A revolution has taken place inside the executive suites of American's railroads that may mark the beginning of the end of the nation's oldest federal economic regulatory agency.
Furious at recent decisions by the 91-year-old Interstate Commerce Commission, rail industry leaders have been moving with uncharacteristic speed since the middle of last summer to prepare for a major assault on an agency they have been reluctant to confront strongly.
They are angry because Southern Pacific asked to exempt certain commodities from ICC rate controls and faced no opposition in some cases. But the ICC still set down the entire case for a long proceeding, killing a market initiatives.
They are angry because Illinois Central Gulf asked for peak-pricing, seasonal rates on grain shipments, to take place on six days' notice. This was designed to make the railroad more competitive with unregulated barges, but the ICC required a 30-day notice, which meant the rail firm would have had to install a rate with which it would be struck for 60 days even if it later decided it had made an error in pricing, a lack of flexibility that most businesses could not endure.
Railroad executives site other cases, including ICC orders to move specific freight cars to specific locations, a decision the executives think they, rather than agency officials, can make best.
The major impetus for change is growing fear that this country's railroad industry has become so depressed that recovery may be impossible and government ownership may be required unless there is a fundamental change in the way they do business.
It is difficult to find a business less profitable than railroading today. It has the lowest rate of return on net worth among 73 industry categories, according to a Citibank survey. Soft-drink bottling ranked first with a 22.7 percent return in 1977, followed by building, heating and plumbing equipment (22.4 percent), property and liability insurance (21.3 percent), autos and trucks (20.3 percent) and truck transportation (20.1 percent).
For all transportation, the rate of return was 7 percent, near the bottom of the list. And dragging down that average was the rail industry, in last place with a return of 1.9 percent.
For the first six months of 1978, the nation's 37 major interstate rail firms suffered an overall net loss of $71.4 million compared with year-earlier profits of $186.8 million. Of these railroads, 11 operated in the red for the six months - 6 in the Northeast, 2 in the South and 3 in the West.
The future does not look better. An ICC study has warned of a sharp downturn in rail profitability next year, and the railroads last week asked for a $1.7 billion rate increase to cover higher costs - but the rate case was filed in the wake of new Carter administration price guidelines and faces tough scrutiny. A draft report by the Department of Transportation sees a potential capital shortage of up to $16 billion for railroads in the next decade.
In terms of intercity freight services, the railroads also find that most of their competition. Today is not regulated by the federal government. Most truck freight is carried either by private firms such as Sears for themselves or by small carriers exempt from ICC control. Most barge shipping is not subject to ICC price regulation. Now, the airline cargo business is deregulated.
Consolidated Rail Corp. (Conrail), the government-aided successor to Penn Central and other former bankrupt lines, drags down the industry-wide totals and accounts for the bulk of the eastern railroads' $407 million in first-half losses. Western and southern railroads reported overall profits but at levels below those of earlier years, with all signs pointing to continued decline in what could become a recessionary environment over the next year.
"Quite simply, railroads provide a service, and they should be compensated fairly for that service," says Edward Jordan, chairman of Conrail. "Clearly, current regulatory practices have artificially shaped the railroads' role in the nation's transportation system - and they have produced a rail industry that is economically unbound."
Jordan's company was set up by the federal government to replace bankrupt midwestern and northeastern railroads and it has been aided by government grants and loan guarantees. Conrail will have suffered a net loss of about $1 billion from operations in the first 33 months of its existence ending Dec. 31.
The losses are higher than projected, and Conrail will receive more federal aid over a longer period of time before it can stand on its own, if it ever can.
And a "major reason" is ICC regulation, according to Jordan. He says inflation has obscured real progress in reducing operating costs at Conrail because of the regulatory agency's time-consuming and outdated methods of studying requests for freight rate increases.
Conrail executives have launched a campaign to get rid of federal economic regulation of the rail industry, warning that unless such drastic action is taken soon, the big northeastern [WORD ILLEGIBLE] will need even more of a dole from the federal texpayers. And the problems created by unprofitable but required rail services in the dense region served by Conrail will spread to other parts of the nation, the executives said here last week.
If Conrail were the only railroad company with changed attitudes toward regulation, perhaps one could dismiss the attack on regulation as a special case. Conrail is a unique experiment, an attempt by the federal government to create a new for-profit, self-sustaining business out of the ashes of several corporate bankruptcies using a large commitment of tax-payer money up front. Hopefully, the investment will be repaid.
But Conrail is not alone. Interviews with industry leaders have made it clear that most of the railroads want a change. Federal government transportation policy makers also want a change, with the recent DOT study stating that industry problems are due "in large part" to government policies.
The basic change being sought is eventual elimination of the current regulatory setup in which ICC officials decide the validity of freight rates, freight car utilization and entry into the market or abandonment of unprofitable business.
According to industry sources, Association of American Railroads President William Dempsey established a working task force of about a dozen people in the industry nearly two years ago to look at competition, to assess trends in government and to watch the experience of airlines under what looked like an inevitable trend toward deregulation.
In an interview, Dempsey said AAR groups more recently began studying proposals to end or reduce economic regulation after many rail presidents concluded that the ICC is ignoring a two-year-old rail regulation law that mandated reduced controls.
Based on the current studies, the AAR soon will ask its directors to approve proposed legislation for submission to Congress next year. The Carter administration is talking to the rail leaders and is expected to have a similar, sweeping proposal that would sharply reduce the role of the ICC in rail industry rate-setting and business practices.
"It is fair to say the ICC has seemed to regard itself primarily as an agency dedicated to protecting shippers by keeping rates as low as possible rather than an agency with at least an equal obligation to secure the health of the railroad industry, and it (ICC) is blind to the fact that it is doing a disservice to shippers because there will be no service at all" if railroads are not permitted to market their services profitably, Dempsey declared.
John Snow, who formerly fought for an end to federal regulation while deputy under secretary at DOT under President Ford, now fights the same war as vice president for government affairs in Washington for Chessie System Inc., owner of the Chesapeake & Ohio, Baltimore & Ohio and Western Maryland railroads.
A member of the AAR deregulation study group, Snow told reporters recently that he advocates "substantial deregulation of railroads in five years." Snow said his industry "simply can't live with the kind of regulation the ICC is dishing out."
Another member of the AAR working group, who asked not to be identified, said that, "On balance, most people think a broad-based deregulation - not overnight, but deliberate - would provide the industry with the flexibility it needs to price and redeploy assets into self-sustaining markets."
Last spring, Rep. Fred Rooney (D-Pa.), chairman of the Commerce Transportation Subcommittee, decided that the legislation of two years ago did not have a clearly defined goal of bringing 20th Century initiative to the rail industry by ending unnecessary federal intervention in management decisions, a source said.
Rooney reportedly told the railroad officials that it probably would be best to start at the bottom, and he has scheduled a private stratregy session with rail industry and union leaders in Hershey, Pa., starting next weekend. The goal of the unprecedented rail summit will be to end ICC intervention as soon as possible.
A railroad executive said Rooney "is taking a leadership role, with hopes of getting everbody to agree on a program or proposals to take to Congress." The role of organized labor's leaders at the summit is described as delicate because the discussions will focus on productivity and the current round of union negotiations has not been concluded.
Conrail has assumed an early leadership role within its industry, in the discussions on reducing regulation. Executives of the company are making presentations before DOT, the U.S. Railway Association (which monitors Conrail on behalf of the taxpayers) and members of Congress.
Jordan has described Conrail as the "cutting edge" for confronting problems which beset the entire industry. In a recent address to the Transportation Association of America, Jordan asked: "Do we really believe that the rail industry should remain in the private sector? If so, then how are the needs of that industry going to be paid for?"
His answer was that the needs of the railroads would have to be met by an economy that depends on rail transportation, even though the railroads' share of intercity freight volume has declined over the decades from more than 60 percent after World War II to less than 50 percent today. Truck and barge volume climbed during the 1950s and 1960s and, although airline cargo volume today accounts for less than one percent of intercity freight, air freight is expected to grow gradually in deregulated environment.
But railroads still have the largest overall share and will continue in a strong position. The question about future operations concerns the source of capital. Are shippers who use railroad service to pay for it in a basic free-enterprise operation, or will th taxpayers be called on to provide financing in what would become an instrument of government policy?
As Jordan sees it: "Either role may indeed be valid, but it is essential that the shaping of the answer also recognizes the obligations and consequences that accompany it. I am personally convinced that, in the long run, Conrail - and the rail industry itself - cannot continue in the private sector in the current environment of regulation and inequitable competition."
What Conrail proposes, in general terms, is eliminating federal economic regulation. The mechanics of accomplishing that goal, such as what happens to the ICC, have not been decided. But Conrail wants to put itself with most other industries under the full force of the nation's antitrust laws, the mechanism by which the public interest is protected from illegal price fixing, predatory rates or monopoly practices. Railroads currently are exempt, and groups of railroads meet in regional "rate bureaus" to set collective rates.
ICC Chairman Dan O'Neal is prepared for the new attack, and he has internal studies in progress on the agency's implementation of the two-year-old rail legislation. He said policy options will be discussed with the White House and DOT, "but there is nothing concrete yet."