Take all the proposed legislation, mix 'em together, and you almost have Open Access!

[Anonymous]

Was waiting for someone else to post this stuff, but as usual it's left up to me, so here it goes.....

At the annual Railroad Day in DC, rr lobbyists stated their support for an as yet unnumbered Senate bill "Freight Rail Infrastructure Capacity Expansion Act" which would provide a 25 percent capacity expansion tax credit to any company (railroad, trucking, et al) that makes a qualified "freight-rail infrastructure" expenditure. At the same time, they voiced their opposition to the "Railroad Competition Improvement and Reauthorization Act of 2005" (HR 2047) and the "Railroad Competition Act of 2005" (S 919), which would either improve the Surface Transportation Board’s rate challenge process and eliminate excessive fees for filing rate cases (the positive spin) or re-regulate the rail industry (the negative spin). Additionally, they oppose the Railroad Antitrust and Competition Act of 2005 (HR 3318), which would remove railroads’ exemptions from antitrust laws (apparently both sides agree on this result).

Meantime, the chemical industry was also in DC supporting HR 2047, S 919, and HR 3318. There is no word yet as to if they might support the infrastructure expenditure bill, perhaps they feel they would gain nothing if the railroad monopolies have capacity expansions subsidized by the feds, because they might still be subject to the short end of the differential pricing scheme.

What is telling amid all this is that the crux of some of these proposed bills are the same stuff we on the forum had bandied about regarding open access. Hmmmm, tax credits for freight rail infrastructure expansions, introduction of competition based pricing, partial re-regulation, no more antitrust exemption to finally put an end to the anachronism of natural monopoly tendencies of US railroads....... with some minor corrections (aka allow the infrastructure tax credit but also regulate the infrastructure side of the equation), these are the basis for the Open Access experiment proposed by some of us.

From these links......

http://www.progressiverailroading.com/freightnews/article.asp?id=8489
http://www.progressiverailroading.com/freightnews/article.asp?id=8490

....you get the gist of the RR POV, as well as the POV of the American Chemistry Council (ACC). One telling statement made by Ed Hamberger of AAR shows a logical fallicy inherent in the RR position. He states "Supporters of this legislation have been vocal in demanding that railroads increase capacity and improve service. But they have utterly failed to explain how artificially lowering rail rates and rail earnings would lead to increased investments. In fact it wouldn’t. Instead, it would compel railroads to cut back on or eliminate projects aimed at increasing capacity.”

Hmmm, isn't the problem right now one of the current monopolistic system's inability to keep up with current capacity needs? This is the inherent flaw of the closed access system - it is predicated on limiting capacity to enhance pricing power. Monopolism is counterintuitive to capacity expansion. Therefore, it is illogical and disingenuous to aver that antitrust remedies would reduce capital expenditures.

It is competition that compels capacity expansion, not monopolism. What is important to remember is that the compeition must be market induced, not mandated by government regulation, which is why HR 2047 and S 919 need to be tweaked into an AT&T style breakup of the railroad oligarchy, which would then allow for true market based intramodal competition. In this respect, both the AAR and the ACC are off base.

Yet, it is interesting to see what would happen if ALL these bills became law. There would be some form of remedy for captive (aka domestic) shippers, and at the same time incentive for railroads to expend on capacity expansions. It wouldn't be Open Access - the question is, would it be better or worse than OA?

[Anonymous]

Don't hold your breath. The Representatives and Senators I spoke with and their staffs weren't big on the chances for any of the bills you mention. Where were you? With the RRs or the chemists?
LC

[edblysard]

I think he was the guy telling the RRs which one of the chemists "products" works best!
Ya know, independent consultant stuff!

Ed

[jeaton]

"Monopolism is counter intuitive to capacity expansion" ??? I wonder what chemicals induced that brilliant assertion.

[greyhounds]

Legislators, legislation, and legislatures are some of the most frightening things on This Planet.

Don't get me wrong here! They are better than any alternative. But I've been involved with a couple, and they do get scary. They generally have no idea what they're doing, but they have the power to take your property, cause you to be put in jail for doing stuff like not preventing your dog from chasing a rabbit (pending in California), tax your income without limit, etc.

It was probably better when they had little communication and drank a lot.

[CSSHEGEWISCH]

I'm still not sure how the concept of open access will improve capacity and how reduced rates will improve the financial health of the operating railroads.

Let us assume that the non-operating owner of the Sunset Route between Los Angeles and El Paso is making a satisfactory (in his mind) return on investment on his capacity-constrained single-track main line. He has little to no incentive to invest in added capacity because he feels that the expense of adding and maintaining a second mainline track will outweigh any additional revenue to be gained. Therefore, capacity is unlikely to be increased.

Let us further assume that there are several underfinanced operating companies providing discount grain rates between multiple small loading points in Montana and ports in Washington and Oregon. What happens to the rates when these operators suspend rail operations because their rates no longer cover costs? What happens to the shippers who have prepaid contracts with these now-defunct operators?

This outlook may be pessimistic, but you must consider worst-case situations when making a proposal. A firm may elect not to invest additional capital in its business for whatever reason, and a firm may be so underfinanced as to have questionable long-term prospects for survival.

[Anonymous]

Well, in terms of maintaining rates that cover costs, if you take the STB's 180% RVC standard as the key indicator of "sufficient" revenues from rates, then it would seem that intermodal is not covering the RVC standard. Meanwhile, those Montana grain rates are running well over 200% RVC, so if they get knocked down closer to the 180% standard, the railroad is still covering the costs. The disparity between import intermodal rates and domestic bulk rates is just ridiculous, and anything the forces rates to be sustainable for covering costs yet nondiscriminatory may be a good thing for US production. I personally think the best thing for the trade deficit right now would be for US export commodities to have reduced rates to port, and for import intermodal stuff to have to pay higher rates (which will reduce domestic consumption of imports).

Regarding how one would judge the proper incentive to expand capacity, one thing that is clear is that the current closed access monopolistic system does not provide incentive to expand capacity (otherwise such would be happening right now). Let's face facts: The railroads have spent the last few decades complaining about "over capacity", all that in spite of a continually growing economy. (Hasn't the GDP more than doubled since the 1950's?) The truth is, there was no "over capacity", just a refusal to take what the freight transportation market was offering, with railroads seemingly content to defer business to trucks and barge lines.

Frankly, I don't see how capacity investment can get any worse than it is right now. Why then assume that a non-operating track owner would do worse than what is happening now? If anything, the non-operating track owner has more incentive to expand capacity, because each unit of capacity expansion provides an extra unit of marginal revenue, e.g. the track use fees are predicated on covering all associated costs of track ownership. In other words, there is no disincentive to capacity expansion, because to do so reduces the overall revenue stream. You have to follow the demand curve to understand this.

Finally, what is so hard to grasp with the truism of "Monopolism is counterintuitive to capacity expansion"? That's Econ 101. Unfortunately for jeaton, he must have been educated in Bulgaria during the Cold War.

[CSSHEGEWISCH]

Other postings by FM suggested that the rates that could be charged to operating companies by infrastructure companies would be regulated, not unlike public utilities until fairly recently. In the past, regulated public utilities had little variation in their stock prices and were generally held for their steady dividends, providing a virtually guaranteed income to stockholders. In the current market atmosphere, steady dividends with little stock appreciation do not carry a lot of weight with many large investors such as mutual funds and hedge funds. Consequently, it could be quite difficult for an infrastructure company to attract capital for upgrading its assets. An infrastructure company with a large percentage of its stock held by hedge funds could be expected to expend any retained earnings on stock buybacks rather than additional capacity.

[Anonymous]

For the record, regulated utilities are doing just fine in the stock market. Secondly, what you have to remember is the positive effect a regulated rail infrastructure combined with a relatively unregulated rail transportation sector would have on the stock values of US rail shippers. With the fortunes of rail shippers tied to an OA concept, they would have more than enough incentive to keep that rail infrastructure value up, otherwise their's might falter.

Of course, this is all conjecture at this point. In keeping with the topic, what I am trying to point out is that the current spate of rail related legislation embodies certain elements of the OA concept. But taken en masse it would still not result in OA or an OA market reaction. For starters, it is difficult to enforce or procure "competition based rates" without actual intramodal competition, which the current legislation does not address. What they are trying to do in terms of dictating what a "proper" competitive rate would be sans real competition will only result in market disfunction. What I ask is that in terms of the rail shippers if all this legislation somehow was enacted into law, would it result in better conditions for rail shippers or worse? Will the railroads grudgingly accept more stringent enforcement of the Stagger's competition caveats in exchange for the infrastructure maintenance tax credit?

[CSSHEGEWISCH]

What recourse would shippers or operators have if the rate-regulated infrastructure company elected not to invest in increased capacity?
There is an alternative to shipping by rail if you don't like rail rates: it has been in existence since the 1920's and is called the truck.

[Anonymous]

QUOTE: Originally posted by CSSHEGEWISCH

What recourse would shippers or operators have if the rate-regulated infrastructure company elected not to invest in increased capacity?

If revenues are volume based, why wouldn't any rational company invest in capacity increases? You see, that's the difference, because right now revenues are premium based, not volume based. Secondly, a regulated utility generally can't defer in capital investment if the demand curve stays high and the revenues are steady. The capital spending protocol is implicit in the rate determined by the regulators.

QUOTE:
There is an alternative to shipping by rail if you don't like rail rates: it has been in existence since the 1920's and is called the truck.

Well, if you want to stretch things that far, why do you say "there is an alternative", rather than "there are alternatives" to shipping by rail? Truck is just one way of moving something from one spot to another. There's also car, pickup, bicycle, tricycle, motorcycle (with or without sidecar), barge, ship, paddleboat, jetboat, canoe, blimp, airplane, helicopter, glider, rocket, hod, conveyor belt, wheelbarrow, pram, backpack, surfboard..................

Of all these, ships and barges come closest to rail in terms of the amount of stuff that can be moved at one time, and airplanes are best in terms of moving something at speed.

The problem with your logic is that you are avering that the stuff that moves best by rail can just as easily move by truck, thereby making truck a *viable* alternative. Remember, rails are best at moving large amounts of stuff at speed. You're not shipping 10,000; 5,000; even 1,000 tons of stuff via truck, ergo the truck is not a viable alternative to rail in most cases.

[Murphy Siding]

Oh man. I saw Groundhog Day once. That was enough.[;)]

[Anonymous]

QUOTE: Originally posted by futuremodal
[
...
Of course, this is all conjecture at this point....

Wow, FM said something I agee with...

LC

[jeaton]

"Finally, what is so hard to grasp with the truism of "Monopolism is counterintuitive to capacity expansion"? That's Econ 101. "

FM-If that is what you were taught in Econ 101, you ought ask for a refund.

[edblysard]

Man, that sounds so familar...

QUOTE: Originally posted by Murphy Siding

Oh man. I saw Groundhog Day once. That was enough.[;)]

[petervonb]

I saw those two bits in Progressive Railroading and wondered why the grain folks from Montana aren't in there together with the Chemical guys so they can put more pressure on more legislators.

[CSSHEGEWISCH]

QUOTE: Originally posted by petervonb

I saw those two bits in Progressive Railroading and wondered why the grain folks from Montana aren't in there together with the Chemical guys so they can put more pressure on more legislators.

Probably because the farmers feel that they're getting worked over by the chemical companies regarding the price of fertilizer and pesticides. Farmers aren't all that different from any other businessmen, they want to minimize costs and maximize their income.

[MichaelSol]

QUOTE: Originally posted by petervonb

I saw those two bits in Progressive Railroading and wondered why the grain folks from Montana aren't in there together with the Chemical guys so they can put more pressure on more legislators.

QUOTE: Originally posted byCSSHEGEWISCH
Probably because the farmers feel that they're getting worked over by the chemical companies regarding the price of fertilizer and pesticides. Farmers aren't all that different from any other businessmen, they want to minimize costs and maximize their income.

Gratuitous opinions on the topic continue to be plagued by complete ignorance of the controversy.

The recent railroad re-regulation proposal in Congress attracted more shipper support than any previous piece of similar legislation. It was directly supported by:

The American Chemistry Council, The National Industrial Transportation League, National Association of Wheat Growers, The Fertilizer Institute, National Barley Growers Association, The American Plastics Council, The Paper & Forestry Transportation League, The Edison Electric Institute, The National Rural Electric Association, Lyondell Petrochemical Company, Dow Chemical, Alliance for Rail Competition, American Public Power Association, Chemical Manufacturers Association, National Council of Farm Cooperatives, The Society of the Plastics Industry, Inc., Transportation Intermediaries Association, United States Clay Producers Traffic Association, Wheat and Barley Commissions in Colorado, Idaho, South Dakota and Washington, Oregon Wheat Growers League, Western Fuels Association, Dow Chemical, DuPont, Glass Producers Transportation Council.

If you will look at the Association for Rail Competition, you will see that its active leadership includes the Wheat & Barley Committees of several states, DuPont, Dow Chemical, and representatives of various energy interests. Its membership includes a veritable cross-section of agriculture, coal, consumer and industrial products, chemicals, minerals and petrochemicals.

Indeed, at ARC, Terry Whiteside of the Montana Grain & Barley Committee is the current Chairman, the current Secretary is from Dow Chemcal, and one of the Directors is from DuPont.

Best regards, Michael Sol

[CSSHEGEWISCH]

I'm not surprised that shippers are in favor of re-regulation of rail and presumably truck and barge rates. It gets their costs down with minimal management effort on their part. Of course, to be absolutely fair, the prices that they charge their customers should also be regulated.

[MichaelSol]

QUOTE: Originally posted by CSSHEGEWISCH
In the past, regulated public utilities had little variation in their stock prices and were generally held for their steady dividends, providing a virtually guaranteed income to stockholders. In the current market atmosphere, steady dividends with little stock appreciation do not carry a lot of weight with many large investors such as mutual funds and hedge funds.

Like any industry, Electric Utilities have their ups and downs, but in 2005, electric utility stocks advanced 11.7%, well ahead of the S&P 1500 rise of 3.8%, and has overall beat the market by about 110% over a five year average.

TIAA-CREF, the big public employee (primarily teachers, professors) investment account manager, reports that its "Growth Equity & Income (Dividend)" mutual fund has significantly outperformed its "Growth Equity" fund over the past five years. The former is fairly heavy in electric utilities.

Best regards, Michael Sol

[MichaelSol]

QUOTE: Originally posted by CSSHEGEWISCH

I'm not surprised that shippers are in favor of re-regulation of rail and presumably truck and barge rates. It gets their costs down with minimal management effort on their part. Of course, to be absolutely fair, the prices that they charge their customers should also be regulated.

They are, by fully competitive markets.

Oops, that's not true. Some shippers can't compete on the same basis as other shippers even though they may be more favorably located as to market. There is a factor out there that skews the ability of shippers to offer fully competitive prices, which underscores the impact of that throughout the supply chain of commodities and materials.

Best regards, Michael Sol

[MichaelSol]

QUOTE: Originally posted by CSSHEGEWISCH

I'm not surprised that shippers are in favor of re-regulation ....

Read the list again. There's an astonishing lack of shippers from China, or firms importing from China. They seem to be perfectly happy. "De-regulation" was the best thing that ever happened to them.

Of course, they are charged 106%, or less, of the variable cost of service, while the ARC firms are charged 200%, 300% and even 400% of the variable cost of service. Why wouldn't the foreign firms be happy? They have the best transportation deal in the world. Their rates are subsidized by their American competitors, courtesy of the U.S. Rail industry..

Best regards, Michael Sol

[Anonymous]

QUOTE: Originally posted by jeaton

"Finally, what is so hard to grasp with the truism of "Monopolism is counterintuitive to capacity expansion"? That's Econ 101. "

FM-If that is what you were taught in Econ 101, you ought ask for a refund.

Hmmmm, maybe you should provide some evidence to the contrary. ANY evidence to the contrary. Objective, subjective, cited or uncited, or even from the depths of your own personal feelings, doesn't matter, just give us something.

Until then, we have this:

1. First, most economists will tell you that, unlike a competitive market, a monopolist market is predicated on limiting any expansion of supply drivers, the purpose of which is to allow for pricing power and profit maximization. Agree or disagree?

2. Most transportation economists agree that NA railroads are "natural monopolies", in that the owner of the track is also the provider of transporter services, and practical limitations to entry into that market prevent side by side multiple carrier intramodal competition in most areas. Agree or disagree?

3. In the past half century, it has been the modus operandi of railroads to reduce route miles and service offerrings, via abandonments, company consolidations, etc. because NA railroading has been in a state of "overcapacity" (in spite of an ever growing US and world economy!). Agree or disagree?

Take the sum of #1, #2, and #3 above, and what do you have? "Monopolism is counterintuitive to capacity expansion".

Now, do you still disagree with that statement?

If so, then it is your econ teachers that have failed you miserably.

[Anonymous]

QUOTE: Originally posted by Limitedclear

Don't hold your breath. The Representatives and Senators I spoke with and their staffs weren't big on the chances for any of the bills you mention. Where were you? With the RRs or the chemists?
LC

Perhaps you should relay your concerns to ProgressiveRailroading.com, the Journal of Commerce, Ed Hamberger of the AAR, etc. since all this has been reported/emailed this past week.

[Anonymous]

QUOTE: Originally posted by Murphy Siding

Oh man. I saw Groundhog Day once. That was enough.[;)]

Best Bill Murray movie ever!

So......what does Groundhog Day have to do with current railroad related legislative proposals in Congress, and how some of the aspects of those proposals are quite similar to things we discussed in your Open Access Thread?[;)]

[Murphy Siding]

QUOTE: Originally posted by futuremodal

QUOTE: Originally posted by Murphy Siding

Oh man. I saw Groundhog Day once. That was enough.[;)]

Best Bill Murray movie ever!

So......what does Groundhog Day have to do with current railroad related legislative proposals in Congress, and how some of the aspects of those proposals are quite similar to things we discussed in your Open Access Thread?[;)]

Oh Lordy! My open access thread.[:0], I'm being pulled to the dark side![(-D]. May the force be with me.[:o)].
Edited to note that I didn't like the movie.[xx(],either.

[edblysard]

Join forces with him, Murphy!
Together, you can overthrow the evil Emperor Monopolistic and rule the Free Access Galaxy!


Ed

[TomDiehl]

QUOTE: Originally posted by edblysard

Join forces with him, Murphy!
Together, you can overthrow the evil Emperor Monopolistic and rule the Free Access Galaxy!


Ed

Oh come on Ed, this thread has the potential to become REALLY funny. [:D]

Will a light sabre really cut a rail with one swipe?

[edblysard]

I dont know, you will have to ask Darth Modal....

They work great on cheese, which goes really well with all the whine here....

Ed

[MP173]

Quite an impressive list of organizations that are ready for a change in the railroad regulation scene. Lets take a look at a few of them:

Exxon Mobil (major chemical producer) ROE = 32.5%
DOW Chemical ( ditto) ROE = 29.5%
Dupont (ditto) ROE = 23.7%
GE (plastics) ROE = 16.5%
ADM (agribusiness) ROE = 11.5%
BNSF (railroad) ROE = 16.1%
Union Pacific (railroad) ROE = 7.5%
NS (railroad) ROE = 13.8%
CSX (railroad) ROE = 14.4% (due to being highly leveraged in debt)
JB Hunt (trucker using intermodal) ROE = 20.5%

I can certainly understand why those chemical companies would want lower transportation rates...gotta keep those ROE's high so the stock price stays high.

GE is kinda in a different situation, not only being a plastics manufacturer but also a locomotive supplier and the largest railcar leasing fleet, they certain want lower transportation rates, but...someone has to purchase those $3 million locomotives!

Lets see...ADM...wasnt it just a few years ago that they were considering changing their motto from "Supermarket to the World" to "Price fixers to the world"? Now there is a company that certainly understands pricing!

Lets see we condemn the Chinese for transporting their goods cheaply, yet do we "Buy American" anymore? I dont think so. Those manufacturing jobs left the country and it wasnt due to low rail rates. And by the way...what about those low intermodal rates JB Hunt gets...I have yet to see anyone critical of their pricing ability.

I dont think many of our major shippers want to go back to the good old days of hundred plus Class 1 rails with routing and rating structures that required green eye shaded "traffic managers".

Someone once said on this forum that rail rates have dropped considerably since 1980.

I would like someone to backup that statement with per carload comparison pricing over that period.

ed