Almost all coal moves under contract. Coal accounts for nearly 50 percent of tonnage but only 23 percent of revenue for Class I railroads. Of the remaining traffic by tonnage, this means 40% moves under contract and 60% moves by tariff. Of the 40% that moves under contract, any bets as to who gets the genuine competitive advantage -- competitive or non-competitive shippers? Who has the bargaining power?
Columbia Grain, Inc. (CGI) and BNSF Railway Company (BNSF) announced today that they have agreed to terms and conditions under which Columbia will expand its facility at Carter, Mont., to accommodate 110-car shuttle grain trains. The upgrade to the facility, which currently loads 52-car trains, is expected to be completed during the third quarter of 2007.
The agreement follows BNSF’s announcement in 2004 that it would maintain its Great Falls-Fort Benton line, on which the Carter facility is located, to allow for the operation of 110-car shuttle trains.
“We are pleased to have reached this agreement with Columbia Grain,” says Kevin Kaufman, BNSF’s group vice president, Agricultural Products. “This facility will provide the benefits of shuttle train service to even more Montana farmers, and it reinforces our commitment to the Fort Benton line.”
“Columbia Grain looks forward to the opportunity to better serve Chouteau County producers with efficient and competitive shuttle service,” said Tom Hammond, chief executive officer of Columbia Grain.
Columbia has other shuttle loading facilities in Montana at Harlem, Kasa Point and Rudyard. Addition of the Carter facility will bring the number of BNSF-served shuttle loading facilities in the state to 13.
Columbia Grain is a leading world grain exporter located in Portland, Ore. It supplies superior quality western grain to service both U.S. domestic markets and export markets worldwide. Columbia’s supply lines include the western region of the United States, well known for its high quality wheat, feed grains and pulses. With extensive origination facilities, Columbia is able to supply reliable and quality products to meet its customers’ needs.
MichaelSol wrote:I may be confused myself. Not sure I understand the 140% reference.
I may be confused myself. Not sure I understand the 140% reference.
I apologize. The 140% value was not directed to you. It was just a thought I had while I was typing my response to your post. If you look back through the thread, you will notice where the 140% - 180% range comes from, which is why you needed to post your first response to unconfuse me.
MichaelSol wrote: Datafever wrote:Mr. Sol, for the data that you have posted (including the study that you participated in), does the data include confidential contracts?I think the question answers itself. Sounds like a BobWilcox question. However, we did ask elevator operators the question and got some answers. There was little incentive for railroads to offer captive shippers significant concessions, whereas the railroads appeared to have plenty of incentive to offer concessions to competitve shippers. You might ask what the bargaining leverage of a captive shipper is? Contracts did appear to exist for companies like Cargill -- favoring large corporate agriculture over the co-ops and independent -- and using the locations where they had compettive alternatives as the source of their bargaining power for their captive facilities. Not "really" captive shippers in those cases because they did have a source of market power. The largest captive coop shuttle elevator we spoke to said the railroad wasn't interested. There was a logic in our conclusion that confidential contracts were consistent with our findings and represented nothing that would skew the findings.
Datafever wrote:Mr. Sol, for the data that you have posted (including the study that you participated in), does the data include confidential contracts?
I think the question answers itself.
Sounds like a BobWilcox question. However, we did ask elevator operators the question and got some answers. There was little incentive for railroads to offer captive shippers significant concessions, whereas the railroads appeared to have plenty of incentive to offer concessions to competitve shippers.
You might ask what the bargaining leverage of a captive shipper is?
Contracts did appear to exist for companies like Cargill -- favoring large corporate agriculture over the co-ops and independent -- and using the locations where they had compettive alternatives as the source of their bargaining power for their captive facilities. Not "really" captive shippers in those cases because they did have a source of market power.
The largest captive coop shuttle elevator we spoke to said the railroad wasn't interested. There was a logic in our conclusion that confidential contracts were consistent with our findings and represented nothing that would skew the findings.
I'm sorry - I don't think that I meant the question the way you took it. No, the question really doesn't answer itself as there is some information known about confidential contracts. What I don't know is how much information is available.
For instance, the GAO report says that 70% of all traffic (tonnage) moved under contract. If it is known how much tonnage (and revenue - 71%) moves under contract, then it seems reasonable to me that other information might be known also, even if only in a summarized form.
On the other hand, if (as you seem to imply) the rates being charged under confidential contracts are not being taken into account when these studies are done, then a HUGE piece of the picture is missing as far as I'm concerned.
Also, I get the impression from what you have said that confidential contracts are mostly used with "competitive" shippers. Yes?
I think the question answers itself by the use of the word "confidential".
Contracts did appear to exist for companies like Cargill -- favoring large corporate agriculture over the co-ops and independents -- and using the locations where they had competitive alternatives as the source of their bargaining power for their captive facilities. Not "really" captive shippers in those cases because they did have a source of market power.
The largest captive coop shuttle elevator we spoke to said the railroad wasn't interested. There was a logic in our conclusion that confidential contracts were consistent with our findings and represented nothing that would skew the findings except perhaps further in favor of competitive shippers -- since they alone had bargaining power.
Datafever wrote:Okay, I'm confused already. But another flaw that I've just noticed is the use of the 140% number. To claim that a shipper that pays 145% or even 150% R/VC is captive just doesn't wash at all. Or at least, such shipper is not being charged "captive rates". After all, the railroad does have to earn a profit.
Okay, I'm confused already.
But another flaw that I've just noticed is the use of the 140% number. To claim that a shipper that pays 145% or even 150% R/VC is captive just doesn't wash at all. Or at least, such shipper is not being charged "captive rates". After all, the railroad does have to earn a profit.
I may be confused myself. Not sure I understand the 140% reference. Congress intended to deregulate rates charged below 180%. The message was to the railroads, for so long as you charge below that R/VC threshold, charge away. The threshold is based on the studies at the time which showed that, industry typical fixed and variable costs, the following net profits would be produced.
R/VC % Profit
135 0.00% 140 3.70% 145 7.41% 155 14.81% 160 18.52% 165 22.22% 170 25.93% 175 29.63% 180 33.33%
Above the 180% R/VC threshold, cross-subsidization beyond anything the market was likely to tolerate became unacceptable -- or at least regulated -- because Congress was aware it was permitting a class of shippers to exist who would not be able to access competitive markets for this service. In order to permit railroads to continue to be exempt from direct anti-trust regulation, protection of these shippers was a necessary part of the law.
MichaelSol wrote:Careful. It is easy to confuse numbers with dollars here. Thirty one % of Class I revenue is obtained from captive shippers [economist's version] or potentially captive shippers [Staggers Act version], that is, rates moving at over 180% R/VC. The average rate charged to the average competitive shipper might well be 106%, and that might represent rates charged to 50% of the shippers. But, 5% of the shippers might represent 50% of the railroad revenue and their overall rate average might well be within the 140%-180% range. And that's probably not far off.
Careful. It is easy to confuse numbers with dollars here. Thirty one % of Class I revenue is obtained from captive shippers [economist's version] or potentially captive shippers [Staggers Act version], that is, rates moving at over 180% R/VC.
The average rate charged to the average competitive shipper might well be 106%, and that might represent rates charged to 50% of the shippers. But, 5% of the shippers might represent 50% of the railroad revenue and their overall rate average might well be within the 140%-180% range.
And that's probably not far off.
Futuremodal's original comment (and my reply) was in respect to the GAO report which was actually basing its percentages on revenue. So even though futuremodal (and myself) used the word "Shipper" my thought was total revenues generated by those shippers. But then I seem to have switched gears and applied that same concept to the study that you posted numbers for, which seems to have been an incorrect thing for me to do.
But if I understand you correctly, while the number of shippers charged rates in the 140% to 180% category are small, the revenues that they generate could be quite large.
Datafever wrote: futuremodal wrote:To clarify, the number of captive shippers based on the >180% standard is around 30%.The number of captive shippers based on the >300% standard is 6%.Then the number of captive shippers based on a 140% standard can be guesstimated at about 45%(?), while the number of captive shippers based on having one physical connection to a Class I is about 55%(?).I don't know that it would be accurate to guesstimate "captive" shippers using a 140% standard at 45%. If the figures that Mr. Sol posted have any validity at all, then the number of shippers who pay from 140% to 180% R/VC would have to be very small. Small enough that there are probably less than 5% of shippers that fit into the 140 - 180% category. Then using a 140% standard should get you no more than 35%.
futuremodal wrote:To clarify, the number of captive shippers based on the >180% standard is around 30%.The number of captive shippers based on the >300% standard is 6%.Then the number of captive shippers based on a 140% standard can be guesstimated at about 45%(?), while the number of captive shippers based on having one physical connection to a Class I is about 55%(?).
To clarify, the number of captive shippers based on the >180% standard is around 30%.
The number of captive shippers based on the >300% standard is 6%.
Then the number of captive shippers based on a 140% standard can be guesstimated at about 45%(?), while the number of captive shippers based on having one physical connection to a Class I is about 55%(?).
I don't know that it would be accurate to guesstimate "captive" shippers using a 140% standard at 45%. If the figures that Mr. Sol posted have any validity at all, then the number of shippers who pay from 140% to 180% R/VC would have to be very small. Small enough that there are probably less than 5% of shippers that fit into the 140 - 180% category.
Then using a 140% standard should get you no more than 35%.
greyhounds wrote:The 35% figure will vary all over the place.
The 35% figure will vary all over the place.
How much?
In general. A high volume line will have a lower fixed to variable ratio than a low volume line.
"Overhead [fixed] costs ... are typically incurred in the production of all of the services provided by a firm." Ronald Braeutigam, "An Analysis of Fully Distributed Cost Pricing in Regulated Industries," The Bell Journal of Economics, 11:1, Spring, 1980, pp. 182-196, 184.
Fixed costs are company costs, not line costs.
By definition, they can't "vary all over the place."
futuremodal wrote: greyhounds wrote: And margins aren't profitablity. A railroad can make more money on freight priced at 110% of variable than it does on freight priced at 200% of variable. It depends on volume.Wrong. Dead wrong. No railroad can make money at 110% R/VC if the VC + FC ratios are around 140% of R. Therefore, if a railroad is charging one customer 110% R/VC, they have to make it up on the 200% customer or they will go under. Volume means nothing if you aren't covering TC.
greyhounds wrote: And margins aren't profitablity. A railroad can make more money on freight priced at 110% of variable than it does on freight priced at 200% of variable. It depends on volume.
And margins aren't profitablity. A railroad can make more money on freight priced at 110% of variable than it does on freight priced at 200% of variable. It depends on volume.
Wrong. Dead wrong. No railroad can make money at 110% R/VC if the VC + FC ratios are around 140% of R. Therefore, if a railroad is charging one customer 110% R/VC, they have to make it up on the 200% customer or they will go under. Volume means nothing if you aren't covering TC.
As I read greyhounds post, I noticed that he used the words "can make money". In my mind, he did not imply that this was a common thing, or even that it was actually the case in the way that today's railroads are run. He seemed to only be pointing out the possibility of profitability below some magical number.
An example that I could think of would be a hypothetical industry that ships more than a dozen unit trains a day along a relatively short piece of track. The fixed costs would be quite small compared to the variable costs and such railroad could very well be covering TC with 110% R/VC.
Sure it could - run it like Nike. Transform all your fixed costs into variable costs. Sell every possible asset and lease back on day by day operating lease. Outsource all G&A functions on a week by week or job by job basis. Hire train operators as contractors. The only assets they'd have would be the land under the track and the only fixed costs would be a skeleton staff. Trim the network to maximize traffic density.
The whole notion that dividing up costs into fixed and variable categories has some sort of deep and cosmic source and meaning is ridiculous. Costs are costs. Dividing them into these various categories is for the convenience and enterainment of accountants and lawyers....and sometimes the marketing department. And then of course, these forums!
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
bobwilcox wrote: TomDiehl wrote: futuremodal wrote: And most importantly of all, all captive shippers are domestic.So you're saying that every other country in the world has at least two rail lines serving each shipper?I guess those potash mines in SK served only by the CP are not captive. Then again there is the entire country of China.
TomDiehl wrote: futuremodal wrote: And most importantly of all, all captive shippers are domestic.So you're saying that every other country in the world has at least two rail lines serving each shipper?
futuremodal wrote: And most importantly of all, all captive shippers are domestic.
And most importantly of all, all captive shippers are domestic.
So you're saying that every other country in the world has at least two rail lines serving each shipper?
I guess those potash mines in SK served only by the CP are not captive. Then again there is the entire country of China.
I didn't realize that China had more than one railroad serving each industry.
When someone in the United States [or any nation of origin] refers to "domestic" vs. "foreign" it is a convention that he or she is referring to the nation from or about which he speaks as "domestic" for freight or services originating in that country, and "foreign" otherwise. The comment was clear on that, as was the context.
Datafever wrote: futuremodal wrote: That's probably the most reasonable approach, far more reasonable than the GAO's extreme example of defining only rates above 300% R/VC as being captive. It should be disappointing to any American that the normally credible GAO would use such an extreme and irrational methodology for determining captive rail customers.Here's some articles in Railway Age that touch on the subject of the looming spector of harsher regulations to come:http://www.railwayage.com/B/xfromtheeditor.htmlhttp://www.railwayage.com/B/feature1.htmlNo wonder the GAO's (and Ken's) ascersion that "only 6% of rail customers are captive" seemed more fishy than usual.......Whoa, whoa, whoa!!! The GAO does not define captivity as > 300% R/VC. It uses the 180% value for its basis of potentially captive shippers. The GAO also recognizes the 180% value as the threshold for statutory relief.Here's the values from the October 2006 report:Since 1985, and as a percentage of all traffic, the amount of potentially captive traffic traveling at rates over 180 percent R/VC and the revenue generated from that traffic have both declined. Revenue generated from traffic traveling at rates over 180 percent R/VC decreased from 41 percent of all industry revenue in 1985 to 29 percent in 2004.However, since 1985, tonnage from traffic traveling at rates substantially over the threshold for rate relief has increased. Total industry tonnage has increased significantly (from 1.37 billion tons in 1985 to 2.14 billion tons in 2004), with the tonnage traveling at rates above 300 percent R/VC more than doubling—from about 53 million tons in 1985 to over 130 million tons in 2004.As a percentage of all industry traffic, traffic traveling at rates between 180 and 300 percent R/VC decreased from 36 percent in 1985 to 25 percent in 2004. In contrast, the percentage of all industry traffic traveling at rates above 300 percent R/VC increased from 4 percent in 1985 to 6 percent in 2004. I hope that clarifies the GAO position.
futuremodal wrote: That's probably the most reasonable approach, far more reasonable than the GAO's extreme example of defining only rates above 300% R/VC as being captive. It should be disappointing to any American that the normally credible GAO would use such an extreme and irrational methodology for determining captive rail customers.Here's some articles in Railway Age that touch on the subject of the looming spector of harsher regulations to come:http://www.railwayage.com/B/xfromtheeditor.htmlhttp://www.railwayage.com/B/feature1.htmlNo wonder the GAO's (and Ken's) ascersion that "only 6% of rail customers are captive" seemed more fishy than usual.......
That's probably the most reasonable approach, far more reasonable than the GAO's extreme example of defining only rates above 300% R/VC as being captive. It should be disappointing to any American that the normally credible GAO would use such an extreme and irrational methodology for determining captive rail customers.
Here's some articles in Railway Age that touch on the subject of the looming spector of harsher regulations to come:
http://www.railwayage.com/B/xfromtheeditor.html
http://www.railwayage.com/B/feature1.html
No wonder the GAO's (and Ken's) ascersion that "only 6% of rail customers are captive" seemed more fishy than usual.......
Whoa, whoa, whoa!!! The GAO does not define captivity as > 300% R/VC. It uses the 180% value for its basis of potentially captive shippers. The GAO also recognizes the 180% value as the threshold for statutory relief.
Here's the values from the October 2006 report:
Since 1985, and as a percentage of all traffic, the amount of potentially captive traffic traveling at rates over 180 percent R/VC and the revenue generated from that traffic have both declined. Revenue generated from traffic traveling at rates over 180 percent R/VC decreased from 41 percent of all industry revenue in 1985 to 29 percent in 2004.
However, since 1985, tonnage from traffic traveling at rates substantially over the threshold for rate relief has increased. Total industry tonnage has increased significantly (from 1.37 billion tons in 1985 to 2.14 billion tons in 2004), with the tonnage traveling at rates above 300 percent R/VC more than doubling—from about 53 million tons in 1985 to over 130 million tons in 2004.
As a percentage of all industry traffic, traffic traveling at rates between 180 and 300 percent R/VC decreased from 36 percent in 1985 to 25 percent in 2004. In contrast, the percentage of all industry traffic traveling at rates above 300 percent R/VC increased from 4 percent in 1985 to 6 percent in 2004.
I hope that clarifies the GAO position.
What I'm getting at is Ken's claim a while back that the GAO has measured the percentage of captive customers at only 6%. Obviously, he left out a few details!
greyhounds wrote: Datafever wrote: Based on that, I would then have to agree that any shipper that pays less than approximately 135% R/VC is potentially being cross-subsidized. (The 135% number based on Mr. Sol's value that fixed costs are approximately 35% of variable costs). The 35% figure will vary all over the place. In general. A high volume line will have a lower fixed to variable ratio than a low volume line.And margins aren't profitablity. A railroad can make more money on freight priced at 110% of variable than it does on freight priced at 200% of variable. It depends on volume.
Datafever wrote: Based on that, I would then have to agree that any shipper that pays less than approximately 135% R/VC is potentially being cross-subsidized. (The 135% number based on Mr. Sol's value that fixed costs are approximately 35% of variable costs).
Based on that, I would then have to agree that any shipper that pays less than approximately 135% R/VC is potentially being cross-subsidized. (The 135% number based on Mr. Sol's value that fixed costs are approximately 35% of variable costs).
The 35% figure will vary all over the place. In general. A high volume line will have a lower fixed to variable ratio than a low volume line.
Agreed. Thanks for pointing that out.
futuremodal wrote:That's probably the most reasonable approach, far more reasonable than the GAO's extreme example of defining only rates above 300% R/VC as being captive. It should be disappointing to any American that the normally credible GAO would use such an extreme and irrational methodology for determining captive rail customers.Here's some articles in Railway Age that touch on the subject of the looming spector of harsher regulations to come:http://www.railwayage.com/B/xfromtheeditor.htmlhttp://www.railwayage.com/B/feature1.htmlNo wonder the GAO's (and Ken's) ascersion that "only 6% of rail customers are captive" seemed more fishy than usual.......
Datafever wrote: Okay, I've gone off and done my homework. After much reading (particularly in the areas of electric utilities and telecommunications), I have come to the conclusion that my orginal concept of cross-subsidization is only a part of the picture.It seems to be commonly accepted that urban utility customers cross-subsidize rural utility customers. For instance, the maintenance cost per mile of rural lines is higher than the cost per mile of urban lines. In addition, there are significantly fewer customers per mile of rural line than there are in urban areas. So even though rural customers *may* pay a higher rate than urban customers, it is commonly accepted that their rates would be significantly higher if they had to pay full cost. What this means is that (a large number of) urban customers pay a slightly higher rate so that (a small number of) rural customers can end up with a significantly reduced rate. Similarly in manufacturing - if a product is not being sold at a price high enough to not only cover the cost of manufacturing the product, but also the full cost of research, development and marketing of the product, then that product is considered to be cross-subsidized. What is not considered to be cross-subsidization is differing profit rates. If one product produces a profit margin of 20% while another product only produces a profit margin of 2%, no cross-subsidization is considered to have taken place.Based on that, I would then have to agree that any shipper that pays less than approximately 135% R/VC is potentially being cross-subsidized. (The 135% number based on Mr. Sol's value that fixed costs are approximately 35% of variable costs).
Okay, I've gone off and done my homework. After much reading (particularly in the areas of electric utilities and telecommunications), I have come to the conclusion that my orginal concept of cross-subsidization is only a part of the picture.
It seems to be commonly accepted that urban utility customers cross-subsidize rural utility customers. For instance, the maintenance cost per mile of rural lines is higher than the cost per mile of urban lines. In addition, there are significantly fewer customers per mile of rural line than there are in urban areas. So even though rural customers *may* pay a higher rate than urban customers, it is commonly accepted that their rates would be significantly higher if they had to pay full cost. What this means is that (a large number of) urban customers pay a slightly higher rate so that (a small number of) rural customers can end up with a significantly reduced rate.
Similarly in manufacturing - if a product is not being sold at a price high enough to not only cover the cost of manufacturing the product, but also the full cost of research, development and marketing of the product, then that product is considered to be cross-subsidized.
What is not considered to be cross-subsidization is differing profit rates. If one product produces a profit margin of 20% while another product only produces a profit margin of 2%, no cross-subsidization is considered to have taken place.
selector wrote:Hey, I am not disagreeing with you.
Hey, I am not disagreeing with you.
Thanks for your support, selector. And I invite you (and anyone else) to participate. I would think that you have an interest, or you probably wouldn't even read threads like this.
Datafever wrote: selector wrote: They grow thick and fast in these "fertile" discussions. Get used to them.Personally, I don't see any reason to get used to them. There really is no place for character assassination on this forum (or anyplace else, for that matter). Among other things, there are minors that read this forum. Wouldn't it be great if we could teach them that it is possible to have disagreements that foster reasonable discussions?I am participating in these discussions in order to learn. I am finding that what I thought I *knew* isn't always what really IS.
selector wrote: They grow thick and fast in these "fertile" discussions. Get used to them.
They grow thick and fast in these "fertile" discussions. Get used to them.
Personally, I don't see any reason to get used to them. There really is no place for character assassination on this forum (or anyplace else, for that matter). Among other things, there are minors that read this forum. Wouldn't it be great if we could teach them that it is possible to have disagreements that foster reasonable discussions?
I am participating in these discussions in order to learn. I am finding that what I thought I *knew* isn't always what really IS.
Hey, I am not disagreeing with you. I have attempted to point these fallacies out myself, but find that I am peeing into a windstorm. Do what you can, and what you feel you must; just don't look for any meaningful results.
My opinion based on my experience here.
I sincerely hope you do better.
Datafever wrote: selector wrote: They grow thick and fast in these "fertile" discussions. Get used to them.I am participating in these discussions in order to learn. I am finding that what I thought I *knew* isn't always what really IS.
I'm with DF on this one. I get tired of the shots certain people take at others. I for one am trying to learn also, and the insults and bad blood take away from the arguments both sides are trying to make. I think we can do without the insults.....
selector wrote:They grow thick and fast in these "fertile" discussions. Get used to them.
Datafever wrote: greyhounds wrote: And he don't say. Ask yourselves, are Sol's actions those of an honest man? There really is no call to use personal attacks here. In fact, he stated quite clearly what he *presumed* the study to use as a criteria for captive/non-captive. It wasn't his study so he went with what the study most likely used as a criteria. Now ask yourself this question - What sort of person resorts to ad hominem attacks?
greyhounds wrote: And he don't say. Ask yourselves, are Sol's actions those of an honest man?
And he don't say. Ask yourselves, are Sol's actions those of an honest man?
There really is no call to use personal attacks here. In fact, he stated quite clearly what he *presumed* the study to use as a criteria for captive/non-captive. It wasn't his study so he went with what the study most likely used as a criteria.
Now ask yourself this question - What sort of person resorts to ad hominem attacks?
Datafever wrote: Similarly in manufacturing - if a product is not being sold at a price high enough to not only cover the cost of manufacturing the product, but also the full cost of research, development and marketing of the product, then that product is considered to be cross-subsidized. What is not considered to be cross-subsidization is differing profit rates. If one product produces a profit margin of 20% while another product only produces a profit margin of 2%, no cross-subsidization is considered to have taken place.Based on that, I would then have to agree that any shipper that pays less than approximately 135% R/VC is potentially being cross-subsidized. (The 135% number based on Mr. Sol's value that fixed costs are approximately 35% of variable costs).
Pretty good summary. At that point, both volume and capacity become key factors. With excess capacity, anytime the company can sell the product at any percentage over the VC, the company earns revenue to cover fixed costs.
Enough volume, and the product or commodity can in fact generate a profit in excess of the total fully distributed costs (FC + VC(x)) of the service for that product or commodity. Indeed, as cross-subsidized traffic adds volume, the fixed cost allocation per unit for all traffic declines, most of the time, and other traffic becomes more profitable relative to their fully allocated costs as a result. Cross subsidization does not exist in a vacuum and has both positive and negative potential impacts on the profitability of other services as well as the company as a whole.
However, until the service in question covers its own variable and fixed costs, it is cross-subsidized. After that point it is a genuine profit center.
At close to capacity, cross-subsidized products or services suddenly develop sharp edges. The company can't just keep adding volume. The capacity constraint may prevent development or acquisition of more profitable traffic. And, this is more true for railroads than just about any other industry -- as capacity limits are approached, costs of operation -- variable costs -- begin to climb. Cross-subsidized traffic that may have been contributing to fixed costs suddenly gets swallowed up by rising variable costs.
The rate of climb in operating costs for Class I's over the past 4 years is unprecedented in a low inflation environment. Slower trains, dead on hours, all of the indicators of capacity limits all increase operating costs. This is why the average R/VC has slid over the past six years so that more traffic now travels at rates under 180% R/VC than six years ago -- and why more traffic is now forced to travel at rates over 300% R/VC to make up for it.
Congestion increases operating costs, and that needs to be fixed.
That requires investment, and an increase in fixed costs. Hmmm, and where does that investment go? Well, that's where cross-subsidized services always, always, represent the sharp edge. Because it is typically priced below its fully compensated cost, a cross-subsidized service represents an inherent economic subsidy from other products or services. Like any subsidized service, it attracts more business or users than a non-subsidized, or fully compensated, service. And, in an elastic market, the more it is cross-subsidized, the more business it gets. Cross-subsidization became a much more significant driver of pricing post-Staggers than it was during the regulated era -- it was the why and how of the "race to the bottom" in post-Staggers rates.
And the average manager or investor looks and sees ALL THAT BUSINESS! Let's spend some money on it and get some more.
Well, that is usually about when the pin is pulled on the hand grenade.
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