The above-referenced article was in yesterday’s Wall Street Journal - Mon. Jan. 5, 2009 - Page A-5, I believe. It can also be accessed online - at least for approx. the next 7 days (per the WSJ’s website) at:
http://online.wsj.com/article/SB123111502899652523.html
It’s interesting, but not much new to anyone who’s been following this subject for the past several years.
Dear Greedy Something-for-Nothing Shippers:
Go ahead and re-regulate and watch your shipping costs more than double, contrary what you have deluded yourselves to believe while being blinded by skewwed balance sheets.
Get a life!
Very truly yours (not!),
Mud
The farmers, elevators and middle men want the railroads to supply cars whenever they want them and in the quantities they need, all at a super low price, regardless of how much the cars cost, the cost of capital and the rate of return, the price of fuel and all the rest. They have found willing politicians who buy into this on their behalf. The general public will buy into it, as well, because they will only get one side of the story from a media that is too lazy to check the facts at best, and increasingly biased against business at worst.
John Timm
Well, it only seems fair. If the government is going to set the prices that a transportation company can charge for it’s services, it should be able to set Mr. Shipper’s selling price as well. [}:)]
You might as well go right to a wage and price freeze while you’re at it. Paging Richard Nixon…[xx(]
Hmmm…yeah, regulation worked really well the last time around. So well in fact, that countless numbers of railroads went bankrupt due to lack of money from too-low rates they couldn’t change, and the infrastructure itself degraded to mud, rust, and rotted ties. It appears that these shippers think nothing of turning millions a year in profits themselves, but they think the railroads should charge just enough to break even, and keep the status quo. Sadly, there are those in Congress who’ll cry a river over the shippers “plight” and give them what they want. Get ready to relive the pre-Staggers Act days of the 1970s’ all over again!
If I stick up a guy with my own gun I should expect to go to jail but if I can get congress to use their hired guns to rob someone else, like the greedy railroad, drug company, cable provider, electric utility, pick your own corporate bad guy, that is just smart business.
Mac
This history of railroad economic regulation in the US is not a good one. Rate and service regulation severly hurt the railroads and did great and lasting damage to the US economy. Countless loads of freight were diverted from rail to less efficient road and barge movement to the detrimit of the nation.
The most salient example is, I think, “In the Matter of Container Service”, handed down by a lawyer of the Interstate Commerce Commission in 1931.
If you read (and I suggest you do so) a book titled “The Box, How the Shipping Container Made the World Smaller and the World Economy Bigger” by Marc Levinson you’ll find the following quotes:
“(International Sea) Transportation has become so efficient that for many purposes, freight costs do not much effect economic decisions. … It is better to assume that moving goods is essentially costless than to assume that moving goods is an important component of the production process. … Before the container, such a statement was unimaginable.” - page 8.
“The key question asked today is no longer how much capital and labor an economy can amass, but how innovation helps employ those resources more effectively to produce more goods and services.” - page 12.
The theme of Levinson’s great book (he’s an economist) is that the international sea container reduced the costs of moving freight so much that the world economy changed through growth.
Now wouldn’t it have been wonderful to have that level of logistics cost reduction happen here within the US decades before such a development on the international level. It would have made our domestic economy grow and prosper. In fact, such a development of a domestic container system was happening before the idiot government regulators put a stop to it. Domestic containerization began to develop in t
Although I disagree with reregulation I do see the shippers’ point. The article states that some freight rates are doubling. DOUBLING? Why? I can understand and appreciate why these shippers are angry and concerned…just as you and I would be concerned about a sudden doubling of our insurance, phone cost etc.
Furthermore, due to economic circumstances there is plenty of capacity available and costs are down not up (look at fuel for example). How do the rails justify doubling rates? They must realize that doing so would seriously jeopardize their customers as a utility (for example) might have trouble passing that cost on to its own customers.
The railroads are doing this to themselves…truck rates are WAY down…in the present situation no sane trucker would contemplate a large rate increase. What planet are the rail managers on?
This was so interesting I had to pull the volume in our rail library and read it last night. The representation, it turns out is not true. Now, I don’t about the “lawyer” part – it was a decision of the full Commission. I assume you looked up the backgrounds of the full ICC in 1931 and found that they were all lawyers. All lawyers? I’m not too sure about that, but it would be interesting if true.
However, the Opinion itself – and it is a well written and interesting opinion – ultimately stood for the proposition that the Container rates being proposed were based entirely on weight. The ICC pointed out that by offering that alternative, it certainly was competitive – because it eliminated the ability of the railroads to obtain revenue by differential pricing for high value goods.
Yeah, everybody who had been paying higher rates would go for that! They would do it today!
The ICC carefully pointed out that the loss of revenues to the industry would be catastrophic if the NYC was allowed to offer a generic rate based on solely on weight. The NYC itself hadn’t considered that it was losing higher revenue traffic in order to carry the sam
First, thanks to both of you for going back to the original source.
Now this gets really interesting - to me, anyway - but I’ve got to go do some other things for the bi-weekly paycheck. Will try to post again later in the day.
[quote user=“Bagehot”]
This was so interesting I had to pull the volume in our rail library and read it last night. The representation, it turns out is not true. Now, I don’t about the “lawyer” part – it was a decision of the full Commission. I assume you looked up the backgrounds of the full ICC in 1931 and found that they were all lawyers. All lawyers? I’m not too sure about that, but it would be interesting if true.
However, the Opinion itself – and it is a well written and interesting opinion – ultimately stood for the proposition that the Container rates being proposed were based entirely on weight. The ICC pointed out that by offering that alternative, it certainly was competitive – because it eliminated the ability of the railroads to obtain revenue by differential pricing for high value goods.
Yeah, everybody who had been paying higher rates would go for that! They would do it today!
The ICC carefully pointed out that the loss of revenues to the industry would be catastrophic if the NYC was allowed to offer a generic rate based on solely on weight. The NYC itself hadn’t considered that it was losing higher revenue traffic in order to carry the same traffic at lower rates. Whether it was a lawyer or an economist that actually wrote the thing, I don’t know, but whoever it was clearly understood that the NYC was so enamored of its bright idea, that it hadn’t considered the fact that the proposal ultimately wasn’t about containerization – which the ICC pronounced as an innovative idea – it was the idea that NYC was offering a low rate for everything, based simply on weight and that proposal violated the classification system for rate-making that the railroads themselves – then and now – relied on for their revenue structure.
It didn’t matter that the the rates were offered on containers, flatcars, boxcars, or donkeys – the ICC objected to the rate methodology which offered nothing more than one railroad offering a d
Holy Doppelgänger Batman, ya think?[;)]
Gee - The price of everything else goes up on the manufacturing end and mysteriously the transportation provider can’t raise his rates to cover his costs? Meanwhile utilities are guaranteed a set rate profit. Hmmmm…
never mind…
Ulrich,
Regarding your question about doubling of a rate. The party cited was Seminole Power. My suspicion is that this is a “legacy contract”, one entered into 10 years or so ago. At that time the prevailing railroad marketing logic was to lock up the business for as long as possible. Evidently they made no provision for rate increases. As these contracts come up for renewal the railroads are repricing them based on current market conditions and corrent costs and current capacity which is still relatively constrained.
If my guess as to the underlying situation is correct, the power has not seen a real rate increase in 10 years because of the long term contract. Absent that contract rates would have risen a bit over each of the past 10 years and the jump would not be much today. Ten years of 7% increase will about double any number. Typical of shipper PR, they complain about a big jump today, when in fact they have enjoyed a bargain at the carrier’s expense for some extended period of time. Typical media does not bother to find out what is really going on.
The Union Pacific’s 2007 annual report, on page 20, includes the following statement: “Since 2004, we have repriced approximately 75% of our business.” That means that 25% has not been repriced for an indeterminate period prior to 2004.
Mac
The inability of the Class Ones to come up with enough money to rebuild their own infrastructure and haveing to come to Congress for help should say something. Congress deregulated them so that they could make lots of money unhindered by rules and regulations and an agency looking over thier shoulders. When that deregulation took effect the big railroads promised more competition thus more competitive rates and that the existing railroads would prosper. Today there are fewer Class I railroads with less competition and shippers crying foul. Since this is opposite what the industry promised would happen with deregulation, your darn right reregulation will be a subject to be brought up to the STB and Congress. But reregulation does not have to be the same as it was under the ICC. I believe in fact that it would be suicidal for all forms of transportation if it were to be the same. Of course today railroads are not competing against themselves any more, at least not like in the past, but only against other land transportation systems. So what is going to be the crux of the reregulation or no regulation arguement is going to center around the word “competition” followed by the word “service” followed by “responsibility”.
Hearing examiners, in my experience, were always attorneys. Every one that I have ever known was. Our library has a wall full of hearing examiner reports to the Commission. Every single one was authored by “an attorney.”
In this instance, one of the Commissioners was Joseph Eastman. He was hardly a circus clown and was never in his distinguished career suspected of having his opinions “dominated” by anybody.
Hearing examiners didn’t write Commission opinions. I have no idea what your gripe about attorneys is, but you obviously have one, and think that attorneys, by training, were against Containers. Interesting perspective, I am guessing clouded by a divorce or something. Who should the Hearing Examiners have been and why would this one hate Containers?
At the time, railroads carried 95% of intercity freight. Your alleged crisis hadn’t happened yet. And trucks were regulated in 1935 at the urging of the rail industry as trucking’s share of intercity freight approached the burdensome figure of 7% and 90% of that was within a 70 mile radius.
With all due respect…get off your high horse. This is an internet forum, not a court of law with strict, precise rules of order and a judge to enforce them. People diagree with your ideas. Get over it.
You’re probably right about the ten year term; however, I doubt they’re predicating their steep rate increase on 7% year over year. I’ve never heard of anyone in the freight business getting that kind of an annual increase, especially when inflation has been lower over that period. Most carriers would consider themselves fortunate to get 2% annually…in my experience many rates haven’t changed much if at all in the 20 years I’ve been in the business. In fact some have gone down and most shippers today are looking at low
CURE and other groups advocating more regulation of railroad rates claim that the mergers of the roads into 6 major Class 1’s has reduced competition between any two points to generally two lines, at best, and the lack of competition between rail carriers has let them boost rates without fear of loss of business.
I contend it is not any kind of monopoly condition that gives railroads pricing power, rather, it is the lack of any significant excess capacity to handle new business. Given that premise, what would be the point of cutting a rate to get new business? It lends itself to a condition where customers may have to pay more just to keep a spot in the “production” schedule. The ironic thing is that any government mandate to reduce rates also reduces the pile of cash available to expand capacity.
One securities analyst calls reregulation MAD-Mutually Assured Destruction.
The rereg proposals that I have seen floating around Congress would actually be worse than the pre-Staggers regulatory system in many respects, and would subject the rail industry to a tighter regulatory system than was in place before 1980, both for rates and for service. This is not the place to get into a detailed discussion of the various measures (also, I don’t have the time today), but if you look at, say, the Oberstar proposal, you’ll see what I mean.
With respect to your suggestion that there is less rail-rail “competition” these days than there used to be, I suspect you are not very familiar with how railroads “competed” with each other prior to St