Estimating Maintenance-of-Way Costs for U.S. Railroads After Deregulation

The movement of freight on railroads, like most transportation services, is subject to a number of restrictions that make costing of specific traffic a complex process. Among these restrictions are conditions of joint production; economies of scale, scope, and density; and a lack of data on specific expenditures as related to individual freight movements. Yet costing of specific movements is a desirable activity for shippers, railroads, and regulatory bodies. Traditionally, movement costing has involved the use of accounting-based allocative costing models such as the Uniform Rail Costing System developed by the Interstate Commerce Commission for use in regulatory hearings. Most econometric studies have aimed at characterizing the underlying economic nature of costs with little or no application to the cost of providing a specific service, and as such they may be of little use in costing specific traffic. Moving beyond the historic econometric costing models’ application of economic analysis, cost behavior is evaluated for a single sector of railroad activity. The process involves four steps. First, a consistent econometric model of total railroad expenditures is developed by applying a translog function within a multidimensional definition of railroad output. Second, the model is decomposed into individual partial-elasticity estimates relative to each of the several related intermediate output measures within the framework of a total differential of the cost function. Next, specific traffic movements are defined relative to the measures of rail output. Finally, the total differential is applied using several simplifying assumptions to yield estimates of incremental (marginal) costs for the specific traffic definition.