(The following editorial by Gerald E. Vaninetti was posted on the Milwaukee Journal Sentinel on October 9.)
MILWAUKEE, Wisc. — Some media reports from recent state Public Service Commission hearings on Midwestern rail service suggest that the several railroads serving Wisconsin and the region are somehow not doing their jobs. Nothing could be further from the truth.
The railroad industry is operating at a record-setting pace. Tonnage shipped so far in 2006 is well ahead of last year’s record volumes, with coal up 4.5% and general freight shipments up 6.4%.
In addition, over the past decade, the railroad industry has reinvested 18% of its revenue back into its infrastructure, as opposed to less than 4% for the manufacturing sector.
The hearings were largely one-sided affairs in which opponents to market-based rail services were provided a platform to advance their pro-regulation, special-interest agendas.
The complaints included concerns about railroad capacity, rail service and rail rates, despite a 40% reduction in rail rates since the industry was deregulated in 1980.
The efforts of railroads to operate efficiently and profitably on lines of varying capacity is a central issue with shippers, which are coming to find that one size doesn’t fit all. Underutilized lines, like much of Wisconsin’s rail system, don’t produce the same economies of scale for price and service as do the more heavily used lines.
Conversely, the cooperation of shippers is required for the highly utilized lines to be operated efficiently to avoid congestion and forestall expensive capacity expansions. Wisconsin’s shippers must contend with both issues.
The railroad industry has been awash in capacity for many years, and with increased shipment levels, the industry is finally working off its “excess” capacity in its primary haul corridors. Consequently, much of the railroad marketplace is shifting from an excess-capacity mentality to one in which capacity is in sync with demand.
This means that rail rates and business practices based on excess capacity no longer apply, and this makes shippers mad. Their anger is misplaced, as one can’t expect railroads, or any business for that matter, to make expenditures “on spec” without commitments and rates that justify the expense.
What we’re really talking about is using public pressure and threats of re-regulation to force the railroads to do something that isn’t financially prudent.
An example of a business practice that needs to change due to constrained capacity is utility coal stockpiling. In recent years, many utilities have dramatically reduced their coal stockpiles to save on inventory carrying costs – a practice that has increasingly exposed them to delivery risks.
Some of these utilities recently found themselves in a bind when the railroads couldn’t jump through hoops for them in a capacity-constrained marketplace. While they blamed the railroads for having to buy high-priced gas to supplement their low-cost coal generation, the real culprit was their inadequate fuel inventory policies.
Xcel Energy Inc., a major utility in the Midwest based in Minneapolis, is changing its fuel inventory policies.
Despite all the hoopla, what this really is all about is maximizing profits at the expense of someone else’s pocketbook – in this case, the railroad’s pocketbook.
For instance, utilities would complain that rail rates for coal shipments are too high, but since the 1980 deregulation of railroads, coal rail rates have declined by more than 30% while electric rates have increased by 38%. Let’s state the obvious: Lower rail rates mean higher profits for shippers.
Now that the rail system’s major haul corridors are at capacity, shippers are unwilling to make the commitments or pay the market rates necessary for the railroads to justify the costs of adding capacity, relying instead on desperate measures that would attempt to re-regulate the industry.
Given the dramatic improvements in the nation’s rail system since deregulation, what we’re looking at here is killing the golden goose.