So Ken, you're in favor of reregulation of rates, rather than implementing intramodal competition combined with public/private support for infrastructure?
Let me explain something to you to put this and other such studies into perspective. An econ study you get today is based on past econ studies, which themselves are based on further past econ studies that are responsible for constructing the template of analysis. All our academic studies of the US rail system is based on over 100 years of studying an integrated private system. All the terms used in analysis (aka "natural monopoly") is based on this integrated model. Trying to construct a brand new template for the analysis of competitive access is subsequently difficult for these academics - they just can't seem to imagine a rail system where infrastructure operations are separated from transporter operations, such as we have with our highway and waterway transportation systems:
1. The Ivaldi and McCollough study mentions the open access analogy to telecommunictions and utilties as being not apt, yet they make no similar comparative analogy to highways and waterways! Hmmmmmmm.......
2. This same study does mention the returns to density of an infrastructure owner as being the key to track owning profitability - with separation and subsequent transparency of cost accounting, you will find that profits are related to hosted volume. "(Open) Access proponents might argue....that the newcomer's aggresive marketing would result in more economies of density." It is suprising that these same economists do not take more time to study the relationship between integration and intra-operational market skewing, as dispatchers push for reduced maintenance windows while trackmen push for more maintenance windows. I guess we'll leave it to more government regulation to force more track inspections via the FRA....
http://www.trains.com/trn/print.aspx?c=a&id=1004
3. The Bitzan study (which we parsed a while back in another OA thread) builds it's case on the acceptance of his "natural monopoly" definition as being an inelestic definition, e.g you can't dissect a natural monopoly, ergo introducing competition does not jive with cost considerations. Of course, he completely ignores the existence of multiple user rail lines in the US, and the ability of those firms to co-exist in a competitive market in seemingly good corporate health. Evidence of multiple user lines would suggest that the inelastic natural monopoly is a false premise, and I would suggest that the natural monopoly exists soley due to government sanction rather than market naturalization. Again, his study does not analyze track ownership cost in a transparent setting, prefering (as all these referenced economists) to accept the fuzzy accounting of the integrated firms.
4. The grad-student thesis disguised as an economic study (Candell and Kalt) is much of the same, arguing that the separation of infrastructure from transporter operations would result in intra-firm manipulation, rather than taking the separation as a de facto splitting of the firm itself into separate entities. The analogy of the factory building being forced to accept the production needs of a competitor (not explicitly referenced, but that's where it was heading anyway) is the most egregious error an economist could commit, since the infrastructure of the railroads is a utility function, not a plant production function. This is where the transmission analogy is a better fit, with energy companies now hosting competitors' electric production over their private transmission lines, yet the electric production itself is still off limits to competitive intrusion.
Again, Candell via Kalt ignores the existence of multiple user lines, arguing for integration as being more "promising" for rail access coordination. Again, if current rail dispatchers can coordintate access with multiple transporters in trackage rights situations, et al, then the whole conclusion of Candell is blown away. Someone might also point out to Candell that those negotiated contracts have fallen out of favor - so much for counteracting the inefficiencies that arise from price discrepency aka differential pricing aka monopoly pricing. (p 16)
What?!? One of these cited references actually admit that differential pricing is an "inefficiency"? Well, yes and no - yes it's an inefficiency when the example is used in passing to buttress some other talking point, but somehow not when the topic is the focus of study. Hmmmm.......
The problem with all these studies is that very little attention is paid to the unintended consequences of the antiquated private integrated model for rail operations (aka, the contribution of the US integrated rail system to the US trade deficit via the differential pricing conundrum), and the *** dychotomy of railroad companies resisting "forced" access, yet accepting "forced" government regulation.
The clear failure of Staggers is that it is focussed on buttressing the financial situation of the railroad companies, not on what's best for the US transportation system. US shippers want and deserve widespread rail access (even out here in the boondocks) and competitive rail rates, and you can't get that with the condensed integrated model. What's best for the Big Six is not necessarily what's best for rail shippers' needs.
BTW - anyone notice that Staggers has not appreciably improved the ratio of net available reinvestment funds to capital expenditure needs? Well, what do you expect with a rail system anachronism that is the moral equivalent of Feudalism?
jeaton wrote: Having made my prediction, I will also predict that relief will come on the basis of existing laws and regulations, and not on some big revision of the law. And further, the relief will fall far short of the level some hope for.
Having made my prediction, I will also predict that relief will come on the basis of existing laws and regulations, and not on some big revision of the law. And further, the relief will fall far short of the level some hope for.
It's a safe prediction since the captive shippers have, themselves, only asked for enforcement of the existing law. I don't think there is effective support for a major revision by anyone. Interpretation and enforcement has been the topic of the essential debate, not the law itself.
By the way, the fact that the number of shippers (not number of shipments) subject to rates over 300% of variable costs has increased from 4% to 6% does not prove that their is a growing gap between rates paid by "non-captive" and "captive" shippers. Can you come back with numbers showing that "non-captive" shippers are being subject to rates with less, more or the same revenue to variable costs ratios as in the past. Seems to me that to argue a growing gap of some kind has to show an increasing spread between the high and low. Otherwise it is comparing apples to nothing.
This is pretty shaky reasoning.
If more shippers are paying over the 300% R/VC rate, and since variable costs have increased over the past five years, then revenue from captive shippers paying over the 300% R/VC rate will be 1) higher, 2) lower, 3) the same?
Those shippers will be paying 1) the same, 2) less, 3) more than they were paying before their rates went over the 300% level?
If shippers are paying more to transport their wheat than they were ten years ago, but most other rates are lower than they were ten years ago, is the rate spread between wheat and general rates 1) the same, 2) wider, 3) narrower?
The quiz will be graded.
Can you come back with numbers showing that "non-captive" shippers are being subject to rates with less, more or the same revenue to variable costs ratios as in the past.
?
That's what the GAO report did -- it examined the relative proportions of shippers and whether or not those shippers paying various relative rates had increased or decreased -- it found that the number of shippers subject to rates between 180% and 300% R/VC has declined, for instance.
The "gap" between the relative levels of R/VC rates has increased. I would have to go back and look, but I believe it also specifically said that more shippers ship at rates below 180%.
If you are looking for a means of defining "gap" or a "widening" gap to meet some predisposed view that is contrary to the data, why don't you simply say you don't believe the data, and refuse to believe any data that is contrary to your professed belief system?
That will shorten the discussion, minimize the hostility that invariably erupts, and clarify your position immensely.
greyhounds wrote:This is a good and interesting paper on this subject. It is not light reading. http://www.transportation.northwestern.edu/programs/exec/RAIL04/papers/gallamorePanzarPaper.pdf
This is a good and interesting paper on this subject. It is not light reading.
http://www.transportation.northwestern.edu/programs/exec/RAIL04/papers/gallamorePanzarPaper.pdf
Ignoring the caution of the second quote in my signature, I will predict that the STB will find that there are some conditions of market dominance. ( For the benefit of others who might look at these posts, "market dominance" is the condition that must be proven and the existance of a rate over 180% of variable cost or even a much greater ratio of rate to variable cost does not automaticly prove that the market dominance condition exists.)
"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
jeaton wrote: "Unfortunately, this 2004 "study" has been upended both as out of date, and probably poorly researched, by the recent GAO report:" (From above) So you are saying that the GAO report is a model of exemplary research? Bet you the entire group of GAO staffers doing their study wouldn't come close to matching the credentials of either of the authors orf the NU study. You really are great at picking out statements you claim to make your point. The line you quote from the NU report says: "...importantly, the governing regulatory authority finds no firm evidence of a widening gap between exclusively-served and other rail shippers since 1984." You can argue that the governing regulatory authority is wrong with this view, but it is, in fact their view. Should the paper state that the regulatory authority has a different view? Unless there is much more in the full report by the GAO, it appears that they have just presented examples of the railroad's differential pricing-a condition few will dispute. The NU study undertakes to address "Open Access" as a solution to any differential pricing conditions that may exist. They accept that differentials may go away, but seem to make a good case that open access would significantly erode the ability of the railroads to maintain or expand the service with a consequent impact on the quality or availability of the service for shippers. Seems to me that any comparison of the two studies is like comparing coal and grain.
"Unfortunately, this 2004 "study" has been upended both as out of date, and probably poorly researched, by the recent GAO report:" (From above)
So you are saying that the GAO report is a model of exemplary research? Bet you the entire group of GAO staffers doing their study wouldn't come close to matching the credentials of either of the authors orf the NU study.
You really are great at picking out statements you claim to make your point. The line you quote from the NU report says: "...importantly, the governing regulatory authority finds no firm evidence of a widening gap between exclusively-served and other rail shippers since 1984." You can argue that the governing regulatory authority is wrong with this view, but it is, in fact their view. Should the paper state that the regulatory authority has a different view?
Unless there is much more in the full report by the GAO, it appears that they have just presented examples of the railroad's differential pricing-a condition few will dispute. The NU study undertakes to address "Open Access" as a solution to any differential pricing conditions that may exist. They accept that differentials may go away, but seem to make a good case that open access would significantly erode the ability of the railroads to maintain or expand the service with a consequent impact on the quality or availability of the service for shippers.
Seems to me that any comparison of the two studies is like comparing coal and grain.
I do not comment on the open access portion of the paper. However, the authors do note that, regarding differential pricing "it is important to note ..." and they offer nothing to disagree with the STB position as it existed prior to 2004. I simply take them at their word that they think it is important to note that there is no widening gap. In fact, captive shippers being charged over 300% R/VC have increased from 4% to 6%. Whatever you want to call it, I call it a "widening gap."
Multiple threads have examined whether or not wheat tariffs went down or up. I certainly was gratified to see that the GAO agreed with my analysis when it concluded earlier this month that the price railroads have charged for wheat has not followed the general trend of declining rail transportation charges since Staggers but has, in fact, gone up.
A lot of arguing and name-calling accompanied those discussions, and particularly and most vociferously by people who claimed they knew all about rates, claimed that they had relevant degrees, and claimed that they knew how to read charts and graphs.
Certainly, the GAO Report is an interesting denouement to that discussion and to the credibility of those posters.
That the STB has felt compelled to begin hearings on the issue next week certainly underscores your comments about what the "governing regulatory authority" is doing in response to an objective government analysis. It certainly raises the question as to comments in a 2004 NU study that seems to have been turned on its head on these specific issues on the basis of a study of the data, as opposed to a reliance on the conclusions of the STB.
If nothing else, it underscores the risks of taking a position based on someone else's homework which is what the NU study in essence does when it accepts the conclusion of the STB uncritically.
I am very familiar with Rob Gallamore and his work. I obtained a copy of his doctorate thesis in 1972 [Gallamore, Robert, "Railroad Mergers: Costs, Competition, and the Future Organization of the American Railroad Industry," Harvard University, Ph.D. Dissertation, 1968] and I still have that copy. I thought it was a very good work and I have cited to it on several occasions.
However, currently the data does not support the position taken by his "important" reference to the STB. Had he stated that the STB's position was important because it showed that the STB was not taking the situation of captive shippers seriously, then my comment would be different, but he didn't, and so I can only conclude he believes what the STB said, and that happens to be wrong on that specific point.
If it is an important premise to the remainder of his paper and the conclusions he reaches, then the remainder of the paper, no matter how well written, may well be irrelevant. A false premise does not yield a good analysis no matter how good the analysts.
Hearings begin November 2.
Ohhhhhh-K. Here we go again...
LC
"...importantly, the governing regulatory authority finds no firm evidence of a widening gap between exclusively-served and other rail shippers since 1984."
Unfortunately, this 2004 "study" has been upended both as out of date, and probably poorly researched, by the recent GAO report:
Washington Insight: GAO Finds Disparities in Rail Freight Rates
From Ag Commentary, by Jim Wiesemeyer, 10/17/2006:
Members of Congress asked GAO to review changes in the railroad industry since the Staggers Rail Act was signed in 1980, including changes in rates and competition. They also requested that GAO review actions taken by the Surface Transportation Board to address shippers' concerns, for a projection of future freight demand and capacity, and for potential federal policy responses to the projected changes.
Status of industry: According to the report, since the enactment of Staggers, the railroad industry's financial health improved substantially as it cut costs, boosted productivity and "right-sized" its networks. Rail rates generally have declined since 1985 for certain commodity groups and routes, but rates have not declined uniformly, and some commodities are paying significantly higher rates than others, says GAO. For example, from 1985 through 2004, coal rates declined 35 percent while grain rates increased 9 percent.
GAO notes lingering concerns about competition and captivity (dependence upon one railroad) in the industry because traffic is concentrated in fewer railroads. "It is difficult to determine precisely how many shippers are captive to one railroad," says GAO. "Nevertheless, our analysis indicates that the extent of potential captivity appears to be dropping, but that the percentage of all industry traffic running at rates substantially over the statutory threshold for rate relief has increased."
Furthermore, the report found that some areas with access to only one Class I railroad have higher percentages of traffic traveling at rates that exceed the statutory threshold for rate relief. "This situation may reflect reasonable economic practices by the railroads in an environment of excess demand, or it may represent an abuse of market power," GAO said.
The report found that a reduction in competitive options can have a significant effect on the rates railroads charge shippers. Comparing two routes for shipping the same commodity, but using a different number of rail carriers, can illustrate this effect. For example, GAO looked at two long-distance grain routes (from Minot, N.D., and Sioux Falls, S.D.) that both terminate at Portland, Ore., and found that both routes carry comparable tonnage, but the route originating in the Sioux Falls area is served by two Class I railroads, whereas the route from the Minot area is served by one Class I railroad. "The rates for the Minot route are roughly double the rates for the Sioux Falls route," said GAO.While competition between rail carriers is particularly important in some cases, in other cases, competition between rail and other transportation modes, such as trucks and barges, may be more important. Particularly for bulk commodities such as grain, when shipper locations can be served by barge transportation, rail rates will be lower relative to rail costs than on routes that are not conducive to barge competition, the study found.
To test this theory, GAO examined the costs and revenues for two routes, one (from Champaign, Ill., to New Orleans) with rail and barge options, and the other (from Champaign to Atlanta) with just a rail option. The agency found that although both routes have the same origin, for shipping the same commodity over a comparable distance, the route with the barge option has consistently lower rates than the route with just rail service.
Looking at costs to ship grain via railroad, GAO looked at 20 years' of cost and revenue data from Minot, N.D., and Billings, Mont., to Portland, Ore. The agency found that from 1985 through 2004, revenue from all grain traffic on the Minot to Portland route increased from approximately $18.4 million to approximately $30.8 million. Variable cost increased at a much slower pace, rising from approximately $12.2 million to approximately $12.4 million.For the route from Billings to Portland, grain revenue more than tripled, from approximately $11.2 million in 1985 to approximately $42.7 million in 2004. Variable cost also increased substantially — although still not as much as revenue — rising from approximately $5.5 million to approximately $15.1 million.
The Surface Transportation Board (STB) has scheduled a Nov. 2 public hearing to examine grain transportation issues raised by the GAO report. According to STB, the hearing will focus on the market conditions that led to report's conclusion that grain rates have diverged from industry trends
We've kicked these issues around a lot out here with a lot of emotion. The authors were faculty members (economics) at Northwestern University. I know that at least one, Gallamore, has retired. He was the Director of the Tansportation Center at NU. They bring some cold, hard, informed, analysis to the subject. And:
"We conclude that constrained market pricing under ICC and SB supervision has been the correct policy, and more radical measures such as 'Open Access' are not warranted."
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