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

[MP173]

The IC struggled in the 70's, but they survived....and survived quite well. In fact, they pretty much became the model for medium density operations.

Their line will never be a traffic powerhouse, most traffic moves east west in this economy, but IC (CN) seems to do it fairly efficiently.

Regarding the 70's....it was a dark time, no doubt.

ed

[MichaelSol]

QUOTE: Originally posted by greyhounds
If a railroad is priced at 180% of variable and wants to make more money it can basically do one of two things: 1) raise the rate, or 2) lower its costs. Obviously, the second option is better for all concerned. More efficient railroads are a good thing.

If lowering costs is a good thing then a price cap is the way to do it, according to this. According to the results of the Staggers Act, competition was the way to do it -- as costs came tumbling down, not by choice, but by the rigorous action of market forces which forced railroads to act fast to cut their costs. While the AAR loves to spin that as an almost benevolent choice on the part of the railroads to generously pass along "savings," I don't know of a serious economist that would believe that spin for a second -- railroads were forced to by competition and did so to survive in the relatively ruthless post-Staggers world.

What would have attenuated efficiency gains? Lack of competition.

So, if there is a substantial cash flow of captive money, does it make sense that this attenuates the need to obtain efficiencies? To me it makes sense that it does -- it is a straightfoward economic market theory argument that requires no name calling nor evasive factual presentations to understand.

But, too, the railroad is not priced at 180% as the poster misleadingly states above. Rather, that is a legally-defined cost threshold at which presumptions change. It is not, and never was, a "rate cap." That completely misunderstands, misrepresents the Staggers Act captive shipper provision.

[jeaton]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by jeaton
By the way, interesting strategy on the part of the State of Montana with regard to banning the use of the highway by grain trucks.

?

This is my point about rewriting things ...

Excuse me. I see it was a weight limit thing. Same result. Trucks don't move the grain.

[MichaelSol]

QUOTE: Originally posted by jeaton
By the way, interesting strategy on the part of the State of Montana with regard to banning the use of the highway by grain trucks.

?

This is my point about rewriting things ...

[jeaton]

So it took the miracle drugs provided by the Fed's to keep it going? When I went to buy their services in 1984, they did a reasonably good job and they were still kicking when the CN came around.

By the way, if the captive shippers get the lower rates that they want, how do they propose that the railroads maintain or improve capacity and service with lower cash flows? Is the next step telling the railroads where they must put their money or telling them to raise their rates on other traffic to make up the difference? Or both?

By the way, interesting strategy on the part of the State of Montana with regard to banning the use of the highway by grain trucks. "We are to cheap or to poor to do our part for the transportation infrastructure, but we can divert attention to that by putting the blame for the problems on the privately owned and operated transportation companies.

[MichaelSol]

QUOTE: Originally posted by jeaton
Compared to a number of other railroads, the Illinois Central did survive through the 1970's rather well. Maybe we just had smarter people doing the risk analysis.

Well, rewriting history is becoming a pastime here. "Rather well?" The Chairman of the ICC called it a "basket case" in Senate Testimony in January, 1978. It took more federal money than Milwaukee Road to keep it working.

[MichaelSol]

Greyhounds and Montana wheat. Never ends.

In 1980, a good percentage of wheat did leave Montana by truck, to the Lewiston barge terminal. There was a pretty good rate there. A relatively short truck movement over a two lane road through a wilderness.

After the trucks tore up the highway, Idaho put a weight limit that killed the traffic. I haven't seen a truck go that way in years. Of course, Greyhounds never saw one at all, so how could he possibly know what happened to it. Hence 97% goes by rail and, in 1984, the ICC did, in fact, find "market dominance" of the BN in Montana under the Staggers Act guidelines. Now, that was an agency finding after detailed testimony by both sides and due consideration by knowledgeable professionals -- not the greyhounds approved method of simply making it up so that he can argue about something he was never involved in.

The Whiteside paper shows there were some efficiency gains. I am not, and never have, argued the Whiteside position on this. I am presenting the Staggers Act argument which incorporates higher costs, lower costs, however the ball bounces. The "straw man" of the Whiteside paragraph that mentions efficiency gains is greyhhound's way of changing the subject, although I think the net result of the Whiteside paragraph is only that lower costs show up in the formula and must be acknowledged by law. Well, that's exactly what the R/VC threshold does. Nothing magical about that, nor mendacious.

Readers might recall greyhounds first brought this up in a discussion as to whether competitive rate-making of the Milwaukee Road had caused lower or higher rates back during that era. Greyhounds triumphantly announced this paper and misinterpeted a variety of conclusions from it, and failed to disclose that none of the data was from the Milwaukee Road era -- then conveniently left out a link so no one could read it for themselves. A completely dishonest argument from start to finish.

As to BobWilcox, for better or for worse, the STB methodology is the legal methodology mandated by Congress. As I also mentioned, it can incorporate current specific data. As I also mentioned, you can "know" some things, such as my choice of a station on a mainline, through a fairly efficient yard to destination, and compare that to the system average. The methodology allows you to use as much as you know about the movement and uses system averages for what you don't know. Fair enough.

That is a reasonable approach to any system analysis. The problem with it is that you are working hard to be unreasonable.

[bobwilcox]

QUOTE: Originally posted by MP173

So, the STBprogram is based on system averages?

That is a bit antiquated for determining costs for specific movements. If I were a pricing manager, my decisions would be based on specific data for each customer. That, of course involves very propriatary information, which i would be extremely reluctant to share.

ed

That is one of the reasons no one running a Class I railroad uses this junk. Current railroad costing systems use very specific data on each move. The user can decide to agregrate the data as appropriate to the piece of traffic under review.

Having used this data their are wide variances in the cost. As an example their is a hudge difference if you are using a branch line with four cars on the typical train vs. a main line with 100 cars on the typical train.

STB costs are part of the strange and wonderful world of lawyers. As the attorney said to his client, "Be careful of which hole you go down Alice!"

[greyhounds]

You know, a lot of the "captive shipper" BS out here comes from Sol's contention that Montana wheat farmers are "captive" to the BNSF.

They're not.

According to the Montana Wheat and Barley Commitee, truck movement is a viable alternative.

http://wbc.agr.mt.gov/factsfigs/other/mwbtr.html

(That's a state of Montana web site)

In 1980, the year before deregulation (or so Sol says) 39% of the Montana wheat crop moved out by truck. That ain't no railroad monopoly.
So there is a truck alternative. No need for government involvement here!

But then an ironic thing happend as rail rates were deregulated and the Millwaukee Road through Montana was ripped out of the ground like the cancer it was. The truck share of wheat shippments from Montana began to decline, down to 20% in 1989, 16% in 2001 and only 9% in 2002.

The Sol called "Monopoly" known as the BN/BNSF began to gain market share. Oh, that's strange. According to Sol, they're charging exhorbitant, monopolistic rates while gaining market share in face of a viable alternative, trucking. Remember, 2 out of 5 wheat tons moved by truck in 1980. Unless Montana ripped up its roads, trucking is still an alternative.

What happened was that the BNSF became more efficient, reduced its rates in real dollar terms, and made itself more competitive with the viable truck alternative. Why else whould the wheat have shifted from truck to rail?

But since the Montana wheat farmers are desperate, they seek to loot the BNSF through government regulation.

The Montana wheat shippers are in no way "captive" to the BNSF. The roads to the Snake River barges are still in place. The shippers just want a lower price, and they don't care how much damage they do if they get one.

[jeaton]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by jeaton

The whole idea of limiting a rate to a percentage of variable cost falls on its face because it does not provide any consideration of the effect of the volume of business on the return on the investment in the portion of the fixed plant used for the move.

The original proposal called for a 160% R/VC. Railroads were actually able to articulate an argument that it should be higher, based on that consideration. Railroads got their way on the percentage. Congress meets in regular session. There is no reason why, when a change is warranted, a change cannot be made.

QUOTE: According to Michael Sol, railroads are using some measure like whatever flips your switch to allocate capital. Some 30 years ago, I work for a railroad where a couple of guys with educations from The Wharton School and the Harvard Business School worked up the internal ROI's on the proposed capital projects, considered the odds that the projects would produce those returns, and then ranked the projects to provide senior management with a rational story to take to the board of directors. I have been away for a long time. Has that method become obselete?

Apparently the system didn't work too well. Thirty years ago, the railroads were in enormous trouble. The Staggers Act came after the efforts you describe.

The method you describe of ascribing probabilities also requires rational information and theory in the course of assigning those probabilities. The process is memorialized in modern software programs such as Decison Tree or Crystal Ball. The problem is when the odds don't work out ... for some reason railroads miss those a lot. I am sure the same process underlay the industry support for Staggers. Then Railroads did not expect the substantial decline in industry revenue as a result of Staggers; they expected it to go the other way.

Oops.

QUOTE:
As I stated earlier on this thread, if the proposals for the increased regulation of railroads are enacted ...

I think most captive shippers would simply like to see the original law enforced.

What I am suggesting is that R/VC is not relevant to a determining that the revenue is adequate for a particular operation because it does not consider the volume of business. Is it one car or a thousand cars? How many other cars at other rates use that piece of the railroad?

Compared to a number of other railroads, the Illinois Central did survive through the 1970's rather well. Maybe we just had smarter people doing the risk analysis.


Change the law or enforce the original law, either way it is a change from the current situation. So if they get the changes they wish for, they get the lower rates and result number two prevails. Are the lower rates worth anything if the wheat gets to the port but misses the boat?

[greyhounds]

QUOTE: Originally posted by jeaton

The whole idea of limiting a rate to a percentage of variable cost falls on its face because it does not provide any consideration of the effect of the volume of business on the return on the investment in the portion of the fixed plant used for the move.

The general principals taught in Econ 101 on the private enterprise capitalistic system became irrelevant to transportation in the US on the first day that governments-at any level-started to build and pay for the facilities used for transportation. With that any chance that there would be a free and open market to efficiently allocate capital resources used for transportation facilities went in the tank.

The "captive shipper" concept is real only if you firmly believe that the only possible competition for one railroad is another railroad, or, according to Futuremodal, at least two and possibly more. If you buy that, call me because I have a two for one deal going on some bridges in New York City.

According to Michael Sol, railroads are using some measure like whatever flips your switch to allocate capital. Some 30 years ago, I work for a railroad where a couple of guys with educations from The Wharton School and the Harvard Business School worked up the internal ROI's on the proposed capital projects, considered the odds that the projects would produce those returns, and then ranked the projects to provide senior management with a rational story to take to the board of directors. I have been away for a long time. Has that method become obselete?

As I stated earlier on this thread, if the proposals for the increased regulation of railroads are enacted, one of two things will happen.

Having discovered that operating near capacity provides a certain pricing power, the railroads individually decide that there is no point in going ofter the other guys business by cutting rates.

OR,

The proponents of the changes are sucessful in their goal of getting lower rates. Cosequently, the railroads' cash flow is reduced, capacity expansion slows or stops, and there is a further deterioration of service. From what I have seen looking at the CURE membership and the businesses offering the most support for the changes, they seem to be mostly businesses that own or lease railcars, rather than use carrier supplied cars. So if service becomes worse, they wind up having to buy or lease more cars. Along with that they suffer other consequences of service getting worse.

Be careful what you wish for.

Hey Jay, all Hell broke loose at work this afternoon or I would have been there.

I agree that Sol "assumes irrational behavior" and that "The whole idea of limiting a rate to a percentage of variable cost falls on its face " But I've got another reason.

If a railroad is priced at 180% of variable and wants to make more money it can basically do one of two things: 1) raise the rate, or 2) lower its costs. Obviously, the second option is better for all concerned. More efficient railroads are a good thing.

But if it's rates are capped at some artificial revenue/cost ratio by economic regulation, why would it bother to become more efficient. Any gain would be lost - the regulators would force the railroad to give it to the shippers. There would be no return on buying more efficient locomotives, improving equipment utilization, improving maintenance procedures, etc. Capping rates at some artificial ratio would be an incentive for inefficient railroads, and the last thing this economy needs is an inefficient railroad network.

If you look at the "White Paper" prepared by Whiteside & Associates for the Governor of Montana, you'll see that this is just what the BNSF did. (see page 14) It made itself more efficient while holding the rates down.

http://rscc.mt.gov/docs/White_Paper_Meeting_10_05.pdf

They made themselves more efficient and now the shippers in Montana want the railroad's efficiencies to go into their own pockets instead of the BNSF's. And those shippers are looking to the government regulators to force the BNSF to fork it over.

[MichaelSol]

QUOTE: Originally posted by jeaton

The whole idea of limiting a rate to a percentage of variable cost falls on its face because it does not provide any consideration of the effect of the volume of business on the return on the investment in the portion of the fixed plant used for the move.

The original proposal called for a 160% R/VC. Railroads were actually able to articulate an argument that it should be higher, based on that consideration. Railroads got their way on the percentage. Congress meets in regular session. There is no reason why, when a change is warranted, a change cannot be made.

QUOTE: According to Michael Sol, railroads are using some measure like whatever flips your switch to allocate capital. Some 30 years ago, I work for a railroad where a couple of guys with educations from The Wharton School and the Harvard Business School worked up the internal ROI's on the proposed capital projects, considered the odds that the projects would produce those returns, and then ranked the projects to provide senior management with a rational story to take to the board of directors. I have been away for a long time. Has that method become obselete?

Apparently the system didn't work too well. Thirty years ago, the railroads were in enormous trouble. The Staggers Act came after the efforts you describe.

The method you describe of ascribing probabilities also requires rational information and theory in the course of assigning those probabilities. The process is memorialized in modern software programs such as Decison Tree or Crystal Ball. The problem is when the odds don't work out ... for some reason railroads miss those a lot. I am sure the same process underlay the industry support for Staggers. Then Railroads did not expect the substantial decline in industry revenue as a result of Staggers; they expected it to go the other way.

Oops.

QUOTE:
As I stated earlier on this thread, if the proposals for the increased regulation of railroads are enacted ...

I think most captive shippers would simply like to see the original law enforced.

[jeaton]

The whole idea of limiting a rate to a percentage of variable cost falls on its face because it does not provide any consideration of the effect of the volume of business on the return on the investment in the portion of the fixed plant used for the move.

The general principals taught in Econ 101 on the private enterprise capitalistic system became irrelevant to transportation in the US on the first day that governments-at any level-started to build and pay for the facilities used for transportation. With that any chance that there would be a free and open market to efficiently allocate capital resources used for transportation facilities went in the tank.

The "captive shipper" concept is real only if you firmly believe that the only possible competition for one railroad is another railroad, or, according to Futuremodal, at least two and possibly more. If you buy that, call me because I have a two for one deal going on some bridges in New York City.

According to Michael Sol, railroads are using some measure like whatever flips your switch to allocate capital. Some 30 years ago, I work for a railroad where a couple of guys with educations from The Wharton School and the Harvard Business School worked up the internal ROI's on the proposed capital projects, considered the odds that the projects would produce those returns, and then ranked the projects to provide senior management with a rational story to take to the board of directors. I have been away for a long time. Has that method become obselete?

As I stated earlier on this thread, if the proposals for the increased regulation of railroads are enacted, one of two things will happen.

Having discovered that operating near capacity provides a certain pricing power, the railroads individually decide that there is no point in going ofter the other guys business by cutting rates.

OR,

The proponents of the changes are sucessful in their goal of getting lower rates. Cosequently, the railroads' cash flow is reduced, capacity expansion slows or stops, and there is a further deterioration of service. From what I have seen looking at the CURE membership and the businesses offering the most support for the changes, they seem to be mostly businesses that own or lease railcars, rather than use carrier supplied cars. So if service becomes worse, they wind up having to buy or lease more cars. Along with that they suffer other consequences of service getting worse.

Be careful what you wish for.

[MichaelSol]

QUOTE: Originally posted by MP173

So, the STBprogram is based on system averages?

That is a bit antiquated for determining costs for specific movements. If I were a pricing manager, my decisions would be based on specific data for each customer. That, of course involves very propriatary information, which i would be extremely reluctant to share.

Steel wheels, steel rails, standardized equipment, standardized pay scales, fuel costs don't vary much across a system, nothing very proprietary, and nothing that can change too much. A typical example where the cost of obtaining the specific data would probably exceed, in most instances, the usefulness of the data since it will look very much like old data with the logical changes in wage scales and fuel costs. Cycle times will swing the "cost" around more than anything, but the nice thing about the STB program is, of course, that's pretty easy to know and enter as a particular data.

Proprietary information, if there is any, make sense if there were competitors, but .... these are captive shippers. That's the whole point.

The competitors already know how your railroad is doing as a whole -- it's all published. But, too, it is the system the railroads themselves agreed to, knowing full well that plenty of slack was built into the statutory threshold. You, as a railroad manager, may want to know more -- you may not want to disclose that to the customer -- the cost may be less than the calculated cost of service -- it is an average, after all.

STB updates the data each year, and what is surprising is how difficult it is to change actual data. Averages tend to be hard to move, up or down. On the other hand, the 180% threshold offers the railroads the opportunity to come forward to explain a higher cost of service than the average. Too, you can look at "reasonableness" and comparing a Shelby to Portland movement, through Pasco, compared to a Nebraska or South Dakota movement to Duluth through Lincoln or Northtown would show the Pasco yard moves faster.

A brief review tonight single car to shuttle, moves from Nebraska and South Dakota origins to Duluth at R/VC ratios of between 127% and 174% with one at 217%, average haul about 550 miles. Stations were chosen with Shuttle elevators only. Shelby wheat to Portland, 781 miles, varies between 172% and 338% with the single car moving at 172% of VC, and a shuttle carload moving at 338% of VC.

[MP173]

So, the STBprogram is based on system averages?

That is a bit antiquated for determining costs for specific movements. If I were a pricing manager, my decisions would be based on specific data for each customer. That, of course involves very propriatary information, which i would be extremely reluctant to share.

ed

[MichaelSol]

QUOTE: Originally posted by MP173

But, we dont know what the VC ratio is today. Once upon a time it occurred. Is it happening today? Perhaps. If so and it is the law...then go after them.

The STB utilizes a program based on railroad-supplied data that generates a R/VC ratio. Like all data-based analytical systems, it is of course bound by the reporting parameters necessary to compile, deliver, and upload the data -- so it's never quite current -- data rarely is. However, the program does allow an interested person to enter such current data as may be available. for a given shipment on a given railroad a given distance. While I wouldn't rely on it for great precision, it provides a useful ballpark that is pretty close to the mark compared to the detail studies I have seen. Today, Shelby wheat is probably around 240-250%, R/VC. My version of the STB program is loaded at home, not here, so I'm working from memory as well as interpolating a recent rate increase.

QUOTE: Cap earnings on the top, then a company (or individual) is limited in their earnings potential. Michael, what do you suggest about handling that?

Well, not even Microsoft has a margin higher than 50%.

BNSF has the lowest average competitive R/VC of any of the four largest Class I railroads, at 100.6% R/VC. Although I suspect it has dropped considerably just in the past few years, when initially conceived the FC/VC ratio varied within a range of 45-50%. In either case, it's clear that BNSF has been buying market share somewhere with regards to its competitive customers.

On the other hand, BNSF has the lowest percentage of captive shippers at 21.9%, but it receives nearly the highest R/VC at 238.1% for the average captive shipper. The system average, for which BNSF seems to currently be earning a pretty good average rate of return, is 130.7% R/VC.

But, you can see where the leverage for profit is. That 78.1% of shippers who are averaging only 100.6% of their R/VC.

Overall, the 180% R/VC seems to have been intended to build in a pretty good profit margin overall. The alternative? The alternative for the railroads was to continue to be required to offer physical competitive service at every possible reasonable location. The rate threshold was a trade-off, no doubt, but one designed to benefit the railroads through expedited abandonments. Well, the railroads got that.

The problem was, they got into a rate war on competitive traffic, which was ridiculous because the lanes were full for that traffic -- what was going to happen if they raised rates? The other guy couldn't carry it. But instead of raising rates, they engaged on enormously costly physical plant upgrades ... to increase capacity ... raising their operating costs .... so that they couldn't raise rates because by now the other guy had capacity coming on line that meant he could carry the traffic if anybody made the first move and raised rates. This is an example where money from captive shippers enable railroads to make irrational investment decisions -- high cost investments to perpetuate cut throat competition.

Certain shippers get a below cost service. Certain shippers are handed an enormously useful competitive advantage over their competitors -- subsidized transportation costs. Transportation costs are not the only cost for sure, but they are the deciding cost when they differ significantly because of location, and the manufacturer can't just charge more for the product. Just like wheat. Very few businesses get the luxury, as railroads do with fuel prices, of simply passing the costs directly through as a surcharge.

The margin is, say, 5% on the transportation cost of an item imported (or more fortuitously located) instead of manufactured in Ohio where the marginal cost of transporation is 2.5 times the cost to the competitor, and the manufacturer pays 12.5%. The manufacturers make, say, 5%.

The numbers say the manufacturer shuts down his plant in Ohio and relocates.

He has to.

The wheat farmer? Well, I'm not sure what he does. Just goes a little farther in the hole every year and then sells out to Ted Turner for a Buffalo farm.

[MP173]

But, we dont know what the VC ratio is today. Once upon a time it occurred. Is it happening today? Perhaps. If so and it is the law...then go after them.

My foundation still remains. Cap earnings on the top, then a company (or individual) is limited in their earnings potential.

Michael, what do you suggest about handling that?

We went round and around on the wheat issue on the Montana thread and I will not pursue it further. Revenues didnt increase over 30+ years. There is a capacity issue in the wheat market which hasnt been addressed. Too much wheat.

ed

[rrandb]

Not all railroads are in the same boat. I now of one where all traffic is terminated with no run thru. All cars are either loaded or unloaded. Every shipper is captive. I am not talking about a terminal road but one of the larger class 2's with over 400 miles of main and 250 miles of concrete ties.. Unfair rates have to be looked at on a case by case basis. Me thinks only congress and the courts can fix the mess they created.

[TomDiehl]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by cogload

Ok. This thread has degenerated into a mud slinging match..

It always does when three key gentlemen make their inevitable appearance.

To be truly accurate in a statement like this, you need to see where the "mud" first is slung and by who.

[MichaelSol]

QUOTE: Originally posted by cogload

Ok. This thread has degenerated into a mud slinging match..

It always does when three key gentlemen make their inevitable appearance.

[MichaelSol]

Well, ever since the Sherman Act, BG has had a mandate to step in to protect "the little" guy, and, pursuant to sound economic theory, to avoid monopoly situations. That mandate didn't change under the Staggers Act. In the case of Montana in 1984, the ICC concluded that BN had market dominance of the type that establishes captive shippers. The R/VC rate charged to wheat shippers was found to be 300%. Damages were awarded. That was under a straightforward implementation of the Staggers guidelines, by the agency charged with interpreting them.

Commodity prices have nothing to do with the rate argument. The analogy would be that it's OK to hold up rich people, but not poor people; perhaps more apropo, to hold up poor people, but not rich people. The law needs to be applied no matter what. In this instance, a Montana grower will still be uncompetitive to his peers, even though he has the best product and excellent positioning to the primary market. If he earns 10%, and his counterparts earn 20%, because of artificial transportation cost differentials, his counterparts ultimately have greater access to capital, to resources, the value of the land is worth more, everything changes if there is a substantial differential, no matter what the commodity market is doing in general.

[Anonymous]

Ok. This thread has degenerated into a mud slinging match...A couple of companies in the UK have put their toes into the vertical integration water, National Power did it before selling up to EWS (as a way to force prices down methinks) and British Nuclear Fuels (BNFL)are VI to an extent as well. The extent is that they did not/ Do Not own the track. BNFL does control some of its own siding infrastructure, but they have their own locomotives, wagons and crews. A lot of it is to have control of a very sensitive supply.

However, just two large flies in the OA ointment. Though the shippers have a choice of freight operators the track provider is basically drowning in debt and is looking to differentiate the price of track access which could see some traffic lost to rail whether Red train Co, Blue Train Co or Green Train Co operates it. They are very very price conscious and price elastic so it seems. Secondly the amount of bureaucracy involved is somewhat mind boggling. If you want a certain amount of Intramodal comp then the US will have to move to basically a scheduled railway system I would think.

[MichaelSol]

QUOTE: Originally posted by MP173

The comparison of a company to another company is required and occurs on a minute to minute basis in the equity markets. The business models may differ, but just as oil flows to market, so does capital, both in the form of debt and equity structures.

Hence, my comparison.

Railroads use a considerable amount of capital, one of the lowest asset turnover rates. Thus, if the turnover rate is low then the margins must compensate. Each piece of business a railroad prices out is part of the overall equation. I liked Murph's comment about certain customers providing 110% of profits.

As I have said before, if 180VC is the law, then enforce it, but that places a restrictive cap on earnings potential. What will be done on balance to stablize the disruption of market forces?

Well, railroads will probably never be comparable with something like Microsoft, in terms of assets, income, margin, debt, or equity. Never.

And "risk" is a key distinguishing factor between such business models. Netscape yesterday is not Netscape today.

Note what happened though when Microsoft got essentially market control in its key product areas: browser, word processor, OS. Innovation literally ceased. Fifty per cent profit margins, and development of important business productivity software came to a screeching halt.

Where's the Captive Market profits money going? Games.

[MP173]

Little ag loses as long as their commodity prices are low. What has little ag done in order to increase those prices? Generally what occurs in commodity type businesses is that capacity is taken out of the market at certain opportunities. In the case of LA, I dont know. Michael you can certainly retrieve the acreage figures better than I can.

What has occured, at least in my mind, has been BG(Big Government) has stepped in to support LA.

Of course, BG steps in to help a number of industries. Take a look at the ethynol situation right now. ADM has become as much of a play on energy as food processing. The selection of the new CEO confirms that.

ed

[MP173]

The comparison of a company to another company is required and occurs on a minute to minute basis in the equity markets. The business models may differ, but just as oil flows to market, so does capital, both in the form of debt and equity structures.

Hence, my comparison.

Railroads use a considerable amount of capital, one of the lowest asset turnover rates. Thus, if the turnover rate is low then the margins must compensate. Each piece of business a railroad prices out is part of the overall equation. I liked Murph's comment about certain customers providing 110% of profits.

As I have said before, if 180VC is the law, then enforce it, but that places a restrictive cap on earnings potential. What will be done on balance to stablize the disruption of market forces?

ed

[MichaelSol]

QUOTE: Originally posted by MP173
Big agriculture? ADM's stock is just off an all time high. High priced lobbying in Washington by the railroads? Oh my gosh, you dont think the oil patch and agricultural concerns dont have men and women in $2000 suits?

"Big" agriculture refers to manufacturers of end products in most cases. Over the 20 year life of a manufacturing facility, they can move -- and many manufacturers have made the decision to select where competitive rail services exist.

Toyota has an advantage over old-line GM and Ford factories and specifically site selects based on competitive rail transportation. Over the long run, that changes the face of manufacturing America. And the railroads lose a substantial chunk of their captive shippers, but by imposing relocation costs on the economy as a whole, as well as favoring new entries over established firms.

But, you can't move a farm.

ADM pays the farrmer the going rate, minus shipping costs. Cargill pays the going rate, minus shipping costs. The farmer receives only $4.69 a bushel for HRS at the Shelby Elevator. The elevator operator, CHS, Inc., receives the $5.81/bu. at Portland -- most of the difference being transportation costs. Big Ag wins, Railroads win -- for a while, the economy as a whole suffers inefficiencies resulting from inefficient market allocation of resources, and Little Ag always loses.

[MichaelSol]

Exactly my point.

Comparing a highly vertically integrated industry such as Oil with railroading is just too much of a stretch, even if we all knew the important details of that industry, but it is hard enough to get one's arms around one industry well enough to begin to understand it, let alone two or three for comparison. Delivering the product is the service component that the oil industry provides -- and is certainly comparable on that component to railroading -- but that is consistent with being vertically integrated. That is, the shippers, by and large, control the infrastructure that provides the service.

[CSSHEGEWISCH]

Vertical integration usually means a manufacturing business that owns everything in the manufacturing chain from the source of the raw materials to the plant that produces the finished product. Since railroads provide a service rather than a product, I don't see where vertical integration comes into play.

[MichaelSol]

QUOTE: Originally posted by MP173
Michael and Dave, your example of petrochemical companies is not going to get too many folks concerned, take a look at XOM's earnings the past year.

My only comment on petrochemicals was directed to the fact that several posters -- including some who claim ominpotent knowledge of this industry without ever actually presenting an honest "fact" -- don't seem to know what "petrochemicals" are, and that overall the substantial bulk of them are carried by rail, not by pipeline.

The danger of comparisons with other industries is underscored by a rail forum having little enough understanding of its own industry. You can look at the lengthy list of posts by greyhounds on this thread alone to see an extensive list where his alleged knowledge is simply contrary to established fact. Over and over. Coupled with the tendency of some to get on a thread just to yap, it is difficult enough to generate an accepted set of facts on any discussion topic.

But when the discussion looks for analogies outside the industry, the discussion can only deteriorate because of the lack of specialized knowledge about those industries on a thread such as this. I can't talk in detail about the oil industry as a business; some feel they can. But does it really shed any "light" on the captive rail dilemma? Oil flows to the best price received, by however it can get there -- and there are many ways it can get there.


But, it's a commodity, not an infrastructure.

For oil, by and large the shippers own the infrastructure.


The usefulness of any analogies to the rail industry ends there for me. There is virtually zero vertical integration in the rail industry.

[MichaelSol]

QUOTE: Originally posted by Character

It certainly seems that ... Mr. Sol both liberally quote and grasp for support that does not in fact support their propositions very well at all...

Please be specific.