousand-car-a-day coal mine. If I am the small coal mine I like that a great deal, because it keeps me in business. If I want to live in a country that allows small businessmen to get into business, and hinders the large businessman's power, I want regulation of the market. If I want to live in a country that gives the consumer the lowest possible price, I want deregulation of the market.

An assertion today that regulation would be good, or bad, as a summary judgement, based on today's value system, can be made. If it's a consistent and defensible argument, it will probably stick. Projected backward, it's an ahistorical assertion unless it considers the value system of the past. Slavery, for instance, was a good deal for the slaveowner. Bad for the slaves and for later generations, but apparently that didn't concern the slaveowners very much. Ahistorical assertions also diverts attention from the larger question: why it is that a majority of Americans in the past found economic regulation desirable, and why it is that a majority of Americans find it undesirable now. After all, we did it: railroad regulation was not imposed by aliens or evil overlords, but by Americans.

So why did America change? What it was that led Americans to believe railroad regulation was a good idea in the late 1800s, and about a century later to conclude it was a bad idea? I submit that regulation and deregulation both were logical outcomes of substantial reassessments of what it was people wanted out of their lives. Of the first change, most historians consider it a revolt against modernity and an emphasis that America should remain a nation of individuals of roughly equal economic power, along with a strong fear of classism, monarchies, immigrants, certain religions, and ironically, a fear of distant control. Of the second change, most historians consider it a revolt against limits on individual expression and self-realization, namely, limits on the personal expression called "I want to get really rich and accumulate cool toys." Ironically, it also includes a strong fear of distant control. The irony of the past is that to achieve regulation, control of the market had to be vested in distant Washington, with a dubious oversight called the popular vote, and the irony of the present is that to achieve individual wealth, control has to be vested in distant boards of directors, with a dubious oversight called the annual election of the board of directors.

I find deeply incisive what BNSF VP Stevan Bobb said to me two years ago to explain grain rates: "We believe in equal opportunities, not equal outcomes." That is, everyone has the freedom to invest in any piece of land they want and reap all the reward the market will allow, but the railroad (and by extension the government) has no obligation to assure everyone gets the same reward regardless of their decisions. Those who invest in badly located farms get high rates, and those who invest in well located farms get low rates. The economic rent of the land will reflect location.

Mark,

Your understanding of economics is purely textbook, not rooted in the reality of considering all variables. Your comment (and BNSF's rationale to charge discriminatory rates to Montana farmers compared to the rates charged Kansas farmers) lacks a complete analysis of "good" investment vs "bad" investment in farm locations. The ONLY reason BNSF is able to do this is that the STB did not follow the protocols of ensuring no undo economic damage to regions and enabling the maintenance of access to competitive rates when the original BN merger was authorized, along with the subsequent Milwaukee abandonment and the eventual BN + SF merger. When the STB allowed the BN merger, they all knew that the Milwaukee was not long for this earth, yet they made no attempt to rectify the eventuality of Montana (and most of the Northern Tier states) becoming captive to a regional monopoly, where once there had been several viable competitors (albeit in the days before the PARTIAL DEREGULATION of the Staggars Act). The STB should have allowed UP access to BN's Northern Tier lines, the same as was done for Nevada and Utah when SP and UP merged.

To say that Montana farmers were fooli***o "invest" in Montana farmland is to ignore both the STB's creation of a monster and the fact that most of this farmland was settled long before any such mergers took place. I guess next time the STB allows a merger that creates monoplolistic pricing for adjacent landowners, the landowners should just throw in the towell and donate their land to the Nature Conservancy. The fact that Kansas farmers have access to rate competition while Montana farmers do not is not the result of any economic models or bad business decisions of landowners, rather it is the result of unequal application of federal policy.

"We believe in equal opportunities, not equal outcomes." What a crock! Mr. Babb knows full well that his Northern Tier customers do not have access to equal opportunities. He'd have more credibility if he simply gave Montana farmers the finger.

[daveklepper]

I do have questions: Isn't there still some transcontinental traffic via the Moffat and Grand Junction? A BNSF trackage rights or haulage train each way? Do they run this just to protect their trackage rights with anything important going via the Transcon? Or is it a viable routing?

[Anonymous]

Thank you gentlemen for your insightful comments. I see more and more through the forum that railroading during the regulated era was a vastly creature than the post Staggers Era.

Please respond to my new thread regarding Rio Grande's and Western Pacific's motive power philosophy.

[dldance]

I finally got to Winter Park in August and saw the west end of the Moffat Tunnel (and a lot of coal trains). How that crossing could ever compete with Sherman Hill is beyond me.

dd

[greyhounds]

Keeping the DRGW in the transcon market was part of an overall problem with economic rate regulation.

On any lane there were the low cost, or "strong", routes such as the Union Pacific. On the same lane there were the high cost, or "weak", routes such as the Rio Grande. Since the rates had to be the same for all routes, should those rates be set a levels that allowed only the strong routes to make a good buck? If this was done, the weak routes would die.

This was not to be allowed under regulation, so the rail rates were kept high enough so that the weak routes could make money.

This had some very bad effects. 1) It kept rates high enough to divert freight to motor movement. 2) It prevented concentration of traffic on the low cost carriers. This would have allowed those carriers to further improve their efficiencies with normal traffic growth and prevented some diversions to truck.

Economic regulation of transporation may have produced some benifit here or there, although I can't think of any. It sure did do a lot of damage to the US economy, that much is very evident.

[Anonymous]

Rob welcome. Guys thanks for the good stuff. I need to re-reard this a few times. I'll be back with more questions. Thanks!

One quick question: After the mergers, why would anybody use or need DRGW? I guess coal saved the RIO?