Take all the proposed legislation, mix 'em together, and you almost have Open Access!

Trains Magazine General Discussion
1

Was waiting for someone else to post this stuff, but as usual it’s left up to me, so here it goes…

At the annual Railroad Day in DC, rr lobbyists stated their support for an as yet unnumbered Senate bill “Freight Rail Infrastructure Capacity Expansion Act” which would provide a 25 percent capacity expansion tax credit to any company (railroad, trucking, et al) that makes a qualified “freight-rail infrastructure” expenditure. At the same time, they voiced their opposition to the “Railroad Competition Improvement and Reauthorization Act of 2005” (HR 2047) and the “Railroad Competition Act of 2005” (S 919), which would either improve the Surface Transportation Board’s rate challenge process and eliminate excessive fees for filing rate cases (the positive spin) or re-regulate the rail industry (the negative spin). Additionally, they oppose the Railroad Antitrust and Competition Act of 2005 (HR 3318), which would remove railroads’ exemptions from antitrust laws (apparently both sides agree on this result).

Meantime, the chemical industry was also in DC supporting HR 2047, S 919, and HR 3318. There is no word yet as to if they might support the infrastructure expenditure bill, perhaps they feel they would gain nothing if the railroad monopolies have capacity expansions subsidized by the feds, because they might still be subject to the short end of the differential pricing scheme.

What is telling amid all this is that the crux of some of these proposed bills are the same stuff we on the forum had bandied about regarding open access. Hmmmm, tax credits for freight rail infrastructure expansions, introduction of competition based pricing, partial re-regulation, no more antitrust exemption to finally put an end to the anachronism of natural monopoly tendencies of US railroads… with some minor corrections (aka allow the infrastructure tax credit but also regulate the infrastructure side of the equation), these are the basis for the Open Access experiment proposed by some

2

Don’t hold your breath. The Representatives and Senators I spoke with and their staffs weren’t big on the chances for any of the bills you mention. Where were you? With the RRs or the chemists?
LC

3

I think he was the guy telling the RRs which one of the chemists “products” works best!
Ya know, independent consultant stuff!

Ed

4

“Monopolism is counter intuitive to capacity expansion” ??? I wonder what chemicals induced that brilliant assertion.

5

Legislators, legislation, and legislatures are some of the most frightening things on This Planet.

Don’t get me wrong here! They are better than any alternative. But I’ve been involved with a couple, and they do get scary. They generally have no idea what they’re doing, but they have the power to take your property, cause you to be put in jail for doing stuff like not preventing your dog from chasing a rabbit (pending in California), tax your income without limit, etc.

It was probably better when they had little communication and drank a lot.

6

I’m still not sure how the concept of open access will improve capacity and how reduced rates will improve the financial health of the operating railroads.

Let us assume that the non-operating owner of the Sunset Route between Los Angeles and El Paso is making a satisfactory (in his mind) return on investment on his capacity-constrained single-track main line. He has little to no incentive to invest in added capacity because he feels that the expense of adding and maintaining a second mainline track will outweigh any additional revenue to be gained. Therefore, capacity is unlikely to be increased.

Let us further assume that there are several underfinanced operating companies providing discount grain rates between multiple small loading points in Montana and ports in Washington and Oregon. What happens to the rates when these operators suspend rail operations because their rates no longer cover costs? What happens to the shippers who have prepaid contracts with these now-defunct operators?

This outlook may be pessimistic, but you must consider worst-case situations when making a proposal. A firm may elect not to invest additional capital in its business for whatever reason, and a firm may be so underfinanced as to have questionable long-term prospects for survival.

7

Well, in terms of maintaining rates that cover costs, if you take the STB’s 180% RVC standard as the key indicator of “sufficient” revenues from rates, then it would seem that intermodal is not covering the RVC standard. Meanwhile, those Montana grain rates are running well over 200% RVC, so if they get knocked down closer to the 180% standard, the railroad is still covering the costs. The disparity between import intermodal rates and domestic bulk rates is just ridiculous, and anything the forces rates to be sustainable for covering costs yet nondiscriminatory may be a good thing for US production. I personally think the best thing for the trade deficit right now would be for US export commodities to have reduced rates to port, and for import intermodal stuff to have to pay higher rates (which will reduce domestic consumption of imports).

Regarding how one would judge the proper incentive to expand capacity, one thing that is clear is that the current closed access monopolistic system does not provide incentive to expand capacity (otherwise such would be happening right now). Let’s face facts: The railroads have spent the last few decades complaining about “over capacity”, all that in spite of a continually growing economy. (Hasn’t the GDP more than doubled since the 1950’s?) The truth is, there was no “over capacity”, just a refusal to take what the freight transportation market was offering, with railroads seemingly content to defer business to trucks and barge lines.

Frankly, I don’t see how capacity investment can get any worse than it is right now. Why then assume that a non-operating track owner would do worse than what is happening now? If anything, the non-operating track owner has more incentive to expand capacity, because each unit of capacity expansion provides an extra unit of marginal revenue, e.g. the track use fees are predicated on covering all associated costs of track ownership. In other words, there is no disincentive to capacity expansion, because to do s

8

Other postings by FM suggested that the rates that could be charged to operating companies by infrastructure companies would be regulated, not unlike public utilities until fairly recently. In the past, regulated public utilities had little variation in their stock prices and were generally held for their steady dividends, providing a virtually guaranteed income to stockholders. In the current market atmosphere, steady dividends with little stock appreciation do not carry a lot of weight with many large investors such as mutual funds and hedge funds. Consequently, it could be quite difficult for an infrastructure company to attract capital for upgrading its assets. An infrastructure company with a large percentage of its stock held by hedge funds could be expected to expend any retained earnings on stock buybacks rather than additional capacity.

9

For the record, regulated utilities are doing just fine in the stock market. Secondly, what you have to remember is the positive effect a regulated rail infrastructure combined with a relatively unregulated rail transportation sector would have on the stock values of US rail shippers. With the fortunes of rail shippers tied to an OA concept, they would have more than enough incentive to keep that rail infrastructure value up, otherwise their’s might falter.

Of course, this is all conjecture at this point. In keeping with the topic, what I am trying to point out is that the current spate of rail related legislation embodies certain elements of the OA concept. But taken en masse it would still not result in OA or an OA market reaction. For starters, it is difficult to enforce or procure “competition based rates” without actual intramodal competition, which the current legislation does not address. What they are trying to do in terms of dictating what a “proper” competitive rate would be sans real competition will only result in market disfunction. What I ask is that in terms of the rail shippers if all this legislation somehow was enacted into law, would it result in better conditions for rail shippers or worse? Will the railroads grudgingly accept more stringent enforcement of the Stagger’s competition caveats in exchange for the infrastructure maintenance tax credit?

10

What recourse would shippers or operators have if the rate-regulated infrastructure company elected not to invest in increased capacity?
There is an alternative to shipping by rail if you don’t like rail rates: it has been in existence since the 1920’s and is called the truck.

11

If revenues are volume based, why wouldn’t any rational company invest in capacity increases? You see, that’s the difference, because right now revenues are premium based, not volume based. Secondly, a regulated utility generally can’t defer in capital investment if the demand curve stays high and the revenues are steady. The capital spending protocol is implicit in the rate determined by the regulators.

Well, if you want to stretch things that far, why do you say “there is an alternative”, rather than “there are alternatives” to shipping by rail? Truck is just one way of moving something from one spot to another. There’s also car, pickup, bicycle, tricycle, motorcycle (with or without sidecar), barge, ship, paddleboat, jetboat, canoe, blimp, airplane, helicopter, glider, rocket, hod, conveyor belt, wheelbarrow, pram, backpack, surfboard…

Of all these, ships and barges come closest to rail in terms of the amount of stuff that can be moved at one time, and airplanes are best in terms of moving something at speed.

The problem with your logic is that you are avering that the stuff that moves best by rail can just as easily move by truck, thereby making truck a viable alternative. Remember, rails are best at moving large amounts of stuff at speed. You’re not shipping 10,000; 5,000; even 1,000 tons of stuff via truck, ergo the truck is not a viable alternative to rail in most cases.

12

Oh man. I saw Groundhog Day once. That was enough.[;)]

13

Wow, FM said something I agee with…

LC

14

"Finally, what is so hard to grasp with the truism of “Monopolism is counterintuitive to capacity expansion”? That’s Econ 101. "

FM-If that is what you were taught in Econ 101, you ought ask for a refund.

15

Man, that sounds so familar…

16

I saw those two bits in Progressive Railroading and wondered why the grain folks from Montana aren’t in there together with the Chemical guys so they can put more pressure on more legislators.

17

Probably because the farmers feel that they’re getting worked over by the chemical companies regarding the price of fertilizer and pesticides. Farmers aren’t all that different from any other businessmen, they want to minimize costs and maximize their income.

18

Gratuitous opinions on the topic continue to be plagued by complete ignorance of the controversy.

The recent railroad re-regulation proposal in Congress attracted more shipper support than any previous piece of similar legislation. It was directly supported by:

The American Chemistry Council, The National Industrial Transportation League, National Association of Wheat Growers, The Fertilizer Institute, National Barley Growers Association, The American Plastics Council, The Paper & Forestry Transportation League, The Edison Electric Institute, The National Rural Electric Association, Lyondell Petrochemical Company, Dow Chemical, Alliance for Rail Competition, American Public Power Association, Chemical Manufacturers Association, National Council of Farm Cooperatives, The Society of the Plastics Industry, Inc., Transportation Intermediaries Association, United States Clay Producers Traffic Association, Wheat and Barley Commissions in Colorado, Idaho, South Dakota and Washington, Oregon Wheat Growers League, Western Fuels Association, Dow Chemical, DuPont, Glass Producers Transportation Council.

If you will look at the Association for Rail Competition, you will see that its active leadership includes the Wheat & Barley Committees of several states, DuPont, Dow Chemical, and representatives of various energy interests. Its membership includes a veritable cross-sect

19

I’m not surprised that shippers are in favor of re-regulation of rail and presumably truck and barge rates. It gets their costs down with minimal management effort on their part. Of course, to be absolutely fair, the prices that they charge their customers should also be regulated.

20

Like any industry, Electric Utilities have their ups and downs, but in 2005, electric utility stocks advanced 11.7%, well ahead of the S&P 1500 rise of 3.8%, and has overall beat the market by about 110% over a five year average.

TIAA-CREF, the big public employee (primarily teachers, professors) investment account manager, reports that its “Growth Equity & Income (Dividend)” mutual fund has significantly outperformed its “Growth Equity” fund over the past five years. The former is fairly heavy in electric utilities.

Best regards, Michael Sol