The Staggers Act

[gabe]

Oh, so the bars of the zoo cages needed a good rattle this afternoon?

RWM

If memory serves me correctly, the last person to do this managed to be a Bengal Tiger's lunch.  Then again, the tiger didn't get fair too well either . . .

[MichaelSol]

I'm trying to get a better grasp on the whole effect of the Staggers act, and derugulation of the railroads in general, since that all seems to be inter-related. 

"Between 1981 and 1988, the inflation-adjusted operating revenues of Class I railroads included in our analysis declined, on average, about 4.3 percent annually..." -- a loss overall of approximately 30% of the industry revenue by 1988. U.S. General Accounting Office, "Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980," May, 1990, GPO.

Objectively, the Staggers Act actually diminished some of the strong improvements being made under the 4R Act.  Regarding coal rates (both tariff and contract), for instance, "the real increase in prices from 1973 to 1978 is about 4.6 percent per year; the real increase from 1978 to 1983 is about 2.1 percent per year. The results indicate that the percentage increase in rail prices is higher during the period containing the 4-R Act than the period containing the Staggers Act". Frederick C. Dunbar and Joyce S. Mehring, "Coal Rail Prices During Deregulation, a Hedonic Price Analysis," The Logistics and Transportation Review March, 1990, 26:1, p. 17.

After 1983, coal prices began a long decline notwithstanding that coal was not seriously impacted by truck competition, and this is part of the collapse of industry revenues in the ten year period following the passage of the Staggers Act.

 

 

[MichaelSol]

Michael, you seem to be giving all the credit for line abandonments to 4R, and none to Staggers. I believe both acts should be credited, but Staggers more so. Line abandonments did not seem to pick up speed until 1980, other than the 3000 miles Conrail did not pick up in 1976. It was Staggers that forced the ICC to make all decisions on abandonments within 9 months.

Part of the problem in this is giving credit to the Staggers Act for everything that happened after the Staggers Act was passed.

The 4R Act gave the ICC the authority to exempt railroads from the standard abandonment requirements. Under 4R, the ICC could approve abandonments when no traffic had moved over the line for at least 2 years and ICC found no valid user complaints. Between 1984 and March 1989, railroads filed to abandon about 7,600 miles under the 4R Exemption Authority. The ICC approved abandonment of about 6,900 miles in that time frame. Unfortunately, we don't have Exemption Authority abandonment statistics prior to 1984 because the ICC, for some reason, didn't compile the data. But, those were 4R abandonments. Extrapolating back to 1981, we could guess that as much as 12,000 miles of track was abandoned, post-Staggers, but under 4R Act Exemption Authority, while the remainder was abandoned under 4R revenue to cost standards. Although Staggers established a nine-month deadline for consideration, the Exemption Authority abandonments were generally decided considerably faster than that anyway. And that's really all Staggers did, was set a deadline -- but there was no evidence that the ICC was not generally expediting petitions by that time anyway under its increased 4R Act authority.

Similarly, abandonments on Conrail were not governed by the Staggers Act, but by the Northeast Rail Service Act of 1981 which established different abandonment procedures for Conrail. Under that Act, the ICC was required to approve Conrail abandonment applications filed on or before October 31,1986, unless the lines were purchased or received a subsidy for continued operation. Conrail pretty much got a blank check under the NRSA.

Between 1981 and March 1989, railroads-excluding Conrail and certain exempted railroads- applied for approval to abandon about 16,000 miles of line-about 6 percent of the track they owned in 1980. The ICC approved the abandonment of about 16,800 miles [including applications made outside the data period]. Well over half of that was 4R Exemption Authority abandonment.

Between 1982 and March 1989, Conrail filed applications to abandon about 4,600 miles under the NRSA. The ICC approved about 3,900 miles-about 12 percent of Conrail-owned track. But that had nothing to do with the Staggers Act.

I'm not sure why, but it goes back to the original post. In many minds, anything that happened after the passage of the Staggers Act was because of the Staggers Act. It's just not true, but the assumption leads to those generalizations that often mislead, rather than illuminate.

 

[Dakguy201]

Choochoo I think you are right in believing the airlines are about to go through the same kind of a combination process the Class I railroads did.  For example, United and Delta are reported to be talking to each other right now but others say it is Delta and Northwest.  If any of that  were done, it could easily kick off another round as American, Frontier (and whomever) scramble to find partners.

The more interesting question is will we see further combinations among the Class I's?    I have major doubts mostly based on my assumption of government opposition to such a move; but should anyone have a differing viewpoint, I'd like to hear the reasons you think it might occur.

[choochoobuff]

I think that by the end of 08 we will begin to see more mergers in the airline industries not unlike the rail industry in the past 50 years.  As to the maintenance factor, planes are operating at 25,000 feet and constant maintanence is a good idea.  The airline industries are poor planners for sure, but is Amtrak using this to thier advantage?  I dont know, ridership is up and that is good.  However, will Amtrak make the decisions necessary to grow the company or wait on Uncle Sam to do it for them.

[MichaelSol]

Yikes!  Be careful what you ask for.  After the genie was let out of the bottle, what did the the railroad managers try to do to stop the tide?

This may shed some light:

[Murphy Siding]

Did the railroads anticipate that deregulation could cause some price wars, that would send rates downward?

I would say no, based on the statements of several Class I VPs of Traffic.  The were talking about only using contract rates to cover deals where the railroad had to put up capital and needed a revenue committment to make the deal look good to a lender.  However, the reality was very different and to me not surprising looking back at the overcapcity rate wars in the 1890s.  I think there were three things that caused these predictions to be so far off.  No one had any experience with a deregulated enviroment. Very few people knew anything about the 1890s.  They were whistling in the dark.

Two illustrations from the real world.  Bud Braun was the VP of Sales and Marketing at the C&NW and retiring in the same week Staggers went into effect.  He wished us well and said he picked a perfect time to retire.  Bud was right! I had a soda ash customer that was so eager for rebates he asked us for a proposal in the window between Carter signing the law and it taking effect.  Within three years the C&NW's margin on soda ash dropped from 100% to zero and my succesor was telling soda ash shippers to give the BN the traffic.

Throughout my carrier I noticed that shippers and railroads grasp on history did not reach back before they started working.  In terms of today there is not much grasp of anything before 1980.  Very few supply chain managers with a shipper or market manager at a railroad are aware of the costs and benifits to their employer with Staggers.  They view it as about as relvent as the Battle of Yorktown. In many ways the a correct as the manage thier business going forward.

Yikes!  Be careful what you ask for.  After the genie was let out of the bottle, what did the the railroad managers try to do to stop the tide?

[bobwilcox]

Did the railroads anticipate that deregulation could cause some price wars, that would send rates downward?

I would say no, based on the statements of several Class I VPs of Traffic.  The were talking about only using contract rates to cover deals where the railroad had to put up capital and needed a revenue committment to make the deal look good to a lender.  However, the reality was very different and to me not surprising looking back at the overcapcity rate wars in the 1890s.  I think there were three things that caused these predictions to be so far off.  No one had any experience with a deregulated enviroment. Very few people knew anything about the 1890s.  They were whistling in the dark.

Two illustrations from the real world.  Bud Braun was the VP of Sales and Marketing at the C&NW and retiring in the same week Staggers went into effect.  He wished us well and said he picked a perfect time to retire.  Bud was right! I had a soda ash customer that was so eager for rebates he asked us for a proposal in the window between Carter signing the law and it taking effect.  Within three years the C&NW's margin on soda ash dropped from 100% to zero and my succesor was telling soda ash shippers to give the BN the traffic.

Throughout my carrier I noticed that shippers and railroads grasp on history did not reach back before they started working.  In terms of today there is not much grasp of anything before 1980.  Very few supply chain managers with a shipper or market manager at a railroad are aware of the costs and benifits to their employer with Staggers.  They view it as about as relvent as the Battle of Yorktown. In many ways the a correct as the manage thier business going forward.

 

[MichaelSol]

Well, I have got to get some work done in the real world, and so this will probably be my last post on the topic. But, if an analyst wanted review the direction of influences on the rail industry leading up to today, compared to, say, 1979, and wanted to make a hypothesis to test, this would be an interesting one:

General Economy                 65%

Non-crew Productivity          25%

Train Crew Staffing              25%

Tax law changes                 15%

4R Act                                5%

Carload weight                  -15%

Staggers Act                    -20%

These describe, for the purpose of modeling a hypothetical, 100% of the economic influences on the rail industry. This is a view I suspect may be true. And if you have decided that the Staggers Act is the sole reason for a particular economic outcome, the Staggers Act can look very good indeed. But, there are many things which affect outcomes. Looking only at an overall result can obscure the actual effect of inputs, and ignoring key inputs can in fact compel the wrong analysis.

I think it has with Staggers.

 

 

[MichaelSol]

Therefore, as you point out, it's the avoided costs that the railroads sought, that affected their post 1980 financials-upward, as opposed to downward. 

Well, "upwards" and "downwards" implies that its relative to something. But, not relative to the years preceding Staggers because the investments weren't being made then either. Had the investments been necessary for some reason, things would have looked pretty bad after Staggers. But, had they been actually made before Staggers, things would have looked worse compared to what they actually were as well.

The point is, overall, abandonments did not change post-Staggers income statements compared to pre-Staggers income statements except for a loss of profitable revenue.

Too, looking at 1991 - a minor recession year -- and look at the impact on ROI. Worse than nearly any pre-Staggers number since WWII.  As I postulated early in this thread, the rail industry has prospered, but I think the reasons lie mostly outside of the Staggers Act, while the Staggers Act itself has created a greater sensitivity to economic conditions; indeed it may be more leveraged by economic conditions -- doing even better in good times, but, well ... we haven't seen the bad times yet and what the Staggers Act may really mean.

The "results" of Staggers are compared to the 1970s. But conditions have been nothing like the 1970s, so where's the comparison? Anything would look good by comparison, including the most onerous regulation.

And the industry has been lucky insofar as what those economic conditions have been. That 1991 result -- a virtual zero ROI -- is clearly a post-Staggers phenomenon for which the industry has had little experience and a lot of luck.

It sits there, firmly planted like a dark and forbidding cancer in the post-Staggers statistical record, refuting everything that Staggers is alleged to mean, even as the celebration goes on pretending it is not there.

 

[Murphy Siding]

And since many lines were still in the "profit-taking" phase, often the result was a loss of net cash flow when abandonment occured. But, they avoided the cost of rebuilding the lines by abandonment, there wasn't much reason to rebuild the lines in most cases -- hence the abandonment -- and there wasn't much to go to the bottom line by abandonment because it was the avoided cost the railroads were seeking, not actual costs they were saving.  

  I had to go back and re-read that for clarity, but it does make sense.  The avoided cost, by way of the abandonments, as you point out, were not a boon of cash when the lines were shut down, more a termination of whatever cashflow was still coming in from the line.  Therefore, as you point out, it's the avoided costs that the railroads sought, that affected their post 1980 financials-upward, as opposed to downward.  I'd have a hard time believing that railroads would have abandonded lines for anything other than financial reasons.

[MichaelSol]

Based on what you've stated previously in this thread, the "cash" (your word) is what kept the Adjusted Return on Investments from being *lower* than they were on your chart.  If, as you stated, the abandonments only helped the railroad's finances in the future tense, what shows on your chart is a future that was better, in part, due to the abandonments you say helped the bottom line.  Thanks for provided the chart to help visualize that.

I may be misunderstanding you. The "net cash" came during the period 1960-1976; as deferred maintenance allowed branchlines to contribute positive cash flow to the companies even as their condition spiralled down. After abandonment, there was no "cash flow" because there was nothing to "harvest".

The net cash flow enjoyed during the period 1960-1976 stopped after abandonment. The railroads lost that net cash flow. They wouldn't have had it anyway, but the fact is, railroads had lower revenue on that account after abandonment than they did before abandonment and, given the nature of the "harvest", the loss of revenue was the loss of revenue that generated a profit over the costs incurred. They were less profitable overall on that particular point after abandonment, and if you measure abandonment by the Staggers Act as a point of reference, then there was a loss of that profitable revenue after the Staggers Act which had nothing to do with the unexpected losses in revenue due rate competition.

And yes, as I initially stated, the idea of abandonments was to avoid future investment drains. These things were at the end of their economic service lives; either abandon or put money into them. But at the same time as they avoided those expenditures by abandonment -- they had been avoiding them already for 20 years and still getting cash flow out of them. And that was going to stop.

 

[selector]

Readers, I interject at this point only to offer a suggestion.   First, though, I genuinely appreciate the sincerity and general tone in this discussion...it's quite refreshing.  I can absolutely tell that all of you are busting your butts trying to keep this moving positively forward, and that some of you are struggling a bit, either with terms, logic, or with making sense of facts. I see it, and I hope you can keep it up.  I say this aware that there has been some tension, as well, here and in previous threads.  So far, so good.

My suggestion, for what it may be worth, is that there has been an almost overhwelming breadth of information supplied here, and many questions asked about points of clarification.  The thread has grown a bit hairy, in other words, and the nails are long, too.  It may be useful for all readers to pause, and to go away from the thread for a bit.  Take a break, maybe for a day, and then start reading right at the beginning again and use fresh eyes to try to make sense of all that is being said.

I suggest this because a rest may make clear some things that just won't leap off the pages for you at present. 

Thanks for reading this, and I hope that whatever happens the thread continues to teach us all something.

My compliments, and respect, to all of you.

-Crandell

[Murphy Siding]

The Justice Department's eagerness to shut down the Rate Bureaus is my judgement of what was going on in the market place at that time. Justice had been consistant in their dislike for railroad or trucking Rate Bureaus.  At that time I had been working with shippers and rate departments for 18 years and was in a good position to make a judgement.  In talking to our representatives at the Bureaus (C&NW and SP) and my cheimical shippers the big question was how were we going to make tariff rates without the Rate Bureaus in conjuction with several carriers via thousands of junctions.  

Did the railroads anticipate that deregulation could cause some price wars, that would send rates downward?

[Murphy Siding]

The Year 1980 wasn't that bad of a year, compared to the decade following Staggers. If you perform a trend line analysis, the rail industry, 1980-1991, was pretty middling; trending down. Where was the cash resulting from abandonments?

 

Based on what you've stated previously in this thread, the "cash" (your word) is what kept the Adjusted Return on Investments from being *lower* than they were on your chart.  If, as you stated, the abandonments only helped the railroad's finances in the future tense, what shows on your chart is a future that was better, in part, due to the abandonments you say helped the bottom line.  Thanks for provided the chart to help visualize that.

[MidlandPacific]

 

Railroads could not abandon mainlines because mainlines were subject to General Mortgages with "Mainstem Covenant" clauses. 

 

The term "mainstem covenant" is new to me.  It appears to be straighforward, but I want to be sure I understand what it means.

For example, railroads A & B both have a mainline (mainstem) between a specific city pair, although their mainlines elsewhere are not parallel.  They merge.  The resulting railroad wishes to abandon one of the duplicate routes.  Railroad A's route is superior due to grades, intermediate traffic, maintenance, length or whatever.  However, Railroad B had bonds out there with a "mainstem covenant".  Effectively that says line B can not be abandoned without paying off the bonds.  The merged railroad is left facing a bad choice -- abandon the better route, pay off the bonds, or continue to operate both mainlines. 

Do I have it correctly?

 

Michael, it's always great to see these discussions - I know they are painful for you sometimes, but I've learned a lot about the economics of railroading by reading them. 

Dakguy, you essentially have it right.  A covenant is a restriction that's written into a bond agreement that limits the borrower's freedom of action, usually with a view to protecting the value of the asset.  Some of them are comparatively trivial (a requirement to keep locomotives painted for a certain company, for example), while others are significant.  A big portion of the value of the main line is its physical continuity and state of repair; break it, and a portion of the value of the asset to the lender if it's repossessed is lost.  In the case you mentioned, maintaining it may be sufficient; there were a lot of miles of railroad out there that carried rails for years without trains because of mortgage covenants - the SP's Promontory Branch, for example, lost a lot of its usefulness when the Lucin Cutoff was built, but when SP applied to abandon service in the 1930s, their lawyers stated explicitly that they only wanted to abandon service - not remove the rails, because the line itself was a part of the original Central Pacific, which was mortgaged.

The legal sanctity of contract is a key underpinning component of covenants; they're legally enforceable and failure to live up to them can void the agreement. 

Hope I haven't clouded the discussion.

[MichaelSol]

The last year of regulated rates, 1980, wasn't that bad of a year, compared to the decade following Staggers. If you perform a trend line analysis, the rail industry, 1980-1991, was pretty middling; but trending down. Where was the cash resulting from abandonments?

[MichaelSol]

     No, I don't have a theory. 

     I know that the Staggers Act greatly changed American railroading, allowing it to become what it is today. 

Well, you said you do have a theory, and a belief system -- you know it with certainty -- and there's nothing wrong with postulating a theory -- that's how the scientific method works.

But, the scientific method then requires more before a conclusion can be reached. But, I get the sense you are looking for confirming opinons, not facts that need to be weighed before an opinion can be reasonably generated.

There are probably 15 or 20 studies "out there" that examine various specific changes in the rail industry and attempt to assess their cause and impact, post-Staggers. But, I know, most people don't want to be bothered by studies and facts -- "when the legend becomes fact, print the legend". So, there's no point in even referencing them.

A good approach, however, is breaking down Staggers, issue by issue, and examining each effect. Focusing on abandonments is certainly part of that. I am puzzled by that part of the discussion because there seems to be a real "desire" -- almost an emotional one -- to attribute to Staggers what was plainly a 4R development. I don't know why that is. What's the point?

Staggers is not a Holy Grail. It was legislation -- as the second poster attempted to point out, part of a series of revisions over a considerable period of time. It had its good points and its bad points. Its most salient feature -- elimination of most rate regulation -- caused a swift reduction in industry revenue.

Staggers didn't do much for infrastructure. The Tax Reform Act of 1981 had much more to do with creating investment benefits for the rail industry by investing in infrastructure-- and that change in attitude, which affected all industry, really put the tailwind behind capital investment and drove it, but for everyone. It wasn't a result of the Staggers Act even though nearly every celebration of the Staggers Act celebrates the increase in capital investment as though Stagggers had something to do with it. The Tax Reform Act of 1986 put another gust of wind behind industry investment.

But for Staggers, that collapse in revenue was a challenge considering the industry supported Staggers because it thought it could raise rates. To the industry, Staggers was not "visionary", it was a booby trap, and it blew up.

Now, if what doesn't kill you makes you stronger, then there may be an interesting perspective on that. But, Staggers can only be assessed, the way you want to do it, by comparing what the industry looks like today, with how a regulated industry would have looked in a booming economy with heavy traffic: and the existing record shows that regulated railroads in booming economies with heavy traffic did very well. And you can't really make the comparison without doing that in some fashion, and doing it suggests that railroads would, in fact, being doing very well whether they were regulated or not.

 

 

[MichaelSol]

What I'm reading into your posts is while profits may have not changed much at the time of abandoment, profits a few years down the road were greater due to not having to make an investment in line maintenance that didn't have a chance of paying off with expected revenues. I'm also wondering how much of the current rail network would be able to payback the costs of new construction.

Well, profits were greater in prior years too, from not having made the investments in the lines that resulted in the deferred maintenance. Looking at BN's deferred maintenance as of 1977, $389 million; Milwaukee's of $510 million, and CNW's of $990 million, these sums weren't, by and large, mainlines. But it does represent money they did not spend over a 20 year period or more.

So, the avoided expenditures in the future after abandonment meant ... what ... in terms of increased profits? Compared to what? The period of time they weren't spending anything anyway? How does that "help" the bottom line by comparison, post-Staggers, if it was already "helping" the bottom line for the 20 years prior to Staggers -- i.e. not spending the money?

What ended upon the finality of abandonment was the loss of net cash flows that in many cases existed as the railroads cashed out of the investment over the period of time of deferred maintenance. That cash flow was gone. Didn't pop back up again after abandonment. Railroads suffered a reduction in income in many cases after the abandonment cycle was over compared to the previous 20 years. 

I do think the 4R was a great relief on that count. It finally allowed the logjam to begin to break free. It just happened, in many instances, to actually reduce net cash flow. In many instances, it reduced losses. But the idea that suddenly a huge tidal of wave of cash was "freed up" for use elsewhere, and that Staggers alone was responsible, is what I cannot find in the statistical record. Doesn't mean its not there, I just haven't seen it. But I won't claim something that I haven't seen and understood, as a truth. And I have seen the detail studies.

 

[Dakguy201]

 

Railroads could not abandon mainlines because mainlines were subject to General Mortgages with "Mainstem Covenant" clauses. 

 

The term "mainstem covenant" is new to me.  It appears to be straighforward, but I want to be sure I understand what it means.

For example, railroads A & B both have a mainline (mainstem) between a specific city pair, although their mainlines elsewhere are not parallel.  They merge.  The resulting railroad wishes to abandon one of the duplicate routes.  Railroad A's route is superior due to grades, intermediate traffic, maintenance, length or whatever.  However, Railroad B had bonds out there with a "mainstem covenant".  Effectively that says line B can not be abandoned without paying off the bonds.  The merged railroad is left facing a bad choice -- abandon the better route, pay off the bonds, or continue to operate both mainlines. 

Do I have it correctly?

 

[Murphy Siding]

there wasn't much to go to the bottom line by abandonment because it was the avoided cost the railroads were seeking, not actual costs they were saving.  ........

.......As I say, if there is some evidence that railroads gained some profit by abandonment, I would like to see it.

How is it, that  these two ideas can be different things?

[erikem]

I am reading from the record. That's what the record says. I have no idea how I can contradict myself since I am stating what the record says. Railroads didn't have the money to maintain those lines. Many were obvious relics of another era. Since abandonment was more difficult before 4R, and was costly and frustrating, why bother? I mean, literally, what's the point? They extracted every last nickel as speeds slowly declined. Well, what's wrong with that? And when the opportunity arose to begin abandonments in earnest, well they did that too. And since many lines were still in the "profit-taking" phase, often the result was a loss of net cash flow when abandonment occured. But, they avoided the cost of rebuilding the lines by abandonment, there wasn't much reason to rebuild the lines in most cases -- hence the abandonment -- and there wasn't much to go to the bottom line by abandonment because it was the avoided cost the railroads were seeking, not actual costs they were saving.  

Your comments on this subject reminds me of your assertion that the railroads would have been better off running their newer steam locomotives into the ground before replacing them with diesels (i.e. stretched out the process of dieselization by a few years).

What I'm reading into your posts is while profits may have not changed much at the time of abandoment, profits a few years down the road were greater due to not having to make an investment in line maintenance that didn't have a chance of paying off with expected revenues. I'm also wondering how much of the current rail network would be able to payback the costs of new construction.

[MichaelSol]

It still appears to me, that you are contridicting yourself. 

I am reading from the record. That's what the record says. I have no idea how I can contradict myself since I am stating what the record says. Railroads didn't have the money to maintain those lines. Many were obvious relics of another era. Since abandonment was more difficult before 4R, and was costly and frustrating, why bother? I mean, literally, what's the point? They extracted every last nickel as speeds slowly declined. Well, what's wrong with that? And when the opportunity arose to begin abandonments in earnest, well they did that too. And since many lines were still in the "profit-taking" phase, often the result was a loss of net cash flow when abandonment occured. But, they avoided the cost of rebuilding the lines by abandonment, there wasn't much reason to rebuild the lines in most cases -- hence the abandonment -- and there wasn't much to go to the bottom line by abandonment because it was the avoided cost the railroads were seeking, not actual costs they were saving.  

As I say, if there is some evidence that railroads gained some profit by abandonment, I would like to see it. These discussions often turn on burdens of proof, and I keep offering, but not getting much back. As Selector has pointed out, the habit of simply gainsaying evidence, while insisting something else must be true without an ounce of evidence is really not an acceptable discourse. And I don't really know what else to look at except actual railroad studies, but those seem to meaningless in the face of determined opinions:

"Had the railroads not been anticipating an ease up of the abandonment procedure, and/or the ICC had made them keep their lines in serviceable condition, it seems apparant that the branchlines in question would have been in the negative.  To say that abandonments didn't affect the railroad management's thinking, as to how it would affect their bottom line, based on possible future expenses doesn't seem right."

Looks like a theory, although I have no idea who said that abandonments didn't affect railroad management's thinking based on possible future expenses.

Indeed, that is exactly what I said: they were avoiding future investment costs.

 

[Murphy Siding]

Abandonments weren't a big relief to the bottom line. Nobody was spending anything on those lines. In a very great many cases that I have looked at, the lines were generating positive cash flows, as the very last ounce of profitability was wrung out of them prior to either abandonment, or rebuilding if something warranted that. So, as an odd artifact of that circumstance, most railroads suffered slightly in loss of revenue as the result of abandonments overall. So, what a few months difference in consideration of the petitions meant, I could not guess.

Anyway, that is my recollection. If you wish, I can give you a link offline to my private copy of Milwaukee Road's light line abandonment study of 1977. Two lines that I am familiar with were identified in that study for abandonment in March ... and were abandoned by September. In that study, 3,600-odd miles of lines were identified for potential abandonment, with a detailed accounting for each line of "normalized maintenance" and "actual maintenance" as well as carloads, commodity types, and revenue, and you can see a corporate policy of simply keeping costs under income until a final abandonment could occur -- which ironically resulted ultimately in a loss of positive cash flow upon actual abandonment, but it avoided future investment needs. As I say however, that's my recollection, and I haven't read the study for some time.

I went back and re-read your post, a little slower this time perhaps.  It still appears to me, that you are contridicting yourself.  Had the railroads not been anticipating an ease up of the abandonment procedure, and/or the ICC had made them keep their lines in serviceable condition, it seems apparant that the branchlines in question would have been in the negative.  To say that abandonments didn't affect the railroad management's thinking, as to how it would affect their bottom line, based on possible future expenses doesn't seem right. 

     No, I don't have a theory.  I'm trying to get a better grasp on the whole effect of the Staggers act, and derugulation of the railroads in general, since that all seems to be inter-related.  Thanks you for your contibutions to this thread.  While they do seem to run counter to most of what I've read in books and magazine articles, they do give one something to ponder.

 

 

[MichaelSol]

If they had stayed out of bankruptcy, until after Staggers, the Milwaukee Road would have been able to dump unproductive lines quickly and cheaply, thus benefitting greatly from Staggers.

The Milwaukee proceeding moved from application to final decision in 143 days. The current STB rules set 110 days. You said Staggers required 9 months -- 270 days. Considering this was a major mainline abandonment, how could waiting until after Staggers have made any difference? The proceeding occured faster than under the Staggers deadlines.

You will have to describe how Staggers substantively changed the abandonment procedures from 4R. I guess I don't get it. That would be a useful exposition for this thread to know the differences.

[bobwilcox]

In addition, in the early 80s the railroads lost their ability to fix rates much as OPEC sets the price of oil.

In the early 1980s the Fed started making Rate Bureaus so burdensome to administer they went away. The Rate Bureaus operated much like OPEC but for railroads. If you were dealing with commodities that moved by rail, barge and/or truck the Bureaus had gotten to be pretty silly by 1960. The truckers and barge lines weren’t invited to the party. It would be like trying to run OPEC without letting Iran and Nigeria participate.

However, on commodities where railroads had a large market share the Bureaus were able to keep rates high. As an example, plastic resins moved almost exclusively by rail out of the Texas Louisiana Gulf Coast. It was perfectly legal for the railroads serving Texas and Louisiana to set down and agree on rates. The conventional wisdom was that the ICC would protect the shippers. Also, since rates had to be public, everyone knew if say the Santa Fe cut rates from Houston the MP and SP would react immediately with cuts of their own to protect market share. That was obviously a zero sum game.

When contract rates came along this changed because business could be tied up for one or two years in return for a price reduction. In the case of plastics, starting this ball rolling down the hill didn’t sense for the SP or MP since they had the business. That was not the case for the Santa Fe or the Katy. It was an expensive process to relearn the pricing lessons of the 1890s but huge price drops while car storage capacity was disappearing brought home the message. It only took about 25 years to let the dust settle.

Bob-could you expand on this part a little bit?  Was this the FED's way of trying to get rid of it?  Thanks

     Am I understanding this correctly, that before Staggers, railroad could set a rate collectively in a region, as long as they put the rates out in the open for all to see?  Liek gas stations do with gas prices? (weird analogy, I know).  After Staggers, they were allowed to make confidential, rates over a time period?  Could they not set rates over a 1 or 2 year contract before?

The Justice Department's eagerness to shut down the Rate Bureaus is my judgement of what was going on in the market place at that time. Justice had been consistant in their dislike for railroad or trucking Rate Bureaus.  At that time I had been working with shippers and rate departments for 18 years and was in a good position to make a judgement.  In talking to our representatives at the Bureaus (C&NW and SP) and my cheimical shippers the big question was how were we going to make tariff rates without the Rate Bureaus in conjuction with several carriers via thousands of junctions.  

Prior to Staggers railroads could only charge their tariff rates.  This was a public price list .  The prices were public knowledge and anyone meeting the conditions of the tariff could use the rate.  After  Staggers tariff rates continued in tariffs and move a lot of traffic today but with many fewer railroads and junctions.  However, with Staggers for the first time in decades railroads could make confidental contracts with a shipper.  As and example Union Carbide would say, "we have a movement of 200 cars per year of alcohol from Houston to Atlanta for transfer to trucks and local delivery in N. GA.  We want the best package via UP-NS, UP-CSXT, SP-NS or SP-CSXT. Traffic via CSX will move by NOLA but traffic via NS can move NOLA or MEMPH. We will pick the best package and agree to ship 200 cl/yr for two years via one of these  six routes.  While your at it we want the truck delivery included in the deal so we will only have one frieght bill from Houston to our truck customers near Atlanta."  This kind of package would be worth $1-1.5 million to the railroads in 1980 dollars.  They were eager to show Union Carbide why they were the route to use! 

[MichaelSol]

 They could do it before Staggers. The PCE was the biggest abandonment of mainline in American history -- had nothing to do with Staggers. This isn't really a question about the Staggers Act, it has to do with specific powers granted by Congress to the USRA to manage the rationalization of Conrail, specific powers of Federal Courts to impose "cram-down" provisions on mortgage holders, and the rights of mortgage holders to accept substitute collateral. A lot of things that just don't have anything to do with the Staggers Act.

The PCE abandonment had nothing to do with the 4R Act either. The CMSP&P was given permission to rationalize by the bankruptcy court.

The bankruptcy court is a federal court, as referred to in my post, now highlighted for reference. That was, in fact, and remains today, one way of avoiding the Mainstem Covenant clauses in general mortgages. I don't know how else to say that except to repeat it.

However, the Milwaukee abandonment petition, was, in fact, prepared and submitted to the ICC using 4R guidelines. It was specifically a 4R petition. It had everything to do with 4R. The Federal Court exercising bankruptcy jurisdiction under Chapter 77 at that point in time had no authority to order railroad line abandonments. Judge McMillen needed the permission of the ICC -- under 4R! Congress then intervened and interrupted the 4R process through the MRRRA, which directed the ICC to consider an ESOP alternative to affirming or denying the abandonment petition. And technically, the ICC then gave "permission" to the bankruptcy court to issue the order.

I'm not sure why something doesn't seem clear here, but, once again, this was before Staggers and yes, it did involve a Mainstem Covenant Clause and, yes, a federal court was a way around that. And the ICC authorized the largest mainline abandonment in history. All before Staggers. I'm pretty sure that's exactly what I said ...

 

[MichaelSol]

  Why would all the railroads be so in favor for it otherwise?

Well, who said they weren't in favor it?

You paint a picture of it being of very little relevence to the railroads' finances, but yet they all vigorously pursued it.  The two trains of thought don't seem to dovetail.

Your comment contained a lot of built-in assumptions, including "feelings". I gather from the assumptions you have a theory. If you have some numbers that show that railroads derived a huge financial benefit, and suddenly surged to profitability because of abandonments, I would enjoy the opportunity to see those numbers and how they line up.

But, I did say this:

Abandonments weren't a big relief to the bottom line. Nobody was spending anything on those lines. In a very great many cases that I have looked at, the lines were generating positive cash flows, as the very last ounce of profitability was wrung out of them prior to either abandonment, or rebuilding if something warranted that. So, as an odd artifact of that circumstance, most railroads suffered slightly in loss of revenue as the result of abandonments overall. ... In that study, 3,600-odd miles of lines were identified for potential abandonment, with a detailed accounting for each line of "normalized maintenance" and "actual maintenance" as well as carloads, commodity types, and revenue, and you can see a corporate policy of simply keeping costs under income until a final abandonment could occur -- which ironically resulted ultimately in a loss of positive cash flow upon actual abandonment, but it avoided future investment needs.

That's my take on it from reviewing a pretty thorough study of a major Midwestern railroad probably about as typical of railroading outside the northeast as there was. And offering a specific study is the best I can do at the moment in support of my viewpoint. I don't have an axe to grind on the subject, that's simply how the numbers played out. As I say, you seem to believe strongly in a different view, and if you actually have some numbers, or at least references that show a different result, I would enjoy seeing them.

 

[Murphy Siding]

  Why would all the railroads be so in favor for it otherwise?

Well, who said they weren't in favor it?

 

You paint a picture of it being of very little relevence to the railroads' finances, but yet they all vigorously pursued it.  The two trains of thought don't seem to dovetail.