(erielack) ICC; was: More Merger Scenarios - Comments

["Paul Brezicki" <doctorpb_@_bellsouth.net>]

(Warning: lengthy post, read only if interested in analysis of the effects 
of regulation.)

Jim and Randy,

I respectfully disagree. As I've said previously, it is difficult to 
overestimate the damage done to railroads by the ICC, as well as the cost to 
society. Your position overlooks the far-reaching deleterious indirect 
effects of regulation, and supports the myth that RR's problems were largely 
self-inflicted by mismanagement. Few would argue the necessity of the 
creation of the ICC in 1887 to stabilize RR cartels. The problem came in 
later years when its powers were expanded, particularly in 1920 when it 
should have been scaled back in the face of emerging competition. Instead, 
it gained jurisdiction over minimum rates, and building and abandonment, 
among others. Yes, it was simply carrying out the mandate given to it by 
Congress, but it had a fair amount of discretion over how it was interpreted 
and of course, complete control over how efficiently it was carried out.

One of the ICC's goals was to promote capital investment as well as 
safeguard shareholders' equity, but in fact, it achieved the opposite. It 
attempted to engineer various merger scenarios in true Big Government Knows 
Best tradition, instead of allowing the free market to determine what was 
needed.

Expanded regulation came at precisely the wrong time. The rails became 
heavily regulated in the manner of utilities which generally enjoyed 
geographic monopolies; meanwhile, their monopoly disappeared in the face of 
competition. 1920-76 was indeed the era of Positive regulation: positive for 
the less-regulated trucking and barge lines, and destructive for the rail 
network.

A big problem with rate regulation was the support of a "value"-based tariff 
structure (roughly the ratio of value to weight of a commodity). As well as 
requiring armies of personnel to administer this structure, it kept rates on 
manufactured goods artificially elevated, which had two effects: the 
tendency to balkanize commerce into self-sufficient regions, reducing the 
available long-haul traffic the RR's are best suited for; also, diverting 
traffic to unregulated truckers who based rates on actual cost of providing 
service. Prime casualties were the container systems developed by NYC and 
PRR in the 1920's. Rates were FAK (freight-all-kinds) based on weight and 
distance, ie: cost. In 1931 the ICC determined that FAK threatened the 
existing rate structure, and raised container rates so high it killed off 
the business, setting containerization back 40 years.

The ICC approach to merger regulation tended to preserve the regional 
cartels that existed in the late 19th century. At the same time, with the 
"dead hand" of regulation restricting the ability of management to innovate 
and seek new markets, RR's concentrated on controlling costs, especially 
cost of labor. This entailed bigger power for longer trains, and bigger 
yards to classify cars more efficiently. Longer trains mean reduced 
frequency and service degradation. They also reduce equipment utilization, 
increasing the industry's capital costs, thus making it difficult to attract 
investment capital. Cost control also provided the incentive for merging 
parallel, competing lines, because this was where the cost savings were: 
elimination of duplicate routes and facilities. EL (list content!), SCL, PC 
and BN are examples of this. What was needed instead were end-to-end 
mergers, creating true transcons to compete with the emerging coast-to-coast 
truckers. However, this type of combination produces minimal cost saving. I 
often refer to the Rock Island case as a pivotal example of a dithering, 
counterproductive ICC. This merger proposal extended the SP to KC and the UP 
to Chicago and St Louis, a small step in the right direction; it was 
submitted in 1964 and paralyzed the ICC for 9 years. After 4 years and 
45,000 pages of testimony, the lead ICC examiner handed off the case due to 
health problems, and his substitute, in Fred Frailey's words, "went into 
deep hibernation" for 5 years before rendering an opinion. It attached so 
many protections for competitors and the Rock deteriorated so much during 
the delay, that UP and SP bailed and the Rock entered bankruptcy in 1975. 
Your tax dollars at work. It is correct to say that progressive rail mergers 
were often opposed by competitors. However, ICC mechanisms provided the 
means by which opposing interests could hold them up. If the Commission 
considered itself the arbiter of the evolving rail map, it should have 
exhibited leadership instead of paralysis.

As RR's became increasingly a long-distance mode, their restriction to 
regions (or ICC "districts") meant that by the 1950's, over half of rail 
traffic was interchanged. This mandated that all rolling stock must be 
compatible and therefore, similar. This stifled innovation since the cost 
and logistics of modifying or replacing the entire car fleet was too great. 
This is largely why the long-obsolete late-19th century innovations, the air 
brake and semi-automatic coupler are still with us. Combined with the long 
trains and hump yards mentioned above, they produce the slack action and 
violent coupling impacts that damage cargo and help divert it to trucks. A 
route structure consisting of a handful of competing transcons would have 
less need for compatibility. Each system would have been less beholden to 
existing technology, promoting creation of modern systems incorporating 
fully automatic couplers and electropneumatic brake systems, integral trains 
etc.

Again we turn to intermodal for a couple of instructive examples. NYC's 
Flexivan had its shortcomings, but features including the fuel efficiency 
inherent in low tare and low profile made it in some ways superior to 
conventional piggyback. If NYC had become part of a transcon system (say, 
NYC+ATSF+MILW), the technology could have been further developed. Instead, 
it was jettisoned in favor of conventional TOFC to make NYC combatible with 
parallel merger partner PRR and western connections (by the mid-60's close 
to half of Chicago intermodal loads were interchanged). Conventional TOFC 
used the LCD (lowest common denominator) profile that everyone could use: a 
long, inherently unstable flat with heavy deck to accomodate circus-loading 
that put trailers with their heavy wheel assemblies up where wind resistance 
was maximized. Although shifting to a more efficient profile of articulated 
skeleton platforms did not entail use of exotic technology, it did not occur 
on a large scale until after dereg because Trailer Train was reluctant to 
jeapordize its vast investment in long flats.

So in sum, regulation under the ICC produced or contributed to the following 
deleterious effects on RR's:
1. A rate structure which tended to balkanize commerce and minimize the 
long-distance traffic the rails are best suited for.
2. A rate structure which stifled innovation and diverted traffic to trucks
3. An approach to merger regulation which tended to restrict RR's to limited 
geographic areas; this in turn helped perpetuate use of obsolete technology 
which damages cargo, diverting traffic to trucks, and which discourages 
capital investment. Limited geographic reach also place the industry at a 
competetive disadvantage to coast-to-coast trucking.

The above discussion just scratches the surface; it would require a book to 
fully document the subject. A conservative estimate of the overall annual 
cost to society of the inefficiencies produced by ICC regulation is $5 
billion in 1972 dollars. Clearly, it was an archaic, counterproductive 
authority which should have been scaled back in the 1920's, and abolished 
and replaced with a limited, more streamlined mechanism like the STB decades 
before this actually occurred. In combination with publicly subsidized 
competition, it almost resulted in nationalization of the rail network. As 
evidence, look at what happened to the industry after dereg: solvent 
carriers, a doubling of traffic, and a decline in freight rates in constant 
dollars. We're still dealing with the legacies of regional carriers and 19th 
century technology, but at least the trend is now in the right direction.

Anyone who would like a list of references on this subject can contact me 
off-list.

Paul B

From: "Jim Guthrie" <jguthrie_@_pipeline.com>
Subject: Re: Re:Re: (erielack) More Merger Scenarios - Comments

Randy writes:

> The ICC gets a bum rap.  Every now and then (three or four times a day), a
> posting blames the ICC >for all the past, present and future woes of the
> railroad industry in general and, specifically, for denying >us the
> business structures we would like to see -- even while we can't agree on
> what they would be.

AMEN. Thanks for injecting a note of sanity here.

The other thing I find interesting is the tendency of railfans (and others)
to treat the ICC as if it were the same agency with the same mission over
its entire life. One way to break it down is the era of Negative Regulation
(1887-1920), Positive Regulation (1920-1976) and Deregulation (1976-1995).

In the era of negative regulation, it was "The People" vs the big bad
railroads. But that period is subdivided again -- for the first 15 years or
so, the ICC didn't even think it had much in the way of powers to do
anything, and it didn't. The railroads still maintained their own rate
cartels as best they could -- even employing the NYS&Ws Garrett A Hobart as
one of the enforcers (list content).

After the DL&Ws Truesdale, the Erie's Eben Thomas and Fred Underwood (more
list content) and the other anthracite barons insulted President Teddy
Roosevelt in 1902, the calls for an agency with teeth were answered by a
Presidnet of the United States who was not going to put up with B.S. from
these railroad guys.

World War I turned out to be a disaster for the railroads -- not as in the
sense of later railroad propaganda about the evils of the USRA (which
actually left management in place), but because the railroads squabbling and
inability to handle demands were preventing execution of the war effort --
hence government direction to get freight moving (there's nothing in Penn
Central's operations mismangement that wasn't SOP on the part of the Erie,
PRR, DL&W and most of the rest in the months immediately preceding the
USRA).

With passage of the Transportation Act of 1920, there was a major change --
including a mandate to merge railroads in a smaller number of balanced
carriers. One of the ICCs goals (and that of the Prince plan and the rest)
was to merge everyone so as to protect the security holders -- people who
owend stocks and bonds -- or all the railroads by making sure the strong
also had to take care of the weak.

Once can make the case that the experts working for the ICC had a much
better handle on the long range economics of the situation than the
railroads' own lawyers and economists. And that men like John Barriger and
other familiar names of railroading management from the 50s and 60s (and the
merger movement of the era) were products of the ICC merger effort.

Some plans -- like the Vans' C&O-PM-Erie-NKP merger were unacceptible
because they would weaken the competitors without additional mergers and
protections. In the long run, the DL&W and LV would have been wiped out as
the anthracite industry went away, for example. And the mandate was to
protect and enhance railroad investment, not to destroy it.

The Great Depression made a mess of everything, of course, and one could say
World War II did as well. But the railroads managed a magnificent job during
the war, no matter how much regulation was out there.

Congress and a succession of Presidents were involved in rate regulation to
be sure, but the biggest "enforcer" of what we might describe as bad
decisions by the ICC were other railroads, using protests and political
clout alike to tear down each other.

Did the ICC fail in some cases? Sure. Probably the most eggregious was its
utter disinterest in enforcing a U.S. Supreme Court ruling in 1946 that
banned racial segregation in interstate commerce -- i.e. trains and buses.
When the Freedom Riders forced the issue, embarassing the Kennedy
administration, Attorney General Bobby Kennedy told the ICC to enforce the
law it had ignored for 16 years -- and that was the end of Freedom Riders
(and Jim Crow Coaches on the railroads).

Railroads and airlines were deregulated in the Carter administration, of
course (Reagan deregulated Savings and Loans <g>); FWIW, Boxcar freight was
deregulated almost at the beginning, and has just about disappeared. That's
a great toic by itself <g>.

In any case, we fast-forward to today, where the issue has become lack of
capacity in a deregulated environment, causing a huge increase in
transportation costs (with no benefit to the invester -- at least of you
listen to that hedge fund hectoring CSX <g>).

But in the end, whatever one thinks of regulation pro or con, it should warm
the hearts of EL list members that The presidents of the DL&W and the Erie
were among the fewer than a dozen people most responsible for giving us
railroad regualtion in the first place.

Cheers,
Jim Guthrie
ELHS #1296
 


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