Volume 1 Description of the U.S. Freight Railroad Industry
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VOLUME 1 DESCRIPTION OF THE U.S. FREIGHT RAILROAD INDUSTRY Laurits R. Christensen Associates, Inc. Madison, WI November 2009 Revised Final Report Prepared for The Surface Transportation Board Washington, DC Volume 1 I VOLUME 1: CONTENTS ABBREVIATIONS LIST OF FIGURES LIST OF TABLES CHAPTER 1 INTRODUCTION AND OVERVIEW OF VOLUME 1 1A. OVERVIEW OF THE U.S. FREIGHT RAILROAD INDUSTRY............................ 1-1 1B. ECONOMIC CHARACTERISTICS OF NETWORK INDUSTRIES WITH COMPARISONS TO THE RAILROAD INDUSTRY................................... 1-2 1C. REVIEW OF ECONOMIC STUDIES OF RAILROAD PRICING, COSTS, PRODUCTIVITY, AND INDUSTRY STRUCTURE................................ 1-3 1D. CONCERNS ABOUT THE PERFORMANCE OF THE U.S. FREIGHT RAILROAD INDUSTRY. ..................................................................... 1-4 CHAPTER 2 OVERVIEW OF THE U.S. RAILROAD INDUSTRY INTRODUCTION ........................................................................................................ 2-1 2A. ROLE AND IMPORTANCE OF THE RAILROAD INDUSTRY IN THE U.S. ECONOMY ..................................................................................... 2-1 2B. REGULATORY HISTORY................................................................................... 2-3 2C. EVOLUTION OF THE POST-STAGGERS ACT RAILROAD INDUSTRY ........... 2-6 Industry Structure ................................................................................................ 2-6 Freight Railroad Traffic ...................................................................................... 2-11 Industry Performance ........................................................................................ 2-14 CONCLUSION.......................................................................................................... 2-15 CHAPTER 3 ECONOMIC CHARACTERISTICS OF NETWORK INDUSTRIES WITH COMPARISONS TO THE RAILROAD INDUSTRY INTRODUCTION ........................................................................................................ 3-1 3A. IMPORTANT ECONOMIC CHARACTERISTICS OF NETWORK INDUSTRIES 3-2 3B. COST STRUCTURE AND PRICING IN NETWORK INDUSTRIES..................... 3-3 Background ......................................................................................................... 3-3 Cost Structure and Pricing in the Telecommunications Industry.......................... 3-5 Cost Structure and Pricing in the Postal Industry ................................................ 3-6 Cost Structure and Pricing in the Trucking Industry............................................. 3-7 3C. COMMON CARRIER AND UNIVERSAL SERVICE OBLIGATIONS................... 3-8 Background ......................................................................................................... 3-8 Obligations in the Telecommunications Industry ................................................. 3-9 Obligations in the Postal Industry ...................................................................... 3-10 Obligations in the Trucking Industry .................................................................. 3-10 3D. OPEN ACCESS AND COMPETITION .............................................................. 3-10 Background ....................................................................................................... 3-10 Open Access and Competition in the Telecommunications Industry................. 3-11 Open Access and Competition in the Postal Industry........................................ 3-12 Open Access and Competition in the Trucking Industry .................................... 3-12 3E. MPLICATIONS FOR INFRASTRUCTURE IMPROVEMENTS.......................... 3-12 Background ....................................................................................................... 3-12 Infrastructure Investment in the Telecommunications Industry.......................... 3-13 Infrastructure Investment in the Postal Service Industry.................................... 3-13 Infrastructure Investment in the Trucking Industry............................................. 3-13 3F. IMPLICATIONS FOR THE RAILROAD INDUSTRY .......................................... 3-14 Railroad Industry Cost Structure and Pricing..................................................... 3-14 Railroad Industry Common Carrier and Universal Service Obligations ............. 3-14 Railroad Industry Open Access and Competition .............................................. 3-15 Implications for Infrastructure Improvements in the Railroad Industry............... 3-15 CONCLUSION.......................................................................................................... 3-15 Volume 1 II CHAPTER 4 REVIEW OF ECONOMIC STUDIES OF RAILROAD PRICING, COSTS, PRODUCTIVITY, AND INDUSTRY STRUCTURE INTRODUCTION ........................................................................................................ 4-1 4A. BACKGROUND................................................................................................... 4-2 4B. RAILROAD PRICING STUDIES.......................................................................... 4-4 Regulatory Oversight........................................................................................... 4-5 Economic Framework.......................................................................................... 4-6 Studies Addressing the Effects of Partial Deregulation ....................................... 4-6 Studies Addressing the Effects of Competition.................................................... 4-8 Studies Addressing Captive Shipper Issues........................................................ 4-9 4C. RAILROAD COSTS, PRODUCTIVITY, AND INDUSTRY STRUCTURE .......... 4-11 Pre-1970 Studies............................................................................................... 4-11 Late 1970s through 1980s................................................................................. 4-12 1990s to Present ............................................................................................... 4-14 CONCLUSION.......................................................................................................... 4-16 CHAPTER 5 CURRENT CONCERNS ABOUT THE PERFORMANCE OF THE U.S. FREIGHT INDUSTRY INTRODUCTION ........................................................................................................ 5-1 5A. SYNOPSIS OF 2006 GAO REPORT ON U.S. FREIGHT RAILROAD INDUSTRY .................................................................................... 5-1 5B. OVERVIEW OF STAKEHOLDER INPUT PROCESS ....................................... 5-4 Interview Protocol.............................................................................................. 5-5 Stakeholder Selection ....................................................................................... 5-5 Rail Competition Study Advisory Panel............................................................. 5-6 5C. SUMMARY OF STAKEHOLDER FEEDBACK.................................................. 5-7 Capacity Issues................................................................................................. 5-8 Rates Issues ..................................................................................................... 5-9 Competition Among Railroads......................................................................... 5-11 Service Quality Issues..................................................................................... 5-12 Captivity Issues............................................................................................... 5-13 Cost Shifting.................................................................................................... 5-14 Railroad Earnings............................................................................................ 5-15 Access to Rail Networks ................................................................................. 5-15 Issues Related to Class II and Class III Railroads........................................... 5-16 Legislative Proposals ...................................................................................... 5-17 STB Issues...................................................................................................... 5-18 5.D ADDITIONAL RESEARCH CONSIDERATIONS............................................. 5-20 Capacity—Railroad Equipment Markets ......................................................... 5-20 Rates—Fuel Surcharges................................................................................. 5-21 Costs of Service Quality Issues....................................................................... 5-21 Cost Shifting.................................................................................................... 5-21 Network Access .............................................................................................. 5-22 Critical Evaluation of Rail Demand Growth Projections................................... 5-23 CONCLUSION.......................................................................................................... 5-23 APPENDIX 5-A: MEMBERS OF ADVISORY PANEL.............................................. 5-25 REFERENCES ABBREVIATIONS III ABBREVIATIONS 3-R Act Regional Rail Reorganization Act of 1973 4-R Act Railroad Revitalization and Regulatory Reform Act of 1976 AAR Association of American Railroads AFC Average Fixed Cost ATC Average Total Cost AVC Average Variable Cost BEA Bureau of Economic Analysis BLS Bureau of Labor Statistics