The MacNeil/Lehrer Report; 4120; Railroads / Deregulation

ROBERT MacNEIL: Few things can still excite small boys and grown men quite like trains, and trains are still vital to the U. S. economy. But unless big changes happen soon, the industry says, economic realities are going to kill not only the romance but the railroads themselves.

Good evening. Today the nation`s railroads began charging seven percent more for hauling freight. The White House was happy they had jawboned the increase down to conform with the wage-price guidelines. But the railroads are not happy. Although they still haul the lion`s share of vital freight around the country, that share is declining and they are losing money. Of all major industries, railroads offer the lowest return on capital invested, 1.7 percent last year. The railroads blame much of their distress on what they consider excessive government regulation through the ICC, the Interstate Commerce Commission. The railroads and the White House are gearing up for a campaign for substantial deregulation, to give the industry more flexibility and make it more competitive; and the Department of Transportation today sent President Carter an outline of options in how that might be accomplished.

But rail deregulation is a dirty word in many quarters, and a major battle lies ahead, some of it inside the federal government. Tonight, is deregulation the cure for a sick industry? Jim?

JIM LEHRER: Robin, the railroads, despite their troubles and their thing of the past image, still play a major role in moving goods and products around this country. Sixty percent of the shipments of chemicals and primary metals, seventy percent of the coal, two thirds of the food, sixty percent of the grain: they all go by rail. Overall the railroads set a record for cargo hauling this past year, in fact, moving over 865 billion ton-miles of freight, and it all generated $21 billion in revenues. So why, then, are the railroads so sick? Well, that`s exactly what I want to ask William Dempsey, the number one spokesman for the railroad industry. Mr. Dempsey is president of its major trade association, the American Association of Railroads.

Mr. Dempsey, you`re on. How sick is your industry, and why is it that way?

WILLIAM DEMPSEY: Well, I think the data that was mentioned by Mr. MacNeil indicates in a way the degree of sickness. The industry is a resilient one; it, as you indicate, plays an essential role in the American economy. But for the past ten or fifteen years we`ve been afflicted by a serious disease and it is all attributable to the chronically depressed state of our earnings. This year, in the year ending this past September 30th, our rate of return that last year, as Mr. MacNeil indicated, was around 1.7 percent, fell below one percent; below one percent return on that investment. We consistently come out in last place on any list of major industries, and so what we have is a situation in which we simply cannot forever continue to perform this essential role for our customers and for the American consumer unless some way is found to increase the earning capacity of the industry.

LEHRER: All right. When you speak of the industry, we continue to read reports about some railroads, like the Santa Fe, the Burlington Northern and others that are doing all right financially. How do you account for that?

DEMPSEY: Well, first of all, you`re quite right. When I speak of the industry I speak in a very generalized way; there are component elements of the industry that are doing reasonably well. But I might add that not even the best components of the industry are doing well as the best components of other industries. We have only three railroads earning as much as seven percent on that investment, and none earning more than nine percent. But bearing that, let me say that we operate as an integrated web and therefore the weakness of any of the essential elements of the industry necessarily spreads to the balance.

LEHRER: All right. How much of the problem that the railroad industry has now is caused by ICC regulation?

DEMPSEY: Well, of course it`s impossible to quantify that in percentage terms or anything of that sort. I would not want to give anyone the impression that if we could only solve the regulation problem then we would have solved all the problems of the industry; that simply isn`t so. There is another perversion of federal policy in the subsidies that are given to our competing modes, the motor carriers and the barges. About the best I can say, Mr. Lehrer, is that there are four or five important steps that have to be taken to rehabilitate the industry; one of them is the question of regulation.

LEHRER: How would deregulation help the industry, in general terms?

DEMPSEY: Let me give you one or two examples. First of all, the regulatory lag. Now, this is not a matter that the Interstate Commerce Commission really can take care of, because what`s involved here is the necessity of having cost increases occur, having them occur for a long enough period of time so that you can assemble the mountain of data that one has to put into the Interstate Commerce Commission, and then wait for the responses from protestants and all of that. That costs this industry about one billion dollars a year over the last three or four years. That`s an enormous amount of money coming right off the bottom line.

LEHRER: You mean the cost in time, from the time you ask for something to the time you get a result.

DEMPSEY: No. I want to emphasize that that is not what I`m talking about, because the point I want to make is that one cannot correct this by having the commission act more rapidly. What I`m talking about is the time that the cost increases occur that in other industries, those industries can respond immediately because they don`t have to go anyplace to have...

LEHRER: I see; I understand.

DEMPSEY: I use that as an example. Beyond that, when we face motor carriers that are not regulated in terms of agricultural commodities, for example, they make the best deal they can make with their shippers; and we on the other hand simply can`t do that. So we`re competing with motor carriers, sixty percent of whom are unregulated, and they`re our major competitors; and with barge lines, ninety percent of whom are unregulated -they can act as the ordinary businessman does in the marketplace, and the railroads simply can`t. We simply don`t have the flexibility.

LEHRER: All right; thank you. Robin?

MacNEIL: The companies which ship their products by rail have as much to gain or lose on the question of deregulation as the railroads themselves. ASARCO, which is short for American Smelting and Refining Corporation, is one of the country`s largest shippers. ASARCO mines and refines non-ferrous metals like copper, as well as coal and asbestos. Each year ASARCO`s freight bill comes to between $80-$100 million. Frank. Merwin is ASARCO`s vice president who for the past twenty-three years has been in charge of contracting and paying that bill. Mr. Merwin, what do you say to the argument that government regulation is killing or greatly weakening the railroads?

FRANK MERWIN: I don`t agree with that premise at all. A great many people have a misunderstanding that the Interstate Commerce Commission arranges the prices which the railroads charge. The prices are determined by the railroads themselves. I was interested in what Mr. Dempsey said about time lag. It`s been my experience over the years that it takes the railroads a longer period of time to arrive at a decision as to the amount of increase they need rather than any regulatory block between the time the petition is filed with the commission until it hands down its order.

MacNEIL: What would it do to your business if ICC regulations of railroads were largely done away with?

MERWIN: Well, it must be understood by the public that we cannot permit the railroads to go out of business. They`re an integral part of our entire transportation system, and our system is composed of the water carriers, the trucking lines, the air lines, and so on and so forth. Particularly in the movement of bulk commodities the railroads are the important carrier.

MacNEIL: And if they`re deregulated, how would that affect you?

MERWIN: Well, oddly enough, I think that most shippers will agree with me that the railroads should have some type of deregulation. Now, as an example of deregulation, I would say that in the case of mergers or consolidations of railroads there should be some vehicle by which the carriers can determine amongst themselves that there should be fewer carriers than there are presently. Certainly the ICC is doing what it can to expedite these cases, and under the 4-R Act (Railroad Revitalization and Regulatory Reform Act) indeed they have a time limit, but I myself would like to see many mergers take place as soon as possible.

MacNEIL: Some people say that would happen if there were deregulation.

MERWIN: Well, that is probably right, but they can also happen under regulation.

MacNEIL: Why do industries like yours or customers of the railroads like yours need regulatory protection?

MERWIN: Well, you must go back to the history of the Interstate Commerce Act back almost a hundred years ago. Under the freewheeling free enterprise in the late part of the nineteenth century certain abuses came to light and so the government decided that certain laws should be passed to regulate the industry.

MacNEIL: And your industry is protected how? In what way are you saved from some danger...

MERWIN: Well, as far as the shipper is concerned, I guess the most important thing is that the act protects the shipper in that the rates charged by the railroad should be reasonable rates, that they be published and filed in a central place, that all shippers know what those rates and charges are.

MacNEIL: And is it your view that if there were substantial deregulaontion shippers like you who have to rely on the railroads -- you can`t ship any other means, a lot of the time -- would be at the mercy of the railroads?

MERWIN: No, I don`t believe that is so. The railroads have for the most part very good management. Certainly if they should raise the rates to the point where I could not economically ship over their line, they wouldn`t have the traffic and this would just injure themselves.

MacNEIL: To put it in a word, you deregulation -- some, but not major, is are not in favor of substantial that correct?

MERWIN: That`s right.

MacNEIL: Thank you. Jim?

LEHRER: No, Robin, it`s yours.

MacNEIL: Oh, you`re right, I`m sorry. Within the Carter administration there`s a strong push for deregulation from Transportation Secretary Brock Adams and John Sullivan, head of the Federal Railroad Administration. And it was their plan or outline of options that went to the White House today. Mr. Sullivan, a Pennsylvania businessman, was recently described by Forbes Magazine as a new, unorthodox kind of government official, cut from the same mold as Alfred Kahn, who deregulated the airlines. Mr. Sullivan, I don`t know whether you agree with that description or not, but would you tell us to what extent do you believe that government regulations are responsible for the unprofitability of the railroads?

JOHN SULLIVAN: I think it`s a story that only begins there. I`d like to think that if anybody is going to be protected, we`d be here to protect the taxpayer. And what we have found after a very extensive two year study is that we do indeed have a major railroad crisis on our hands, but we also find that it`s a crisis that can be solved. It can be solved with all of us getting together and realizing that to keep railroads in the private sector and not produce a railroad-post office type of operation, the first essential step is deregulation and out of that we would eliminate the need for the government to be the bank of last resort to providing $20 billion to keep this very essential industry alive. Mr. Merwin mentioned mergers as a remedy; we don`t see, in looking over our shoulders, that mergers have been the great panacea at all. We do say that restructuring is necessary, we do assure consumers that we`re not just talking about the railroads` ability to raise prices, we would rather think in terms of the amount of cost that`s built into their structure that they would be able to reduce if given the flexibility that Mr. Dempsey mentioned earlier. Having been a businessman, I can assure you that the bottom line is all-important and what`s needed here is improved cash flow, and without that improved cash flow, why, the taxpayer is going to be called on to pay that burden through a very inefficient government mechanism, and I`d like to head that off.

MacNEIL: What kind -- I know you can`t go into the details because it isn`t totally decided, but in general, what kinds of regulations would you like to see lifted or eased?

SULLIVAN: Well, I think there are a series of things. There needs to be more flexibility in setting of rates, as Mr. Dempsey mentioned; I think the ability to get out of markets where you no longer have adequate tonnage to support your structure; I think where a merger is desirable to provide a connecting link and perhaps open up new markets for a particular region, that`s important; I think the very fact that everything that happens at this time in the railroad industry becomes a court case subject to adjudication between contending parties, I think that`s very good for lawyers but not very good for taxpayers and consumers.

MacNEIL: Would you intend abolishing the Interstate Commerce Commission?

SULLIVAN: Not at all. I think Chairman O`Neal has been very progressive and very far-sighted, but keep in mind he has other commissioners to deal with. If the people on his staff who perhaps have been there for years don`t like some of his new ideas, why, they can lobby the other commissioners and generate some opposition. It`s not a body that`s structured for rapid response, and I think what we need at this time is a return to something that would provide the railroads the ability to respond rapidly to market conditions and unwarranted cost increases.

MacNEIL: Well, thank you; we`ll come back. Jim?

LEHRER: The other side of the government coin now from that Mr. O`Neal -- Daniel O`Neal, chairman of the Interstate Commerce Commission. Do you feel the answer to the railroads` problems is deregulation?

DANIEL O`NEAL: Well, I don`t think that total deregulation, certainly, is the answer. I think there can be adjustments in regulation, and many of those adjustments have already been made and others are being made. I think that probably a fundamental problem here is that while the Congress and the Interstate Commerce Commission, following through on the 1976 act, have tried to build into the system some rate flexibility, the difficulty is that the railroads for one reason or another have not taken advantage of the rate flexibility; and I think we need to look to the railroads to start some initiative on their own, and I think this is one of the fundamental things we`ve got to stimulate in some way.

LEHRER: You don`t think that any further legislation that might come out of the DOT plan that went to the White House today -- you don`t think anything like that is necessary?

O`NEAL: Well, I don`t know, I haven`t been favored with a copy, so I haven`t seen exactly what they`re proposing.

LEHRER: In general, do you think legislation which would further deregulate the railroads is necessary?

O`NEAL: I don`t know what form that legislation would have to take to help the railroads more than what has already occurred.

LEHRER: Is the health of the railroads a major concern of yours in the ICC?

O`NEAL: Well, certainly. That`s one of the obligations of the commission under the Interstate Commerce Act, is to be aware of the condition of the railroads and to take steps consistent with our other responsibilities to ensure that there`s adequate service to shippers around the country at reasonable prices, at non-discriminatory prices; that consistent with all these different responsibilities the railroads are under those conditions operating at a profitable level.

LEHRER: But that`s not your main concern, is it?

O`NEAL: Well, it`s one of several concerns.

LEHRER: The reason I asked you that, this Forbes article that Robin mentioned a moment ago has this quote from you -- at least it`s attributed to you between quotation marks -- it says: "If it`s only a question of whether an industry survives or not, who cares? It`s the public service side that we are concerned about."

O`NEAL: What I meant to say there was that if what we`re concerned about is whether the railroad industry can make money, I think you get a much different question than if what we`re concerned about is how that industry serves the nation`s transportation system. Obviously, if you`re only looking at the corner drugstore and whether it makes money, you get a different set of questions, a different set of answers probably, than if you`re looking at an industry that the rest of the country relies upon, that all the businesses in this country -- or many of them, at least -- rely upon that compete with one another and that we all rely upon for the flow of commerce around the country.

LEHRER: Well, look, how much of the cause of the problems that the railroads have right now do you think can be attributed to the ICC regulation and overregulation?

O`NEAL: Well, I think in the past the commission has tended to be a little too restrictive in many areas. Much of that has been changed, and we`re looking constantly for new areas that we feel we can open up so that the carriers can have a little more freedom, or maybe a lot more freedom, depending on the situation. The commission just recently voted to start a rulemaking -- the first step in possibly changing the rule -that would allow the railroads to price and to operate free from regulation in the transportation of fresh fruit and vegetables around the country. Now, that`s not a large amount of their business, but it is a part of their business where they`re very competitive with exempt, non-regulated truckers. So that`s just one of several steps that the commission has taken in recent months.

LEHRER: All right, thank you. Robin?

MacNEIL: Mr. Dempsey, why wouldn`t the sort of new flexibilities that Commissioner O`Neal is talking about achieve the end that you want? Why is legislation and massive deregulation needed?

DEMPSEY: Well, I think the experience under what is referred to as the 4-R Act, the legislation that was passed in 1976, makes the point. The Congress thought in that legislation that it was giving the industry adequate rate flexibility, but in point of fact, from our perspective it hasn`t done anything at all. That`s been largely because of what we regard as the unduly restrictive decisions by the Interstate Commerce Commission in the first couple of years of administration of that bill. Now, I will say, to the commission`s credit, that its recent decision in the rate case was expeditious and its fresh fruit and vegetable decision was welcome; but fundamentally the difficulty is that as long as the railroads must go to the commission for every rate increase, we`ll never be able to correct our problem. We found pleadings that, piled one on top of the other, would have reached fifteen feet higher than the Washington Monument in this last rate case. We simply have to be shut of that kind of regulation, and there`s no way under the existing statute that the commission can do that. It can take steps, but necessarily with the best of will they will be too small.

MacNEIL: Mr. O`Neal?

O`NEAL: I think it`s important to get a picture of what was intended in this act of 1976. The idea of the statute was that the railroads would be given rate flexibility in those areas where there was adequate competition. It was up to the commission to determine a very imprecise question: just where did the railroads have competition, and above what level didn`t they have competition, adequate competition so that the marketplace could serve as the constraint on excessively high prices. The commission went through the process, determined that point, a point which is developed to help protect captive shippers -- that is, shippers who have no other means of transportation, who rely totally on the railroads -- to protect them against excessive rates, against the use of monopoly power by the railroads. Below that level there`s a substantial amount of rate flexibility; there`s a lot of traffic that is below this line. And the railroads have not, in my opinion, really taken advantage of the flexibility that exists. There have been 493 rate increases sought, and that`s not all that many, that were protested, and only eleven of those did the commission hold up at all.

MacNEIL: Mr. O`Neal, is it your position that your commission has the power and the flexibility now to do enough easing or modifying of regulations to give the railroads what they need to be more flexible and competitive?

O`NEAL: Well, we`re looking at that very question right now. I think there are some additional things that we can do, and I`m not really prepared at this stage to say exactly what those are; but I do feel there are some adjustments we can make. I`d be very interested in looking at what the Federal Railroad Administration has proposed.

MacNEIL: Well, let`s ask Mr. Sullivan. Is it your position, Mr. Sullivan, and Secretary Adams` of the Department of Transportation that the ICC does not have sufficient power under present legislation to modify and deregulate enough and that therefore new legislation is needed?

SULLIVAN: I think there are powers there that can be used. As I said earlier, Chairman O`Neal has made some moves in a very constructive direction.I think if the rest of the commission gets behind him that more can be done. I might say that he inherited an interpretation of market dominance, which he referred to, that if I can put it in layman`s terminology as a small businessman, simply what they did in defining market dominance was eliminate those areas where the railroads had a decent chance to improve their profits and let the railroads alone in those areas where they were faced with the most severe competition. Now, that just doesn`t work out right, and I`m very pleased that Chairman O`Neal is having his people restudy that, because I think that`s a case where the law could have been used more liberally than it was; but I hasten to add that Chairman O`Neal, I think, inherited that in coming into his position.

O`NEAL: I think I ought to defend the commission on this, because I supported the position that was taken. And I would describe this situation a little bit differently. What the commission has done is set a level above which, if the railroads were free to make readjustments, without regulatory constraints of any kind, they would be exercising monopoly power, they would be free to raise their rates to practically any level because there would be no other alternatives readily available to the user. Now, if I were a railroad that`s exactly what I would want; I`d want that kind of freedom because that`s where you can raise prices without concern about any problems from competitors. What the railroads need to do, though, is get very competitive in that zone where flexibility exists, which is below the level where they have monopoly power.

MacNEIL: Let`s ask a big customer and then the railroad gentleman himself, Mr. Dempsey. Are the railroads using the flexibility they`ve got under present law enough, from your point of view, in setting prices?

MERWIN: No, I don`t think they are. I think there are many areas where if they believe they`re handling a particular piece of traffic very marginal in profit, they certainly in those particular areas can adjust the rate upward, by the way, without going to the commission. They can voluntarily do it, increase their tariff, and unless it`s protested by a shipper or group of shippers involved, that becomes an increased rate. And I don`t think that they did use the tools that were granted to them in 1976 as they could. But there`s something that we must remember. I get it from Mr. Dempsey that he talks about rate flexibility to increase prices. There are two things that interest my side of the table, and that`s price and service. And if they price themselves out of the field and don`t compensate for that with better service, there will be a continued erosion of their gross revenue and this will just continue the supposed sickness they`re in.

MacNEIL: You say "supposed sickness". In a word, you don`t believe they`re sick?

MERWIN: Well, the railroads keep talking about -- or the AAR keeps talking about the return in investment. That`s for all of the railroads of the United States, including the particularly unique problem we have with ConRail here in the East. If you take out the problem of ConRail, the return on investment increases substantially.

MacNEIL: I`m going to have to stop you there because we just have a few seconds and I would just like to get a final word from Mr. Dempsey.

DEMPSEY: I was very interested in what Mr. Merwin had to say. I agree with it; I agree with just about everything he said this evening, because it seems to me it underlines the principal argument in favor of regulation, and that is the notion that Mr. O`Neal adverted to of the captive shipper, as he said the shipper to whom the railroads can charge whatever they want. You...

MacNEIL: I think, gentlemen, we`re going to have to tell our viewers to stay tuned for future developments and watch their train schedules.

(General laughter.)

MacNEIL: Thank you all for joining us tonight. Good night, JIm.

LEHRE R: Good night, Robin.

MacNEIL: Thank you, Mr. Merwin, as well. That`s all for tonight. We`ll be back on Monday night. I`m Robert MacNeil. Good night.