Current US government kills BNSF railway

[ostlandr]

http://biz.yahoo.com/ap/090219/nd_basin_bnsf.html?.v=1

$350 million in fines and rate reductions. And Congress wants to go even farther, with more regulation of rates and anti-trust legistation. We just turned the clock back to 1970: http://en.wikipedia.org/wiki/Penn_Central

Sell your US railroad stock- and your stock in the steel mills that roll the rails, and the sawmills that make the ties, and the timber companies that cut the logs for the ties, and the factories that make locomotives and cars and MOW equipment.

Call me crazy, but the current administration seems to want to punish success and reward failure. Run your business into the ground? Get a federal bailout. Run a profitable business? Prepare for a financial prostate exam. People who bought more house than they can afford and are "upside down" with an interest-only variable rate mortgage for more than the value of their house are getting bailed out. Oh, and a $5,000 tax credit (refundable, so you get it even if you didn't pay taxes) to catch up your payments. But since my wife and I have a fixed rate mortgage for half the value of the property and converted our home equity line to fixed rate, we get $0. And our taxes go up to pay for the other folks' bailouts.

[Zhall]

Welcome to change. Welcome to the obama administration.

[kalvingp30fan]

I hope the government does not cuase another penncentral case.

[Train-a-Mania]

This isn't another Penn Central. This is NOTHING like Penn Central.

Penn Central failed because it was an unsuccessful merger between two companies - NOT because of companies claiming their pricing was unfair.

[PikkaBird]

ITT we blame Obama for a decision made by a non-political DOT agency about a complaint made five years ago. Hooray!

@ ostlandr, yep, as long as companies are making a profit the regulators should butt out and not enforce any rules or investigate complaints. I CAN SEE NO POTENTIAL PROBLEMS WITH THIS SITUATION oh shi global financial collapse.

[ostlandr]

Trying not to get political on this one, but what happened last time is that railroads were prevented from raising rates high enough to generate a sufficient return on capital in order to prosper and attract investment. If BNSF's rates are so high, why not have the coal delivered by truck? Or, if they are a "captive shipper", shut down that power plant and relocate all the equipment to somewhere with better transport access.
Let's say BNSF determines that their cost to deliver the coal to that power plant is $5 per short ton. So they raise the rate to $6 per ton, in order to make a 20% gross profit. (Net profit is lower due to taxes, cost of capital, etc.) But now the Federal Government determines that a "fair and equitable" rate is $4 per short ton. So how is BNSF supposed to make a profit? When the contract expires, they will simply decline to deliver coal to that shipper. Unless of course they are forced to, under some "transportaion fair access act" or some such nonsense.

Now, in a cut-throat, profit-hungry free market, somebody else might say "Hey, I can deliver coal to that power plant for $4.75 per ton, charge the power company $5.75, and still make a good profit." So, based on a long-term contract to deliver coal to that power plant, they lay rail from the nearest coal mine to there. They sink a ton of capital into the line, and expect to make enough profit to pay it back with interest (darn those evil bankers) and still get rich the old fashioned way- providing a needed service.
Now- suppose those potential railroad builders can't be sure the Federal government won't bow to political pre$$ure from the mine owners to overturn the contract as soon as they start delivering the coal? In that case, a "cost based" rate finding by the STB would put that new railroad into bankruptcy. So without the trust that that contract would be sacrosanct and not subject to review by bought-and-paid-for politicians (of either party) they won't take that risk.

Or say I run a widget factory. Mega-X corporation is short on widgets, and needs a bunch of them in a hurry. I agree to produce them at a markup over my usual price for the rush order. So I buy the materials on credit, put my guys on overtime, hire a few new workers, maybe invest in a new machine (again on credit.) Bam! Mega-X corporation has their pet politicians rule against me for "profiteering" or "price gouging" or some such phantom offense, and forces me to sell the widgets at less than it cost me to produce them. I lose my shirt, and Mega-X has just committed legalized theft against me. THAT is what I am talking about.

Adam Smith said it better than I can:

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

http://en.wikipedia.org/wiki/Invisible_hand

If anyone on the forum hasn't read "Atlas Shrugged" by Ayn Rand, you should. Contrary to popular myth, it isn't some dry philosophical tome but an action/adventure/romance in the spirit of Tom Clancy or Clive Cussler. And much of it involves railroading, specifically the struggles of Taggart Transcontinental to survive in a dystopian nightmare of a postwar USA.

[Kisfvo]

First off, I firmly believe PennCentral failed because both New York Central and Pennsylvania Railroad had both already shot the other one and were losing so much blood so quickly that nothing was going to stop eventual failure for both of them.

Second of all, we here all saw President Obama's failure for competative railroads when Amtrak was created, and every good thing about competative passenger service was abolished with it in the U.S. They complain every year that they need a bailout, but they don't get one, as the government is spending their money on nationalising freight as well into it.

Call me crazy, but this is another example of the fact that socialism doesn't work in a county as big as the U.S.

[Kevo00]

Dude, if the US is just a county then its a hell of a big one. Now I'm no socialist, but the counterfactual would probably suggest that much of the Amtrak network would not survive without some sort of subsidy. Hence if something requires subsidy there is zero chance of competition, unless the government subsidises two parallel operators and that would just be wasteful. Face up to it, without Amtrak you probably wouldn't have any passenger trains outside of the NEC, because train is just not a competitive option for most Americans outside of the NEC. Or at least not a passenger service open to general usage - if you look at the parallels in similar sized countries with similar GDP per capita levels, long distance passenger service in both Australia and Canada is effectively confined to expensive land-cruising and is otherwise heavily subsidised when it falls within state/province boundaries.

I love the way most Americans can't have a political discussion without bringing the S-word into it - I would have argued that the country size made intervention necessary, not the other way round.

[Kisfvo]

Ahh, yes, the S-word. Like sword but not exactly.

While the U.S. is most famous for it's passenger competition in the Northeast, Santa Fe, Union Pacific, and what is CSX all at one time carried passengers. You don't see stylish trains any more because no one has to compete for passengers, it's all in one big subsidy. Trains in the U.S. (at least where I live) have gotten a bad reputation for being so slow that no one would use them. I'm positive that if all the companies got competative again, that would mean good-looking trains and fast connections. Airlines fail. Railways don't fail like that unless it's very poor management or ridiculously intense competition because of the absence of rail barons in an area. BNSF, UP, CSX, NS, and Providence and Worcester don't have that problem. Each railroad has a different part of the country. You can't go anywhere in Virginia, West Virginia, or even powerplants in New Jersy without seeing at least one long-haul train of Norfolk Southern coal hoppers. You can't go anywhere West of the Appalachians without seeing Union Pacific and Burlington Northern Santa Fe trains.

Then President Obama could use the money to make sure those trains don't get bombed.

[Kevo00]

Well tell me this then - why were US passenger services nationalised in the first place?

I was under the impression that it was because the existing companies had already lost most of their passengers and couldn't afford to invest further, and further were reluctant to invest in passenger transport because they knew it was a dead market. Back in the 1950s and 60s there were more class 1 railroads than today - how come then the situation got so bad if according to you this competition would have stimulated them into improving their services?

I was under the impression that plenty of railroads in the US have gone bankrupt and that pretty much the whole US rail system was bankrupt in the 1960s-70s, and that only a lot of government bailout (CSX/Conrail, for example) and mergers saved the situation, with many track miles abandoned.

[ostlandr]

The creation of Amtrak was a bailout in itself. The railroads were required to provide passenger service under the "common carrier" statute, but it had been losing money for years. After WWII, the railroads put a bunch of money into fast, attractive passenger trains. And the ICC, in its infinite wisdom, decided to lower the "excessive" rates the railroads were charging passengers, rather than let the free market set the rates.
But even shedding their money-losing passenger services to Amtrak wasn't enough to save the Northeast railroads. A combination of overregulation, bad management, and competition from trucks on the government-funded Interstate Highway System are what led to Conrail. The major floods in 1967 and 1972 were the last nails in their coffins. Conrail ripped up thousands of miles of track to "rationalize" the system. Some parallel routes were completely scrapped. Other lines were "cut" forming stub ended branches with a 12-15 mile gap in the middle.
So far, short lines are having trouble generating enough capital to bridge these gaps. In addition, some of these short lines were created with a "paper barrier" restricting the short line to interchanging cars only with the "parent" railroad. That has to stop.


Before the current crash, the railroads were coming back. Deregulation and the increase in fuel prices helped, as did a shortage of truck drivers. Now, just when the railroads were actually generating enough return on investment to pay the cost of capital on major infrastructure work, it looks like the Government will step in and prevent those "excessive" profits. Instead of expanding, the railroads will have to cut everything to the bone, cancel expansions, defer maintenance and equipment purchases, etc. Deferred maintenance and deteriorating track conditions will destroy their level of service, which will reduce traffic even more, whick will lead to more cutbacks, just like it did the last time.

Well tell me this then - why were US passenger services nationalised in the first place?

I was under the impression that it was because the existing companies had already lost most of their passengers and couldn't afford to invest further, and further were reluctant to invest in passenger transport because they knew it was a dead market. Back in the 1950s and 60s there were more class 1 railroads than today - how come then the situation got so bad if according to you this competition would have stimulated them into improving their services?

I was under the impression that plenty of railroads in the US have gone bankrupt and that pretty much the whole US rail system was bankrupt in the 1960s-70s, and that only a lot of government bailout (CSX/Conrail, for example) and mergers saved the situation, with many track miles abandoned.