Take all the proposed legislation, mix 'em together, and you almost have Open Access!

[MichaelSol]

QUOTE: Originally posted by MP173
[Someone once said on this forum that rail rates have dropped considerably since 1980.

I would like someone to backup that statement with per carload comparison pricing over that period.

What size carload? What commodity? There are still thousands of such "rates" out there.

On a per ton-mile basis, which is the conventional industry measure, rates dropped about 45% between 1982 and 2000 according to the STB and the GAO.

Now, that's the average. Naturally, some shippers got better improvements in their rates. Some didn't enjoy the average improvement. Some rates increased.

Best regards, Michael Sol

[MichaelSol]

QUOTE: Originally posted by MP173
Those manufacturing jobs left the country and it wasnt due to low rail rates.

No, it would be due to high rail rates compared to the competition.

Best regards, Michael Sol

[MichaelSol]

QUOTE: Originally posted by MP173

Quite an impressive list of organizations that are ready for a change in the railroad regulation scene. Lets take a look at a few of them:

Exxon Mobil (major chemical producer) ROE = 32.5%
DOW Chemical ( ditto) ROE = 29.5%
Dupont (ditto) ROE = 23.7%
GE (plastics) ROE = 16.5%
ADM (agribusiness) ROE = 11.5%
BNSF (railroad) ROE = 16.1%
Union Pacific (railroad) ROE = 7.5%
NS (railroad) ROE = 13.8%
CSX (railroad) ROE = 14.4% (due to being highly leveraged in debt)
JB Hunt (trucker using intermodal) ROE = 20.5%

I can certainly understand why those chemical companies would want lower transportation rates...gotta keep those ROE's high so the stock price stays high.

An interesting theory that successful companies in a very good economy should not complain about captive pricing. Do they have to wait until they are dead, under your theory, before they have a fair complaint?

Why are you listing specific companies, but not industry averages? Why aren't you listing those "industries" where the ROE is 10% or less? Industry return on specialty chemicals, most subject to foreign competition, is 4.7%. A little different than what you are trying to show. Farm products (including big Agribiz) are 8.4%. Agricultural chemicals are 12.2%. Electric utilities (coal) are 12.1%. Plastics are 9.7%. Paper products, 10%. Auto parts -- 0.0%. Trucking, 10%.

Why aren't you listing any importers or foreign companies? I notice you didn't list any of the industries directly impacted by foreign competition -- oh, that's right, those companies are gone. Well, why not GM, Ford?

If pricing power was what you were trying to get at, then why didn't you point to profit margin on sales, showing BNSF at 11.79%, GE at 11%, ExxonMobil at 10.87%, Coal utilities at 7.5%, and agricultural at 3.0%, dairy at 2.6%, major chemicals at 7.5% (including DuPont at 7.3% and Dow at 9.75%).

Or for that matter, ADM at 2.4%.

Best regards, Michael Sol

[jeaton]

QUOTE: Originally posted by futuremodal

QUOTE: Originally posted by jeaton

"Finally, what is so hard to grasp with the truism of "Monopolism is counterintuitive to capacity expansion"? That's Econ 101. "

FM-If that is what you were taught in Econ 101, you ought ask for a refund.

Hmmmm, maybe you should provide some evidence to the contrary. ANY evidence to the contrary. Objective, subjective, cited or uncited, or even from the depths of your own personal feelings, doesn't matter, just give us something.

Until then, we have this:

1. First, most economists will tell you that, unlike a competitive market, a monopolist market is predicated on limiting any expansion of supply drivers, the purpose of which is to allow for pricing power and profit maximization. Agree or disagree?

2. Most transportation economists agree that NA railroads are "natural monopolies", in that the owner of the track is also the provider of transporter services, and practical limitations to entry into that market prevent side by side multiple carrier intramodal competition in most areas. Agree or disagree?

3. In the past half century, it has been the modus operandi of railroads to reduce route miles and service offerrings, via abandonments, company consolidations, etc. because NA railroading has been in a state of "overcapacity" (in spite of an ever growing US and world economy!). Agree or disagree?

Take the sum of #1, #2, and #3 above, and what do you have? "Monopolism is counterintuitive to capacity expansion".

Now, do you still disagree with that statement?

If so, then it is your econ teachers that have failed you miserably.

1. Disagree. It is more likely that the economists will say that the entity having the monopoly will limit the installation of capacity by another entity. I can not think of any reason why the company holding the monopoly would not expand capacity if such expansion would maximize profits. Check that. If the demand curve was flat and there was no population growth, the monopoly could just keep raising prices thus making more profits without expanding capacity. I have been looking around for something with those conditions, but have not seen anything like that lately.

2. As opposed to an “unnatural monopoly”? Let’s get something straight. “Most places” don’t produce freight. Places that produce the most freight usually find a couple of carriers in town, and save for your conspiracy theory of duopoly, that looks like a competitive environment. Oh yes, in spite of your denials, the real world offers some fairly attractive competitive transportation modes. One of them is trucks and they go just about anywhere.

3. I will have to agree with your third item. I guess you are trying to say that this action demonstrates that the railroads are hell bent on getting capacity down to such a shortage that rates can go through the roof or something like that. No other reason? Nothing to do with costs continuing even if the property is idle, or that the cash from salvage is more productive than idle assets?

By the way, the four US Class 1’s have announced plans to take their combined $4.8 billion profit and another $3 billion from other cash flow and put it all into their 2006 capital budget, capacity expansion included. Seems to me that means that either your claim that monopolism is counterintuitive to capacity expansion is wrong or your claim that railroads are natural monopolies is wrong. Otherwise maybe you can explain why they are making the investments.

One final question. Can you explain just how open access, with its resulting reduced rates, revenues, profits and cash flows, is going to generate more capital for capacity expansion?

[Anonymous]

QUOTE: Originally posted by futuremodal

QUOTE: Originally posted by Limitedclear

Don't hold your breath. The Representatives and Senators I spoke with and their staffs weren't big on the chances for any of the bills you mention. Where were you? With the RRs or the chemists?
LC

Perhaps you should relay your concerns to ProgressiveRailroading.com, the Journal of Commerce, Ed Hamberger of the AAR, etc. since all this has been reported/emailed this past week.

Since I was making the rounds with Ed and others I feel certain he already knows.

BTW, the shipper rereg bills will likewise not get any traction.

LC

[tormadel]

QUOTE: Originally posted by CSSHEGEWISCH

I'm not surprised that shippers are in favor of re-regulation of rail and presumably truck and barge rates. It gets their costs down with minimal management effort on their part. Of course, to be absolutely fair, the prices that they charge their customers should also be regulated.

Well the trick is you cannot regulate the price of one thing and not another. So the only way it works out fair and doesn't give someone an undue advantage is to regulate Everything. But as our old USSR friends will tell you that smacks of communism and we all know how well that worked.

Now from what FM said early on (ie mention of the Ma Bell break up) it seems someone is suggesting that the mega railroads be hit with a large hammer and broken apart again. Now I won't say that I would be in favor of the big 6 being chewed up by piranhas. But I do believe that competition based on choices of Railroad A or Railroad B is not enough. It does seem that better rates (less complaining about unfairness) should result from alittle more competition. A, B & a C.

The STB seemed to resolve this problem with the huge amounts of trackage rights given in the BN+SF merger and the UP+SP merger. But that doesn't seem to really logic out in my mind, that is just a chance to create more congestion. And most likely the host road is going to give priority to they're trains.

I can't quite find the right way to describe it, but to me things like. BNSF haveing all 3 routes to the pacific northwest through the Dakota's and UP having 2 from St. Louis to the heart of texas seems anti-competitive. One way trafficing up and down each Arkansas line may be cheaper but I am surprised STB didn't require the divesture of one of the duplicate routes and if they need more capacity should have to Improve the mainline they keep.

I'm sure I'll have more to say as I think about this topic.

[tormadel]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by MP173
Those manufacturing jobs left the country and it wasnt due to low rail rates.

No, it would be due to high rail rates compared to the competition.

Best regards, Michael Sol

Well I would say that's why jobs left the rail, not why people decided to start making they're radios in Japan.

[MP173]

Selective? Sure they are selective, this is a forum, not a textbook. I had 20 minutes to research, not a year.

As to why I used ROE vs margins, I consider a company's ROE much more an indicator of a company's overall financial health. Probably a better indicator would be ROIC, but I dont have the time to calculate those.

As to why I stated certain companies...those were companies or industries you brought up...Dow, DuPont. I threw in Exxon Mobile as they are a big shipper and are a chemical and petroleum company. ADM was added as they are a major shipper and are agribusiness.

I dont have time nor the resources to completely analyze this. I think you do. Make you a deal...you write a book and if you sign it, I will buy it.

Seriously.

ed

[MichaelSol]

QUOTE: Originally posted by MP173
As to why I used ROE vs margins, I consider a company's ROE much more an indicator of a company's overall financial health. Probably a better indicator would be ROIC, but I dont have the time to calculate those.

As you pointed out, for CSX, the high debt the company carries skews the ROE to look good, when in fact the Company is probably not all that healthy. That's a problem with ROE, $99 debt and $1 equity, and any income at all looks terrific. ROE is typically used as a standard within a company; looking to shift it in a positive fashion without damaging the debt to equity ratio. It's a little more problematic to use as a comparison between companies, because financial structures can vary so much.

The above is a good example, would you invest in ADM on the basis of its ROE, or its ROS? I am sure it is an interesting coincidence, but I doubt there is a company out there where the investment decision is so dramatically different depending on which ratio you look at.

Overall "financial health" is a combination of ratios, or data, and is something that "Altman Z" calculations are better at discerning, or "Logit" analysis, which is my personal preference.

As you note, that is time-consuming.

Best regards, Michael Sol

[bobwilcox]

Is it true that Altman scores are only geared to predecting if a manufacturing company will go into banckrupcy in a short period? I do not beleve any of the railroads or chemical companies under discussion are in this catagory.

[Murphy Siding]

QUOTE: Originally posted by edblysard

Join forces with him, Murphy!
Together, you can overthrow the evil Emperor Monopolistic and rule the Free Access Galaxy!
Ed

My take on this, is that I've "been there,done that", long, long ago, in a galaxy far,far away. Re-opening yet another thread on the topic of open access will, no doubt, be like re-living Ground Hog's Day. I'll choose to put my energies somewhere else, so as not to bother those who are winding up to join this discussion.
So there I was.....cruising down the mainline of the open access galaxy.....My conductor was some big,hairy guy, who kept saying "Who's your daddy?"....and life was great!!!

Oh yes-don't forget to ship on the Norfolk & Wookie![;)]

[MichaelSol]

QUOTE: Originally posted by bobwilcox

Is it true that Altman scores are only geared to predecting if a manufacturing company will go into banckrupcy in a short period? I do not beleve any of the railroads or chemical companies under discussion are in this catagory.

Chemical companies are within the original data set of manufacturing companies used to derive the orginal Altman Z formula, that is, they manufacture things from raw materials. Not sure how else they might be classified.

The reason the formula is described a "manufacturing" model is the role that inventory and inventory turnover ratios play in the formula. They are not a key component, but they are in there. For companies that don't really have "inventory" as a key component of their operation, it wasn't clear whether the lack of inventory skewed the results of the formula or not. The evidence so far is that it does not.

The formula has been applied to other business models outside of manufacturing and found in most instances to have a predictive power in excess of 90%. Dr. Altman applied the formula to WorldCom and found that it demonstrated a financial weakness in the company at a point in time in which the investing community still thought it was hot stuff. WorldCom is not a manufacturing company in any sense, but perhaps most closely resembles railroads in its high value asset, networking character.

The formula generates a score. A low score shows financial weakness. A high score demonstrates relative financial strength. A very low score correlates highly with a probability of bankruptcy.

The only railroad application I am aware of is one that I performed on Milwaukee Road's revenue figures in 1975 which showed a high probability of bankruptcy within two years. The formula nailed it precisely. We will probably be testing the forumla against a broad selection of railroad companies 1960-1980, possibly in conjunction with Dr. Altman, this summer or fall. Then we will know a little more about it and whether it needs to be modified to be fully useful in a railroad context.

Best regards, Michael Sol

[MP173]

Well, I did invest in ADM, but at the time, it wasnt based on ROE or ROS. As a matter of fact and full disclosure, I have invested in several of the companies or industries listed.

I agree with you Michael about the financial health indicators...you really need to look at a number of factors to get a general feel for the company and then hope that the numbers are not cooked, ie Enron and others. Thus, the best pure indicator is probably free cash flow, as companies simply cannot hide or manipulate their cash flows.

Getting back to ROE, obviously companies with a large asset base such as railroads, utilities, or ADM usually will not have a high ROE, unless they are leveraged, as you indicated. The problem with being highly leveraged is that so much of your ca***hat is generated must go to debt service. So, a company can be highly leveraged with a high ROE and be very finacially unsafe....(CSX).

Michael, asking you to write a book is quite an endeavor, hopefully you are well into writing it, but if you would care to write a "paper" and post it regarding the captive shipper/excessive rates, etc. it no doubt would lead to a very healthy and emotional discussion, which would be enlightening and entertaining.

ed

btw...the previous sentence was probably the longest I have ever written...hope no one tears it up for grammerical errors.

[MichaelSol]

QUOTE: Originally posted by MP173
Michael, asking you to write a book is quite an endeavor, hopefully you are well into writing it, but if you would care to write a "paper" and post it regarding the captive shipper/excessive rates, etc. it no doubt would lead to a very healthy and emotional discussion, which would be enlightening and entertaining.

Oh boy, I am already six papers and one book behind; have at least one co-author pretty well convinced I am awol; then got asked by the general manager to join a consulting team last week for "strategic planning" for the paper mill that I coincidentally recently referred to. If there was some way to take the summer off and get some of these things done, but then the problem might be that it just would sound so nice to take the summer off .... However, I appreciate the comments. It is an interesting area for which surprisingly little has been written from an analytical standpoint.

Best regards, Michael Sol

[MP173]

I will take that for a "no" then.

ed

[MichaelSol]

I like the idea, so "maybe," if I can get some other projects on the waiting list done. It does dovetail in a fashion with a Staggers Act study that a colleague has proposed. The $7.8 Billion in capital expenditures proposed, and as pointed out by Jay above, for instance, by and large is invested in those lines where the most competition is experienced, and where the rates charged are as low as 106% of the variable costs of service. (The theoretical break-even point (which varies) is generally around 148-153% of variable costs, if fixed costs are allocated). That is, the fixed costs are being increased significantly for those corridors where the traffic is not coming close to covering the fixed costs. But, that's where the competition is. Little of that investment is going to the captive areas, where the rates charged are 200, 300, and 400% of the variable costs of service. It seems clear that there is an enormous transfer of wealth, through differential pricing, by which railroads exploit the pricing power of monopoly to fund their capacity expansion in areas of highly competitive traffic. Primarily this represents a enormous tax on American companies exclusively, to benefit foreign shippers and those American companies fortuitously located.

Best --Michael Sol

[MP173]

I dont think the railroads are intentionally giving the benefit to the foreign companies. Rather it is a factor of the type of transportation involved....intermodal. The intermodal rates given to a domestic company such as JB hunt or others no doubt is going to be very close to the 40' container rate.

Right now China (and others) have us by the balls, at least in my opinion. Manufacturing has left our country. The purchase of our debt has left our country. The economic power is beginning to swing away from us. Now, is this all due to the railroads pricing of 40' containers? I dont think so. That trend started years ago and it was due to such a wide varience in labor rates.

Differential pricing exists. Look around and you will see it in any industry, in any service that is out there. I practice it in my sales career. My objective is "what the market will bear."

I hope you put the essay together, it will make good discussions.

ed

[MichaelSol]

Transportation costs used to work against imports. Now they work in favor of imports.

That is a significant change. It is the most important legacy of the Staggers Act.

It's not just intermodal. Competitive coal gets a considerably different price than captive coal. The low prices breed congestion. Then capital flows to alleviate congestion, even though the traffic is below cost, probably even when volume is considered. This is the subsidy that is now offered to foreign firms, even while the capital to provide the service is provided by the captive firms. Yet, the captive firms get poorer and poorer service as more and more resources are dedicated to the ultimately destructive end game; railroad policy ultimately dictating macroeconomic results destructive to the very economic engine upon which railroads depend for their survival.

Differential pricing exists.

So does suicide.

That does not suggest that the argument in favor of either one is economically, legally, or morally compelling.

Best regards, Michael Sol

[bobwilcox]

Let's close all this business down with foreigners. Especially the ones that buy US wheat!

[Anonymous]

QUOTE: Originally posted by jeaton

QUOTE: Originally posted by futuremodal

QUOTE: Originally posted by jeaton

"Finally, what is so hard to grasp with the truism of "Monopolism is counterintuitive to capacity expansion"? That's Econ 101. "

FM-If that is what you were taught in Econ 101, you ought ask for a refund.

Hmmmm, maybe you should provide some evidence to the contrary. ANY evidence to the contrary. Objective, subjective, cited or uncited, or even from the depths of your own personal feelings, doesn't matter, just give us something.

Until then, we have this:

1. First, most economists will tell you that, unlike a competitive market, a monopolist market is predicated on limiting any expansion of supply drivers, the purpose of which is to allow for pricing power and profit maximization. Agree or disagree?

2. Most transportation economists agree that NA railroads are "natural monopolies", in that the owner of the track is also the provider of transporter services, and practical limitations to entry into that market prevent side by side multiple carrier intramodal competition in most areas. Agree or disagree?

3. In the past half century, it has been the modus operandi of railroads to reduce route miles and service offerrings, via abandonments, company consolidations, etc. because NA railroading has been in a state of "overcapacity" (in spite of an ever growing US and world economy!). Agree or disagree?

Take the sum of #1, #2, and #3 above, and what do you have? "Monopolism is counterintuitive to capacity expansion".

Now, do you still disagree with that statement?

If so, then it is your econ teachers that have failed you miserably.

1. Disagree. It is more likely that the economists will say that the entity having the monopoly will limit the installation of capacity by another entity. I can not think of any reason why the company holding the monopoly would not expand capacity if such expansion would maximize profits.

You have to remember that monopolists are risk averse. Why risk financing capacity expansion if you don't have to to survive and prosper? You might end up diluting your net, and that would negatively affect your degree of pricing maximization. Look at the areas where the railroads are spending on capacity expansion, it's mostly in the import intermodal lanes, because that is the only market where railroads truly compete with each other. They are not risking capacity expansion in the captive markets - again, why do so if there is no incentive to do so?

QUOTE:
2. As opposed to an “unnatural monopoly”? Let’s get something straight. “Most places” don’t produce freight. Places that produce the most freight usually find a couple of carriers in town, and save for your conspiracy theory of duopoly, that looks like a competitive environment. Oh yes, in spite of your denials, the real world offers some fairly attractive competitive transportation modes. One of them is trucks and they go just about anywhere.

Actually, "most places" do produce freight of some kind, that's what grain, timber, aggregates, e.g. natural resources embody, at least throughout the Northern Tier, Pacific Coast, Midwest, etc. (Maybe you can leave out the desert Southwest, which is mostly pass through territory for rail.) And since those natural resources are usually produced in bulk, they are perfect commodities for railroads. And those "most places" for the most part lack a second rail service provider within the vicinity, let alone the requisite triopoly necessary to most closely emulate a competitive market. And please, enough about trucks being an attractive competitive transportation mode - we are not about to start moving even a significant portion of our export commodities and domestic coal supplies by truck. It is simply and logistically improbable and impractical.

QUOTE:
3. I will have to agree with your third item. I guess you are trying to say that this action demonstrates that the railroads are hell bent on getting capacity down to such a shortage that rates can go through the roof or something like that. No other reason? Nothing to do with costs continuing even if the property is idle, or that the cash from salvage is more productive than idle assets?

See, this is what raises the red flag. If you agree with #3, then why not #1, since #3 is the exhibition of #1?

This action does have a connection with the regulatory climate of pre-Staggers, but more so to the natural monopoly of NA railroads, although to what degree is open to question. Railroads did capitulate to the advent of the Interstate Highway System for medium to long haul boxload traffic, even though railroad technology has always been capable of higher sustained speeds than highway vehicles. Railroads' share of intercity freight dropped from 70% to 40%, and their revenue share dropped to around 10%. The question is, how much of this is truly due to regulation and "subsidized" highways, and how much is due to the inherent characterization of the natural monopoly? I will aver one thing - if open access has been instituted in the 1940's, railroads would still be carrying 70% of intercity freight. All trucking would have dominated is what it's natural characteristics suggest it would, namely the boxload shorthaul market. Practically all medium and long haul trucks would have been moving TOFC, which seems to be the trend now.

QUOTE:
By the way, the four US Class 1’s have announced plans to take their combined $4.8 billion profit and another $3 billion from other cash flow and put it all into their 2006 capital budget, capacity expansion included. Seems to me that means that either your claim that monopolism is counterintuitive to capacity expansion is wrong or your claim that railroads are natural monopolies is wrong. Otherwise maybe you can explain why they are making the investments.

As I stated above, most of this is taking place in the import intermodal lanes, where there is still a hint of true competition among carriers and containerlines. It's not taking place in Montana (one of the captive high profit areas).

QUOTE:
One final question. Can you explain just how open access, with its resulting reduced rates, revenues, profits and cash flows, is going to generate more capital for capacity expansion?

It is not necessarily "reduced" rates we are talking about, it's competitive rates which may or may not result in a reduction of the captive rates. Rates should and would be determined by the competitive market. Who knows, maybe we'll find out that even captive rates haven't been sufficient. No matter, as long as it is a true market price and not either a monopolistic price or a government madated price. And most importantly, all rail users will be paying the same relative rates, e.g. no more of this differential market skewing in favor of imported goods.

What will happen is that market forces will force the return of railroad capital outlays to those areas where the profits (or profit potential) are highest, opposite of what is happening now. New entrants into formerly captive areas will result in demand for more capacity. The assumption is that users of track will be paying enough of a fee to cover both current maintenance and future capital outlays, just like the electric utility sector, and for the most part the national highway system. Another assumption is that participation by public entities will bolster available funds for capacity expansion, just like those tax credits being pushed now. The difference is that under the current situation, such tax credits would be going to monopolistic entities (which usually doesn't bode well with the public), while under a more open access situation the tax credits become part and parcel of the entire public transportation infrastructure (and the perception of public access or benefit usually flies well with the public).

Equalize the multimodal playing field, and let the chips fall where they may.

[jeaton]

I should remember not to try to argue with somebody who just believes. I forget that a believer doesn't think about anything and therefore is not conflicted by reality.

The only thing I can attribute to the idea that open access won't result in total revenue and profits is that it must be the result of a deep faith.

The statement that the railroads are not making capital outlays directed at the most profitable (or potentially profitable) areas is just ludicrous. I don't know about you, but given a choice between putting money on something producing ten new units at a $100 profit for each or a project that is going to produce a thousand new units at $10 profit per, guess where I am going.

By the way, according to Jim Valentine from Morgan-Stanley, only about 50% of the current railroad revenue has been repriced to reflect the capacity limits. His information from both railroaders and shippers is that the big import movers with expiring contracts are going to see their rates take a big jump. Maybe the 7+billion isn't going to the wrong place.

On the matter of your item three, I could not disagree with the fact that mainline, branch and yard track has dramaticly declined in the last 50 years. You implied that the motivation was to get capacity short of need so that pricing power could be improved. For that I do not agree. Idle capacity is a cash drain and the net cash generated from salvage is obviously more productive than idle physical assets-even when in passbook savings accounts. The capacity reduction was driven by that financial consideration. The railroad pricing/marketing types of the era didn't have any idea that limiting capacity would make getting price increases so easy.

You are welcome to advocate your beliefs as long as you want to, but if you are going to wish for something be wary that the chips may not fall the way you think they should. Consider the state of the passenger airline business.

[CSSHEGEWISCH]

I may be guilty of oversimplifying, but jeaton is doing well by reminding all of us of an ancient curse:

"Be careful of what you wish for, you just might get it."

[MichaelSol]

Coming off the contracts should permit the rail industry to increase its rates and profitability. But, this same industry -- and many of the same analysts -- that said that going to contracts was one of the biggest advantages of the post-Staggers market environment.

Tariffs, in a non-regulated environment, permitted shippers to "shop" and were viewed as exerting downward pressure on margins. Contracts, on the other hand, "locked in" customers so that railroads could plan more efficiently, and removed the day-to-day negotiation that tariffs permitted. Well, that was the theory, then.

Getting "contracts" instead of using tariffs was a big deal. Stock prices went up at the prospect of railroads finally making some realistic profits.

Is Valentine suggesting that the rail industry didn't know what it was doing when it jumped on the contract bandwagon in the first place?

Is there a pattern here?

Best regards, Michael Sol

[bobwilcox]

In my experience with chemical shippers contracts were used as a way to slow the race to the bottom. Rail service was viewed as a commodity. Service by railroad A was the same as by railroad B. If you put your price cut in a tariff it was the same as cutting your list price. If you put your price cut in a contract you could negotiate some price cuts that were lower than others. You could also fix the base price for two or three years before you had to drop your price again. On some one year contracts I saw margins go from 100% pre Staggers to 0% within five years. If you were doing two or three year contracts the race lasted an extra five or ten years. Now isn't that just wonderful!

[Anonymous]

QUOTE: Originally posted by CSSHEGEWISCH

I may be guilty of oversimplifying, but jeaton is doing well by reminding all of us of an ancient curse:

"Be careful of what you wish for, you just might get it."

Actually, isn't that a country song? "Be careful what you wish for 'cause it someday might come true", or something like that.

And it's not a curse, it's an admonishment to think things through before you jump in lock stock and barrel. Intelligent human beings have the capacity to take an optimistic proposal and analyze the best and worse case scenarios, then compare those results to the status quo. That's precisely what the US forefathers did when they jumped into this hypothetical form of government known as "democracy". They are the ones who added items such as area representation (Senate) to population representation (House), the electoral college to elect the president, the balance of powers, etc. Even though it is technically still a work in progress, it has been a smashing success by most accounts.

We have some serious problems with the NA rail system. Not enough capacity (after having "too much" capacity just a few years ago!), obscene price discrimination (that for some reason gives the short end of the stick to the domestic rail shippers), lack of true market access to the infrastructure (which skews true market based pricing). There are proposals put out there by both sides, neither of which is a consensus preference. What I suggest is that all the proposals be consolidated in one bill, and let the overseers then kick the entire package around with the necessary remedies to produce an optimal proposal. That would be the most likely scenario for an open access package to emerge.

[greyhounds]

QUOTE: Originally posted by MichaelSol

I like the idea, so "maybe," if I can get some other projects on the waiting list done. It does dovetail in a fashion with a Staggers Act study that a colleague has proposed. The $7.8 Billion in capital expenditures proposed, and as pointed out by Jay above, for instance, by and large is invested in those lines where the most competition is experienced, and where the rates charged are as low as 106% of the variable costs of service. (The theoretical break-even point (which varies) is generally around 148-153% of variable costs, if fixed costs are allocated). That is, the fixed costs are being increased significantly for those corridors where the traffic is not coming close to covering the fixed costs. But, that's where the competition is. Little of that investment is going to the captive areas, where the rates charged are 200, 300, and 400% of the variable costs of service. It seems clear that there is an enormous transfer of wealth, through differential pricing, by which railroads exploit the pricing power of monopoly to fund their capacity expansion in areas of highly competitive traffic. Primarily this represents a enormous tax on American companies exclusively, to benefit foreign shippers and those American companies fortuitously located.

Best --Michael Sol

This is bogus to the max.

No sane person would attempt to "allocate" fixed cost. But the author does so, aparently in an attempt to promote some wierd agenda that is divorced from reality.

A freight rate that covers 106% of its variable cost will put good money on the railroad's bottom line and not "burden" any other shipper by an "enormus wealth transfer". If someone doesn't "understand" that, then that someone is either: 1) pushing a political agenda, 2) being a troll, or 3) is ignorant. Take your pick.

[daveklepper]

How could trucking be restricted to its natural short-haul market when most analysists that have any impartiality at all write that trucking pays onlly one-third to one-half the costs trucking imposes on the highway system? And on top of that the truckers get the highway without paying any real estate taxes on the land the highways occupy while railroads pay real estate taxes on their rights of way?

But traffic is returning to the railroads because of highway congestion and lack of qualified drivers. But I am not sure that open access would, in the long run, result in the inequities being any less than they are now, just different, nor the traffic greater, in the long run. Unless increased subsidy of railroads in one way or another is part of the open access arrangement.

[MP173]

I have never quite agreed with the argument that truckers dont pay their way for the highways. I hve believed it is very well placed "information".

What we are seeing now is the natural progression of intermodal moving to the rails due to trucking's problems of fuel and driver supply.

It will be very interesting to see what happens when these container contracts are up for negotiation. The pricing power the rails have should continue as the imports really dont have too many options at this time, what with the congestion at all ports, highways, and rails.

ed

[MichaelSol]

QUOTE: Originally posted by greyhounds
This is bogus to the max.

No sane person would attempt to "allocate" fixed cost. But the author does so, aparently in an attempt to promote some wierd agenda that is divorced from reality.

The presumably sane people at AAR, STB and even at GAO, routinely calculate the average revenue received per ton-mile received by American railroads on an annual basis. Similarly, the average cost per ton-mile of operation can be calculated on an annual basis. In that instance, the average cost of operation per ton-mile includes both variable and fixed costs.

The average "competitive" rate, according to STB reauthorization testimony to the US Senate, is 106% of variable costs. Non-competitive rates currently charged to selected shippers vary between 200% and 400% of the average variable cost of operation. The average total cost of operation, including fixed charges is, however, approximately 150% of the identified average variable costs of operation on US railroads. This changes with volume, however, statistically this hasn't resulted in a dramatic change in this ratio over the past ten years, varying between 148% and 153%, not much change, even though volume has increased substantially over that time.

This is the process by which the 180% variable cost thresh-hold was calculated for legislative purposes -- so as to ensure that there was a formula that could use readily identifiable variable costs as the basis for the presumption of "rate reasonableness" and yet generate sufficient income to cover fixed costs and still generate a profit.

In fact, the allocation of fixed costs is a necessary component of the current regulated rate structure such as it still exists.

Further, however, in "the old days" anything in excess of 100% of the variable costs of operation was considered a "profit" that went to overhead then, hopefully, to profit. The more the better. Those were the days of plenty of capacity, and relatively flat traffic growth. Fixed costs were substantially divorced from variable costs.

Today, with very large transactional organizations operating near or at capacity, the old rate reasoning is no longer true. Additional traffic does, in fact, correlate closely with rising fixed costs of operation. It's nothing you would care to calculate on a carload by carload basis, but it is a statistical phenomenon that clearly exists in a predictable and identifiable fashion. Additional traffic is correlated with increases in fixed costs in a fashion that was not statistically true prior to, say, 1990, or any date you might feel reflects this change in railroad capacity.

In any case, the 180% variable cost thresh-hold of rate reasonableness is based precisely on just such an allocation of fixed and variable costs for the average freight movement, and even though Greyhounds insists that it's "bogus," the rest of the rail industry recognized the usefulness of just such an allocation over two decades ago, and it is, in fact, part and parcel of the legislation that governs the industry today.

Best regards, Michael Sol

[MP173]

So, are you saying MIchael, that the establishment of 180% of variable costs are based on average costs?

Having had a background in transporatation pricing, I would think the 180% threshold would be based on actual costs of the movement, not just averages.

The actual costs can very easily be determined, based on cost accounting data, including switching costs, linehaul, transfer costs in yards, etc.

ed