I don't think "public" vs "private" pricing has much to do with what happened in the PRB once UP/CNW enterred the market. In the first place, the coal railroad prices aren't very "private" - they can be determined from filings utility companies are required to make with their own regulators. But, more importantly, the difference in UP/CNW and BN pricing in the early years represented a fundamental difference in pricing strategy. BN was the incumbent, and was (at least from the perspective of UP/CNW) trying to protect its existing margins. UP/CNW were the new entrants and trying to gain market share through pricing. Whether the pricing was "public" or "private" would have made no difference.
The photo on page 214 of Walter Grande's "The Northwest's Own Railway" offers a good glimpse at the area you're discussing. It shows three Alcos leading a westbound freight across a modern bridge spanning the just-completed I-90 freeway. In the background you can see both the UP/MILW and GN/SP&S high bridges over the Spokane River. This bridge over I-90 still stands today, and if it still had track it would form the west side of a wye where the Latah Creek Bridge splits. The SP&S at this point was at about the same elevation as the west end of Latah Creek Bridge; in order to make this happen, Latah Creek was built with a nearly 1-percent grade climbing west from Sunset Junction.
And here's where the reasoning for BN's new alignment up the hill to Lyons kicks in. Westbounds coming off Latah Creek Bridge bound for Wenatchee now use just under half a mile of re-engineered SP&S grade at first, then swing away onto the new alignment. Had they kept using the original SP&S and GN trackage, westbounds would climb over the bridge, then descend through the tunnel under Greenwood Cemetery to Fort Wright Junction, and then start climbing again on GN's circuitous route up and around the basalt ridge through Highland. A lot of up-and-down and out-and-back for a 1970s main line overhaul. Instead, BN chose to create a better, steady climb off the west end of Latah Creek Bridge, spanning Indian Canyon on a second bridge, reaching the top of the bluff and turning west toward Wenatchee with fewer curves and less miles than the GN.
Paul,
The answer to your question about the new Latah Creek bridge contributing to the abandonment of the SP&S is that it did not. The main purpose of the new bridge was to connent the GN line across eastern Washington with the NP's elevated line through downtown Spokane. This allowed the GN line through Spokane to be abandoned and the GN right of way through Spokane to become most of the site of Expo 74. The GN connected with the SP&S at Fort Wright, an interlocker just west of the west end of the old GN bridge. The new bridge included a connection to the SP&S near its west end as well, so there was no net change in that regard.
My recollection is that a few miles of the former GN main line was relocated west of the new bridge because the west end of the new bridge was higher than the old line and at least a few hundred feet to the south of the old line.
Mac
Bruce Kelly [snip] . . . spring flooding in the cuts between Fish Lake and Cheney, sparse traffic generated on-line, no important branch line connections. [snip]
Your Trains article mentioned and illustrated with a photo at the UP overpass that it was sometimes also known as the ''Wet Line'' . . .
And maybe it was just one of those hard decisions similar to those that ConRail had to make about which of the several routes across NJ, NY, and PA that it should keep - and which should be abandoned - in view of insufficient traffic to keep both/ all of them active. [See many posts by henry6 on that point.] It's not that there's anything major 'wrong' with a route - it's just that in evaluating A and/ or B and/ or C, etc., the loser might nevertheless have some very good attributes. But we can wish that the 'High Line' been 'mothballed' as CR pretty much did to the ex-Erie-Lackawanna Southern Tier of NY lines, as it seems to keep coming back to life every ten years or so.
Whatever happened to the big bridges and the R-O-W of the High Line ? Were they dismantled and scrapped and sold off and are now occupied by subdivisions ? Or, are they pretty much still intact and in place, and could be re-assembled, if someone had enough $ and was inclined to do so ? Just wondering, that's all . . .
- Paul North.
Bob Downing is indeed a kind and knowledgable person. He climbed the ranks from MofW to the top. His executive roles at both GN and BN made him instrumental in the merger, going clear back to the days of the Wyer-Dick report. When BNSF built its refueling facility at Hauser, Idaho, the control points at either end of the fuel pad were named West Downing and East Downing in his honor. Bob was present the day of the ribbon cutting.
As for the abandonment of the SP&S from just east of Pasco to Fish Lake, the reasons cited above from Solomon's book, as well as those from my Trains articles cited above, were the ones widely circulated at the time. Bridge and tunnel maintanence, rock and earth slides in Devils Canyon and along the north wall of the Snake River, spring flooding in the cuts between Fish Lake and Cheney, sparse traffic generated on-line, no important branch line connections.
Bridge maintanance may have been overstated, but the other conditions were reality. Not that they were un-managable; a fraction of the investment made a decade later to reopen Stampede Pass could have made the SP&S High Line nearly trouble-free. UP's neighboring Ayer Sub between Hinkle and Spokane traverses the same basic territory the SP&S did, with one giant bridge (over the Snake River at Joso), a couple of medium-sized bridges (over the Palouse River at Park and Hooper Junction), equal if not greater landslide potential along the south bank of the Snake and in the Palouse River Canyon with its six tunnels and steep walls, and similar flooding issues between Fish Lake and Cheney. But UP has important branch connections, and no alternate route of its own to switch to. Thus, it invested where necessary and has kept the Ayer Sub alive and well for its daily dozen or more trains.
BN was able to blame physical shortcomings for its decision to cast off the High Line, but the real reasons had more to do with what BN was planning to do elsewhere, and what it needed to make it happen. It's a story that someone will hopefully get around to telling, some day. But one thing has been sure since the day BNSF came into being. Everyone I've talked to, from the brass on down, has said they wish the High Line was up and running today.
466lex: Thanks for that. It was fun to read and informative. It's too bad that Leaders Count was written in Cascade Green ink. None of the *leaders* involved seemd to be described as having anything much less than magnificant qualities. Perhaps a good book that needs to be wriiten is a historical one about railroad leaders-written by an objective author. That would be a good read, especially when you consider that what made a guy the cat's meow 20,50,100 years ago, might be a trait that would be valueless today.
Thanks to Chris / CopCarSS for my avatar.
Wow.
466, what a great explanation. It makes sense. MoPac would have been far too big to acquire. Sometimes, particularly for us that gaze at our old Official Guides and maps, we wonder....why, or why not. On maps merger that didnt happen make sense. Without the proper financial and operations background, we just dont know.
I realize that the Frisco line has been a pretty good acquisition over the long haul, but my God...MoPac was a powerhouse. Great point about the energy viewpoint of BN vs MoPac. Coal just wasnt that big of a deal to MoPac at that time.
ed
Sounds plausible enough to me. Might make an interesting master's thesis or B-school case study. Mainly just need access to the primary sources to be able to support the several sub-premises, and refute possible alternative explanations, etc.
466lex [snip] So it must have been easy for Grayson to pick up the phone and call Menk. They had worked together at the Frisco before Menk went to CB&Q. [emphasis added; snip]
I thought that was lurking in the background as well. I wonder how often it is that a rail merger involves one of the railroads that the acquiring CEO had worked for previously - and therefore presumably knows its strengths and weaknesses really well - as opposed to a road that he had no previous contact with, or even a competitor of his former employer ? Might be an interesting tabulation to compile.
MP173 asked:
"Can anyone give a logical reason why BN pursued Frisco rather than merge with MoPac?"
Some historical speculation: Lou Menk's Burlington Northern of the 1970's was a "new" railroad, but burdened with expensive merger conditions, labor in particular, and only modest opportunities for operating and marketing synergy from the merger. Inflation and competition were taking their toll on BN. The spectre of the Penn Cental debacle hung over the industry. PRB coal was a gleam in BN's eye, but the potential payoff was highly uncertain, with the greatest immediate profit opportunity being tonnage to Upper Midwest Utilities, not to the Southwest. Overall profitability was mediocre at best, with essentially no capacity for acquisitions. Any merger would have to be a stock transaction of middling companies.
Meanwhile, in the Sun Belt, Downing Jenk's Missouri Pacific was thriving (at least by railroad industry standards of the time). Outstanding management and service to the burgeoning chemical industry on the Gulf Coast were the heart of MP's value. PRB coal would not have been seen as a significant profit opportunity in the natural gas-rich Southwest. After all, everyone in the industry was aware of BN's "missionary" PRB coal rates to San Antonio.
Railroad presidents have always had their conversations about possible combinations. Missouri Pacific had to look appealing to BN because of its management and franchise, and there can be little doubt that at least conversations took place. Railroad presidents have always had their egos. It is not hard to imagine that Jenks would have viewed MP as worth much more than Menk would have been able or willing to pay. Plausibly, Jenks would have seen MP taking over BN to finally seize the so far unrealized original BN merger benefits and to unlock the natural resouce values of BN's vast property holdings, but not as a dramatic franchise extension. Would Menk be in a self-sacrificing mode so soon after the BN merger? Unlikely.
Meanwhile, just down Olive Street from the MP in St. Louis, Dick Grayson of the Frisco was surveying the railroad landscape of 1980's and beyond. Nimble niche player among lumbering giants that it was, the risk of the Frisco being stepped on was increasing. Santa Fe always seemed the natural network fit for Frisco. (In fact, rumor had it that such a merger might have happened in the 1960's but for Menk's ego.) But Santa Fe of the 1970's seemed somnolent. Who knows if any conversations occurred with UP or MP or Southern or ....? Probably. But what value would the Frisco bring to such mergers? Modest, at best.
So it must have been easy for Grayson to pick up the phone and call Menk. They had worked together at the Frisco before Menk went to CB&Q. The merger would make few waves, nothing dramatic. Some headquarters and administrative savings could be had. And, there wouldn't be that ego thing. Grayson would be ready to retire by the time the ICC had completed its lengthy review. A simple stock transaction among friends.
PRB coal opportunity in the equation? Not visible at the time. Funny, though, how things pan out. One of BNSF's major PRB coal moves today is to power plants in the Birmingham area. And, oh yes, Frisco fits very nicely into that (BN)SF network. Just took a couple of decades ... and not much ego. Thanks, Jerry Grinstein.
Well, then that's no doubt why the linked court opinion - essentially a ruling on a 'discovery dispute' - was so interesting to you. Good on ya, cobber ! Once in a while those jobs have compensations and benefits beyond the 'smallish' paycheck amount . . . I used to say that I was paid $2.65 an hour in wages, plus $2.65 an hour in benefits by the experience and insight gained. For a couple of summer vacations [only], it was a fair enough deal.
Back around the same time or maybe 5 years earlier, I was told that as a ''quality assurance'' measure, all such data was entered twice, once each by 2 different people. If it all agreed, fine; if not, a supervisor decided which of the discrepancies was correct. Supposedly one benefit of 'off-shoring' that process was that the non-English-literate transcription personnel had no temptation or ability or incentive to correct the grammar and spellings as they actually appeared in the original documents - apparent mistakes and all - which allegedly would occur when using English-literate staff here, and which would 'corrupt' the integrity of the finished product. But now, with the benefit of 20+ years of experience and cynicism, while some of those rationalizations may well be true, I doubt if that was the real or true reason - instead, I suspect that saving $ and/ or a lower cost to produce the finished work-product was the primary motivation.
Paul_D_North_JrI remember that. I believe it was ETSI = Energy Transportation Systems, Inc. Here's a link to one of the many court opinions in that litigation: http://www.altlaw.org/v1/cases/516064I
I remember that. I believe it was ETSI = Energy Transportation Systems, Inc. Here's a link to one of the many court opinions in that litigation:
http://www.altlaw.org/v1/cases/516064I
Interesting stuff !! The litigation support co. I worked for (my first job after college) was hired by the pipeline co. mainly to go thru the documents provided by the railroads and organize them into a computerized database by looking at copies of documents and entering the names of people and companies, and other things, into boxes on a paper form. The forms were then shipped to like Indonesia or someplace where data-entry people typed in the information. We had to be very careful to make out letters exactly a certain set way, since the people doing the data-entry usually couldn't read or write English so could easily make mistakes. I guess that was "state of the art" computer technology in 1985!!
It was kinda fun since, although I was a low level clerk, I was also the only person there who knew anything about railroads, so a lot of time the higher-ups would come to me to explain some term or something to them. Plus, when BN finally delivered the documents requested in the suit, they sent EVERYTHING in their archives, like a million pages of documents (most the original documents) saying we had to make copies ourselves and send the originals back...so for like two weeks I stood at a copy machine making copies one page at a time. I got to see the NP charter signed by President Lincoln, that was pretty neat.
Can anyone give a logical reason why BN pursued Frisco rather than merge with MoPac?
Up had to have been thanking the railroad Gods for that decision. Or am I looking at events thru 30 year old history?
Falcon48 said:
"Also, as UP/CNW enterred the PRB market, it seemed that BN was more interested in preserving its margins on its exisiting business than competing against the new entrants for new business. That's consistent with BN personnel following a rigid edict from On High as to profitability. The result was that nearly all of the PRB growth for a long time went to UP/CNW."
Union Pacific's merger with Missouri Pacific was a strategic coup. BN diddled with Frisco, but UP locked up the Chemical Coast. Related to the topic of this thread, the perhaps even more important acquisition was coal-burning utilities on MP to terminate PRB coal. Intense BN price competition for tonnage to "naturally tributary" UP/MP utilities didn't make a whole lot of sense. Had pricing been "public" (see my earlier post) market equilibrium would have been reached much earlier and at enrgy-market appropriate rate levels. Instead, blind negotiations for winner-take-all 20 year contracts under threats of build-outs, etc., ultimately drove rates to near uninvestable levels. Still, the intense competition drove innovation: AC locomotives; 286,000 gross aluminum cars; distributed power; concrete ties; BN's (ultimately unsuccessful) TroughTrain; crew consist agreements; etc.. Innovation drove down costs, supporting positive financial returns. (Yet another example of the un-wisdom of Ratio-driven pricing, from CFO's (or others).)
Mac, what you say makes sense to me. Why did they not just 'mothball' or 'railbank' it, as was done with Stampede Pass Line ?
When Bressler became CEO and the emphasis shifted to natural resources - with the railroad as a mere sideline to that - is about when I sold off my then-BN stock (formerly NP). I could see that handwriting on the wall.
Dumb-Question-of-the-Day Dept.: Did the circa 1984 completion of the high and long Latah Creek Bridge on the west side of Spokane - which unified the ex-GN, NP, and SP&S lines there - facilitate or otherwise have anything to do with the abandonment of this SP&S line ? I understand that some of the connections and consolidation of those lines had to occur pretty quickly after the merger so that the ex-GN yards could be vacated for the 1974 [?] Spokane World's Fair / 'Expo' - Mr. Downing gave an interview to a Spokane paper a few months ago regarding that (I'll see if I can retrieve that - EDIT: See:
http://www.spokesmanreview.com/tools/story_pf.asp?ID=262712
''Engineering Success: Ex-railroad exec's Expo '74 involvement a part of Spokane history''), and he also discusses it a little on pg. 119 of Solomon's book. But if the above date for the bridge is correct, that is long after - like 10 years - the World's Fair-related needs, but not long before the abandonment. I'm just not familiar enough with the locations and routes there to understand it well.
So it seems that CSX does not have a monopoly on that kind of bone-headed move - see Fred Frailey's column in this month's (September 2009) Trains on CSX's 'bottleneck' Northern Subdivision of the 'A' line for an acocunt of that.
Thanks for the insights, Mac.
EDIT: The following is from my post of 07-29-2009 at 2:48 PM, which is at about the middle of Page 2 of 4 of the ''Re: BN Move to Fort Worth'' thread, at: http://cs.trains.com/trccs/forums/p/157633/1739382.aspx
''If you want to know more, in the BNSF book by Brian Solomon that I referenced above [MBI, 2005], there's a 2-page interview with Robert W. Downing - BN President, 1971-73, COO 1973-76 - on the subject of the merger. I remember that he said the delays due to the legal appeals of the merger worked in their favor - it gave them more time to prepare and integrate things. Also, that the merger implementation process went slowly and 'incrementally', by design. There were some things that could be done on 'Day 1', but many things that needed to wait until new facilities and connections were built. One good example of that which comes to my mind is the Latah Creek high bridge on the western side of Spokane, which wasn't completed until 1974, if I recall correctly - and only then could the ex-GN's traffic through Spokane could be consolidated onto the ex-NP route. Mr. Downing was still alive and healthy as of last fall - and may well still be - so there appears to be some resources on the Internet regarding this. For example, here's the link to a little interview he gave to the Spokane newspaper dated Oct. 1, 2008, titled 'Engineering Success' - http://www.spokesmanreview.com/tools/story_pf.asp?ID=262712 ''
I just re-read Mr. Downing's remarks, and he seems like a very wise and kind person. I recommend this interview to everyone. - PDN.
You have correctly quoted the official party line. My personal opinion, but one I believe shared by many is that this was in the era when BN was trying to shed assets, any assetts, even good ones. IIRC Dick Bressler was in charge. He was much more interested in Natural Resources, which was his background, than the railroad that he knew very little about.
If the bridges were really a high cost item, which I doubt, they could have been filled by slicing rock off the side of the adjacent canyon walls. This would have best been done with the line shut down. Another alternative was to take the line out of service and see how things went for a few years. Bob Downing, then Executive VP and a career railroader, tried to talk Bressler out of the abandonment with no success. They abandoned the line, traffic volumes rose and soon crews could not make the 144 miles between Spokane and Pasco in 12 hours. This was somewhat relieved by placing double track on Providence Hill, the ruling grade in both directions.
Earl Currie in his book about James J. Hill and his legacy to rail operations discusses this and a similar bonehead move in Illinois that BN pulled about the same time.
Bruce KellyMurphy, does this book include an explanation of why BN abandoned most of the SP&S between Spokane (Fish Lake to be precise) and Pasco, WA? If so, does the explanation include any recent commentary from Bob Downing on the subject? In the various discussions he and I have had on this and other BN-era developments, Bob's painted a considerably different picture than the one that was officially circulated back in the day.
Brian Solomon, in his 2005 book Burlington Northern Santa Fe Railway (MBI Publishing), says that post-merger, the parallel and engineering-inferior NP line was upgraded and 'directional running' established - eastward on 1 line, westward on the other [I'm not sure which was which right at the moment]. But in 2 places in that book, he writes that the reason that the SP&S line was abandoned was because of the expenses of maintaing the high bridges [5 of them ?], the several tunnels, and no traffic originating or terminating on that segment. Is that the official 'party line' view on this ?
The following may also be of interest or relevance:
Crossing a creek in style Trains, March 1984 page 31 [NOTE: I suspect that date is wrong - should be 1974 instead ?]Burlington Northern's Latah Creek bridge ( BN, BRIDGE, "KALBACH, JOHN", SPOKANE, TRN )
Ten years after Trains, August 1998 page 30 Spokane, Portland & Seattle route through Washington ( ABANDONMENT, FRONTISPIECE, "KELLY, BRUCE", SP&S, WASHINGTON, TRN )
-Paul North.
With respect to 466lex's post, I don't know anything about the internal machinations of BN or their CFO in the late 1970's and early 80's. The BN pricing missteps to which I was referring occurred earlier. By the late 70's, BN had changed course, and was trying to get out of many of the deals it had struck earlier.
Still, this has a ring of truth. I know that heads rolled at BN because of the original pricing missteps so, presumably, this is when the new CFO came in and BN's pricing policies changed. Also, as UP/CNW enterred the PRB market, it seemed that BN was more interested in preserving its margins on its exisiting business than competing against the new entrants for new business. That's consistent with BN personnel following a rigid edict from On High as to profitability. The result was that nearly all of the PRB growth for a long time went to UP/CNW.
Presumably, 466lex has some insight into the internal workings of BN during this period. It's interesting that, based on his note, BN was still following the pattern of "marketing is responsible for volume, finance is responsible for profitablility", and actually saw this as the solution to its earlier missteps. This kind of division of responsibility (sometimes called a "check and balance" system) may have made sense in the days of rate bureaus, where most prices were made collectively, but it made no sense at all as individual pricing became more and more the norm. As 466lex's note demonstrates, pricing decisions demand tradeoffs between volume and contribution, and require consideration of competitive and marketing factors external to the company, something a finance department is not in a position to do. That's why railroads today make their marketing departments responsible for striking the proper balance.
466lex Volume leverage on the bottom line in the railroad business is powerful … both ways. Simplistic formulae in such a complex economic environment are an invitation to a train wreck. So dealing with the volume - profit tension is always there. It may be tension between Marketing and Finance. Or between the left lobe and the right lobe of the CEO‘s brain. But beware of CFO’s bearing Ratios!
Volume leverage on the bottom line in the railroad business is powerful … both ways. Simplistic formulae in such a complex economic environment are an invitation to a train wreck.
So dealing with the volume - profit tension is always there. It may be tension between Marketing and Finance. Or between the left lobe and the right lobe of the CEO‘s brain. But beware of CFO’s bearing Ratios!
"Volume leverage on the bottom line in the railroad business is powerful … both ways."
"But beware of CFO’s ANYONE bearing Ratios!"
Yep!
Falcon48 said (among other things): “You get what you measure” This, in reference to the natural tension between volume objectives (Marketing & Sales) and profitability objectives (Finance). But what if you measure the wrong thing with a funny yard stick?
In the late 1970’s BN hired a new CFO from the old AT&T. (You remember the classic AT&T trade-off of Mr. Vail: Regulate my monopoly but guarantee my return on invested capital.) The new BN CFO vowed that BN would not carry a carload of freight that did not earn BN’s cost of capital. An infamous pricing yard stick was put in place: The Revenue-to-Variable Cost Ratio of every piece of traffic had to be at least 1.34.
“You get what you measure.” What if you are not measuring the market place? What if you are not measuring the competition? What if you are not measuring what variable costs could be? What if you are not measuring what the asset utilization rate could be.
The new CFO’s rigid ratio ran head-on into the perfect storm of intense competition across all transportation modes (think completion of the interstate highway system) and the double-dip recession of 1980-82 and an inflated general railroad rate structure that was driven by a compliant ICC responding to uncontrolled railroad labor costs. Mr. Vail really did have a monopoly, so let the costs soar and may the asset base blossom. Management at BN had no such safe haven.
The result was ugly. Millions of tons of non-coal traffic were willfully lost or foregone in the late 1970’s and early 1980’s because the sacred Ratio dictated. Marginally profitable? Sure. But in 1982 when traffic levels fell to unfathomable levels, some 1.15 ratio traffic would have paid a lot of bills. But even more ironic was the reality that variable costs dropped like a rock as new BN management rationalized the labor cost structure. So traffic that in 1980 was shunned for a ratio of 1.15 could have had a ratio of 1.40 in 1984. But it was gone.
A central strategic goal of BN during the 1980’s and 1990’s was to try to bring non-coal traffic and excess non-coal capacity into balance: Line sales and abandonments, Expediter intermodal trains, transloading centers, etc., etc. Volume leverage on the bottom line in the railroad business is powerful … both ways. Simplistic formulae in such a complex economic environment are an invitation to a train wreck.
http://www.altlaw.org/v1/cases/516064
United States Court of Appeals for the Fifth Circuit
August 12, 1987 - 8 Fed.R.Serv.3d 545; 822 F.2d 518
- PDN.
EDITS:
As to the water usage and supply issue, here's a link to a nearly-unanimous 1988 U.S. Supreme Court opinion that held that the Secretary of the Interior had no authority to contract with ETSI to provide the needed water for the 'slurry' part from Lake Oahe:
http://supreme.justia.com/us/484/495/case.html
U.S. Supreme Court - ETSI Pipeline Project v. Missouri, 484 U.S. 495 (1988), No. 86-939 - Argued November 3, 1987 - Decided February 23, 1988
Despite this result, the railroads were still held liable for the damages that supposedly resulted from their actions in violation of the anti-trust laws. See the following excerpt from the 'Representative Experience' biography entry of one of the lawyers, John L. Carter, of Vinson & Elkins, at:
http://www.vinson-elkins.com/lawyers/showpdf.aspx?page=http://www.vinson-elkins.com/lawyers/lawyer_detail_fb_print.aspx?id=1558
Antitrust Litigation
ETSI v. AT&SF Railroad
wjstix About 25 years ago I was involved (in a very low-level way) in a lawsuit filed by a pipeline company against BN and some other railroads. The pipeline co. had developed a way to add water to ground up coal, turning it into a slurry that could be sent thru a pipeline, and they wanted to serve the Powder River Basin. The pipeline compnay's suit contended that several railroads in the Powder River Basin area (BN, UP, CNW) had conspired to make their shipping rates unprofitably low so that the coal companies would choose the railroad and not the pipeline co.
About 25 years ago I was involved (in a very low-level way) in a lawsuit filed by a pipeline company against BN and some other railroads. The pipeline co. had developed a way to add water to ground up coal, turning it into a slurry that could be sent thru a pipeline, and they wanted to serve the Powder River Basin. The pipeline compnay's suit contended that several railroads in the Powder River Basin area (BN, UP, CNW) had conspired to make their shipping rates unprofitably low so that the coal companies would choose the railroad and not the pipeline co.
I seem to remember reading that one of the main factors that kept the coal slurry pipeline concept from mounting real competition to the RR's was the lack of suitable sources of water in the PRB....the system required LOTS of H2O...
"I Often Dream of Trains"-From the Album of the Same Name by Robyn Hitchcock
The above are a couple of very informative posts - thanks for sharing.
One point mentioned by 466lex is one that I was going to add in here also, after reviewing that portion of Brian Solomon's Burlington Northern Santa Fe book last night: the fear of coal slurry pipelines, and that their economic impacts on the railroad's coal traffic might turn the western railroads into wards of the state, similar to what had just recently happened back then to Penn Central and ConRail. He devotes several pages to that discussion - mainly borrowed from other sources - and says that it wasn't a dead issue until the mid-1980s. It's not too hard to see that threat exerting a downward pressure or a cap on rates, which may have led the railroads to price lower than they would have wanted or desired, simply to avoid creating an economic incentive that would encourage the greater disaster of coal slurry pipelines.
I think the discussion here is less about any rate-setting mistakes - in terms of the art of evaluating a lot of 'soft' factors - than it is about the failure to realize the long-term cost implications of the traffic in terms of having to invest in new track, signals, locomotives, shops, etc., and including those costs into the rate 'floor'. Solomon and those he quotes discuss a lot of that in detail as well, and most of it echoes what has already been posted above, esp. mudchicken's comments about the conditions of some of those lines. One other notable point is how little coal the component railroads of BN - GN, NP, and CB&Q - were moving pre-PRB, approx. 16 Million Tons Per Year altogether. Further, that was broken down into something like 12 MTPY, 3 MTPY, and 1 MTPY (not respectively), so clearly even that limited experience wasn't across-the-board or widespread. I may have more time to post more excerpts or insights from that book in a couple of days.
EDITS: One other factor that's not been mentioned so far is inflation. That era - from the early 1970s throught the mid-1980s - had rampant inflation, culminating in a prime interest rate in the high teens %'s in the fall of 1979 - see any economic reference on the subject for more details. The ICC was notorious for being slow to allow rate increases to compensate for inflation, and so a rate that may have seemed reasonable in the early 1970s could have become inadequate in just a few years through just the passage of time and the gradual escalation of prices.
The subject of this thread seems like it would make a good topic for a master's thesis or a business school case study, provided that the primary sources still exist/ are alive, and are non-sensitive enough to be available for review, etc.
I didn't mean to suggest that BN pricing personnel were stupid, or that they may not have had reasons for their pricing strategy that seemed valid at the time. Pricing is an art, not a science and, as some of the other posts point out, mistakes will be made. From the standpoint of hindsight, BN's original pricing strategy on coal was almost certainly a mistake. And BN recognized it was a mistake, probably by the late 1970's. Unfortunately, but perhaps inevitably, their efforts to deal with it galvanized utilities and led to the never ending cycle of coal rate litigation we see today.
One factor which may have contributed to the original problem was the way railroad marketing and pricing functions were typically organized prior to the 1980's. The "marketing" or "sales" department (or whatever it might be called) was responsible for volume while the "finance" department was responsible for profitability standards/ The "profitability" standards were nominally supposed to be followed, but they could be (and frequently were) overruled if marketing could make the case that following them would result in loss of present or potential traffic and contribution. This might have made some sense in an era when most rates were made collectively through railroad rate bureaus rather than by individual railroads. But it didn't make a whole lot of sense when you start moving into an era of individual pricing, You get what you measure. If the marketing people are measured on volume, that's what you'll get. If you're responsible for volume, but not profitability, you can almost always make the case (or could have back then) that the railroad is better off handling traffic that makes at least some supposed contribution than not handling it at all. And, of course, if you're a manager who is evaluated solely on volume, you'll make that case every time. One of the big changes in railroad marketing departments that happened post Staggers is that railroad marketing personnel were made responsible (and evaluated) for profitability. In other words, the responsibility for making the tradeoff between contribution vs volume now rests on the same head.
Having made my share of railroad rate-making errors, I hesitate to second-guess decisions taken more than thirty years ago. Heck, there was potential coal-slurry pipeline competition, real natural gas and nuclear competition, inter-railroad competition, barge competition, cross-country utility competition. Who could honestly say in the mid-1970's they foresaw Three Mile Island, the failure of the slurry pipelines to gain the right of eminent domain accross railroads, the full play of the Clean Air Act, and a multiplicity of other energy game-changers. Not to mention CNW access to the PRB, UP merging with MP to lock in a huge utility base.
The wonder isn't so much that the early pricing was imperfect. No, the wonder is that BN made those early investments in the face of such uncertainty. Prescience, luck, or almost blind faith in future railroad productivity gains paid off. (One BN executive of the time said (roughly), "The unit train is as central to the railroads' future as the resurrection is to Christianity.")
In my opinion the major BN rate-maker misjudgement of the era (and a misjudgement compounded in spades by CNW/UP coal ratemakers until 6 years ago) was to believe that long-term rates determined in "secret" head-to-head negotiations and to be held as "secret" in private contracts (quasi before Staggers; de facto after) would assure long-term competitive viability and support the massive facilitiy investments being made.
It is a funny thing, but one of the central articles of faith (speaking of resurrection) among many (most?) railroaders pre-Staggers was the crying need for "freedom to contract" freight rates. Funny thing ... one of the most powerful underlying (and mostly forgotten) reasons for the original Interstate Commerce Act of 1887 was the desire of the railroads to force public filing of all rates, and to end secret rebates." Standard Oil, et al, were eating the industry's lunch. Rate secrecy was daylighted. (Only 20 years or so later did the ICC actually gain meaningful power to set rates.) Those who don't know their history ... or microeconomics ....
Fast-forward to the 1980's, post Staggers. By 1984 BN had made enemies of many (most?) PRB coal burning utilities, but it had largely won the legal and ICC rate battles to make the business investable. And the coal continued to move. Enter UP. Bidding (literally) to make up for lost time, UP trashed PRB coal rates to .... fill excess capacity? Nope. They had poured (and were pouring) hundreds of millions into coal capacity expansion (a la BN in the 1970s). Faith in unit train productivity gains apparently had converts in Omaha too.
An illuminating aside: By 1987 the good news of secret rate contracts for high volume railroad movement of commodities had made the covered hopper grain fleet uninvestable. Reaching outside the railroad industry, BN hired managers from the grain industry to revamp the economics of hauling grain. They dusted off good ole BN Tariff 4022. Gosh, that was 20 years ago! Just went to the BNSF website ... sure enough ..... http://www.bnsf.com/markets/agricultural/bnsf4022/bnsf4022.html
BN bought a thousand 286,000 lb. gross capy. C6 covered hoppers for grain in 1990 and hasn't looked back.
Well, back to my sermon outline .... Public coal rates would have enabled BN and UP to duke it out, but without the unredeeming loss of blood that ensued for almost 20 years.
Any prophecies on coal rates in 2039?
jeaton [snip] As I indicated in my post above, the earliest buyers of PRB coal had more sources for coal as sulphur content was not a big issue. I am just guessing, but I suspect that the utilities came to the BN with a number and indicated that if the BN couldn't make the rate, there would be no movement. [snip; emphasis added - PDN]
Just to reiterate this aspect of it, and one of the possible effects: So neither the PRB mining companies, nor the railroad, had strong pricing power on this commodity and traffic, since back then adequate substitutes could be readily obtained elsewhere. Actually, the PRB coal had 2 strikes against it: 1.) It is comparatively lower in BTU per lb. fuel value than many other coals, so is inherently worth less; and, 2.) It was further away from many power plants than other competing coals, so it also had a higher transportation cost handicap.
Against that background, the railroad may well have felt that if the traffic was to move at all, the railroad really had to make a rate that would enable the PRB coal to compete in the marketplace - kind of like being the last runner in a 4-man relay race, ''It's up to you to win or lose this race'' [''Oh, that's just great''].
Perhaps more significantly, though, if that's when and how the power companies were able to lock in their rail shipping rates, then they were able to take advantage of a short-term weak spot in the market. That was a blindness to or ignorance of the forthcoming demand for low-sulphur coal, and the resultant turn-around in the comparative advantages of coal sources and the rail hauls. The impending future importance and market price of the PRB coal and the rail shipment of it were perhaps not as fully appreciated by the railroads as it was by the power companies when those early PRB rail rates were being established.
Today, a central principle of any such business negotiation is to know as much as possible about your counterpart's business, suppliers, trends, needs, vulnerabilities, etc., so that the situation can be viewed as objectively and as fully informed as possible, to hopefully prevent such mistakes and mis-judgments. Of course, if that was the objective reality at the time, perhaps even if BN knew all that, the result still would not have changed a whit.
AgentKid Just one observation. Would the PRB have taken off if BN had priced their coal hauling contracts "right". I have a friend who deals with mining companies in his job, and they are tough cookies to deal with. AgentKid
Just one observation. Would the PRB have taken off if BN had priced their coal hauling contracts "right". I have a friend who deals with mining companies in his job, and they are tough cookies to deal with.
AgentKid
In the era of the PRB start up, the utilities were ( and in some cases still are) subject to considerable pressure by utility regulators and public watchdog groups to hold down fuel costs. They would not come to the railroads with a blank check.
As I indicated in my post above, the earliest buyers of PRB coal had more sources for coal as sulphur content was not a big issue. I am just guessing, but I suspect that the utilities came to the BN with a number and indicated that if the BN couldn't make the rate, there would be no movement. Only an insider at the utility would be able to say that some money was left on the table, but you can be sure no one was going to disclose such information. That left the BN people making the pricing decision with a choice of getting a few bucks over the operating cost, i.e., some money to go in the hopper for some track, equipment or dividends, or getting nothing at all. At the time, getting even marginaly profitable revenue might have been the desired outcome. However, it is appearant that the decision makers did not consider or underestimated the impact the trains would have on track maintenance.
I highly doubt that the BN's pricing strategy was to establish "low introductory" rates to promote the development of the PRB. It is still not easy, but in the regulatory era getting rate increases almost took divine intervention.
"We have met the enemy and he is us." Pogo Possum "We have met the anemone... and he is Russ." Bucky Katt "Prediction is very difficult, especially if it's about the future." Niels Bohr, Nobel laureate in physics
Were the BN contracts directly with the consuming power companies - in other words, was the coal priced ''FOB mine'' ? In which case, the mining company would not be directly involved or have its own money 'at risk', other than the 'collateral damage' effects of and perceived as being competitively disadvantaged or even priced out of the market by the higher rates.
Or if the BN contracts were with the coal companies, then the obvious harm to them is a lot easier to see - esp. if the power companies took the position that the risk of rate changes is on / was assumed by or borne by the mining cos. as a matter of contractual assignment of that particular risk, and that as a result no additional compensation was due from the power company to the mining cos.
Certainly that was not a good situation for anyone. But I suspect that in the long run, the actual level of rail rates is not hugely determinative of the fates and prosperity of the PRB coal mines and their rail traffic - that is determined more by the requirements of the Federal Air Pollution Control Act laws and regulations, which generally require that the 'BAT' or 'Best Available Technology' be implemented, and do not consider cost implications when they are applied.
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