Thoughts on rail......

[gabe]

I am not taking a stand on anything anyone has said on here thus far. But, I would point out, referencing Ed's post, one might be surprised at some of the legal and practical similarities between the railroad business and baseball.

Gabe

[edblysard]

True,
If you want to own a major league team, you gotta pony up. and play by the same rules as the other teams...

And, if your city can not or will not create the infrastructure to support a major league team...ya cant play baseball!

And, the legalities of the franchise system does, in a fashion, mirror railroading....

Ed

[Junctionfan]

It is possible that the government could give out tax breaks on line with high density traffic and lower taxes on multiple lines as to discourage the railroads from ripping up multiple lines in order to save money on taxes.

This allows the railroad to operate the way we socialist want it without conflicting the way the business capitalists want it. This way the railroad has the capacity to increase traffic when needed without having to buy land back to run another parallel line. It also give the railroads the benefit that by having the extra line, they can keep it for siding space when the extra mainline isn't needed, and can be used for storage or crew changes without effecting the other "main" and it wouldn't cost them as much in taxes.

Because the railroads are private and certain laws are governed by constitutional law, it is also better to try to get the railroads to "do what the people want" and invest in them. As an investor, the government has the respected weight that business prefers to listen to other then listen to "intrusive profit hinderers".

The basic idea of open access is an interesting idea but right now the way the laws and constitution reads, I can't see it happening as I don't feel that there is enough support to change it just for that purpose.

[Anonymous]

Ed,

I sincerely appreciate the tone and content of your last posts. You made some truly valid arguments.

Speaking of captive shippers, you really can't argue that captive shippers are captive simply because no other railroad wants the business. Most captive shippers did not start out being captive to a single Class I with "differential" rates. Take a look back a few decades, and there were more Class I's competing in most areas of the country, and doing so under rate regulation. The oft dissed Montana farmers at one time had three separate transcons to select from (GN, NP, and Milwaukee), with a fourth weak link in the form of UP coming up from Pocatello. Now it is down to one transcon and the same weak UP link in Silver Bow. Or take the case of most manufacturing facilities in the U.S. Most of those still in operation today were built when there was a multitude of Class I's under rate regulation. Does anyone think such facilities would still have been constructed where they are at (and in the same numbers) if they knew they would be subject to no head to head rail competition and differential pricing? Read through the energy press regarding the duress captive coal fired power plant owners are having with delivery rates suddenly being doubled by the two western Class I's. One can easily paraphrase their owners lament today - "If we had known the railroads would do this to us, we would not have located our plant or our source of coal on only one Class I line."

I challenge you to take the time to contact rail oriented businesses that are looking for a site for a new facility, and ask them if they are willing to locate that facility with access to a sole Class I rail service provider. You will find that they are on to the differential pricing schemes of the Class I's, and will only locate (all other factors being equal) where they can access rates and services from more than one Class I.

If you are coming from the perspective of a railroad insider, it is legitimate to say that the industry ain't broke, so don't fix it. If you are coming from the perspective of a rail shipper, the consensus is that it IS broke. The U.S. is losing ground in manufacturing and production to other nation's, and part of the blame lies with differential pricing.

Here's another challenge: Find a nation outside North America where railroads engage in differential pricing. I haven't been able to find one. Perhaps someone with more motivation to prove the open access proponents wrong will be able to provide some examples.

[brazos87]

Futuremodal,

Find a single country whose railroads are as successful as American railroads. Look at Europe, where the State of Texas is larger than most European nations!

Most shippers are located sufficiently close to another Class 1 to short haul their switching carrier to route the long haul to a competitor Class 1. It happens more often than you might think. Open access is not the answer, nor is government involvement, which open access would involve. Capacity is certainly an issue, but in many cases, (not all certainly), the capacity is an issue of too much business being routed to rail.

In this case, it certainly behooves the carrier in question to decide what business they will be able to handle. Guess what? The business which provides the most most profit! A carload of scrap will not interfere with a with a unit coal, stack, or UPS train. Dollars count in railroads just as they do in every other business. While intermodal has a low profit margin, intermediate handling is minimized, so a railroad makes its' profit by running the blazes on said train.

If you want to screw up a good thing, get the Federal government involved. The free market has spoken since the Staggers Act was passed, yes, some shippers are slighted, but the vast majority of shippers do much better. Congestion seems to be the biggest issue, but the railroads are victims of their OWN success. As Mr. Blysard has said, railroads are NOT public utilitilies, but for the most part, publicly traded stock.

If a shipper must look elsewhere other than shipping by rail, chances are it doesn't make financial sense for the railroad to provide that shipper the service they need, providing the revenue the railroad would generate. Remember, the railroads are in business to make profits, not just revenue.

Look at this way, if you run a successful business out of your home, someone says they want open access, and to provide this, the government says you have to open your home to your competitor. While you provided the means to get your business off the ground, someone is able to use your hard work and open their own business with the infrastructure you paid for. Doesn't sound like such a good idea, does it?

I'm an Ilk, hoping to become a member of the Ilk's Lodge, and a recovering Unihead.

[daveklepper]

Here is a new thought for open access. Leave the present structure alone. But let the Goevernment build a series of links that bypass particuilar RAIL & HIGHWAY congestion points and treat these rail links as open access toll highways . The first one that should be built is New Haven, CT - Trenton, New Jersey, including a rebuild of the Poughkeepsie River Brisge. It should be built as a high-speed electrified line so Amtrak can bypass New York City and the slow non-tilt running on Metro North to operate a Boston - Washington high speed service that can reduce running time to 5-1/2 hours to start being competitive with. 4:45 to Batimore, and 3:15 Boston-Philadelphia. At the same time CSX and NS could run trains directly to southern New England and not have to go all the way up to Albany (Selkirk or Mechanicsville) and back to reach Bridgeport, New Haven, New London, and Waterbury. This might return some decent industries to those locations and should reduce food prices for those living there. The Port of New Haven would become more competitive.

The Flordia East Coast might consider becoming a private open access toll road with CSX and NS offering competitive service. Mike make more money that way than as a private short line.

I could also suggest it for the Providence and Worcester, with Guilford, CXS, NS, and some of the other New England short lines competing for traffic, but the P&W is itself doing a terrific job for its shippers and making money. It does have some of its own trackage rights on the NEC and in some places is the only freight carrier on the NEC.

This is really just a large application of what has happend for the Ports of Los Angeles and Long Beach in CA.

[kevarc]

A few things

Electrical Transmission - Under the new FERC guidelines, they want utittiles to set up tranmission into Regional Transmission Organizations (RTO's). This is being done to "open" the tranmission to all users. So far this has been a huge mess. Why? Each RTO STILL has the same managers as before. Who says that they will not give preference to their former owner, even though they are supposed to be independant. We are having problems with the transmission owners trying to screw to death muni's and other small operators in this scheme. Will it ever happen, maybe, but it will take a lot of ORDERS from the FERC to make it happen.

Captive shippers

Again, I speak from experiance. We are captive. And it costs us at a minimum of $7 a ton for the coal we burn. $7/ton adds up in a hurry. Figure one train of 100 cars carrying 100 tons/car - that is $70,000/train that is an added cost to us and it DOES get passed on to the consumer. We do have the option of doing a build out to the KCS. We can recover the cost in less than 5 years and this includes a major bridge of the Red River. KCS will not pay for it. Their view is if you build it, we will quote you a rate. They will not build it as they fear that after 5 years (that is if you can get a 5 year contract, which has become almost impossible in the last couple of years), the other RR will come back with a competitive bid and take the traffic back and they have a lot longer cost recovery period.

Government involvement

You really do not want that. What has the goverment got involved with that was not totally screwed up in a few years.

[greyhounds]

To FM

"Here's another challenge: Find a nation outside North America where railroads engage in differential pricing. I haven't been able to find one. Perhaps someone with more motivation to prove the open access proponents wrong will be able to provide some examples."

Can you define just what you mean by "differential pricing"?

[Anonymous]

QUOTE: Originally posted by greyhounds

To FM

"Here's another challenge: Find a nation outside North America where railroads engage in differential pricing. I haven't been able to find one. Perhaps someone with more motivation to prove the open access proponents wrong will be able to provide some examples."

Can you define just what you mean by "differential pricing"?

Charging captive customers much more than non-captive customers, all other cost variables being equal.

[Anonymous]

QUOTE: Originally posted by brazos87

Futuremodal,

Find a single country whose railroads are as successful as American railroads. Look at Europe, where the State of Texas is larger than most European nations!

If American railroads are so successful, why are they still unable to recover their cost of capital? Truck lines and barge lines can recover their cost of capital, why can't railroads? Because U.S. railroads choose to burden themselves with proprietary closed access infrastructure rather than risk having to compete head to head nationwide. To put it in the perspective of separating transporter divisions from infrastructure divisions, rail transporters in the U.S. are less successful at recovering capital cost than those rail transporters located in open access countries, because the latter are not burdened with infrastructure responsibilities, e.g. that burden is at least partly borne by government and by regulated infrastructure companies. This allows them in much of the region to focus on only one corridor of tracks for multiple rail transporter companies. By contrast, we usually just have to have one corridor of tracks for each rail transporter. Thus, we are wasting land and capital maintaining multiple tracks in multiple corridors, where one corridor of tracks would suffice. It would be like each trucking company needing it's own freeway into a city, and the result is three or five or so redundant freeways where one would do. Of course, companies could (and often do) share trackage, but this is true only in limited areas of the country.

Of course, comparing America to Europe begs the observation of comparing apples to oranges, since most European companies seem to get some sort of subsidy, and the tax structure in Europe is more burdensome than that in the U.S. What we do know is that in the area of railroad evolution of capital usage efficiency, those European nations with open access systems are light years ahead of our closed access system. Our response to the need for rationalization of rail capital is to merge or force out the redundant trackage (along with the competing rail transporter companies), even if the need of shippers is for multiple rail service providers to provide sufficient healthy competition.

What we needed was more efficient use of capital while maintaining head to head competition, not the elimination of rail service providers. Under open access this is possible. Under the closed access system, this is impossible.

[gabe]

Dave,

I mean this politely. But, I really am starting to see your argument as wanting your cake and eating it too or wanting someone else to pay for your cake.

(1) More competition equals more profits? Maybe more profit for the companies served, but surely not by the railroad. If competition equaled profit, there would be no need for anti-trust regulation. Are you really saying more competition equals more profit to you or your interests?

(2) Not "the" reason but "a" reason highway, waterway, and open-access European rail is successful is subsidy. To think that open access in America will profit American railroads without a like subsidy is like removing ham from ham and bean soup and expect it to taste the same. I suspect you would be one of the first people to cry when taxes were heightened to pay for the subsidy to allow railroads to function on an open access system.

Worse yet (for me), the requisite subsidy to make railroads work under your system would effectively make me (as a tax payer) subsidize the customer (yet again). I see your argument really coming down to you want someone else (the American tax payer) to pay for someone else’s (rail customer) benefit.

Gabe

[Anonymous]

QUOTE: Originally posted by gabe

Dave,

I mean this politely. But, I really am starting to see your argument as wanting your cake and eating it too or wanting someone else to pay for your cake.

(1) More competition equals more profits? Maybe more profit for the companies served, but surely not by the railroad. If competition equaled profit, there would be no need for anti-trust regulation. Are you really saying more competition equals more profit to you or your interests?

(2) Not "the" reason but "a" reason highway, waterway, and open-access European rail is successful is subsidy. To think that open access in America will profit American railroads without a like subsidy is like removing ham from ham and bean soup and expect it to taste the same. I suspect you would be one of the first people to cry when taxes were heightened to pay for the subsidy to allow railroads to function on an open access system.

Worse yet (for me), the requisite subsidy to make railroads work under your system would effectively make me (as a tax payer) subsidize the customer (yet again). I see your argument really coming down to you want someone else (the American tax payer) to pay for someone else’s (rail customer) benefit.

Gabe

Gabe,

Do you conversely think competition is a negative? Most economists outside the socialist faction surely wouldn't say so.

Competition is the essential element that makes a free market economy work. Competition forces innovation, innovation improves the customer base, and an increased customer base usually equals more profits for the best innovators. Without competition, there is less incentive to innovate. Monopolistic and oligarchic companies can become risk averse, and innovation subsequently becomes scarce. They begin to buy the notion of the zero sum gain (a favorite of the left), and thus when new ideas come along they see it as you described in your opening paragraph e.g. the innovators want to have their cake and eat it too, or to put it another way, the idea of synthesis becomes a nonparlance.

Also, be careful how you define subsidy. Is a user fee a subsidy? I would not say it is. Since the majority of highway funding comes from user fees as it pertains to interstate freight transportation, it is not out of the question that such could work for an open access rail system. John Kneiling thought so 30 years ago, before the term open access was even applied. He just thought correctly that the proprietary closed system was a waste of macro capital, since each rail transporter just had to have their own set of rails, rather than having multiple rail transporters share common trackage, not to mention the fact that under the closed access system the failure of a rail service provider meant the loss of the tracks that went with it. Under an open access system, the failure of a rail transporter will not harm the existence of the tracks, since the tracks are held under a separate entity.

Is a tax credit for maintenance a subsidy? The shortline tax credit recently passed by the feds is something that could be expanded for use on a privately owned open access rail system. And before you say that a tax credit means someone else pays higher taxes to make up for the loss in tax revenue from the recipient of the tax credit, isn't it true that infrastructure improvements provide an important incentive for retaining and recruiting rail using businesses, thus actually expanding your tax base? Remember that if the tax credit means the rail lines can stay up on maintenance and thus provide a secure reliable ROW for rail transporters (on a more equalized basis with highways and waterways), the users of rail services will be more inclined to stay in the U.S. rather than relocating overseas, or change their minds about shutting down a factory in lieu of non capital intensive investments, or expanding the planting of grains in a field rather than putting a field into a conservation plan. Since a tax credit is something not sent to the federal treasury, you in essence get 100% of the return, whereas a de facto subsidy oft times returns as little as 20% on the dollar of original tax payment (with the rest going to fund the bureaucracy).

So you see, it is very probable to create an open access rail system without tapping the general fund or raising your taxes. Generally, I wouldn't have the confidence in the feds to not use tax receipts for such a venture, but given that they took the tax credit route for the short line maintenance bill, I believe they would take the same general approach for supporting a transistion to an open access rail system.

Of course, no such action is perfect. I would think that an open access ROW would be exempted by federal decree from state and local property taxes (one part of the "equalization" ideal), and thus those entities would have to make up for that loss of tax revenue in other ways. But some of those same locales would benefit from increased industrial investment, so at least they can make up for it.

To sum up, I believe an open access rail system can be supported without tapping the general tax fund, via user fees, maintenance tax credits, and property tax exemptions. I personnally am not opposed to using part of the highway trust fund as an additional supporting tool, but some might object. The easiest way to facilitate that is to tax all modes with the same federal fuel tax, and then lump all the revenues into an infrastructure trust fund, with each mode getting a guaranteed percentage of what they pay in, with some wiggle room for multimodal projects and general cross funding.

They proved in the 1980's that a nation can cut taxes and in return get higher tax receipts, so in that vein you can have your cake and eat it too. By reducing the capital funding burden on railways via tax credits and tax exemptions, and then opening up all major rail lines to head to head competition (resulting in additional infrastructure funding from an increase in rail transporter paying some sort of user fee), you can kill two birds with one stone e.g. reducing the transporter's share of capital outlay for infrustructure while also providing rail shippers with market based rate and service competition. Trust me on this one, fostering head to head rail transporter competition will end up increasing rail's macro share of the intercity freight market, because potential users of rail service will be more likely to fulfill that potential. Granted, some transporters will fall by the wayside, but those that do it right will prosper (as will their stockholders).

[Sterling1]

Some people ought to realize that the taxpayer pays for the govenrment to do whatever is asked of it by the citizens . . .
The RR could very well use the money possibly wasted on taxes . . . grunt . . . asked for by taxes . . . to build and invest in their own RR.
. . . . .

[daveklepper]

Please remember that there still is competition between rail and truck. In the 1930's the Justice Department considered streetcar systems a monopoly and that it was unfair of electric power companies to own them. They forgot or chose to ignore that private cars, taxis, limousines, and walking provided competion. So who bought the trolley companies when the power companies were forced to sell? In about half the cases, National City Lines, a combination of Firestone, Texaco, General Motors.

Did that make for more competition? The reverse I would say!

[gabe]

Dave (futuremodal),

No. I am very much in favor of competition. It is simply a matter of how much are we willing to sacrifice to facilitate competition and what level of competition is adequate.

I am learning a great deal about railroads on this forum; after another five or six years, I will consider myself to have worked my way up to amateur status. So, I can't say one way or another that your model to open access is too attenuated to work—the question is simply above my intelligence level.

That having been said, I do know that the ARR says a railroad needs an operating ratio of 80% or lower to earn the cost of capital, and as of right now only two railroads meet that mark (one just barely). More competition lowers prices. I am not sure railroads can afford less profit right now.

From my limited knowledge, I am not willing to risk as much as you for competition. I am dead-set against ANY future rail consolidations, I would have liked to see the government step in and save the Milwaukee Road (in 1974, when it could have—I don't think it was savable by 1980). But, risking the implosion of our national rail network on an unproven theory seems a bit risky to my picayune knowledge. Besides don’t trucks and barge traffic provide additional competition?

Gabe

[bobwilcox]

QUOTE: Originally posted by gabe

Dave (futuremodal),

No. I am very much in favor of competition. It is simply a matter of how much are we willing to sacrifice to facilitate competition and what level of competition is adequate.

I am learning a great deal about railroads on this forum; after another five or six years, I will consider myself to have worked my way up to amateur status. So, I can't say one way or another that your model to open access is too attenuated to work—the question is simply above my intelligence level.

That having been said, I do know that the ARR says a railroad needs an operating ratio of 80% or lower to earn the cost of capital, and as of right now only two railroads meet that mark (one just barely). More competition lowers prices. I am not sure railroads can afford less profit right now.

From my limited knowledge, I am not willing to risk as much as you for competition. I am dead-set against ANY future rail consolidations, I would have liked to see the government step in and save the Milwaukee Road (in 1974, when it could have—I don't think it was savable by 1980). But, risking the implosion of our national rail network on an unproven theory seems a bit risky to my picayune knowledge. Besides don’t trucks and barge traffic provide additional competition?

Gabe

Railroads take in about 15 cents of every dollar spent on intercity freight transportation in the US.