Farmers complain about BNSF rates to STB

[Anonymous]

QUOTE: Originally posted by MichaelSol

The wheat producers who were located the farthest from the market, offering a poorer quality wheat, got the better profit, entirely because of railroad policy.

This is actually a big problem for our global wheat marketers. What is getting out there the most is a relatively inferior product compared to what could be representing US wheat quality. If Montana wheat has the top characteristics of grain quality, it should be the product prioritized for transportation to overseas markets. But the U.S. railroads have skewed this market to the detriment of U.S. producers and to the benefit of foreign producers.

[MichaelSol]

QUOTE: Originally posted by jeaton
The problem was the land was not too great, the growing season was fairly short, and the primary markets for the products were far away. Something like Montana.

During the "settlement" era, these were the statistics available and used by the railroads, MILW, GN and NP, to promote settlement in Montana.

Average bushel per acre production of some Midwestern states and Montana from 1900 to 1910 (Wheat)

State/ Average Bushel Production
North Dakota 12.1
South Dakota 12.1
Nebraska 17.5
Kansas 14.0
Wisconsin 16.6
Minnesota 13.0
Iowa 14.0
Montana 26.3

Source: The United States Department of Agriculture, Yearbook of Agriculture, Washington: Government Printing Office, 1911, p.532.

Best regards, Michael Sol

[MichaelSol]

QUOTE: Originally posted by MP173

So a Montana acre in 2004 produced $124.55 in revenue. That acre is worth $386 per acre, so the revenue per acre/asset value per acre ratio is .32.

The Illinois farm valued at $2425 produces about $350 (based on 175 bushels of corn @ $2) for a ratio of .14.

The typical Montana farm generated $266,412 in revenue in 2004, much higher than I would have thought. The farm would have been valued in excess of $800,000.

Take that one step farther and you're on to something.

After expenses, including transportation, the average Illinois farm according to the USDA earns $148 net income per acre and the the average Montana farm earns $12 per acre, net revenue. Among other things, you can see the effect of the railroad cost penalty, roughly $44/acre in this instance, it's extremely significant, and I think that's the point where that cost is $14 to $20 higher per acre than anywhere else on the railroad for the identical commodity a similar distance shipped.

QUOTE: The problem was the land was not too great, the growing season was fairly short, and the primary markets for the products were far away. Something like Montana.

For wheat, this is backwards. Montana is the nearest and largest wheat producer in the nation to what is historically the single largest export port, offering historically the highest wheat prices: Portland, Oregon.

The growing season in Montana is considered ideal for wheat, which is why so much of it is grown in Montana and it is considered the highest quality of American wheat. None of that does Montana growers much good thanks to the BNSF.

In an economically rational world, Montana is ideally located to its primary market and should be enjoying a higher prosperity because of that compared to other wheat farmers. The opposite is true, entirely because of railroad pricing policy.

The problem is that, although the closest large producer to the largest and best market offering the highest prices, Montana pays the highest percentage of income earned for transportation of that product. As recently as 2003, BNSF engaged in the insidious practice of "inverse pricing." It cost more to ship a carload of wheat to Portland from Montana than it did a carload of wheat from Minnesota to Portland.

I don't mean "per mile," I don't mean "per ton mile," I mean that it was cheaper absolutely to ship the carload from Minnesota than it was from Montana even though on the same railroad on the same mainline, and even though it was more than twice the distance.

Minnesota wheat flooded into Portland. The price of wheat collapsed. Montana farmers paid more to get their wheat there, even though 1000 miles closer, and received less per bushel thanks to BNSF's pricing policy.

The wheat producers who were located the farthest from the market, offering a poorer quality wheat, got the better profit, entirely because of railroad policy.

And the railroad car cycle times collapsed, the COT system fell apart, overall congestion increased, all traffic encountered increased cycle times, and the railroad earned substantially less than it would have under a straightforward and fair set of rates. Who wudda thought that fair and rational pricing would have been more profitable to the railroad.

Not the railroad.

Best regards, Michael Sol

[jeaton]

The situation faced by the Montana farmers kind of reminds me of something of my past. Just after World War II, my father bought a small dairy farm in north central Wisconsin. We were typical of the size of the farms in the area. My father quit farming in 1959 and in the following decade or so most of the other farmers in the area also got out of the business.

The problem was the land was not too great, the growing season was fairly short, and the primary markets for the products were far away. Something like Montana.

[MP173]

So a Montana acre in 2004 produced $124.55 in revenue. That acre is worth $386 per acre, so the revenue per acre/asset value per acre ratio is .32.

The Illinois farm valued at $2425 produces about $350 (based on 175 bushels of corn @ $2) for a ratio of .14.

The typical Montana farm generated $266,412 in revenue in 2004, much higher than I would have thought. The farm would have been valued in excess of $800,000.

Interesting numbers. Anything else farmed on those acres, or just wheat? Down here we have corn, beans, and wheat on a rotation.

ed

[Anonymous]

QUOTE: Originally posted by futuremodal

Yep, just post something about railroad rate gouging, and the ilks will slither up from the cesspool of arrogant idiocy.

I didn't know your home had such an interesting and fitting name FM...FOFLMAO...

I missed a few things while turning and burning I guess...

LC

[greyhounds]

QUOTE: Originally posted by MichaelSol

Well, this is pasted from an Excel Spreadsheet, but if you place these back into EXcel and then graph these, you will see that Montana and North Dakota wheat is one the few railroad items which has increased in shipping costs under Staggers, rather than benefitted from the huge drop in cost per ton-mile enjoyed by most other rail shippers, even as the price of wheat at Great Falls has stayed below $3.50 per bushel and even as operating costs are 375% higher in 2005 than they were in 1975.

National Average 0.063 0.039 0.0295 0.024
MT Cost to ship/ton-mile 0.023 0.028 0.034 0.038
Cost to ship/carload 1800 2268 2736 3066
Distance 870 870 870 870
Price of wheat 2.67 3.47 2.74 3.31
1975 1985 1995 2005

Best regards, Michael Sol

Are those costs adjusted for inflation?

[MichaelSol]

QUOTE: Originally posted by MP173

Thanks for the info. Any idea of what a typical acre of land is worth? It will be interesting to plug the numbers in and compare to farms in this area.

According to the USDA, as of 2002, the "estimated market value of land and buildings" for Montana farmland is $386.00 per acre. The average for Illinois is $2,425.00 per acre.

Best regards, Michael Sol

[MP173]

Michael:

Thanks for the info. Any idea of what a typical acre of land is worth? It will be interesting to plug the numbers in and compare to farms in this area.

Sure, send me the excel spreadsheet. I will play with it.

ed

[MichaelSol]

QUOTE: Originally posted by MP173

I simply want to know this...what does a car of wheat cost, how many bushels in a car (I despite an MBA can then do the math to determine bushel cost) and then look at the cost of wheat and figure what the transportation costs are.

Ed, I can email you an Excel BNSF Pricing Model that will calculate for you the specific carload cost, across four pricing categories, and the "per train" revenue as well as the transportation cost, as well as automatically selecting the best Port Export destination based on the port wheat price and the specific transportation cost, from virtually any elevator on the BNSF system, all in one Excel model. It is currently loaded with the April 15, 2005 tariffs as I haven't had time to update it to the current tariffs, but it calculates total cost and carload cost, as well as rate per mile automatically for any elevator location.

If you wish, I can ship it off to you by email.

Best regards, Michael Sol

[MichaelSol]

Ed, a 100 Ton hopper car holds approximately 3450-3500 bushels of wheat.

Montana has been remarkably stable on some statistical farm criteria for the past thirty years., not so stable on others.

This first category is relevant to Bob Wilcox's misleading comment:

QUOTE: Small farmers virtually died twenty years ago after the credit crunch in the early 1980s. They are usefull when agri-business is after a political payoff such as a subsidy from the local evil railroad.

As you can see below, nothing of the sort happened as a result of the "credit crunch" of the early 1980s, indeed, farms did not consolidate and get larger, they got smaller. There are more farms in 2005 than there were in 1974.

The number of acres of farmland in Montana:
1974 [Average size of farm]
62,158,351 [2,665 acres]

1982
60,539,209 [2,618 acres]

1992
59,642,536 [2,613 acres]

2002
59,612,403 [2,139 acres]

Wheat crop yield per acre
1974 [Aver. price per bushel]
24.7 bu [$4.24]

1982
33.6 bu [$3.55]

1990
28.1 bu [$2.65]

1991
36.5 bu $3.17]

2000
27.5 bu [$3.02]

2004
34.5 bu [$3.61]

Market value of products sold
1974 (adjusted for 1974 dollars)
$1.03 Billion

1982
$1.6 Billion ($780 million)

1992
$1.7 Billion ($550 million)

2002
$1.8 Billion ($460 million)

Average age of operator
1974
51.1 years

1982
50.5 years

1992
54.0 years

2002
55.4 years

Source: National Agricultural Statistics Service, USDA.

Best regards, Michael Sol

[MichaelSol]

Well, this is pasted from an Excel Spreadsheet, but if you place these back into EXcel and then graph these, you will see that Montana and North Dakota wheat is one the few railroad items which has increased in shipping costs under Staggers, rather than benefitted from the huge drop in cost per ton-mile enjoyed by most other rail shippers, even as the price of wheat at Great Falls has stayed below $3.50 per bushel and even as operating costs are 375% higher in 2005 than they were in 1975.

National Average 0.063 0.039 0.0295 0.024
MT Cost to ship/ton-mile 0.023 0.028 0.034 0.038
Cost to ship/carload 1800 2268 2736 3066
Distance 870 870 870 870
Price of wheat 2.67 3.47 2.74 3.31
1975 1985 1995 2005

Best regards, Michael Sol

[MP173]

Michael:

I can go and find tariff rates with anyone. The disagreement we got into last time was that the rates I was finding were not pertenent to the traffic movements.

I simply want to know this...what does a car of wheat cost, how many bushels in a car (I despite an MBA can then do the math to determine bushel cost) and then look at the cost of wheat and figure what the transportation costs are.

Anytime someone does analysis, it is always good to take a historical perspective. Hence the historical commodity prices. I also think it would be a good idea to take a look at typical farm size, etc.

I have a very good understanding of Illinois corn, beans, wheat farming but realize there is a difference.

FM, dont get too upset by what I want, it is pretty simple actually.

ed

[gabe]

You guys know how to make me feel like I have not missed anything. I had to get away from the forum, and three months later, there is a carbon copy of the thread I was reading three months ago.

Gabe

[MichaelSol]

QUOTE: Originally posted by MP173
I am very interested in the economics of the Montana wheat farmers, so I am really looking forward to your answers to the questions I posed.

Well, I am tied up in an Employment and Labor Law seminar all weekend. Sort of like 16 hours of continuous dental surgery. However, the General Counsel of WalMart actually knew all about the Pullman Strike of 1888, which was both remarkable and generated an interesting discussion last night -- for the two of us in the room who knew what it was at all.

Sunday afternoon, I might be able to gather something together on economic trends of wheat shipping, wheat prices, and farm values, if the right box of stuff is in the right place where I can find it.

Best regards, Michael Sol

[Anonymous]

QUOTE: Originally posted by DaveBr

Gentlemen,You have your Montana farmers trying to survive with the railroads.Have any
one heard the full scoop on the Oregon farmers and the water they will be able to get?
I understand it's going to be a fight between the Salmon coming upstream and the
farmers trying to irrigate their land? At Klamath Falls
DaveBr.

In the case of the Klamath farmers, they are fighting government entities, including but not limited to the EPA, USF&W, NOAA, and most importantly, the 9th Circuit Court of Appeals. The creation of the new 12th Circuit Court of Appeals can't come soon enough for them!

Isn't it ironic that farmers, dams, ect take all the blaim for ostensibly low salmon returns, yet the feds continue to allow tribal and commercial fishermen to stretch their hundreds of gill nets across all the salmon bearing streams and rivers? Last time anyone looked, a gill net doens't discriminate between a *protected* wild salmon and a harvestable hatchery fish. There was a federal judge who rightly ruled that there is no difference between hatchery and wild fish, and if push comes to shove I expect the Bush Administration will use that combined count to delist most of these fish.

[DaveBr]

Gentlemen,You have your Montana farmers trying to survive with the railroads.Have any
one heard the full scoop on the Oregon farmers and the water they will be able to get?
I understand it's going to be a fight between the Salmon coming upstream and the
farmers trying to irrigate their land? At Klamath Falls
DaveBr.

[Anonymous]

QUOTE: Originally posted by MP173



Now, do me a favor. I could probably do it, but we have brilliant minds on this discussion that could do this in a fraction of the time I could.

What is a typical rate (today) from Montana to a major market for a unit train of wheat? How many bushels will that unit train hold and how much per bushel will the transportation cost? What is the price for a bushel of Montana wheat (today). What has it historically been? How much was it 1 year ago, 5 years ago, 10 years ago?

What is the size of an average farm in Montana (or is referred to as a ranch?). What is value of that farm (value per acre)? How does that compare to 1 year ago, 5 years ago, 10 years ago?

This is deja vu all over again! Didn't we go through that on the old "Montana Farmers Strike Back Against BNSF" thread? I do not look forward to searching through 300 forum pages to find out the stuff Micheal Sol and artftbe posted regarding Montana grain transportation rate comparisons. Maybe Micheal can reiterate all that data for you(?)

BUT, I can point out one thing in response to the framing of your questions: If you only want Montana prices compared to a few years ago, and not Montana prices compared to the rates other areas of the country are getting, then you will miss the gist of the problem. The problem is with the pricing and transport rates imposed upon Montana shippers relative to other areas of the country and other areas of the world. I made this point in the other thread regarding captive vs non-captive rates, it is the relative comparison that makes all the difference.

[Anonymous]

QUOTE: Originally posted by Nuclearwinter

QUOTE: Originally posted by futuremodal

Note to NuclearWinter: You can edit the topic title to get rid of the "Framers" misspelling and replace it with the proper "Farmers" spelling, unless "Framers" really was your intent?

Do it, if for no other reason than to make the subsequent "framers" references look just plain stupid.

Actually I did that at 6 in the morning, my bad will change it now :)

On behalf of the framed farmers, we thank you![^]

[MichaelSol]

QUOTE: Originally posted by MP173

I would be the USOC group would be a pretty political group, not unlike the diverse opinions found here.

Cats, hundred and hundreds of cats, all daring to be herded.

Best regards, Michael Sol

[MP173]

Michael,

I would be the USOC group would be a pretty political group, not unlike the diverse opinions found here.

I am very interested in the economics of the Montana wheat farmers, so I am really looking forward to your answers to the questions I posed.

thanks in advance.

ed

[MichaelSol]

QUOTE: Originally posted by MP173

What is the USOC and NGB? Too bad about the book. Saunders did a great job with that book. It is a book that actually could have been bigger.

I am hoping he is following up on a third such book. I will call him today and see if he is.

USOC is the United States Olympic Committee; an NGB is the recognized business entity that "operates" or administers a specific sport, "National Governing Body."

There's a $100 million operating budget for the USOC (in a non-Olympic year, which just about triples in an Olympic year), plus individual operating budgets for the individual sport entities, probably a total of $300 million or so involved. As you might guess, there is a collision between "sport" people and "business" people over best practices and budgeting.

Once in a while an NGB -- which are pretty autonomous entities ordinarily -- falls flat on its face financially, typically misfeasance if not malfeasance.

In this instance, the USOC stepped in and restructured the particular entire NGB from the bottom up -- a very unusual step. In essence, it was a Receivership with the USOC taking the position of Trustee. Specialists brought in to oversee the actual operation and reorganization report to the Trustee, not to the former officers or board, and are technically "special assistant to" or just "assistant to the Trustee," which would be the position I was filling along with several other appointed persons.

In this instance, I was appointed to develop a plan to reorganize what was in essence the old entity into something on the order of a subsidiary that could operate within a larger but more streamlined new business entity with a different set of financial and political controls. Interesting process as it involves working with the former stakeholder interests who have conflicting goals and ideas, and sometimes not too much business or organizational sense. My review of the corporation's books suggested possible malfeasance, and I personally made the referral for criminal investigation to the Economic Crimes Unit of the Colorado Springs District Attorney's office [USOC's main office is in C. Springs]. But, the $1.5 million deficit is now nearly gone, and so next year will be a rebuilding phase as everyone gets reoriented to the new structure.

Saunders attacked a big, complex topic, but he's a good writer so its all very readable and interesting. There is a reliance on secondary and tertiary sources, inevitably, and a couple of spots where the secondary sources had the analysis wrong, but that is inevitable in a work of that scope. I would look forward to his third book (got the other one, Main Lines, sitting here, no time to read it just now).

Best regards, Michael Sol

[Anonymous]

QUOTE: Originally posted by futuremodal

Note to NuclearWinter: You can edit the topic title to get rid of the "Framers" misspelling and replace it with the proper "Farmers" spelling, unless "Framers" really was your intent?

Do it, if for no other reason than to make the subsequent "framers" references look just plain stupid.

Actually I did that at 6 in the morning, my bad will change it now :)

[MP173]

Michael:

What is the USOC and NGB? Too bad about the book. Saunders did a great job with that book. It is a book that actually could have been bigger.

I am hoping he is following up on a third such book. I will call him today and see if he is.

ed

[MP173]

BP has a major presence in the United States. But, just to acknowledge your point...

XOM's ROE is 28.3% while BP's is 20.5%.

XOM (Exxon Mobile) is a US company, granted with worldwide productiona and refining. The fact they (and BP) are worldwide would not be because of captive rail rates, but for several other factors:
1. Location of crude oil.
2. Ability to refine such crude oil
3. Environmental laws allowing or restricting production and refining

Regarding your second question...yes, I was a part of a transportation company which eventually closed down due to poor service to customers. I left before the fact, as I saw the writing on the wall. Revenues were in a downward fall, upper management was weak and self centered, and there was no investment in the future of the company...in other words the owners (second generation) were living off of the father's investment and work.

So, yes, I have been involved in that type of business, first hand. I went to the exact opposite of a company, one with dynamic ownership which is involved in the day to day operations. A company which produces the industry's best product and service (based not on my opinion, but the marketplace reaction). A company which motivates and rewards it's employees and a company which invests it's substantial profits in both return to investor and growth of the company.

I have never said that railroads dont have problems. If you go back to my posts from day one, you will find me questioning their operations and their marketing. I will continue to do so. I believe that they must get better.

If it is one thing I have learned in business...actually I have learned a couple of things, but it is critical for a company to grow. For the rails, growth generally means intermodal in today's business climate. They have done a decent job of growth in intermodal.

I might as well clarify something now. I dont deal with buying transportation service from railroads. I am not going to try and be something that I am not. I am not on the front lines of buying rail services. Never ever admitted that I was. My background in the aforementioned company gives me a background in transportation. I can find my way thru a tariff, as Michael found out several months ago. My interests here are hobby related. I wish I could add antedotes of either successes or failures, but I cant.

However, I do understand the business climate. Perhaps I dont speak your language of STB, CURE, captive intermodal, etc, but I can usually figure it out with a little help.

Now, do me a favor. I could probably do it, but we have brilliant minds on this discussion that could do this in a fraction of the time I could.

What is a typical rate (today) from Montana to a major market for a unit train of wheat? How many bushels will that unit train hold and how much per bushel will the transportation cost? What is the price for a bushel of Montana wheat (today). What has it historically been? How much was it 1 year ago, 5 years ago, 10 years ago?

What is the size of an average farm in Montana (or is referred to as a ranch?). What is value of that farm (value per acre)? How does that compare to 1 year ago, 5 years ago, 10 years ago?

We can take this even further, if you like...seed prices, fuel prices, taxes, equipment costs, etc.

I dont know the answers. This is no trick question on my behalf. I have an idea as I do own a farm in Southern Illinois. Post your answers and then I will continue an intellegent discussion. You dont have to site your sources.

ed

[Anonymous]

QUOTE: Originally posted by MP173

BTW...speaking of BP, their ROE is 20.5%, NS's is 13.6%.

Easy to ***, when your supplier is making all that money, isnt it.

ed

So the moral of the story is that companies that locate plants overseas to obtain lower outbound shipping costs from the plant will earn more than the railroads the tried to screw them back in the States? Do you think the railroads should advertise this fact, especially to their stockholders?

I'm curious Ed, have you ever witnessed a business closing shop due to poor customer relations, or is that just storybook stuff in your opinion?

[MichaelSol]

QUOTE: Originally posted by MP173
BTW, how did you like Merging Lines? I would highly recommend the followup book Main Lines. But, I didnt understand your comment about "petty and childish behavior." Please explain.

Well, I was in San Jose last weekend as the Chair of a USOC-appointed committee reorganizing the business side of an NGB on behalf of the USOC. My copy of Merging Lines, complete with dog ears and my annotations, was and possibly still is sitting on top of the ATM at the San Jose Marriott.

I have ordered another copy. It's an interesting book.

Best regards, Michael Sol

[MP173]

BTW...speaking of BP, their ROE is 20.5%, NS's is 13.6%.

Easy to ***, when your supplier is making all that money, isnt it.

ed

[MP173]

The biggest difference between my "captive" customers and the railroads is that my company delivers the value added difference that allows them to justify the difference. I make no bones about it. My customers have choices, as do the rail customers which are captive.

Dont even begin with me about BP. I fully understand how they operate and what their motives are. They are not about fairness, they are about BP and BP alone. That is the kind of customer I DONT want.

Michael, you make a very telling remark about moving from "good margins" to "no margins". That is what you and most large shippers require. "Here is my business, please go make money off of someone else, but not me."

My guess is that the majority of shipping locations have only one option. I could be wrong. But very few industries have more than one rail spur into their facility.

It looks like Toyota, for their case, got it right. Demand competition. Demand it from the government, or the plant and the jobs wont be there. Cant you see what this is? Michael, dont you understand all of this?

It is about leverage, pure and simple. It is not about evil railroads and wonderful shippers. IT is about leverage. Who can and will squeeze the very last drop out of every business dollar out there. It is called survival in today's business environment. Global survival.

BTW, how did you like Merging Lines? I would highly recommend the followup book Main Lines. But, I didnt understand your comment about "petty and childish behavior." Please explain.

ed

[MichaelSol]

QUOTE: Ed writes:
I personally like captive customers. It enables me to make good margins. That is the goal.

Your customers understand you completely. That's the goal that will cause your clients to outsource to where the captive market doesn't exist. The inexorable operation of capitalism that will put you and your company out of business. "Good margins" will be replaced by no business at all if the customer perceives them as unfair, or perceives you as taking advantage of them.

Everyone sees it coming.

From Railway Age, November 2002, by Luther Miller:
...
[C]aptive customers insist that they're being under-served and overcharged in ways never intended by the Staggers Rail Act of 1980, nor by the Surface Transportation Board's approval of mergers that severely eroded rail-to-rail competition (particularly, for chemical shippers, the Union Pacific/Southern Pacific consolidation).

Solvay America President David G. Birney told Senator Breaux: "One of our major operations with thousands of railcars has seen an increase in the average transit time from 7 to 9 days on loads and from 10 to 15 days on returning empty railcars. This has forced it to add 250 cars at an annual cost of $1.7 million. To add insult to injury, railroads now claim that the chemical industry has too many railcars and have instituted punitive demurrage charges of up to $100/day for cars held out on their lines; shippers are left with no recourse because there are no competitive options available."

Sunoco Chemicals ships and receives 38,000 rail carloads annually. According to Senior Vice President Bruce Fischer, railroads "are willing to offer service accountability on select competitive movements, yet are unwilling to stand behind their service products on lanes where no competition exists. Our ability to deliver products competitively from two of our single-railroad served plants is hindered by the local carrier being inflexible on economic demands, often necessitating supplying a customer from a much more distant competitively served site producing the same products." [China?]

Petrochemical manufacturer BP, whose transportation costs add up to $110 million a year, put this into the record: "We have 80% of our business captive at origin or destination. One of our major businesses is significantly disadvantaged by lack of competitive access. Despite the efforts within the business to reduce manufacturing, site logistics, corporate overhead, and other supply chain costs, we continue to be faced with high rail costs. In this business alone, we pay an approximate premium of $9 million in rail freight annually, on a total spend of $35 million. This premium along with other competitive factors has caused BP to rationalize the business and shut down production sites and lines. Competition, much of which will be foreign in the future, requires us to have lower costs to compete. It is essential we have congressional support to allow us to be effective in meeting current and future competitive challenges."

Celanese Chemicals President Lyndon E. Cole said discriminatory pricing is going from bad to worse: "For Celanese, a freight premium of 30% to 40% is typically imposed at our plants without rail competition. This value gap is increasing, as railroads lower their prices in competitive markets and offset the revenue loss by increasing prices where they have no competition. Ultimately, this impacts decisions on where product is made, putting the economic viability of many existing plants and their communities at risk."

DuPont is "very concerned about the lack of competition in the rail industry," said Gerard L. Donnelly, Global Director, Logistics. Noting that the post-Staggers rail industry has "dramatically improved its overall financial situation," Donnelly said that "the competitive marketplace forces Congress had correctly relied on to 'regulate' the industry have all but disappeared." The result, he said, is "a less responsive and innovative rail partner and the imposition of a 'monopoly premium' in excess of 30% being imposed on captive shippers."

The build-out option, a condition imposed by the STB in approving the UP-SP merger, is one escape for captive shippers, though a costly one. A company that has taken this route is Basell North America, whose president, Charles E. Platz, represented not only his own company but the American Chemistry Council at the Senate hearing. Platz noted that Basell has production facilities in Lake Charles and Taft, La., as well as in Bayport, Texas, and Jackson, Tenn. "Basell is not captive at Lake Charles," said Platz. "But one of the railroads at that location [Union Pacific] does have a monopoly on rail service at Basell's Bayport facility. That railroad uses its market power to obtain leverage over our Lake Charles traffic. Because of this situation, Basell and three other shippers of chemicals have joined with another railroad [Burlington Northern and Santa Fe] to create San Jacinto Rail Limited, a partnership whose mission is to introduce and provide competitively priced rail service options. Although my company would prefer to invest in plastic resin production facilities rather than rail assets, current regulatory policies compel us to do so."

Texas Senator Kay Bailey Hutchison, October 23, 2003:

"For manufacturers facing tough economic times, the story is different. In the absence of competition, shippers are forced to pay arbitrary rates. It is common practice for captive shippers to send their goods without knowing how much they will pay for carriage, and without a guarantee of on-time delivery. Every day captive shippers face the choice: pay the rate or close the business.

"Almost 35 percent of the nation's railroad traffic is now considered captive. Not surprisingly, captive shippers pay a premium per mile compared to those served by more than one railroad. In Victoria, Texas, a shipper once had three railroads competing for business. After the mergers, only Union Pacific remains. With no competitors, UP has added new fees for carriage of empty cars, dispatching and storage until overall shipping costs rose more than 35 percent for this shipper in Victoria.

"Toyota currently operates five major manufacturing plants in the United States, some captive, some competitive. Captive facility rates were so much higher that Toyota adopted a policy dictating that no plant could be built without service from at least two railroads. Ultimately, Toyota chose to build its sixth plant in San Antonio, TX but not until our Legislature threatened to build a spur to the site so another railroad would be able to compete with the incumbent.

"In San Antonio, a build-out was an option, due to the relative proximity of a competing rail line. For most captives, this is not the case and build-outs are prohibitively expensive.

"The Staggers Act was explicitly intended to protect captive rail shippers and preserve competition. However, Congress had never anticipated that the Staggers dispute resolution mechanisms would have to function in a market of only five Class I railroads. Bringing a rate case under Staggers is slow and expensive. We need to bring the law into the 21st century."

STATEMENT OF GLENN ENGLISH, C.E.O. National Rural Electric Cooperative Association. Surface Transportation Board U. S. Department of Transportation October 19, 2005 STB Ex Parte No. 658:

Twenty-five years after the Staggers Act, deregulation is clearly not working for “captive” rail customers in many vital industries, as evidenced by the experience of consumer-owned electric cooperatives. Today, cooperatives that are “captive” under current practices and decisions are subject to the unrestrained monopoly power of the rail carrier upon whom they are dependent.

With some rare exceptions, cooperatives that are “captive” are not able to negotiate reasonable commercial relationships with their monopoly carriers. They have rates and terms of service dictated on a “take-it-or-leave-it” basis – rates that are significantly and unreasonably high when compared to non-captive shippers. In addition to exhorbitant rates, captive shippers often receive poor service and suffer from a lack of rail capacity.
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NRECA has determined from a recent survey of our members, however, that at least 40-percent of our coal-fired generation and transmission cooperatives are subjected to captive rail rates for their shipments of coal. This issue is particularly important to our nearly 40-million consumer-owners because about 80% of the electricity produced by cooperative generators is fired by coal. And we should all be aware that when consumer-owned, captive electric cooperatives are charged arbitrary and unreasonably high freight rates for that coal, those increased costs make it even more difficult for our industrial, manufacturing, processing, and agricultural producers to be competitive in domestic and world markets, and impairs their ability to retain and expand jobs, facilities, and operations.

Best regards, Michael Sol