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Saving the Railroad Industry TO Death - The Evil of Economic Freight Rate Regulation
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[quote user="Datafever"][quote user="futuremodal"] <P>[quote user="Datafever"]</P> <P>Differential pricing may or may not be cross subsidization. Some shippers are located in areas where there is relatively small amounts of rail traffic. I would expect those shippers to pay more for shipping product than a shipper that was located on a heavily trafficked route. Why? Because the fixed costs become a much larger percentage of the overall cost of doing business.<BR><BR>[/quote]</P> <P>If only that were reliably true. But some of the highest R/VC ratios are forced upon shippers who are located right on some of the most heavily trafficked mainlines. Not a lot of extra fixed costs there, yet they are paying a higher rate standard than some of those shippers who are located on lighter trafficked lines. Clearly, rate disparity is not a function of mainline proximity so much as it is a function of relative captivity. And because the rate disparity is borne of relative captivity, in those cases it is quite clearly cross subsidization.</P> <P>[/quote]<BR>Here's what an October 2006 GAO report has to say on the subject.<BR><BR>"The Staggers Rail Act recognized the need for railroads to use demand-based differential pricing to promote a healthy rail industry and enable it to raise sufficient revenues to operate, maintain and, if necessary, expand the system in a deregulated environment. Demand-based differential pricing, in theory, permits a railroad to recover its joint and common costs—those costs that exist no matter how many shipments are transported, such as the cost of maintaining track— across its entire traffic base by setting higher rates for traffic with fewer transportation alternatives than for traffic with more alternatives. Differential pricing recognizes that some customers may use rail if rates are low—and have other options if rail rates are too high or service is poor. Therefore, rail rates on these shipments generally cover the directly attributable (variable) costs, plus a relatively low contribution to fixed costs. In contrast, customers with little or no practical alternative to rail—”captive” shippers—generally pay a much larger portion of fixed costs. Moreover, even though a railroad might incur similar incremental costs while providing service to two different shippers that move similar volumes in similar car types traveling over similar distances, the railroad might charge the shippers different rates. Furthermore, if the railroad is able to offer lower rates to the shipper with more transportation alternatives, that shipper still pays some of the joint and common costs. By paying even a small part of total fixed cost, competitive traffic reduces the share of those costs that captive shippers would have to pay if the competitive traffic switched to truck or some other alternative. Consequently, while the shipper with fewer alternatives makes a greater contribution toward the railroad’s joint and common costs, the contribution is less than if the shipper with more alternatives did not ship via rail."<BR><BR>In particular, note the last sentence.<BR>[/quote]</P> <P>Actually, what I note is the generalization of the GAO report, e.g. they define <STRONG>captive</STRONG> as "no practical alternative to <EM>rail</EM>", rather than defining captive as being physically served by only one rail service provider. In other words, the GAO report is lumping all rail service providers into one and then comparing that to non rail alternatives. They are not discerning the service aspects of one rail company vs other rail companies. Seems rather sloppy on the part of the GAO. </P> <P>Apparently they are also of the mindset that modes *compete* with each other, rather than recognizing that product characteristics determine optimal mode of transport, and when that optimization takes place there is no real competition between modes.</P> <P>Perhaps the GAO is made up of folks named "Larry", "Curley", and "Moe".[D)][D)][D)]</P>
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