A . 0 LC . Z‘ g,x1ggE;:i1niCi’t§‘P“JE;:£iSiw M 13 70! 20 2. -bu‘.-.T".".f'.’.m\§€—:J4(a=;.r1—'..'.’:L"-."‘i . -Z-.5 " “' “ '”"' . Irv‘ ‘_ ; ‘ V — I. . . “».-. ';_»_-'."7.:\.“‘ P I ‘-7 -9 ‘ > * . ‘- ~ " V: r ‘-'.\: ';. ' ’ xx -5‘ 14 ‘~57 as . ' - -» ~ '1 ‘ 3/‘ :1 *3 F 53"} ‘"’\'.../s" , . A} \‘A‘, . E ,, rs . 3: Mini Brief ST. LG £55, it. CONGRESSIONAL RESEARCH _ SERVICE ;~gne:;;2;,F 1munflQiflgi[fim@i»@it@I@ii]‘giiMi@fliimu RAILROAD PROBLEMS: A PRECIS MINI BRIEF NUMBER MB79202 AUTHOR: Thompson, Stephen J Economics Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE HAJOB ISSUES SYSTEM DATE ORIGINATED ggggggzg DATE UPDATED gzgggggg FOR ADDITIONAL INFORMATION CALL 287-5700 0730 CBS“ 1 HB39202 UPDATE-07/29/80 .I.§§Q.¥.=...12.1§§l¥.l$£QE It is generally recognized that the GL5. railroad industry. is having serious financial difficulties. Although some railroads, such as the Union Pacific and the Southern Railway System, are financially healthy, a number of other railroads are in bankruptcy (such as the Milwaukee Road, and the Rock Island) or are financially weak (such as the Chicago and North Western, and the Illinois Central Gulf). Conrail, the quasi-private railroad serving a 17-State area in the Hidwest, hid-Atlantic, and parts of New England, is incurring deficits. Conrail spokesmen indicate that Conrail eventually will need as much as another $1.1 billion in Federal aid. Conrail has already received about $3.3 billion Federal aid. The Department of Transportation (DOT) has concluded that if present trends continue, railroads will incur a shortfall of between $13 billion and $16 billion in needed capital investment within the next few years. This mini-brief considers several factors thought to have contributed to the current financial condition of U.S. railroads. BACKGROUND FREIGHT TRAFFIC For nany years railroads were among the largest and most complex businesses in the United States and carried most of the intercity freight traffic. bore rail lines were built, however, than the present quantity of rail traffic can support profitably. As the U.S- economy shifted from producing predominately manufactured commodities using large quantities of coal, ore, and other heavy materials, to an economy emphasizing services and high-technology products, rail over-capacity increased. Although large quantities of raw and semi-processed materials, and finished products, continue to be transported, now much of this traffic is transported by pipelines, barges, and trucks. Huch of the railroads‘ most lucrative, high-value traffic shifted to trucks as the network of paved roads grew until it reached virtually everywhere in the Nation, and as trucking grew from little more than a substitute for horse drawn local cartage to a large and financially strong industry, able to supply fast, reliable service relatively free from loss and damage, to virtually every town and workshop in the country. As a result of decentralization and diversification of businesses, fostered by the availability of surfaced roads and trucks, railroads became less adapted to the needs of more and more shippers. Railroads are now virtually out of the business of carrying shipments smaller than one rail car, while multiple car lots, or whole trains of one commodity moving from one origin to one destination, are common. nuch of the perishable traffic, such as live animals, fresh neat, vegetables, and fruit, now moves by trucks, and some of it moves by air carriers. Pipelines drew away most of the petroelu traffic. Carriers on the inland vaterways, coastal waterways, and the Great Lakes obtained a substantial p.oportion of rail traffic. Improved carrier technology and federally provided facilities and navigational services contributed to the ability of water carriers to compete for traffic traditionally carried by railroads. Hater carriers deal primarily in traffic composed of cheap, bulky commodities, such as coal and mineral ores which travel long distances, where water routes are available along a substantial proportion of the distance. CRS- 2 fiB79202 UPDATE-07/29/80 PASSENGER TRAFFIC Airlines and private automobiles diverted passenger traffic until. rail passenger service shifted from a profitable operation to a loss operation based on fully allocated cost, and, finally, also based on solely related cost. As passenger traffic was declining, U.S. nail contracts and other profitable traffic usually carried on passenger trains, such as milk and newspapers, shifted to competitors of the railroads. LABOR*fiANhGEHENT RELATIONS Labor rules established while railroads were under Federal control during World war I continued tenaciously. Prominent among these were rules on the “100-mile day" and the use of firewen. The 100-mile day refers to the option open to train crews (as distinguished from yard crews) to elect to be paid a full day's pay for working eight hours or for operating a train for 100 miles. The two methods yielded roughly equivalent results in the World War I era, but today many trains, especially passenger and expedited freight trains, cover much more than 100 miles during an eight—hour period. Firemen on coal-fired steam locomotives shoveled the coal into the locomotive's boiler. By the late 1950s the transition of locomotives from steam to diesel and diesel—electric was nearly completed, but firemen remained on many trains. Bail management holds that the fireman position is unnecessary and nus is an example of feather—bedding. Rail labor takes the ‘view that the second person in the locomotive is important for safety reasons and in case of emergency the fireman would be available to assume control of the train. There are now fewer trains having a firenan.in the locomotive but it is a continuing source of disagreement between rail labor and rail aanagenent. RAIL MANAGEMENT Rail management has been characterized by some as not being sufficiently adaptive to cope adequately with the fundamental shifts in the technological, public policy, and marketing environment of freight transportation. Top management is characterized by some observers as having had a tendency to encourage patience rather than problem solving as the route to advancement within management ranks. ECONOMIC REGULATION Big John Rail Cars some observers believe that economic regulation has sometimes retarded technological and structural change within the rail industry. One attempt by the railroads to prevent the shift of bulk traffic, such as grain, to trucks resulted in the development of a much larger covered hopper car called the "Big John.“ The economics of the larger cars significantly lowered ansportation costs, but it was a number of years before the Interstate Commerce Commission (ICC) allowed rail rates to decline commensurate with the decrease in costs of operating Big John cars. Regulation of mergers CBS- 3 HB79202 UPDATE-O?/29/80 one positive aspect of structural change within the over-built railroad system is the reduction in duplicate facilities that occurs when competing railroads merge. One important proposed merger was between the Rock Island and the Union Pacific. The proposal ‘was complicated and was protested vigorously by a number of railroads and shippers who stated that they would be adversely affected as a result of th proposed merger. The merger application was under consideration by the ICC for over a decade. Meanwhile, the Rock Island became bankrupt and conditions in the industry changed so significantly that when the application finally was approved by the ICC, the Union Pacific withdrew its offer and the merger never occurred. The Railroad Revitalization and Regulatory Reforl Act of 1976 (48 Act) has somewhat streamlined rail merger procedures. ' "Umbrella Ratenaking“ Rate regulation appears to have hampered railroad efforts to compete with truck and water transportation. The railroads generally are not allowed to charge rates below the out—of-pocket (variable) cost of nodes competing for a specific novement of traffic, even though the proposed rail rates would cover rail out-of-pocket cost and contribute some revenue toward rail fixed cost ——— cost that would be incurred whether or not the rails carry the traffic upon which the proposed rates would apply. Railroads now may charge seasonal rates —~~ rates that are higher during periods of peak demand, but they must post the rates 30 days before they become effective and changes require mother 30-day notice. Railroads claim that the 30-day notice, which barges and trucks generally do not have to give for most of the products in question, such as grain, prevents peak pricing from being a useful idea, since rail competitors can quickly set their rates just below the announced rail rate increases. The HR Act gave the railroads authority, for a trial period, to raise rates, within limits, on all traffic over which they did not have market dominance. Few such rates were filed before the authority to do so expired early in 1978, however, and the railroads claim that the reason was an overly restrictive definition of market dominance developed by the ICC. The ICC recently reversed a long standing —policy and now allows railroads to charge contract rates so long as the rates are extended to all shippers who meet the requirements set out in the contract rate. Branch Line Abandonment Railroads were required, for wany years, to provide rail intercity passenger service on lines incurring losses on the traffic. Railroads currently are required to provide freight service on many seldom-used rail branch lines that are incurring large losses in proportion to the amount of traffic carried on these lines. TAXES In 1976 railroads paid $466 million in taxes to State, “county and nicipal governments. That was $fl willion.wore than net railway operating income in 1976 and $119 million more than net railway operating income in 1977. some of these taxes are levied upon rail rights-of-way and related structures and improvements- Thus, these taxes are rail expenditures on rights-ofrway in addition to rail expenditures to build, repair, maintain and operate rail rights—of-way and related structures. The railroad industry feels that these taxes are inequitable in the sense that trucks and barges do CRS- 4 MB79202 UPDATE—0Z/29/80 40t have a proportionate level of fixed tax obligations associated with their rights-of-way in addition to having to pay the full cost of construction, repair, maintenance and operation. RAIL CAR SHORTAGES Bail car shortages are a recurring problem and one that was a year-round problem in 1972-73 and 1977-78. The ICC has recently increased the payments (called per diem) railroads must make for use of certain types of rail cars controlled by another railroad. These rates are above the amounts needed to acquire and maintain the cars, and are intentionally set high to attract investment in new rail cars. Some of these payments are to non-railroad investors, however, and in these cases, result in payments from railroads to non-railroads without increasing rail ownership in rail cars. CAPITAL INVESTHENT NEEDS Each of the factors just discussed has contributed, to some extent, to the current capital shortage in the railroad industry. The DOT has estimated that future rail investment will fall from $13 to $16 billion short of capital needs if present trends continue. The rate—of-return that railroads will have to achieve to replace equipment and facilities as they become worn out has been estimated by the ICC at about 10.5% and by the DOT at between 1.9 and 12.5% per year. In contrast to these needed rate-ofdreturn estimates, the rail industry's highest rate of return during the past 50 years was 5.3%, achieved in 1929- It appears likely that some of these. issues will receive Congressional attention during the 96th Congress, as an outgrowth of general public interest in “the railroad problem“ and deregulation, and Conrail's likely continuing need for Federal financial aid. Information on rail taxation is contained in CBS report no. 78-225E, entitled "Railraod Taxes Levied by State, County and Municipal Governments: Implications for National Transportation Policy," dated Dec. 11, 1978. Information on rail car shortages is contained in CBS report no. 78—243E, entitled "Rail Car Shortages: Background and Analysis" dated Dec. 11, 1978. Information on Federal transportation promotion policies is contained in CBS report no. 77-112E, entitled, "Federal Aid to Domestic Transportation," dated nay 16, 1977. Iniormation on Conrail is contained in issue brief 78252, entitled "Conrail: Experience and Outlook,“ and CBS report no. 78-2023, entitled "Conrail: Experience, Forecast, and National Transportation Policy Implications," dated Oct. 26, 1978. A221.’-13l..QEél.-_1.3l3.E§B§E§E 50.93535 B.S. Congress. Senate. Committee on Commerce, Science, and Transportation. ICC Implementation of the 4R Act (synopsis_ of views presented at hearings before the Subcommittee on Surface Transportation of the Senate Committee on Commerce, Science, and Transportation, Feb. 7, 1979). Prepared by CBS. 96th Congress, 1st session. Committee Print. Washington, 0.5. Govt. Print. Off., May 1979. 187 p. U.S. Department of Transportation. A prospectus for change cns- 5 3579202 UPDATE-07/29/80 _in the freight railroad industry. Washington, October 1978. 186 p. 0.5. Library of Congress. Background information on the railroads of Western Europe and Japan [by] John H. Fischer. CBS Report No. 79-73 E, mar. 12, 1979. 22 p. ----- Conrail: experience and outlook [by] Stephen J Thompson. , CR5 Issue Brief No. 78252. ----- Conrail: experience, forecast, and national transportation policy implications [by] Stephen J Thompson. CRS Report Do. 78-202 B, Oct. 26, 1978. 23 p. --“— Federal aid to domestic transportation [by] Stephen J Thompson, Barbara 0. Haffei, and William A. Lipford. CRS Report No. 77-112 B, may 16, 1977. 169 p. ----- Rail car shortages: background and analysis [by] Stephen J Thompson. CR3 Report No. 78-203 E, Dec. 11, 1978. 26 p. Rail strike insurance [by] Alice L. Ahmuty and Stephen J Thompson. CR5 Mini Brief 78242. . ——--- Railroad taxes levied by state, county and municipal governments: implications for national transportation policy [by] Stephen J Thompson. CRS Report No. 78-2253, Dec. 11, 1978. 29 p. » —--- Railroads: regulatory issues [by] John W. Fischer. CRS Issue Brief No. 79003. ---- Rural transportation: some important issues, by Dr. Stephen J Thompson. CRS Report No. 79-12uE, June 15, 1979. 35 p. Subsidizution of unprofitable local rail service [by] John W. Fischer. CBS Special Report No. FY 78 B-19, Aug. 29, 1978. 17 p. --vr Subsidization of unprofitable local rail service, an update [by] John W. Fischer. CR5 Economics Division Report, Jan. 23, 1979. u p. rrvrr Transportation intermodalisn: some prospects and problems [by] Kenneth R. De Jarnette. CRS Report No. 77-174 E, July 1977. 30 p- ---- Trucking: economic regulation [by] Stephen J Thompson. CR5 Issue Brief 76019. ----- Waterway user charges: the inland waterways revenue act of 1978 [by] L. Alan Talley and Stephen J Thompson. CRS mini Brief No. 78257. Lsassmmv OF WASHINGTON UNIVERSITY n--a.