Legislation intoduced to make railroads subject to antitrust laws.

[MichaelSol]

QUOTE: Originally posted by MP173

Do you mind discussing what the Gateway conditions were for the merger and how it affected the Milw?Specifically, was BN required to funnel traffic to the MILW? I do not have the resources to go check on the conditions of the merger and the affect.

Ed, that's quite a subject. I will try and put something together, and put it on the other , Milwaukee Road, thread, but it will probably be this weekend before I get around to it.

Best regards, Michael Sol

[MP173]

Michael:

Interesting stuff on the Milwaukee Road PCE. I recall reading this about a year ago.

Do you mind discussing what the Gateway conditions were for the merger and how it affected the Milw?

Specifically, was BN required to funnel traffic to the MILW? I do not have the resources to go check on the conditions of the merger and the affect.

perhaps you could point me in the direction of a good reference.

Thanks,

ed

[daveklepper]

Just like Mineta doesn't seem to want to consider land use in transportation subsidy pricing I was way off the mark on my train speed statement. I was correct about train speeds, yes, but the shipper is not concerned about train speed, he is concerned about timely arrival of his shipment and it is the overall time in transit of the particular car that counts. I had not included that fact and must apologize.

[Anonymous]

QUOTE: CSSHEGEWISCH - most local governments can be made to understand the link between a loss of rail infrastructure and a resultant domino effect on other industries. When presented as an option of either continuing to have viable rail service without being able to assess property taxes on the rail ROW, or losing the rail service and a bunch of local industries with THEIR property tax contributions, then they understand that exempting the railroad ROW from property taxes is the lesser of two tax base erosion scenarios. If anything, a percieved guarantee of long term rail service will result in industrial additions to the tax base in the long run.

How I wi***he local government in Peoria and East Peoria IL would see it that way, they are all for abandoning a viable line to place bike trail. The latter turned down a request to place a large grain to rail facilty in EP because they wanted the tracks removed for more strip malls. Leaving it to the local government may not be such a good idea, with that whole imment-domain stuff in the supreme curts (meant to spell that way:)

I do find this whole Open Access idea facinating though and like both sides arguments.

[BaltACD]

QUOTE: Originally posted by bobwilcox

QUOTE: Originally posted by gabe

QUOTE: Originally posted by bobwilcox

It is my belief the only area where the anit-trust laws do not apply is with mergers. Anti-trust is certainly an issue when developing marketing strategies.

Do we have any lawyers out there who no of areas besides mergers where anti-trust does not apply?

Baseball, the national defense industry, legalized prostitution, and gambling.

We do have the best Congress money can buy!

I agree....not only Congress but the various State and Local governments are the best that special interest money can buy.

[Anonymous]

Jay,

Regarding railroads' roles in utilizing trucks, is there any reason why a railroad company cannot better utilizing trucking's unique aspects to further buttress the railroad company's bottom line? To keep this short, I believe that under open access you would see a megafold increase in the utilization of bi-modal technolgies. Because of the low modal transfer costs and very quick transfers between modes, bi-modal technology can function in all but the shortest of lanes. The only holdback (aside from the inefficiencies of the closed access system) is that railroads don't maximize their on line rail speeds to compensate for the terminal dwell time.

I also believe that railroads could easily take over the short haul bulk commodity movements if they really wanted to. Short haul shuttle trains simply cannot be matched by anything the truckers do, and the railroads could price the service at just under the trucking rate. With head to head competition there would be some erosion of this monopoly profit, but I doubt it would reach cutthroat levels because these short haul corridors tend to be smaller markets. More than likely you would see co-ops and grain companies run their own shuttle trains under open access. Whatever the outcome, truckers would be relegated to their natural status as feeders to the system.

It is true that it is unlikely a railroad company would go after single truckload shipments, but it is true that you would proably see trucking companies and 3PI's use their consolidation abilities to somehow incorporate that single truckload into a larger consist if the rail lane is available.

GE is an example of a company that has it's interests in so many divergent business opportunities. Like any good business, they will buy low and sell high if the right price comes along. Consolidation and diversification are ever evolving constants, and one of the advantages of going after any business is that you never know when one seemingly small business avenue will suddenly explode in growth.

Regarding my current business obligations, it involves AMR, nothing in transportation.

Daveklepper - I would argue that the massive retrenchment that was well under way before Staggers and premeditated congestion with longer consists was what resulted in trucking taking over so much business from the railroads. I'll say it again; railroads basically gave away the business. The truckers didn't come along and take it from them. Railroads used to run point to point trains at one time even in the smaller lanes, but as the bean counters got their way and it became holy writ that the "best" way to run trains is to consolidate into mile long consists, those smaller market cars suddenly started traveling hundreds of miles out of the way, being shunted and lost in the huge new yards, only to travel another hundred or so miles out of the way to yet another huge yard, and so on and so on. I bet the thought at the time was that the railroads would keep that business anyway so who cares if customers had there orders delayed? I remember one of John Kneiling's stories about the factory owner who sat by his office window day after day and watched his boxcar go by his plant four times before the railroad finally delivered it. It is examples such as this that show that truckers were (are) not the competition so much as they are the bailout option born of shipper frustration. In hindsight it is absolutely inexcusable for the railroads to have done what they did, because it resulted in a loss of the most profitable business opportunities, and I believe such would have never occurred if there had been real head to head competition between railroads for every customer.

[MichaelSol]

QUOTE: Originally posted by futuremodal
[brAlso, regarding Milwaukee's Gateway conditions, I will stand by my belief that the Milwaukee made a mistake in not including full access rights over the SP&S lines and the entire I-5 corridor, and access to Lewiston ID in addition to the Billings haulage agreement, to fully cover the PNW. I don't know if such inclusions would have made THE difference, but they certainly would have put the Milwaukee on a more even playing field.

Well, it was interesting at the time. No one had asked for conditions like that -- that extensive -- before in a railroad merger case. We now know that Milwaukee could have just about asked for the moon, and gotten it. The long term financial trends for the Northern Lines were very poor. MILW's operating ratio had bettered the NP in 1957, bettered the CBQ in 1965, and the trend line analysis shows it would have bettered the GN in 1972. And these were established long term trends.

And they weren't because MILW was skimping on maintenance to make its OR look better. By 1967, MILW had the fastest route to Omaha, the fastest route to the Twin Cities, and the fastest route to the Pacific Northwest. It had over 1,000 miles of installed 131 pound rail, compared to 79 miles on GN, for instance. MILW could have achieved those results only if it was spending more, per mainline mile on maintenance than any of the Northern Lines. Historically, 1950-1967, it had.

On the PCE, while MILW historically had lower tonnage, it typically had very high revenue freight on very long hauls compared to its competitors. It had significantly lower operating costs, not only because of its electrification which provided higher speeds in mountain territory at lower cost, but MILW had seen the light and fortuitously decided early on to abandon its long haul passenger service, while its competitors continued to labor under that handicap.

Milwaukee's initial response to the Northern Lines Merger proposal was its standard historical response: no way. The perception was that the Northern Lines were very strong and the MILW weak. This is the fine result of public relations when no one actually analyzes the historical financial data. I think Warren Ploeger saw this.

Ploeger was Milwaukee Road's Western General Counsel, in Seattle. He had no operating background in railroading, but was one of those unique few individuals who, in the words of one of Milwaukee's VPO's, "understood railroading better than anyone." He understood that the Northern Lines had to have that merger. It was a matter of survival. You could see that clearly if you graphed the operating revenue vs the operating expenses for the previous 20 years. NP was doomed, sooner rather than later, although with its natural resources, no one expected bankruptcy. But the railroad was going to begin losing money, and there was nothing anyone could do about it. The Q would make it maybe five more years before it began losing money. The GN, maybe ten years.

However, Ploeger was the only one who saw that. So, these Gateway conditions were a big deal, especially Billings and particularly Portland. Could they have gotten more? I think so. Downing and Smith both felt that the conditions were just smoke and Fritz Kahn told me he thought they were mere "window dressing." They grossly misunderstood the impact of those conditions. Ploeger didn't.

But, holy cow. Things took off for the MILW after the BN merger. During the 1960s, MILW averaged about 7 MGT annually between St. Paul and Seattle. By 1977 this had climbed to 10 MGT and but for the dramatic shortfall in equipment ($64 million in unfilled orders), would have carried 13-14 MGT in that year, nearly equaling the GN and with longer hauls. By 1974, MILW had 76% of Port of Seattle traffic, and over 50% of Port of Tacoma traffic. And that was in direct competition with Burlington Northern and Union Pacific.

From 2-4 trains a day, the MILW now had 6-10 trains a day. The additional business carried on the PCE 1970-1977, amounted to nearly $400 million in additional revenue. A good chunk of that resulted from the Burlington Northern merger conditions, although I also think Milwaukee happened to get some very good people in the right places at that time.

As "antitrust conditions," the BN merger conditions were probably the most successful protective conditions ever imposed on a railroad merger. Milwaukee Road's Western lines became enormously profitable for the Company, so much so that Curtiss Crippen would advise Worth Smith in the Spring of 1975 that "that line is the lifeblood of this Company."

Anti-trust policy, in a regulatory context, propelled by the innovative thinking and perception of a key individual, turned out in that instance to provide a far better result than years and years of expensive litigation would have ever been able to provide in a non-regulatory context.

Best regards, Michael Sol

[jeaton]

Did I miss something? The last I heard there was a company named Boeing in the business of making airplanes. Still, I suppose that the countries involved in the Airbus consortium have decided that one competitor is enough and have put the blocks on more than one up-start willing to invest $50 billion or so to get into the jumbo jet business.

While I doubt very much that railroads could ever match the discreet, individualized service that trucks provide at a cost that would allow them to be price competitive, I will grant you your premise that they could. You have argued that an intelligently managed business would go after anything that makes a profit. I won't dispute that market share is an element of business strategy, but more than a few companies have died on that. Have you not read or heard a Board Chairman or CEO say that the company is going to focus on its "core business" or "strength"? I can cite several cases, and I am sure that there are thousands of cases where this focus resulted in a company pulling out of a profitable market or selling off a profitable operation. Because it happened to be of personal benefit, I know of a very profitable half-billion a year business that was sold off by General Electrical. I think the consensus would be that GE is a pretty well run business. What do you suppose they were thinking?

I'll grant you it is arguable, but I think you are too optomistic that, free of the cost of building infrastructure, new operating companies will rapidly be formed and the railroad freight market will become highly competitive. To say that Open Access would produce a competitive environment similar to the truck market is at least a tad bit of apples to oranges comparison. All it takes is one truck and one man to go after a piece of a truck market. I don't think that a railroad operating company is going to get into a market that cheap.

By the way, since you are consulting for an electric utility, I assume you are working with their fuel/transportation buyers. Just informally, why don't you ask just how interested they would be in setting up a railroad operating company if open access would come to pass?

Jay Eaton

[daveklepper]

You are wrong about trains getting slower. Even with reduced frequency delivery and pick-up times, freight trains are faster than they were in the days before the interstate highways. We read the statistics that average freight trains speeds are about 22-25 mph today. I remember as kid (say around 1946) being astounded by learning that the average freight train speed was not much faster than a NY 42nd Street crosstown streetcar, about 14 mph! Three times and half the speed of walking! And the average single freight car movement visited about three yards en route, and the average dwell time was most of a day. about 20 hours as I recall . Today a lot goes by unit train, without visiting yards, most loose car shipments visit only one or two yards en route, and the average dwell time is about half. But the downside is this is not only the result of improved efficiency and technology, and some is that, but also about deliberately turnning away business, or at least pricing for business that was loosing money before Staggers at a compensatory rate making tucking (either private or common carrier) far mroe competitive.

[Anonymous]

jeaton,

1. The cost of going to the STB is high due to the extreme delays in getting a case settled. 17 years and still the McCarty Farms case is in limbo? Maybe the STB needs a God Squad to get these cases expediated.

2. The Highway Trust Fund (and the Waterway Trust Fund) are already raided for non highway/waterway use. Some of this is in the form of intermodal funding, while other is going to transit and such. Those cold dead hands are remarkably pliant for current cross funding!

An Intermodal Trust Fund would legitimize some of the cross funding issues currently going on, and make it that much easier to put the funding for enhancing supply chain logistics on a more optimal keel. I don't think trucking companies would complain too much about intermodal funds going to a rail expansion project if they know they will be able to access the lines themselves under their own operating procedures. All these entities are transportation companies, and it is reasonable to presume that a true transportation company would want to access all modal forms at will wherein that access optimizes their entire supply chain. But you are correct that the independent truckers may complain since they are less likely to utilize the rails to complete their journey.

3. On that political note, what allows monopolies to thrive is government protection. Otherwise the economic theory you cited would act as a natural reponse to monopoly profits. With our government so entrenched in the lobbying way of influence (regardless of party affiliation), the predictable actions of monopolists is to use that power of influence to create a climate that is hostile or at least much more difficult to new entrants. Since it is government that is providing such protection against competitors, it takes on a socialist aspect in principle. Look at Airbus.

4. User fees - both UPS and the Montana farmer would be paying the user fee each time they utilize transportation.

5. Tax credits vs subsidy - Tax credits are moneys you get to keep, while paying taxes then getting a subsidy in return involves the expense and time consumption of having that money transferred from one hand to the other and back. Money in the hand improves cash flow, while having to wait for a tax return can delay cash flow.

6. I would argue that railroads have willingly given up the market share that trucks now own. Railroads were at one time a faster conveyance than highways, then highway design evolved while railroads got slower. Perhaps it was the ICC and the onser of rail regulation in the early 1900's that caused railroads to stop progressing on the speed front, but it happened nonetheless. Look at the history of some trucking companies, and they came about because there was a market opportunity that the railroads weren't covering. It wasn't that the trucking firms came along and booted current rail operations. Remember John Kneiling's example of the banana trade? The railroads lost the banana trade because they would not adapt to consumer demand by increasing train speed and frequency to match the ever evolving consumer demand.

Do you really think truckers can come along today and take over a commodity haul from railroads, terminals and mileage being equal? What kind of truck convoys would it take to haul 10,000 tons of grain from Mocassin to Kalama? How about coal from PRB to Louisiana? How about 250 containers from LA to Chicago? You can bet that truckers would only get those hauls if the railroads gave it up of their own free will. Yet for the grain and containers the railroad is entirely dependent on trucks to get the product from the ship or farm to the rail terminal. Trucks feed the railroads. It makes no sense to consider trucks the competition when they are in fact the life support for railroads.

Do you ever wonder why the people involved with the barge lines don't go around calling trucks the competiton? They know they would be hard pressed for traffic if the trucks didn't bring it to them and deliver it to the final destination for them.

Each transport mode has it's own special characteristic that engenders optimization, if only they would exploit said advantage. Truckers act as the feeder system and final delivery system for all the other modes, and will only go beyond that short haul system when the other modes decline to serve. Airlines move small lots at very high speed. Barges move ultra large lots at very low speed. Railroads in theory should be moving sufficiently large lots at highest possible surface speed, but instead they have focussed on moving ultra large lots at medium low speed. Because of railroad's inability to maximize the limits of the technology and take advantage of their ability to run trains of sufficient size makeup (wherein the units of labor required to move a certain amount of cargo has swung in rail's favor), a whole large market share for trucks was the default creation.

Trucks are the transport mode of last resort for anything over a short haul. Couldn't get that last container on the double stack in time? Well, we'll just ship it by truck then. No rail service between Reno and Las Vegas? Well, we'll just ship it by truck then. The railroad doesn't want to supply a box car at a team track just for three pallets of widgets? Well, we'll just ship it by truck then. BNSF no longer wants to supply car load service to branch line elevators? Well, we'll just ship it by truck then.

Has anyone ever heard of a scenario where something couldn't be shipped by truck for reasons of unresponsiveness or red tape, etc. and as a fall back decided to ship by rail instead?

Railroads have so emasculated themselves with this misguided obsession to maximize train length/tonnage at the expense of speed and service, that I guess the "crumbs off the table" is a bad analogy. It's more like body parts off the operating table.

7. So much car supply today is owned by shippers, that I expect such shippers would form their own transporter companies if a standard transproter declined their business offer. Your ascertion that mergers and subsequent shipper monopolies would result does not play out when you analyze how truckers have dealt with dereg. There is not one place in the U.S. that does not have access to two or more trucking firms. One reason you don't see a loss of trucking firms due to mergers is that even if a trucking merger takes place, pretty soon there's another trucking firm ready to take their place. Getting in and out of the transporter business is easy. It is entry into infrastructure ownership that is difficult. If you open it up, the transporters will come.

8. Not having recieved my Sept TRAINS I cannot comment on the article to which you refer. However, there are a multitude of examples of shared track arrangements in the U.S., and as far as we can tell those arrangements are working well in spite of ownership.

[jeaton]

Michael Sol

I was offline and did not see your "cold, dead" quote, when I did mine. Yours was better.

Jay Eaton

[jeaton]

Futuremodal

I am going to first state that I do not particularily care whether an idea falls to the left or right on the political spectrum. I try to base my argument on whether the idea will solve the problem and I think that contending that an idea is wrong just because it is too conservative or too liberal is pretty shallow.

You are certainly correct that the our more conservative government representatives have been the proponents of conditions that can allow for open competition, but I submit that their primary objective is to reduce or eliminate government regulations of business. Increased competition is not the end but rather a justification and a good one at that. There are other very good justifications, such as a business environment that is undencumbered by regulation leads to faster economic growth and, not to be over looked, can also produce greater returns for the owners.

The thing that the deregulation advocates have either choosen to ignore or not mention is that a deregulated environment can lead to market dominance or even a monopoly. Conservative economists will argue that monopolies can not last because the profits generated by a business with a monopoly will be great enough to attract capital to form a competing entity. That may be true in the long run, but as you certainly realize, for a highly capital intensive business such as railroading, the amount of capital that needs to be acquired and the investment risk presents a very formidable barrier to entry into the rail market.. Not that it can't be done. I'd make a pretty good wager that the DM&E will get into the Powder River Basin. On the other hand, I don't see anybody chomping at the bit to build another rail line to your downtrodden friends in the grain business in Montana.

Not withstanding Congressman Green's grandstanding, your proposal still is in a very opposite direction of what the rather conservative folks now in power are willing to take.
If you think otherwise, you just haven't paying too much attention to what the Bush administration and congress has been up to the last few years. And it certainly hasn't just been the last four or five years. The Clinton administration wasn't any slouch in coming up with pro-business legislation and policies. The decline in the Justice Department's anti-trust enforcement didn't just come about in 2001. (As an aside, you have complained that the cost of going to the STB is prohibitively high. Do you think a civil anti-trust case is going to be less expensive?)

So my first point is that you are faced with a government that has philosophical objection to adding regulation. You might be able to overcome that objection by getting powerful support for a change, but where would that come from? The infrastructure companies would probably be OK with the rate regulation as long as it allowed a rate of return a couple of points above the cost of capital and had those nice tax benefits. And yes, the shippers that consider themselves severly damaged by the "monopoly" will be there. On the other hand I doubt there will be much in the way of strong support from the general public. Unlike charges for phones and electricity, they don't get a bill from a railroad and unlike the use of other "ways" they aren't very likely to be able to slap a hi-rail rig on the family car and go off for a Sunday drive. On the negative side, your suggestion for property tax abatement brings the whole deal very close to the public. Maybe there are no property taxes in Idaho, but I have never met a home or business property owner that didn't go ballistic over anything that might increase his or her bill. And that, even if there are very positive overall benefits for the deal. Throwing all the gas revenue into a common transportation trust fund? I can see a trucker now. "They will have to pry that fund out of my cold dead hand". User fee? I am sure UPS is not going to like paying X extra bucks for there loads to help out a Montana grain farmer. Tax credits? I don't see any difference between getting some of my tax money sent back to me or getting to keep it in the first place. Somebody else is going to have to kick in taxes to cover my benefit.

OK, so in spite of all the obstacles, let assume that the whole deal gets through. (Note that I have not argued that an order to railroads to make the split is not unconstitutional). My view is that it may not solve the problem of some shippers getting stuck paying rates assumed to be too high. Even though the threshold for the minimum capital need to become a competitor in the market is much lower, it is still a factor, and there is no certainty that any considerable number of new operator companies are going to jump into the fray. For one thing, we know that the total profits of the class one railroads only get close to the cost of capital threshold. Clearly margins are going to decline and to offset that situation there either needs to be tremendous traffic growth or substantial efficiency improvements. You have argued that lower rates would vastly increase market share and total profits, but you have totally discounted the value of of the service level that can be provided by trucks, who are the things with the lions share of the total market. If you think that shorter trains will overcome that disadvantage, you just have no clue as to how railroads work. I have been in the business of buying transportation services for a number of companies and I can assure you that the modal decision is not just based on price. Of course the other way to improve profit is to increase efficiency. I am not sure there is very much to get for that. One prospect is to reduce labor costs, the one man crew and all that, but given the difficulty that railroads have getting qualified personnel at existing wage rates, I doubt that there is much chance of getting lower rates.

In spite of that some operate companies will come in, but I suspect there are much more attractive markets than the business of hauling seasonal freight that moves in loose car consignments. So it is now an open market with competition and winners and loosers, and with that you will still have managers striving for market domination as a profit strategy. That can lead to mergers and acquisitions and even monopoly conditions, especially when there is only enough business in a market to support one carrier. To you propose to establish regulations that force at least two carriers to serve every market?

I am not going to go into all the possible operational problems, but for a good example of what can happen when one railroad is responsible for the maintanence of a track also used by another, check out page 10 of the September Trains. And if you think there aren't going to be major hassles over which train gets priority when there are conflicts, I still have that bridge to show you.

I have two more comments. I don't think Hunt and Schneider National and many others are likely to agree with you that trucks just get the crumbs off the railroad table. UPS either. They just laid out $1.5 billion for Overnite just so they could get into the LTL market.

Your statement that that Socialistic countries supports monopolies runs a little counter to the European experience. Just ask Jack Welch or Bill Gates.

And I know what the Laffer Curve is all about.

Jay Eaton

[Anonymous]

Michael,

Your synopsis is apt regarding the difficulties of the small guy vs the big corporation, but it doesn't explain why the segment of the economy that can be represented by captive shippers, which is by far a much larger portion of the economy than that represented by the railroads, cannot exert much in the way of viable action to remedy those concerns, other than the fact that current antitrust law as it pertains to railroads effectively blocks such actions. If the Green legislation becomes law, I believe the rail shippers affected by differential pricing, bottleneck pricing, et al, will finally have a viable means to eradicate those market perversions.

Also, regarding Milwaukee's Gateway conditions, I will stand by my belief that the Milwaukee made a mistake in not including full access rights over the SP&S lines and the entire I-5 corridor, and access to Lewiston ID in addition to the Billings haulage agreement, to fully cover the PNW. I don't know if such inclusions would have made THE difference, but they certainly would have put the Milwaukee on a more even playing field.

[Murphy Siding]

MichaelSol Do you think there is any provision in state or federal law that would allow for the imposition of the Excess Profits Tax (?) that was put on oil companies one time, to be leveled toward a railroad?

[MichaelSol]

QUOTE: Originally posted by futuremodal
[Michael Sol - Isn't the right to private action against alleged monopolistic abuses the heart and soul of all antitrust laws? Without that right to private action, antitrust laws are frankly impotent, otherwise Congressman Green wouldn't need to have introduced his legislation in the first place. Makes a big difference if all a monopolist has to do is to lobby DC vs having to lobby against private interests. If I read this legislation correctly, this will allow those affected industries to bypass an impassive Congress and take direct action regarding the rate abuse.

Well, in theory, practice and theory yield identical results. In practice, they don't.

Anti-trust litigation is phenomenally expensive. Only the big guys, with tons and tons of free cash, play the game. Oracle v. Microsoft, AOL v. Microsoft, etc.

Look at WordPerfect. WP12 is not just arguably better than Word. It is a far superior word processing program. And WPDOS6.2 is still the outstanding word processor of all time. As one nationally syndicated legal scholar recently wrote, "I will stop using WordPerfect for DOS when they pry the program from my cold, dead hard drive." Columbia University maintains a troubleshooting website so that current users of the DOS version can continue to function in today's Windows environment. When I need to work with complex documents -- lots of footnotes and graphics -- I still use WPDOS 6.2.

Did WordPerfect have a cause of action against Microsoft? Absolutely. But, once the slide begins, that means shrinking revenues, shrinking market share, no money for litigation. Novell, which sold off WordPerfect years and years ago, only recently launched an antitrust suit against Microsoft. Corel, which now owns WP, can't afford it.

And this underscores a certain reality of private causes of action. When they exist, federal and state agencies are far more reluctant to take on the burdens of litigation, usually responding, "well, you can file your own lawsuit, why don't you do that?"

So, legislation which includes alternative enforcement procedures, usually defaults to the private sector, which ordinarily does not have the resources to pursue that kind of litigation.

Already a victim of a violation of law, the victim is urged to spend their own money -- money they don't have because of the violation -- to seek justice. Even though it is, ultimately, the public that is being hurt.

Efffective antitrust litigation occuring at the company level last occured in the railroad industry with the SP/UP suit over the Overland route restrictions in the 1960s. At least, that is the last one I can think of off the top of my head. Very interesting piece of litigation.

The Northern Lines merger case was an anti-trust case at some levels. The US Department of Justice intervened on behalf of Milwaukee and CNW, but particularly Milwaukee, arguing that the merged Northern lines would create exactly what the Sherman Antitrust Act prohibited, and which prior proceedings had explicitiy prohibited.

When Milwaukee itself turned around and offered its Gateway conditions as a condition of its own approval, and the Northern Lines instantly accepted, DOJ was stunned, but refused to drop its opposition to the Northern Lines merger, all the way to the US Supreme Court. The theory being that railroad companies should not be permitted to negotiate their own suicides.

Of course the irony there illuminates the impact of effective management, even in the face of what bystanders sometimes call "market forces." Contrary to the expectations of most, Warren Ploeger's Gateway Scheme turned out to be hugely successful for the Milwaukee Road, pushing its PCE to record levels of traffic and profitability indeed, the premier railroad success story of the 1970s. All sorts of interesting schizophrenia resulted from that. Including photo captions in Trains that continually suggest that the PCE had no business [See Classic Trains this month, for example] which is just simply false history.

For the shipper, an antitrust suit is perhaps not even the proper approach. Antitrust is an action between competitors. High rates resulting from monopoly pricing power in limited areas is a different legal creature, and falls more to "Fair Trade Practices Acts" at the state levels, and Federal Trade Commission legislation at the Federal level.

In the case of railroads, STB legislation continues to regulate rates for key commodities, such as grain, but the regulatory procedure is nearly almost always at private initiative, which has in fact inhibited effective action. The McCarty Farms cases, dragging on for 17 years, are Exhibit A for the enormous obstacles to the private cause of action for unfair rate-making.

If there were not a private cause of action in that instance, only a federal cause of action, the outcomes of rate discrimination efforts might well be different.
Best regards, Michael Sol

[Anonymous]

QUOTE: Originally posted by CSSHEGEWISCH

I'm not sure that Community High School District 200 would appreciate the loss of tax revenue if the property taxes on Clearing Yard were abated. There is not a whole lot of vacant land suitable for industrial development within the school district's boundaries so any offset of lost taxes by increased valuations due to industrial development would be minimal. In most urban areas, vacant land suitable for industrial development is relatively rare and much of it is being rezoned residential or commercial anyway. Shipping by truck is a viable option for many of the remaining industries, too.

You are correct, except that in today's economy industrial development in one locality tends to extend economic benefits to adjacent areas. Our great highway system has allowed people to commute farther and allowed support industries to spring up even several hundred miles away, so if County A does it's job and preserves a rail line that serves an industry that may be endangered otherwise, the benefits will also be felt in Counties B, C, D, etc do to increased retail development and population growth, and that will serve those taxing districts. If said rail line also passes through Counties B, C, and D to get to County A, even if there are no direct rail customers in B, C, and D they would still benefit by contributing to preserving that line via tax exemption in return for the greater regional dollar turnover.

QUOTE: Question for FM: In your scenario for open access, the infrastructure would be owned by a separate firm, which presumably would be responsible for its maintenance and possible upgrading. Since this firm would have a monopoly on the rail infrastructure, what devices would be in place to prevent this firm from charging whatever it pleases for access to operate over its line?

It is logical that said entities should be governed as regulated utilities in the same vein as electric utilities. That was(is) part of the problem with past railroad regulation, the whole kit and kaboodle was regulated including the transporter parts. That ended up hurting the ability to adjust to market forces, and almost killed the railroad companies.

Separate and regulate the infrastructure, and keep the transporter services unregulated.

[CSSHEGEWISCH]

I'm not sure that Community High School District 200 would appreciate the loss of tax revenue if the property taxes on Clearing Yard were abated. There is not a whole lot of vacant land suitable for industrial development within the school district's boundaries so any offset of lost taxes by increased valuations due to industrial development would be minimal. In most urban areas, vacant land suitable for industrial development is relatively rare and much of it is being rezoned residential or commercial anyway. Shipping by truck is a viable option for many of the remaining industries, too.

Question for FM: In your scenario for open access, the infrastructure would be owned by a separate firm, which presumably would be responsible for its maintenance and possible upgrading. Since this firm would have a monopoly on the rail infrastructure, what devices would be in place to prevent this firm from charging whatever it pleases for access to operate over its line?

[Anonymous]

QUOTE: Originally posted by mark_in_utah

QUOTE: Originally posted by up829

Shared access to utilities is a joke and does the opposite of what's intended. For example in my area we have power outages about twice a month, the power company has never heard of ANSI or any of the Power Quality organizations and makes up it's own standards instead. Next year we will be able to 'buy' electricity from another company but they will be using the same rotten infrastructure so my service will be no different. It's also likely that competitive rates will result in even less maintenance to the system. Thanks to power company deregulation we got Enron.

Congratulation on having some stupid management (along with most of the rest of the US) for your power company. As I noted before, ALL of the deregulation talk was to deregulate the generators, but NOT to deregulate the wires. Most all companies cut line work to SUBSIDIZE the cuts in the generation rates. This was a grossly stupid thing to do, as it actually CUT the allowable rate of return for their stockholders, and cripled the system. The quicker they start to understand this simple fact, the sooner they'll start to invest again into the infrastructure to better serve their customers. This is ALSO where the money is to be made. They did this in Australia (deregulation), and those companies that kept the wires are making money, and those that are generating power are scratching out a living.

Same thing goes for RR's. In a deregulated environment the money to be made is in the rails, and NOT in the freight they haul. Surprise!!!!! Want to make more money? Build more rails to relieve the congestion and improve through-put. Run as many trains as possible over the rails as quickly as possible. Keep a few of your own trains on the tracks to compete, but keep the two parts of the business seperate. Make the rails AND the trains both pay their seperate way. You'll be surprised how quickly management thinking changes.

Mark in Utah

Whether public or private, there are plenty of dis-incentives to building excess-capacity into infrastructure. Just enough to meet peak demand is probably the best use of capital. Build more and the stockholders or voters will complain capital is being wasted. Build significantly more in a competitive environment and price wars, defered maintainence, and eventually consoldidation will occur. We're near the end of this phase with the railroads.

On the other hand, if there's too little infrastructure or a crisis occurs due to some unforseen event, the owner gains a tremendous amount of pricing power, more than enough to compensate for lost business. As with the energy bill, a crisis prompts government action, incentives, and tax breaks. Virtually all forms of infrastructure are at or below meeting peak demand. Water, sewer, highway, bridges, electric transmission, refining capacity, ports, canals, airport landing rights and now rail. Some of these are public, some private, some regulated, some shared, it doesn't seem to make any difference.

I suspect the problem is our very short term expectation for return on investment. in the private sector, and limited funds due to budget deficits and the inability of governments to raise capital using bonds.

IMHO the problem FM's shippers face is lack of pricing power due to the global economy. Railrroads now have some pricing power and are an attractive target to blame. Large industries faced with global competition have done the same. Detroit has been leaning on suppliers and outsourcing parts for almost a decade now. Farmers and small domestc producers usually don't have the same options.

[Anonymous]

QUOTE: Originally posted by Murphy Siding

Future Model: Would you entertain the idea of a seperate thread started to calmly discuss the ideas and challenges that pertain to any kind od open access system?

Absolutely. I notice you started one pertaining to the British open access experience. Did you want to expand beyond that, e.g. asking our Aussie friends their opinions on open access in Australia? Or even analyzing other transportation modes as Michael Sol suggests?

[Anonymous]

MP173 - You are correct that I look at this issue through the eyes of rail shippers, not limited to energy companies but all captive rail shippers. As I've stated before, the segment of the national economy represented by rail shippers is far larger than that represented by the rail transporter half of the railroad companies. Even if one buys the contention that rail transporter companies would be hurt by open access competition, from the macro perspective the econony would gain. That counts for a lot in my book.

jeaton - I had mentioned previously and will mention again, in addition to recieving a portion of an Intermodal Infrastructure Trust Fund (which would replace the Highway Trust Fund, and all modal forms would contribute) and getting tax incentives (property tax exemptions and maintenance tax credits, not taxpayer subsidies out of the general fund) for ROW maintenance to better balance the cost structure of highway and waterway maintenance, rail infrastructure companies would then be closer to the characteristic of a public utility and thus should probably have their charges and maintenance schedules regulated. Being the apparent political hypocrite that I am, I usually oppose regulation of competitive markets, but not specialized markets such as private ROW's. In my view there is a net gain for the economy when you regulate pathways for the sake of unregulated transporter service providers. The former would fall into the catagory of a safe investment, while the latter are the higher risk/higher return investments. A nice balanced portfolio.

For the record, when one thinks of a leftist political philosophy one does not include a competitive market. That's why monopolists seem to thrive in socialistic settings, they've gotten some type of protection from potential competitors by government action, which then tends toward fascism. It is frankly implausible for one to be labeled a leftist whilst he supports increased market competition. But the whole thing is probably a subjective argument anyway.

daveklepper - When speaking of interstate traffic, trucks do pay most of the cost of the highway, but when local road maintenance is considered then your 1/2 to 1/3 estimate is more in line. Makes me wonder if publicly owned railroad ROW's would be supported by property taxes instead of contributing to them.

CSSHEGEWISCH - most local governments can be made to understand the link between a loss of rail infrastructure and a resultant domino effect on other industries. When presented as an option of either continuing to have viable rail service without being able to assess property taxes on the rail ROW, or losing the rail service and a bunch of local industries with THEIR property tax contributions, then they understand that exempting the railroad ROW from property taxes is the lesser of two tax base erosion scenarios. If anything, a percieved guarantee of long term rail service will result in industrial additions to the tax base in the long run.

The WC example is a good one, but of limited support for the truck competition myth, since WC was a regional with short home rail hauls. And yet, if all the railroad had to do was offer the service, it seems they always won out. It is only when the railroad declines the service or reduces the quality of the service that truckers can snatch the crumbs from the table. Truckers in that vein aren't competitors so much as they are the option of last resort after business has been rejected by the railroads. It's analogous to the idea that vultures are the competition against wolves, which is fallacious because vultures only get what the wolves leave behind, they don't do the actual stalking, killing, and initial feasting. Barge lines are more akin to being a true competitor to railroads, because no matter what the railroads do to keep the non-time sensitive business, the barge lines can undercut them at every turn. Of course, barge lines are very limited in their market reach. The bottom line is this - when railroads do things the way they are supposed to do things, truckers cannot compete, thus they are not true competition in my view. Truckers can only work in partnership with barge lines or other railroads to be a part of a competitive option to a railroad.

Michael Sol - Isn't the right to private action against alleged monopolistic abuses the heart and soul of all antitrust laws? Without that right to private action, antitrust laws are frankly impotent, otherwise Congressman Green wouldn't need to have introduced his legislation in the first place. Makes a big difference if all a monopolist has to do is to lobby DC vs having to lobby against private interests. If I read this legislation correctly, this will allow those affected industries to bypass an impassive Congress and take direct action regarding the rate abuse.

Mark-in-Utah - Thanks for the report.

BTW - for anyone interested, there is a rail infrastructure trade show this fall in Great Britain. I'd love to attend but work obligations, travel costs and my aversion to flying will keep me stateside, yet even so I hope some report is posted to add data to this great debate:

http://www.infrarail.com/if_page.asp?articletypeid=59

[Murphy Siding]

Future Model: Any thought to that seperate thread idea yet?

[Anonymous]

QUOTE: Originally posted by up829

Shared access to utilities is a joke and does the opposite of what's intended. For example in my area we have power outages about twice a month, the power company has never heard of ANSI or any of the Power Quality organizations and makes up it's own standards instead. Next year we will be able to 'buy' electricity from another company but they will be using the same rotten infrastructure so my service will be no different. It's also likely that competitive rates will result in even less maintenance to the system. Thanks to power company deregulation we got Enron.

Congratulation on having some stupid management (along with most of the rest of the US) for your power company. As I noted before, ALL of the deregulation talk was to deregulate the generators, but NOT to deregulate the wires. Most all companies cut line work to SUBSIDIZE the cuts in the generation rates. This was a grossly stupid thing to do, as it actually CUT the allowable rate of return for their stockholders, and cripled the system. The quicker they start to understand this simple fact, the sooner they'll start to invest again into the infrastructure to better serve their customers. This is ALSO where the money is to be made. They did this in Australia (deregulation), and those companies that kept the wires are making money, and those that are generating power are scratching out a living.

Same thing goes for RR's. In a deregulated environment the money to be made is in the rails, and NOT in the freight they haul. Surprise!!!!! Want to make more money? Build more rails to relieve the congestion and improve through-put. Run as many trains as possible over the rails as quickly as possible. Keep a few of your own trains on the tracks to compete, but keep the two parts of the business seperate. Make the rails AND the trains both pay their seperate way. You'll be surprised how quickly management thinking changes.

Mark in Utah

[Anonymous]

QUOTE: Originally posted by futuremodal

Geez, so many off the wall retorts, so little time.....

Mark in utah - was that plant built pre-Staggers or post-Staggers? Makes a huge difference, since most rail dependent plants were built back when rates were still regulated, thus the investors believed they would retain relatively low shipping costs.

The IPP plant was completed in the early 80's, which means that the planning and construction was done in the '70's. Not being that heavily involved in the RR business, I'm guessing that the freight rates were regulated and reasonable at the time. Utah coal costs were quite reasonable, and still are to a degree even though they've gone up almost 50% over the last few years as eastern utilities gobble up all the clean coal they can.

As for the "problems" associated with open access, these can be solved by adding more capacity. Right now utilities are scared to add more capacity because of the uncertaintities around de-regulation. They're waiting for the other shoe to fall. The problem is that NOBODY has talked about deregulating the entire electrical supply system, only the generation plants. The transmission and distribution system would continue to be heaviliy regulated.

This is closely akin to regulating the rates charged for trains to use the tracks, but deregulating the train owners to charge what they wish. UP would be free to charge what they wish for hauling coal, but Utah Railway or BNSF could step in and run coal trains to IPP and pay the same trackage rates that UP has to charge itself, plus a reasonable margin for profit (regulated rate of return).

Mark in Utah

[CSSHEGEWISCH]

Declaring that long-haul trucking cannot provide competition to railroads does not make it so. Railroads ignore trucking competition at their own peril. Several years ago in TRAINS in an article about Wisconsin Central, WC's management that they respected Schneider National as a competitor, which would suggest that this major trucking firm was indeed providing real competition to WC.

To FM: What sort of right-of-way cost equalization do you suggest for your open access infrastructure companies? Property tax abatement might not fly since it would be a federal vs. state question and I'm sure that the school districts, municipalities and other government units that would lose that property tax income would not appreciate the reasoning behind such an abatement.

[Anonymous]

Gabe -

I have been far too busy to get into this argument, but Mike is correct. Witness the Justice Department's approval being required in all Class 1 rail mergers in addition to that of the STB (and in the past the ICC).

LC

QUOTE: Originally posted by gabe

7. Railroads have always been subject to anti-trust principles, through Congressional directives beginning with the Transportation Act of 1920. Taking railroads out of the jurisidiction of the Sherman Anti-trust Act only removed the private cause of action therein, it did not remove anti-trust oversight.

I am not sure where this point leads me; but I will note that this is a really good point that adds a lot to my understanding of the debate.

Gabe

[gabe]

7. Railroads have always been subject to anti-trust principles, through Congressional directives beginning with the Transportation Act of 1920. Taking railroads out of the jurisidiction of the Sherman Anti-trust Act only removed the private cause of action therein, it did not remove anti-trust oversight.

I am not sure where this point leads me; but I will note that this is a really good point that adds a lot to my understanding of the debate.

Gabe

[edblysard]

Dave,
Ownership of "the land" is a legal concept...in reality, you can't own it, any more that you can "own" the air above it.
I would suggest you think about how the people who ended up "owning" the land in question got there in the first place.
Your assumption that the land was part of the public coffers in the first place is in error...
Who, in fact, did the "public" buy it from?
Or, are you assuming that because it was there for exploitation, and no one was sitting on it using it, it was "public property"?
That’s a pretty arrogant assumption, as it negates the rights of the "native Americans", who did live on the land before the "public" decided it was theirs to do with as they saw fit...such as claim ownership, divide it up, and sell it.
Should not following your "fair business practices" logic mean anyone who "owns" those lands now has a "moral and a financial debt" to the original, and now displaced, land users?
Or do you infer that the government, as the elected representative of the people, has the right to just claim any lands they see fit, when ever and where ever they choose, and call it "public" property?

Because if they do, then they also have the right to “give” or “grant” it to whomever they choose, for what ever purpose they choose.

If such a grant is in the interest of the public, such as creating opportunities for westward expansion, then even better.

I would suggest you consider that, with the exception of the coastal areas, the land west of the Mississippi was pretty barren and unpopulated, and with out the railroads presence, would still be so today.
Any moral and financial obligation for the relatively small ROW and the adjacent land grants has been more than retired by the fact that the very existence of most of the major cities west of the big muddy is due to the railroad bringing their base population, building material, fuel, water, food, just about everything needed to create and maintain these cities, to the area in the first place.
Bluntly, with out the railroads, these places would still be wilderness.

Ed

QUOTE: Originally posted by futuremodal

Oh, yeah, regarding the "moral obligation" statement I made - On reflection I admit it is in error for me to say that the railroad companies have a moral obligation to provide payback to the public in exchange for the land grants into perpetuity. Corporations are amoral, thus not inclined to moralisms one way or the other. For that statement I deserve the criticism.

What I should have said (and will probably still get criticism) is that the government has a moral obligation to the public to make sure railroads give payback to the public in exchange for the land grants, and should do so into perpetuity, e.g. there is no time limit for return consideration. The land is gone from the public coffers forever, why shouldn't the return favor also last forever?

[daveklepper]

May I enter the debate on the side of what I claim is real honesty and real objectivity? (Note, I claim it, but there is the possibility that one of you may prove me wrong.)

The railroad industry made a decent profit under regulations that guaranteed fair competition and precluded monopolistic practrices until

Transportation planning, spending, and taxation, were skewed to benefit the industry's competition and not the railroads.

This led to giant reduction of railroad mileage, locations served, optional routes, industry sidings, etc., and

prevented advances in technology and business practices except where suppliers (like EMD and Union Switch and Signal (CTC) could see a market that would provide a profit for themselves.

I really don't think open access BY ITSELF would do anything except lead to nationalization of a whole bunch of bankrupt railroads. Open access would have to balanced for the industry by the restoration of a level playing field where over the road trucking and river and canal and offshore shipping and air freight begin to pay a true price of what their operations cost the public. Again, only the freight railroads support schools and hospitals and police by the real estate taxes on their rights of way. Over the road trucking pays 1/3 to 1/2 the true expenses of the highway maintainance the trucks as opposed to private cars require. ETC.

Then, the question is, if there were truly a level playing field again, would Open Access be needed? Wouldn't then the return on capitol be sufficient so railroads would be willing to expand their capacity and really go after business again? Not all, perhaps, but the savy ones would and that would bring up the whole industry.

[MichaelSol]

QUOTE: Originally posted by edblysard


RE: The "numbers" thing - As I've stated before, I don't believe there are any publicly accessable studies that analyze the prospective comparison of converting the current U.S. rail picture into some form of open access vs leaving things as they are and/or reregulating railroad rates and services. I have scanned all the Class I websites, the AAR website, the FRA website, the STB website, and have not found any studies on the issue.

A couple of observations, well, OK, six , well, eleven....

1. Futuremodal researches his ideas, and generally formulates very good arguments on his topics.

2. The inevitable namecalling -- "pretty far left", "socialist," "stupid",etc., -- really isn't much of an argument, is it? The last refuge of a scoundrel is to accuse someone of being a college student ....

3. There are tons of econometric studies of open access systems, starting with the highly successful Interstate Highway System. Equating one's own [internet-based] knowledge with state of the art understanding is quite a howler.

4. I don't have an opinion on the topic because I am of an older generation of Class I railroading when that had a particular competitive meaning that no longer exists, although I happen to think it needed tweaking to be successful, not destruction.

5. For a start, "Railroad Costs and Competition," by John D. Bitzan, Journal of Transport Economics and Policy, vol. 57, part 2, May, 2003, pp. 201-225, presents an extensive economic analysis of open access and, while he concludes it would not be cost effective, it is by no means the final word on the topic.

6. Total ignorance of topical studies does not mean they do not exist. It's your fault, not their's, that you are completely unaware of them. Probably because this is a technical field in which everyone with an opinion does not necessarily mean they have any basis for offering them to the world...

7. Railroads have always been subject to anti-trust principles, through Congressional directives beginning with the Transportation Act of 1920. Taking railroads out of the jurisidiction of the Sherman Anti-trust Act only removed the private cause of action available therein, it did not remove anti-trust oversight.

8. Congress has continually, since 1920, emphasized "competition" among carriers as overriding National Rail Policy.

9. The Department of Justice vigorously promoted the anti-trust language of the Transportation Acts until finally, in the 1970s, after a series of Supreme Court rebuffs on the topic, they frankly gave up.

10. The ICC staff during that era almost always gave strong deference to the competitive language of the Transportation Acts, while the Commissioners almost always more typically sided with the industry which claimed that mergers -- studies to the contrary -- were good. Of course, ICC staff rarely went on to become railroad presidents, while ICC Commissioners such as Darius Gaskins did.

11. The last four points are based on my own perspective obtained through personal experience during that era as well as my personal discussions and correspondence with Warren Magnuson and Frtz Kahn on the topics. Those of you with strong opinions on everything in sight including the Laffer Curve, will know who the gentlemen are.

Best regards, Michael Sol