STB to hold hearings on grain shipments

[MichaelSol]

They teach this in MBA schools;  students do case studies on pricing.  I did them.  I passed. I got the degree.  You didn't. 

Actually, you are wrong on that too! Batting zero so far. MBA, Management & Finance. At least you are consistent, if nothing else.

We need to remember that Michael has done it all, just ask him.

Actually, ask Strawbridge, he brags about his MBA on the average of once a week.  However, when he starts fabricating other people's credentials or lack of them ... well, he happens to be as wrong about that as everything else. He simply made it up.  I suspect, based on his usual and standard careful research, that much of what he posts is simply made up ...

[bobwilcox]

They teach this in MBA schools;  students do case studies on pricing.  I did them.  I passed. I got the degree.  You didn't. 

Actually, you are wrong on that too! Batting zero so far. MBA, Management & Finance. At least you are consistent, if nothing else.

We need to remember that Michael has done it all, just ask him.

 

[MichaelSol]

They teach this in MBA schools;  students do case studies on pricing.  I did them.  I passed. I got the degree.  You didn't. 

Actually, you are wrong on that too! Batting zero so far. MBA, Management & Finance. At least you are consistent, if nothing else.

[Limitedclear]

In any event, it is impossible to "allocate", as Mr. Sol tries to do, the fixed (or overhead) cost to any particular sale.  The railroad pricing people (and I was one) are charging as much as they can on any sale.  That's a good thing. 

As long as it exceeds variable costs (and, short term, sometimes when it just exceeds cash outflow), it's a good thing and doesn't burden anyone else. Sol is trying to say that it does, and that's simply wrong. 

As to the highlighted part, simply weird.

As Kenneo has pointed out, allocating fixed costs on any particular sale is not useful. That is why the R/VC formula is based on the variable costs. No fixed costs in there.

However, and it is a big "however", if the cumulative total of income does not cover both fixed and variable costs, the company is in trouble.

People like Strawbridge weren't at the level that they were concerned with fixed costs in the price quoted. They couldn't be. He confuses his pay grade with reality.

But, that was then. There was excess capacity.

This is now. Different story. CSX now prices differently because of that.

But insofar as a formula for determining captivity is concerned, it is indeed based solely on marginal costs, as is required by marginal cost theory.

What Strawbridge does not understand is that allocation is necessary to test the usefulness of the formula. People like him had no reason to be testing economic theory in day-to-day price quotes. Exceed the marginal cost of the service -- good deal.

In modern practice, Management, on the other hand, has every reason to test economic theory and determine allocation and they would be idiots if they didn't.

That is exactly what happens in the Stand Alone model, because it allocates all theoretical fixed costs of providing the service, and that is the purported reason for using it. Oddly, in that alternative to the R/VC model, Strawbridge does not object to that particular allocation of fixed costs.

I am sure he has very good reasons for treating his objection to one differently than his acquiesence to the other.

 

Look Sol, you don't know what "level" I was at.  There is no place in pricing for the allocation of fixed costs.  They teach this in MBA schools;  students do case studies on pricing.  I did them.  I passed. I got the degree.  You didn't.  Then I went out and did it for real.  I'd say you didn't, pretty sure you didn't, but you won't say what you did for any railroad.  You may have helped screw up the Milwaukee Road in one form or another.

So we all must be continually left to wonder why you continually say such incredibly inane things.  But you continually do. 

As to the "Stand Alone" model - you're wrong again.  It doesn't allocate fixed costs, it requires that they be covered.  And that is a huge difference that you don't seem to understand. 

I do object to the "Stand Alone" model.  (You're wrong about that too.  Crap, you're wrong so much you should run for governor of Illinois) If you could actually understand what you read, you'd know that.  The "Stand Alone" model is a method of government regulation of railroad freight rates.  I am opposed to any form of governement regulation of railroad freight rates. 

I've said that.  You didn't understand it, but I said it.

Coming through loud and clear here.

LC

[greyhounds]

In any event, it is impossible to "allocate", as Mr. Sol tries to do, the fixed (or overhead) cost to any particular sale.  The railroad pricing people (and I was one) are charging as much as they can on any sale.  That's a good thing. 

As long as it exceeds variable costs (and, short term, sometimes when it just exceeds cash outflow), it's a good thing and doesn't burden anyone else. Sol is trying to say that it does, and that's simply wrong. 

As to the highlighted part, simply weird.

As Kenneo has pointed out, allocating fixed costs on any particular sale is not useful. That is why the R/VC formula is based on the variable costs. No fixed costs in there.

However, and it is a big "however", if the cumulative total of income does not cover both fixed and variable costs, the company is in trouble.

People like Strawbridge weren't at the level that they were concerned with fixed costs in the price quoted. They couldn't be. He confuses his pay grade with reality.

But, that was then. There was excess capacity.

This is now. Different story. CSX now prices differently because of that.

But insofar as a formula for determining captivity is concerned, it is indeed based solely on marginal costs, as is required by marginal cost theory.

What Strawbridge does not understand is that allocation is necessary to test the usefulness of the formula. People like him had no reason to be testing economic theory in day-to-day price quotes. Exceed the marginal cost of the service -- good deal.

In modern practice, Management, on the other hand, has every reason to test economic theory and determine allocation and they would be idiots if they didn't.

That is exactly what happens in the Stand Alone model, because it allocates all theoretical fixed costs of providing the service, and that is the purported reason for using it. Oddly, in that alternative to the R/VC model, Strawbridge does not object to that particular allocation of fixed costs.

I am sure he has very good reasons for treating his objection to one differently than his acquiesence to the other.

 

Look Sol, you don't know what "level" I was at.  There is no place in pricing for the allocation of fixed costs.  They teach this in MBA schools;  students do case studies on pricing.  I did them.  I passed. I got the degree.  You didn't.  Then I went out and did it for real.  I'd say you didn't, pretty sure you didn't, but you won't say what you did for any railroad.  You may have helped screw up the Milwaukee Road in one form or another.

So we all must be continually left to wonder why you continually say such incredibly inane things.  But you continually do. 

As to the "Stand Alone" model - you're wrong again.  It doesn't allocate fixed costs, it requires that they be covered.  And that is a huge difference that you don't seem to understand. 

I do object to the "Stand Alone" model.  (You're wrong about that too.  Crap, you're wrong so much you should run for governor of Illinois) If you could actually understand what you read, you'd know that.  The "Stand Alone" model is a method of government regulation of railroad freight rates.  I am opposed to any form of government regulation of railroad freight rates. 

I've said that.  You didn't understand it, but I said it.

[MichaelSol]

In any event, it is impossible to "allocate", as Mr. Sol tries to do, the fixed (or overhead) cost to any particular sale.  The railroad pricing people (and I was one) are charging as much as they can on any sale.  That's a good thing. 

As long as it exceeds variable costs (and, short term, sometimes when it just exceeds cash outflow), it's a good thing and doesn't burden anyone else. Sol is trying to say that it does, and that's simply wrong. 

As to the highlighted part, simply weird.

As Kenneo has pointed out, allocating fixed costs on any particular sale is not useful. That is why the R/VC formula is based on the variable costs. No fixed costs in there.

However, and it is a big "however", if the cumulative total of income does not cover both fixed and variable costs, the company is in trouble.

People like Strawbridge weren't at the level that they were concerned with fixed costs in the price quoted. They couldn't be. He confuses his pay grade with reality.

But, that was then. There was excess capacity.

This is now. Different story. CSX now prices differently because of that.

But insofar as a formula for determining captivity is concerned, it is indeed based solely on marginal costs, as is required by marginal cost theory.

What Strawbridge does not understand is that allocation is necessary to test the usefulness of the formula. People like him had no reason to be testing economic theory in day-to-day price quotes. Exceed the marginal cost of the service -- good deal.

In modern practice, Management, on the other hand, has every reason to test economic theory and determine allocation and they would be idiots if they didn't.

That is exactly what happens in the Stand Alone model, because it allocates all theoretical fixed costs of providing the service, and that is the purported reason for using it. Oddly, in that alternative to the R/VC model, Strawbridge does not object to that particular allocation of fixed costs.

I am sure he has very good reasons for treating his objection to one differently than his acquiesence to the other.

 

[MichaelSol]

Michael-

Would you know if the majority of Montana's farmers will be voting for or against Senator Burns ? 

Don't know. I don't know the other guy very well. Burns always speaks in favor of enforcing the Staggers Act, and he supports the right bills, but gosh, nothing ever seems to get done. Nothwithstanding his image, Conrad Burns is not a farmer -- made his money in telecommunications. He's smart. The other guy is a farmer, but he supports odd things not popular with Montanans, like repealing the Patriot Act.

Although nothing was done wrong, Burns is tarred with whatever it is that constitutes the "Abramoff scandal," which apparently boils down to senators talking to lobbyists and agreeing with their positions. In my own experience, that's what you do. Some lobbyists advocate reasonable, rational positions. They have the facts and they provide them.You go with those positions that are reasonable. So you agree with some lobbyists, and disagree with others. You can't do otherwise.

His opponent just doesn't have much of a track record. He is supported by Montana's popular current governor, Brian Schweitzer, and that's a big plus.

Conrad is supported by Montana's former governor, Marc Racicot, who was the most popular governor of all time. but I think whose star has been tarnished by his fondness for being a railroad director at a time when "the Railroad" in Montana is not seen in a positive light.

 

[greyhounds]

As the formula was designed to cover all variable costs, plus recover fixed costs and profit, one question is whether the proportion of fixed costs has risen, or fallen, as railroads have approached their capacity.  It seems reasonable that such costs, in proportion, would have fallen over the past 20 years. Those are the only ones that really count in the formula, since the formula already grants 100% of all the variable costs of the service. Whether those costs go up or down, the railroad recovers them all. It is the fixed cost allocation that governs the implications of the formula as it stands.
 

What Mr. Sol continualy fails to understand is that you can not allocate fixed cost.

     greyhounds:  Can you explain what you mean in laymen's terms for me please?

As best I can.

The costs of operating anything can be divided into two categories:  1) Variable and, 2) Fixed. 

 The variable costs "vary" with the amount of business.  I'll use the example of a one car taxi cab company.  The amount of fuel used varries with the amount of buisiness.  The more people our one car cab company here in Antioch, IL hauls, the more fuel he will use.  So fuel is a "variable" expense to the business.

On the other hand, he makes a monthly payment on the car.  That expense is "fixed" and it does not varry with the number of fares he collects.  It is a "fixed" expense that he must meet every month and it is the same if he hauls three people or three thousand.

In making a decision to accept a request for transportation he will only consider the variable cost.  A fare to O'Hare Airport might make his day,  On the other hand, a request to move children to school when their mother's car is inoperable might not pay him much.  But he'll take the call because it coveres his "variable" cost and makes a contribution toward his car payment.  Given the choice, he'll take the fare to O'Hare.  Unless, he could increase his capacity and make more money on the shoter trips.

For the railroads, they have a huge "fixed" cost base in owning all that land and steel.  And just like that one man cab company they have to cover those costs.  And anything that exceeds its "variable" cost contributes to covering that "fixed" cost.

Now there are two ways to cover "fixed".  1) big mark ups, you price well above your variable costs, or: 2) big volume, you price close to variable but handle a lot of business.  It all depends on the situation.  Either way, with one or two trips to the airport of many short trips the cab company will cover its costs and allow the owner to stay in busines.

Businesses use a mix.  They mark up their prices high when they can, but they go for volume when they have to.  The examples are grocery stores that run on a 2% mark up and rely on volume to cover the costs of owning the store.  Jewlers have huge mark ups but don't sell much volume.

In any event, it is impossible to "allocate", as Mr. Sol tries to do, the fixed (or overhead) cost to any particular sale.  The railroad pricing people (and I was one) are charging as much as they can on any sale.  That's a good thing. 

As long as it exceeds variable costs (and, short term, sometimes when it just exceeds cash outflow), it's a good thing and doesn't burden anyone else. Sol is trying to say that it does, and that's simply wrong. 

I learned this in the Northwesten University Graduate School of Management.  It's one of the top rated management schools in the US of A.  I can't distill (I can't spell either) those years into a post.  But I hope this helps. 

 

 

 

[nanaimo73]

Michael-

Would you know if the majority of Montana's farmers will be voting for or against Senator Burns ? 

[Murphy Siding]

As the formula was designed to cover all variable costs, plus recover fixed costs and profit, one question is whether the proportion of fixed costs has risen, or fallen, as railroads have approached their capacity.  It seems reasonable that such costs, in proportion, would have fallen over the past 20 years. Those are the only ones that really count in the formula, since the formula already grants 100% of all the variable costs of the service. Whether those costs go up or down, the railroad recovers them all. It is the fixed cost allocation that governs the implications of the formula as it stands.
 

What Mr. Sol continualy fails to understand is that you can not allocate fixed cost.

     greyhounds:  Can you explain what you mean in laymen's terms for me please?

[greyhounds]

As the formula was designed to cover all variable costs, plus recover fixed costs and profit, one question is whether the proportion of fixed costs has risen, or fallen, as railroads have approached their capacity.  It seems reasonable that such costs, in proportion, would have fallen over the past 20 years. Those are the only ones that really count in the formula, since the formula already grants 100% of all the variable costs of the service. Whether those costs go up or down, the railroad recovers them all. It is the fixed cost allocation that governs the implications of the formula as it stands.
 

What Mr. Sol continualy fails to understand is that you can not allocate fixed cost.

[MichaelSol]

     I take that as saying the shippers want a quicker, cheaper resolution to rate disputes from the Surf Board?

Well, I think what those shippers are saying is that they simply seek enforcement of existing law. As Roger Nober pointed out above, Congress provided for a small rate procedure -- the STB just can't seem to get around to designing it -- 26 years and counting.

The whole general idea of a regulatory, as opposed to litigation, approach to enforcing the law is to expedite the process, lower the costs, and provide clear policy guidlines so as to promote settlement rather than contested cases.

None of that exists, indeed the court cases on the matter have proceeded more expeditiously in nearly every case than the regulatory proceeding. Yet that was the whole idea of the Staggers Act in attempting to preserve a form of market regulation of rates rather than agency regulation.

A crucial issue no doubt is the threshold standard. The current stand-alone measure is almost always wrong. It either overprices or underprices the hypothetical new entrant -- although that is industry-specific. For railroads, it substantially overprices. Naturally, the railroads like that one -- and it also requires enormous expenditures by the shipper and a great deal of discovery work and time to construct the SA model. In the McCarty Farms case, many of the original plaintiffs were dead by the time the case was resolved.

I happen to agree with the economists who originally designed the entire deregulation model, that a marginal cost formula is far more accurate, and it happens to be simpler and faster to make a determination as well.

Should the 180% R/VC be adjusted up or down?

That requires some work. Current competitive pricing by the railroads invariably falls between 100% and 135% R/VC or thereabouts, so there is little evidence that  the 180% R/VC threshold does not represent a generous range of rate-setting ability. The original 160% R/VC was seen as quite adequate when it was proposed, but the railroads successfully argued that "circumstances" might once in a while compel a rate higher than 160%. [!]

As the formula was designed to cover all variable costs, plus recover fixed costs and profit, one question is whether the proportion of fixed costs has risen, or fallen, as railroads have approached their capacity.  It seems reasonable that such costs, in proportion, would have fallen over the past 20 years. Those are the only ones that really count in the formula, since the formula already grants 100% of all the variable costs of the service. Whether those costs go up or down, the railroad recovers them all. It is the fixed cost allocation that governs the implications of the formula as it stands.
 

[rrandb]

Asking the federal government to help you solve a problem with a dispute over finacial isses, like price disputes, is like asking a known burgler to house sit for you while you are on vacation. They (we the American people/government) have racked up a trillion dollar defict and invested well over 200 billion dollars in that "Gold" mine known as Iraq/Afganistan. We do not have a strong track record on fiscal responsibility. While I agree there needs to be an equitable solution to this issue I will not hold my breath for D.C. to solve it.
  As for the lumber mill that needs work done to there spur/branch line if anyone other than the owner/operater pays this cost it could become part of a national rail system. That would be a another topic all together aka open access etc etc etc. Probably not in my life time. They are still working on that in England

[MichaelSol]

A reasonable question is why the STB acknowledges the problems, promises to do something about them, but then never does.

Former STB Chair Linda Morgan became a railroad lobbyist, joining Union Pacific's law firm, Covington & Burling. C&B partner Michael Hemmer was named VP-Law Union Pacific Railroad in 2002.

Roger Nober, STB Chairman from 2002 until 2006, is a Washington lobbyist for BNSF as a member of the Law Firm of Steptoe & Johnson whose rail clients include three of the four largest Class Is and the Association of American Railroads

Nober's chief of staff, John Scheib, left the STB to work as counsel at Norfolk Southern. Dennis Starks, an STB staff attorney, went to work for the Association of American Railroads.

The STB staff is filled with employees with ties to the railroads, including associate general counsel Ray Atkins, previously a railroad lawyer.

Roger Nober's former boss at the House Transportation & Infrastructure Committee -- Jack Schenendorf -- is a registered UP lobbyist.

The former head of the Federal Railroad Administration, Betty Monro, departed under a cloud due to a relationship with UP's chief lobbyist.

[Murphy Siding]

     I take that as saying the shippers want a quicker, cheaper resolution to rate disputes from the Surf Board?

[MichaelSol]

Let the market work it out.  People on all sides will be PO'd because they didn't get what they wanted and they had to compromise.  But it will be a far better solution than the government could come up with. 

They did negotiate and they did compromise. They agreed on the 180% R/VC standard as a fair delineation of captivity and rate reasonableness and when the burden was supposed to shift to railroads.

The marginal cost ratio standard was reached as a compromise through negotiation and enacted by "politicians" without change as what the shippers and rail industry had agreed on.

Then one of the parties breached the agreement.

Guess which one.

    Would *forccing*(?) the railroads to abide by the 180% standard solve the problems the captive shippers want solved?

I have posted the following about "what captive shippers want" before, and I think it summarizes a perfectly reasonable position -- they want clarity and predictability in the existing system. They are not demanding re-regulation of railroads, demolition of current profitability, or anything else. Just simple, clear, honest enforcement of the law.

Joint Written Testimony of the American Chemistry Council, American Farm Bureau Federation, American Soybean Association, Colorado Wheat Administrative Committee, The Fertilizer Institute, Idaho Barley Commission, Idaho Wheat Commission, Kansas Wheat Commission, Montana Wheat & Barley Committee, National Association of Wheat Growers, National Barley Growers Association, National Council of Farmer Cooperatives, National Farmers Union, National Grain and Feed Association, National Grain Sorghum Producers, The National Industrial Transportation League, North Dakota Grain Dealers Association, North Dakota Public Service Commission, the North Dakota Wheat Commission, South Dakota Wheat Commission, Texas Wheat Producers Board, Washington Barley Commission, Washington Wheat Commission, Alliance for Rail Competition, Consumers United for Rail Equity.

Ex Parte No. 646, Rail Rate Challenges in Small Rate Cases, Before the Surface Transportation Board, July 24, 2004.

"Simplicity is crucial. Complexity and undue uncertainty drive up the cost of any litigation, including litigation before the Board, and given the smaller amounts at stake by definition in a “small rate case,” complexity and cost will terminally chill the exercise of the statutory right to reasonable rates for the very large majority of captive users of rail services. In this regard, the Board’s experience in Stand-Alone Cost cases is an object lesson in what should not happen in small rate case proceedings.

"Since the Interstate Commerce Commission decided the first Stand-Alone Cost case eighteen years ago, the complexity, size and cost of a SAC case before the agency has increased astronomically. But instead of guarding against complexity in small rate cases, the Board’s current small rate case rules invite complexity at the very outset: they define little, rule nothing out, and identify virtually no standards for decision.

"While this gives the Board maximum flexibility and discretion, it makes it impossible for potential complainants to know whether small rate case procedures will be used; what evidence will be considered; how long the case will take; and what the case will cost. These problems, formidable in the best of cases, become insurmountable when combined with defendants’ litigation incentives to make small rate cases long, complex and expensive in order to discourage future complaints. The issue was summed up by Chairman Nober in recent Congressional testimony: the uncertainty of the small rate case procedures “appears to be a major reason why no cases have been brought using the small-case process.”

"Clarity is similarly important. If parties are going to avail themselves of the rate complaint process, they need the assurance of a system featuring relatively straightforward eligibility and substantive standards, so that they can predict to some reasonable degree what cases qualify for small rate case procedures and which rates are likely to be found unreasonable.

"This does not mean that the outcome of small rate case litigation must be perfectly and entirely predictable. It does mean that the eligibility for small rate cases should be clearer and that processes for determining eligibility should be defined. It also means that the substantive inquiry should be sufficiently transparent to allow exercise of reasonable, though necessarily imperfect, judgment.

"Most importantly, clarity and predictability will enhance the potential of private settlements, since both parties will be able to make more accurate assessment of their risks. Where there is good reason to conclude that rates are reasonable, neither side has an incentive to litigate. Where rates appear unreasonable, regulatory uncertainty should not protect the status quo. And where cases fall between these points, clarity promotes negotiated solutions. In short, if the small rate case process becomes clearer, it is even more likely that customers and suppliers will conduct balanced negotiations leading to private resolutions rather than Board-ordered relief.

"Finally, it is most important for the Board’s rules on small rate cases to establish a process under which a complainant can be assured of expeditious action. Unlike coal movements that generally continue for years and even decades, small rate cases are likely to involve movements that may last for only a few years. The need to spend two years litigating rates for a movement that may last only three to five years would discourage most if not all potential complainants. Moreover, increased litigation time usually means increased litigation cost.

"The Board’s current small rate case standards do not appropriately balance the rights of shippers and carriers. The complexity, uncertainty and cost that are inherent in the current small case procedures and standards, combined with the astronomical cost, time and uncertainty of a Stand-Alone Cost case, make it virtually impossible for any captive shippers, other than the largest coal shippers, to exercise their right to a reasonable rate under the ICC Termination Act.

"As Chairman Nober testified before Subcommittee on Railroads of the House Committee on Transportation and Infrastructure on May 20, 2003, “shippers who feel they have been charged an unreasonable rate have a right to have that complaint heard by the Board in a fair, impartial, expeditious and economical manner. That is part of our fundamental charge from the Congress. That is not the case now ....” Nober Testimony, May 20, 2003, p. 9.
...
"As Chairman Nober testified on May 20, 2003 to the Railroad Subcommittee of the House Committee on Transportation and Infrastructure, railroads have been known to spend $5 million on each rate case, while a shipper’s spendi

[Murphy Siding]

Let the market work it out.  People on all sides will be PO'd because they didn't get what they wanted and they had to compromise.  But it will be a far better solution than the government could come up with. 

They did negotiate and they did compromise. They agreed on the 180% R/VC standard as a fair delineation of captivity and rate reasonableness and when the burden was supposed to shift to railroads.

The marginal cost ratio standard was reached as a compromise through negotiation and enacted by "politicians" without change as what the shippers and rail industry had agreed on.

Then one of the parties breached the agreement.

Guess which one.

 

    Would *forccing*(?) the railroads to abide by the 180% standard solve the problems the captive shippers want solved?

[Anonymous]

I agree Murph. 


I agree with Michael that the 25 extra cars per week shouldnt go to provide revenue for the 2nd mainline. 
ed

To do this would be classified as "fully alocated cost".  This was one of the passenger railroads favorite tools to justify abandonments and train off petitions.  Finally, the ICC (and also the STB) forced these "bad actors" to use the realistic value of "avoidable costs" which were the value of the incremental costs that the railroad would directly save.  For example, it costs more to maintain track for ClassV than it does for Class III.  That difference would be an example of avoidable costs.

These 25 cars per week in our example, requiring a capacity increase that would be a second track - to have the rate set to "fully pay" for that expansion would be a "fully allocated cost".  The next shipper to add traffic to that line would not pay for that capacity expansion and you can be sure that the original shipper paying that full allocation is going to object -- fiercly.

Fully alocating costs has its place.  Rates is not one of them.

Example:

Take your typical PNW small time lumber mill.  They might be able to fill 10 centerbeams a week when times are good.  Those subsequently loaded centerbeams can and do end up just about everywhere on the North American rail network.  But that same little mill is located at the end of a 25 mile spur line over 90 lb jointed rail laid back in steam days.  The original Class I has sold the line to a shortline operator, and predictably the shortline has deferred as much as they can to the point of no return.

Here's the two extremes -

To keep this line in service, should the shortline itself bear the entrire cost of minimal rehab and charge the fully allocated cost to the one mill? 

Or, since the output of the mill ends up throughout the NA rail grid, shouldn't the costs of minimal rehab be borne by the entire NA rail grid?

Most macro economists would say the latter, for this reason - Our transportation system is not predicated on fully allocated costs, rather it is predicated on spreading such costs nationwide via the various transport trust funds, with an equivalence of incremental costing borne by State and local supplements to federal user fee funding.  When all players are given access to the national transport system, there is a net comprehensive gain for all - that "bridge to nowhere" in Alaska certainly has as much legitimacy to access federal highway dollars for a portion of it's cost as any other 'bridge to nowhere" located in Anywhere USA, because it would be available for all to use.  And there are literally thousands of such "bridges to nowhere" througout the USA, and each in their small way contribute to the fluidity of the US transportation system.

The US rail industry, being a private integrated system, fails to realize this axiom.  It is willing to lop off the small players to focus on the volume producers, seemingly forgetting that those small players add up to rather decent volumes when taken collectively.  Conversely, when the small players are neglected, the cumlative effect is a significantly negative one on the bottom line, but perhaps more importantly the neglect usually leads to some rather loud complaining via the communication avenues affored to us by our representative style government.

Oh, and those small players vote.  Which is why we are heading back to regulation.

[kenneo]

I agree Murph. 


I agree with Michael that the 25 extra cars per week shouldnt go to provide revenue for the 2nd mainline. 
ed

To do this would be classified as "fully alocated cost".  This was one of the passenger railroads favorite tools to justify abandonments and train off petitions.  Finally, the ICC (and also the STB) forced these "bad actors" to use the realistic value of "avoidable costs" which were the value of the incremental costs that the railroad would directly save.  For example, it costs more to maintain track for ClassV than it does for Class III.  That difference would be an example of avoidable costs.

These 25 cars per week in our example, requiring a capacity increase that would be a second track - to have the rate set to "fully pay" for that expansion would be a "fully allocated cost".  The next shipper to add traffic to that line would not pay for that capacity expansion and you can be sure that the original shipper paying that full allocation is going to object -- fiercly.

Fully alocating costs has its place.  Rates is not one of them.

[MichaelSol]

Let the market work it out.  People on all sides will be PO'd because they didn't get what they wanted and they had to compromise.  But it will be a far better solution than the government could come up with. 

They did negotiate and they did compromise. They agreed on the 180% R/VC standard as a fair delineation of captivity and rate reasonableness and when the burden was supposed to shift to railroads.

The marginal cost ratio standard was reached as a compromise through negotiation and enacted by "politicians" without change as what the shippers and rail industry had agreed on.

Then one of the parties breached the agreement.

Guess which one.

 

 

[MichaelSol]

He made the case for the investment and then waited and waited and waited....finally it came.  Did he make the correct choice?  Short term...probably not.  The stock got pummelled by the Wall Street crowd.  Long term???without a doubt the right choice. 

No. Timing is everything on investments, and it doesn't matter that "some day" something may finally generate revenue. When "some day" is in fact defines whether an investment is a good one or not -- a positive or negative IRR.

Rob Kreb's "investments" generated increased fixed charges and decreased income. The internal rate of return was enormously negative and will remain negative for all time. Had the same investment been made in 2001 or later, the IRR would have been positive.

But, it wasn't, and that investment represents a substantial and permanent net financial loss to the Burlington Northern SF Railway.

 

[greyhounds]

     Without being *forced* to, by the Government, would railroads and *captive* shippers be able to work out some compromise on freight rates, that everybody could live with?  What incentives would each side have, to negotiate in good faith?

Yes, and they have.

First, there is a need to understand that in any marketing/distribution channel there is a natural conflict between any buyer and any seller.  The buyer naturally wants a lower price and a better good and/or service.  The seller naturally wants a higher price and less of an offering in terms of the good and/or service being sold.

This conflict is good because it creates a friction that leads to inovations that improve the channel.  Each member is always searching for a better way. 

In our salient example, Montana wheat, the BNSF's incentive to compromise is the need to see that the farmers (wheat ranchers?) survive in business and continue to produce wheat for the railroad to haul.  The wheat ranchers? incentive to compromise is to have a railroad that can move their wheat efficiently.

Unfortunately, the politicains are involved.  Their incentive is to get/retain power. 

Let the market work it out.  People on all sides will be PO'd because they didn't get what they wanted and they had to compromise.  But it will be a far better solution than the government could come up with. 

 

 

[tree68]

     Without being *forced* to, by the Government, would railroads and *captive* shippers be able to work out some compromise on freight rates, that everybody could live with?  What incentives would each side have, to negotiate in good faith?

My - I seriously doubt it.  The railroad is likely going to try for the cost of operating the line as a stand-alone, while the shippers are going to push for averaging the cost over the entire system, including those high-density, money-making mainlines.  Both have arguable positions. 

But why limit this to just Montana grain shippers?  I live near over 100 miles of track with 'captive shippers' - there's only one railroad here, and the odds of another railroad building in are so slim as to be nonexistant (yes there are trucks, but this is about railroads).  In fact, word has it that the current railroad is looking to get out of running the line.  What percentage of shippers fall into this realm?  Seventy-five?  Eighty? 

[Murphy Siding]

     Without being *forced* to, by the Government, would railroads and *captive* shippers be able to work out some compromise on freight rates, that everybody could live with?  What incentives would each side have, to negotiate in good faith?

[greyhounds]

I agree Murph. 

It is clear that certain issues need to be addressed, on both sides.  Bob made a very good point about 180% being a hurdle at a point in time that is much different than today. 

I agree with Michael that the 25 extra cars per week shouldnt go to provide revenue for the 2nd mainline.  It would be quite an investment to increase your capacity...would want to make sure of it before approving that project.

ed

What really happens is that you go to Finance Department to get on the list of capital projects.  They will want to what will be the profitablility of the new traffic you can handle because you have gone from one track to two tracks.  They will also want to take a look to see if operating costs will go down.  Then they do their rate of return number crunching and you see how competitive your project is with the other projects looking for funding.  The problem is the project list is a lot longer than what the Finance people can raise money for.

I think you're right.

They're going to raise the rates to ration the capacity.  Sell it to the highest bidder. 

But they'll want more of that high revenue freight, so they'll add capacity.  But they'll add it incramentally by picking the low hanging fruit first.  They'll work on the worst bottlenecks first and then go on down the list adding capacity as traffic and finances warrent.

Building extra railroad capacity is a risky thing.  If you buy real estate you might loose money on your investment, but you'll be able to get some money out.  The cost of building that track is sunk and aside from the scrap/resale value of the rail, it's totally commited and you can't pull it out.  If the traffic doesn't materialize as projected you just peed away several hundred million dollars.

What's happening is a logical, reasoned, business like approach to the need to increase US railroad capacity. 

The worst thing that could happen is for the government to try to set the prices.  It can not possibly know how to do that.

And I do agree, marginal costs and incramental costs are synonyms in common use.

[MP173]

Bob:
I see your point.  It would have to be a combination of increases in revenue plus a reduction of unit costs.  It would be interesting to see one of those proposals and the simulations and economic models used. 

That is what i find interesting about Rob Kreb's big gamble on the BNSF's transcon line.  He made the case for the investment and then waited and waited and waited....finally it came.  Did he make the correct choice?  Short term...probably not.  The stock got pummelled by the Wall Street crowd.  Long term???without a doubt the right choice. 

ed 

[bobwilcox]

I agree Murph. 

It is clear that certain issues need to be addressed, on both sides.  Bob made a very good point about 180% being a hurdle at a point in time that is much different than today. 

I agree with Michael that the 25 extra cars per week shouldnt go to provide revenue for the 2nd mainline.  It would be quite an investment to increase your capacity...would want to make sure of it before approving that project.

ed

What really happens is that you go to Finance Department to get on the list of capital projects.  They will want to what will be the profitablility of the new traffic you can handle because you have gone from one track to two tracks.  They will also want to take a look to see if operating costs will go down.  Then they do their rate of return number crunching and you see how competitive your project is with the other projects looking for funding.  The problem is the project list is a lot longer than what the Finance people can raise money for.

[MP173]

I agree Murph. 

It is clear that certain issues need to be addressed, on both sides.  Bob made a very good point about 180% being a hurdle at a point in time that is much different than today. 

I agree with Michael that the 25 extra cars per week shouldnt go to provide revenue for the 2nd mainline.  It would be quite an investment to increase your capacity...would want to make sure of it before approving that project.

ed

[Murphy Siding]

This is a good place to start a discussion on what reforms are needed, if any, to the STB process for rate reasonableness.

The 180% R/VC standard is based on marginal cost theory, not incremental costs which, judging by your use of it, you mean to include fixed costs.

We and our customers used marginal and incremental as synoyms.  It was not a theory but generating paid freight bills for my employer.  The Staggers negotiators were the Class I CEOs and a dozen or traffic managers from firms like DuPont, ADM and US Steel.  I don't think they made the distinction either.

Well, the shipper that has those 25 carloads that has to pay for the second mainline isn't paying just marginal costs if he's carrying the cost of the second mainline. That's a fixed cost carried by the system. His marginal cost is no different than the marginal cost of an identical train on the existing mainline. The fully distributed costs at that point in time, if apportioned out, would be higher for both shippers if the second mainline has to be built to accomodate the second shipper, but their marginal costs have no reason to be different.

 

     I for one, would find this an interesting discussion.  I hope it doesn't stall out over semantics.

[MichaelSol]

The 180% R/VC standard is based on marginal cost theory, not incremental costs which, judging by your use of it, you mean to include fixed costs.

We and our customers used marginal and incremental as synoyms.  It was not a theory but generating paid freight bills for my employer.  The Staggers negotiators were the Class I CEOs and a dozen or traffic managers from firms like DuPont, ADM and US Steel.  I don't think they made the distinction either.

Well, the shipper that has those 25 carloads that has to pay for the second mainline isn't paying just marginal costs if he's carrying the cost of the second mainline. That's a fixed cost carried by the system. His marginal cost is no different than the marginal cost of an identical train on the existing mainline. The fully distributed costs at that point in time, if apportioned out, would be higher for both shippers if the second mainline has to be built to accomodate the second shipper, but their marginal costs have no reason to be different.