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Review of Industrial Organization

Erschienen in:

03.05.2016

Freight Rail Costing and Regulation: The Uniform Rail Costing System

verfasst von: Wesley W. Wilson, Frank A. Wolak

Erschienen in: Review of Industrial Organization | Ausgabe 2/2016

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Abstract

Railroad regulation in the post-Staggers Act regime compares the revenues earned to a measure of the “variable cost” of the shipment. While revenues are readily observed, the “variable cost” is calculated using the “Uniform Rail Costing System” (URCS) that was developed by the Interstate Commerce Commission. We characterize the properties of the URCS rail costing methodology and its role in rate regulation, and we assess whether it produces an economically valid estimate of the cost caused by a rail shipment. We find that the URCS methodology is an accounting cost allocation procedure that does not recover an estimate of the cost of a rail shipment that a rational railroad operator would use to make pricing or operating decisions. We then explain why in the post-Staggers Act regime, even if an economic meaningful shipment cost measure were available, this information would not come any closer to solving the problem of determining what is an unreasonable price for a railroad to charge. We conclude by arguing that the use of the URCS methodology should be abandoned in railroad rate reasonableness regulation and replaced with a price benchmarking approach.

Vorheriger Artikel Regulation in a ‘Deregulated’ Industry: Railroads in the Post-Staggers Era

Nächster Artikel Understanding Railroad Investment Behaviors, Regulatory Processes, and Related Implications for Efficient Industry Oversight

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The Regional Rail Reorganization Act of 1973 (3R Act) provided funding to railroads that were bankrupt and authorized the creation of Conrail. At this time, seven large railroads in the Northeast and Midwest were in bankruptcy. The Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) provided additional funding to these railroads but also introduced the concept of market dominance and established a zone of rate flexibility.

See Meyer and Morton (1975), Wilson (1994), and others for more discussion.

There have been many studies of the effects of these actions on industry performance. See Boyer (1987), Burton (1993), MacDonald (1989), MacDonald and Cavalluzzo (1996), McFarland (1989), Winston (1993, 1998), Winston et al. (1990), Wilson (1994, 1997).

The various STB regulatory processes for obtaining rate relief are described in Sect. 2.

Joint costs relate to costs that are incurred when the production of one good necessarily results in the production of another good. Common costs refer to costs that are shared across multiple outputs.

Market Dominance Determinations—Product and Geographic Competition, STB Ex Parte No. 627, July 1, 1999, available at http://www.stb.dot.gov/boundvolumes4.nsf/b466c97893ec3be08525680b006041bd/f317b26a2b7d098b85256ed900651244/$FILE/vol4-20.pdf.

http://www.stb.dot.gov/stb/industry/Rate_Cases.htm.

As noted in STB (2010, p. 5), 78 % of total expenses are allocated to these groups. The remaining 22 % are assigned “default variability factors” based on prior judgments by the regulatory authority. For example, the return on road property investment and on capital expenditures are each assumed to be 50 % variable.

The URCS variable cost is additively separable across accounting activities (which implies that there is no substitutability in input costs between the activities). As will be shown in Eq. (6) below, the regressions that are run to operationalize these concepts are based on linear functional forms. As noted by Wilson and Bitzan (2003), each of these assumptions is unlikely to be consistent with how railroads incur costs.

Although Rhodes and Westbrook (1986, p. 291) criticize several of the assumptions that are implicit in the URCS methodology, their primary focus is the validity of the econometric methods that are employed to estimate the variability ratios that are used to compute the cost allocation factors that apportion shares of each accounting category total costs to individual shipments. They do not examine whether the URCS methodology yields an economically meaningful measure of the cost of a shipment.

For the case of a single railroad that hauls two commodities, products 1 and 2, over the same rail line that connects an origin and a destination, the multiproduct cost function is C(q₁, q₂). The incremental cost of the firm that ships q₁ given q₂—IC(q₁|q₂)—is equal to (C(q₁, q₂) − C(0, q₂)), which the difference between the cost of producing q₁ and q₂ and the cost of producing just q₂.

For more on this issue, see Nolte, Carl and Howe, Kenneth, “Transcontinental Rail Gridlock: Merging of SP, UP tracks creates a train bottleneck,” San Francisco Chronicle, October 11, 1997.

The assumption of cost minimization is not needed to compute these causal cost concepts. As long as a railroad has a stable production plan in the sense described in the appendix, incremental and marginal cost are economically meaningful for determining prices that recover shipment costs with railroads that employ inefficient modes of production.

While it is possible that pricing below incremental costs may reflect price wars, signals of toughness with rivals, or even predatory pricing, the routes, frequency, and time periods when this occurs seems inconsistent these explanations.

The Carload Waybill Sample is available annually. It is a stratified random sample of waybills and contains shipment-specific information that allows prices and shipment characteristics to be identified along with the URCS “variable cost” of the shipment. More information is available from http://stb.gov/stb/industry/econ_waybill.html.

Each of these product categories are identified by Standardized Transportation Commodity Codes (STCC). The product categories and associated STCC products included in each category are: (1) farm products (STCC2 = 1); (2) chemical products (STCC2 = 28); and (3) coal (STCC2 = 11). Petroleum products were defined by a collection of five digit commodities (13211, 291111, 29112, 29113, 29114, 29115, 29117, 29119, and 29121).

The program can be downloaded from the STB Website (http://www.stb.dot.gov/stb/industry/urcs.html), which also provides annual update files (from 2006 to 2013). Due to space constraints, we only report results for 2006 and 2013.

The seven Class 1 railroads are: Burlington Northern and Santa Fe (BNSF); Norfolk Southern (NS); Union Pacific (UP); CSX Transportation (CSXT); Canadian National (CN); Canadian Pacific (CP); and Kansas City Southern (KCS). In the results, the identity of the railroads is not provided to retain confidentiality.

The URCS program allows outputs that include the cost components. These cost components are provided in the user manual for the URCS program. In our case, we define depreciation as the sum of cost component outputs labeled numerically by the program as (605, 608, 615, 621, 624, 627, 630, 635, 638, 642, 645, 648, 651, 654, 657, 660, 663, 666, 669, 672, 675, 678, 681, 686, 690, 693) and return on investment costs (603, 606, 609, 616, 622, 625, 628, 631, 636, 639, 643, 646, 649, 652, 655, 658, 661, 664, 667, 670, 673, 676, 679, 682, 687, 691, 694).

The other percentiles are available in the working paper version of this paper, which is available on RESEARCHGATE or the co-authors’ webpages (http://pages.uoregon.edu/wwilson or www.stanford.edu/~wolak.

We used railroad numbers instead of railroad names to preserve the confidentially of the revenue information in the Waybill Sample data. The railroad number in these tables denotes the same railroad across all tables.

The benchmarking approach is discussed in further detail in the National Academies of Sciences Report (2015).

Boyer, K. D. (1987). The costs of price regulation: Lessons from railroad deregulation. The Rand Journal of Economics, 18(3), 408–416.CrossRef

Burton, M. L. (1993). Railroad deregulation, carrier behavior, and shipper response: A disaggregated analysis. Journal of Regulatory Economics, 5(4), 417–434.CrossRef

Eaton, J. A., & Center, J. A. (1985). A tale of two markets: The ICC’s use of product and geographic competition in the assessment of rail market dominance. Transportation Practitioners Journal, 53(1), 16–35.

Faulhaber, G. (2014). Stand-alone cost—Response to comments. Verified Statement, STB Docket Ex Parte No. 722.

Interstate Commerce Commission. (1982). The uniform railroad costing system, 1980 railroad cost study. Washington, D.C.: Interstate Commerce Commission, Bureau of Accounts.

MacDonald, J. M. (1989). Railroad deregulation, innovation, and competition: Effects of the Staggers Act on grain transportation. Journal of Law and Economics, 31(1), 63–95.

MacDonald, J. M., & Cavalluzzo, L. C. (1996). Railroad deregulation: Pricing reforms, shipper responses, and the effects on labor. Industrial and Labor Relations Review, 50(1), 80–91.CrossRef

McFarland, H. (1989). The effects of United States railroad deregulation on shippers, labor, and capital. Journal of Regulatory Economics, 1(3), 259–270.CrossRef

Meyer, J. R., & Morton, A. L. (1975). The US railroad industry in the post-world war II period: A profile. Explorations in Economic Research, 2(4), 449–501.

Panzar, J. C. (1989). Technological determinants of firm and industry structure. Handbook of Industrial Organization, 1, 3–59.

Pittman, R. (2010). Against the stand-alone-cost test in US freight rail regulation. Journal of Regulatory Economics, 38(3), 313–326.CrossRef

Rhodes, G. F, Jr, & Westbrook, M. D. (1986). Econometric analysis of costing system components in rail rate regulation. Journal of Business & Economic Statistics, 4(3), 289–303.

Surface Transportation Board. (2010). Surface transportation board report to congress regarding the uniform rail costing system. Submitted pursuant to Transportation and Housing and Urban Development, and Related Agencies Appropriations Bill, S. Rep. No. 111-69 (2009).

Transportation Research Board (TRB). (2015). Special report 318: Modernizing freight rail regulation. Washington, D.C.: Transportation Research Board.

Westbrook, M. D. (1988). Uniform railroad costing system, research report, Interstate Commerce Commission, Bureau of Accounts.

Wilson, W. W. (1994). Market-specific effects of rail deregulation. The Journal of Industrial Economics, 42(1), 1–22.CrossRef

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Wilson, W. W., & Bitzan, J. D. (2003). Costing individual railroad movements. Upper Great Plains Transportation Institute, North Dakota State University, DP-153.

Winston, C. (1993). Economic deregulation: Days of reckoning for microeconomists. Journal of Economic Literature, 31(3), 1263–1289.

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Winston, C., Corsi, T. M., Grimm, C. M., & Evans, C. A. (1990). The economic effects of surface freight deregulation. Washington, D.C.: Brookings Institution Press.

Titel: Freight Rail Costing and Regulation: The Uniform Rail Costing System
verfasst von: Wesley W. Wilson
Frank A. Wolak
Publikationsdatum: 03.05.2016
Verlag: Springer US
Erschienen in: Review of Industrial Organization / Ausgabe 2/2016
Print ISSN: 0889-938X
Elektronische ISSN: 1573-7160
DOI: https://doi.org/10.1007/s11151-016-9523-2

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