Competition Issues in the Restructuring of Freight Railways

1
Competition Issues in the Restructuring of
Freight Railways

• Russell Pittman
• Antitrust Division, U.S. Department of Justice
• and New Economic School
• 2 April 2009
• Laboratory for Institutional Analysis of Economic
  Reforms
• Higher School of Economics
• Moscow
• The views expressed are not those of the U.S.
  Department of Justice.

2
Background U.S. v. ATT

• ATT (Bell Telephone) was a vertically integrated
  monopolist, regulated at both federal and state
  levels
• Changes in technology possibility of
  competition in long distance
• Changes in economic thinking search
  for ways to substitute competition for regulation
• Continued discrimination by vertically integrated
  incumbent against non-integrated entrant
• Finally U.S. v. ATT. Vertical separation.

3
Gradually, a new paradigm

• Network industries everywhere grid networks
  carrying products and services
• Grids natural monopolies, services potentially
  competitive?
• Telecoms monopoly fixed wire network, but
  competitive long distance (later mobile,
  internet)?
• Electricity monopoly transmission/distribution
  network, but competitive generation?
• Natural gas monopoly pipeline network, but
  competitive exploration and production?
• Railways monopoly track/signaling network, but
  competitive trains?

4
How to encourage competition?

• Clearly Open up services component to
  competition, entry
• But not so clear Separate ownership of network
  from ownership of service provider?
• Economists Of course. Otherwise impossible to
  prevent discrimination. See U.S. v. ATT.
• Incumbents Of course not. Loss of vertical
  economies.

5
Eventually

• Vertical separation became conventional wisdom
  of economists.
• Third-party access (TPA) i.e. entry
  upstream, but maintaining vertical integration of
  network provider became fallback of industry
• Lost in the shuffle Transactions Cost Economics
• Benefits of vertical integration, or at least
  close coordination, in complex environments
  (bounded rationality, imperfect foresight,
  incomplete contracts)

6
Results

• Telecoms Lots of TPA, lots of success. Regrets
  at slow speed of introducing competition. But
  still discrimination concerns. Next on the
  horizon internet neutrality?
• Electricity Lots of vertical separation mixed
  results. Some success stories in UK
  (eventually), US. The but in every
  conversation California.
• Railways Even more mixed. Some TPA, some
  vertical separation. The but here the UK.
  But here a new factor the American model.

7
Consider railway economics more closely.

• Some countries mostly freight (US, Russia,
  Eastern Europe, Australia), others mostly
  passenger (Western Europe, Japan).
• Freight pays its way passenger usually requires
  subsidies.
• Broadly consistent econometric results
• Economies of system size exhausted at fairly
  small levels (5-15K km)
• Economies of density exhausted at much higher
  levels
• Vertical economies at least moderate, perhaps
  larger

8
Consider FREIGHT railway economics more closely

• History of privately owned, vertically integrated
  railways (especially US and UK)
• Often competition over parallel routes (J.S.
  Mill vs. Alfred Marshall)
• Motor carriers competitive for high-valued
  commodities and short-distance hauls
• Rail has big advantage for bulk commodities,
  especially over long hauls

9
A crucial concept source (or geographic)
competition

• Independent, vertically integrated railways
  compete to carry goods from a common origin
• Independent, vertically integrated railways
  compete to carry goods to a common destination
• Econometric support strong, especially for grain
  traffic
• US and Canada rely on
• One basis for reform strategies of Mexico,
  Brazil, Argentina

10
The Mexican Example
11
Thus a 3rd option for railways restructuring

• Vertical separation Sweden, UK, European Union
  (according to the Directives)
• Third party access Germany, much of Europe so
  far
• HORIZONTAL separation the Americas
• The mystery Russia

12
Eastern Europe

• Some mix/hybrid of vertical separation and TPA
• Mixed success of entrants in capturing freight
  traffic
• Romania 20-25, Poland 15, Others near 0
• The surprise who entered
• Large shippers integrating into transport
• Freight forwarders integrating into transport
• Not much by neighboring incumbents
• Mutual forebearance?
• Prefer purchase?

13
Russia

• 3-stage reform plan included
• Increased reliance on independent train operating
  companies
• Consideration of horizontal separation model
• So far
• Lots of privately owned rolling stock
• Lots of private operators using RZhD trains
• Lots of daughter companies
• Very few private carriers and no legal and
  regulatory support structure for them

14
An alternative plan

• Horizontal separation an American model
  restructuring in Russia
• Vertically integrated railways, operated by
  private companies under long-term franchise
  agreements, competing
• To carry freight to and from Moscow in different
  directions
• Parallel routes between Omsk and Moscow
• Large enough to achieve economies of system size
• Back to the future Russia had something like
  this in late 19th century

15
An example of dividing the grid in the Western
part of Russia into twocompeting vertically
integrated rail networks. Source Guriev et al.
(2003).
16
Whats next?

• Complete vertical separation?
• At least, an independent 2nd Cargo Company?
• At least, legal and regulatory framework for
  independent carriers?
• If not
• Vinit strelochnik?
• Vinit ekonomist?