I added that "Evil" part myself, but I'm certain it's true.
The author has a lot of ground to cover, and he covers it quckly. Footnotes and text run concurrently and , to me, it was like reading two papers at once. But wading through it, the author makes really good observations and points as to how Federal Regulation stopped the railroad industry from competing with trucks, diverted important high revenue freight to highway movement, and inevitably lead to the Penn Central debacle.
http://www.thebhc.org/publications/BEHonline/2006/churella.pdf
He also observes that there was significant "cross subsidization" between shippers (and railroads) under regulation. There is no reason a railroad would "cross subsidize" any shipper unless forced to by the government. They forced it. Today it's gone, like the regulation. But some shippers sure want it back.
The government literally prohibited railroad productivity improvements, by stifling domestic containerization. It would be interesting if someone could quantify how much this hurt the US economy, because it hurt a bunch.
All this could only lead to financial disaster when a competing mode, such as trucks, developed. (Disaster as in Penn Central). The trucks would take the "good" business and leave the "bad" on the rails. This left the railroad forced to primarily sell only freight below average costs and was a big cause of the railroad collapse of the late 60's onward.
Please read footnote #24 on page 11. Malcomb McLean was a follower, not a leader. (McLean of Sea-Land fame, the man often credited with developing containerization) The Pennsylvania Railroad was putting containers on ships 25 years before he did it. Of course, they had to get around the damn Federal Economic Regulations to do it.
I don't agree with everything the author says, he's far to kind to the regulators, but it's a good read if you're interested in the economics/regulation of railroading.
He also notes
greyhounds wrote: I added that "Evil" part myself, but I'm certain it's true.
Renesis04 wrote:I wouldn't go that far, not all government regulations are bad.
Deregulation can be a bad thing as well. President Reagan cost American taxpayers hundreds of billions of dollars when he deregulated the Savings and Loan industry.
I wonder if the PRR could have grown like Canadian Pacific, from a Railway they added a trucking company, a logging company, a mining company, a petroleum company, a steamship company and an airline.
nanaimo73 wrote: Renesis04 wrote:I wouldn't go that far, not all government regulations are bad. Deregulation can be a bad thing as well. President Reagan cost American taxpayers hundreds of billions of dollars when he deregulated the Savings and Loan industry. I wonder if the PRR could have grown like Canadian Pacific, from a Railway they added a trucking company, a logging company, a mining company, a petroleum company, a steamship company and an airline.
Yes, CPR turned itself into an integrated transportation company, something the author laments never existed here in the US. What a difference an International Boundary can make. It was pretty natural for a corporation to go that way. A train, truck, ship, plane, whatever, are just machines that produce the same thing. They're tools. Why should a company be prohibited from using the most efficient tool?
They seemed to have understood that in Ottawa. Washington was stuck on dumb.
I think it's important to keep in mind that the author is focused on economic regulation, not safety regulation (such as meat inspection). It's one thing to tell a trucking company what they can charge, where they can run, what they can haul, etc. These things are economic regulation and are less than benificial. It's quite another thing to tell the trucker he has to drive on the right side of the highway. That's safety.
One final note about ecnomic regulation. In the Great Depression one of the things that made things worse was all the bank failures in the US. Not one bank failed in Canada. The US, at least generally, didn't allow branch banking. Each bank was in its own little world. When the economy of that little world got sick, so did the bank. Many failed making things worse.
Canada had no such restriction. Banks spread their risks across the natiion. And bank failure was not a problem in Canada.
Renesis04 wrote:Sometimes I think the Canadians should just run our country
Well, Canada has had it share of goofs too.
A top contender in the "goof bowl" has to have been the "Crows Nest Pass" rates. I'll probably get some detail wrong - but this these are the essentials of the situation.
In the early part of the 20th century the CP sought Canadian Government assisstance for the construction of a line over Crows Nest Pass. The government agreed with the provision that the railroad roll back freight rates on grain to the 1906 levels. This seemed to be no big deal at the time, the railroad agreed, and the line was built.
The problem developed when Canadian farmers had enough clout to keep the rates at the 1906 levels though, IIRC, the 1970's with no inflation adjustments. You can imagine the results.
If you've ever wondered why there are those covered hoppers rolling around that say "Canada" or "Alberta" on their sides, it's because the railroads couldn't justify buying new equipment for the 1906 rates. So the government further subsidized the farmers by buying them railcars to use.
My point is not that Canada does economic regulation better, sometimes they're better, sometimes they're worse. My point is that any government economic regulation is going to have all kinds of unforseen consequences. Governments generally can not respond quickly to these consequences and things can go from bad to worse in a hurry.
And no, I'm not against all economic regulation. I am very much in favor of bank auditors. I just think such regulation should be minimal, because when the Feds start doing things like setting freight rates bad things happen. Bad things as in the destruction of the Pennsylvania and New York Central railroads.
And now back to reality......
Cross subsidization is rampant today under the Staggers/STB partial deregulation. It's called "differential pricing". It's called charging some customers (usually domestic producers) >180% R/VC while others (usually foreign importers) <180% R/VC. It is by every credible measure cross subsidization.
When and if Ken ever acknowledges this fact, we can start a dialogue on how best to remedy this overt disparity, including the "no action" alternative. My choice would be anti-trust action to finally break up the antiquated integrated model, but others might choose an actual enforcement of standing Staggers Act caveats which ostensibly promote intramodal competition.
Then there's those who think everything is hunky-dory, blinders firmly affixed over eyes, fingers embedded into eardrums, voice in constant "I'm not listening, I'm not listening........" droning mode. Which brings us back to the forum's version of the Saturday morning cartoons.....
Take it away, Ken.......
"Canadian banking system during the Great Depression?"
What on earth?
Canada favored rather larger banking corporations. Much like the ICC forcing the PennCentral to absorb the New Haven, the Canadian government routinely forced stronger banks to absorb weaker banks to avoid "failure."
Perhaps the ICC was only following the Canadian "model" practiced during the Depression. According to the poster, it works!
Branch banking had nothing to due with solvency. There was nothing inherently more stable about Canadian banks as a result of branch banking. Most Canadian banks during the Great Depression were in fact "insolvent" but "Government Regulators" simply turned a blind eye to avoid actual "failure," plus the Canadian system had a government-required double liability system that provided a form of deposit insurance in those days -- and a powerful incentive not to "fail."
The Canadian system had no bank failures in that time period not because of lack of government intervention or regulation, but instead because the government was all over it. The system could not afford a failure. It was a much more regulated system. This was because the banks were larger.
Banks in the U.S. were simply allowed to fail if they became insolvent. This market-based approach, the poster suggests, was the result of government economic regulation. Notwithstanding the rhetoric, he obviously doesn't like genuinely market based approaches.
The poster does not understand his own analogy: the Canadian banking system was highly regulated -- albeit more informally -- and banks were not allowed to fail, precisely because of the larger size of the banking corporations. The poster seems to be arguing the analogy that because of the size of US rail corporations, we should follow the Canadian depression era banking model. Well, OK ....
The Canadian system was much like Japan's in the modern era -- considered "too big to fail," each bank was propped up or folded into something stronger (making the stronger, weaker).
The result was also similar to Japan's more recent experience -- the system was not "rational" and in Canada the Great Depresssion was considered deeper and more longer lasting than in the United States -- presumably at least partially because of its "approach" to regulation.
This was inevitably the result of branch banking and the creation of "banks too big to fail" -- the Canadian government could not let normal market forces play out with such large combinations.
This example surely underscores one of the dangers to any economy of large corporate enterprises, how they inevitably become intertwined in political considerations and in times of crisis end up banging on the government's door for assistance -- holding its employees and customers, and the nation, hostage.
Not sure of the railroad context, but it is interesting to see this particular poster advocate preventing normal market forces from working by strenuous government intervention -- which was in fact the Canadian approach to its banking system during that era.
If the poster's comments somehow have something to do with Railroad regulation, and Canada's position regarding federal regulation, it fails upon its merits. The result -- a prolonged depression in Canada -- was not a positive outcome.
greyhounds wrote: nanaimo73 wrote: I wonder if the PRR could have grown like Canadian Pacific, from a Railway they added a trucking company, a logging company, a mining company, a petroleum company, a steamship company and an airline. Yes, CPR turned itself into an integrated transportation company, something the author laments never existed here in the US.
nanaimo73 wrote: I wonder if the PRR could have grown like Canadian Pacific, from a Railway they added a trucking company, a logging company, a mining company, a petroleum company, a steamship company and an airline.
Yes, CPR turned itself into an integrated transportation company, something the author laments never existed here in the US.
BN had a trucking company [Burlington Northern Transport], through its Burlington Northern Resources was heavily into mining, lumbering, real estate development, owned oil wells, and it operated a freight airline -- Burlington Northern Air Freight, begun in the regulated era of 1972.
BN was a US company.
futuremodal wrote:Cross subsidization is rampant today under the Staggers/STB partial deregulation. It's called "differential pricing". It's called charging some customers (usually domestic producers) >180% R/VC while others (usually foreign importers) <180% R/VC. It is by every credible measure cross subsidization.
futuremodal wrote: And now back to reality...... Cross subsidization is rampant today under the Staggers/STB partial deregulation. It's called "differential pricing". It's called charging some customers (usually domestic producers) >180% R/VC while others (usually foreign importers) <180% R/VC. It is by every credible measure cross subsidization.
Cross-subsidization has been around long before Staggers. Prior to May 1, 1971, the ICC would deny passenger train discontinuances on the basis that the profits made in freight operations could cover the passenger train losses even if the passenger trains were virtually empty. Freight rates in the ICC era were often tied to the value of the commodity being shipped, finished goods were billed a higher rate than raw materials. Perhaps some utilities were on the receiving end of cross subsidization but are unwilling to admit it.
Differential pricing exists everywhere in the transportation business. I'm sure that the airfare for my vacation last summer that I paid four months in advance was appreciably lower than what was charged to the business traveler who bought his tickets the day before he traveled. Cross-subsidization may or may not be involved, differential pricing definitely is involved.
Datafever wrote: Differential pricing may or may not be cross subsidization. Some shippers are located in areas where there is relatively small amounts of rail traffic. I would expect those shippers to pay more for shipping product than a shipper that was located on a heavily trafficked route. Why? Because the fixed costs become a much larger percentage of the overall cost of doing business.
Differential pricing may or may not be cross subsidization. Some shippers are located in areas where there is relatively small amounts of rail traffic. I would expect those shippers to pay more for shipping product than a shipper that was located on a heavily trafficked route. Why? Because the fixed costs become a much larger percentage of the overall cost of doing business.
If only that were reliably true. But some of the highest R/VC ratios are forced upon shippers who are located right on some of the most heavily trafficked mainlines. Not a lot of extra fixed costs there, yet they are paying a higher rate standard than some of those shippers who are located on lighter trafficked lines. Clearly, rate disparity is not a function of mainline proximity so much as it is a function of relative captivity. And because the rate disparity is borne of relative captivity, in those cases it is quite clearly cross subsidization.
futuremodal wrote: Datafever wrote: Differential pricing may or may not be cross subsidization. Some shippers are located in areas where there is relatively small amounts of rail traffic. I would expect those shippers to pay more for shipping product than a shipper that was located on a heavily trafficked route. Why? Because the fixed costs become a much larger percentage of the overall cost of doing business. If only that were reliably true. But some of the highest R/VC ratios are forced upon shippers who are located right on some of the most heavily trafficked mainlines. Not a lot of extra fixed costs there, yet they are paying a higher rate standard than some of those shippers who are located on lighter trafficked lines. Clearly, rate disparity is not a function of mainline proximity so much as it is a function of relative captivity. And because the rate disparity is borne of relative captivity, in those cases it is quite clearly cross subsidization.
Or, perhaps rates are a function of capacity. In the real world, when something gets too crowded, you raise the price.
If a line goes from A to B to C and is at or near capacity, any shipper wanting a ride from A to B or B to C better expect to pay the A to C rate - or better!
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
futuremodal wrote: And now back to reality...... Cross subsidization is rampant today under the Staggers/STB partial deregulation. It's called "differential pricing". It's called charging some customers (usually domestic producers) >180% R/VC while others (usually foreign importers) <180% R/VC. It is by every credible measure cross subsidization. When and if Ken ever acknowledges this fact, we can start a dialogue on how best to remedy this overt disparity, including the "no action" alternative. My choice would be anti-trust action to finally break up the antiquated integrated model, but others might choose an actual enforcement of standing Staggers Act caveats which ostensibly promote intramodal competition. Then there's those who think everything is hunky-dory, blinders firmly affixed over eyes, fingers embedded into eardrums, voice in constant "I'm not listening, I'm not listening........" droning mode. Which brings us back to the forum's version of the Saturday morning cartoons..... Take it away, Ken.......
Well, I could acknowledge that differential pricing is cross subsidization. I could also acknowledge that the Earth is flat. Such acknowledgements on my part would not make either one of these false premises true.
OK, I'll explain why Dave is wrong. And he is wrong. I'll try to write to a broad audiance.
First, the costs of any enterprise may be broken down into two broad groups: 1) Fixed, and 2) Variable.
Fixed costs do not change with the amount of service provided by the railroad. An example would be the taxes paid on the right of way. They are the same whether the railroad operates 1 train per day over a line or 30 trains per day over the same line.
Variable costs do change with the amount of service provided by the railroad. An example would be the fuel used to move the freight. The more freight moved the more fuel consumed, so fuel expense “varies” with the amount of business.
Both fixed and variable costs must be covered if the enterprise (railroad) is to remain viable. The ratio between fixed and variable will change according the amount of business. A low volume line will have a higher percentage of its costs in the fixed category than a high volume line.
As an example, let’s take a 1,000 mile line used primarily to move coal to power generating stations and use a fixed cost to variable cost ratio of 1:2. That is 1/3 of the total costs are fixed and 2/3 are variable. If the railroad’s variable costs work out to $2,000/car, then the railroad must charge at least $3,000/car to break even. The “average” cost is that $3,000/car.
This line has additional capacity available.
Now let’s say a demand for ethanol develops at the city served by the generating plants. This ethanol can be provided from several sources, one of which is near the coal mines. Other sources are closer to the receiver and can economically use trucks to move the ethanol. Because of this, if the railroad attempts to charge $3,000/car for the ethanol, it will not get the business.
But if it only charges $2,400/car for the ethanol, its source will become the low cost supplier and get the business. But $2,400 is below the average cost on the line. What to do? (We’re assuming that the cost per car of moving the ethanol is the same as the cost per car for moving coal.)
Well, the railroad prices the ethanol move at $2,400/car and takes the business. That’s the most it can get. Since the $2,400 covers the $2,000 variable cost of the movement, $400/car goes toward covering the railroad’s fixed costs. It would be foolish for the railroad not to take the traffic at $2,400/car, and it would be even more foolish for government regulation to prohibit them from doing so.
Now Dave falsely claims this is a cross subsidy. It’s not. The ethanol shipper is paying for his movement and contributing to the fixed costs. No money is going from the coal producers to the ethanol producer. They’re not paying any more because he’s using the line. There is no cross subsidy.
What are Dave’s alternatives? Well, he don’t say. Dave hasn’t shown that open access will lower costs. (I’m sure it will increase costs). Would he preclude the railroad from pricing the ethanol at $2,400? Who would benefit from that? Certainly not the coal producers. Would he require the railroad to reduce the coal charges to $2,400? Can’t do that. Then they’d be selling everything below average costs and be going broke.
The solution is differential pricing which produces a win-win for all involved. Including the coal producers who now have some other shipper to at least contribute to the fixed cost of owning the rail line.
Datafever wrote: futuremodal wrote: Datafever wrote: Differential pricing may or may not be cross subsidization. Some shippers are located in areas where there is relatively small amounts of rail traffic. I would expect those shippers to pay more for shipping product than a shipper that was located on a heavily trafficked route. Why? Because the fixed costs become a much larger percentage of the overall cost of doing business. If only that were reliably true. But some of the highest R/VC ratios are forced upon shippers who are located right on some of the most heavily trafficked mainlines. Not a lot of extra fixed costs there, yet they are paying a higher rate standard than some of those shippers who are located on lighter trafficked lines. Clearly, rate disparity is not a function of mainline proximity so much as it is a function of relative captivity. And because the rate disparity is borne of relative captivity, in those cases it is quite clearly cross subsidization. Here's what an October 2006 GAO report has to say on the subject."The Staggers Rail Act recognized the need for railroads to use demand-based differential pricing to promote a healthy rail industry and enable it to raise sufficient revenues to operate, maintain and, if necessary, expand the system in a deregulated environment. Demand-based differential pricing, in theory, permits a railroad to recover its joint and common costs—those costs that exist no matter how many shipments are transported, such as the cost of maintaining track— across its entire traffic base by setting higher rates for traffic with fewer transportation alternatives than for traffic with more alternatives. Differential pricing recognizes that some customers may use rail if rates are low—and have other options if rail rates are too high or service is poor. Therefore, rail rates on these shipments generally cover the directly attributable (variable) costs, plus a relatively low contribution to fixed costs. In contrast, customers with little or no practical alternative to rail—”captive” shippers—generally pay a much larger portion of fixed costs. Moreover, even though a railroad might incur similar incremental costs while providing service to two different shippers that move similar volumes in similar car types traveling over similar distances, the railroad might charge the shippers different rates. Furthermore, if the railroad is able to offer lower rates to the shipper with more transportation alternatives, that shipper still pays some of the joint and common costs. By paying even a small part of total fixed cost, competitive traffic reduces the share of those costs that captive shippers would have to pay if the competitive traffic switched to truck or some other alternative. Consequently, while the shipper with fewer alternatives makes a greater contribution toward the railroad’s joint and common costs, the contribution is less than if the shipper with more alternatives did not ship via rail."In particular, note the last sentence.
Actually, what I note is the generalization of the GAO report, e.g. they define captive as "no practical alternative to rail", rather than defining captive as being physically served by only one rail service provider. In other words, the GAO report is lumping all rail service providers into one and then comparing that to non rail alternatives. They are not discerning the service aspects of one rail company vs other rail companies. Seems rather sloppy on the part of the GAO.
Apparently they are also of the mindset that modes *compete* with each other, rather than recognizing that product characteristics determine optimal mode of transport, and when that optimization takes place there is no real competition between modes.
Perhaps the GAO is made up of folks named "Larry", "Curley", and "Moe".
futuremodal wrote:Actually, what I note is the generalization of the GAO report, e.g. they define captive as "no practical alternative to rail", rather than defining captive as being physically served by only one rail service provider. In other words, the GAO report is lumping all rail service providers into one and then comparing that to non rail alternatives. They are not discerning the service aspects of one rail company vs other rail companies. Seems rather sloppy on the part of the GAO. Apparently they are also of the mindset that modes *compete* with each other, rather than recognizing that product characteristics determine optimal mode of transport, and when that optimization takes place there is no real competition between modes.
greyhounds wrote: futuremodal wrote: And now back to reality...... Well, I could acknowledge that differential pricing is cross subsidization. I could also acknowledge that the Earth is flat. Such acknowledgements on my part would not make either one of these false premises true. OK, I'll explain why Dave is wrong. And he is wrong. I'll try to write to a broad audiance. First, the costs of any enterprise may be broken down into two broad groups: 1) Fixed, and 2) Variable. Fixed costs do not change with the amount of service provided by the railroad. An example would be the taxes paid on the right of way. They are the same whether the railroad operates 1 train per day over a line or 30 trains per day over the same line. Variable costs do change with the amount of service provided by the railroad. An example would be the fuel used to move the freight. The more freight moved the more fuel consumed, so fuel expense “varies” with the amount of business. Both fixed and variable costs must be covered if the enterprise (railroad) is to remain viable. The ratio between fixed and variable will change according the amount of business. A low volume line will have a higher percentage of its costs in the fixed category than a high volume line. As an example, let’s take a 1,000 mile line used primarily to move coal to power generating stations and use a fixed cost to variable cost ratio of 1:2. That is 1/3 of the total costs are fixed and 2/3 are variable. If the railroad’s variable costs work out to $2,000/car, then the railroad must charge at least $3,000/car to break even. The “average” cost is that $3,000/car. This line has additional capacity available. Now let’s say a demand for ethanol develops at the city served by the generating plants. This ethanol can be provided from several sources, one of which is near the coal mines. Other sources are closer to the receiver and can economically use trucks to move the ethanol. Because of this, if the railroad attempts to charge $3,000/car for the ethanol, it will not get the business. But if it only charges $2,400/car for the ethanol, its source will become the low cost supplier and get the business. But $2,400 is below the average cost on the line. What to do? (We’re assuming that the cost per car of moving the ethanol is the same as the cost per car for moving coal.) Well, the railroad prices the ethanol move at $2,400/car and takes the business. That’s the most it can get. Since the $2,400 covers the $2,000 variable cost of the movement, $400/car goes toward covering the railroad’s fixed costs. It would be foolish for the railroad not to take the traffic at $2,400/car, and it would be even more foolish for government regulation to prohibit them from doing so. Now Dave falsely claims this is a cross subsidy. It’s not. The ethanol shipper is paying for his movement and contributing to the fixed costs. No money is going from the coal producers to the ethanol producer. They’re not paying any more because he’s using the line. There is no cross subsidy. What are Dave’s alternatives? Well, he don’t say. Dave hasn’t shown that open access will lower costs. (I’m sure it will increase costs). Would he preclude the railroad from pricing the ethanol at $2,400? Who would benefit from that? Certainly not the coal producers. Would he require the railroad to reduce the coal charges to $2,400? Can’t do that. Then they’d be selling everything below average costs and be going broke. The solution is differential pricing which produces a win-win for all involved. Including the coal producers who now have some other shipper to at least contribute to the fixed cost of owning the rail line.
futuremodal wrote: And now back to reality......
Well, sort of close but your model fails to mention a couple of points concerning fixed costs. Fixed costs are more related to costs per mile but have to be reimbursed by cars hauled. Going with your example of assigning $1000 per car in fixed costs for the original traffic that will pay the fixed costs for the line at the given traffic level. Now when you add the new ethanol traffic and increase the number of cars on the line you should reduce the fixed cost charges per car. If the fixed charges divided by the original number of cars came out to $1000 then the same fixed charges divided by the higher number of cars will give a number lower than $1000. Now if this new lower figure of fixed costs per car comes in at $400 then your ethanol business pays it's own way. If the new number is say $600 per car and the variable costs remain at $2000 per car then you are losing $200 per car with the new traffic. But wait, since you are still charging your original customer $3000 per car they are paying ALL the fixed costs for the line. The new customer is contributing $400 per car towards those fixed costs but these costs have already been met by the original shipper. So this contribution goes right to the bottom line, pure profit! Nice for the railroad but the original shipper is cross subsidizing the new customer account the new shipper cannot meet the charges fully for his share of fixed costs. Now say the new fixed costs per car do work out to $400 per car. The ethanol guys are now paying $2000 per car to cover variable costs and $400 per car to fully cover their share of fixed costs. All is well, right? No, since no railroad in their right mind will call the original shippers who are willing to pay $3000 per car for a move which is $2000 in variable costs and $400 in fixed costs. That leaves $600 per car which the railroad takes to the bottom line. So if the original shipper does not find out about the new $2400 per car price structure he still ends up subsidizing the new traffic.
Now is that fair to the original shipper? What does the Railroad care about fair? They are moving traffic at what the shippers are willing to pay. The carrier wi
arbfbe wrote: greyhounds wrote: futuremodal wrote: And now back to reality...... Well, I could acknowledge that differential pricing is cross subsidization. I could also acknowledge that the Earth is flat. Such acknowledgements on my part would not make either one of these false premises true. OK, I'll explain why Dave is wrong. And he is wrong. I'll try to write to a broad audiance. First, the costs of any enterprise may be broken down into two broad groups: 1) Fixed, and 2) Variable. Fixed costs do not change with the amount of service provided by the railroad. An example would be the taxes paid on the right of way. They are the same whether the railroad operates 1 train per day over a line or 30 trains per day over the same line. Variable costs do change with the amount of service provided by the railroad. An example would be the fuel used to move the freight. The more freight moved the more fuel consumed, so fuel expense “varies” with the amount of business. Both fixed and variable costs must be covered if the enterprise (railroad) is to remain viable. The ratio between fixed and variable will change according the amount of business. A low volume line will have a higher percentage of its costs in the fixed category than a high volume line. As an example, let’s take a 1,000 mile line used primarily to move coal to power generating stations and use a fixed cost to variable cost ratio of 1:2. That is 1/3 of the total costs are fixed and 2/3 are variable. If the railroad’s variable costs work out to $2,000/car, then the railroad must charge at least $3,000/car to break even. The “average” cost is that $3,000/car. This line has additional capacity available. Now let’s say a demand for ethanol develops at the city served by the generating plants. This ethanol can be provided from several sources, one of which is near the coal mines. Other sources are closer to the receiver and can economically use trucks to move the ethanol. Because of this, if the railroad attempts to charge $3,000/car for the ethanol, it will not get the business. But if it only charges $2,400/car for the ethanol, its source will become the low cost supplier and get the business. But $2,400 is below the average cost on the line. What to do? (We’re assuming that the cost per car of moving the ethanol is the same as the cost per car for moving coal.) Well, the railroad prices the ethanol move at $2,400/car and takes the business. That’s the most it can get. Since the $2,400 covers the $2,000 variable cost of the movement, $400/car goes toward covering the railroad’s fixed costs. It would be foolish for the railroad not to take the traffic at $2,400/car, and it would be even more foolish for government regulation to prohibit them from doing so. Now Dave falsely claims this is a cross subsidy. It’s not. The ethanol shipper is paying for his movement and contributing to the fixed costs. No money is going from the coal producers to the ethanol producer. They’re not paying any more because he’s using the line. There is no cross subsidy. What are Dave’s alternatives? Well, he don’t say. Dave hasn’t shown that open access will lower costs. (I’m sure it will increase costs). Would he preclude the railroad from pricing the ethanol at $2,400? Who would benefit from that? Certainly not the coal producers. Would he require the railroad to reduce the coal charges to $2,400? Can’t do that. Then they’d be selling everything below average costs and be going broke. The solution is differential pricing which produces a win-win for all involved. Including the coal producers who now have some other shipper to at least contribute to the fixed cost of owning the rail line. Well, sort of close but your model fails to mention a couple of points concerning fixed costs. Fixed costs are more related to costs per mile but have to be reimbursed by cars hauled. Going with your example of assigning $1000 per car in fixed costs for the original traffic that will pay the fixed costs for the line at the given traffic level. Now when you add the new ethanol traffic and increase the number of cars on the line you should reduce the fixed cost charges per car. If the fixed charges divided by the original number of cars came out to $1000 then the same fixed charges divided by the higher number of cars will give a number lower than $1000. Now if this new lower figure of fixed costs per car comes in at $400 then your ethanol business pays it's own way. If the new number is say $600 per car and the variable costs remain at $2000 per car then you are losing $200 per car with the new traffic. But wait, since you are still charging your original customer $3000 per car they are paying ALL the fixed costs for the line. The new customer is contributing $400 per car towards those fixed costs but these costs have already been met by the original shipper. So this contribution goes right to the bottom line, pure profit! Nice for the railroad but the original shipper is cross subsidizing the new customer account the new shipper cannot meet the charges fully for his share of fixed costs. Now say the new fixed costs per car do work out to $400 per car. The ethanol guys are now paying $2000 per car to cover variable costs and $400 per car to fully cover their share of fixed costs. All is well, right? No, since no railroad in their right mind will call the original shippers who are willing to pay $3000 per car for a move which is $2000 in variable costs and $400 in fixed costs. That leaves $600 per car which the railroad takes to the bottom line. So if the original shipper does not find out about the new $2400 per car price structure he still end -Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/) Reply Anonymous Member sinceApril 2003 305,205 posts Posted by Anonymous on Tuesday, November 28, 2006 8:18 AM Well, now we know that Ken thinks the earth is flat. His *example* to prove me wrong is itself a faulty premise. He forgets that most captive customers are either located on the mainlines, or are former branch customers who now must truck their product to the mainline (and as such are still captive to that railroad, albeit with higher initial shipping costs added on). There are little if any additional fixed cost allocations, merely variable costs, yet the customers are paying a rate that far exceeds those variable costs. Meanwhile, the railroads are bringing in imported goods are rates that are near or under the STB's 180% R/VC standard as they compete irrationally for double stack business, which means that such moves are not covering both variable costs and an allocation of fixed costs. Somewhere along the line, someone somewhere has to make up the deficit to keep the tracks in decent running condition, and that someone is those who pay the rates that exceed 180% of R/VC. Only a purposefully blinded individual would look at that disparity and not call that cross subsidization. Reply Edit oltmannd Member sinceJanuary 2001 From: Atlanta 11,971 posts Posted by oltmannd on Tuesday, November 28, 2006 9:37 AM futuremodal wrote: Well, now we know that Ken thinks the earth is flat. His *example* to prove me wrong is itself a faulty premise. He forgets that most captive customers are either located on the mainlines, or are former branch customers who now must truck their product to the mainline (and as such are still captive to that railroad, albeit with higher initial shipping costs added on). There are little if any additional fixed cost allocations, merely variable costs, yet the customers are paying a rate that far exceeds those variable costs. Meanwhile, the railroads are bringing in imported goods are rates that are near or under the STB's 180% R/VC standard as they compete irrationally for double stack business, which means that such moves are not covering both variable costs and an allocation of fixed costs. Somewhere along the line, someone somewhere has to make up the deficit to keep the tracks in decent running condition, and that someone is those who pay the rates that exceed 180% of R/VC. Only a purposefully blinded individual would look at that disparity and not call that cross subsidization. The distinction you are trying to make between "base load" and "incremental" traffic is completely arbitrary and fallacious. The only thing that matters is the net for the total traffic. The only factor price should be based on is value of the service. The service provider's cost to provide is irrelevant to the shipper. Anything that distorts the relationship between the value of the service and the price charged is a cross subsidization. And, the value is based in large measure by the alternatives the shipper has available. There are always alternatives (another RR, another mode, move, reengineer, liquidate, etc.) The whole notion of fixed vs variable costs is only so the RR has some idea of long term profitability of the traffic. Its not some be-all end-all holy grail method for pricing. -Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/) Reply MichaelSol Member sinceOctober 2004 3,190 posts Posted by MichaelSol on Tuesday, November 28, 2006 10:27 AM oltmannd wrote: Rates were set entirely by calculated costs with no respect to the value of the service provided. ?. Reply 12345 Join our Community! Our community is FREE to join. To participate you must either login or register for an account. Login » Register » Search the Community Newsletter Sign-Up By signing up you may also receive occasional reader surveys and special offers from Trains magazine.Please view our privacy policy More great sites from Kalmbach Media Terms Of Use | Privacy Policy | Copyright Policy
Well, sort of close but your model fails to mention a couple of points concerning fixed costs. Fixed costs are more related to costs per mile but have to be reimbursed by cars hauled. Going with your example of assigning $1000 per car in fixed costs for the original traffic that will pay the fixed costs for the line at the given traffic level. Now when you add the new ethanol traffic and increase the number of cars on the line you should reduce the fixed cost charges per car. If the fixed charges divided by the original number of cars came out to $1000 then the same fixed charges divided by the higher number of cars will give a number lower than $1000. Now if this new lower figure of fixed costs per car comes in at $400 then your ethanol business pays it's own way. If the new number is say $600 per car and the variable costs remain at $2000 per car then you are losing $200 per car with the new traffic. But wait, since you are still charging your original customer $3000 per car they are paying ALL the fixed costs for the line. The new customer is contributing $400 per car towards those fixed costs but these costs have already been met by the original shipper. So this contribution goes right to the bottom line, pure profit! Nice for the railroad but the original shipper is cross subsidizing the new customer account the new shipper cannot meet the charges fully for his share of fixed costs. Now say the new fixed costs per car do work out to $400 per car. The ethanol guys are now paying $2000 per car to cover variable costs and $400 per car to fully cover their share of fixed costs. All is well, right? No, since no railroad in their right mind will call the original shippers who are willing to pay $3000 per car for a move which is $2000 in variable costs and $400 in fixed costs. That leaves $600 per car which the railroad takes to the bottom line. So if the original shipper does not find out about the new $2400 per car price structure he still end
Well, now we know that Ken thinks the earth is flat.
His *example* to prove me wrong is itself a faulty premise. He forgets that most captive customers are either located on the mainlines, or are former branch customers who now must truck their product to the mainline (and as such are still captive to that railroad, albeit with higher initial shipping costs added on). There are little if any additional fixed cost allocations, merely variable costs, yet the customers are paying a rate that far exceeds those variable costs. Meanwhile, the railroads are bringing in imported goods are rates that are near or under the STB's 180% R/VC standard as they compete irrationally for double stack business, which means that such moves are not covering both variable costs and an allocation of fixed costs. Somewhere along the line, someone somewhere has to make up the deficit to keep the tracks in decent running condition, and that someone is those who pay the rates that exceed 180% of R/VC.
Only a purposefully blinded individual would look at that disparity and not call that cross subsidization.
futuremodal wrote: Well, now we know that Ken thinks the earth is flat. His *example* to prove me wrong is itself a faulty premise. He forgets that most captive customers are either located on the mainlines, or are former branch customers who now must truck their product to the mainline (and as such are still captive to that railroad, albeit with higher initial shipping costs added on). There are little if any additional fixed cost allocations, merely variable costs, yet the customers are paying a rate that far exceeds those variable costs. Meanwhile, the railroads are bringing in imported goods are rates that are near or under the STB's 180% R/VC standard as they compete irrationally for double stack business, which means that such moves are not covering both variable costs and an allocation of fixed costs. Somewhere along the line, someone somewhere has to make up the deficit to keep the tracks in decent running condition, and that someone is those who pay the rates that exceed 180% of R/VC. Only a purposefully blinded individual would look at that disparity and not call that cross subsidization.
The distinction you are trying to make between "base load" and "incremental" traffic is completely arbitrary and fallacious. The only thing that matters is the net for the total traffic. The only factor price should be based on is value of the service. The service provider's cost to provide is irrelevant to the shipper. Anything that distorts the relationship between the value of the service and the price charged is a cross subsidization. And, the value is based in large measure by the alternatives the shipper has available. There are always alternatives (another RR, another mode, move, reengineer, liquidate, etc.)
The whole notion of fixed vs variable costs is only so the RR has some idea of long term profitability of the traffic. Its not some be-all end-all holy grail method for pricing.
oltmannd wrote: Rates were set entirely by calculated costs with no respect to the value of the service provided.
?.
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