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[quote]QUOTE: Originally posted by greyhounds [quote]QUOTE: Originally posted by MichaelSol [quote]QUOTE: Originally posted by greyhounds Anyway, the main point was that the financial risks of electrification are too great. The projected ROI was fantastic, on the order of 32% for the UP. But, the costs were all up front and the payback was years in the future. The company would have a negative cash flow for 9-10 years. Sensativity analysis showed great risks if everything didn't go as planned. [/quote] Costs of any project are almost always up front. Something doesn't sound right here. "The company would have a negative cash flow for 9-10 years." Guess what the negative cash flow period is for a new road diesel. Does Withun say? Isn't that important to know? What was the risk analysis of staying with the same system, based on the well known historical trends that diesel fuel costs always trend up, while electric power costs almost always trend down? This is the part that is usually missing: the analysis of the risk of not changing. In 1970, electric power price per kilowatt hour averaged 8 cents in the US. In places like Montana with abundant Hydroelectric resources, the price was closer to 5 cents per kilowatt hour. Diesel fuel was less than 8 cents per gallon. This year, electric power costs are at 4.5 cents per kilowatt hour in Montana (industrial), and range from 2.39 cents in Washington state (industrial) to 7 cents in Eastern states. Diesel fuel has gone up from 8 cents per gallon in the early 1970s to $1.17 for railroads in 2004 to $2.19 this year. While we happen to think it's just awful, this isn't that far off the historical trend that has existed since WWII and, indeed, confirms that trend. How does Withun deal with that historical probability in his analysis? I am curious. Given that the historical trends have been well defined and accepted -- Bonneville Power Administration noted and recognized them, in fact emphasized them, in a railroad electrification proposal made to the Milwaukee Road and several other Western railroads (GN, NP, UP, and SP) in the early 1950s -- I have an impression from the description of the Withun article that it is likely that the real "risk" factor was not assessed. The question is interesting enough that I will get the paper and read it. This is a standard business school problem: to do a risk analysis for the change, but not for staying the same. A single risk or sensitivity analysis is fairly meaningless without the corresponding risk analysis. It is the comparison of risks that is important, not "a" single risk. After all, the risk of the staying the same is high. Most businesses ultimately fail when they stay the same, not when they change. Best regards, Michael Sol [/quote] It's not that the costs were upfront. It's that they were so large and upfront. It was a "bet the compny" proposition with a reasonable chance that they could loose. All the analysis came down indicating the risk was too great. Claiming the analysis were wrong, every one of them, is a road to nowhere. A way needs to be found to mitigate the risk. This wasn't a case of one management team arriving at the wrong conclusion, something that does happen. There were numerous independant electricfication studies done. Not one of them produced an electrification project. I don't think a diesel purchase involves much negative cash flow. GE will finance its equipment. The diesel locomotive will begin to produce revenue ton miles almost as soon as it arrives on the property. That revenue will offset the finance charges. And diesels can be bought incramentally on shorter lead times that electrification. There's more certainty in the projections with the shorter time frames. Remember, if the projections about diesel fuel costs, electricity costs, etc. ten years out are wrong, the company will be destroyed. They're risking "other people's money" on what will happen ten years from now. Not exactly a prudent thing to do. Why don't we quit arguing over old analysis and try to come up with a way to reduce the risks of electrification? I think that's the key. There is a need to: 1) convert existing diesel electrics to also operate as straight electrics - reducing the capital costs greatly. 2) deal with the electric current in a way that doesn't require rebuilding of the entire signal system. Including grade crossing protection. 3) assure an uninteruptable adequate power supply 4) keep "pet" projects such as open access, Amtrak, lower freight rates for farmers, etc. out of the process. Do these four things and the risks of electrification will be reduced significantly. Will they be reduced enough to justify it, who knows? [/quote] Your #4 is inconsistent with #'s 1, 2, and 3. If you want the taxpayers to aid in funding such an enterprise, you'll have to accept conditions to that aid. Otherwise, you better let the stock and bond holders know that they will be footing the bill. And by "taxpayers aid", we mean anti-trust exemption as well as direct subsidy.
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