ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, October 13, 1996 TAG: 9610110020
SECTION: BUSINESS PAGE: 1 EDITION: METRO
COLUMN: Competition
SOURCE: GREG EDWARDS
Two hundred years after the death of Scottish economist Adam Smith, his faith in free-market capitalism seems to have been embraced more strongly and by more people than ever before.
Evidence of that can be found in the demise of the centrally planned economies in the Soviet Union and Eastern Europe and, in this country, in the forced break-up of traditional monopolies such as telephone and electric power companies.
Ironically, it has taken government intervention to bring competition to the public utility industries, but then again the Great Scot, Smith, was never totally against government intervention in the economy.
New laws on both the state and federal levels have forced telephone and power companies to open their transmission lines to competitors. Consumers, presumably, have seen or will see the benefits of this competition in lower prices and eventually in the creation of more jobs.
Similarly, in the natural gas industry, the government has dissolved the bonds between gas production and its transport over pipelines, providing local utilities that buy the gas the benefit of competition among their suppliers.
Now, some are suggesting that the benefits of competition should be carried to the railroad industry. They argue that tracks belonging to the nation's railroads should be opened to competitors just as have transmission lines of utilities.
The rail industry, as you might guess, is not amused.
Norfolk Southern Chairman David Goode, speaking last month to the Traffic Club of Chicago, warned that forcing open-access on railroads could mean re-regulation because government would be needed to referee routes, junctions and rates. Requiring railroads to open their track to competitors, Goode said, could discourage investment in new equipment and facilities and that would hurt customer service in the long run.
"Bull! I don't buy that argument," said Fred Palmer, head of the Western Fuels Association in Arlington. "If the business is profitable, the capital will be there."
Palmer's association is a cooperative that mines and buys coal for its owners, municipal utilities and consumer-owned electric cooperatives that operate 12 power plants between the Mississippi River and the Rocky Mountains.
The lack of competition in the railroad industry, Palmer said, costs his members - and thus consumers - millions of dollars annually in added transportation charges. Shippers in some instances pay 60 percent more for rail transportation than they would pay if there was competition, he said.
The railroads, like the telephone and power companies, were built with government help, Palmer said. "Why," he asked, "should the railroads be the only sector of the American economy not subject to the forces of competition?"
A group of shippers of bulk commodities such as coal, agricultural products, plastics and chemicals are meeting now to see if a coalition can be formed to support legislation for open-access. Recent mergers in the rail industry in the West, Palmer and others said, have added to shippers' concerns about the concentration of economic power in the railroad industry.
David Barrett of the National Grain and Feed Association of Washington, D.C., said his group has not been actively involved in the development of open-access legislation but some individual grain companies may have been. The association, however, favors competition, he said.
Many shippers in the grain industry have their own, private freight cars, and the industry has been interested in ensuring access of those cars to rail lines, Barrett said.
A related competitive issue, he said, involves so-called "bottlenecks" in which a shipper is located on a single rail line, but a few hundred miles away the line intersects with a competing railroad, which also provides service to the shipper's destination or vice versa. In such cases, shippers want the railroads to offer them a price for carrying the freight to (or from) the point where competing rail lines intersect so they can take advantage of competition where it exists.
The railroads, however, want to carry the freight as far as possible on their own lines and have resisted offering prices for hauling to a point where they have competition. The federal Surface Transportation Board will hear arguments from the shippers and railroads on the issue on Oct. 31.
Thomas White, a spokesman for the Association of American Railroads, said the rail industry has opposed the bottleneck pricing because it could lead to the "cherry-picking" of the best business by some lines, leaving others with what they make on less profitable short hauls to support their business.
The industry opposes open access, White said, because it will lead to re-regulation by the government, which would have to determine what the fair prices and terms for access would be. Congress deregulated the railroads in the early 1980s, he said, because the railroads weren't making enough money to pay for the investment in new equipment and facilities that were needed.
It's easy for someone like Palmer to dismiss the railroads' objections to open-access with a one-word sound bite, because he doesn't back up his arguments with any facts, White said.
On the other hand, he said, the average price for rail transportation of coal has dropped from 2.51 cents per ton-mile in 1980 to 1.83 cents in 1994, White said. Major railroads - with a few exceptions, such as Norfolk Southern - still are not seeing profit margins as high as the cost of capital. Last year, the railroads generated average profits of 7 percent while borrowing investment capital cost 11 percent, he said.
Railroads are different from the utilities, White said, in that they already face competition, if not from each other, from trucking companies and barge lines. Railroads already face competition that drives down their rates while utilities are guaranteed set rates of return by state public utility commissions, he said.
Although there are significant differences between the railroads and utilities, there are also meaningful similarities, Frank Wilner, a former colleague of White's at the AAR and now an aide to the Republican member of the Department of Transportation's Surface Transportation Board, wrote in the September issue of Railway Age magazine.
Wilner predicted "nasty political and legal trench warfare" ahead, waged by supporters of open-access. Don't be surprised, he wrote, if truckers, who would like the chance to operate their own intermodal trains, as well as regional railroads join electric utilities, coal, chemical, paper, plastic and farm shippers in the push for open-access.
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But neither the National Mining Association, which represents the nation's major coal companies, nor the Edison Electric Institute, which represents major investor-owned electric utilities, has taken a position yet on rail open-access.
Joe Lema, a vice president of the NMA, said the association had supported railroad deregulation and is pleased with how that turned out as shipping rates have increased less than they would have without it. The association, he said, seeks to maintain healthy railroads and would want to examine how open-access would benefit or harm the rail industry.
Ed Comer, a vice president of Edison Electric Institute, which represents major investor-owned electric utilities, said the power industry has been too busy with its own move to open-access to focus on the railroads.
The movement in public policy toward open-access in general is based "clearly on a philosophical underpinning that says competition is better than regulation, and, when you can, you promote competition," Comer said. Although it's easy to call for open-access, it's how you do it that's important, he said.
"The devil is very much in the details," he said. It's important, Comer said, when an industry moves toward open-access that no specific class of customers is harmed in the process.
Perhaps, those who support open-access in the rail industry could learn from what's going on in the power industry, he said.
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