1. Rail Freight: Issues and Policy Challenges “Trouble Ahead – Trouble Behind”

2. October 24, 2004Rail Freight: Issues and Policy Challenges2 Overview  Recent History  What Works  What Doesn’t Work  Why?  Where Are We Headed?

3. October 24, 2004Rail Freight: Issues and Policy Challenges3 Where Did We Come from? Major Trends 1945 - 1980  Rail Industry in Decline Since WW II  Intermodel Competition Captures Passengers and Smaller Freight Shipments  Steady Process of Disinvestment  Competition Based Heavily on Service  Regulation Held Rates Up Overall Prevented Network Rationalization Limited Service Innovation

4. October 24, 2004Rail Freight: Issues and Policy Challenges4 Where Did We Come from? Major Trends 1980 -  “Deregulation” Enabled competition to force rates down Permitted network rationalization Permitted service innovation  Industry Consolidation  More Disinvestment  Rise of Short-Lines  Competition Based Mostly on Cost

5. October 24, 2004Rail Freight: Issues and Policy Challenges5 What Works 1980 -  Profitability Improved Since “Deregulation”  Very, Very Efficient Goods Movement  Consolidation of Railroads has Permitted Greater Availability of “Single-Line” Service  Stockholders Well Rewarded During Many Mergers

6. October 24, 2004Rail Freight: Issues and Policy Challenges6 What Doesn’t Work 1980 -  Railroad ROI Still Too Low To Promote Aggressive Growth  Marketplace Promotes Bad Outcomes Intensive intramodal competition Incentive to develop only captive shippers Promotes greater use of intermodal moves, at the expense of “cheaper,” all-rail alternatives Service takes a “back seat” to cost control

7. October 24, 2004Rail Freight: Issues and Policy Challenges7 Why Doesn’t The Market Work?  Public Utility Economics Cost per incremental carload often below average cost Competition can result in higher costs Lack of competition can result in higher rates  Increased Shipper Negotiating Power Bundling of lanes into single contract Increased shipper size Long-term contracts increase negotiating risk for railroads

8. October 24, 2004Rail Freight: Issues and Policy Challenges8 Where Are We Headed?  Nationalization Not an Option  New Competitive Rules Could Fix Marketplace, but..........................  Unrestricted Open Access Would Restructure Industry With Disastrous Consequences  Some Combination of Tax Incentives and Public Money Could Help us Muddle Through