Just like a bad penny


Some ideas possess more lives than a cat. No matter how thoroughly defeated and deeply buried those schemes may be, they tend to rise again.

In our case, we might call them the undead of domestic transport policy.

A knowledge of the past tends to work wonders and should be sufficient to keep most of these misconceptions at bay. Alas, it's the very people who'd benefit most from a solid historical perspective that seem to have the biggest mouths.

Currently, some of the biggest - and scariest - mouths around are the ones screaming for railroad reregulation.

Just this morning, an on-line version of an upcoming Fortune magazine feature article was posted to the CNNMoney site. It's entitled "Railroads: Cartel or free market success story?" The usual arguments are rehashed, including how the relatively small number of extant Class Is creates an untenable situation since, in theory, such a limited field inevitably leads to activities like price-fixing.

Freight rates are "skyrocketing." The major railroad systems, all part of a massive "conspiracy" with their C.E.O.s members of a "cabal," are "trying to bleed [shippers] dry." Meanwhile, the S.T.B. has proven "impotent" as a regulatory body.

It gets worse.

We're reminded that the Department of Justice originally opposed UP's absorption of the Southern Pacific Lines (but never informed what might have happened to the Espee had that merger not occurred).

The American Bar Association is quoted as stating the railroad industry benefits from "naked economic protectionism."

Keith Smith, Chief Procurement Officer of the chemical powerhouse DuPont, is said to "feel powerless" against the presumed oligopoly.

Bill Koch (whose brothers run Koch Industries), while reiterating his family's belief in smaller, less obtrusive government, strongly advocates the idea "that railroads be tamed by regulation." He told Fortune, "They're in a position of virtually absolute power."

Heard enough?

There are a few sane comments interspersed amidst the drivel, including one by the UP's Jim Young. He ruefully remarked that many folks just "don't understand the financial realities that are out there."

Those realities are legion. Most of us could recite a goodly number of them in our sleep (and, at times, probably have!).

Our railroads, unique in the transportation world, own, operate, maintain and pay taxes upon their own infrastructure. That advantage doesn't come cheap.

Whatever the presumed monopolies railway companies enjoy, they are more than offset through the very real competition provided by other transport modes - every one of which directly benefit from ready access to the taxpayer's pocketbook.

Generally speaking, our Class Is remain "revenue inadequate." The S.T.B. still postulates (and rightfully so) that none of the majors generate returns which might justify calls for reregulation.

Sadly, the dearth of historical knowledge among our elected officials keeps the most salient fact well hidden: it was just over three decades ago that our entire railroad network was on the verge of collapse...due to excessive regulation! There was a profound lack of reinvestment in the property. True technological innovation was scarce. Most of the changes seen came in the form of cutbacks, abandonments and bankruptcies.

Back then, our industry was often viewed as a societal anachronism, long past its prime and with little (or no) future. Today, that isn't the case.

I understand shippers wanting to see their costs go down - everybody does! - but fair is fair. Respected, mainstream publications should inform readers of the basic facts, leaving anti-train diatribes to Bob Szabo and his ilk.

There are many notions which, like that ol' bad penny, just won't go away. In the railway world, most seem tied to passenger service (since it tends to interest the public more than coal and containers). They include splitting Amtrak up into separate Northeast Corridor and national networks (divide and conquer, eh?), replacing new-start rail transit projects with "Bus Rapid Transit" lines (what about T.O.D.?), and the "profitability" of High Speed Rail service (so, where are the private investors?). Aggravating? To be sure; but, none of these fallacies approach the spectre of reregulation: a proposal which offers a few potential short term gains for a handful of businesses while guaranteeing the eventual collapse of our privately owned and operated railroad industry.

UP's Young summed it up nicely. If government interference ever approached its previous levels, railroads would lose their competitive advantages and reasonable returns would vanish...followed by capital expenditures. "If you reduce the profitability of the industry, you're going to reduce capital," he said. "The math is pretty straightforward."

Yes, sir; it is.



  • Capitalist Henry Luce, founder of Fortune magazine and its parent, Time Inc., would be spinning to think that his creation was disseminating such bilge.  Just a few thoughts, and thanks, Garl, for spreading this around.  First, Oilman Koch qualifies for the sobriquet of "socialist wearing a capitalist suit."  This right-wing nut case wants small government as long as it serves his purposes.  Then he wants the very government regulation that he opposes for his own business.

    The railroads have not been found revenue adequate by the STB, although they are closer to that status than in many years.  I won't ue a term like "fair."  Fair is in the eye of the beholder and the mouth of the utterer.  This whole railroad regulation brouhaha is over the split of money between carrier and shipper.  If the carrier is able to control capacity as a means of extracting more of the price of moving freight, then the shipper will pay more.  If the shipper succeeds in reregulating the railroads, it will pay less.  Even a right-wing nut job can understand that.  Regular readers may detect a somewhat greater tone of annoyance in this comment.  That's because I have been fighting this battle since the Penn Central went bankrupt in June 1970.  It gets tiresome.

  • Here's another bit of truth about the shipper-carrier follies.  The shippers all say the same thing (Bob Szabo, their lobbyist, may represent the forces of darness, but he's good at it)  The cite long term conteracts that expired, followed by sharp increases in rail rates.  Well, of course.  Even a dumb shipper knows that the long term contracts were negotiated when the supply-demand equation favored shippers.  Railroads, coming out of the regulatory era, were happy to get the commitment of tonnage and accepted rates that did not cover fully allocated costs.  No longer.  After a 20-year contract expires, the shipper is not going to get a renewal at the same old rate.  Now, the supply-demand equation favors the railroads.

    As for the M&G guy prattling that he cannot use trucks because his supply chain is based on rail service, I'd like to see him explain all the shippers who terminated rail service when relocating a plant served their purpose.  They didn't worry about the railroads, its employees, its supplier, or its stockholders.  Well, guess what?  I dont give a rip about M&G.  The Fortune article is worse than Garl said.

  • Larry:

    Thank you so much for your comments - and for keeping me on the straight and narrow regarding my remarks!

    I don't know what I was thinking when I mentioned the Class Is "revenue adequacy." Somehow, I was mistakenly differentiating between that and "cost of capital"...even though the definition is pretty straightforward:

    "A railroad is considered revenue adequate if it achieves a rate of return on net investment equal to at least the current cost of capital for the railroad industry."

    I plan to alter my composition's text before bedtime.

    A few simple statistics point out the struggles we still face:

    In 2005, cost of capital was defined as 12.2%. Only NS made the grade.

    In '06, the percentage was 9.94, reached (or surpassed) by NS, the SOO Line (CP) and BNSF.

    '07 found NS and SOO still on the list. The industry's minimum goal? 11.33%.

    Finally, in 2008, Norfolk Southern was once again the sole claimant. Cost of capital was pegged at 11.75%.

    So, what about CN's U.S. holdings (such as the IC and GTW)? What happened to UP, KCS and CSX? Seems they were all notably absent during this entire four year timeframe.



  • Okay...

    I've completed my editing.

    By the way, just in case anyone's having trouble locating the original article, here's a direct link:



  • Garl:  Here's some thoughts that you and others may wish to keep in mind when contemplating "revenue adequacy," something I'm sure you do constantly, right?

    This is a regulatory standard and I am unaware of any investment bank that uses it.  You are correct in your definition.  The cost of capital is, of course, a moving target and the degree that it changes - up or down - affects the "revenue adequacy" of any carrier.  A railroad may not be on the revenue adequate list, yet it may be doing superbly well as a real business.  As the calculations are performed, a railroad may be revenue adequate one year, earn even more the next, but not be revenue adequate because the cost of capital may have increased even more.  This is, as I said, a regulatory standard.  A railroad that is determined to be revenue adequate may not participate in general rate increases.  Of course there have not been any such increases since Staggers became law in October 1980, but that's what the law says.  No distinction about being meaningful or not.  This is the government we're talking about.  Oh, and the other significant factor in revenue adequacy: the burden of proof in a rate complaint shifts from the complainant (shipper) to the respondent (carrier.)  Of course if a railroad is revenue adequate and does not take rate increases, it is only logical that a competing carrier that is not revenue adequate will feel inhibited from taking rate increases because it might lose traffic to the competitor that effectively finds its rates capped.

    The STB determinations of cost of capital and revenue adequacy are applied to the U.S. operations of CN and CP, but may not apply to their Canadian operations.  I'm sure the accountants this is just splendid as it virtually guarantees full employment.