"Open Access" and regulation of railroad freight rates.

[JSGreen]

Now you are the federal government, charged by your constituents to maintain both railroad health and intramodal competitiveness.  What do you do?  Do you:

But suppose you are the federal government, and you are charged by your constituents to maintain lowest TOTAL AND OVERALL COSTS to the consumer. (Rembering that the Shippers are consumers of Intramodal services).  And, since we are supposing here, let us also suppose that you believe that the  Market is the best arbitrator of "best use of capital".

Do you
a) make rules that many believe will raise costs, because it will break an integrated transportation system up into different chunks (ie, MOW, Operating) which implies seperate management, overheads, and induced operating ineffeciencies?

b) let the market sort out the best way to do business, without government interference?

c) Do you confuse the issue by subsidizing railroads (with modern day equilivents of land grants) to try to support a company that Market Forces have deemed irrelelvant?


Lets not forget here that once upon a time, there was at least 3 (4?) rail roads that served the left cost at things the RR does best....big loads (big size, big volume, whatever...) for long distances.  The Markets and Money have worked to decrease this to only two.  Yes, some had land grant to get started, but the Land Grants served the desired purpose, which was to bridge the continent with a reliable transportation system which would open up areas for economic use...To seriously propose a similar government gift to industry of any nature, you would have to have an argument that would convince many, many people it would be in their best economic (or security) interest to do so.  The only argument proposed for Open Access has been that it would benefit some shippers...

Heck, many people believe that Amtrack should be a National  Priority, and that a long distance rail for travel is important enough to subsidize.  But the trend in Government is to try to cut it loose and make it independant (Similar to the post office...).  The seem to feel that Aviation is a good competitor and alternative to Rail, so it should operate on its own.  Last time I rode the train,  family of 4, San Diego to Washington, DC, no less, it was much more expensive than flying.  So I guess they are right about there being competition.  But right now, If I want to fly from someplace like Missoula, MT, to San Diego, It is so very much more expensive than flying from Washington, DC to LA.  So, should the government step in and give the smaller carriers which serve Missoula some subsidies?  In local markets, some  local governments have guarenteed a particulare amout of market to lure carriers in, but otherwise they are on their own....if the market doesnt supply the traffic, the carriers leave.  And there is no Natural Monopoly in the air industry, such as rail, so wouldnt you expect competition to lower prices?  There are at least 4 options for flying out of Missoula.  But the air fares are still more expensive, than DC to SD.  (Perhaps the aviation industry would be a better analogy for the Captive shipper discussuion, since there are lots of little airports with only one carrier serving them.)  And there are parallels with OA, since there is no "Natural Monopoly" for Air Carriers.  Yet, there seems to be lots of little towns (read, "Small SHippers") that pay higher prices or find alternate means to transport the commodities.(People).

[MichaelSol]

Now you are the federal government, charged by your constituents to maintain both railroad health and intramodal competitiveness.  What do you do?  Do you:

But suppose you are the federal government, and you are charged by your constituents to maintain lowest TOTAL AND OVERALL COSTS to the consumer. (Rembering that the Shippers are consumers of Intramodal services).  And, since we are supposing here, let us also suppose that you believe that the  Market is the best arbitrator of "best use of capital".

Do you
a) make rules that many believe will raise costs, because it will break an integrated transportation system up into different chunks (ie, MOW, Operating) which implies seperate management, overheads, and induced operating ineffeciencies?

In 1961, Kent Healy offered an interesting financial analysis of railroad companies which opened a debate on the idea of "optimum size" -- the idea that there are not only economies of scale, but diseconomies of scale. He noted, in his study, that smaller railroads in America generated a better rate of return than larger railroads. Subsequent studies, and experience, have shown that the passage of time has not changed the validity of his observations. [Healy, Kent, The Effects of Scale in the Railroad Industry (Cambridge: Yale University Press, 1961)].

However, this is why anti-trust legislation is a sophisticated economic tool, and necessary to a healthy economic system, not merely a piece of antiquated populist 19th Century legislation.

Anti-trust theory proposes that companies don't like to actually compete. What a surprise. Accordingly, at each opportunity to do so, companies will utilize agreements or their pricing power where it exists to eliminate competition.

In order to avoid an economic system composed entirely of self-perpetuating monopolies, anti-trust regulation is part and parcel of our economic system, in order to preserve our economic system.

The comments above, about breaking up an "integrated transportation system." I think miss the mark. I have not seen anyone propose making the physical system less integrated. I have seen proposals that suggest that the current corporations operating that system are substantially past the optimum operating size. However, it is their very size that permits them to operate inefficiently and indeed encourages that result.

Naturally, and with the recent death of Milton Friedman, it is useful to note that our society is fortunate in that it can choose its economic system. We have pretty much agreed on a competitive system with a strong anti-trust component to guard against the natural tendencies to monopoly control. This is based less on grand political principles than a simple utilitarian argument that effective competition maximizes both efficiency of production and maximizes social benefits.

Anytime inefficiency is institutionalized either by monopolistic practices such as captive pricing, overly large corporate entities, or punitive regulation, society overall is damaged.

The current Class I railroads are far beyond the point of maximimum economies of scale, and are in fact substantially incurring diseconomies of scale. Those diseconomies of scale are paid for by eliminating redundancy and by punitive captive pricing. Neither of these practices produce social benefits but rather operate negatively on the overall economy.

Open Access proposals appear to me to be one, just one, of several alternative proposals to restore the positive societal benefits of capitalism in the rail industry to society. I happen to think enforcement of the Staggers Act would be appropriate, but alternatives are certainly interesting to think about, and offer a challenge as to recalling what the system is really all about.

c) Do you confuse the issue by subsidizing railroads (with modern day equilivents of land grants) to try to support a company that Market Forces have deemed irrelelvant?

Interesting. In 1893 "market forces" determined that the transcontinental railroads were "irrelevant." They were bankrupt. And that was after they got the land grants! They could not survive with enormous government subsidy. How much more irrelevant could they be according to this idea of "market forces"?

 

 

[Anonymous]

Now you are the federal government, charged by your constituents to maintain both railroad health and intramodal competitiveness.  What do you do?  Do you:

But suppose you are the federal government, and you are charged by your constituents to maintain lowest TOTAL AND OVERALL COSTS to the consumer. (Rembering that the Shippers are consumers of Intramodal services).  And, since we are supposing here, let us also suppose that you believe that the  Market is the best arbitrator of "best use of capital".

Do you
a) make rules that many believe will raise costs, because it will break an integrated transportation system up into different chunks (ie, MOW, Operating) which implies seperate management, overheads, and induced operating ineffeciencies?

b) let the market sort out the best way to do business, without government interference?

c) Do you confuse the issue by subsidizing railroads (with modern day equilivents of land grants) to try to support a company that Market Forces have deemed irrelelvant?

Let's go back to Econ 101 - Monopolies charge higher prices than competitive enterprises.  Our particular brand of capitalism empowers the (1) regulation or the (2) breakup of monopolies where competitive pricing is nonexistent.  Of #'s 1 and 2 above, regulation will probably result in higher overall costs than breakup.  Staggers eliminated some of the regulatory inefficiencies, but certainly not the most onerous aspects as they affect the customer base.  Staggers is thus partial regulation, where we get a hybrid monster embodying the worst of aspects of regulation and nonregulation.

The fallacy of your a) above is that you assume the breakup of an integrated company would result in more overhead.  Integrated rail companies already have middle management in charge of the various divisions - under simplified break up these middle managers would become the top managers, e.g. no increase in managerial layers.  The ridiculous greyhounds example of redundant crews working the same small customers is not complicit with market realities - the evolution of such moves would probably produce a single 3rd party entity that can handle not only the switcing of Railroad 1, but Railroads 2 and 3 as well, e.g. an increase in managerial efficiency.  And give us a break - "induced operating inefficiencies"?!  You mean like the inefficiency of deferred maintenance, a seeming inherent aspect of the integrated model?  The truth is, "induced operating inefficiencies" are part and parcel of the integrated model, because such inbred inefficiencies can be camaflouged within the entire mega corporation.  Under breakup, such tendencies toward inefficiencies would become more transparent, and would more likely be nipped in the bud before they become entrenched. 

Don't forget too - that if the current Class I oligarchy is broken in two from a vertical standpoint, opposition to further mergers would be mitigated, making it more likely that we'd end up with one or two regulated infrastructure companies and three or four transporter companies.  That's a lot more overhead reduction than we have now under the Big Six.

As for b) and c) above, can you say with a straight face that the current rail oligarchy is the result of no government meddling?  Of course not.  So is it logical to say "let the market determine railroad winners and losers" when the winners were actually recipients of massive government support while the losers did not recieve the same level of government support?  How about this - instead of letting the railroads of lesser government support go belly up, why not equalize the playing field by giving them the equivalent of the winners' level of government support?  Then and only then can you allow a market based decision on who the real winners and losers would be.

There's a reason Matt Rose is so worried about DM&E getting government aid - with it DM&E may prove to be a better run railroad than BNSF (with it's inherited land grants and court favoritism).  BN got off lucky when Milwaukee retrenched - if the trustee of the Milwaukee had chosen to forego the granger lines and keep operations of the PCE as they should have (instead of the other way around), it may have been BN staring down at the face of possible bankruptcy.  The government for all intents and purposes bailed out BN by pushing the PCE retrenchment while keeping the Milwaukee granger operations, despite all the evidence of PCE profitability vs granger unprofitability.

 

[Flint Hills Tex]

futuremodal wrote:

"Question for the experts - If railroads ran with the shorter faster model, would we even need massive classification yards? Could a modern day Class I function today by eliminating massive centralized yards in favor of decentralized mini-yards, e.g. focus on unit trains/shuttle trains for all commodities, while keeping carload volumes at a 25 car + or - train length limit? Wouldn't such decentralization enable a more customer oriented system?"

I couldn't agree more wholeheartedly! Imagine a single SD70AC geared for higher speed at the head of a 25 - 30 car consist barrelling down the main at 100 mph... you could run more trains (higher density) with shorter turnaround time, no more crew changes in the middle of a run, better customer service, less dead time on freight sitting in a big yard, waiting to be classified, etc., etc. Of course, if your customer just wants the freight transferred from the port in LA to his distribution center in Chicago, then you are probably better off with the current mode of transportation.

JSGreen wrote:

"(Perhaps the aviation industry would be a better analogy for the Captive shipper discussuion, since there are lots of little airports with only one carrier serving them.) And there are parallels with OA, since there is no "Natural Monopoly" for Air Carriers. Yet, there seems to be lots of little towns (read, "Small SHippers") that pay higher prices or find alternate means to transport the commodities.(People)."

You are right. Why compare railroads with a utility? It's like comparing apples with potatoes! When making an analogy, we should stick within the genre: transportation. How does RR-freight compare with air-cargo? Anybody know if you have to pay premium prices for air freight from a small airport as compared to a larger one? To use your analogy, JS, if I want to fly from Germany to London, I can drive to Frankfurt Airport and get a flight with almost any carrier. I wont get a ticket for under $100, but I'll get a direct flight into Heathrow or Gatwick, which in turn allows me every possible means of ground transportation into the city. There is a budget airline called Ryan Air which flies from Altenburg-Noebitz (a small town about 30 miles south of Leipzig) to London-Stansted. Both airports can only be reached by car or taxi, but I get a one-way flight for $20! Now, as far as I know, Ryan Air is the only airline to serve these airports (i.e. captive shipper), but the flight is one fifth of the price. Go figure...

MichaelSol wrote:

"The current Class I railroads are far beyond the point of maximimum economies of scale, and are in fact substantially incurring diseconomies of scale. Those diseconomies of scale are paid for by eliminating redundancy and by punitive captive pricing. Neither of these practices produce social benefits but rather operate negatively on the overall economy. ...it is their very size that permits them to operate inefficiently and indeed encourages that result."

I do not totally agree with you, even though what you've written may be accepted economic theory. I believe that, precisely by virtue of their size, the Class I RRs are able to offer efficient, inexpensive long distance intermodal service because they are able to pool their resources and economize both overhead and time.

According to your theory, RRs would function better if there were more and smaller RRs. This scenario brings us back to the days of the alphabet route, with time being lost to multiple interchanges and money being lost to increased accounting neccessary!

I firmly believe that the root of the problem of customer dissatisfaction, whether due to overpricing or poor service, lies in accountability. The bigger a company gets, the less accountable each individual feels towards the customer. Let us take a look at the airlines: a similar process of intense competition with rate cutting led to multiple bankruptcies, which in turn led to mergers. Airlines like Delta became veritable behemoths, and the quality of customer service dropped exponentially (I've flown enough before and after to notice the difference). When you try to make a complaint, NOBODY seems to feel responsible, and you end up wasting your own time and money to effectively achieve NOTHING.

How can you improve accountablility towards your customers despite being a giant corporation? Well, I think that it has a lot to do with management. Since 2002 NS has been implementing so called Business Units, "with the goal of blending the customer focus and flexibility of a small railroad with the resources of a Class I carrier" (see Trains Magazine, July 2006, p.16). The result is that customers have a local partner, a real live, flesh and bone person, a face with a name to turn to with their concerns. This local partner is accountable, and customer satisfaction has risen. A Class I RR with a short line feel to it! What a great idea!

As to OA, I still feel that the best option short of government confiscation of ROW and the formation of a Federal Railway Department to manage operations (do we really want THAT? The RRs don't!) would be for the RRs to form a corporate consortium, pooling all of their ROW, dispatching, MOW, etc. The next step would be for the railway network (RailNet) management to set uniform operating rules and signalling. Then agree on a logistics concept How large will transloading facilities be? How far apart will they be? Who will have access to which facilities? Will each RR switch their own customers, or will they drop cars at a local yard, where a RailNet owned switching crew will make set-outs and pick-ups? Will deliveries be made via combi-traffic, i.e. train-truck? How should the RRs be billed for trackage usage: flat-rate, tons-per-mile, lump sum? Would any of this really lower prices for customers? Would it "produce social benefits"? Would it help railroading survive and thrive?

[MichaelSol]

I do not totally agree with you, even though what you've written may be accepted economic theory. I believe that, precisely by virtue of their size, the Class I RRs are able to offer efficient, inexpensive long distance intermodal service because they are able to pool their resources and economize both overhead and time. According to your theory, RRs would function better if there were more and smaller RRs.

This scenario brings us back to the days of the alphabet route, with time being lost to multiple interchanges and money being lost to increased accounting neccessary! I firmly believe that the root of the problem of customer dissatisfaction...

Well, it's not my theory, but rather the results of a study by a well known railroad economist. Kent Healy has probably done more statistical work on post WWII railroads than anyone.

I have seen the results of that study confirmed by a private study done on the BN ca. 1978 comparing its economic performance with those of its substantially smaller predecessors.

There are no doubt inefficiencies at a small scale due to increased accounting and multiple interchanges. However, to argue there are no inefficiencies of scale ....

 

[Anonymous]

   JSGreen wrote: "(Perhaps the aviation industry would be a better analogy for the Captive shipper discussuion, since there are lots of little airports with only one carrier serving them.) And there are parallels with OA, since there is no "Natural Monopoly" for Air Carriers. Yet, there seems to be lots of little towns (read, "Small SHippers") that pay higher prices or find alternate means to transport the commodities.(People)." You are right. Why compare railroads with a utility? It's like comparing apples with potatoes! When making an analogy, we should stick within the genre: transportation. How does RR-freight compare with air-cargo? Anybody know if you have to pay premium prices for air freight from a small airport as compared to a larger one? To use your analogy, JS, if I want to fly from Germany to London, I can drive to Frankfurt Airport and get a flight with almost any carrier. I wont get a ticket for under $100, but I'll get a direct flight into Heathrow or Gatwick, which in turn allows me every possible means of ground transportation into the city. There is a budget airline called Ryan Air which flies from Altenburg-Noebitz (a small town about 30 miles south of Leipzig) to London-Stansted. Both airports can only be reached by car or taxi, but I get a one-way flight for $20! Now, as far as I know, Ryan Air is the only airline to serve these airports (i.e. captive shipper), but the flight is one fifth of the price.

One big difference in trying to compare small airports with captive rail shippers - airports are owned by the local government, so there is always the option of ditching the current airline in favor of a new airline, e.g. a better comparison would be the franchise model of OA with small airports.

The utility comparison is apt because other energy companies, in the form of either utilities or merchant energy providers (e.g. 3rd party), are able to transport their product over the transmission lines of any other utility.  That is the gist of OA, and in the utility sector is showing gains in overall industry productivity.  Too bad we in the energy industry are now being saddled with expensive renewable mandates on top of the spector of CO2 taxation, such idiocies are not allowing us to show the value of OA in terms of customer pricing.

[oltmannd]

Question for the experts - If railroads ran with the shorter faster model, would we even need massive classification yards?  Could a modern day Class I function today by eliminating massive centralized yards in favor of decentralized mini-yards, e.g. focus on unit trains/shuttle trains for all commodities, while keeping carload volumes at a 25 car + or - train length limit?  Wouldn't such decentralization enable a more customer oriented system?

I have read in past TRAINS various takes on that theme, and in some aspects the automated classification yard seems more of an albatross rather than an innovation.  Other so-called innovations, aka air brakes, seem to be well past their time in this day and age - aka holding on to out dated technologies seems to be an unintended consequence of monopolism.

Does "shorter-faster" = no hump yards?

Probably not.  The problem is  there are too many on-line O/D point pairs.  A railroad NS's size will have 90% of their business (including bulk and intermodal) moving in about 10,000 on-line point pairs.  The remaining 10% moves in another 50,000 on line O/D point pairs or so.

 NS's TOP plan is designed around the notion of eliminating as many intermediate classifications as possible by making as many "long haul" classifications as possible and by using many smaller yards to pre-block and block swap along the way.  Train size by design and in practice was irrelevant.  Big or little trains are neither "good" nor "bad".  The result was being able to close half of Conway and temporarily closing Knoxville.

If you could consolidate traffic down to a couple dozen nodes and make the car load business start to look like the intermodal network, then you could probably move away from hump yards.  BNSF has started to try to do this - but it is not cheap and easy to do.

[JSGreen]

One big difference in trying to compare small airports with captive rail shippers - airports are owned by the local government, so there is always the option of ditching the current airline in favor of a new airline, e.g. a better comparison would be the franchise model of OA with small airports.

OK, now I am officially confused...wouldnt one advantage of OA be that a shipper could decide who is providing the shipping services, reguardless of who owns the rails?  Wether the asset is owned by a local government agency, or by another railroad, isnt the opportunity to chose the shipper one of the facets/goals of OA? 

[VPayne]

Given that most of the Class I’s spend less than 15% of the operation budget on mainline ROW maintenance and expansions would it be proper to say that they are minimizing the return on the smaller revenue stream from the infrastructure portion of their business to maximize the larger revenue stream from the unit train and heavy haul portions of their business. They minimize the infrastructure return by running trains that operate slowly over the main and can no longer reasonably fit within sidings. If each train was simply charged its proportional share of the ROW usage and damage according to the speed ton factored model it would seem that intermodal movements would come out ahead. But the business is concerned with the movement that produces the overall highest rate of return on all aspects. Hence they are using their inherent advantage over those commodities that can not be easily moved by truck due to weighing out to earn the highest rate of return since we have entered the era of constrained capacity.

[bobwilcox]

Well, it's not my theory, but rather the results of a study by a well known railroad economist. Kent Healy has probably done more statistical work on post WWII railroads than anyone.

Who is Kent Healy and what has he published?  Does his research consider the impact of PCs and the internet on productivity?

[MichaelSol]

Well, it's not my theory, but rather the results of a study by a well known railroad economist. Kent Healy has probably done more statistical work on post WWII railroads than anyone.

Who is Kent Healy and what has he published?  Does his research consider the impact of PCs and the internet on productivity?

Healy is pretty well known.

"TRUTH about mergers - railroad mergers" Railway Age, November 1998, by Frank N. Wilner.

"...Yale Economics Professor Kent Healy taught a Legion of students two generations ago that economies of scale evaporate when railroads expand to the size they are today.

"As a gut-wrenching validation of that theory, Healy's apostles point to Union Pacific's service hiccup when it absorbed the Chicago and North Western in 1995 and UP's tumble over Niagara Falls following its 1996 acquisition of Southern Pacific. Some even suggest the relative success of Burlington Northern's 1995 merger with the Santa Fe is owed mostly to fleeing Union Pacific customers."

From the Third Quarter 2006 issue of the American Association of Railroad Superintendent's Journal: "Taylor worked for the Nickle Plate Railroad, Union Railroad, Bessemer Lake Erie Railroad as a trainmaster, the Rock Island Railroad as vice president and controller, Amtrak as regional vice president for the Midwest, and TTX as assistant vice president where he retired in 1991. Taylor served on the AARS board of directors for seven years and was treasurer from 1986 to 1991. [Taylor got his start in the] Yale course taught by Kent T. Healy, [which] was famous for churning out several railroad CEOs and high ranking officials. When Taylor took the course, tuition was $450 a semester."

Press Release, April 1996, University of Pennsylvania: A new fund has been set up at the School of Engineering and Applied Science to create a national program to attract student interest in transportation careers.

The Kent T. Healy Fund, Inc., a group of active and retired railroad executives, has set out to "stimulate interest in and knowledge of transportation, with particular reference to railroads, and to encourage young men and women to choose careers in transportation, particularly railroad man-agement and engineering," according to Downing B. Jenks, president of the Fund and former President of Missouri Pacific Railroad. One of the gifts that launches the program is $10,000 from the Kent T. Healy Fund, and the other is $300,000 in the form of a charitable remainder trust from Mr. Jenks, his wife, and his children.

The Kent T. Healy Fund, Inc., was formed in 1985 by alumni of the late Professor Kent T. Healy of Yale University, to honor their professor and mentor and to continue his work in preparing students for careers in transportation. "Professor Healy's graduates have had a major impact on the industry and have included 30 presidents and vice presidents of railroads and railroad suppliers,"said Dean Gregory Farrington of SEAS in acknowledging the gift.

Works:

Electrification of Steam Railroads, 1929. by Kent T. Healy

Healy, Kent T. “Development of Transportation in Southern New England.” Annual Report of the Connecticut Society of Civil Engineers (1934):95-12

Cases on Railroad Economics: Supplemented by selected statistics (1938)
by Kent T. Healy 

---

Kent T. Healy, The Economics of Transportation in America: Development,
Organization, Functioning and Regulation (New York, 1940).

The Effects of Scale in the Railroad Industry, Kent T. Healy (New Haven, Connecticut, Yale University Press, 1961).

Some Major Aspects of Urban Transportation Policy Formation, By Kent Healy (1963)
Performance of the U. S. Railroads since World War II: A Quarter Century of Private Operation by Kent T. Healy, Review author[s]: Albro Martin, Business History Review, Vol. 61, No. 1 (Spring, 1987), pp. 160-162,. Martin's description of Healy's background is illuminating:
http://links.jstor.org/sici?sici=0007-6805(198721)61%3A1%3C160%3APOTUSR%3E2.0.CO%3B2-W

[MStLfan]

Bob, I think Michael's response answers the question about the impact of pc's and the internet on productivity

By the way, Michael, thanks for that info.

greetings,

Marc Immeker

 

[Anonymous]

BTW - For those of you who claim you are paying higher electric bills due to energy deregulation (and I mean genuine deregulation which includes the open access caveat, not the partial dereg of Staggers), you might find this interesting.....

http://www.energycentral.com/site/newsletters/ebi.cfm?id=238

.....as it seems that the Texas dereg experiment (which includes OA over transmission lines) has resulted in "significantly lower" electric bills for the average Texas customer. 

Quote of Note:  "A residential customer in Houston, for example, would have saved $1,450 over the last four years while one in Dallas would have saved $800."

Furthermore, there is the innovation factor - " At the same time, the commission says that deregulation has spawned innovative pricing options as well as new green products and services."

So, as we debate whether the electric utility comparison to an OA rail system is apt or not, at least admit that energy dereg (when it's done right as it seems to have been done in Texas) does lower prices for the customers.

Thank you, that's all.

[bobwilcox]

Bob, I think Michael's response answers the question about the impact of pc's and the internet on productivity

By the way, Michael, thanks for that info.

greetings,

Marc Immeker

 

Yes it does, his sizeable contribution was made before the arrival of PC and the internet. I think he passed away about 20 years ago.

[MichaelSol]

Bob, I think Michael's response answers the question about the impact of pc's and the internet on productivity

By the way, Michael, thanks for that info.

greetings,

Marc Immeker

Yes it does, his sizeable contribution was made before the arrival of PC and the internet. I think he passed away about 20 years ago.

Well, whatever this means. You just can't throw out something like "computers" or "global warming" and say it explains or does not explain something important without some data.

A McKinsey consulting report in 2001 pointed out that there was a poor correlation between productivity and IT spending.

The report looked at all 60 sectors of the US economy, finding that most of the productivity growth in the U.S. economy after 1995 came from only six sectors: Retail trade, wholesale trade, computer manufacturing, semiconductor manufacturing, securities trading, and telecom services.

Three sectors that spent heavily on computer and internet technology  -- hotels, retail banking, and long-distance data telephony -- had little to show by way of productivity gains.

Railroads have not been a sector that has shown actual productivity benefits as a result of IT investments. If you have a study to the contrary, I would like to see it.

 

[greyhounds]

Well, as far as IT productivity improvements ... There are a lot of people not employed as clerks by the railroads because of IT productivity improvements. 

Just as an example from another industry, I was recently task to produce a 10% ramdom sample of a customer base.  In less than 45 minutes it went from "Hey, we need you to do this" to having the sample, including account number, name, addrerss, city, state, zip +4, ready.  That was over 230,000 randomly selected records.  You couldn't even try such a thing without the IT productivity.   Common sense needs to be applied to evaluations of things like IT productivity.  Without it you'd have clerks reaching into jars drawing out random account numbers, then copying the names and addresses onto some endless list that was 230,000 names long.  It would take an army of clerks.  And a couple of 'em would spill coffee on the list. 

As far as large railroads being less efficient than smaller ones,  the author cited by MS, Kent T. Healy, has been deceased for 20 years.  He studied an industry that no longer exists in the same form.  I'm sure he did good analysis, but it's relavancy today is questionable.  Tremendous productivity gains in railroading came from deregulation.  And the author's work concentrated on the regulated era, which induced a lot of inefficiencies into railroading.

While the UP has had continuing problems digesting its acquisistions, it has improved its operating ratio by five points from 3Q2005 to 3Q2006.  Are their problems the result of their large size, on some inadequate management?  We're gonna' see.

And the Southern, N&W (the old one), Central of Georgia, Nickle Plate, Wabash, and part of the Pennsylvania, Reading, New York Central, etc. all went together to produce a very efficient larger Norfolk Southern railroad.

As did the CB&Q, GN, NP, SP&S, SLSF, and ATSF.

And the best growth into a larger system of all has to be the Canadian National's acquisisitons of the IC, WC and DM&IR (I'll count the GTW as already having been part of CN).  The CN's operating ratio in the 3rd quarter was in the mid 50's.  That's literally unbelievably good.  And they operate a huge, expanded, system that goes from Hallifax to New Oleans to Prince Rupert.  They seem to be able to handle the larger size just fine. 

The experiences of the NS, BNSF and CN refute the notion that bigger is less efficient in railroading.  The jurry is still out on the UP.  I don't want to talk about CSX, they still don't know what they do for a living. 

Kent T. Healy may not have been wrong at the time he wrote, but he seems to be out of date.  Of course, that's not his fault.  It's hard to stay up to date when you've been deceased for 20 years.  May he rest in Eternal Peace and never have to worry about a railroad operating ratio again.  God Rest His Soul.

    

[Flint Hills Tex]

MichaelSol wrote:

"'Lee Koch wrote: I do not totally agree with you, even though what you've written may be accepted economic theory. I believe that, precisely by virtue of their size, the Class I RRs are able to offer efficient, inexpensive long distance intermodal service because they are able to pool their resources and economize both overhead and time. According to your theory, RRs would function better if there were more and smaller RRs.

This scenario brings us back to the days of the alphabet route, with time being lost to multiple interchanges and money being lost to increased accounting neccessary!'

Well, it's not my theory, but rather the results of a study by a well known railroad economist. Kent Healy has probably done more statistical work on post WWII railroads than anyone.

I have seen the results of that study confirmed by a private study done on the BN ca. 1978 comparing its economic performance with those of its substantially smaller predecessors.

There are no doubt inefficiencies at a small scale due to increased accounting and multiple interchanges. However, to argue there are no inefficiencies of scale .... "

Michael, don't misunderstand me, I'm not arguing that there are no inefficiencies of scale in today's class I RRs. If I were, then I would not have quoted the article on NS's regional business units. What I am stating is that I do not believe that a large RR must, by virtue of its size, be inefficient. I'm convinced that prudent managment can counterbalance the effects of the inefficiency of scale. At the same time, I also believe that today's Class Is are better able to efficiently meet the transportation needs of their customers than the conglomeration of small regional RRs that we had in the mid 20th century.

Mr. Healy's research was done before our time, and there was no way that he could forsee the developments in today's transportation market. Sure, post WWII railroads became bloated, and then they failed. Why? They rode on the wave of the post-war economic boom, expanding their operations and their physical plant, and failed to predict how automobiles, air traffic and trucking would affect their business. Back when railroading was the only (transportation) show in town, the RRs' decision to expand made perfect sense. But once they lost their market share, then their size became their handicap.

And I dare say, a study done in 1978, the Dark Age of North American railroading, comparing a gargantuan RR to smaller PREDECESSORS (which, I assume, therefore, were no longer in existence at the time of the study), could produce no other result than that the RRs were suffering under an inefficiency of scale.

[MichaelSol]

Well, I am seeing a little bit of today's "Dilbert" in the discussion.

Anyway, looking at the "Dark 70s":

GDP Growth (Real)
1940s5.6%
1950s 4.1%
1960s 4.4%
1970s 3.2%
1980s 3.0%
1990s 3.1%
2000s 2.7%

The "Dark Days" of the 1970s were "less dark" in terms of economic growth than the 1990s. Railroads were reaching their former WWII tonnage highs by the mid-1970s, and these tonnage highs were substantially higher than they carried during the 1950s and 1960s.

As near as I can tell, the argument is:
1) we never heard of Kent Healy
2) we haven't read his study and don't actually know what it says
3) but, we know it's wrong
4) because "things" have changed.
5) railroad economists with strong economic and engineering backgrounds in the rail industry don't understand the industry,
6) No, we have no actual data for anything we say.

Although regulation is typically blamed for the plight of railroads in the 1970s, and deregulation "unleashed" productivity surges -- although now, I see PCs and the internet are at least partly responsible -- there is little support for this.

Actual economic growth in the 1970s was not bad. But three business models got into trouble in that era -- railroading, automotive, and aircraft manufacturing. For examples, Rock Island, Chrysler, and Lockheed.

From the standpoint of regulation as a causation, it probably wasn't much of a factor compared to other, more significant, factors. Rock Island operated in a regulated, competitive environment. Chrysler operated in a highly competitive, deregulated environment. Lockheed operated in a highly subsidized environment. You could not find three more divergent business models -- all suffering the same problem. Regulation obviously was not the commonality. However, a high capital need during a time of high inflation, and historically high interest rates to obtain that capital was a significant and compelling commonality.

Altman-Z analysis of U.S. corporations in 1979 showed a predictive power of over 90% for economic distress for those corporations with a score less 1.8 or less. But the Altman-Z score is derived from balance sheets and income statements, and appears historically entirely independent of regulatory considerations. And the score, and the basis for the score, does not appear to have substantially drifted -- that is, the elements that determined corporate health in 1970 are identical to the factors that determine corporate health in 2006.

The point? Standard econometric analysis suggests that corporations still succeed the old-fashioned way -- continually improving productivity and passing the savings along to customers. Or fail in the same fashion by being unable or unwilling to do so.

Now, has IT "revolutionized" something? Technological change has driven industrial productivity for over 150 years. There is absolutely nothing new about that. Productivity generally increases every year in every industry unless someone is screwing up. A productivity curve for steam engines on American railroads, for instance, shows a regular rate of marginal improvement in economic efficiency of maintenance and operation in every year after 1920. Did dieselization change the curve? Nope.

I have here a mechanical Burroughs adding calculator. It has 150 keys, and you pull a handle to perform the operation. Anecdotally, I am told this machine enabled the railroad to replace three clerks with one. That was 80 years ago. Did the advent of the electronic calculator again improve productivity? No doubt. Did the IBM 360 computer do what Ken Strawbridge describes above? Yes, and it did so for MILW and CNW in 1959, forty seven years before Ken Strawbridge discovered he could do it just yesterday on a desktop. Is that remarkable progress? Not really. It's normal progress.

Does software and IT improve productivity?  Well, the evidence is spotty on that. Some studies have reported declining productivity. The point is that in order to constitute something remarkable, the productivity increase has to be marginally greater than the historical rate of productivity improvement which almost always exists continuously in any forward looking industry. There is no evidence that has happened in the rail industry as a specific response to IT acquisition. None whatsoever. These operations have always been improving, and IT would be a normal part of that process -- a process that was occuring when Kent Healy was a little boy, when Healy did his studies, and will be occuring in the next generation as well.

So, does any of that change what Kent Healy looked at in terms of general economic operating principles in the rail industry?

Not one iota.

[Datafever]

As I continue to read about open access, I get the feeling that open access is a solution looking for a problem to solve.  I may be crazy, but isn't the normal way to solve problems to start by looking at the problem and then finding a solution?

Do the railroads have some problems?  Let's not hide our head in the sands.  Yes, there are some.

1) Some shippers are captive.  Is this a problem for the railroads?  If it isn't now, it will be when those shippers manage to get enough clout to cause Congress to take action.

2) Large railroads may have created inefficiencies of scale.  Are there significant differences between one large merged railroad and several smaller railroads being held by a single holding company?

3) Lack of competition may stifle innovation.

I'm sure that there are others, but those are the only ones that I can think of off the top of my head right now.  Would anyone be willing to elaborate on these problems, or any other problems they see that the railroads are facing?

[Datafever]

Regarding the inefficiencies of scale that may have been created by railroad mega-mergers:

My suspicion is that most of those inefficiencies result from attempts to standardize operations across the entire system.  Two terminal areas may very well each require slightly different operating procedures to maximize productivity.  Therefore, the more terminal areas that a railroad serves, the greater the likelihood that inefficiencies will be brought into play if standardization is implemented system-wide.

Effective management is the best solution.  If each terminal area is handled as a quasi-separate business unit and allowed to operate in the most efficient manner, then large railroads will not by less efficient than smaller railroads, but can effectively have overall increased efficiency.

[edblysard]

You touched on one of the major reason the UP melt down began in Houston…the attempt by UP to “standardize” the old SP yard system, Englewood in particular, into the UP culture way too fast…

Each terminal, and each yard develops around the customers it serves, and not all customer are the same.

Each terminal manager and every corridor manager who have held their position for any length of time know who needs what service, when and why.

Attempting to make those SP customers accept what they, (UP) though they should have, and trying to change the culture instead of allowing it to adapt plugged the yards with trains.

The rest of the story is well known…

 

Ed

[MichaelSol]

As far as large railroads being less efficient than smaller ones,  the author cited by MS, Kent T. Healy, has been deceased for 20 years.  He studied an industry that no longer exists in the same form.  I'm sure he did good analysis, but it's relavancy today is questionable.  Tremendous productivity gains in railroading came from deregulation.  And the author's work concentrated on the regulated era, which induced a lot of inefficiencies into railroading.

If so, then looking at deregulated industries should shed some light on whether large or smaller corporations are more efficient. If the proposition is that post-deregulation, railroads look more like other corporations, then note that Healy was drawing his analysis from work done on unregulated industries, and only confirmed that railroads behaved the same in terms of efficiency related to size. Regulation had nothing to do with it.

Modern analysis has confirmed that not only are there inherent diseconomies of scale in industrial corporations -- Healy simply showed that railroads, even as regulated, obeyed general economic laws -- but that as the result of improvements in communications and IT technology, the optimum size of corporations is becoming smaller, not larger.

This would not be the first instance that the rail industry got it backwards by thinking as some do that IT technology enables larger corporations to be more efficient. This is, after all, the same industry that thought the Staggers Act would allow them to raise rates.

Maybe PCs and IT do allow larger corporations to be more efficient, but the same technology allows smaller corporations the same advantages. The technology, in that instance, does not change the concept of diseconomies of scale, rather, makes them more, rather than less significant compared to a hypothetical smaller competitor.

Today, the little guy's Dell is just as good as the GM VP's Dell. Forty years ago, there was a world of difference between what the GM guy had available and what the little guy had.

In 1968, I had a choice between my yellow, finely-machined Pickett slide rule, or a third generation IBM 360 identical to the one MILW upgraded to that year. From experience, I will tell you exactly what the difference is between these eras, then and now.

The false premise offered by BobWilcox and greyhounds is that PC and IT technology offers advantages to large corporate enterprises. Yet, the fact that $600 now purchases 10,000 times the computing power of an IBM 360, operates in favor of the smaller, not the larger, enterprise in terms of leveling the competitive advantage formerly offered to large corporations which alone could afford the high investment and ongoing costs required by a 360 installation.

The IBM 360 created an economy of scale that favored the larger corporate enterprise at the very time that Healy was doing his landmark study. Since then, the desktop PC has destroyed that economy of scale. This has to shift the threshold of any diseconomy of scale down, not up.

Healy's results would now show a shift further in favor of smaller railroad companies, as the result of both deregulation and IT technology. Recent econometric analysis supports that view.

"As for the future, the stock market does not expect the largest firms to outperform smaller firms. The stock market valuation of the largest firms, relative to smaller firms, has declined sharply between 1964 and 1998 (Farrell 1998). In 1964 the largest 20 firms comprised 44 per cent of total stock market capitalisation in the United States; in 1998 they accounted for 19.5 per cent. Market value primarily reflects future growth and profit expectations, and thus the market is increasingly sceptical of large firms’ ability to compete with smaller firms. This could be due to industrial evolution, but if it is assumed that diseconomies of scale do not exist, then the largest 20 firms should presumably be able to compensate for a relative decline in their mature businesses by effortlessly growing new businesses.

"A study of firms on the New York stock exchange (Ibbotson Associates 1999, 127-143) similarly showed that small firms outperformed large firms between 1926 and 1998. The total annual shareholder return over the period was 12.1 per cent for the largest size decile and 13.7 per cent for the second largest size decile. It increased steadily to 21.0 per cent for the smallest size decile (p. 129). The real return to shareholders after adjustment for risk (using the capital asset pricing model) was -0.28 per cent for decile 1, +0.18 per cent for decile 2 and rising steadily to +4.35 per cent for decile 10 (p. 140). Note, however, that market capitalisation was used as the definition of size in this study.

"The above evidence shows that concentration in the manufacturing sector—defined as the share of value added, employment, assets or market capitalisation held by large firms—has changed little or has declined over  much of the last century. The size of large manufacturing firms has kept pace with the overall growth of the manufacturing part of the economy since the 1960s in value-added terms, but has declined in employment terms since 1979 (and has declined relative to the total US corporate sector and the global corporate sector). This indicates that there is a limit to firm size and that this limit may be decreasing in absolute terms, all of which supports the research findings of this thesis."

Bureaucratic Limits of Firm Size: Empirical Analysis Using Transaction Cost Economics, PhD Thesis, Staffan Canbäck, Henley Management College, Brunel University, February 2002.

http://canback.com/dissertation.pdf

The OA argument may be that the rail industry, having already destroyed its ability to operate at societally acceptable levels of efficiency -- that is, maximized -- might be, for its own good, broken into a model that permits recovery of those efficiencies; whereas arbitrary break-up of the industry into more efficient independent units may be impossible at this point.

 

[Datafever]

There are a couple of points that keep getting made over and over that just kind of nag at the back of my cognitive processing.  These points frequently seem to be used to bolster each other and they do provide a backdrop for each other.  These points are:

1) Trucks are not (always) a competition for trains.

2) Imported goods are never captive.

Both statements are fairly accurate.  The argument seems to go something like this:

Domestic manufacturers that are captive shippers are at an economic disadvantage to imported goods.  Since imported goods will get low competitive rail rates while domestic manufacturers (at least the ones for whom truck transport is not an alternative) are likely to be tied to only one Class 1 railroad and therefore pay exorbitant monopolistic rates.  This gives imported goods an economic advantage over domestic goods and contributes to the trade imbalance.

And yet, what types of commodities cannot reasonably be transported by truck?  Minerals (such as coal and potash) are brought up as an example.  Grains (such as wheat and corn) are another example.  Liquids (such as ethanol).

But these are not the types of commodities that are generally imported.  Most imported goods can generally be reasonably transported by truck or rail.  Domestic manufacturers of those types of goods can also use truck or rail for transport and therefore they are not captive shippers.  Therefore they are not paying outrageous monopolistic rates for transportation of their goods.  And therefore, they are on level playing ground economically.

I don't know that I have done a very good job of expressing what I wanted to say, but hopefully my point has been made.

[Anonymous]

There are a couple of points that keep getting made over and over that just kind of nag at the back of my cognitive processing.  These points frequently seem to be used to bolster each other and they do provide a backdrop for each other.  These points are:

1) Trucks are not (always) a competition for trains.

2) Imported goods are never captive.

Both statements are fairly accurate.  The argument seems to go something like this:

Domestic manufacturers that are captive shippers are at an economic disadvantage to imported goods.  Since imported goods will get low competitive rail rates while domestic manufacturers (at least the ones for whom truck transport is not an alternative) are likely to be tied to only one Class 1 railroad and therefore pay exorbitant monopolistic rates.  This gives imported goods an economic advantage over domestic goods and contributes to the trade imbalance.

And yet, what types of commodities cannot reasonably be transported by truck?  Minerals (such as coal and potash) are brought up as an example.  Grains (such as wheat and corn) are another example.  Liquids (such as ethanol).

But these are not the types of commodities that are generally imported.  Most imported goods can generally be reasonably transported by truck or rail.  Domestic manufacturers of those types of goods can also use truck or rail for transport and therefore they are not captive shippers.  Therefore they are not paying outrageous monopolistic rates for transportation of their goods.  And therefore, they are on level playing ground economically.

I don't know that I have done a very good job of expressing what I wanted to say, but hopefully my point has been made.

Notwithstanding the "argument", it rests on a false premise, that trucks and railroads each have an impregnable market segment only they can fill.  Coal, grain, potash, ethanol are all not only "reasonably" transported by truck but in enormous volumes and often for some surprisingly long distances.  Transportation is too complex to reduce to simple generalizations about the market-matched niches of transportation modes, and the result of that reduction has been and continues to be a lot of bad public policy.  There are plenty of examples of coal moving 500 miles by truck and 5 miles by train, for instance.

Take a look at the Bureau of Transportation Statistics Commodity Flow Surveys by Mode.

S. Hadid

[greyhounds]

And yet, what types of commodities cannot reasonably be transported by truck?  Minerals (such as coal and potash) are brought up as an example.  Grains (such as wheat and corn) are another example.  Liquids (such as ethanol).

Oh, they move by truck just fine.  On a tonnage basis, trucks move 2/3 of the US field crops.  Less than 18% of the tons move by rail.  Now that changes when you measure by ton-miles instead of tons, but since most of the field crops don't move very far, trucks dominate.  Ethanol and coal are also trucked.  For more info on the crops see:

http://www.fapri.missouri.edu/outreach/publications/2004/FAPRI_UMC_Briefing_Paper_04_04.pdf

[Datafever]

greyhounds and 1435mm:

I understand what you are both saying, I think.  Basically, your premise is that truck transport is always a viable alternative to rail transport and that shippers choose rail transport because it is economically advantageous for them to do so.  There are some who would disagree with that position, but that is only incidental to the point that I was hoping to make.

Some shippers are considered to be captive because they pay high tranportation rates (or because they have only one direct connection to a Class 1 railroad).  These tend to be shippers of bulk products.  These bulk products are not products that are generally imported.  Therefore it cannot be said that the higher rates are causing these domestic shippers an unfair economic disadvantage compared to foreign manufacturers.

[Datafever]

Notwithstanding the "argument", it rests on a false premise, that trucks and railroads each have an impregnable market segment only they can fill.  Coal, grain, potash, ethanol are all not only "reasonably" transported by truck but in enormous volumes and often for some surprisingly long distances.  Transportation is too complex to reduce to simple generalizations about the market-matched niches of transportation modes, and the result of that reduction has been and continues to be a lot of bad public policy.  There are plenty of examples of coal moving 500 miles by truck and 5 miles by train, for instance.

Take a look at the Bureau of Transportation Statistics Commodity Flow Surveys by Mode.

S. Hadid

A market segment does not need to be impregnable for it to be non-competitive.  If it costs $5 a ton-mile to ship a product by rail and $15 a ton-mile to ship by truck, then what shipper would not prefer rail over truck?  Indeed, if demand for that product drops off significantly when transportation costs exceed $8 a ton-mile, then effectively truck transport is not a competition to rail transport for that product.

I will agree that generalizations are used much too often.  That is why I try to avoid words like 'always' and 'never'.  But market niches do exist.  There are advantages and disadvantages to each kind of transport.  For example, air freight is fast, but expensive.

I think that the railroads are in a transitional period right now, adjusting to market conditions to find the niche in which they are the most profitable.

[Datafever]

And yet, what types of commodities cannot reasonably be transported by truck?  Minerals (such as coal and potash) are brought up as an example.  Grains (such as wheat and corn) are another example.  Liquids (such as ethanol).

Oh, they move by truck just fine.  On a tonnage basis, trucks move 2/3 of the US field crops.  Less than 18% of the tons move by rail.  Now that changes when you measure by ton-miles instead of tons, but since most of the field crops don't move very far, trucks dominate.  Ethanol and coal are also trucked.  For more info on the crops see:

http://www.fapri.missouri.edu/outreach/publications/2004/FAPRI_UMC_Briefing_Paper_04_04.pdf

At one level, don't trucks move almost 100% of field crops for at least some distance?  It may only be a distance of 5 to 20 miles, but I don't think that there are too many places where crop is loaded directly from field to rail.  

[greyhounds]

Yes, I was talking about movement from the elevator.

They used to lay temporary railroad tracks in sugar cane fields and load directly into diminutive trains.  Aside from that, farm products have always come out of the fields on somebody's back, in a horse drawn wagon, or in a truck.

[Flint Hills Tex]

Datafever wrote:

"Domestic manufacturers that are captive shippers are at an economic disadvantage to imported goods. Since imported goods will get low competitive rail rates while domestic manufacturers (at least the ones for whom truck transport is not an alternative) are likely to be tied to only one Class 1 railroad and therefore pay exorbitant monopolistic rates. This gives imported goods an economic advantage over domestic goods and contributes to the trade imbalance.

And yet, what types of commodities cannot reasonably be transported by truck? Minerals (such as coal and potash) are brought up as an example. Grains (such as wheat and corn) are another example. Liquids (such as ethanol).

But these are not the types of commodities that are generally imported. Most imported goods can generally be reasonably transported by truck or rail. Domestic manufacturers of those types of goods can also use truck or rail for transport and therefore they are not captive shippers. Therefore they are not paying outrageous monopolistic rates for transportation of their goods. And therefore, they are on level playing ground economically."


I think you've raised a very good question, to which none of the replies to date has supplied an adequate answer. And it's not like this question hasn't been asked before on this thread: WHY do we need OA, and WHO will benefit from it?

If it is to be the captive shipper, then you have to ask yourself whether appeasing such a small market segment truly justifies the radical infringement of property rights which would be required to be effectively implement OA.

I have another question, though. I've read alot of theory and some statistics on this thread, and now I'd like to see some factual examples (please, no links!) of pricing for captive shippers compared to rates for non-captive shippers and compared to other modes of transportation (primarily trucking). I suspect that the price per ton-mile is lower for almost anything by rail, even for the so called captive shipper, than it would be by truck, but this is just an assumption, as I have no facts to back it up with.

If, however, my assumption is correct, then captive shippers are just belly-aching because they are paying more than other rail shippers, and not, as they would have us believe, because they have no other alternatives.