The above-referenced article was in yesterday's Wall Street Journal - Mon. Jan. 5, 2009 - Page A-5, I believe. It can also be accessed online - at least for approx. the next 7 days (per the WSJ's website) at:
http://online.wsj.com/article/SB123111502899652523.html
It's interesting, but not much new to anyone who's been following this subject for the past several years.
- Pau North
Dear Greedy Something-for-Nothing Shippers:
Go ahead and re-regulate and watch your shipping costs more than double, contrary what you have deluded yourselves to believe while being blinded by skewwed balance sheets.
Get a life!
Very truly yours (not!),
Mud
The farmers, elevators and middle men want the railroads to supply cars whenever they want them and in the quantities they need, all at a super low price, regardless of how much the cars cost, the cost of capital and the rate of return, the price of fuel and all the rest. They have found willing politicians who buy into this on their behalf. The general public will buy into it, as well, because they will only get one side of the story from a media that is too lazy to check the facts at best, and increasingly biased against business at worst.
John Timm
Well, it only seems fair. If the government is going to set the prices that a transportation company can charge for it's services, it should be able to set Mr. Shipper's selling price as well.
You might as well go right to a wage and price freeze while you're at it. Paging Richard Nixon....
Thanks to Chris / CopCarSS for my avatar.
Hmmm....yeah, regulation worked really well the last time around. So well in fact, that countless numbers of railroads went bankrupt due to lack of money from too-low rates they couldn't change, and the infrastructure itself degraded to mud, rust, and rotted ties. It appears that these shippers think nothing of turning millions a year in profits themselves, but they think the railroads should charge just enough to break even, and keep the status quo. Sadly, there are those in Congress who'll cry a river over the shippers "plight" and give them what they want. Get ready to relive the pre-Staggers Act days of the 1970s' all over again!
Joe H. (Milepost S256.0; NS Griffin District)
Pictures: http://anb740.rrpicturearchives.net
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If I stick up a guy with my own gun I should expect to go to jail but if I can get congress to use their hired guns to rob someone else, like the greedy railroad, drug company, cable provider, electric utility, pick your own corporate bad guy, that is just smart business.
Mac
This history of railroad economic regulation in the US is not a good one. Rate and service regulation severly hurt the railroads and did great and lasting damage to the US economy. Countless loads of freight were diverted from rail to less efficient road and barge movement to the detrimit of the nation.
The most salient example is, I think, "In the Matter of Container Service", handed down by a lawyer of the Interstate Commerce Commission in 1931.
If you read (and I suggest you do so) a book titled "The Box, How the Shipping Container Made the World Smaller and the World Economy Bigger" by Marc Levinson you'll find the following quotes:
"(International Sea) Transportation has become so efficient that for many purposes, freight costs do not much effect economic decisions. ... It is better to assume that moving goods is essentially costless than to assume that moving goods is an important component of the production process. ... Before the container, such a statement was unimaginable." - page 8.
"The key question asked today is no longer how much capital and labor an economy can amass, but how innovation helps employ those resources more effectively to produce more goods and services." - page 12.
The theme of Levinson's great book (he's an economist) is that the international sea container reduced the costs of moving freight so much that the world economy changed through growth.
Now wouldn't it have been wonderful to have that level of logistics cost reduction happen here within the US decades before such a development on the international level. It would have made our domestic economy grow and prosper. In fact, such a development of a domestic container system was happening before the idiot government regulators put a stop to it. Domestic containerization began to develop in the US (see the "innovation" quote above) about as soon as trucks that could carry a decent load of freight were developed. Domestic containerization developed rapidly and produced the same reductions in logistics costs that international containerization produced. This was great for the US economy, but the government regulators didn't see it that way.
They just blocked it. They ordered the container rates increased to a level that made domestic container movement uncompetitive. They were lawyers and they thought as lawyers, not as economists or business people. Economic growth and the public good, best being served by free market innovation, were sacrificed.
The commissions that do this sort of thing always end up being dominated by lawyers who listen to arguments of other lawyers and make lawyerly decisions. I suspect this is why the A.B.A. supports one of the reregulation bills. Things will get decided by lawyers in a manner the lawyers understand. Economics be damned.
That's just one example of the terrible effects of past regulation. There are many, many others.
Now there is an effort to return to those days. It won't work this time either. There is no way on Earth that a government commission (inevitably controlled by lawyers) can determine a "correct" price for rail service. In trying to do so they'll screw things up again and we'll generally be worse off for it. The only "winners' will be the politically connected few who know how to manipulate the politicized system to their advantage.
Although I disagree with reregulation I do see the shippers' point. The article states that some freight rates are doubling. DOUBLING? Why? I can understand and appreciate why these shippers are angry and concerned...just as you and I would be concerned about a sudden doubling of our insurance, phone cost etc.
Furthermore, due to economic circumstances there is plenty of capacity available and costs are down not up (look at fuel for example). How do the rails justify doubling rates? They must realize that doing so would seriously jeopardize their customers as a utility (for example) might have trouble passing that cost on to its own customers.
The railroads are doing this to themselves...truck rates are WAY down...in the present situation no sane trucker would contemplate a large rate increase. What planet are the rail managers on?
greyhoundsThe most salient example is, I think, "In the Matter of Container Service", handed down by a lawyer of the Interstate Commerce Commission in 1931. .... ... Domestic containerization developed rapidly and produced the same reductions in logistics costs that international containerization produced. This was great for the US economy, but the government regulators didn't see it that way. They just blocked it. They ordered the container rates increased to a level that made domestic container movement uncompetitive. They were lawyers and they thought as lawyers, not as economists or business people. Economic growth and the public good, best being served by free market innovation, were sacrificed.
....
... Domestic containerization developed rapidly and produced the same reductions in logistics costs that international containerization produced. This was great for the US economy, but the government regulators didn't see it that way.
This was so interesting I had to pull the volume in our rail library and read it last night. The representation, it turns out is not true. Now, I don't about the "lawyer" part -- it was a decision of the full Commission. I assume you looked up the backgrounds of the full ICC in 1931 and found that they were all lawyers. All lawyers? I'm not too sure about that, but it would be interesting if true.
However, the Opinion itself -- and it is a well written and interesting opinion -- ultimately stood for the proposition that the Container rates being proposed were based entirely on weight. The ICC pointed out that by offering that alternative, it certainly was competitive -- because it eliminated the ability of the railroads to obtain revenue by differential pricing for high value goods.
Yeah, everybody who had been paying higher rates would go for that! They would do it today!
The ICC carefully pointed out that the loss of revenues to the industry would be catastrophic if the NYC was allowed to offer a generic rate based on solely on weight. The NYC itself hadn't considered that it was losing higher revenue traffic in order to carry the same traffic at lower rates. Whether it was a lawyer or an economist that actually wrote the thing, I don't know, but whoever it was clearly understood that the NYC was so enamored of its bright idea, that it hadn't considered the fact that the proposal ultimately wasn't about containerization -- which the ICC pronounced as an innovative idea -- it was the idea that NYC was offering a low rate for everything, based simply on weight and that proposal violated the classification system for rate-making that the railroads themselves -- then and now -- relied on for their revenue structure.
It didn't matter that the the rates were offered on containers, flatcars, boxcars, or donkeys -- the ICC objected to the rate methodology which offered nothing more than one railroad offering a dramatically lower rate for everything -- and initiating a massive reduction in overall revenues to the railroad companies at a time when revenues were already deflating (1931). The ICC basically said: it's a good idea but your rate structure makes no sense for the industry.
I don't know why you misrepresented that Opinion -- it was not about containers, per se, but rather about an ultimately destructive rate proposal. The Opinion looks to me, given the point in time that it was written and the regulatory constraints, that it would have been a disservice to the rail industry to allow that particular rate proposal -- as the ICC basically said: you need to think this through; you may be thinking this will give you more traffic. Don't be stupid. Everyone will then do the same thing. In the long run, you won't get more traffic. And in the meantime you will end up with a rail industry with half the revenues of the current rail industry.
Railroads were already entering receivership because of declining revenues. The ICC would have completely destroyed the industry if it had permitted the NYC rates. In the context of the times, the case may be a very good example of intelligent regulation -- without offering a generic defense of regulation otherwise -- rather than how you represented it to the readers here.
As to other comments on this thread, about shippers "wanting something for nothing," I've never met shipper who thought or talked that way. Every shipper I've ever dealt with understands the need for profit for all of their suppliers of goods and services, including railroads.
No business succeeds by trash-talking its customers.
-- Bagehot
First, thanks to both of you for going back to the original source.
Now this gets really interesting - to me, anyway - but I've got to go do some other things for the bi-weekly paycheck. Will try to post again later in the day.
- Paul North.
Bagehot This was so interesting I had to pull the volume in our rail library and read it last night. The representation, it turns out is not true. Now, I don't about the "lawyer" part -- it was a decision of the full Commission. I assume you looked up the backgrounds of the full ICC in 1931 and found that they were all lawyers. All lawyers? I'm not too sure about that, but it would be interesting if true. However, the Opinion itself -- and it is a well written and interesting opinion -- ultimately stood for the proposition that the Container rates being proposed were based entirely on weight. The ICC pointed out that by offering that alternative, it certainly was competitive -- because it eliminated the ability of the railroads to obtain revenue by differential pricing for high value goods. Yeah, everybody who had been paying higher rates would go for that! They would do it today! The ICC carefully pointed out that the loss of revenues to the industry would be catastrophic if the NYC was allowed to offer a generic rate based on solely on weight. The NYC itself hadn't considered that it was losing higher revenue traffic in order to carry the same traffic at lower rates. Whether it was a lawyer or an economist that actually wrote the thing, I don't know, but whoever it was clearly understood that the NYC was so enamored of its bright idea, that it hadn't considered the fact that the proposal ultimately wasn't about containerization -- which the ICC pronounced as an innovative idea -- it was the idea that NYC was offering a low rate for everything, based simply on weight and that proposal violated the classification system for rate-making that the railroads themselves -- then and now -- relied on for their revenue structure. It didn't matter that the the rates were offered on containers, flatcars, boxcars, or donkeys -- the ICC objected to the rate methodology which offered nothing more than one railroad offering a dramatically lower rate for everything -- and initiating a massive reduction in overall revenues to the railroad companies at a time when revenues were already deflating (1931). The ICC basically said: it's a good idea but your rate structure makes no sense for the industry. I don't know why you misrepresented that Opinion -- it was not about containers, per se, but rather about an ultimately destructive rate proposal. The Opinion looks to me, given the point in time that it was written and the regulatory constraints, that it would have been a disservice to the rail industry to allow that particular rate proposal -- as the ICC basically said: you need to think this through; you may be thinking this will give you more traffic. Don't be stupid. Everyone will then do the same thing. In the long run, you won't get more traffic. And in the meantime you will end up with a rail industry with half the revenues of the current rail industry. Railroads were already entering receivership because of declining revenues. The ICC would have completely destroyed the industry if it had permitted the NYC rates. In the context of the times, the case may be a very good example of intelligent regulation -- without offering a generic defense of regulation otherwise -- rather than how you represented it to the readers here. As to other comments on this thread, about shippers "wanting something for nothing," I've never met shipper who thought or talked that way. Every shipper I've ever dealt with understands the need for profit for all of their suppliers of goods and services, including railroads. No business succeeds by trash-talking its customers. -- Bagehot
Wow. You remind me a whole lot of Michael Sol.
First, by your false accusation that I am "missreprsenting" the opinion and second by your twisting of my statement that these government commissions are dominated by lawyers into the claim that they were all (your emphasis) lawyers. We can have good discussions out here, but only if people are honest and respectful. You might want to try that approach this time around as "Bagehot".
The hearings on the container rates were held in various locations by Attorney-Examiner Harry C. Ames and Commisioner Porter. Ames, the attorney, made the report to the full commission. This control of infomation given to the Commission was more than enough to give him "dominance" over the decision. It doesn't matter if the other commissioners were ex circus clowns or lawyers. The information and reccomendation they received came through a lawyer's filter.
Ames ignored the container's true benifit. It greatly, and I mean greatly, reduced the cost of moving freight. In 1930 the ICC conducted a cost study on container vs. boxcar l.c.l freight movement. (l.c.l was the freight most threatened by the new truck competition and the first to be containerized on the railroads as a response to that competition.)
These are the results for the New York Central:
Boxcar Container
Freight Claims: $0.120 $0.000 (That’s a correct number)
Clerical Costs: $2.545 $0.041
Platform Costs: $2.270 $0.000
Crane Costs: $0.000 $0.096
Switching Costs: $1.850 $0.714
Linehaul Costs: $2.230 $1.240
Car Maintenance: $0.405 $0.149
Total $9.420 $2.240
Source: Cheng Shih Hsu, Status and Problems of Co-ordinated Rail-Motor Service in the United States, (Philadelphia: University of Pennsylvania, 1932) p. 147
If the New York Central was "enamored", as you say, with its container innovation, it was enamored with very good reason. By the ICC's own study containerization dropped the railroad's cost of moving freight by over 76%. No rational person could look at those numbers and not be enamored. (In 1929 the NYC testified before the commission that it had never had a freight claim on containerized freight.)
l.c.l frieght, the type of freight that moved in these containers, represented a full 12% of NYC's freight revenue in 1929. This revenue was under severe competitive threat from the new motor carriers. The New York Central recognized that it could not maintain this revenue with its traditiional boxcar service and rate structure. It found an innovative way to compete - the container.
What was happening with the advent of motor freight was a destruction of the rate structure you describe. The railroads' ability to charge more for moving high value goods than for moving low value goods was going away. The truckers typically copied railroad tariffs, but with a twist. They'd undercut slightly the price on high value goods while charging more for the low rated, low value commodities. This diverted the high revenue freight to the trucks while leaving the low revenue freight on the rail.
You, like the ICC, falsely claim that the New York Central's container rates were destroying the rate stucture. This ignores two important things: 1) The rate structure was no longer viable due to motor freight competition, and 2) It's not really the total revenue that counts. It's the spread between the revenue and the costs that counts. (The motor carriers were not economically regulated by the Federal government. In 1931 they could charge what they wanted to charge.)
The New York Central had an innovation that dropped the cost of moving freight by rail dramatically. If they had to pass along some of the cost savings to their customers in order to retain the business, so be it. They recognized that they came out ahead by doing so. This is more than that danged government lawyer Harry C. Ames understood. By preventing through government fiat the use of the container's main benifit, that it reduced costs, to retain rail business the government regulators effectively blocked its use in total.
It is only by ignoring the new truck competition, as you do, and as Harry C. Ames did, that this awful decision can be termed "well reasoned". Well, the competitive environment can't be ignored in a well reasoned anything.
This, IMHO, is the worst regulatory decision ever made with regards to transportation in the United States. It prohibited the railroads from innovating to retain traffic and forced that traffic to go to higher cost motor freight. This increased the logistics costs to our nation and hindered economic growth.
As Marc Levison said: "The key question asked today is no longer how much capital and labor and economy can amass, but how innovation helps employ those resources more effectively to produce more goods and services." By blocking the container innovation the government regulators screwed the US economy and the people of the US. They did this a lot. And now we seem to be going back to the bad old days.
Holy Doppelgänger Batman, ya think?
23 17 46 11
Gee - The price of everything else goes up on the manufacturing end and mysteriously the transportation provider can't raise his rates to cover his costs? Meanwhile utilities are guaranteed a set rate profit. Hmmmm.....
never mind....
Ulrich,
Regarding your question about doubling of a rate. The party cited was Seminole Power. My suspicion is that this is a "legacy contract", one entered into 10 years or so ago. At that time the prevailing railroad marketing logic was to lock up the business for as long as possible. Evidently they made no provision for rate increases. As these contracts come up for renewal the railroads are repricing them based on current market conditions and corrent costs and current capacity which is still relatively constrained.
If my guess as to the underlying situation is correct, the power has not seen a real rate increase in 10 years because of the long term contract. Absent that contract rates would have risen a bit over each of the past 10 years and the jump would not be much today. Ten years of 7% increase will about double any number. Typical of shipper PR, they complain about a big jump today, when in fact they have enjoyed a bargain at the carrier's expense for some extended period of time. Typical media does not bother to find out what is really going on.
The Union Pacific's 2007 annual report, on page 20, includes the following statement: "Since 2004, we have repriced approximately 75% of our business." That means that 25% has not been repriced for an indeterminate period prior to 2004.
The inability of the Class Ones to come up with enough money to rebuild their own infrastructure and haveing to come to Congress for help should say something. Congress deregulated them so that they could make lots of money unhindered by rules and regulations and an agency looking over thier shoulders. When that deregulation took effect the big railroads promised more competition thus more competitive rates and that the existing railroads would prosper. Today there are fewer Class I railroads with less competition and shippers crying foul. Since this is opposite what the industry promised would happen with deregulation, your darn right reregulation will be a subject to be brought up to the STB and Congress. But reregulation does not have to be the same as it was under the ICC. I believe in fact that it would be suicidal for all forms of transportation if it were to be the same. Of course today railroads are not competing against themselves any more, at least not like in the past, but only against other land transportation systems. So what is going to be the crux of the reregulation or no regulation arguement is going to center around the word "competition" followed by the word "service" followed by "responsibility".
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greyhoundsFirst, by your false accusation that I am "missreprsenting" the opinion and second by your twisting of my statement that these government commissions are dominated by lawyers into the claim that they were all (your emphasis) lawyers. We can have good discussions out here, but only if people are honest and respectful. You might want to try that approach this time around as "Bagehot". The hearings on the container rates were held in various locations by Attorney-Examiner Harry C. Ames and Commisioner Porter. Ames, the attorney, made the report to the full commission. This control of infomation given to the Commission was more than enough to give him "dominance" over the decision. It doesn't matter if the other commissioners were ex circus clowns or lawyers. The information and reccomendation they received came through a lawyer's filter.
Hearing examiners, in my experience, were always attorneys. Every one that I have ever known was. Our library has a wall full of hearing examiner reports to the Commission. Every single one was authored by "an attorney."
In this instance, one of the Commissioners was Joseph Eastman. He was hardly a circus clown and was never in his distinguished career suspected of having his opinions "dominated" by anybody.
Hearing examiners didn't write Commission opinions. I have no idea what your gripe about attorneys is, but you obviously have one, and think that attorneys, by training, were against Containers. Interesting perspective, I am guessing clouded by a divorce or something. Who should the Hearing Examiners have been and why would this one hate Containers?
At the time, railroads carried 95% of intercity freight. Your alleged crisis hadn't happened yet. And trucks were regulated in 1935 at the urging of the rail industry as trucking's share of intercity freight approached the burdensome figure of 7% and 90% of that was within a 70 mile radius. Apparently the truckers weren't very good yet at what you accuse them of doing. The vast bulk of the competitive impact of the lower cost of containers, the Opinion makes clear, would have been suffered by the railroads themselves as they undercut each other to gain traffic share. You don't get that.
The point of the Opinion, ultimately, is that by pricing solely by weight, the railroads were losing their ability to price differentially. If you don't understand what that means, then or today, that's your loss. Differential pricing is what the game is all about, otherwise railroads end up like farmers, selling a commodity rather than a service. When you lose differential pricing, it doesn't matter what your costs are -- you will be cutting rates to beat the other guy's costs -- and the other guy's costs are just as low. That's what that opinion states clearly. And that's exactly what would have happened.
Now, this is the second or third time I have been personally insulted for daring to disagree with somebody as apparently there is an ongoing civil war going on here and I stepped into it. Apparently this topic has been discussed before, but I wasn't part of it, and I resent being accused of stealing someone else's opinion or thoughts on the matter, or "sounding" like them as though I had. If this has been a previous topic, then why bring it up again? What's the point here? I originally signed on a few weeks ago because a colleague said there was some research posted here a couple of years ago that relates to a trade study I am working on. I don't know if this forum's search feature is disabled, the archives are locked off, or what, but I was unable to access anything older than June of this year. So, this forum wasn't of much use to me. Maybe I just couldn't figure out how to use it, but I did ultimately find what I needed from another source and so my reason for being here has expired.
Next step: how to unsubscribe. I've tried that three or four times now, and haven't been able to figure that one out either. Unfortunately, these conversations draw one in, and It has resulted in an occassional post on my part. I am amazed how vitrolic some of the posters are here, and there doesn't seem to be any moderation. I am certainly not wasting any of my time further. I don't like the attitudes expressed here. Especially by people who write as though they ought to know better. For instance, I have never, in my career, seen a supervisor whom a railroader thought was "over his head" posted publicly for all to see and to be able to figure out who he was. In my day that would have been a Rule 704 write-up. The fact that it happened here, and alleged railroaders did it, represents a side of railroading I don't want to be associated with in any form. I am disgusted by the idea and the thorough lack of professionalism shown.
If it takes a moderator to do this, since I can't seem to figure out how, please disconnect my registration. I don't want to be on here. These guys can have their little civil war. I don't need an insult contest to discuss rail rates. I work with them and discuss them every day with real professionals -- and for railfans, believe me, they don't talk like these guys, and that includes the shippers, some of whom are consummate professionals -- and only made the mistake of coming here to look for a citation on a recommended paper. My letter to the publisher on recent posts here will go out this week.
Signing off.
Bagehot If it takes a moderator to do this, since I can't seem to figure out how, please disconnect my registration. I don't want to be on here. These guys can have their little civil war. I don't need an insult contest to discuss rail rates. I work with them and discuss them every day with real professionals -- and for railfans, believe me, they don't talk like these guys, and that includes the shippers, some of whom are consummate professionals -- and only made the mistake of coming here to look for a citation on a recommended paper. My letter to the publisher on recent posts here will go out this week. Signing off. -- Bagehot
Never too old to have a happy childhood!
PNWRMNM Ulrich, Regarding your question about doubling of a rate. The party cited was Seminole Power. My suspicion is that this is a "legacy contract", one entered into 10 years or so ago. At that time the prevailing railroad marketing logic was to lock up the business for as long as possible. Evidently they made no provision for rate increases. As these contracts come up for renewal the railroads are repricing them based on current market conditions and corrent costs and current capacity which is still relatively constrained. If my guess as to the underlying situation is correct, the power has not seen a real rate increase in 10 years because of the long term contract. Absent that contract rates would have risen a bit over each of the past 10 years and the jump would not be much today. Ten years of 7% increase will about double any number. Typical of shipper PR, they complain about a big jump today, when in fact they have enjoyed a bargain at the carrier's expense for some extended period of time. Typical media does not bother to find out what is really going on. The Union Pacific's 2007 annual report, on page 20, includes the following statement: "Since 2004, we have repriced approximately 75% of our business." That means that 25% has not been repriced for an indeterminate period prior to 2004. Mac
You're probably right about the ten year term; however, I doubt they're predicating their steep rate increase on 7% year over year. I've never heard of anyone in the freight business getting that kind of an annual increase, especially when inflation has been lower over that period. Most carriers would consider themselves fortunate to get 2% annually...in my experience many rates haven't changed much if at all in the 20 years I've been in the business. In fact some have gone down and most shippers today are looking at lowering their rates. Most of my accounts have asked me to reduce my rates over what they were 4 or 5 years ago. That's why the doubling of rates sounds so outlandish to me. If I did that my accounts would immediately question my competence.
CURE and other groups advocating more regulation of railroad rates claim that the mergers of the roads into 6 major Class 1's has reduced competition between any two points to generally two lines, at best, and the lack of competition between rail carriers has let them boost rates without fear of loss of business.
I contend it is not any kind of monopoly condition that gives railroads pricing power, rather, it is the lack of any significant excess capacity to handle new business. Given that premise, what would be the point of cutting a rate to get new business? It lends itself to a condition where customers may have to pay more just to keep a spot in the "production" schedule. The ironic thing is that any government mandate to reduce rates also reduces the pile of cash available to expand capacity.
One securities analyst calls reregulation MAD-Mutually Assured Destruction.
"We have met the enemy and he is us." Pogo Possum "We have met the anemone... and he is Russ." Bucky Katt "Prediction is very difficult, especially if it's about the future." Niels Bohr, Nobel laureate in physics
henry6 The inability of the Class Ones to come up with enough money to rebuild their own infrastructure and haveing to come to Congress for help should say something. Congress deregulated them so that they could make lots of money unhindered by rules and regulations and an agency looking over thier shoulders. When that deregulation took effect the big railroads promised more competition thus more competitive rates and that the existing railroads would prosper. Today there are fewer Class I railroads with less competition and shippers crying foul. Since this is opposite what the industry promised would happen with deregulation, your darn right reregulation will be a subject to be brought up to the STB and Congress. But reregulation does not have to be the same as it was under the ICC. I believe in fact that it would be suicidal for all forms of transportation if it were to be the same. Of course today railroads are not competing against themselves any more, at least not like in the past, but only against other land transportation systems. So what is going to be the crux of the reregulation or no regulation arguement is going to center around the word "competition" followed by the word "service" followed by "responsibility".
With respect to your suggestion that there is less rail-rail "competition" these days than there used to be, I suspect you are not very familiar with how railroads "competed" with each other prior to Staggers (few people are, since that was over a quarter century ago). In pre-Staggers days, railroads collectively made most of their rates through "rate bureaus", which were legalized price fixing cartels (like OPEC). In fact, the existence of these cartels was one of the main reasons (although not the only one) there were so many railroads - the bureaus tended to keep rate levels high enough to protect their weakest members, which lessened incentives to restructure the industry. In the end, of course, it didn't work, and probably made the inevitable restructuring more painful than it otherwise would have been. Looking back from the vantage point of 2009, the industry probably should have restructured itself into fewer but longer haul railroads in the late 50's and into the 60's, as passenger and short haul freight business left the railroads. What you had by the 1960's was a system where the major railroads could provide a complete origin-destination "single line" service for only a minority of their remaining business (about a third as a national average). That's not a sustainable structure.
I'm very familiar with the rail rate bureaus, because I used to work for one. Their influence extended beyond what they formally did - they instilled a "cartel mentality" throughout the industry that affected virtually the entire range of their competitive activities. The Staggers Act was designed to kill the rate bureaus, and it did - both by imposing severe restrictions that made rate bureau ratemaking impractical and by creating incentives (like the ability to make contracts with shippers) for making rates outside the bureaus. As a result, the bureaus were out of the rate making business by 1984 (they survived solely as tariff publishing houses until the 1990's). The elimination of rate bureau ratemaking was one of the major reasons that rail prices declined after Staggers. Even though there may be fewer Class I railroads today than prior to Staggers, they are far more competitive with each other than the pre-Staggers railroads ever were.
By the way, I have to smile at the arguments some of the proponents of the "Kohl Bill" are making in favor of repealing the antitrust exemptions that railroads still have (which aren't much). They seem to think that railroads are still making rates collectively, which hasn't been the case since 1984. The other thing that makes me smile is that one of the major antitrust "exemptions" the bill is aimed at is something called the "Keogh doctrine" (not actually an exemption, but a judicial principle that private parties can't bring an antitrust case for damages against rates which have been filed with and reviewed by a regulatory agency). The reason this makes me smile is that, while the "Keogh doctrine" was originally created in a long ago railroad case (I think it was in the 1920's), it almost certainly is not applicable to railroads today. That's because Congress repealed the "filed rate" requirement as to railroads in 1996, which destroyed the underlying basis for the doctrine (the reason I said "almost certainly" is because there have not, to my knowledge, been any cases addressing the applicablity of "Keogh doctrine" to railroads since 1996). But the "Keogh doctrine" is alive and well in the utility and communications industries, and there are several cases in recent years where utility and communication companies have successfully avoided antitrust liability because of it. The irony is that utility companies, which are some of the most vocal supporters of the "Kohl Bill," want to kill the "Keogh doctrine" for railroads, where it's probably already dead, but haven't proposed or suggested that it be killed for their own industry, where it clearly is being used to shield anticompetitive conduct. I guess that, if you're a utility, what's good for the goose is definitely not good for the gander.
greyhounds These are the results for the New York Central: Boxcar Container Freight Claims: $0.120 $0.000 (That’s a correct number) Clerical Costs: $2.545 $0.041 Platform Costs: $2.270 $0.000 Crane Costs: $0.000 $0.096 Switching Costs: $1.850 $0.714 Linehaul Costs: $2.230 $1.240 Car Maintenance: $0.405 $0.149 Total $9.420 $2.240
Are these costs per ton or per car or container. A"container" in the 1930's wasn't a shipping container like we have now, a 'container' in the 1930's was a metal box that was more like an airline cargo container, there were from 6 to 20 of them in a gondola or flatcar (they weren't standardized between railroads).
Also I don't know how much "competition" there was with trucks. In 1919 Eisenhower left Washington in the spring with a truck convoy and didn't get to San Francisco until September. Even if the roads were four times faster by 1930 that would still mean a long distance transit time of weeks or months, hardly "competition" with a rail route that would take days or weeks. Since LCL is usually a time sensitive shipment I don't see how, except for short runs trucks could provide any kind of a comparable service to railroads. The interstate highway system wasn't started until the late 50's.
Dave H. Painted side goes up. My website : wnbranch.com
Can anyone tell us what the present-day method of pricing is for containers. I suspect it may be close to that rejected by the ICC nearly 80 years ago, primarily based either on weight or size, with temperature controlled containers obviously atttracting extra charge.
On the competition angle, I have a radical proposal. The nature of private rights-of-way means that in most cases a railroad inherently has monopoly power, reduced somewhat where interchange is possible. My suggestion is that any railroad line that has more than one railroad operating over it, either another freight carrier, Amtrak or commuter, be taxed at the same rate as the competing road system.
Every town of course wants competitive rail freight service and passenger trains, but only if someone else pays the price, preferably the railroad. With the possibility of losing major property tax revenue, they would have to face up to the very unequal playing field that railroads don't always survive. The rail executive has his own dilemma, whether the property tax savings resulting from a tenant will be a net benefit to the railroad.
I don't want to open a debate as to whether commercial trucks pay their share of construction, upgrading and maintenance of the road network. It is, however, reality that they make no significant contribution in the form of taxes to the various cities, towns and and rural districts for the public roads. Like the railroad, these roads and highways occupy land, sometimes very valuable land, so it seems only appropriate that commercial highway users pay the equivalent property tax too, or that both modes be exempt.
John
jeaton CURE and other groups advocating more regulation of railroad rates claim that the mergers of the roads into 6 major Class 1's has reduced competition between any two points to generally two lines, at best, and the lack of competition between rail carriers has let them boost rates without fear of loss of business. I contend it is not any kind of monopoly condition that gives railroads pricing power, rather, it is the lack of any significant excess capacity to handle new business. Given that premise, what would be the point of cutting a rate to get new business? It lends itself to a condition where customers may have to pay more just to keep a spot in the "production" schedule. The ironic thing is that any government mandate to reduce rates also reduces the pile of cash available to expand capacity. One securities analyst calls reregulation MAD-Mutually Assured Destruction.
However, it's true that the ICC once had a policy disfavoring end to end mergers and favoring parallel mergers, but the ICC had abandoned this policy long before Staggers, largely in response to the failed PC merger. During the time this policy was in effect, there were undoubtedly mergers that reduced the number of competing railroads in particular locations, because that's precisely what the ICC was encouraging. There were basically two reasons for it: (i) the ICC felt that a parallel merger was a way to eliminate excess capacity (a big issue at the time) and (ii) parallel mergers would minimize adverse effects on non-merging railroads. A "vertical" market extension merger would have disadvantaged the non-merging railroads by reducing their opportunities to handle the interchange traffic of the merging roads, something the ICC wanted to avoid. In retrospect, this was exactly the wrong policy. Encouraging "vertical" mergers would have forced the non-merging railroads to themselves merge with other roads to create larger networks, which is what should have happened in response to postwar changes in rail traffic patterns. And it eventually did happen after the ICC changed its policies.
Ironically, the more modern mergers have not materially reduced the number of railroads competing between origin and destination markets. The reason is that, when the ICC changed its merger policy, it adopted a practice of requiring rail-rail competition to be preserved where a merger would otherwise eliminate it. The failure of the applicants in the Santa Fe - Southern Pacific merger to adequately do this is the principle reason their merger was not approved. This is also the reason that, in the UP-SP merger, which eliminated UP-SP competition at a number of locations, the BNSF was given trackage rights to replace the lost competition.
Finally, the number of so-called "competing" railroads serving particular markets in pre-Staggers days is really pretty meaningless, since the railroads were pricing their competing services collectively through rate bureaus ("collective ratemaking" was a euphemism for legalized price-fixing). See my earlier post of today.
When I posted my response to Jeaton's post, I completely overlooked the major point he was making (the old slogan about haste making waste comes to mind). His point was that that a major reason railroads have been able to raise their prices in recent times is related to lack of excess capacity, not market power. He is absolutely correct. For most of the last quarter century (probably longer), railroads have had ample excess capacity, so the challenge was how to get traffic that made at least some contribution to the bottom line That led to a strategy of making low prices to get to get traffic that otherwise wouldn't move. As long as the rates covered the short term incremental costs of handling the traffic (fuel, car hire, etc), the railroad was better off handling it. This is similar to airline pricing strategies that seek to fill up seats that would otherwise go empty with people paying bargain fares, so they get at least some contribution from capacity that would otherwise be wasted (the trick is trying to keep customers who would otherwise buy higher price tickets from using the lower fares, but that's a topic for another day).
While this strategy makes sense when there is excess capacity, it is no longer viable when there is little excess capacity in the network, or at particular bottleneck points, which is the stiuation the railroads have had in recent years. It's not only that the railroad doesn't need to cut rates to get new business (although that's part of it). It's also that the cost to handle new business isn't limited to the incremental cost of putting a few extra cars on existing freight trains. In order to handle any significant volume of new business, the railroad will have to expand capacity, and the cost of that capacity has to be recovered from the traffic, or the railroad is better off not handling it at all. The same equation applies to existing business. If an existing block of traffic is moving at rates based on short term incremantal costs, and the railroad could use that capacity to handle higher rated traffic, then the existing traffic should be priced at the higher rate, because that's what the capacity is worth. Another way of looking at it is that, if there is little or no excess capacity, and the railroad must expand capacity to handle additional traffic, the cost of that capacity isn't just attributable to the new traffic - it's attributable to the existing traffic as well, and both segments of traffic must earn enough to justify the capacity they are consuming.
dehusman greyhounds These are the results for the New York Central: Boxcar Container Freight Claims: $0.120 $0.000 (That’s a correct number) Clerical Costs: $2.545 $0.041 Platform Costs: $2.270 $0.000 Crane Costs: $0.000 $0.096 Switching Costs: $1.850 $0.714 Linehaul Costs: $2.230 $1.240 Car Maintenance: $0.405 $0.149 Total $9.420 $2.240 Are these costs per ton or per car or container. A"container" in the 1930's wasn't a shipping container like we have now, a 'container' in the 1930's was a metal box that was more like an airline cargo container, there were from 6 to 20 of them in a gondola or flatcar (they weren't standardized between railroads). Also I don't know how much "competition" there was with trucks. In 1919 Eisenhower left Washington in the spring with a truck convoy and didn't get to San Francisco until September. Even if the roads were four times faster by 1930 that would still mean a long distance transit time of weeks or months, hardly "competition" with a rail route that would take days or weeks. Since LCL is usually a time sensitive shipment I don't see how, except for short runs trucks could provide any kind of a comparable service to railroads. The interstate highway system wasn't started until the late 50's.
Good question. I should have put that in the post. The figures are in dollars per ton. Please note that most of the costs, and the savings, are in the terminal operations. Not the line haul.
The containers were introduced on what today would be "short hauls". Early container operations were concentrated in the industrialized northeastern quadrant of the US. The first New York Central container service was between Chicago and Cleveland.
Today, as in 1931, most freight doesn't move very far. Under present operating models, railroad terminal expenses preclude the rails from competing with trucks for most freight in the US. Once you get a train together and get it moving it can generally produce ton-miles at a much lower cost than a truck. But when you add in the origin and destination rail terminal costs, the overall cost by truck is less unless there are enough miles in the move to overcome the termial cost disadvantage. Today, the railroads don't even try to compete for most freight. They go after only the long hauls or heavy bulk moves or shorter routes. They don't even try to haul Chicago-Cleveland merchandise.
What was happening in the 1920's and continued onward was that the length of haul on which trucks could compete was steadily increasing. The New York Central was very aware of this trend and took good, appropriate action in response. It didn't take an Interstate Highway for a truck to be competitive between Chicago and Cleveland. (Or on a similar length of haul) I agree that it would have been hard for trucks to compete running across Wyoming on transcontinental runs, but they were making significant inroads in the industrialized northeast. Which is where the high volume of freight was. It was also where the New York Central was.
Operating in this "freight rich" environment of relatively short distances the truckers selectively solicited high rated commodities which put a decent dent in rail profitability.
The NYC didn't wait for a crisis. They understood what was happening and found a new, innovative way to deal with the main problem - the terminal expenses of rail movement. This allowed them to stay competitive on lanes such as Chicago-Cleveland. Then the danged government just told the railroad "You Can't Do That".
We'll never know if the continued development of the container system would have allowed the NYC and its successors to remain competitive for merchandise traffic on lanes such as Chicago-Cleveland. What we do know is that without the container system they were not able to remain competitive.
Bagehot greyhoundsFirst, by your false accusation that I am "missreprsenting" the opinion and second by your twisting of my statement that these government commissions are dominated by lawyers into the claim that they were all (your emphasis) lawyers. We can have good discussions out here, but only if people are honest and respectful. You might want to try that approach this time around as "Bagehot". The hearings on the container rates were held in various locations by Attorney-Examiner Harry C. Ames and Commisioner Porter. Ames, the attorney, made the report to the full commission. This control of infomation given to the Commission was more than enough to give him "dominance" over the decision. It doesn't matter if the other commissioners were ex circus clowns or lawyers. The information and reccomendation they received came through a lawyer's filter. Hearing examiners, in my experience, were always attorneys. Every one that I have ever known was. Our library has a wall full of hearing examiner reports to the Commission. Every single one was authored by "an attorney." In this instance, one of the Commissioners was Joseph Eastman. He was hardly a circus clown and was never in his distinguished career suspected of having his opinions "dominated" by anybody. Hearing examiners didn't write Commission opinions. I have no idea what your gripe about attorneys is, but you obviously have one, and think that attorneys, by training, were against Containers. Interesting perspective, I am guessing clouded by a divorce or something. Who should the Hearing Examiners have been and why would this one hate Containers? At the time, railroads carried 95% of intercity freight. Your alleged crisis hadn't happened yet. And trucks were regulated in 1935 at the urging of the rail industry as trucking's share of intercity freight approached the burdensome figure of 7% and 90% of that was within a 70 mile radius. Apparently the truckers weren't very good yet at what you accuse them of doing. The vast bulk of the competitive impact of the lower cost of containers, the Opinion makes clear, would have been suffered by the railroads themselves as they undercut each other to gain traffic share. You don't get that. The point of the Opinion, ultimately, is that by pricing solely by weight, the railroads were losing their ability to price differentially. If you don't understand what that means, then or today, that's your loss. Differential pricing is what the game is all about, otherwise railroads end up like farmers, selling a commodity rather than a service. When you lose differential pricing, it doesn't matter what your costs are -- you will be cutting rates to beat the other guy's costs -- and the other guy's costs are just as low. That's what that opinion states clearly. And that's exactly what would have happened. Now, this is the second or third time I have been personally insulted for daring to disagree with somebody as apparently there is an ongoing civil war going on here and I stepped into it. Apparently this topic has been discussed before, but I wasn't part of it, and I resent being accused of stealing someone else's opinion or thoughts on the matter, or "sounding" like them as though I had. If this has been a previous topic, then why bring it up again? What's the point here? I originally signed on a few weeks ago because a colleague said there was some research posted here a couple of years ago that relates to a trade study I am working on. I don't know if this forum's search feature is disabled, the archives are locked off, or what, but I was unable to access anything older than June of this year. So, this forum wasn't of much use to me. Maybe I just couldn't figure out how to use it, but I did ultimately find what I needed from another source and so my reason for being here has expired. Next step: how to unsubscribe. I've tried that three or four times now, and haven't been able to figure that one out either. Unfortunately, these conversations draw one in, and It has resulted in an occassional post on my part. I am amazed how vitrolic some of the posters are here, and there doesn't seem to be any moderation. I am certainly not wasting any of my time further. I don't like the attitudes expressed here. Especially by people who write as though they ought to know better. For instance, I have never, in my career, seen a supervisor whom a railroader thought was "over his head" posted publicly for all to see and to be able to figure out who he was. In my day that would have been a Rule 704 write-up. The fact that it happened here, and alleged railroaders did it, represents a side of railroading I don't want to be associated with in any form. I am disgusted by the idea and the thorough lack of professionalism shown. If it takes a moderator to do this, since I can't seem to figure out how, please disconnect my registration. I don't want to be on here. These guys can have their little civil war. I don't need an insult contest to discuss rail rates. I work with them and discuss them every day with real professionals -- and for railfans, believe me, they don't talk like these guys, and that includes the shippers, some of whom are consummate professionals -- and only made the mistake of coming here to look for a citation on a recommended paper. My letter to the publisher on recent posts here will go out this week. Signing off. -- Bagehot
I haven't read the 1930's container decision (I don't have immediate access to ICC reports). But the philosophy it seems to represent, based on the description in the postings, was a common one in that era. Railroads must not be allowed to do things that the regulators saw as wasteful competition. This wasn't just a creation of attorneys - it had been accepted rail regulatory policy ever since enactment of the Transportation Act of 1920 (which was largely designed to turn railroads into a regulated cartel, and eliminate such "wasteful" competition as the construction of new rail lines in areas which already had rail service). Remember, too, that, in the aftermath of the Great Depression, hard competition was thought to be a bad thing, and the government's role was to protect private industry from its own excesses.
Seen in this light, the container decision makes some sense. NYC probably believed that, if it didn't offer the rate/service package it had proposed, it ultimately lose the higher rated traffic to trucks (it had to believe this, otherwise undercutting its own rates would make no sense). But the ICC in those days wasn't that concerned with considerations like this. It was far more concerned with insuring the stability of rate structures, and preventing any shippers from having what it considered artificial rate advantages over others. And it was also concerned about preventing the "wasteful" competition the 1920 Act had been directed against. It's the same kind of policy that later led to decisions refusing to allow rate initiatives that undercut the "modal advantages" of the truck industry, and, even later, the infamous "Big John" decision. It wasn't primarily the creation of attorneys - it was the creation of government policy makers, both in Congress and in the ICC, and it continued to be government policy for decades.
Needless to say, from the vantage point of today, we can see that this was a perverse policy, and seriously handicapped the rail industry as trucking took away increasing large slices of former rail traffic. But those effects were probably not clearly seen at the time (in fact, the impact of highway transportation in general was not fully appreciated in the early 1930's). The immediate effects of NYC's new strategy - the disruption of the existing, all sacred rate structures, the danger that some shippers would, horror of horrors, gain advantages over other shippers, and the short term loss of revenues (both to NYC and other roads) were the things that really mattered. And they would be the things that continued to matter until the era of regulatory reform.
Falcon48 When I posted my response to Jeaton's post, I completely overlooked the major point he was making (the old slogan about haste making waste comes to mind).
When I posted my response to Jeaton's post, I completely overlooked the major point he was making (the old slogan about haste making waste comes to mind).
You're forgiven!
After digging up the facts, I think it would be found that the big price increases actually started three or four years years after the last round of major mergers and only begain to take place with the surge of traffic that started about 2004.
Falcon48 The issue of whether all of the ICC commissioners in the 1930's were attorneys or not seems to me to be a side issue, although I don't think that all of them were. Similarly, the question about whether the commissioners were dominated by their hearing examiners or their attorney staffs seems to be a side issue. Again, however, I don't think they were. The ICC in those days was considered a very prestigious agency and many of its commissioners were people of some ability (Joe Eastman, who you mentioned, is one who immediately comes to mind). People like this weren't likely to blindly defer to hearing examiners and professional staffs. I haven't read the 1930's container decision (I don't have immediate access to ICC reports). But the philosophy it seems to represent, based on the description in the postings, was a common one in that era. Railroads must not be allowed to do things that the regulators saw as wasteful competition. This wasn't just a creation of attorneys - it had been accepted rail regulatory policy ever since enactment of the Transportation Act of 1920 (which was largely designed to turn railroads into a regulated cartel, and eliminate such "wasteful" competition as the construction of new rail lines in areas which already had rail service). Remember, too, that, in the aftermath of the Great Depression, hard competition was thought to be a bad thing, and the government's role was to protect private industry from its own excesses. Seen in this light, the container decision makes some sense. NYC probably believed that, if it didn't offer the rate/service package it had proposed, it ultimately lose the higher rated traffic to trucks (it had to believe this, otherwise undercutting its own rates would make no sense). But the ICC in those days wasn't that concerned with considerations like this. It was far more concerned with insuring the stability of rate structures, and preventing any shippers from having what it considered artificial rate advantages over others. And it was also concerned about preventing the "wasteful" competition the 1920 Act had been directed against. It's the same kind of policy that later led to decisions refusing to allow rate initiatives that undercut the "modal advantages" of the truck industry, and, even later, the infamous "Big John" decision. It wasn't primarily the creation of attorneys - it was the creation of government policy makers, both in Congress and in the ICC, and it continued to be government policy for decades. Needless to say, from the vantage point of today, we can see that this was a perverse policy, and seriously handicapped the rail industry as trucking took away increasing large slices of former rail traffic. But those effects were probably not clearly seen at the time (in fact, the impact of highway transportation in general was not fully appreciated in the early 1930's). The immediate effects of NYC's new strategy - the disruption of the existing, all sacred rate structures, the danger that some shippers would, horror of horrors, gain advantages over other shippers, and the short term loss of revenues (both to NYC and other roads) were the things that really mattered. And they would be the things that continued to matter until the era of regulatory reform.
The issue of whether all of the ICC commissioners in the 1930's were attorneys or not seems to me to be a side issue, although I don't think that all of them were. Similarly, the question about whether the commissioners were dominated by their hearing examiners or their attorney staffs seems to be a side issue. Again, however, I don't think they were. The ICC in those days was considered a very prestigious agency and many of its commissioners were people of some ability (Joe Eastman, who you mentioned, is one who immediately comes to mind). People like this weren't likely to blindly defer to hearing examiners and professional staffs.
I think that's a good, accurate synopsis. I read it as saying the danged government tried to take railroads away from economic decisions. And make those decisions based on what?
I don't share any admiration for Eastman. He may have been strong willed, but he was a socialist. And he was a lawyer.
http://books.google.com/books?id=pCoK3vn7URcC&pg=PA153&lpg=PA153&dq=eastman+%22interstate+commerce+commission%22&source=web&ots=QNvJnqkUp_&sig=u9yT0Lj9q82QVmlhXm9No7O6Jdo&hl=en&sa=X&oi=book_result&resnum=4&ct=result
In my way of thinking, a socialist is someone who rejects economic reality in favor of "higher goals". "Higher Goals" are fine, but reality is not something that can be rejected through a law. When the ICC was making its non-economic based decisions under his leadership they were hurting the railroads, the US economy, and the people of the US. He could have acted against this, but his belief that the government (in this case government personified by himself) knew best lead him to promote measures which harmed the people he was supposed to serve.
With regards to lawyers' influence, it's not a side issue. People view facts in the context of their personal background. If someone is trained in marketing, they'll view a problem as a marketing issue. If someone is an operating person, they tend to see the problem as an operating issue, etc. It's the same with lawyers. They will see problems as legal issues that can best be solved through more laws and regulations. Because lawyers tend to dominate legislatures and regulatory bodies we get marketing issues, such as freight rates, decided as legal issues. They are really an economic issue.
The only solutiion that seems viable to me is to keep the regulators away from as much as possible. Granted, there need to be rules involving such things as enforcement of contracts, etc. But setting prices between economic entities is not a legal issue, although the lawyers tend to see it as such.
One of the main goals of the drive to reregulation is to get the lawyers more involved in pricing. We're going to repeat the mistakes of the Eastman era.
The depression of the 1930's created a golden opportunity for command and control advocates to put theory into practice by greater government regulation. Are we seeing the current attempt to reregulate railroads because current hard times have changed the political climate?
A "fair" tax often ends up being one paid by others? Are "fair" rates a benefit to be paid for by the few? There are more shippers than railroads.
The history of command and control economic policies is checkered at best. Unfortunetly, we are not living in the best of times. Distress has ways of reducing acceptance of rational solutions in the political arena. I would not bet against this reregulation plan passing.
Is there another Conrail down the line? May the circle be unbroken?
During the Great Depression railroads were central to our economy. In 60 years the country has moved into an information driven world. Railroads are important but they are no longer at the core of our economy.
This sad fact and Don Phillips recent column about Amtrak getting decent funding because of India's bomb leads me to believe that US freight legislation will be a pawn in negotiations about much larger issues. We we are witnessing a fundamental transformation in the relationships between governments and the world economy. Obama and the Congress are going to be much more focused on how to keep China sending money to pay the governments bills than wiether the chemical plant over in Waynesboro, VA is served by the Buckingham Branch in addition to the NS.
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