Rail Freight:Issues and Policy Challenges

“Trouble Ahead – Trouble Behind”

October 24, 2004Rail Freight: Issues and Policy

Challenges2

Overview

Recent History What Works What Doesn’t Work Why? Where Are We Headed?

October 24, 2004Rail Freight: Issues and Policy

Challenges3

Where Did We Come from?Major Trends 1945 - 1980

Rail Industry in Decline Since WW II Intermodel Competition Captures Passengers and

Smaller Freight Shipments Steady Process of Disinvestment Competition Based Heavily on Service Regulation

Held Rates Up Overall Prevented Network Rationalization Limited Service Innovation

October 24, 2004Rail Freight: Issues and Policy

Challenges4

Where Did We Come from?Major Trends 1980 -

“Deregulation” Enabled competition to force rates down Permitted network rationalization Permitted service innovation

Industry Consolidation More Disinvestment Rise of Short-Lines Competition Based Mostly on Cost

October 24, 2004Rail Freight: Issues and Policy

Challenges5

What Works 1980 -

Profitability Improved Since “Deregulation”

Very, Very Efficient Goods Movement Consolidation of Railroads has Permitted

Greater Availability of “Single-Line” Service

Stockholders Well Rewarded During Many Mergers

October 24, 2004Rail Freight: Issues and Policy

Challenges6

What Doesn’t Work 1980 -

Railroad ROI Still Too Low To Promote Aggressive Growth

Marketplace Promotes Bad Outcomes Intensive intramodal competition Incentive to develop only captive shippers Promotes greater use of intermodal moves, at

the expense of “cheaper,” all-rail alternatives Service takes a “back seat” to cost control

October 24, 2004Rail Freight: Issues and Policy

Challenges7

Why Doesn’t The Market Work?

Public Utility Economics Cost per incremental carload often below average cost Competition can result in higher costs Lack of competition can result in higher rates

Increased Shipper Negotiating Power Bundling of lanes into single contract Increased shipper size Long-term contracts increase negotiating risk for

railroads

October 24, 2004Rail Freight: Issues and Policy

Challenges8

Where Are We Headed?

Nationalization Not an Option New Competitive Rules Could Fix

Marketplace, but.......................... Unrestricted Open Access Would

Restructure Industry With Disastrous Consequences

Some Combination of Tax Incentives and Public Money Could Help us Muddle Through