Coal Rates and Revenue Adequacy in a Quasi-Regulated Rail Industry

This article considers whether equitable rates to captive coal shippers are compatible with competitive rates of return in the rail industry. Using the results of a translog cost function based on panel data of Class I railroads for 1974-1986, I show that returns to scale are sufficiently large to cause coal rates to rise to socially unacceptable levels if coal shippers have to bear the entire revenue burden. Moreover, even if noncoal traffic makes a contribution to overhead, the revenue burden on coal traffic is still substantial and would require increases in coal rates that are probably neither politically nor economically feasible.