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Is The U.S. Rail Freight Industry Ready For Broad Open Access In Key Markets?

FreightWaves

FreightWaves is providing a forum – Market Voices – for a number of market experts.

Jim Blaze is a railroad career economist with an engineering background and a strategic analysis outlook. Jim's career spans 21 years with Consolidated Rail Corporation (CONRAIL), 17 years with the rail engineering firm Zeta Tech Associates, 7 years with the State of Illinois Department of Transportation in Chicago urban goods movement research, and two years studying what to do with the seven bankrupt and unrecognizable Northeast railroads at the federal agency USRA. Now primarily a teacher and writer, Jim likes to focus on contrarian aspects of the railroad industry.

Is the April 2019 Chicago interchange dispute between Canadian Pacific (NYSE: CP) and Canadian National (NYSE: CNI) an unexpected bellwether case regarding the concept of open access?

Open access competition is a regulatory condition practiced in many places around the globe as a method to allow freight rail companies to operate over tracks normally restricted to service only by a competitive carrier.

Open access has long been sought by the freight shipper community as a more efficient and effective competitive business model.

Almost every U.S. railroad freight company resists the idea that nearby railroad "A" can enter the privately built/owned/maintained tracks of railroad "B" in order to serve a customer otherwise served only by railroad B.

Opponents of open access argue that this would decrease the value of their privately owned and maintained tracks. There would be a disincentive to continue to maintain and to invest capital in such private track sections.

Now comes the current dispute

Is the small interchange tension between CP and CNI likely to include elements of the so-far avoided open access discussion in a real market geography like Chicago?  Yes, that is possible, although likely an unintended consequence of the two parties.

Canadian Pacific and Canadian National are in dispute in Chicago – one of the key rail hubs in the United States – over the physical location to interchange freight cars.

The reasons are complex. But one reason is that the years of mergers and shifts in carrier business patterns and internal efficiency models like precision scheduled railroading, known as PSR (which both CP and CNI practice), have come to a head in the suburbs of greater Chicago.

The argument involves the location where traffic originating or terminating on CNI needs to at some point reach (or originate at) a point served by CP.

The dispute involves fewer than 100 rail cars a day in a market with hundreds of thousands of cars handled daily by all the railroads that operate in Chicago.

Negotiations for a reciprocal agreement or a new single site location "contract" have failed. Both of the railroads are trying to modernize and reduce their respective expenses to operate tracks and yards they inherited (acquired) that originally were not part of their "system of yards and train flows."  

After years of owning the former Wisconsin Central, the Elgin, Joliet and Eastern and Grand Trunk railroads, CNI is trying to create a far different operating plan using PSR principles.

Canadian Pacific's vision of PSR railroading doesn't match on a network basis any longer with new Canadian National operating thinking.

Thus the dispute. Unable to resolve their differences, CP has filed a request for intervention by the Surface Transportation Board (STB), which regulates railroads in the United States.

That is unusual, since historically both the STB and its predecessor agency (the Interstate Commerce Commission) doesn't normally issue such operating plan resolution. Instead, it urges the parties to reach a negotiated resolution.

The economics presented highlight the complexity of open access in markets like Chicago.

Ironically, CP management under the late E. Hunter Harrison was not opposed to more open access for freight railroads. The current management of CP thinks differently, however, and has filed the complaint.

Importantly, the verified statements of the CP witnesses have calculated what many economists like myself have argued – there are "various scenarios that identify the costs and the time delays of trying to operate over another railroad's track to reach another terminal area."

The Chicago railroad Freight Terminal is indeed vast.  

Map identifies the challenged CP and CNI small interchange area named Spaulding.  This map is copied from the filed STB documents.

In the CP illustration, the railroad calculates the daily expense of having to operate over a complex, high traffic density Chicago network for more than 90 miles in order to reach CN's Kirk Yard near Gary, Indiana, instead of a far shorter distance west of the Chicago O'Hare airport area to drop and pick up cars near an obscure railroad track location called Spaulding.

In short, the crew time costs, train distances and fees paid to other railroads along the way between the OHare area and Gary make the interchange unprofitable.

CP's evidence makes the case as to why "open access" is impractical.

The classical business approach to open access has been a complex series of many negotiated reciprocal switching and interchange agreements. Almost every one of those agreements has been reached without regulatory mandates or regulatory operating plan instructions delivered to the railroads.

These reciprocal agreements use switch charges and car movement agreements (contracts).

Some of the older agreements were eventually bound to become illogical as railroads try to streamline their merger and acquisition properties in the search for higher earnings through lower operating expenses.

Asking the STB regulators to intervene wasn't an outcome most observers saw coming.

Will CP and CN realize the can of regulatory worms their Spaulding, Illinois versus Kirk, Indiana unresolved case represents?  Will they withdraw from the STB proceeding and compromise? Or will this become a benchmark open access case?

 

The post Is the U.S. rail freight industry ready for broad open access in key markets? appeared first on FreightWaves.

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