Bottleneck rates

[Murphy Siding]

    The March 2010 issue of Trains Magzine has a short article about the proposed Surface Transportation Board Reauthorization Act of 2009.  One of its main provisions would be to require railroads to quote "bottleneck rates" to shippers. When a shipper is serviced by only one railroad, the railroad is not required to offer a rate to a junction with a different railroad, that might get the rest of the haul.  The example given, is of a power plant on UP.  The power plant can't force UP to give it a rate to the nearest BNSF junction, so it's traffic could ride the rest of the way to the Powder River on BNSF lines.

     This must be more complicated than it appears on the surface.  If forced,  can't UP just provide a quote to the nearest BNSF junction that is so high,  UP wouldn't care if BNSF got the rest of the haul?  What am I missing?

    Also ,the article mentions the bill requiring railroads to open their terminal facilities and shippers to competitors,  "provided the incumbant's operations are not adversely affected."  What does that mean?
-Thanks

[Railway Man]

Yes, the railroad with a short-haul to the junction could quote such an exorbitant rate that it was cheaper for the shipper to just give to that railroad for the entire trip, both the long-haul and the short-haul portions.  But then the shipper could protest the short-haul rate to the junction as being excessive and unreasonable -- and likely win. 

In the real world, vendors of goods or services that have a very large investment in their business are sometimes reluctant to engage in price wars because it results in "you hurt us with Customer A, so know we'll hurt you with Customer B" matchups.  When you have vendors who have very little investment in their business -- low barriers to entry, such as the airline or truckload trucking business -- then you often get mutually-assured destruction.  This is what makes the airline industry, for example, a non-profit business that destroys capital and careers.  When it comes to large shippers with large quantities of traffic, it will be difficult for railroads to refrain from competing fiercely for their business because there's substantial revenue swings at stake.  But for the traffic of small shippers, on the other hand, the perceived penalty for fierce competition will be very high versus the very small amount of additional revenue that might result. The risk/reward ratio will be so low that no sensible person at Railroad A will put a lot of effort into taking away a few carloads from Railroad B, and risk Railroad B retailiating.

In short, this is yet another bill promoted by well-intentioned people who are completely ignorant of basic business methods and economics, and people who are the tools of large shippers in their districts or who are financing their lobbying business.  It will result in a wealth transfer from small shippers to large shippers.  It will dry up many branch lines that are today viable, and put more trucks on highways, causing rural state highway maintenance costs in particular to rise.  I can guarantee you that large shippers are perfectly aware of how the proposed law will be to their benefit but most small shippers do not understand how this works and think that intensifying competition will be in their economic interest.  It will not.  Presumably a law that concentrates wealth, causes highway costs to go up, increases the cost of entry for new businesses, causes rail mileage to diminish, and reduces the ability of the railroad industry to reinvest in its infrastructure and pushes it farther down the path toward financial failure and taxpayer subsidy to set it up again, like Conrail, is all to the public good.  It would depend on how you define "good."

(I have no idea what "provided the incumbant's operations are not adversely affected" means.  It could mean anything from "if it makes you break a fingernail or get a papercut, it might be too hard to do" to "unless it bankrupts you by 3:20 this afternoon, it's not an adverse affect."  It sounds to me like fertile ground for litigation.)

RWM, who wants to throw up every time he thinks about this bill.

[greyhounds]

The freight railroads are a healthy US industry (kind of rare these days) that in non-recessionary times is also a growth industry.  They support themselves by in large and require little or no taxpayer support.  They pay good wages and provide good benefits to a union workforce.  In the words of the Federal Railroad Administration they are the safest, most cost effective, and most efficient rail freight system in the world.

And some politicians want to change all that.

http://www.railwayage.com/breaking-news/updated-report-for-stb-warns-of-rate-cut-consequences.html

 

 

[Paul_D_North_Jr]

Railway Man

  Yes, the railroad with a short-haul to the junction could quote such an exorbitant rate that it was cheaper for the shipper to just give to that railroad for the entire trip, both the long-haul and the short-haul portions.  But then the shipper could protest the short-haul rate to the junction as being excessive and unreasonable -- and likely win.  

 

That's essentially what happened in the STB's Feb. 18, 2009 revised decision on the Western Fuels Assoc./ Laramie River vs. BNSF coal rate case - it was a short-haul of like only 114 miles, but it was all BNSF - there was no junction with another railroad.  See the BNSF press release at - http://www.bnsf.com/media/news/articles/2009/02/2009-02-18a.html  The data from another on-line publication - http://www.railresource.com/content/?p=83 -  permits me to summarize the decision as ''STB says a rate at 600 % of variable costs is too much - but 240 % is OK''.  Hey, Murphy - how would you feel about having to sell your boards for either one of those mark-ups/ margins ? 

Railway Man

  In the real world, vendors of goods or services that have a very large investment in their business are sometimes reluctant to engage in price wars because it results in "you hurt us with Customer A, so know we'll hurt you with Customer B" matchups.  

 

That's a classic definition of a high-fixed cost business, and the classic behavior of an 'oligopoly' = very limited competition, not quite yet a monopoly - which are often found occurring together.  So far I'm with you . . .

Railway Man

  When you have vendors who have very little investment in their business -- low barriers to entry, such as the airline or truckload trucking business -- then you often get mutually-assured destruction.  This is what makes the airline industry, for example, a non-profit business that destroys capital and careers.  

 

    And I'm still following your logic . . .

Railway Man

  When it comes to large shippers with large quantities of traffic, it will be difficult for railroads to refrain from competing fiercely for their business because there's substantial revenue swings at stake. 

  

Now I'm becoming confused, or lost.  Non sequitur here, RWM, I think.  That statement seems reasonable on its face and comports with observed experience, I believe.  But what competition ?  By the definition of the question presented, we're discussing a 'bottleneck' case where the shipper has access to only 1 raillroad, correct ?  Or is your scenario post this proposed law, when the shipper would be able to get past the bottleneck with a mandated rate ?  And then, such competition seems contrary to your ''very large investment in their business are sometimes reluctant to engage in price wars'' observation above.  So should we be understanding you to be saying that the potential reward from large shippers will overcome said reluctance to compete on price ?  Why is that happening instead, do you think ?

Railway Man

  But for the traffic of small shippers, on the other hand, the perceived penalty for fierce competition will be very high versus the very small amount of additional revenue that might result. The risk/reward ratio will be so low that no sensible person at Railroad A will put a lot of effort into taking away a few carloads from Railroad B, and risk Railroad B retailiating.

 

That seems to be a '2-way street' to me - maybe Railroad B wouldn't risk incurring Railroad A's retaliation, either.  But I don't need to debate that point.  The essential conclusion, I think, is that small shippers have less market power and hence their prices will tend to be higher in some sense, and that too makes sense and comports with observed experience. 

Railway Man

  In short, this is yet another bill promoted by well-intentioned people who are completely ignorant of basic business methods and economics, and people who are the tools of large shippers in their districts or who are financing their lobbying business.  It will result in a wealth transfer from small shippers to large shippers. . . . I can guarantee you that large shippers are perfectly aware of how the proposed law will be to their benefit but most small shippers do not understand how this works and think that intensifying competition will be in their economic interest.  It will not.  [snip]

 

Now I'm lost.  Please forgive my dullness this morning, but it seems I'm not following how a 'bottleneck rate' situation and the proposed bill's relief from it, correlates with or is affected at all by being a large shipper or a small shipper.  I suppose it could be argued that in the rate and competition dynamics that you describe above, the small shipper is presently cross-subsidizing the large shipper.  These kinds of bills usually work to lower the higher rate, not raise the lower rate - no one ever complains that their rate is too low, right ?  So the post bill dynamic would be that the any shipper with a 'bottleneck rate' could get relief from it - regardless of whether they are large or small.  If there's any competition between the railroads for big shippers, that won't be a huge decrease.  But the smaller shippers - who don't have actual competition working for them, for the reasons you state above - would now have the STB stepping in and doing what the lack of competition can't, i.e., lower their rates.  So I see the wealth transfer as being from the railroads back to the smaller shippers; the large shippers are already pretty much immune from the changes that would be imposed by the bill.

OK, with all that said - please note that I'm neither for or against the bill.  So what am I missing here ?  Historically, our disagreements here have centered more about our respective differing perceptions of the facts and background history of a situation, rather than what ought to be done with or about it now.  I suspect this is of like kind.  Thanks for any response that you care to take the time and thought to provide - I know you're busy guy, too.  And although I've addressed most of this to RWM, that's only because he had the most substantive response and comments.  So I invite anyone else - greyhounds, especially - to jump in as well.  It's too important of a topic to let languish or dismiss as too dry for anyone who thinks they might have something to contribute, or ask, even. 

Railway Man

  (I have no idea what "provided the incumbant's operations are not adversely affected" means.  It could mean anything from "if it makes you break a fingernail or get a papercut, it might be too hard to do" to "unless it bankrupts you by 3:20 this afternoon, it's not an adverse affect."  It sounds to me like fertile ground for litigation.) 

 

Certainly a valid observation - funny, too.      It would be more helpful if the originators of such pieces - and note that here I mean the NewsWire, not Murphy - would include some kind of specific reference or link, such as Senate Bill 1234-XYZ, etc., so that those of us who would like to see it for ourselves to see how bad it really is on such questions would be able to do so.    Without that, it feels like discovering gravity all over again.  Let's see what I can find out or someone else can post here on that in the next day or so. 

- Paul North.

[Murphy Siding]

   Well Paul,  I'm feeling pretty good right now, as I'm usually the one who doesn't get it,  but this time, I understood it to a Tee.   (Either that, or I don't get it at all, and am too dense to know it.).

   I see it like this:   Mr. Big shipper says "quote me a rate to the junction at Kansas City", for example, "then I'll let BNSF and UP fight over my 50,000 (?) carloads of coal from there to the Powder river, and see how low they can go."  You would think that UP and BNSF wouldn't cut each other's throats, but....because of the volume, they probably will.  Dealing with big numbers makes sales people do irrational things.

     Mr. Small shipper says a similar thing, but his 500(?) carloads are considered reletively small potatoes.  BNSF and UP don't get into a rate war over the small shipper.  In fact, the railroad who had been serving Mr. Small Shipper before, might even try raising his rates.  After all, they're not making as much on the big shippers anymore.   They would probably try to make more on the small shippers that the competition isn't that focused on stealing.

    Like a lot of things in llife, this bill probably benefits a few shippers, at the expense of a lot of other shippers,  but is being sold as a benefit to all shippers, in order to get wide support.

   

[schlimm]

 

Paul_D_North_Jr

It would be more helpful if the originators of such pieces - and note that here I mean the NewsWire, not Murphy - would include some kind of specific reference or link, such as Senate Bill 1234-XYZ, etc., so that those of us who would like to see it for ourselves to see how bad it really is on such questions would be able to do so.

 

Senate Bill = S. 2889, Surface Transportation Board Reauthorization Act of 2009

[beaulieu]

snipped to get to the heart of the matter

Paul_D_North_Jr

Now I'm lost.  Please forgive my dullness this morning, but it seems I'm not following how a 'bottleneck rate' situation and the proposed bill's relief from it, correlates with or is affected at all by being a large shipper or a small shipper.  I suppose it could be argued that in the rate and competition dynamics that you describe above, the small shipper is presently cross-subsidizing the large shipper.  These kinds of bills usually work to lower the higher rate, not raise the lower rate - no one ever complains that their rate is too low, right ?  So the post bill dynamic would be that the any shipper with a 'bottleneck rate' could get relief from it - regardless of whether they are large or small.  If there's any competition between the railroads for big shippers, that won't be a huge decrease.  But the smaller shippers - who don't have actual competition working for them, for the reasons you state above - would now have the STB stepping in and doing what the lack of competition can't, i.e., lower their rates.  So I see the wealth transfer as being from the railroads back to the smaller shippers; the large shippers are already pretty much immune from the changes that would be imposed by the bill.

OK, with all that said - please note that I'm neither for or against the bill.  So what am I missing here ?  Historically, our disagreements here have centered more about our respective differing perceptions of the facts and background history of a situation, rather than what ought to be done with or about it now.  I suspect this is of like kind.  Thanks for any response that you care to take the time and thought to provide - I know you're busy guy, too.  And although I've addressed most of this to RWM, that's only because he had the most substantive response and comments.  So I invite anyone else - greyhounds, especially - to jump in as well.  It's too important of a topic to let languish or dismiss as too dry for anyone who thinks they might have something to contribute, or ask, even. 

Railway Man

  (I have no idea what "provided the incumbant's operations are not adversely affected" means.  It could mean anything from "if it makes you break a fingernail or get a papercut, it might be too hard to do" to "unless it bankrupts you by 3:20 this afternoon, it's not an adverse affect."  It sounds to me like fertile ground for litigation.) 

 

Certainly a valid observation - funny, too.      It would be more helpful if the originators of such pieces - and note that here I mean the NewsWire, not Murphy - would include some kind of specific reference or link, such as Senate Bill 1234-XYZ, etc., so that those of us who would like to see it for ourselves to see how bad it really is on such questions would be able to do so.    Without that, it feels like discovering gravity all over again.  Let's see what I can find out or someone else can post here on that in the next day or so. 

- Paul North.

 

What I expect and it appears that Railway Man does to, is that the larger shippers will benefit from lower rates as a result of this, smaller shippers will get a reduction in the "bottleneck" portion of the rate but the total rate will fall little or not at all because the railroad they are getting access to will not really be interested in their business. There are multiple possible outcomes from this including the possibility that the small shipper loses service altogether. Another possibility is similar to the airlines where investment is cut back due to falling revenues, and then service starts to deteriorate, starting a vicious downward spiral like happened in the years prior to Staggers. The problem is how do you get reasonable competition  and avoid the appearance of collusion. Back to government rate regulation? Does anybody think it will work better this time?

[Paul_D_North_Jr]

Railway Man

[snip] (I have no idea what "provided the incumbant's operations are not adversely affected" means.  It could mean anything from "if it makes you break a fingernail or get a papercut, it might be too hard to do" to "unless it bankrupts you by 3:20 this afternoon, it's not an adverse affect."  It sounds to me like fertile ground for litigation.) 

Yep - it appears there's not much more than that.  There are provisions regarding establishing reasonable conditions and compensation for such use/ access, but there's nothing that addresses what is 'reasonable' for the conditions, and apparently the compensation provisions would be relevant only after the use/ access has been found to not have such an 'adverse effect'.  Unless those provisions and compensation are used to implement an exclusion by imposing prohibitively high charges - ''Our compensation is $1 million per carload, to reimburse us for the impact on our network operations'', etc. - there does not appear to be anything more in the way of clarification, definition, or detail, in the proposed bill, as follows:    

S. 2889, Surface Transportation Board Reauthorization Act of 2009, as found at: [emphasis added - PDN]

http://www.govtrack.us/congress/billtext.xpd?bill=s111-2889 

 Thank you, C. Berthold/ schlimm !

11102. Use of terminal facilities

‘(a) For a Class I rail carrier, or other rail carrier as deemed appropriate by the Board, providing transportation over which the rail carrier has market dominance pursuant to section 10707 in a terminal area, the Board may require the rail carrier to make its terminal facilities, including mainline tracks for a reasonable distance outside of that terminal, available for use by another rail carrier for such transporation.

‘(b) The Board may only require that a rail carrier take such action under subsection (a) if the Board finds that such action--

‘(1) would be practicable and would not significantly adversely affect the operations of the terminal or facility owned by such rail carrier or rail carriers otherwise entitled to use the terminal or facilities;

‘(2) would not significantly adversely affect the network efficiency of such rail carrier or rail carriers otherwise entitled to use the terminal or facilities;

‘(3) would not significantly impair service to other customers of such rail carrier or other rail carriers entitled to use the terminal or facilities;

‘(4) is necessary to promote the efficient operation of the railroad system and improve rail service; and

‘(5) is in the public interest.

‘(c) The rail carriers required to make facilities available or provide service pursuant to subsection (a) are responsible for establishing reasonable conditions and compensation for the use of the facilities. The compensation shall be paid or adequately secured before a rail carrier may begin to use the facilities of another rail carrier.

‘(d)(1) Not later than one year after the date of enactment of the Surface Transportation Board Reauthorization Act of 2009, the Board shall establish and maintain standards for determining whether compensation is reasonable for purposes of this section and establish a simplified and expedited method for determining the reasonableness of challenged compensation rates.

‘(2) In developing such standards, the Board shall consider rail carriers’ need to earn adequate revenues to provide and sustain consistent, efficient, and reliable transportation services and to maintain the national rail system.

‘(e) In developing the standards required by subsection (d), the Board shall include, as part of a reasonable compensation-- - [omitted by PDN]

Clearly, this proposed bill needs more words for fix this woeful oversight/ 'loophole'.    I suppose I could be available to supply same - my rate is $10 per, paid in advance. 

- Paul North. 

[narig01]

 

One comment  I'll make is this. In a recent issue of the Trucker News several shippers were actively keeping up the rates to their preferred carriers(truck) to ensure that these operations stayed in bussiness.

    Sometimes you can not do much about an operation. I'll cite in the trucking industry the operation of Arrow Trucking in Tulsa, Ok. or Consolidated Freightways a few years back.   Arrow was possibly  done in by bad management.(Look at several articles in the Journal of Commerce) CF had other issues. When they shutdown a fair amount of freight got stranded. In the case of the former, I suspect one large freight broker may have gotten caught with freight on their(Arrow Trucking) trucks.

     The reason why the broker got caught was that (I suspect) the company (Arrow) was willing to haul the freight for an amount that did not cover costs. The broker should well have understood these costs and still proceeded to give the company non profitable freight. Needless to say now the broker has to cover these loads.(personally I'm awaiting the class action lawsuit). Broker tells the shipper "You want a quality move" then charges $2.00 or more a mile to move freight then pay carrier $1.00 @ mile or less to move freight.

    Not sure what else to say. Oh yes maybe Darwin was right survival of the fittest?.

Rgds IGN