"Open Access" and regulation of railroad freight rates.

[greyhounds]

Bad conclusion, Ken.  There is nothing implicit about a second rail carrier "increasing costs" to serve the plant.  There would be a shift of revenues from the one rail carrier to the new rail carrier, assuming they both use the same trackage.  Loss of revenue does not equate to increasing costs.

No, the cost will go up.  You're going to use a minimum of two trains and two crews to do the work now done by one. 

You are assuming that competing rail companies will not be able to maximize labor and capital productivity.  Faulty assumption.  Again, look at all the currrent multiple use, trackage rights, et al agreements - these are not increasing costs, they are actually lowering costs.

Trackage rights are not the same as OA.  They're basicallly a 'bridge' where one railroad sells excess capacity to another railroad.  A railroad operating on TR generally can not serve customers on the line.  There are exceptions such as Reno/Sparks and Salt Lake City.

The inherent inefficiencies of an open access system come into play when two or more rail carriers try to serve the same customer.  That would be the whole misguided point of open access - gettting a facility to be served by more than one "Natural Monopoly" - thereby driving up the cost of rail transportation.  Trackage rights are not, in any way, shape, or form, equivalent to open access.

If they were, your dream would be fulfilled.  OA would be a reality.  It thankfully isn't.  UP and BNSF have trackage rights over very signficant parts of each other's systems.  These "rights" sure don't make for open access - thankfully again.

You're stuck on faulty.  Why would a 3rd party need three crews?  You really aren't thinking this through.

I never said the 3rd party would need three crews.  You misunderstood.  The 3rd party would BE the thrird crew.  Instead of the one crew now handeling things, you'd have:  1) the 3rd party crew doing the swtiching, 2) Railroad "A's" crew picking up some of the loads, and 3) Railroad "B's" crew picking up part of the loads.  Productivity would plumet under open access.  Under the "3rd Party Scenario" you'd have a seperate switch crew, and each of the two road crews would handle fewer cars than they now do.  Reducing productivity is a really bad idea.

Railroad crews are trained (no pun intended) professionals.  They don't come cheap.  (Nor should they.)  Use them wisely and well.  Replacing one crew with three is not such a use. 

Answer us this - why do you automatically assume intramodal rail competition would increase costs, but intermodal competition would not?

I never addressed that.  You are assuming an assumption on my part.  Here's what I know:

Open access will increase the total cost of rail transport and also the average cost of rail transport.

Intermodal competition (trucks, barges, etc.) will reduce the total cost of rail transport (because there will be less of it) , but increase the average cost of rail transport (because fixed expenses won't fall with the decline in traffic and will have to be borne by a smaller business base.).   

But you can't very well tell a shipper not to put a load on a truck if that's what he's got in mind.    

[Datafever]

No, the cost will go up.  You're going to use a minimum of two trains and two crews to do the work now done by one.

You know, until I read your post, greyhounds, I never really understood why the costs would go up.  Thanks to your explanation, I now "get it".  But just to clarify in my own mind, bear with me a moment.

If a particular terminal area (say a branch line out in the middle of nowhere) is serviced by one railroad, that railroad sets up a schedule to service that terminal area, say twice a week.  Now, if another railroad gains access to those customers and that traffic, it will also have to provide service twice a week.  The first railroad has no reduction in costs, but now has only half the revenue.  The second railroad has increased its costs in order to gain marginal revenue.  Overall, the costs have gone up (by the amount that it costs the second railroad to service the terminal area) while revenues have almost certainly gone down (because competition has forced lower rates).

Have I painted that picture correctly?

Trackage rights are not the same as OA.  They're basicallly a 'bridge' where one railroad sells excess capacity to another railroad.  A railroad operating on TR generally can not serve customers on the line.  There are exceptions such as Reno/Sparks and Salt Lake City.

The inherent inefficiencies of an open access system come into play when two or more rail carriers try to serve the same customer.  That would be the whole misguided point of open access - gettting a facility to be served by more than one "Natural Monopoly" - thereby driving up the cost of rail transportation.  Trackage rights are not, in any way, shape, or form, equivalent to open access.

If they were, your dream would be fulfilled.  OA would be a reality.  It thankfully isn't.  UP and BNSF have trackage rights over very signficant parts of each other's systems.  These "rights" sure don't make for open access - thankfully again.

At first, I wanted to take exception to your statement that trackage rights are not in any way equivalent to open access.  In my Internet explorations, I have found sites that definitely do call trackage rights a form of open access.  However, I find your argument to be persuasive, and I agree with it.

[greyhounds]

.

If a particular terminal area (say a branch line out in the middle of nowhere) is serviced by one railroad, that railroad sets up a schedule to service that terminal area, say twice a week.  Now, if another railroad gains access to those customers and that traffic, it will also have to provide service twice a week.  The first railroad has no reduction in costs, but now has only half the revenue.  The second railroad has increased its costs in order to gain marginal revenue.  Overall, the costs have gone up (by the amount that it costs the second railroad to service the terminal area) while revenues have almost certainly gone down (because competition has forced lower rates).

Have I painted that picture correctly?

Well, I think you're using a bad example.  I have a freind who is an RN.  She has refered to people as being in "End Stage".  That means they're dying and there isn't anything anyone can do about it.

A twice a week line is in "End Stage".  Just like the person, it'll stay in operation until something significant hapens, then the decision will probably be made "just to let it go" and not keep it on life support. 

It is unlikely that any open access train operating company would set itself up to go after business on such a line.  The first railroad isn't going to share its locomotive and crew, so the second operating company would have to acquire the same to go after business that won't support one train per day.  Cost go through the roof under such a scenario.

Aside from that, I think you've basically got the understanding. 

OA in such a situation would basically double operating costs - and if it didn't significantly increase the business it would simply hasten the inevitable demise of the twice a week line

So could the introduction of a second train operating company significantly increase the business?  Why would it?  This could only happen if the current operator was incredibly stupid and wasn't anywhere near maximizing their own business potential.  Not too likely.

[Datafever]

What I've learned:

At first, it seemed that most people were against open access because of the regulatory aspects that accompanied most open access proposals.  Of course, those proposals were driven by shippers that felt they were paying "way too much" to ship because they were in non-competitive situations.  And a non-regulatory open access implementation would not provide relief, so why bother.

But I couldn't see any reason to not support a non-regulatory open access proposal if one should come along.  However, it is apparent that even a non-regulated open access implementation would increase railroad industry costs.  In this way, the railroad industry is not at all like the trucking industry.

Example:  Say trucking company A has twenty customers that each ship one load per day, and each shipment requires one driver for one day.  If trucking company B comes along and takes away half the customers, then trucking company A now needs only ten drivers and rigs and company B only needs ten drivers and rigs.  Very little has changed.  There are still only twenty drivers employed and twenty rigs utilized.  As the trucking industry has low fixed costs and high variable costs, it is relatively easy for a trucking company to adjust its resources based on its customer base.  While it is true that the competition between the trucking companies will keeps rates low, those rates will stabilize at a point where each company is making a reasonable rate of return on investment.  If the rates were to drop below that point, the less efficient company would remove itself from the marketplace (or be facing bankruptcy).

The example that I used in my previous post illustrates that a similar situation does not hold true for railroads.  In addition, because railroads have high fixed costs, it is not very easy for a railroad to adjust its resources.  The investment of installing new track requires a very long term outlook of potential profitability for the traffic over that track.

I have also seen comparisons between the railroad industry and power companies.  But that analogy breaks down when it is taken into consideration that all railroads operate at pretty much the same level of efficiency.  (Some may say that shortlines are more efficient that class 1s.  Fine.  But even so, most shortlines operate at the same level of efficiency, and most class 1s operate at the same level of efficiency.  There may be exceptions.)  One railroad cannot provide terminal or switching service cheaper than another railroad can - at least not significantly so.  I know, I know, that statement is probably way too generalized, but bear with me.

Power companies have large variances in operating costs.  A hydroelectric dam, a nuclear power plant, and a coal-burning plant all have unique characteristics in the cost and quantity of electricity generated.  There are transmission losses, and while I don't know exactly what those losses are, I suspect that they are sufficient that a nuclear plant in NY is going to be at a competetive disadvantage to a nuclear plant in NV when it comes to attracting customers in CA.

IMO, what would be the result of a non-regulated implementation of open access where all railroads had access to all customers?  First of all, chaos.  Rate drops for captive shippers, but only in the short run.  Eventually, because of bankruptcies, industry would stop competing for the marginal customers who would lose service altogether or end up paying even more than they do now.  Major shippers that now pay relatively high rates would see rate decreases, but that would decrease the profitability of railroads as whole.  More bankruptcies.  Eventually things would shake down to a couple of major railroads and a multitude of smaller railroads that managed to carve out a profitable niche for themselves that they can defend against competitors.

Lacking government interference, I think that railroads will continue to engage in voluntary trackage rights, switching rights, terminal rights and so on - because they find it convenient and/or economical to do so.

While I have always been against regulation, I had thought that open access in and of itself was not a bad thing.  At this point, I cannot see any benefit at all to any forms of government imposed open access, regardless of how inclusive one is in defining open access.

[Datafever]

Well, I think you're using a bad example.

Okay, so I skewed things a little bit just to illustrate my line of thinking.  Let me posit another example.

Let's say a large facility generates two unit trains per day, served by railroad A.  If railroad B is allowed to come along and manages to garner half the traffic, it might get one train a day while railroad A keeps one train a day.  So, no increase in crews or switching at all.  At this point, I might be tempted to just ask, "so where does the increase in costs come from in this example?"

If the rates are unregulated, railroad A can just charge railroad B a hefty rate for trackage fees.  In such a situation, railroad A has no decrease in revenues, or perhaps a decrease that is commensurate with the reduction in revenue.  Railroad B, having to pay high trackage fees, cannot offer the customer significant rate reductions, so why would the facility bother diverting traffic to railroad B in the first place?  And the only thing that regulation does is take money out of railroad A's pocket and put it into the pocket of the customer.  One company becomes more profitable at the expense of another company becoming less profitable.

[Anonymous]

Bad conclusion, Ken.  There is nothing implicit about a second rail carrier "increasing costs" to serve the plant.  There would be a shift of revenues from the one rail carrier to the new rail carrier, assuming they both use the same trackage.  Loss of revenue does not equate to increasing costs.

No, the cost will go up.  You're going to use a minimum of two trains and two crews to do the work now done by one. 

No, you're not.  You are making an incredibly faulty assumption that the free market is zero sum gain.  You are forgetting that the market will work things out. 

Your scenario is unrealistic to begin with.  Where do you have one crew working one customer limited to a full work week or less on one line, and no one else?  Very rarely if ever.  Most likely the current crew is two or three shifts operating a local, picking up and dropping off for various customers.  Right there you have a two or three way split.

No additional crews overall = no cost increase.

Taking your example for analysis, the most likely scenario for small carload aggregation would be the franchise model.  One operator is given a franchise to work that one shift per day, 5 or less days per week local.  After a certain time, if the shippers don't like what they are getting in the way of service, they can yank the franchise from the underperformer and give it to a second operator.  If the shippers are satisfied with the current operator, he keeps the contract for another term.

No addtional crews = no cost increase.

Then there is that supreme example of free marketeering - the increase in business with access to input price competition.  Often there is production that is skewed (usually at a higher cost to the producer) for the benefit of truck haul.  The new intramodal competition may cause that producer to go back to more basic production that favors rail haul.  Perhaps there is an idle production facility (probably shut down due to captive rail rates) that restarts production with that market guarantee of intramodal competition.  Perhaps there is a company siting for a new production facility that locates on the line in question rather than locating overseas or over the border because of that implicit competitive rate guarantee.  Etc, etc, etc. 

New business = new revenue for rail industry.

You see, Ken, you gotta pull your head out of the zero sum box and start to see how new intramodal rail competition increases economic activity that benefits the rail industry.

You are assuming that competing rail companies will not be able to maximize labor and capital productivity.  Faulty assumption.  Again, look at all the currrent multiple use, trackage rights, et al agreements - these are not increasing costs, they are actually lowering costs.

Trackage rights are not the same as OA.  They're basicallly a 'bridge' where one railroad sells excess capacity to another railroad.  A railroad operating on TR generally can not serve customers on the line.  There are exceptions such as Reno/Sparks and Salt Lake City.

Well, those "exceptions" speak volumes, don't they?  I.E. > IT WORKS!

The inherent inefficiencies of an open access system come into play when two or more rail carriers try to serve the same customer. 

Here's where you are stuck in a rut.  Remember, highways are open access, waterways are open access, European railroads are mostly open access (and moving to eventual system wide open access), Aussie railroada are open access.......EVERYONE BUT NA RAILROADS!   Obviously, those aforementioned open access systems are very efficient from a market standpoint, yet they share the same basic infrastructural principle as NA railroads - you can fit basically one ROW unit per corriodor.  So why are these OA systems so doggone efficient?  Because the "natural monopoly" portion is separate from the transporter portion.  The aggregation principle you cling to is not written in stone as being the sole determinant of one service provider being more efficient than two service providers, because it is superceded by the (1) franchise model of OA, (2) the crew split scenario, and (3) the new business potential of competitive markets.  All three such efficiencies cannot exist in the monopoly fiefdom.  Therefore, it is just plain ignorant to bestow the efficiency crown to the monopoly.

You're stuck on faulty.  Why would a 3rd party need three crews?  You really aren't thinking this through.

I never said the 3rd party would need three crews.  You misunderstood.  The 3rd party would BE the thrird crew.  Instead of the one crew now handeling things, you'd have:  1) the 3rd party crew doing the swtiching, 2) Railroad "A's" crew picking up some of the loads, and 3) Railroad "B's" crew picking up part of the loads.  Productivity would plumet under open access.  Under the "3rd Party Scenario" you'd have a seperate switch crew, and each of the two road crews would handle fewer cars than they now do.  Reducing productivity is a really bad idea.

Railroad crews are trained (no pun intended) professionals.  They don't come cheap.  (Nor should they.)  Use them wisely and well.  Replacing one crew with three is not such a use. 

Well, only a true "professional" would simply aquiesce to such a non-sensical performance.  Almost as farcical as OJ's glove not fitting - yes, the glove would fit him in any other situation, except when putting on the glove would bring a guilty sentence.  I could really see some of the current crop of rail managers pulling an OJ to *prove* that intramodal competition "just won't work".  Which is why the task of dragging the NA railroad industry into the 21st century will probably fall to non-railroaders.

Answer us this - why do

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