Abstract
Borrowing from the literature on optimal road pricing, this paper introduces three efficiency-based principles for setting track access fees. The fundamental principle is that track fees should be set as close as possible to optimal congestion tolls on a track segment. Since this procedure gives an incentive to keep capacity inefficiently low in order to increase congestion tolls, the second principle is that track fees be devoted to paying for track maintenance, the opportunity cost of land, and the amortization of plant and equipment installed on the track. The third principle is that track fees should be set by traffic and cost conditions on a line and should not vary with the identity of the user whose freight is hauled on the line; this third principle is designed to encourage efficient location and mode choice. The combination of these three principles has the promise of increased willingness to use rail logistics systems, the installation of an appropriate level of capacity on each line, and optimal routing and traffic levels throughout the rail system.
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Notes
For a definition of revenue adequacy and a description of the discussion surrounding the move towards revenue adequacy, see Macher et al. (2014). A good description of the regulatory justification for prohibiting shippers from accessing more than the carrier that owns the track to their establishment can be found in Transportation Research Board (2015).
See, for example, Walters (1961).
Widely quoted figures from annual calculations made by Texas A&M University measure the cost of mis-priced highways in hundreds of billions of dollars per year. See Shrank et al. (2012).
Full costs incorporate both costs that are expended by track and train operators as well as the non-paid costs that are borne directly by shippers. Full costs are thus quite different from those that are calculated from models that are based on aggregate production functions and estimated with the use of accounting costs that are drawn from regulatory records; for example, see Ivaldi and McCullough (2001).
Wardrop’s law is a standard tool of traffic assignment in a network; see, for example, Yang and Huang (2005).
The idea of infrastructure capacity as measured by the width of the facility is used by Keeler and Small (1977).
Considerable discussion on road pricing surrounds the question of the extent to which these maintenance costs that vary with traffic levels are appropriately passed through to individual highway users in the form of fuel taxes or weight-distance taxes. See, for example, U.S. Department of Transportation (1997). In the case of railroad tracks, use-based depreciation of the infrastructure should clearly be part of the price-per-mile that is paid by the tenant carrier to the track owner.
Equations (11) and (12), following the standard procedures of road pricing, do not take into account the costs of traffic coordination on a shared facility. These coordination costs—when there is competition “above the rail” (Pittman 2009)—were the original justification in the 1820s for tracks’ being owned by a single operator regardless of the source of investment funds for the enterprise. See Boyer (2013). Gómez-Ibáñez (2016) argues that recent experience in railroads around the world suggest that these coordination costs are still substantial and can still be used to support policies that restrict entry of new operators on existing lines. But with the dramatic decline in the cost of information processing, and particularly with the ongoing installation of the nascent technology of positive train control on the North American network, it is no longer clear that these coordination costs will be substantial in the future. Moreover, there is no reason that the efficient prices that are proposed in this paper should not be a part of the process by which efficient traffic coordination is achieved. In fact, the coordination costs of having multiple carriers on the same track can all be seen as mis-priced externalities which would be internalized in the proposals in this paper.
When all location rents can be seized, as is currently facilitated by the use of contracts with non-linear pricing mechanisms, there is no incentive to under-invest in capacity. But this induces suboptimal investment patterns by railroad customers, as is outlined in the next section.
The purchase of a track connection to the rail network by its sole customer is a form of vertical integration; this is a classic response to the hold-up problem that derives from firm-specific investments. See Klein et al. (1978). This solution will only be effective, however, if the customer can access other carriers at the end of the siding. If it cannot, it will still be vulnerable to opportunistic behavior on the part of the railroad with which a customer must do business.
The region of diseconomies of scale that is illustrated in Fig. 3 is the result of the technological relationship in which increasing levels of both infrastructure and carrier inputs do not lead to equiproportionate increases in transportation output. This is logically separate from what is often called economies of scope, which refers to the costs of accommodating different types of trains (passenger and freight, or fast and slow) on the same track. It is also logically separate from the costs of coordination that in the past have given rise to vertical integration in the railroad industry.
The fact that 19th century railroads kept prices above costs and, during boom times, provided inter-locational price differences that appeared to justify railroad building, was one element of the irrational level of railroad building that provided the legacy lines that are used today. For an excellent description of the motives beyond economic efficiency that created the American railroad system, see Wright (2011). For a numerical calculation of the costs of over-building, see Boyer (2013).
There is a close resemblance between the behavior that is described below and what Carlton and Waldman (2002) describe as behavior to extend market power in the case of intellectual property.
It should be recognized that a railroad that owns a siding to a factory can, under current conditions, determine prices for shipping to or receiving from all possible locations on the railroad network and thus can manipulate the geographic structure of prices to its advantage. See Boyer (2013). Since in this model there is a single destination and only one rail origin, the calculation presented in this paper does not allow for the analysis of how a profit-maximizing railroad would quote prices to different destinations or from different origins.
Rail shippers are often large firms, and thus the relationship between rail carriers and railroads may be affected by considerations of multimarket contact. See Bernheim and Whinston (1990). Whether considerations of multimarket contact would increase or decrease market power compared with the calculation in this section is unclear.
The particular two-period example that is used here is quite stark. Joskow (1987) describes some ways in which contracts have been written in response to opportunistic motivations. See also Pittman (1991), which identifies concern for reputation as helping to protect a shipper from the dynamic described in this section. The great majority of rail shipment is done through secret contracts and secrecy should be expected to blunt the reputation motive; but in the case of large customers that might build facilities in multiple locations, the possibility of forbearance by railroads from rent seizure from firms based on reputation concerns cannot be dismissed.
For a description of anonymous pricing of infrastructure, see Arnott and Kraus (1998).
The railroad pricing literature has been dominated by the assumption that the railroad problem is the need to cover fixed costs through charging linear prices to different customers—perhaps because prior to 1980, railroads were suffering from a lack of freight and were required to charge linear prices. See the survey in Ellig (2002). As railroads have moved to a reliance on secret contracts that contain non-linear pricing, the issue of railroad pricing shifts from the inefficiency of deadweight loss, which is minimized by so-called Ramsey Pricing (Baumol and Bradford 1970) to the issue of rent transfer. Note that the assumption that efficient full-cost based pricing will not cover the complete cost of railroad operations is based on models that do not include congestion tolls as part of the cost of doing business.
The idea that an investor should be able to get the full benefit of its own investment, innovation, industry, or foresight is the language of Carlton and Heyer (2008).
The idea that the receipts of the track owner should not exceed the costs of the track owner appears to be behind the logic of the standalone cost test (SAC), although the SAC test mistakenly assumes new construction of multiple track segments rather than adjusting the capacity of individual track segments, thus preventing the test from having the desired efficiency incentives.
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Boyer, K.D. Three Principles for Optimal Pricing of Trackage Rights. Rev Ind Organ 49, 347–369 (2016). https://doi.org/10.1007/s11151-016-9518-z
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DOI: https://doi.org/10.1007/s11151-016-9518-z