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

[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.

[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.

[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 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.

[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)

[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]

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

I understand that you don't.

[(-D]Okay

[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.

[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.

[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]

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]

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

[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]

Market theory is pretty well established. And understood.

[Murphy Siding]

According to *market theory*, then, the company I work for has some captive customers, for various reasons. Why don't I see our company running out and blowing money unwisely? Or, does this theory only apply to railroads?

[MichaelSol]

You tell me.

[TomDiehl]

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.

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.

So now you're comparing what a railroad charges two different customers for transportation service to what companies spend on R&D for new products.

Couldn't get much more unrelated than that.

[rrandb]

QUOTE: Originally posted by 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%

This from an industry that by its own admission has virtually no competitive pricing with in. How much difference is there from one company to the next in the price of gas at the pump. None. These are the guys who when gas was less than a quarter a gallon came up with 9/10's of a cent and still use it todat. When you put one gallon in and ask for 1/10 of a cent back will say there is no such thing.. Who are reaping there largest profits in there history in spite of "gouging " by the railroads. If they did get lower rates what are the odds of them passing the saving along to consumers. I won't holp my breath. It does support my claim that many shippers are "captive". And why would so many railroads have spent so much money for new service to once captvie industries. Why have they actually pusured branches to oil refineries when they knew they would not be the only railraod and reduced the number of "non-captive" shippers. And you claim I know how to spin. Oil Knows how to spin.

[n012944]

QUOTE: Originally posted by MichaelSol

National Petrochemical and Refiners Association:

Now if you are going on about price gouging in an industry, why on earth would you use oil companies as an example??? I get it, its the railroads fault that I paid $3.05 a gallon to fill up my car today. 1st it was Katrina, then Rita, then tensions in Iran, and now the railroads. Give me a break.

Bert

[Murphy Siding]

QUOTE: Originally posted by MichaelSol

You tell me.

Okay......because, as far as I can tell, no one in the building materials industry works that way. That's why I wonder why you believe the railroad industry does work that way. And, in order for that to be true, [i]all[i] the railroads would have to work that way, in order for them to be in the same boat, reletively. I think your *theory* doesn't quite hold up in this case.[xx(]

[Anonymous]

QUOTE: Originally posted by n012944

QUOTE: Originally posted by MichaelSol

National Petrochemical and Refiners Association:

Now if you are going on about price gouging in an industry, why on earth would you use oil companies as an example??? I get it, its the railroads fault that I paid $3.05 a gallon to fill up my car today. 1st it was Katrina, then Rita, then tensions in Iran, and now the railroads. Give me a break.

Bert

Bert,

The reference to the petroleum industry was in the context of it being subjected to captive rates, aka roughly 50% of the industry is captive to one Class I railroad. Whether the oil industry itself also engages in captive pricing or not was not the issue.

However, if you know of ANY locale that only has one oil company offering, please let us know. I know that there are scads of small towns (under 1000 population) that have only one local source of fuel, but of course they are not that far (10 to 15 miles) from larger towns that have several fuel sources. Unless you are walking down to the fuel pumps to fill your gas cans for your lawn mower, most small town residents have no problem filling their tanks at any number of fuel stations.

[MichaelSol]

QUOTE: Originally posted by Murphy Siding

QUOTE: Originally posted by MichaelSol

You tell me.

Okay......because, as far as I can tell, no one in the building materials industry works that way. That's why I wonder why you believe the railroad industry does work that way. And, in order for that to be true, [i]all[i] the railroads would have to work that way, in order for them to be in the same boat, reletively. I think your *theory* doesn't quite hold up in this case.[xx(]

Actually, Market Theory is not my theory.

And to disregard 200 years of experience would also disregard the specific reasons that protections for Captive Shippers were specifically written into the Staggers Act.

Because we, as an economy and a society, have already done the experiments that prove the theory. Fixed prices, captive prices, monopoly prices all result in inefficient use of resources, market distortions, and ultimately, harm to the company that practices them, and harm to the society that permits them.

To even suggest that "Market Theory" isn't tested or "doesn't hold up" is I think, profoundly wrong. It's argument for argument's sake, and nothing more.

[MichaelSol]

QUOTE: Originally posted by 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.

Wow, businessmen do stuff like that even when they don't have captive shippers. What on earth is the comment supposed to mean. Evidence of something? Does the name "Dennis Kozlowski" ring a bell?

[MichaelSol]

QUOTE: Originally posted by TomDiehl

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.

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.

So now you're comparing what a railroad charges two different customers for transportation service to what companies spend on R&D for new products.

Couldn't get much more unrelated than that.

You will have to talk to greyhounds about his generalization into all "business managers." I agree with you since railroad captive shippers are a unique situation, but he made the assertion, and the assertion was, as usual, demonstrably false.

[rrandb]

Market theory is that you charge for your service "as much as the market will bear". If you charge too much you will lose market share. Too little and you are losing income for your stock holders. Is this not what the railroads are doing. Companies chose to ship by rail because it is the most cost effective and efficent way to move their product. There complaint isn't that they are paying too much but that some one else is paying less.

[MichaelSol]

You miss the point, and it is clear why.

"Market" is the word you use, without understanding its meaning.

There is no "market" if a shipper is captive.

[rrandb]

The market is where they sell their product. If the railroads raise the rates to the point that they can not sell there product the railroad and the shipper lose business. Its part of a free market economy. It is what Staggers was created for. Thats not what's happening. Does the oil industry claim that it has lost market share because of rail rates?

[MichaelSol]

Well, you talk about railroads "charging what the market will bear" then say it is somebody else selling their product. Very confused thoughts there.

If "whatever it is you are talking about" is what Staggers was created for, then you automatically concede that Staggers also included a fairly strong protection for captive shippers, because society had agreed, through the legislation, that monopoly rate-setting would be detrimental, unproductive, and ultimately destructive, and that continued regulation of those rates to prevent captive rate setting to be used to offset losses otherwise was necessary.

[TomDiehl]

QUOTE: Originally posted by Murphy Siding

QUOTE: Originally posted by MichaelSol

You tell me.

Okay......because, as far as I can tell, no one in the building materials industry works that way. That's why I wonder why you believe the railroad industry does work that way. And, in order for that to be true, [i]all[i] the railroads would have to work that way, in order for them to be in the same boat, reletively. I think your *theory* doesn't quite hold up in this case.[xx(]

Just follow this thread for a while Murphy. You'll find he has several humorous "beliefs."