'5: CONGRESSIONAL ~ . RESEARCH ‘ ‘ Universi of Missouri - Columbia SERV"’E |l||||| ||||| ||||I|||||| |||| ||||||||||||||||||| LIBRARY OF - _ « CONGRESS 10-10 861242 RlILROADS: REGULATORY ISSUES ISSUE BRIEF NUHER IB79003 AUTHOR: Fischer, John W . Econom ics Div i sion THE LIBRARY or consmass consnzssronu nmnanca sznvxcn MAJOR ISSUES SYSTEM DATE ORIGINATED glggggzg \ DATE UPDATED ggggggg FOR Annfrxouzu. INPORHATION CALL 287-5700 Oil 21 cms- 1 11379003 upnmmr-on/13/so »L§§UE..D.§.1.’..I.NI2l.0 Railroading is an industry that has been in decline for a long time. some industry spokesmen and supporters have«cited the extensive rate and service regulation administered by the Interstate Commerce gctmmission (ICC) as a major element in the decline. The ICC has been slow to act on numerous important cases, and many in the industry are of the opinion that it has kept many rates unreasonably low. Abandonments and new services are also thought to have been unreasonably delayed by the ICC. The railroads see some degree of deregulation as one means by which the position of the industry can be strengthened. By allowing rails greater freedom in setting rates, abandoning service, and offering different types of service, it is believed that they will be in a better position to compete with . other providers of transportation, such as trucks and barges. Throughot its existence the Interstate Commerce Commission (ICC) has been charged with protecting the public from predatory and discriminatory practices engaged in by the railroads prior to regulation. This protection derives from over eighty years of administrative rulemaking and case law, wmuch of which was promulgated during a period when railroads enjoyed a virtual monopoly over U.S. inter-city transportation. As the role of the railroad has changed, the ICC has often found it difficult to shift its regulatory thrust to better address the needs of the industry. The position of the railroad in American History is unique and many of the traditions of railroading have become part of our folk heritage. Yet, the railroads have not always been seen in a romantic light. In the last quarter of the nineteenth century railroad owners were considered by many of their critics to be “robber barons." Because of Federal and local incentives, railroads were being built at a fantastic rate often with insufficient regard for the economic need for a particular line. The impetus behind this growth often was speculative. Builders were offered lucrative land grants and other inducements to build in.a given area. The result often was a disjointed rail network that in many places failed to have a traffic base adequate to support its operation. ywhere a. railroad had a monopoly, the rates often nwere exhorbitant. Where it.had competition, it often engaged in rate wars, rebating, and other activities of both a legal and illegal nature to attract traffic. one of the results of this confusion was a call for some degree of public control over rail operations. This view was originally manifested in the so ‘called "Granger Laws” passed by individual States. when many of these were s‘nuck down in the Courts, usually because of the "Commerce Clause" ind the Constitution, demand for regulation was transferred to the national level. The Act to Regulate Commerce of 1887 was the result. The Act established the ICC, though it would take several more acts, going well into the twentieth century, before the ICC would have real power over rail rates and service. The ICC now reviews proposed rail rates on all commodities. Further, it has review power over all rail abandonments, and monitors almost all important CRS- 2 1 1379003 UPDATE-O’-1/18//80 aspects of rail mergers and operations. FINANCIAL HEALTH OF THE RAIL INDUSTRY In 1977 the railroad industry had a net rate of return on its investment of only 1.26%, among the lowest for any industry in the Nation. And, in 1978 it fared little better, improving to 1.62%, based mainly on the improved financial positions of western railroads. Railroad financial problems certainly are not a new phenomenon. The creation of the National Railroad Passenger Corporation (Amtrak) to take over operation of unprofitable passenger rail service was only symptomatic of many problems in the rail industry. The collapse of the Penn Central in June 1970 was the first big contemporary bankruptcy in the industry. This remains the single largest business failure in U.S. history and came only two years after the Pennsylvania and the New York Central had merged to form the nation's largest railroad. The Penn Central collapse was quickly followed by that of several other northeastern railroads, leaving most of the Northeast's and a good portion of the Midwest's rail network in receivership. These roads initially were kept in service by emergency Federal grants. This, however, was not a satisfactory solution. The Regional Rail Reorganization Act of 1973 (3R Act), created the United States Railway Association (USRA) to study the problem and recommend a solution. The final system plan arrived at by USRA determined the shape of what became the Consolidated Rail Corporation (Conrail), implemented under the Railroad Revitalization and Regulator Reform Act of 1976 (HR Act). Since it began operating on April 1, 1976, Conrail has failed to live up to expectations. Formed as a private, for-profit corporation with Federal financial backing ($3.3 billion has been appropriated to date), Conrail was expected to become a profit—making operation within five years. This has not been the case. Conrail's losses during its first two years of operation have far exceeded loss projections, and profitability seems as far away as ever. with the knowledge that Conrail might require even further Federal funds, USRA is talking of going back to the drawing boards to find another solutiona. Among those being discussed are the sale of Conrail lines to other healthy railroads and creation of a much smaller railroad with the vast majority of its branch lines either abandoned or operated by local authorities. 9 Even as Conrail continues to lose large sums of money, several railroads in the Midwest are in extreme difficulty and one, the Chicago, Rock Island and Pacific (Rock Island) has been orda:ed to liquidate. In addition, the Chicago, Milwaukee, St. Paul 8 Pacific (The Milwaukee) seems destined soon to be reduced to less than half its percent size. The Chicago and Northwestern and the Illinois Central Gulf have also serious financial problems that could make them prey for the same fate. The situation of railroads in New England is equally bleak. The Boston and Maine is in receivership, the remaining lines could follow. The Delaware and Hudson (DER), which almost doubled in size by bei required to asborb parts of bankrupt lines as a result of USRA's desire to maintain some competition at the time of Conrail's creation, is also on the verge of bankruptcy. The D83 has been unable to operate its new segments without substantial Federal assistance in the form of USRA loans. The Norfolk and Western, of which the D811 is an indirect subsidiary, has been unwillng to come to its aid. The result is that the DGH is currently able to CRS- 3 IB79003 UPDATE-OH/18/80 continue operating only as long as Federal funds are available. when these cease, as USRA has suggested they will, the railroad seems certain to join 5 many companions in receivership. ABANDONHENT As a result of the Transportation Act of 1920, the ICC has the power to grant or deny rail abandonments, as well as new rail construction (of which there has been very little). Since 1916, when rail mileage in the nation reached its peak, rail mileage has been decreasing steadily. This has not, however, always.been accomplished in a manner and time frame desired by the railroad industry. Until recently, it was possible for the ICC to deny an abandonment request based on its perception of the economic or social impact on a community. Abandonment has rarely been well received by the communities involved. They see loss of a rail line as an end to further economic development. The result has often been a long drawn out fight before the ICC between the community and the railroad, during which time the railroad has been required to continue operating the line at a loss. The LIB Act contained provisions designed to speed up the abandonment process by simplifying abandonment application procedures. Under current procedures, railroads can only be required to operate a line for six months if a certificate of abandonment has been issued and only in those circumstances where there was a realistic expectation that a subsidy or other arrangement would be made by State and local interests to continue the eration. The HR Act made Federal operating subsidies for specified periods available to communities to assist in maintaining service. The interpretation of the an Act adopted by the ICC did. not, however, lead .to the speedup envisioned. The ICC required operation beyond six months when it felt the railroad was purposely trying not to reach a subsidy agreement. The courts have since defined that the intent of Congress was for continuation to be limited to six months. The ICC is, therefore, revising its abandonment procedures. However, the railroads and their supporters are seeking additional legislation to clarify and further simplify abandonment proceedings. RATES While the Act to Regulate Commerce of 1887 gave the ICC some power over rate-making, considerable further legislation was required to arrive at the almost total control it enjoys today. Notable among these subsequent acts was the Transportation Act of 1920 which, in effect, established the "rule of .ratemaking." By this "rule" the ICC was charged with maintaining a rate environment in which railroads could expect to enjoy a fair return on their investment. The amount of such fair return was never established by statute. AThe 1920 Act also gave the ICC its first authority over minimum rates. The Transportation Act. of 19ll0 was the first legislation to charge the ICC with a mining national transportation policy in its procedures thereby requiring the ICC to account for intermodal competition in its rate setting procedures. Among the HR Act's provisions designed to allow the railroads more flexibility in their ratemaking, the most controversial is section 202 (b) , regarding "market dominance" and maximum rates. In effect 'this section cns- n 1379003 UPDATE-0 n/18/so states that the ICC can not deny any rate increase on the grounds of its too high unless it is for a commodity whose transportation by rail has effective competition from other modes. The ICC has chosen, in carrying out this provision, to ascribe what the railroad industry and other Federal agencies feel to be a much stricter definition of market dominance then Congress intended. However, the ICC interpretation thus far has stood the test of the courts. Railroads, with Department of Transportation (DOT) support, are seeking relief through further Congressional action. OUTLOOK The near-term rail industry forecast is bleak. The western and southern railroads generally remain healthy, but must interface with unhealthy lines in the East and Midwest, a condition that can only serve to slowly errode the stronger carriers’ positions. Conrail does not appear to be progressing toward economic independence, thus leaving significant unanswered questions as to the proper role of the Government in aiding failing railroads. The railroads need large amounts of capital to upgrade equipment and maintain their rights of way. what little rate freedom has been available to the railroads has not appreciably improved their position. New initiatives will be required if further bankruptcies are to be avoided. I The ICC has taken some small, but rather dramatic steps to improve the regulatory climate in which the rails operate. Making fresh fruits and vegetables an exempt commodity should allow railroads to compete with true for this traffic, if they so wish. In another departure, the ICC has decided to allow railroads and shippers to enter into contract rate agreements over one year in length. The ICC has recently decided to consider even more far reaching reforms, such as elimination of general rate increases. I DOT and rail supporters are looking to other ‘mechanisms to help the railroads. For example, DOT is encouraging joint use of tracks by more than one railroad where parallel competing lines exist, thus allowing abandonment of such duplicative services where possible. To this end, they also seek joint ownership or use of certain other rail facilities. more coordinated movements, involving through trains or other variations, are to be encouraged. In some cases mergers and acquisitions are encouraged. Given such proposed mergers as that between the Chessie system and the Seaboard Coast Line, this may prove to be a very active area. In all of these instances, ICC approval will be required. In those cases of mergers and acquisitions where possible anti-trust questions arise the Department of Justice is expected to become involved. What‘ will’ probably remain most troubling to the rail industry, however", will bethe lack of sufficient capital. with a large investment in plant and equipment to replace and maintain, the railroads must generate huge amounts of capital over the next decade, partially due to the deferred maintenance * and lack of adequate investments in the past. Railroads, given their poor performance, have not proved attractive to private investors. DOT has ‘suggested that a shortfall of as much as $16.2 billion nay result betwe 1976 and 1985. It is increasingly clear that any solutions to deal with rail problems will heavily involve the Federal government. It is the nature of this involvement that is changing and will continue to change. CRS- 5 IB79003 UPDATE-OH/18/80 The Cannon Proposal The "Railroad Transportation Policy Act of 1979" (S. 1946), introduced on ioct. 29, 1979 by Senatxm Cannon, passed by the Senate on Apr. 1, 1980, reflects the results of hearings held on the Administration's proposed legislation and on S. 19u6. The hearings, in the views of Senator Cannon and other Commerce Committee members, indicated a number of basic problems with S. 796, the Carter Administration proposal, that were best resolved with a new deregulation bill as a starting point. As with the Administration proposal, maximum reliance would be placed on the marketplace as a regulator. However, the amount of flexibility the railroads would have enjoyed outside the pervue of the ICC would be reduced. Under 3. 19146 the railroads would be free to establish any rate equal to, or less than, an average revenue to variable cost ratio established by the ICC that would insure that the railroad recovers its total operating expenses plus a reasonable profit. The ICC would be charged with determining this ratio at least once each year. A zone of reasonableness would be established in which rates could be raised, without ICC approval, by 4% annually. General rate increases would be gradually phased out over the next few years during which the size of such increases would be limited. Contract rates would be allowed, and would be authorized as a separate class of service. Rate bureau proceedings would be open to the public. Under the provisions of an amendment incorporated into the bill on the Senate Floor, captive shippers, would be provided a certain -measure of atection. The ICC would be charged with setting revenue-to-variable cost ratios on a commodity.h If a railroad charged a rate exceeding this ratio, ’the ICC would be empowered to investigate the rate. If the ICC chose not to investigate, it would be required to explain its reasons for not doing so- The ICC could also consider the energy impact of such rates, but would not be required to do so. Under the proposed legislation, there would be little change in existing merger statutes. There would be strict time limits proposed on ICC actions regarding other proposed rail restructurings. while the ICC would retain much of its power over mergers and consolidations, its power to issue car service orders would be limited. Such orders could only be issued in emergency situations as:defined by the act. The ICC also would lose its jurisdiction over railroad securities, such authority being transfered to the Securities and Exchange Commission. uore expeditious action on railroad abandonment requests would be required. In cases involving bankruptcy and the restructuring of railroads, portions of the current.notice requiremnts would be eliminated. Under the proposed law, the ICC would be given the authority to determine the rate of subsidy or the purchaseeprice that a railroad could receive for a line, when ’the railroad and the party offering to subsidize the service or purchase the line are unable to reach satisfactory terms. Time limits for hsuch actions .also would be imposed. L§§l§LAElQH S. 19u6 (Cannon, et al.) Revises the economic regulation of the railroad industry with respect to rail rates, entry into the industry, services, abandonments and CRS- 6 1379003 UPDATE-04/18/80 discontinuances, pooling agreements, and mergers or acquisition of control agreements. Repeals or reduces the Interstate Commerce Commission's regulatory authority with respect to such matters. Introduced Sept. 2" 1979; referred to Commerce, Science, and Transportation Committee. Pass... R Senate Apr. 1, 1980; referred to the House. EEABIEEE 0.5. Congress. House. Committee on Interstate and Foreign Commerce. subcommittee on Oversight and Investigations. Regulatory reform-volume III: Interstate Commerce Commission. Hearing, 9lIth Congress, 2d session. Washington, U.s. Govt. Print. Off., 1976. 737 p. "Serial no. 94-82“ ---— Coal rates and.Federal railroad regulation: Oversight of the Railroad Revitalization and Regulatory Reform Act of 1976. Hearings, 96th Congress, 1st session. Washington, 0.5. Govt. Print. off., 1980. 867 p. "serial no. 96~7fl" U.S. Congress. House. Committee on Interstate and Foreign Commerce. subcommittee on Transportation and Commerce. Local rail service continuation assistance. Hearings, 94th Congress, 1st session. Washington, U.S. Govt. Print. 0ff., nun p. "Serial no. 95-7a" —---- uilwaukee railroad bankruptcy. Hearings, 95th Congress, 2d session. Jan. 5, 1978. Washington, U.S. Govt. Print. Off., 1978. 135 p. "Serial no. 95-90" 11.5. Congress. House. Conittee on the Budget. Task Force on Tax Expenditures. Government organization, and regulation, economic aspects of Federal regulation on the transportation industry. Hearings, 95th Congress, 1st session. July 13-14 and 18-19, 1977. Washington, U.S. Govt. Print. Off., 1977. 508 p. 11.5. Congress. Senate. Committee on Commerce, Science, and transportation. Railroad Improvement Act of 1977. Hearing, 95th Congress, 1st session. July 25 and 29, 1977. Washington, U.S. Govt. Print. Off., 1977. 234 p. "Seri'al'no. 95-HO" —---- Railroad bankruptcies. Hearing, 95th Congress, 2d session. July 11, 1978. Washington, U.S. Govt. Print. Off., 1978. 68 p. 9 "Serial no. 95-12¢" -----9 Hilvaukee Railroad financial crisis. Hearing, 96th Congress, 1st session. Hay 21, 1979. Washington, U.S. Govt. Print. Off., 1979. 271 p. "Serial no. 96-30" --3--- "Railroad Deregulation Act of 1979." Hearings. 96th CRS- 7 IB79003 UPDATE-On/18/80 Congress, 1st session, Part 1. April 12, 20, and p. 43 May 22, 1979. Part II May 23. June 6, 7, and 20 #69 p. Part III June 21, July 5 and 6 1979 403 p. Washington, 0.5. Govt. Print. Off., 1979 Congress. Senate. Committee on Commerce, Science, and Transportation. Subcommittee on Surface Transportation. Railroad Amendments Act of 1978. Hearing, 95th Congress, 2d session. June 15, 1978. Washington, 0.5. Govt. Print. Off., 1978. 160 p. "Serial no. 95-111!" 96th Congress, 7, 1979. 369 p. ---- uilwaukee Railroad financial crisis. Hearing. 1st session on S. 839, S. 1286, and S. 1u92, Sep. Part 2. Washington, 0.5. Govt. Print. Off., 1979. "Serial no. 96-30" Joint Economic Committee. Subcommittee on Economic National railroad policy: which Part 1. 0.5. 0.5. Congress. Growth and Stabilization . way is up? Hearings 95th Congress, 2d session. Govt. Print. off., 1979. 375 p. .1§-QB1§-l1.!'.2.§QH§B.l3.5519331-..@Q! .P.1.§E2§ Senate. Committee on Commerce, Science, and Transportation. "ICC Implementation of the LLB Act." Washington, 0.5. Govt. Print. Off., 1979. 187 p. (96th Congress, 1st.session. Committee print. 0.5. Congress. Congress. House. Committee on Interstate and Foreign Commerce. Local Rail Service Assistance Act of 1978; report together with additional, individual and dissenting views, including cost estimate of Congressional Budget Office, to accompany H.R. 11979. Washington, 0.5. Govt. Print. Off., 1978. 43 p. (95th Congress, 2d session. House. Report no. 95-1482). Congress. House. Committee n Interstate and Foreign Commerce. Subcommittee on Transportation and Commerce. Congressional symposium on railroads -- 1977 and beyond: problems and promises. Washington, 0.5. Govt. Print. Off., 1977. 275 p. (95th Congress, 1st session. Committee print 95-32). Congress. Senate. Committee on Commerce, Science, and Transportation. Local Rail Services Act of 1978; report to accompany 5. 2981. Washington, 0.5. Govt. Print. Off., 1978. 31 p. (95th Congress, 2d session. Senate. Report no. 95-1159). Regional Rail Reorganization Act Amendments of 1978; report to accompany S. 2788. Washington, 0.5. Govt. Print. Off., 1978.. 26 p. (95th Congress, 2d session. Senate. Report no. 95-885). ‘ ----- Railroad Transportation Policy Act of 1979; report on 5. 1906, Washington, 0.5. Govt. Print. Off., 1979. 85 p. (96th Congress, 1st session, senate. 02/29/80 02/13/80 01/31/79 11/10/79 11/07/79 10/29/79 09/26/79 on/2n/79 Oil/11/79 12/15/78 J12/O8/78 11/13/78 T 11/08/73 11/01/78 10/10/78 cns- 3 1379003 UPDATE-O4/18/80 Report no. 96-470) . Senate Passed 3. Act of 1946, Railroad Transportation Policy 1979, referred to House. ICC directed service on Rock Island terminated. Sixteen railroads granted temporary operating authority over routes. Court ordered embargo take effect on 14,600 miles of Milwaukee railroad. Representative James Florio indicated potential provisions of House rail deregulation bill (not yet filed). ICC rejected employee/shipper proposal to operate roughly «half of Milwaukee lines not scheduled for operation as a result of bankruptcy reorganization. Congress acted to continue service on the Chicago, Milwaukee, St. Paul and Pacific. Senate began hearings on S. 19146. Senator Cannon introduced 5. 19146, the "Railroad Transportation Policy Act of 1979." ICC directed Kansas City Terminal Company to provide service over Chicago, Rock Island and Pacific. House subcommittee on Transportation and Commerce began hearings on Administration deregulation proposals. senate began hearings on.Administration deregulation proposals. DOT proposals on deregulation sent to President for consideration. ICC approved general freight rate increase of approximately 7%. ICC proposed to exempt fresh fruits and vegetables from rate regulation. ICC adopted policy statement that would permit contract rates between railroads and shippers. Local Rail Service Assistance Act of 1978. USRA Amendments Act of 1976 became law. Provides an additional $1.2 billion in Federal aid, by way of security purchase, (to Conrail. DOT released preliminary report "A Prospectus for CRS- 9 IB79003 UPDATE-Oi:/18/80 Change in the Freight Railroad Industry" 06/26/78 -- U.S. Court of Appeals in Chicago struck down certain aspects of ICC abandonment procedures. OI-l/2!!/78 -- Court upheld ICC interpretation of "market dominance." 12/19/77 -- Chicago, uilwaulkee, St. Paul and Pacific Railroad Co. filed for reorganization under section 77 of the Federal Bankruptcy Act. O2/05/76 -- Congress passed P.I.. 9ll-210, the Railroad Revitalization and Regulatory Reform Act. Act provides funding mechanism for Conrail to takeover operation of northeast and midvest railroads. Makes reforms in rail regulatory areas such as rates abandonment, and mergers. Provides Federal aid for rail improvements and operating subsidies in certain cases. O0/O3/75 -- Chicago, Rock Island, and Pacific Railroad filed for reorganization under section 77 of the Federal Bankruptcy Act. 01/02/711 -- Congress passed P.L. 93-236, Regional Rail Reorganization 9 Act of 1973 (BR Act). Creates USRA to reorganize bankrupt railroads of the northeast and midwest. O0/06/70 -- Penn Central filed for bankruptcy causing the largest single business failure in U.S. history. Collapse is shortly followed by failure of seven additional lines in the northeast and midwest. O0/00/1970-00/00/71 - National Railroad Passenger Corporation (Amtrak) formed to take over unprofitable railraod passenger service of the private railroads. O0/O0/1887 — Regulation of railroads began with passage of the Act to Regulate Commerce of 1887 F Harbeson, Robert 17. Progress and poverty on transport regulatory reform. Quarterly review of economics and business, v. 17, summer 1977: 119-66. Mac Avoy, Paul 17. ed. and John 1!. Snow, ed. Railroad revitalization and regulatory reform." Washington. American Enterprise Institute for Public Policy Research, 1977. 246 p. Nelson, James R. ed. and Herbert G. whitten, ed. Foreign regulatory experiments: implications for 13.5.: an analysis and evaluation of foreign transportation regulatory experience. Washington, 0.5. Federal Railroad Administration, office of Policyand Program Development, 1977. 1 volume. FRA-OPPD-77-2'4. Rooney, G.J. The RRRR Act - some implications for railroad rate bureaus. Transportation journal, v. 17, winter 1977: cns-10 1379003 UPDATE-O4/18/80 17-31. Stone, Paul. Future of American railroads. Editorial Research Report, 1978, v. 1, no. 10. 183-200. !!.S. Department of Transportation. A prospectus for change in the freight railroad industry: a preliminary report by the Secretary of Transportation. Washington, 1978. 186 p. 0.5. alnterstate Commerce Commission. Bureau of Economics. A cost and benefit evaluation of surface transport regulation. Washington, 1976. 30 p. U.S. Library of Congress, Congressional Research Service. Subsidization of Unprofitable Local Rail Service [by] John W. Fischer. Aug. 29, 1978. Washington, 1978. 17 p. ---— Conrail: forecast, and national transportation policy implications [by] Dr. Stephen J’. Thompson. Oct. 26, 1978. Washington, 1978. 23 p. —---“ Local rail service: The State experience [by] John W. Fischer. Feb. 1, 1980. Washington, 1980. 22 p. LIBRARY °F TON As:—uNG ‘N uNIVE§-‘£3-{TY gr: LQUQS - M0‘ T7"