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[quote]QUOTE: Originally posted by PNWRMNM Future, You are missing the point. According to CURE, competitive traffic of all kinds moves at a RVC ratio of 103% in the West(UP-BNSF Average). [/quote] But why do you think this 103% average is based on coal more so than import intermodal? According to the CURE study, the captive coal rates for BNSF/UP ($18.52 average) are 15% higher than the corresponding captive coal rates for NS/CSX ($15.82 average), while the non-captive coal rates for all four railroads are only a 7% difference. This would indicate that BNSF and UP have a greater percentage of captive coal customers than the eastern railroads. Meanwhile, the percentage of revenue derived from captive customers is about 37% for NS/CSX and 24% for BNSF/UP, so a far greater percentage of total captive traffic is in coal for BNSF/UP than it is for NS/CSX. Therefore, it is statistically less likely that either BNSF or UP would have an RVC ratio for coal under the 180% standard. The recent news that demand for PRB coal is outweighing BNSF's and UP's ability to deliver would infer that both BNSF and UP can exercise more pricing power for PRB coal moves. I just doubt that DM&E's entry into PRB will cause a rate war. [quote]QUOTE: DME coal will be all competitive. One would expect it to move at about the regional RVC ratio in the absence of data to the contrary. If their route is better in terms of mileage, ruling grades, and/or rise and fall, then their RVC would be higher at a given rate than the competition's. If their route is inferior their variable cost will be higher and they will hit the 100% RVC wall before their competitors. I do not know which is true. Odds are these factors will be reasonably close on some moves. I would assume them a push. [/quote] DM&E would have the most direct route east out of the PRB with their east-west alignment contrasted with the Orin line's north-south alignment. I am assuming therefore that DM&E's mileage to the eastern customers will be shorter than either BNSF's or UP's routes. As for gradient, I'll have to check the website to see if they are offering a profile map of the extension. Again, my assumption is that relative grade comparisons will be a wash. [quote]QUOTE: DME's problem is that their investment base will be in current dollars, while much of the competitors is in older dollars, some of which has been depreciated. I suspect DME's ratio of investment to revenues will be higher than their competitors. Industry average is $3 investment to generate $1 of annual revenue. If DME ratio will be higher, that will be a big burdem. I suspect it is more likely to be higher than lower. Even if DME is willing to settle for 6% ROI they need a RVC ratio of at least 118% (100% plus 3*.06). I do not think they can get that RVC, BNSF and UP will not let them. They don't let each other get 118%, so why would they let the DME? [/quote] If you can source that, that'd be great. At this point I am not willing to take your word that either BNSF or UP have RVC ratio's under 180% for all (captive and non-captive) coal hauling out of the basin. I will however accept your contention that DM&E will need an average RVC of over 118% to make the project viable to it's investors (including Uncle Sam), and I have no doubt they will be able to do this unless PRB coal demand collapses somehow. [quote]QUOTE: The other point is that the private capital markets would not invest in this project even at 6%. They will demand more than that even of a sure investment. DME is far from sure so the market will require a risk premium. The prospect of RRIF money minimizes this problem and could get cost of capital down to 6%, but it will be a very risky business and the FRA does evaluate the borrower's business plan. I would not put my money into it. [/quote] Again, I believe the lack of private investment enthusiasm over DM&E's PRB extension is soley due to the uncertainty of PRB coal demand being able to outweigh potential changes to the political landscape come 2006/2008 and beyond. If the Democrats take over both the Presidency and/or Congress it could spell trouble for coal based projects. We saw that in the 1990's with Clinton's EPA et al and the negative effects it had on coal relative to natural gas power plant development. That's why DM&E needed some hard federal backing to make sure financing is independent of private investment skittishness. If DM&E gets all the 2.5 billion secured before the 2006 elections they'll be just fine.
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