Economics of Investment in U'S' Rail Freight Network

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Economics of Investment in U.S. Rail Freight
Network

• Gerard McCULLOUGH
• Department of Applied Economics
• University of Minnesota

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Structure-Conduct-Performance
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I. Supply and Demand Conditions
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Railroad Production Process
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Operational Output

• Intermodal
• General
• Bulk

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Infrastructure Output
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Natural Monopoly
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Network Cost Subadditivity
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Operating Cost Subadditivity
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Railroad Cost Subadditivity
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Shipment Characteristics

• Frozen food - Saltillo to Baltimore 1753 mi
• Annual use200 tons, value 0.37/lb
• Transport Rail 3083 Truck 2477
• Total Logistic Rail 134/ton Truck 127/ton
  
• Wheat - Kansas City to Mexico City 1736 mi
• Annual use 10,500 tons, value 0.06/lb
• Transport Rail 3974 Truck 3888
• Total Logistic Rail 33/ton Truck
  163/ton
• Source Paul O. Roberts, World Bank
  Presentation 2/10/99

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Shipper Characteristics

• Electric Utilities 21.2
• Intermodal 13.3
• Motor Vehicle 12.8
• Farm Products 7.4
• Food Products 7.2
• Lumber and Wood 4.4
• Pulp and Paper 4.3

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2. Market Structure
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Railroad Consolidation 1980-2002
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Countervailing Effects

• Intra-modal Competition
• Inter-modal Competition
• Product/Geographic Competition
• Multi-market Contacts
• Ex ante Contract Negotiations
• Residual Regulation

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3. Pricing Behavior
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Pricing Behavior
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Price-Cost Margins
Source AAR Costed Waybill File URCS Estimates
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Rail Traffic Trends
Source AAR Costed Waybill File URCS Estimates
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4. Investment Behavior
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Investment Behavior

• Railroad solves ?p(y,k)y-c(y,k)
• Increases in capital (k) can
• Enhance Revenue
• Reduce Costs
• Deter Entry
• Sources of capital
• Internal cash
• External borrowing/investment

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Railroad Capital Spending1993-2002
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Capital vs. Net Cash1993-2002
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4. Current and Future Performance
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Current Investment Trends
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Future Investment

• Market-Driven Evolution Continued investment
  for the medium-term to minimize the costs of
  existing operations. Uncertain longer-term
  prospects.
• Policy-Driven Evolution Increased public
  investment in rail network capabilities and/or
  revised public policies on highway usage.
• Note The terms are from AASHTOs Freight-Rail
  Bottom Line Report.