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

[Murphy Siding]

Michael: In *theory*, the railroads could take all that *extra* dough from the captive shippers and blow it on booze and strippers too. I see nothing more than your theory to support the fact that they don't.

[MichaelSol]

Have to take your word for it; I don't follow the industry.

[bobwilcox]

Michael-As we both know this comes out Washington. They, like the AAR, are masters at spin. I also know when you ask the NPRA for plant locations and volumes they start to mumble a lot.

[MichaelSol]

National Petrochemical and Refiners Association:

"Legislation to remedy the current lack of access to competitive railroad operations and rates facing “captive shippers” -- including many petrochemical manufacturers -- has been offered in the 109th Congress. S. 919, The Railroad Competition Act of 2005, is co-sponsored by a bi-partisan group of Senators including Conrad Burns (R-MT), John D. Rockefeller IV (D-WV), Max Baucus (D-MT), Byron Dorgan (D-ND), Tim Johnson (D-SD), Mark Dayton (D-MN), Larry Craig (R-ID), John Thune (R-SD) and David Vitter (R-LA). S. 919 proposes to "clarify" national rail policy under the Interstate Commerce Commission (ICC) Termination Act and requires the Surface Transportation Board to "ensure effective competition" among railroads at origins and destinations; enforce reasonable rail rates "in the absence of effective competition," and maintain consistent and efficient rail service for shippers, including timely distribution of rail cars."
...
"NPRA supports a competitive, market-driven, and consumer-oriented North American rail transportation system. The Association favors providing the necessary federal resources to improve rail competition as well as rail infrastructure. Actions must be taken to hold railroads accountable in maintaining or improving service and making operations more efficient. As captive shippers, NPRA members should be protected from lack of competitive rail alternatives and rates. Severe service problems, such as those that resulted from past railroad mergers, must be prevented and/or mitigated though effective remedies. These remedies should include provisions such as performance guarantees, reasonable compensation for unacceptable performance, and guaranteed access to gateways and other railroads."

According to NPRA: Percentage of "Petroleum or Coal Products" captive by revenue percentage: 49.1%

[bobwilcox]

I understand that in two decades after Staggers ; negotiating frieght rates with petroleum and petrochemical rail shippers vitually all of the shippers "captive" in 1982 became open to at least two railroads with the passage of time.

It's not a theory, it's just my experience negotiating millions of dollars worth of contracts.

[rrandb]

What is your solution to level the playing field? [ ?] Since you are well educated in the science of economics there must be an existing theory or maybe even a new one.

[Murphy Siding]

QUOTE: Originally posted by MichaelSol

I understand that you don't.

[(-D]Okay

[MichaelSol]

I understand that you don't.

Market Theory postulates that competition for price is essential to the efficient allocation of resources because it communicates actual financial information about production and responds "efficiently" by means of price -- it is the only mechanism we know of that does so effectively. And "efficiency" in this context is defined in terms of overall economic benefit.

Stockholders can't just command it, because stockholders only govern one company, whereas Market Theory governs a complex system of microeconomic interactions.

Otherwise we wouldn't need a Market Theory, all we would need is a Stockholder Theory.

Perhaps a BNSF Knows Best Theory.

But those would replicate the command economy aspects of Marxist Theory, not true Capitalism or Market Theory.

[Murphy Siding]

QUOTE: Originally posted by MichaelSol


A guaranteed source of income is much like creating a Trust Funder. He's more careless with his money, more casual with his investments -- it doesn't matter, the cash cow is always going to be milking.

This is why Trust Funders make horrible investment advisers. It's never really money they have to earn. This is why, as a matter of well-proven theory, the very existence of captive customers results in poor resource allocation and poor investment decision making.

Captive customer pricing is bad theory, it's against the law, and we don't have to look far to know that it will -- it absolutely will -- result in misallocation of resources because that is exactly what happens when pricing it taken out of a free market context and immunized against market forces by a command economy mentality.

Hm........ Where does the idea come from, that if a railroad makes *easy* money on a captive shipper, they will *blow* it all on bad investments? That seems to be a really big stretch to me. The railroad could just as well spend some of that *easy* monet on other things, like infrastructure, or even.....dividends.[:0]. These companies do have stockholders to answer to, don't they? I just don't see the correlation.[xx(]

[MichaelSol]

QUOTE: Originally posted by greyhounds
And Pharmeceutical companies direct research into promissing areas - they don't all pay off, but they are not intentionally investing in business areas that they know won't pay off ....

Well, as usual with your broad unsubstantiated statements and strong unsupported conclusions, here is an example to the contrary:

"Often leaders do not realise that the values they hold are in practice contradictory or inconsistent."

"Companies have codes of ethics but do not translate the values in terms of how the business is managed. There are instances where a business leaders acts on values that he has never made any concerted effort to express in words to employees. The leader's actions write the story of the organisation's values. "

"However, a leader's values and their will to act on them are shaped by the history and the culture of the organisation itself.

"One of the more dramatic illustrations of business leadership and values is the case of P Roy Vagelos CEO of Merck & Co Inc. Vagelos gave a researcher permission to test Ivermectin as a cure for river blindness, a disease which affects the poorest people in the world."

"Once its success had been proved Vagelos tried to get funds to produce the drug. His efforts failed and Merck announced that the drug would be given away free. It cost Merck over $200 million but it believes that if medicine is for people, profits will follow.

" Vagels' moral leadership extended beyond the company into industry, Glaxo, Dupont and Cyanamid have followed the Merck example. It is reasonable to assume that Merck acted on its values. Any future benefits required a leap of faith. Business leaders' values matter to the organisation only if they act on them."

Joanne B. Ciulla. "The importance of leadership in shaping business values", Long Range Planning, April 1999 v32 i2 p166(7)

[MichaelSol]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by greyhounds
No.

No business manager in his/her right mind would cross subsidize business and '"divert their resources from productive traffice to traffic that does not generate a sufficient rate of return"

Why on earth would any sane person do that? Your statements make no sense.

QUOTE: Originally quote by UP829
Saying business shouldn't or doesn't cross subsidize is like saying Toyota shouldn't use profits from it's Lexus division to pay for a new plant to produce Camrys. During incentive programs, Detroit regularly sells product at a loss, sometimes for sound business reasons.

Exactly, Strawbridge is off his rocker.

As I said, there are good reasons, and a lot of times there are bad reasons. The "sometimes" is the key word there -- statistically, such investments fail at the rate of 50%. Pharmaceuticals, 90%. It's dangerous ground for any company. Some companies commit to reinvesting in problematic endeavors as part of a culture that their survival rests on finding one in ten products that "might" go somewhere.

Ordinarily, however, those are also companies with high margins, where innovation is a key to their product line development. Indeed, innovation is the key to their ability to generate high margins -- not because they have captive customers that they can force to pay for their product. But, because of high margins, they have some ability to absorb the inevitable cost of mistakes -- indeed, only the high margins on successes permits them to take that risk.

Railroads generally don't fall into that category.

Of course one effect of the high margins in any other industry is that it attracts competition -- that is one driver to innovation, the first mover advantage in a new product or service. The Pharmaceutical industry is one of the most competitive -- they get a patent for a limited number of years, but each product is still subject to competition, indeed, the higher the margin on a patented product, the more R&D competitors spend to develop an analogous product.

The high margins in those cases conform with market theory quite well. A customer pays for an innovative product previously unavailable. In any industry, whether the product is HDTV or Nucleoside Reverse Transcriptase Inhibitors, notwithstanding patent law intense competition dramatically improves the products and drops the price.

If there are truly captive customers, that does not occur.

In railroading, the high price paid does not bring the inevitable advantages to the customer. The service doesn't get better, it gets worse. The price doesn't go down, it goes up.

A guaranteed source of income is much like creating a Trust Funder. He's more careless with his money, more casual with his investments -- it doesn't matter, the cash cow is always going to be milking.

This is why Trust Funders make horrible investment advisers. It's never really money they have to earn. This is why, as a matter of well-proven theory, the very existence of captive customers results in poor resource allocation and poor investment decision making.

Captive customer pricing is bad theory, it's against the law, and we don't have to look far to know that it will -- it absolutely will -- result in misallocation of resources because that is exactly what happens when pricing it taken out of a free market context and immunized against market forces by a command economy mentality.

[Murphy Siding]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by Murphy Siding

Michael: What I get out of your posts, here and on other threads, is that you feel the railroads are *overcharging* captive customers, so they can *subsidize* competitive business sectors?
In a round about way, this may be true, but I don't feel it's necessarily done on purpose. It's likely, that the railroads are getting away with charging captive customers more. I would feel they are keeping those prices as high as possible, but not high enough to get in trouble with the STB.

A little like saying the bank wasn't robbed on purpose. The police just weren't doing their job.

I'm not saying the pricing to captive customers isn't done on purpose. I'm just saying that I doubt there was a grand plan to overcharge captive customers, for the sole purpose of subsidizing non-captive customers.[;)]
Competition being what it is, if there were no captive shippers, the railroads would probably still play cut-throat on pricing, until someone said "uncle". Or, until capacity issues gave them an out to raise prices....[:-,]

[MichaelSol]

QUOTE: Originally posted by Murphy Siding

Michael: What I get out of your posts, here and on other threads, is that you feel the railroads are *overcharging* captive customers, so they can *subsidize* competitive business sectors?
In a round about way, this may be true, but I don't feel it's necessarily done on purpose. It's likely, that the railroads are getting away with charging captive customers more. I would feel they are keeping those prices as high as possible, but not high enough to get in trouble with the STB.

A little like saying the bank wasn't robbed on purpose. The police just weren't doing their job.

[MichaelSol]

QUOTE: Originally posted by greyhounds
No.

No business manager in his/her right mind would cross subsidize business and '"divert their resources from productive traffice to traffic that does not generate a sufficient rate of return"

Why on earth would any sane person do that? Your statements make no sense.

QUOTE: Originally quote by UP829
Saying business shouldn't or doesn't cross subsidize is like saying Toyota shouldn't use profits from it's Lexus division to pay for a new plant to produce Camrys. During incentive programs, Detroit regularly sells product at a loss, sometimes for sound business reasons.

Exactly, Strawbridge is off his rocker.

As I said, there are good reasons, and a lot of times there are bad reasons. The "sometimes" is the key word there -- statistically, such investments fail at the rate of 50%. Pharmaceuticals, 70%. It's dangerous ground for any company. Some companies commit to reinvesting in problematic endeavors as part of a culture that their survival rests on finding one in ten products that "might" go somewhere.

Ordinarily, however, those are also companies with high margins, where innovation is a key to their product line development. Indeed, innovation is the key to their ability to generate high margins -- not because they have captive customers that they can force to pay for their product. But, because of high margins, they have some ability to absorb the inevitable cost of mistakes -- indeed, only the high margins on successes permits them to take that risk.

Railroads generally don't fall into that category.

[Murphy Siding]

Michael: What I get out of your posts, here and on other threads, is that you feel the railroads are *overcharging* captive customers, so they can *subsidize* competitive business sectors?
In a round about way, this may be true, but I don't feel it's necessarily done on purpose. It's likely, that the railroads are getting away with charging captive customers more. I would feel they are keeping those prices as high as possible, but not high enough to get in trouble with the STB. The other part about *subsidizing* some business is a little fuzzier, in my mind. If there were no *captive* customers to charge at premium prices, then the railroads would have to *subsidize* every shipper?
I feel a lot of these pricing issues will start to work themselves out on their own, once capacity issues start to alter pricing. At some point(and we may be there now) railroads will be able to say shippers will pay more for intermodal, or they'll have to put it on the highway.
The captive shipper/180%/STB/blah blah blah....part is so murky, that it could be (and has been) jawed about for years, without much change.

[MichaelSol]

QUOTE: Originally posted by n012944

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by greyhounds
Which is exactly why capcity declined and they're now playing catch up after years of government opression and government forced diversion of profitable freight to highway.

Deregulation occured 26 years ago, and railroads just "now" decided to play catch-up?

Wow. And which current events are you still blaming on the Civil War?

The capacity issues has more to do with the explosion of imported goods in the last 20 years than dereg.

Statistically, on a ton-mile basis railroads grew at a slightly lower rate, 1980 -2000, than they did 1960-1980.

That always seems to be a huge surprise to people, but in fact, it is suggestive that railroad policy, not traffic growth, created "capacity issues."

[Anonymous]

Varying profit margins by customer and line of business, volume discounts, and preferred customers have been a part of business ever since there was business. Saying business shouldn't or doesn't cross subsidize is like saying Toyota shouldn't use profits from it's Lexus division to pay for a new plant to produce Camrys. During incentive programs, Detroit regularly sells product at a loss, sometimes for sound business reasons.

These captive shipper discussions often fall into comparing agricultural rates with intermodal, which are really two different lines of business. There's also an implicit assumption that capital investment is going only to intermodal on the SF transcon i.e. there's no agricultural traffic on the ex-SF and no intermodal on the northern transcon?

Economists have long known that monopolies will occur as part of the normal business cycle. Breakup or regulation as public utilities are two ways to deal with that. Regulation of other business practices has also been well established as a legitimate need. It's also not uncommon for some lines of business to be regulated, while others are not. Certain segments of the banking industry are still highly regulated while others are not.

The current trend of deregulating certain industries has been a mixed bag, working well in some cases but not as well in others. In many cases the problem is with the regulators rather than the companies. I don't see Montana farmers selling wheat at lower than market prices, regarless of any social need, nor would I expect railroads not to want to charge as much as they can. Few businesses that did so would remain in business very long.

FM and some others seem to come up with some rather non free-market ideas in order to avoid blaming the regulators, perhaps because his favored party are the regulators and he's unwilling to ask 'Where's the Beef?'. Is BNSF really the villain here or is it the STB? I'd suggest that just because the regulators have done a poor job or perhaps gone too far in one direction instead of another, there's no need to scrap the system. Perfect competition and completely open markets rarely exist under any economic system and there will always be a need for regulation. Likewise there will also be debate over how much, who's paying too much, who's paying too little and so on according to the self-interest of the respective parties.

[MichaelSol]

QUOTE: Originally posted by greyhounds

QUOTE: Originally posted by MichaelSol

Strawbridge: "No business manager in his/her right mind would cross subsidize business and "divert their resources from productive traffic to traffic that does not generate a sufficient rate of return"".

Strawbridge: "...which is just exactly what you said the railroads are doing."

Strawbridge is finally at the point of completely contradicting himself, offering only in his own defense, "boy, this is stupid."

Couldn't agree more.

And just how was that "contradicting myself"?

Ken Strawbridge

Well, first you proclaim they wouldn't invest in a lower rate of return line of business, then you take the position that is exactly what I said railroads were doing. You denied they would do it, it would be insane, you said.

Then you accused me of saying what I said: they are taking high margin profits and sinking it into low margin business. And indignantly "accused" me of having said it as though I had denied it somewhere.

Or, faced of course with a plethora of examples that businesses actually do it all the time, you may have, once again, realized you didn't know what you were talking about and are now attempting to take the position that it is perfectly justified for a railroad to do that.

Hard to tell with you. Between fabrications and emotion, you're hard to pin down.

[MichaelSol]

QUOTE: Originally posted by cogload

Pharmaceutical companies are selling to a "captive market" protected by patent law. And they have rather large tax breaks (in various parts of the world) to do so.

Not a good example.

Well, think about it first.

Just as captive shippers were protected by provisions of the Staggers Act.

Suppose the Pharmaceutical companies couldn't get courts to enforce the patent laws .... that's where the captive shippers are at.

[Flint Hills Tex]

While the only way to really resolve the problems of captive shippers would be open access, there really doesn't seem to be any practical way to implement open access (please see the pertinent threads).

It is not command economy at work here, but rather monopoly pricing, a very capitalistic trait. I would not compare the railroads to other free enterprise operations, but rather to utilities. Take telephone service for example. Everyone in North America was at the mercy of AT&T for pricing until Ma Bell was broken up and the market opened for competition. AT&T had to submit to government regulations requiring them to open up their infrastructure (i.e. telephone lines, relais, etc.) to competitors like MTI and Sprint. Now the customer had a choice, and that forced the telephone companies to price their services competitively.

Over here in Germany, they've done the same thing with electric and gas companies. While the local power and light company maintains their power plants, high voltage lines, substations, etc. I, as a customer, can choose a cheaper offer from a competing electric company, even though the electricity flows through the competition's lines.

Theoretically, the government could require railroads to open up their rails to competition, but that would only work if Rail Traffic Control (i.e. dispatching) were in neutral hands.

[greyhounds]

QUOTE: Originally posted by MichaelSol

Strawbridge: "No business manager in his/her right mind would cross subsidize business and "divert their resources from productive traffic to traffic that does not generate a sufficient rate of return"".

Strawbridge: "...which is just exactly what you said the railroads are doing."

Strawbridge is finally at the point of completely contradicting himself, offering only in his own defense, "boy, this is stupid."

Couldn't agree more.

And just how was that "contradicting myself"?

Ken Strawbridge

[n012944]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by greyhounds
Which is exactly why capcity declined and they're now playing catch up after years of government opression and government forced diversion of profitable freight to highway.

Deregulation occured 26 years ago, and railroads just "now" decided to play catch-up?

Wow. And which current events are you still blaming on the Civil War?

The capacity issues has more to do with the explosion of imported goods in the last 20 years than dereg.


Bert

[Anonymous]

Pharmaceutical companies are selling to a "captive market" protected by patent law. And they have rather large tax breaks (in various parts of the world) to do so.

Not a good example.

[MichaelSol]

Strawbridge: "No business manager in his/her right mind would cross subsidize business and "divert their resources from productive traffic to traffic that does not generate a sufficient rate of return"".

Strawbridge: "...which is just exactly what you said the railroads are doing."

Strawbridge is finally at the point of completely contradicting himself, offering only in his own defense, "boy, this is stupid."

Couldn't agree more.

[greyhounds]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by greyhounds
No.

No business manager in his/her right mind would cross subsidize business and '"divert their resources from productive traffice to traffic that does not generate a sufficient rate of return"

Why on earth would any sane person do that? Your statements make no sense.

Pharmeceutical companies do it all the time with enormous R&D expenses, hoping that one in ten might pay off.

IBM did it with PCs for years.

Venture capitalists do it for a living.

Boeing does it with every plane it develops, looking at overall losses for years on the product, until finally they hit (hopefully) the break even point.

In the real world it is fairly common for a variety of reasons, some of them simply being mistakes and business makes a lot of them.

Boy, this is stupid.

QUOTE: Originally posted by MichaelSol



"Boeing does it with every plane it develops, looking at overall losses for years on the product, until finally they hit (hopefully) the break even point."

Boeing won't invest in a new plane type unless it believes that the plane will pay off investments. Every start up has negative cash flow - but that doesn't mean they won't get their investment back with interest.

What you said the railroads were doing was intentionally making investments that they knew wouldn't pay off - and that is one dumb thing for you to have said.

And Venture Capitalist do not make bad investments for a living.

And Pharmeceutical companies direct research into promissing areas - they don't all pay off, but they are not intentionally investing in business areas that they know won't pay off, which again, is just exactly what you said the railroads are doing.

And you are wrong again.

Ken Strawbridge

[MichaelSol]

QUOTE: Originally posted by jeaton

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by greyhounds
No.

No business manager in his/her right mind would cross subsidize business and '"divert their resources from productive traffice to traffic that does not generate a sufficient rate of return"

Why on earth would any sane person do that? Your statements make no sense.

Pharmeceutical companies do it all the time with enormous R&D expenses, hoping that one in ten might pay off.

IBM did it with PCs for years.

Venture capitalists do it for a living.

Boeing does it with every plane it develops, looking at overall losses for years on the product, until finally they hit (hopefully) the break even point.

In the real world it is fairly common for a variety of reasons, some of them simply being mistakes and business makes a lot of them.

But you are saying it is wrong if railroads invest cash generated from one segment of business into a segment that may be earning a lower rate of return?

If it is based on coercive rate making for some, creating a subsidy for others, it distorts markets, and it distorts resource allocation. Milton Friedman would undoubtedly say it is the worst thing a company can do, as it inevitably creates unproductive or even destructive resource allocation strategies.

However, to your point, Greyhounds states it would be insane to do so and that railroads don't do that.

I happen to think it happens all the time, and generally not resulting from insanity. Good reasons and dumb reasons.

But, your point is best taken up with greyhounds. It's not just wrong, he says, it's insane. I am sure you will take him to task for it.

[jeaton]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by greyhounds
No.

No business manager in his/her right mind would cross subsidize business and '"divert their resources from productive traffice to traffic that does not generate a sufficient rate of return"

Why on earth would any sane person do that? Your statements make no sense.

Pharmeceutical companies do it all the time with enormous R&D expenses, hoping that one in ten might pay off.

IBM did it with PCs for years.

Venture capitalists do it for a living.

Boeing does it with every plane it develops, looking at overall losses for years on the product, until finally they hit (hopefully) the break even point.

In the real world it is fairly common for a variety of reasons, some of them simply being mistakes and business makes a lot of them.

But you are saying it is wrong if railroads invest cash generated from one segment of business into a segment that may be earning a lower rate of return?

[MichaelSol]

QUOTE: Originally posted by greyhounds
No.

No business manager in his/her right mind would cross subsidize business and '"divert their resources from productive traffice to traffic that does not generate a sufficient rate of return"

Why on earth would any sane person do that? Your statements make no sense.

Pharmaceutical companies do it all the time with enormous R&D expenses, hoping that one in ten might pay off.

IBM did it with PCs for years.

Venture capitalists do it for a living.

Boeing does it with every plane it develops, looking at overall losses for years on the product, until finally they hit (hopefully) the break even point.

In the real world it is fairly common for a variety of reasons, some of them simply being mistakes and business makes a lot of them.

[MichaelSol]

Well, if you think Jay is agreeing with you that most shippers are captive, I think you are spinning his remarks. No matter how "open to interpretation" you think they are, they are not incomprehensible.

After your declaration that I am putting words in his mouth, you thereupon proceed to put words in his mouth by saying it means 7000 carloads in 55 car trains of 13 trains per day.

Of course, "13 trains" a day does not describe the Northern Tier BNSF traffic either. Closer to 30.

However, this exhange precisely underscores my contention that these conclusions arise in "fact free zones," -- indeed "facts" are casually invented wholesale ("most shippers are captive", "13 trains a day") when they are convenient to the conclusion. Here we see facts simply made up. No basis whatsoever, completey wrong in fact. The search for a supporting theory is equally elastic.

So elastic in fact that fundamental characteristics of command and control economies are translated into a positive good and relabeled as "capitalism" when in fact they are no such thing, but the antithesis.

[rrandb]

No but then I do not propose to put words in his mouth . However you are willing ( with quotations marks) to blantantly miss quote what he said. At 7000 loads a day on the trasncon, close to say 13 trains of 55 car unit trains a day I won't say in "quotes'" that he said its too little. What I would say since his answer is open to interpretation that only he knows excactly what he meant to say. As the spinee to the spinner I'd bet you passed your bar on the first try. [2c]