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
So shovel the coal, let this rattler roll.
"A Train is a Place Going Somewhere" CP Rail Public Timetable
"O. S. Irricana"
. . . __ . ______
I worked for a BN competitor, so I don't have any first hand, inside knowledge of BN coal pricing practices. But, by the time we began competing with BN for PRB coal, BN was already disliked by many of its coal customers, and those who could were often eager to switch to another road.
Here's what many of our people thought had happened. When BN first began handling large amounts of coal, they did price it "too low". The reason, as stated in some of the earlier posts, was that they originally looked at it as "incremental traffic" . Then, after a few years, they recognized something I think all coal railroads recognize today. If you are handling heavy coal unit train traffic, the basic railroad has to be built and maintained for that traffic. That means the coal traffic is necessarily base traffic, not incremental traffic, and the coal rates have to pay for the basic railroad. I'm not sure when BN had this epiphany, but I suspect it was when they realized what the coal traffic was doing to their railroad and watched their maintenance costs on their coal routes going through the roof. As a result, heads rolled at BN, and the railroad began to impose large increases on their coal customers to rectify their original mistake. Of course, there's another way of looking at this. It wasn't so much an issue of identiying what was "incremental" or what was "base" traffic but, rather, a failure to properly identify all of the "incremental" costs the coal prices had to cover (which would include the "incremental" infrastructure costs imposed by coal traffic). But the bottom line is the same either way you look at it - the prices were too low in relation to the costs attributable to the traffic.
As I recall, in some cases, BN actually attempted to repudiate some of the particularly low priced, long term "contacts" they had made, on the grounds that contracts weren't permissible under the Interstate Commerce Act. This was, of course, before the Staggers Act expressly legalized contracts (interestingly, largely in response to BN's efforts, the original Staggers contract provision had a section that expressly legalized pre-Staggers contracts). Naturally, measures like this didn't set well with BN's customers (particularly those who had made long term supply contracts with particular coal mines in reliance on BN's original pricing) . But BN probably felt it had no choice.
Are there any former BN people following this thread who have any insights?
Murphy SidingCertainly not. I just couldn't get my mind around the idea of making what, from the 2009 perspective, seems to be a whopper of a mistake, made by a company with 100 years experience.
As noted in the comments on Staggers, et al, I think a key bit of wisdom might be "By definition, if you don't know what you're looking for, you won't know when you've found it."
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
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.
Thanks to Chris / CopCarSS for my avatar.
bobwilcox I hope there is not an assumption that railroad managers are expected to never make mistakes. It isn't so. Also, they can not walk on water.
I hope there is not an assumption that railroad managers are expected to never make mistakes. It isn't so. Also, they can not walk on water.
The interest in PRB coal and the shipments of it were the direct result of the Clean Air Act of 1970 and the regulations promulgated pursuant to it over the next several years - see http://www.epa.gov/air/caa/caa_history.html Those regs heavily restricted sulfur in coal to minimize air pollution and esp. acid rain - sulphuric acid - among other pollutants. Without that, I doubt that anyone other than a local would have known or cared about PRB coal at all.
I believe the BNSF contracts were for 30 years, not 'forever', which is a really long time. That'a common enough time frame for the practical economic or expected service life, and financing of bonds, etc., for both the power plants and the railcars that serve them. I'm sure there were some adjustment/ escalation prices in them for certain economic inputs - diesel fuel, train crew wages, maybe the AAR's cost index for track and equipment repairs and maintenance, etc. - but probably not broad or high enough to cover replacing and/ or upgrading the whole shootin' match of the infrastructure after only a few years. It's one thing to have to change/ replace the tires on your car after a few years and 60,000 miles; but it's another thing entirely to have to drop in a new engine and another transmission at 100,000 miles, if you see what I mean - maybe until 250,000 miles would be more reasonable for that, etc.
- Paul North.
P.S. - MP173's lumber yard example above resonated pretty well with you, Murphy, I expect. I too thought of doing that for an example - but only after the camel thing . . . Sorry ' bout that.
Thanks for the input guys. I see what you're saying. I'm still just shaking my head. Did BN sign these *too low priced* contracts forever & ever, as some of the lawsuits tried to say?
The railroad in question (both the CB&Q and C&S/FW&D sections) was one step away from being abandoned for those not familiar with the neighborhood. The subgrade in many places on the Wyoming to Texas lines (especially around the CO/NM border) are recurring nightmares. General Dodge (that guy) did not get their quick enough to keep the D&NO/UPD&G/C&S/FW&D from creating a legacy headache. (Thomas Wigglesworth et al blew it bigtime)
Paul_D_North_Jr - The traffic was probably priced on the basis of the additional/ incremental/ marginal/ variable costs of just adding a train or two a day to an existing line that was at less than full capacity anyway. Also, handling it with existing cars, locomotives, signal systems, yards, locomotive service facilities, grade crossing signals, interchange arrangements and 'joint facilities' agreements, etc. No one probably ever imagined that it would grow to the point where they would have to essentially build a whole new multi-track railroad for those coal routes.
- The traffic was probably priced on the basis of the additional/ incremental/ marginal/ variable costs of just adding a train or two a day to an existing line that was at less than full capacity anyway. Also, handling it with existing cars, locomotives, signal systems, yards, locomotive service facilities, grade crossing signals, interchange arrangements and 'joint facilities' agreements, etc. No one probably ever imagined that it would grow to the point where they would have to essentially build a whole new multi-track railroad for those coal routes.
PDN: I would hope that RRs have learned this lesson and any new rate quote would say we will haul so many ton miles over ABCD route in such and such capacity cars. If you desire to have more haulage than this contract we will have to issue a new contract for the excess amount..So most of the time there would be no increase. However if some one really ramped -- up say the traffic around Horseshoe to where the 4th track would have to be restored then new rates for the excess may need to be implemented. This has been a worry because of the possible 2035 traffic projections coming true.
Lets say you are selling lumber. Your book of business (types of lumber) is let's say 100 products.
A new customer comes along and asks if you can sell him lumber. After doing the due dilegence (such as credit check, legitimacy of the company, etc) you agree.
You own a nice lumber yard that suits the needs of your immediate community and your prices are reasonable and you make a decent profit.
Suddenly the new customer demands another 50 items to be sold. No problem, you have the infrastructure to handle the additional 50 items. The warehouse and lot are filling up but you can handle it. However, the cash flow is starting to get a bit tight. The spread between paying for the inventory and the payments for the sales is stretching out. You must go get a larger line of credit.
Now the customer comes to you and says, we need another 100 products available. Suddenly you realize the facility will not handle the 150 new items, particularly in the quantities required. You need a new facility, not only to handle the inventory, but also the logistics of receiving the lumber by rail and loading out the trucks.
Time for a new facility. You are now finding that a new customer service rep is needed to handle just this account, plus that cash flow situation keeps stretching out a bit. Not only do you need to finance the new facility, but the costs are increasing just to handle the new business.
Soon, the new customer's business is growing at such a rate they demand 24 hour/7 day pickups. Now you must staff not only the warehouse full time, but also have customer service people available 24/7.
This is no doubt a simplistic example, but most businesses find their level of high productivity over years. They expand or retreat, or stay the same size. As long as it is steady growth, they can handle the steady expansion. Rapid growth and expansion provides great opportunities...for success and failure (if not managed correctly).
Remember, volume is vanity and profit is sanity
ed
Let me take a different approach. I bought a new car and paid it off this year. It is three years old and I have plans for the money that was going to the car payment. I figure I won't need a new one for 5-7 years hopefully. Today on my way to work a guy ran a red light and totaled it so now I have to buy another and foergo the other purchases I was going to make or forego the car. My logic was good but it didn't consider the potential of something outside my control changing my financial model. It is even more important in business. It's never what you know. It's always something you didn't know that causes you problems. There is a famous B school case about a buggywhip company that fired a guy for suggesting that those newfangled horseless carriages might be a good market. He was told that buggywhips would always be needed. End discussion. Now let's consider BN. If I remember correctly the government had not started to lean on power plants regarding the use of low sulfur coal. Now the Powder RIver basin is the national source for low sulfut coal. If you were planning on three trains a day and it is now thirty how will you handle them? Obviously you will need more engines, cars and possibly additional tracks. So are you getting the return after having to pay for all that? Probably not. hence the comment.
Let me try again - EDITED a little bit at 9:00 AM: I think jeaton has touched on most of the major ones, but here are a few more, or a different emphasis - in no particular order:
- The PRB moves started in the early 1970s, long before Staggers deregulation.
- At that time, many rates were set on the basis of broader market and shipper considerations, not necessarily the railroad's cost structure.
- There may well have been a belief that "Even if we lose a little on each load, we'll make it up on volume".
- Most of the experience then with effects and implications of coal and unit trains as the primary and dominant traffic on a division and route was with the eastern coal roads - C&O, L&N, N&W, etc. - not with the grangers or western roads.
- That new railroad wasn't just the tracks - it also included the service and support functions. Most notably, the signals and communications infrastructure over the entire route likely had to be expanded and upgraded, which can be just as expensive as the track (so I'm told).
- Most of BN's coal car experience until then - even in unit trains - had been with 50- and 70-ton capacity / 220,000 lb. gross railcars. Now they were moving into solid trains of 100-ton capacity/ 263,000 gross cars, and above. The rails and track structure suffered way more than proportionately from that. It wasn't politically correct for the Engineering Dept. people to be too vocal about that, but you can see it if you know where to look - like the research by CN, which being government-owned then, was a little more insulated from having to conform to marketing pressures.
- Similarly, the higher loads and utilization led to a lot of discoveries of weak points in traditional car construction. Truck bolster center plate wear and fatigue cracks come to mind. There may be others - a Mechanical Dept. person could add more here.
Murphy Siding BaltACD Haven't read the book. That being said, once Staggers took effect you were left with railroad managment that had to operate in a relatively free market transportation business that had absolutely no idea what it meant to operate in a free market transportation business. All they knew and all they had experienced was the highly regulated business model that the railroad had pre-Staggers. It was a 'brave new world'; a world in which they learned to operate as a business one contract at a time. This truley drives home my not understanding things past, based on my 2009 perspective of things. How did BN figure out what to charge for hauling something before deregulation?
BaltACD Haven't read the book. That being said, once Staggers took effect you were left with railroad managment that had to operate in a relatively free market transportation business that had absolutely no idea what it meant to operate in a free market transportation business. All they knew and all they had experienced was the highly regulated business model that the railroad had pre-Staggers. It was a 'brave new world'; a world in which they learned to operate as a business one contract at a time.
Haven't read the book.
That being said, once Staggers took effect you were left with railroad managment that had to operate in a relatively free market transportation business that had absolutely no idea what it meant to operate in a free market transportation business. All they knew and all they had experienced was the highly regulated business model that the railroad had pre-Staggers. It was a 'brave new world'; a world in which they learned to operate as a business one contract at a time.
I think I provided a partial answer to your question in my post just above. To elaborate a bit, the ICC was not ignorant of market source competition. In fact, in their interpretation of the IC Act, one of their goals was to keep rates at a level so that any producer at any location could compete with every other producer in a given market. Under the scheme where anybody could protest a given rate, the railroad serving the producer way out in left field would have to struggle to prove that a sought rate did not meet long run variable costs. On the other hand, if the railroad didn't care, they could establish rates and haul freight below such cost levels, so long as it didn't upset the applecarts of other railroads and shippers.
"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
Perhaps this is one explaination why Santa Fe's management (Krebs and his associates) were chosen to lead the BNSF after the merger. And why some dubbed the new company " Big New Santa Fe'.
The Burlington started moving coal out of the Powder River Basin in the 1970's. Consider this: Because of the relatively low BTU content of the coal and the generally long hauls to the markets, nobody at the time thought the movement would ever amount to more than a small hill of beans. As with just about every railroad in the country, the Burlington was happy to haul any freight it could get so long as there some revenue in excess of marginal costs. The Q was not new in the coal business as they served many mines in Southern Illinois. It is possible that at the time the railroad had excess cars and power.
I don't know for a fact, but it is entirely possible that an electric power company came to the BN suggesting that they would take a train or two a week of PRB coal if they could get it delivered at a cost of "X" cents per BTU which would be competitive with other sources. The BN may have decided that they could make a buck or two on the move and published the necessarily low rate.
As is said, the rest-including the Clean Air Act of 1990-is history.
That is not to say that the Burlington's decision was the based a solid consideration of potential consequences. I recall a conversation with one of our ICG Railroad business planners in 1973 or 1974 who said he had heard the Burlington was finding that the track infrastructure on the line into the PRB was failing due to the coal tonnage. I wouldn't be surprised to learn that the initial decision to get into the business was based on agreements between the Coal Sales/Pricing and Operating Departments, with the Engineering Department left out of the decision making process.
Paul- I have a hard enough time understanding the workings of regulation and the Staggers Act. But really, you just plain lost me on the camels.
Well, it's a complex subject, and I'm not a recognized authority on it, but I'll take a stab at it with the hope and expectation that if I miss on something, that will motivate someone who does know to come on in and correct/ supplement as needed.
Basically, it's the railroad's version of "the last straw that breaks the camel's back". To prevent that from happening, sometime before that would occur you need to get at least one other camel to share and distribute that load. Camels cost money - and newer and more modern camels cost more than the older camels did, even when they were new.
So if you have more straws than 1 camel can carry, but not enough for 2 full camel-loads - then how do you load each of your camels, and how do you allocate all of the the costs of owning and operating the camels between and among the 2 partial loads of straws ? Then - and most important and relevant in this context - how do you charge your customers for those 2 partial loads of straws ?
For example, do you charge on the basis of each camel being as efficient as it can be by carrying a full load ? That will result in a competitive lowest possible unit price, but that price won't fully compensate you for the partial load on the 2nd camel. Or, do you assume half the load is on each camel, divide accordingly, and come out with a slightly higher unit price ? Or, do you assume the 'worst-case scenario' - that you have 1 full camel load plus 1 more straw, so you have to use 2 camels - and divide those costs among the straws, which could almost double the 'per straw' price as compared to a single full and efficient load. Or, do some combination or something in between ? And this doesn't take into consideration what cost to use for the camels themselves - the old, historical, and lower purchase cost, or a current higher replacement purchase cost, or something in between, or a depreciated value, etc. ?
TO BE CONTINUED. Future topics - RR rates were set by/ in bureaus, so no experience with the cost-out exercise and implications
Volume increases were usually small enough that they could be handled with existing cars, locos, track, and facilities, and so the RRs historically priced to get each little increment of traffic - cars or trains - that could be handled by the existing. Never took into account than existing would have to be replaced pretty soon, at a much higher cost than had been experienced.
other considerations . . .
Murph:
I read it a couple of years ago and pretty much agree with you...the second half is much more interesting.
BN did not factor in the rebuilding of the line in their initial rates. Didnt someone from NW try to tell them they were making a mistake? The above post by Balt is on the money...they really had no experience in the free market. It took a few years for that attitude to sink in.
I still think they made a mistake in purchasing Frisco rather than MoPac.
That being said, once Staggers took effect you were left with railroad managment that had to operate in a relatively free market transportation business that had absolutely no idea what it meant to operate in a free market transportation business. All the knew and all they had experienced was the highly regulated business model that the railroad had pre-Staggers. It was a 'brave new world'; a world in which they learned to operate as a business one contract at a time.
The old saying 'Be careful what you ask for; you may get it!' applied. They got what they asked for and didn't know how to act when they got it. This applied to the entire industry, not just BNSF or any other individual carrier.
Never too old to have a happy childhood!
I'm reading Leaders Count The Story of BNSF Railway, by Lawrence H. Kaufman, a book I looked forward to reading for a long time. I hated the first half of the book. It seemed to be western railroad history, as viewed through Cascade Green glasses. The second half, about post BN merger railroading, is quite interesting. One big thing popped up in the second half of the book. I had read before that BN had priced hauling PRB coal too low, and had a hard time playing catch up. From the book: "BN costed the business as though it were incremental tonnage, to be moved over an existing line."........ "Pretty soon, it became clear that the railroad would have to rebuild....upgrade....buy new cars and locomotives " ..... "wasn't factored into earlier rate quotes.." HUH? How in the world, would a 100 year old railroad not know how to cost the hauling of freight tonnage? BN had a terrible fight with their customers, trying to raise the originally quoted prices, including a lot of lawsuits. The customers contended that BN should live by their earlier quotes. BN seemed to say they temporarily didn't know what they were doing(?) Can someone shed some light on this subject? Thanks Note: The book has explained a lot to me, about the regulation of railroads, and the early deregulation period. Some of that is so *out there*, that I have a hard time even buying into some of the attitudes back then, as viewed through my 2009 perspective.
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