July TRAINS takes on the captive shipper debate - Best Issue Ever?

[Anonymous]

And just when I thought TRAINS would forever settle for the strictly railfan genre!

First, an excellent in depth analysis of the captive shipper vs railroads debate by Jason Gallinger.

Then, another thoughful opinion piece by Tom Murray.

Both went right to the heart of the matter - captive shippers simply want rail competition.

Intramodal competition, what a concept!

Your thoughts on the Gallinger and Murray pieces?

[samfp1943]

No complaints, Here. Just a lot of good reading...
So far, I found the major articles worth going back for a closer read,and I thought the jewel, so far was the story about the Chinese Steam coming here,to be of interest, looks like Iowa will have the corner here on Chinese Steam Locomotives in the USA. Whoda thunk that, several years ago?[swg][swg][swg][swg][tup][tup]
Sam

[CSSHEGEWISCH]

The so-called captive shippers just want a cheaper rate, even if it is to the financial detriment of the carrier. What will the shipper do when the carrier resorts to deferred maintenance when the lower rate charged makes it more difficult to pay the bills?

[Anonymous]

To: csshgewisch , maybe the stock holders and bankers and evecutives could take afew dollars each less . Then we could build a whole new railroad

[bobwilcox]

QUOTE: Originally posted by CSSHEGEWISCH

What will the shipper do when the carrier resorts to deferred maintenance when the lower rate charged makes it more difficult to pay the bills?

They do not care. The firm only looks at next quarters earnings as they kowtow to Wall Street anaylists. The individual VP Logistics only care about their next promotion. They will be long gone when the chickens come home to roost. The people making the bad government policy decisions in the 1930s, 40s and 50s were not around when the bill came due in the 1980s. That very expensive bill was paid by employees, stockholderes, taxpayers and investors.

[MichaelSol]

QUOTE: Originally posted by CSSHEGEWISCH

The so-called captive shippers just want a cheaper rate, even if it is to the financial detriment of the carrier. What will the shipper do when the carrier resorts to deferred maintenance when the lower rate charged makes it more difficult to pay the bills?

This would be a good question to pose to the railroads as to why they offer these rates, already, to the non-capitve shippers.

If the proposition offered is true, then the railroads rely on captive shippers to fund maintenance and pay bills, while the non-captive shippers are apparently pay rates -- if the post is true -- that are non-compensatory.

Now, why would the Poster think that the railroads would do that?

[beaulieu]

The railroad wants nothing of the sort. The railroads wants to maximize its revenues, while minimizing costs, just like all businesses. To achieve that it will use a form of yield management. In the often used Montana Grain Growers example the potential volume is stable within a range determined by growing conditions with slow growth due to improvements in plant genetics, and growing practices. The same rules apply to International Intermodal and Coal, the outlook is different. The railroad goes through the same ROI study for each comodity and route. How much can we charge, how much will it cost, will the capacity expansion pay all costs and provide the required return. The railroads see significant growth potential in both International Intermodal and Coal, although they are watching the DM&E and the scrubbers on Eastern Powerplants as perhaps negative possibilities. As for how a railroad can get burned? Look no further than PNW grain. The BN did a study following the boom in grain purchases by China in the early '90s and concluded that there was an urgent need to expand capacity. Traffic and Engineering studies were done with emphasis on choke points. The routes in Washington State got the hardest look. Schemes were studied looking at improving Stevens Pass, Reopening either Stampede Pass or a hybrid using portions of Snoqualamie Pass. Both Stevens Pass and Snoqualamie Pass were rejected on cost and political reasons with the reopening of Stampede Pass the chosen program. No sooner was Stampede Pass reopened than grain traffic fell off due to China not purchasing grain in the quatities that they had been. The investment in reopening Stampede Pass has not come close to paying for the investment. Once burned by Agriculture twice very shy.

[rrandb]

QUOTE: Originally posted by TRAINMANTOM

To: csshgewisch , maybe the stock holders and bankers and evecutives could take afew dollars each less . Then we could build a whole new railroad

Thats an excellent way for your only source of capital to evaporate. They will simply invest their dollars elsewhere. That would be great way to expand your infrastructure and add the desperatelly need capacity. Why does any company charge more than one price for the same service. [2c] AS always ENJOY

[Anonymous]

One point of interest - The AAR spokesman is quoted as saying, if paper barriers are outlawed, the Class I's will simply stop selling their branchlines to shortline operators and opt for abandonment instead.

My take - I think the rail shippers are calling the AAR's bluff on this one. For one thing, are there any Class I branchlines left out there that haven't been sold to shortline operators? Most of the branchlines have already been sold, and what's left is probably already captive (e.g. no physical connection with another Class I) and/or produces enough traffic to justify keeping it. Will the Class I's go to the extreme of repurchasing their old interconnected branchlines just so they can scrap them, rather than the slight possibility that the shortline in question might do business with a Class I competitor?

[MichaelSol]

QUOTE: Originally posted by beaulieu

The railroad wants nothing of the sort. The railroads wants to maximize its revenues, while minimizing costs, just like all businesses. To achieve that it will use a form of yield management. In the often used Montana Grain Growers example the potential volume is stable within a range determined by growing conditions with slow growth due to improvements in plant genetics, and growing practices. The same rules apply to International Intermodal and Coal, the outlook is different. The railroad goes through the same ROI study for each comodity and route. How much can we charge, how much will it cost, will the capacity expansion pay all costs and provide the required return. The railroads see significant growth potential in both International Intermodal and Coal, although they are watching the DM&E and the scrubbers on Eastern Powerplants as perhaps negative possibilities. As for how a railroad can get burned? Look no further than PNW grain. The BN did a study following the boom in grain purchases by China in the early '90s and concluded that there was an urgent need to expand capacity. Traffic and Engineering studies were done with emphasis on choke points. The routes in Washington State got the hardest look. Schemes were studied looking at improving Stevens Pass, Reopening either Stampede Pass or a hybrid using portions of Snoqualamie Pass. Both Stevens Pass and Snoqualamie Pass were rejected on cost and political reasons with the reopening of Stampede Pass the chosen program. No sooner was Stampede Pass reopened than grain traffic fell off due to China not purchasing grain in the quatities that they had been. The investment in reopening Stampede Pass has not come close to paying for the investment. Once burned by Agriculture twice very shy.

China's average imports of US grain averaged about $500 million per year, 1987-1995. There was a big year in 1995, $2.5 billion. But, this was about half of China's grain imports compared to the early 1980s. Indeed, as BN hauled a record amount of grain in 1983, 1.2 billion bushels, that was also the year it shut down Stampede Pass as the 2.2% grades were just not made for grain trains. The 1995 spike immediately began to taper off to about $800 million in 1999. Even though 1995 was the big spike, BN began rebuild plans for Stampede in 1994, before the grain spike, but the modifications did not include changing the limitation on grain trains, the 2.2% grades.

[MichaelSol]

QUOTE: Originally posted by rrandb
Why does any company charge more than one price for the same service. [2c]

Actually, that's fairly rare, as arbitrage almost always eliminates the differential.

[beaulieu]

QUOTE: Originally posted by MichaelSol

China's average imports of US grain averaged about $500 million per year, 1987-1995. There was a big year in 1995, $2.5 billion. But, this was about half of China's grain imports compared to the early 1980s. Indeed, as BN hauled a record amount of grain in 1983, 1.2 billion bushels, that was also the year it shut down Stampede Pass as the 2.2% grades were just not made for grain trains. The 1995 spike immediately began to taper off to about $800 million in 1999. Even though 1995 was the big spike, BN began rebuild plans for Stampede in 1994, before the grain spike, but the modifications did not include changing the limitation on grain trains, the 2.2% grades.

Quite Right but the idea was initially more limited. The intent was to take 3 to 4
empties off of the SP&S. The original plan was just tie replacement with minimal replacement of rail. Step two was to enlarge the tunnel for doublestack, followed by step three new CWR and for track upgrades. Stage Four was doubletracking Providence Hill. In the event Bob Krebs did Stage One and a fair amount of Three, which caused much head-shaking amongst the people who planned the project. The original idea was to take each step as traffic justified it. Instead for some reason President Krebs ignored the plan. This is one of the things he was taken to task for when Revenue and Profits failed to justify the expenditures made.

[daveklepper]

The Montana shipper feels the same way that the self employed businessman who has to make ends meet in his own cottage industry and is flying economy to visit a new prospective client who called the day before for an apointment-- feels when he is sitting next to a collage student who planned his vacation trip months earlier and paid 1/4 the price for his ticket. And brags about it.

[MichaelSol]

QUOTE: Originally posted by beaulieu

QUOTE: Originally posted by MichaelSol

China's average imports of US grain averaged about $500 million per year, 1987-1995. There was a big year in 1995, $2.5 billion. But, this was about half of China's grain imports compared to the early 1980s. Indeed, as BN hauled a record amount of grain in 1983, 1.2 billion bushels, that was also the year it shut down Stampede Pass as the 2.2% grades were just not made for grain trains. The 1995 spike immediately began to taper off to about $800 million in 1999. Even though 1995 was the big spike, BN began rebuild plans for Stampede in 1994, before the grain spike, but the modifications did not include changing the limitation on grain trains, the 2.2% grades.

Quite Right but the idea was initially more limited. The intent was to take 3 to 4
empties off of the SP&S. The original plan was just tie replacement with minimal replacement of rail. Step two was to enlarge the tunnel for doublestack, followed by step three new CWR and for track upgrades. Stage Four was doubletracking Providence Hill. In the event Bob Krebs did Stage One and a fair amount of Three, which caused much head-shaking amongst the people who planned the project. The original idea was to take each step as traffic justified it. Instead for some reason President Krebs ignored the plan. This is one of the things he was taken to task for when Revenue and Profits failed to justify the expenditures made.

Well, that was interesting.

I always thought it was remarkable that they spent $120 million on a relatively small project at Stampede Pass, then didn't use it much, but that some argued that $51 million to upgrade 1400 miles of Milwaukee PCE to a fast Class IV was a "high" cost and not justified by the 8-10 trains a day.

[rrandb]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by rrandb
Why does any company charge more than one price for the same service. [2c]

Actually, that's fairly rare, as arbitrage almost always eliminates the differential.

Happens every day. If you order 5 widgets and I order 10,000 widgets do you think we will get the same price. If I order 1 truck load a week and you have a gauranteed 20 truckloads a day will we get the same price. One car load or a unit train a week should they be the same price. Does Home Depot pay the same price for a John Deere riding mower as Fred's Tractor supply with one on the show room floor. Happens every day. [2c]

[MichaelSol]

QUOTE: Originally posted by rrandb

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by rrandb
Why does any company charge more than one price for the same service. [2c]

Actually, that's fairly rare, as arbitrage almost always eliminates the differential.

Happens every day. If you order 5 widgets and I order 10,000 widgets do you think we will get the same price. If I order 1 truck load a week and you have a gauranteed 20 truckloads a day will we get the same price. One car load or a unit train a week should they be the same price. Does Home Depot pay the same price for a John Deere riding mower as Fred's Tractor supply with one on the show room floor. Happens every day. [2c]

Well, then it's not the same service is it?

You've got your metaphors pretty well mixed up here.

Today, shipping a shuttle trainload out of Shelby Montana, 115 cars, the shipper will pay $2,681 per carload at the Shuttle rate. A shipper shipping a slightly longer distance in the Midwest to Duluth will pay $191 dollars less -- $2,490 -- for a single carload, at a single carload rate.

Using your example, if those were lawn tractors, then Fred's Tractor Supply is getting a much better rate than Home Depot.

If that happens "everyday," please show me where.

[PBenham]

If your employer is in an area where the possibility of a good backhaul is not very good, like mine, then you pay dearly for service of any kind, good, bad or in between! Truckers tend to be very predatory when it comes to spotting a small volume shipper/receiver and gouging them accordingly! Railroads will try to do the same things, depending upon the carrier one is dealing with. They tend to go for the maximum possible return on your business, some will work with you (CN),some will listen, at least (NS),some will tell you politely to go away if you do not want to be served their way at their price (CP,CSX). I was reading the article on the Conrail split, and that was the best business oriented article I've seen in a while. The captive shipper article was, to me, a bunch of big government re-regulation propaganda, but with a bone for the railroads in that it was explained that re-regulation could backfire, with dire to serious problems for all the majors, and more serious problems for the undercapitalized, large and not as large. We cannot afford to return to Big Government manipulating freight rates, let the marketplace, not a bunch of bureaucrats set rates. The "captives" have a very shaky case. They may find themselves without rail service at all if re-regulation comes along!

[rrandb]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by rrandb

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by rrandb
Why does any company charge more than one price for the same service. [2c]

Actually, that's fairly rare, as arbitrage almost always eliminates the differential.

Happens every day. If you order 5 widgets and I order 10,000 widgets do you think we will get the same price. If I order 1 truck load a week and you have a gauranteed 20 truckloads a day will we get the same price. One car load or a unit train a week should they be the same price. Does Home Depot pay the same price for a John Deere riding mower as Fred's Tractor supply with one on the show room floor. Happens every day. [2c]

Well, then it's not the same service is it?

You've got your metaphors pretty well mixed up here.

Today, shipping a shuttle trainload out of Shelby Montana, 115 cars, the shipper will pay $2,681 per carload at the Shuttle rate. A shipper shipping a slightly longer distance in the Midwest to Duluth will pay $191 dollars less -- $2,490 -- for a single carload, at a single carload rate.

Using your example, if those were lawn tractors, then Fred's Tractor Supply is getting a much better rate than Home Depot.

If that happens "everyday," please show me where.

No, you showed me yourself. The railroad is charging a different price for the exact same service. Ask the passengers on a plane how much each one paid for there tickets to go from the same place at the same time to the same destination the exact same distance. They will not be all the same price for the same service. Now check the price to an airport half the distance but with only one airline serving it. It will be twice the price for half the distance. I know I have seen it happen. Happens everyday. I am not saying it is right but it is nothing new and "It Happens Everyday". It is not just the railroads.[2c] P.S. Do not tell Home Depot that Fred's pays less which would be a different price for the same thing.

[MichaelSol]

Well, if a single car cost is the "same service" as a shuttle train, someone ought to let the accountants know (hint: cost of the service is considerably different).... and the wheat shippers as well.

[rrandb]

Whether you move one unit or 100 units they all move by the same service. The difference is the volume of the service you provide not the service. While it would seem logical that you should get a better price for 100 units than 1. We have already established this is not always so. We also have established that " cost of service " has little to do with the price of service. I asume you have a solution to this conundrum. Once we fix the railroads and appease the wheat farmers maybe we can start on the airlines. What i would love to see are any figures for a second rail line to free these captive shippers? Would there be enough traffic to support a second line.[?] [2c]

[MichaelSol]

QUOTE: Originally posted by rrandb
Do not tell Home Depot that Fred's pays less which would be a different price for the same thing.

Since in the real, non-railroad world, Fred's doesn't pay less than Home Depot, it doesn't, in fact, "happen that way all the time," or at all ... no need.

[MichaelSol]

QUOTE: Originally posted by rrandb
While it would seem logical that you should get a better price for 100 units than 1. We have already established this is not always so. We also have established that " cost of service " has little to do with the price of service.

Your extremely mixed metaphors, jumbling volume pricing with differential pricing, then confusing it with a competitive environment, backwards no less -- Fred's with Home Depot -- underlies your confusion over the fact that there are no competitors, the cost charged to captive shippers has nothing to do with the cost of service because, in fact, it is a completely uncompetitive situation that does not 1) obey laws of supply and demand, 2) is not affected by competitive influences, 3) is set on a whim rather than an efficient deployment of resources, and 4) has nothing whatsoever to do with free market economics at all.

It is command and control economy pricing, and would be the envy of any Commissar.

[rrandb]

Would a return to regulated freight rate be an answer. What ever savings in rates by Montana's farmer's would have to made up by other shippers. How about open access? Could another operator haul it out for less after trackage rights are paid? Many of these shippers are captive because there was not enough year round traffic to support more than one rail line. [2c]

[MichaelSol]

QUOTE: Originally posted by rrandb

Would a return to regulated freight rate be an answer. What ever savings in rates by Montana's farmer's would have to made up by other shippers. How about open access? Could another operator haul it out for less after trackage rights are paid? Many of these shippers are captive because there was not enough year round traffic to support more than one rail line. [2c]

Well, you are back to looking at the "cost" of service argument as justifying the service after just having announced that "cost of service has little to do with the price of service" after having rationalized why it makes perfect sense for Fred's to charge more for a lawnmower than Home Depot, except oops, it also now makes perfect sense for Fred's to charge less than Home Depot.

Well, I guess it really doesn't matter if there is a coherent justifying principle; this manner of quickly changing to opposite positions suggests that this is not the case of a conclusion being justified by a well-understood economic principle, but rather a pre-determined conclusion desperately in search of a justifying principle ... any principle will do.

My suggestion is that market economics is not going to help you out, but there are two such theories that might. National Socialism supported the idea that industry should be permitted to charge command prices in the name of the state, and Marxism proposed that the state itself should command the price structure. That, in either case, market setting of prices in response to competitive forces was strictly forbidden.

Our market system proposes that only market pricing promotes efficient use of resources. Without it, markets are distorted throughout the economy, which promotes inefficient use of resources. Captive shipper pricing is regulated under the Staggers Act to specifically regulate "command" or monopoly pricing because after 200 years, we don't need any more experiments to learn that command pricing is neither efficient nor effective. It is not capitalism, it is anti-capitalism.

[tree68]

I am reminded of the very true tale about a grocer who just happened to own the property where the other grocery store in town, his only major competitor, did business.

The owner decided not to renew the lease, causing the tenant grocery store to close. Most local residents, still wanting to support a local merchant, started shopping at the other store. Prices at the two stores had been comparable. They soon noticed, however, that their average grocery bill had risen substantially...

I know I stopped shopping there.

[jeaton]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by rrandb

Would a return to regulated freight rate be an answer. What ever savings in rates by Montana's farmer's would have to made up by other shippers. How about open access? Could another operator haul it out for less after trackage rights are paid? Many of these shippers are captive because there was not enough year round traffic to support more than one rail line. [2c]

Well, you are back to looking at the "cost" of service argument as justifying the service after just having announced that "cost of service has little to do with the price of service" after having rationalized why it makes perfect sense for Fred's to charge more for a lawnmower than Home Depot, except oops, it also now makes perfect sense for Fred's to charge less than Home Depot.

Well, I guess it really doesn't matter if there is a coherent justifying principle; this manner of quickly changing to opposite positions suggests that this is not the case of a conclusion being justified by a well-understood economic principle, but rather a pre-determined conclusion desperately in search of a principle ... any principle.

My suggestion is that market economics is not going to help you out, but there are two such theories that might. National Socialism supported the idea that industry should be permitted to charge command prices in the name of the state, and Marxism proposed that the state itself should command the price structure. That, in either case, market setting of prices in response to competitive forces was strictly forbidden.

Our market system proposes that only market pricing promotes efficient use of resources. Without it, markets are distorted throughout the economy, which promotes inefficient use of resources. Captive shipper pricing is regulated under the Staggers Act to specifically regulate "command" or monopoly pricing because after 200 years, we don't need any more experiments to learn that command pricing is neither efficient nor effective. It is not capitalism, it is anti-capitalism.

Oh, please spare us. For transportation, the market system of pricing as a means of promoting the efficient use of resources went in the tank the first time transport infrastructure was built and paid for by government entities. I suppose that is irrelevant for anyone that denies that other modes can compete with railroads. The fact is that trucks can haul coal and grain and any other bulk product, and if they can set a rate at or below the rail rate and make a profit on the haul they will come. The obvious fact is that in many circumstances and especially with bulk commodities, a railroad will have a cost advantage that will allow it to set a price that a trucker can't touch.

So anyway, we do have the "captive" shipper. Of course, if it wasn't for the railroad the captive shipper wouldn't be in business at all, but I guess the issue is fairness.
Assuming any of the proposed changes in the law are made before 2009, here is what I think will happen.

1. Being at capacity, railroads will raise rates on the business with the lowest margins even if the business is lost and will not aggressively go after business that becomes available from formerly captive shippers.

2. The new laws will have the desired effect of lowering rates charged to formerly captive shippers. As a result there will be reductions in railroad revenue and cash flow, which will mean a reduction in the rate of capacity expansion.

Take you pick.

[MichaelSol]

QUOTE: Originally posted by jeaton
2. The new laws will have the desired effect of lowering rates charged to formerly captive shippers. As a result there will be reductions in railroad revenue and cash flow, which will mean a reduction in the rate of capacity expansion.

Of course, with this remark, you give up the game. You are conceding that railroads are using revenue from captive shippers to finance capacity expansion for non-captive shippers -- i.e. non-captive shipper revenue that does not generate a sufficient rate of return on its own to finance the additional capacity necessary to carry more of it.

I happen to agree entirely that is exactly the game, and your diagnosis can be nothing but true, for so long as railroads divert their resources from productive traffic to traffic that does not generate a sufficient rate of return to finance the solutions to the congestion problems created by ... low rates and low rates of return.

The old railroad conundrum -- noncompensatory rates -- in a new dress.

[jeaton]

Yes, but if the shippers that have pushed for the changes get the lower rates and as a result problems resulting from capacity constraints become worse one might suggest the've shot themsleves in the foot.

[rrandb]

Nice try Micheal. What I said was many companies charge different prices for the same sevices (products). I offered the airlines as an example. Exact same service with dramatically different prices. Happens everyday. Fred can charge more for his JD mower if he's not next door to HD. He can make the same amount or more per mower as HD but he will never sell as many. The majority of rail shippers are captive to the line they built next to. More so in the west than the developed areas of the coast's or mississippi valley. Being served by more than one rail shipper is the exception not the rule. You yourself stated that grain shippers pay the same or less per carload (when adjusted for inflation) today than they did 30 years ago. There complaint is they are paying more than there competitors are who are shipping from a more cost effective location transportation wise.

[MichaelSol]

QUOTE: Originally posted by jeaton

Yes, but if the shippers that have pushed for the changes get the lower rates and as a result problems resulting from capacity constraints become worse one might suggest the've shot themsleves in the foot.

The capacity constraints seem to be where the shippers are subsidized ... that is a rational result of overcharging captive shippers to offer lower rates to other shippers ... who aren't paying the bills for their heavy use made possible through subsidized rates.

Try as you might, you can't get away from the rule that markets promote efficiency, and that it is neither a rational market for captive shippers, nor a rational market for subsidized shippers. Consequently, railroads will not, cannot, use their resources efficiently. Perhaps that explains some problems of railroading. That's market economics, not the hokum on these threads that posters try and pass off as profound laws of economics.