Suing For Lower Price

Although very interesting, this thread has strayed a long way from the original question. Henry asked how utilities can reasonably “go back” years later and challenge rail rates they contracted for. Ken answered correctly that usually the old contract has expired and, pending re-negotiation, the railroad has “renewed” the utility at a more-modern tariff. The utility doesn’t like this rate and appeals to the STB, a process that can drag on for years.

A year or two ago the Congressional Budget Office (or whatever it is called now) found that, complaints notwithstanding, “captive” shippers were paying about what they were 25 years ago, corrected for inflation. But of course this does not stop some big shippers (and their demagogue friends in Congress) from trying to pick the pockets of railroad stockholders, which include widows and orphans.

[quote user=“ICLand”]

Well, that’s a new one to me, but the conclusion that they are is hardly “novel.” Most states and the federal government make the claim as well.

Here are some examples:

Ohio. § 5727.01. Definitions.

(A) “Public utility” means each person referred to as a telephone company, telegraph company, electric company, natural gas company, pipe-line company, water-works company, water transportation company, heating company, rural electric company, railroad company, or combined company.

Chapter 2 of Title 54 of the Utah Code: a public utility includes “every railroad corporation, gas corporation, electrical corporation, distribution electrical cooperative, wholesale electrical cooperative, telephone corporation, telegraph corporation, water corporation, sewerage corporation, heat corporation, and independent energy producer not described . . . where the service is performed for, or the commodity delivered to, the public generally.”

California Constitution, Art. IV, § 33.

"Every private corporation, and every individual or association of individuals, owning, operating, managing, or controlling any commercial railroad, interurban railroad, street railroad, canal, pipeline, plant, or equipment, or any part of such railroad, canal, pipeline, plant, or equipment within this State for the transportation or conveyance of passengers, or express matter, or freight of any kind, including crude oil, or for the transmission of telephone or telegraph messages, or for the production, generation, transmission, delivery or furnishing of heat, light, water or power or for the furnishing of storage or wharfage facilities, either directly or indirectly, to or for the public, and every common carrier, is hereby declared to be a public utility

Wyoming: 37-1-101.

I read your paper. You indicate you approve of it. While it discusses a completely irrelevant topic, at page 4, on this point it says this:

“Railroads are, in the main, natural monopolies.”

Thank you.

The “point” of placing the original question into the context of “public utility” theory is because that effectively answers the poster’s question. And “public utilities” are based on the idea of “natural monopolies” which are defined politically, because they are created politically.

In the United States, only the power of eminent domain – a “sovereign” power – can allow these entities to come into existence because otherwise a private corporation cannot just walk up to your door at gunpoint and force you to sell your property to them. A railroad company, an electric power utility, a gas or oil pipeline can do just that, armed with an order from a judge accompanied by the county sheriff with a gun and the authority to use it.

In a nutshell, that’s the power of eminent domain. And you don’t get a railroad line, a transmission line, a telephone line, or a pipeline without it.

And the legal power to compel that was adjudged by a bunch of politicians to be worth overriding the fundamental property rights of the individual because it was in the public interest to encourage efficient transportation. And that’s why the politicians get to define what a “public utility” is, and not you.

It was and is of crucial importance for railroads that they specifically be defined as “public utilities” in each state because only public utilities get the authority they need to condemn private property for their operating purposes. Sorry it gets in the way of your unique theory, but in reality, railroads had to be defined as public utilities. It was so important in California – so thoroughly controlled by a railroad company at the time of the 1879 adoption of its constitution – that the classification of railroads as public utilities was made a constitutional principle.

And it didn’t matter if the goods transported were electric power, electrons of information, oil, gas, people or boxcars: the purely political idea was that the benefit of permitting privat

And as a closing, since economic theory gives me a headache, it is useful to note that the Staggers Act permits – requires – reparations on contracts or tariffs if they are imposed in violation of the relatively complex guidelines that are part and parcel of the Staggers Act.

The interesting thing to note is that, during mergers and consolidations within the rail industry during the 1990s, some good railroad coal rate people ended up working for various Public Utility Commissions or Public Service Commissions.There was a significant knowledge transfer from the railroad companies to these state regulatory agencies about the coal rates – in at least a couple of instances.

And this goes to the idea of the earlier poster who claimed that the electric power utilities are “more of a monopoly” than the railroads, so what are they complaining about?

Well, think about that one, and I don’t mean the non sequitur of being “more of” a monopoly.

If it is true, and maybe it is true for at least some of them, I have no idea, that the electric power companies are monopolies, one characteristic of a monopoly is its power to pass through all of its costs, and cost increases, to its customers.

Why, then, would an electric power utility take the time, invest the enormous sums of money into a rate challenge, and run the relatively high risk of losing, to challenge a coal rate or contract?

  1. It isn’t a monopoly, or

  2. it is compelled to litigate the rates by its regulatory authority based on the regulatory agency’s suspicion that the transportation rates that the electric power utility is using to justify its own electric power rate structure are excessive, i.e. violate the Staggers Act.

And some of those guys are pretty knowledgeable about coal rates.

And what’s just as bad, if not worse - the customers that are being charged “below costs” then think the railroad is wonderful - at best, they stay; at worst, they ship even more at the below-cost rate. So the railroad has lost the “+” side of the equation, and is stuck with the “-” side. Said another way - “Heads - I win; Tails - you lose”.

  • Paul North.

And as that all continues, railroads fail to earn the cash necessary to replace worn out assets-let alone cash to expand-and before long it is the 1970’s all over again.

For those who weren’t around, the US rail system came within a heartbeat of total collapse. There were even some, ideologically opposed to using government funds to prevent the collapse, who advocated the complete abandonment of the Northeast railroads. It finally dawned on the top executives of a dozen or so of the US’s major manufacturing companies that their facilities could be left stranded and the survival of their businesses was also on the line.

The history is well documented and has often been discussed on this forum. Anthony Hatch is an independent financial analyst covering the railroad business. I like his description of reregulation: MAD- Mad Assured Destruction.

&n

Correct. Only now, some 30 - 40 years later, and looking back, do I realize how very close that came to happening, but for the courage and convictions of a few dedicated persons, and some lucky events.

And, there are now much fewer major industries that are dependent on railroads left in the NorthEast US than back then - no big steel companies, few auto plants, coal as an electric power plant fuel source is declining, etc. Query: Fast-forward a few years if re-regulation does occur - without those major manufactuers on the scene and looking out for their own interests, who would then be willing to ‘step up to the plate’ to save railroading yet again ? Might not be any ‘super-hero’ this time around - instead, only a bunch of politicians and/ or bureaucrats who wold be eager to get those pesky freight trains off the tracks so that their pet commuter or intercity rail projects ca

[(-D] [tup] Good one, for this context !

This is a classic example of mis-applying the language from a U.S. Supreme Court case. Not to beat up on the dead horse or ICLand any further, but in general we should be extremely skeptical of any Supreme Court decision as old as 1934, regardless of topic. Second, as Mr. Wilcox astutely points out, it’s a milk-marketing case, not a railroad regulation case - so the quoted language is obiter dicta, which is lawyer-speak and Latin for mere surplusage and being irrelevant to the case at hand - it’s technically not necessary for the decision of that case, because the then-accepted public utility status of railroads has nothing to do with = does not govern or inform, whether or not milk prices should be regulated. Third, it’s from a line of U.S. Supreme Court cases where the Court became intensely involved in critically reviewing legislative enactments, which we now know and refer to as ‘Lochnerizing’ (Lochner was a New York baker - see a pattern here

  1. Nebbia was cited because of its useful language in the context of a railfan forum.

  2. It was written by a “conservative,” business-oriented Court, well before the FDR court-packing plan changed the Su

Wow - that response covers quite a bit of territory - more than I likely have sufficient time to reply to today. But it’s more clear that you indeed know whereof you speak, and I apologize for thinking that the “switch shanty lawyer” remark applied to you. And it’s good to have someone out there who’s conversant in the subject matter - I was going to say ‘worthy adversary’, but I think we’re in agreement on about 3/4 of the points you’ve made, so that doesn’t seem quite right. The rest seems to be largely either a disagreement or misunderstanding of the scope/ subject of the discussion, and maybe the relevance of one line of decisions to another . . . to be continued, I hope.

  • Paul North.

A few further thoughts in response to the Original Post:

  • “Don’t cry for me, Argentina”: If you look at these decisions, and believe the STB’s application of its criteria, the railroads involved are not getting gored. The STB basically allows them to collect all of the many variable costs, plus a substantial percentage above that towards overhead - I can’t recall right now whether it is 60 or 80 %, but for darn sure it’s not 10 %. Further, included in those variable costs are supposed to be the "Cost of Capital

When Staggers was passed captive rail shippers were concerned that their rates would go through the roof. They reached a compromise with Con Rail, etc. saying that if their was no competition a rail rate could not be above a certain threshold (1.85 Rev/Long Run Variable Cost?) if the railroad was earning its cost of capital. Thirty years ago the ICC leaned over backward for the railroads because they were focused on getting CR’s hand out of the Federal Treasury. It worked! Today’s Class I are doing a lot better and the STB’s has gotten a loud message from Congress that captive shippers are being treated unfairly. Fairness is not a business issue but it is sure a political issue.

In the future it will be interesting to see what the train loads of railroad lawyers argue about competition. I think they will argue that competition between railroads, modes, products and markets should all be taken into account. If the STB leans in that direction to help pay for PTC, etc. you will see very few captive customers. There is a coal case currently in the pipeline about a power plant served by one railroad but the railroad saying there is competition via rail/water over Jacksonville so the power plant is not captive.

[quote user=“ICLand”]

  1. Only “old” cases refer to these concepts because they have been long considered “accepted law.” A lawyer would be an idiot to try and take a case to the Supreme Court today to argue that railroads are not legally defined public utilities. No railroad lawyer would want to because it is a railroad creation: the railroads benefit from this entirely. It is fundamental to their existence. I take note that no one on this circuit offered a contrary case, old, new or otherwise. Because it doesn’t exist. This is one of the most clearly settled areas of railroad law.

  2. When I did ask for a paper or support, I was referred to a paper by a couple of modern economists that stated specifically that railroads are a “natural monopoly,” which is exactly the economic foundation of “public utility law” and precisely what Nebbia referred to. And it was written in 2006.

  3. No Class I railroad in the country would want to lose its public utility “status” because that is, historically and legally, how they obtained their eminent domain powers. These statutes are not “Progressive Era” legislation: they are core concepts written into law by politicians bought and paid for by railroad companies.

  4. Eminent domain powers are crucial to the concept of building and growing railroads.

  5. Eminent domain powers do not mean rate regulation at the state level. That is exactly what I said. That’s thanks to the “Commerce Clause” which seems to have been overlooked.

While I am at it, let me address the proliferation of bizarre ideas appearing on this thread.

  1. A modern example of the “utility” of public utility designation is the Powder River Basin. The largest expansion of railroad line and business in modern times was built upon the back of eminent domain powers. That is a particular reason I quoted Wyoming “public utility” law on the topic. That’s how the railroads had the power to build the Powder River Basin

I know NS has rattled the eminent domain saber when trying to find acceptable sites for terminals along the Crescent Corridor.

Some might say the RRs definitely are “foul” or even “fowl” as in “turkey”!

As to gabe’s eminent domain points (1), (2), (5), and (6) only:

DM&E’s PRB extension/ expansion - Some time in the past few months, when the CP announced ‘suspension’ of the DM&E’s PRB extension/ expansion, I recall reading that there were something like 40+ eminent domain cases under way for that project, which CP/ DM&E wou

Have mercy on my grammatically-challenged soul . . .

Gabe

Sorry. I couldn’t resist that one…

That was the most recent big flurry of cases. They are fairly common where there is railroad expansion, whether endways or sideways. It would be something like a disaster if railroads could not exercise eminent domain in the same fashion as other public utilities. There’s not a lot of published opinions, because the law is pretty much cut and dried on the topic and anyone taking an appeal has more money to spend than common sense. The 40 cases referred to here were known to the more general public just because the ranchers got into an uproar and generated some news coverage. Ninety nine percent of eminent domain cases are never heard of by any kind of a general public.

A recent New York case: In the Matter of Genesee and Wyoming Railroad Company, Respondent, v. Myron O. Brady, Sr., Appellant, et al., Respondent (2003) 305 A.D.2d 1033; 760 N.Y.S.2d 792

A better discussion is here: Dakota, Minnesota & Eastern v. State of South Dakota (USCA, 8th Cir, 2004) 362 F3d 512.

This is pretty much all Google stuff.

I find it just about inexplicable that someone might suggest that railroads don’t really “need” eminent domain anymore. Or that somehow, the fact that they – and that pretty much goes for all the public utilities these days – don’t need it “much” justifies changing the rules regarding public utilities who used eminent domain to get what they have today. I suppose that’s a political view: a Hugo Chave

Usually in the context of making it clear that the topic of public utilities includes railroads because there are people out there who do not know they are treated the same. This thread is pretty much proof of the need to do that.

Please locate and identify the case that 1) treats them disjunctively, and 2) specifies why a railroad is not a public utility.