Datafever wrote: I wouldn't say that what I stated was a definition, per se. It just kind of "makes sense" to me. After all, if an LOB is actually losing money (not covering the variable costs) then I think that it is inarguable that such LOB is being cross subsidized by the rest of the business.
RR ...Captive....Competitive
BNSF... 215.6% 109.1%
CSX... 186.8% 93.1%
NS ...209.2% 102.3%
UP ...210.4% 106.8%
These are averages. A study I participated in two years ago showed that on BNSF for a given commodity there was a variation of 20% either way system wide in competitive areas and ranged from between 240% and 380% in captive areas. In other studies, BNSF's average has been as low as 101% R/VC for competitive traffic.
It is inarguable that there is cross-subsidization occuring by even the narrowest definition of cross-subsidy.
MichaelSol wrote:It is inarguable that there is cross-subsidization occuring by even the narrowest definition of cross-subsidy.
So let me ask you the question that I don't seem to be getting a plethora of responses to:
What is the definition of cross-subsidy?
I thought that the term referred to the subsidy of a money-losing LOB, e.g. the sale of a product at a price less than the cost to manufacture it - something that a manufacturer might do in order to gain name recognition/boost market share.
Certainly the term can't just refer to one LOB being more profitable than another LOB within a company. So what determines when cross-subsidization is taking place? I'm not trying to define the term, I'm trying to understand it.
Datafever wrote:What is the definition of cross-subsidy?
It is a regulatory concept from decades ago. When railroad's prices and services were regulated, government agencies would tell they had to run a money losing service and could make up the difference on the profits from another service. As an example coach passenger rates were held low but the railroads were told they could make it up on their share of Pullman travel. It was almost like a income transfer from wealthy passengers to poorer passengers. The STB no longer has the authority to make such a ruling.
The generic definition of cross-subsidy that I have seen repeatedly is this:
"Cross subsidization occurs when one purchaser pays a relatively high price and thus enables another purchaser to pay a relatively low price.'
True enough. If the game is to earn, achieve or exceed WACC [weight adjusted cost of capital], the market no doubt determines the feasible price mix to achieve the goal. The problem is when a customer is captive. There is no market based price. And this presents the dilemma when a company -- and many do -- utilizes market share pricing rather than marginal cost pricing.
The company can buy more market share -- at lower prices than it would or could ordinarily charge -- if other customers can be forced by their captivity and inelastic demand needs to contribute the additional profit margin necessary to meet the earnings goals of the company. If all the players in a given market have captive shippers, that enables those companies to compete on price for market share at rates lower than any of those companies would or even could otherwise charge those customers. Sometimes they don't have captive customers and still go for market share pricing for a variety of reasons. Auto companies do it all the time, and pay the economic consequences from time to time.
In essence, the customers paying the lower share are subsidized by the very existence of the captive shipper -- receiving services at prices that could not be rationally offered to them based solely on market principles, without the compensating income gained by the company at the other end of the price spectrum.
It is both an artificial subsidy, for some, and an artificial price penalty, for others. It could not exist in either case if genuine market conditions prevailed.
It is not differential pricing, rather it is inverse pricing -- the captive customer often pays more for less service, rather than for a differentiated service.
It subsidizes some customers at the expense of others and disrupts genuine market mechanisms of customers because competing customers receive irrational prices compared to each other, and it affects the competitive outcomes of other producers in other industries as a result. That is a recognized economic negative, introduces inefficiencies into the economy, and is the reason for the regulation.
It is command economy power, given over to a private corporation which dictates price to a customer with no practical alternatives. Our system has been adverse to that principle, as the principle is as deadly to rational investment decision making in private hands as it is in government hands. The active principle is not improved from an economic standpoint simply because the identical power is exercised on behalf of a board of directors rather than a politburo.
The 180% R/VC is a statutory price threshold designed to minimize cross subsidization -- which was one of the key objectives of the Staggers Act in the first place.
The former regulatory requirement of high profit shippers subsidizing low profit services has been replaced by a competitive drive to lower prices below a sustainable return, because and only because of the existence of shippers who can be compelled to pay higher prices to produce the necessary profits.
But, that is still called cross-subsidization because it is not the source of the compulsion that generates the definition, but the result.
MichaelSol wrote:A hypthetical railroad named BNSF has $10 billion in operating expenses. Historically, that breaks out to roughly $7.4 billion in variable costs and $2.6 billion in fixed costs.If the BNSF is charging an average of 160% R/VC, its revenue will be $11.85 billion, showing a net profit of $1.85 billion. That is a 15.63% rate of return on revenue which is substantially above the WACC of the BNSF over the past ten years. At 180%, it would be a 25% rate of return.
A hypthetical railroad named BNSF has $10 billion in operating expenses. Historically, that breaks out to roughly $7.4 billion in variable costs and $2.6 billion in fixed costs.
If the BNSF is charging an average of 160% R/VC, its revenue will be $11.85 billion, showing a net profit of $1.85 billion. That is a 15.63% rate of return on revenue which is substantially above the WACC of the BNSF over the past ten years. At 180%, it would be a 25% rate of return.
You bring up an interesting example here. Let me posit a counter-example:
This hypothetical railroad named BNSF decides to set rates to 160% R/VC across the board. In doing so, it loses 25% of its business to competitors (and I don't care whether those competitors are other railroads and any other means of transportation or if it just means that the shipper goes out of business). Straight up, there is a 25% reduction in variable costs, so VC is now $5.55 billion. But fixed costs only decrease 5% (just for sake of the example) so FC is now $2.47 billion. Total costs are now $8.02 billion. At 160% R/VC, revenue now comes in at $8.88 billion for a profit of $0.86 billion or a 10.7% rate of return on revenue.
If BNSF decides that it wants to return to the same level of profitability (15.63%) that it had before losing all that business, it will need to boost its rates to 171% R/VC across the board. Of course, doing so will drive away even more business...
Ordinarily, textbook production reflects that the variable costs of production fluctuate with changes in product numbers. No less so than with trains. A 20 car train has much the same overall variable costs of operation as a 110 car train, and some differences as well (less fuel, lower capital charges). However, for the smaller train, the cost per revenue unit will be higher than with the big train. But, as a rule, less business higher VC, more business lower VC per unit. Marginal cost pricing theory grants to the railroads the entire variable cost, no matter what it is. That is, 100% of VC are recovered.
The historical FC on BNSF is about 35%-37% of the VC. FC and VC are linked more closely than people might imagine, at least statistically, and at least on railroads. There is certainly an interesting hypothetical out there to imagine "what if", but the 180% R/VC threshold is a very liberal standard, for which we now have 25 years of actual experience and data to draw from.
Too, that liberal threshold permits a wide range of rate making and the average is only that -- a statistical artifact of thousands of independent prices tailored to each competitive market or service need, or "not", as the case may be, and varying as noted above, from a net loss on variable costs to a very healthy profit margin from captive shippers who are plainly subsidizing competitive shippers. Averages, in that sense, are difficult however to budge. Very difficult.
Elasticity plays a large role, and that contributes to the stability of the statistical average. Coal and agriculture are about 60% of the whole RR ball of wax, and the demand for railroad services for those industries are relatively inelastic. For the 31% of RR revenue that is extracted from captive shippers, the elasticity approaches zero.
Datafever wrote: If BNSF decides that it wants to return to the same level of profitability (15.63%) that it had before losing all that business, it will need to boost its rates to 171% R/VC across the board. Of course, doing so will drive away even more business...
Or improve its productivity which is, in general, the long term approach to maintaining profitability. That, of course, is why the economists who designed the deregulation process felt it necessary to impose a marginal cost pricing guideline to restrict cross-subsidization -- the easy alternative to productivity increases is simply to raise prices -- and that tends to be for captive shippers.
That design, then, is important. Productivity improvements are the driving engine of capitalism, not raising prices because it easier. The whole idea of "the market" is to drive price efficiency -- actively compel it. There is no incentive to efficiency in a captive market, for the obvious reason that there is no actual "market." That's why the protections are given to the captive shippers in the Staggers Act and should be enforced.
They do not protect the captive shippers, they protect the economy as a whole.
MichaelSol wrote:The historical FC on BNSF is about 35%-37% of the VC. FC and VC are llinked more closely than people might imagine, at least statistically, and at least on railroads. There is certainly an interesting hypothetical out there to imagine "what if", but the 180% R/VC threshold is a very liberal standard, for which we now have 25 years of actual experience and data to draw from.
The historical FC on BNSF is about 35%-37% of the VC. FC and VC are llinked more closely than people might imagine, at least statistically, and at least on railroads. There is certainly an interesting hypothetical out there to imagine "what if", but the 180% R/VC threshold is a very liberal standard, for which we now have 25 years of actual experience and data to draw from.
Could you provide me with some examples of what is considered FC vs VC? I mean, some things are obvious, like fuel costs are VC while company management is FC. What is track repair? The engineer's (prorated) salary? Or an agent that deals with three shippers in a terminal area? If a track services only one shipper (such as branch line to a coal company), is that track maintenance considered VC or FC? How about a manager (and staff) that provides service to a single intermodal firm? RR ownership of boxcars? Are there guidelines for this somewhere? Or is it up to each individual RR to decide if a particular cost can be allocated to a particular shipper?
MichaelSol wrote:Or improve its productivity which is, in general, the long term approach to profitability. That, of course, is why the economists who designed the deregulation structure felt it necessary to impose a marginal cost pricing guideline to restrict cross-subsidization -- the easy alternative to productivity increases is simply to raise prices -- and that tends to be for captive shippers. That design, then, is important. Productivity improvements are the driving engine of capitalism, not raising prices because it easier. The whole idea of "the market" is to drive price efficiency -- actively compel it. It is not efficient in a captive market. That's why the protections are given to the captive shippers in the Staggers Act and should be enforced.
Or improve its productivity which is, in general, the long term approach to profitability. That, of course, is why the economists who designed the deregulation structure felt it necessary to impose a marginal cost pricing guideline to restrict cross-subsidization -- the easy alternative to productivity increases is simply to raise prices -- and that tends to be for captive shippers. That design, then, is important. Productivity improvements are the driving engine of capitalism, not raising prices because it easier. The whole idea of "the market" is to drive price efficiency -- actively compel it. It is not efficient in a captive market. That's why the protections are given to the captive shippers in the Staggers Act and should be enforced.
Improvement of productivity is another area that seems a little counter-intuitive to me. No, I don't mean that RRs shouldn't improve their productivity, but let me use another example---
VC = 100, R = 180, R/VC = 180% -- shipper is happy
Now if improvements are made resulting in a VC reduction of 20 --
VC = 80, R = 160, R/VC = 200% -- shipper is unhappy even though the rate lowered?
In other words, if the improvement in productivity occurs on the VC side of operations, R/VC will rise even if the full savings of the improvement in productivity are passed on to the shipper.
As the designer of deregulation in America, Alfred Kahn was no dummy. That's how all the world works -- businesses routinely pass on more than 100% of their productivity increases -- and still become more profitable. Passing on less than 100% creates a level of profit which absolutely at some point invites competitors -- and then the rate drops back down, with the new competitors in hot pursuit. That invites the "race to the bottom." A sophisticated manager does not want to be there. Producers always end up yielding more than 100% to the customer, even if they "think" they can do otherwise.
Yet still earn more profit.
That is the genius of the market system, it is genuine win-win, and a careful producer passing through more than 100% will carefully price to minimize competition at that price.
You will note that the R/VC does in fact rise -- but if the equation is completed through to the penultimate factor -- profit -- the higher R/VC % very coincidentally begins to show net profits which are unattainable in a genuine market. The R/VC formula is, in fact, a good predictor of that if you finish the calculation. In that instance, you will see that the seller that is driven by authentic market forces would be compelled to lower the price charged -- pass through more of the productivity -- and the R/VC ratio declines as a result, and both complies with the law and its purpose to simulate market forces in non-market circumstances which is ... to drive productivity increases and price efficiency.
Alfred Kahn was no dummy.
Datafever wrote: Could you provide me with some examples of what is considered FC vs VC? I mean, some things are obvious, like fuel costs are VC while company management is FC. What is track repair? The engineer's (prorated) salary?
Could you provide me with some examples of what is considered FC vs VC? I mean, some things are obvious, like fuel costs are VC while company management is FC. What is track repair? The engineer's (prorated) salary?
Ouch. I am not a railroad accountant and never played one on TV. My first lessons on the topic were from Ernest Poole, Costs -- A Tool for Railroad Management, 1962. I still have the book. To the extent that there are always some discretionary decisions -- arguments -- battles royale -- between what is fixed and what is variable in any industry, the STB prescribes these currently under the UCRS and to the extent that they are statutorily defined for reporting purposes, there is a complete list of such costs which STB uses in its Railroad Cost Program for the specific R/VC function.
Why is it that whoever, by whatever method, attempts to dictate a paradise of "equality" and plenty ends up producing misery and want? There is a certain irony in the collapse of the I. C. C. and the Soviet Union coming within such a short time of each other.
Okay, having read more than anyone would ever want to know about how STB adjudicates shipping rate complaints, I have come to the conclusion that the STB includes absolutely everything that could possibly be attributed to the cost of supporting one particular shipper to the variable costs side of ledger. I've even seen line items such as the number of steel welding guys that are needed to repair cars.
I'm left with wondering exactly what is on the fixed costs side as those costs are not mentioned. No real need to mention those costs as the pricing ratio is against only the variable costs.
One statement that I ran across a couple of times that has me rather baffled. I don't have the exact quote, but the STB makes the claim that even if R/VC is less than 100%, that is not necessarily an indication that cross-subsidization has taken place. The only thing that I can suggest is that the phrase "not necessarily" in this case means that there is a distinct probability (however small) that under the most awesome of circumstances it just might be possible for R/VC to be less than 100% and yet cross-subsidization has not taken place.
bobwilcox wrote:The STB does not care about cross subsidies. The only thing they care about in a rate case is if a rate is "reasonable". If the rev/lrvc is over 180 and their is a lack of competition the railroad has a very heavy burden to prove their rate is reasonable.
That is accurate. Cross subsidies are part of the economic theory that underlies the Staggers Act and the 180% R/VC. Railroads were given free reign for so long as the rate was under 180%, including the right to cross-subsidize to their heart's content for so long as they did not exceed the rate threshold. Administrative agencies are not good places to undertake broad discussions of policy and economics.
The 180% threshold is the tangible economic (and legal) expression of a large body of economic theory and discussion to achieve underlying economic goals for society. Railroads bear a burden of proof of "reasonableness" above that threshold because on a case by case basis there can, in fact, be legitimate reasons under the marginal cost theory as to why 180% R/VC does not offer a reasonable rate of return -- a high fixed cost installation, for instance, to serve a given shipper.
As with any legislation, the trick is in the proper administration of the intent of the law, as applied on that case by case basis referred to above. And, as with any agency charged with that administration, the execution of Congressional intent is often less than stellar. Nothing new about that.
Part of the momentum leading to the Staggers Act was the increasing bureaucracy of the ICC (and FRA) in dealing with Congressional intent, coupled with (often conflicting) court decisions. Congress acted, nearly every 20 years, to try and fix the Interstate Commerce Act that the railroads themselves had originally clamored for. As the original post on this thread shows (I take a different lesson from the PRR drama), the railroads were often their own worst enemy, and most typically it was the opposition of other railroads that prevented given railroads -- and ultimately the industry as a whole -- from adapting to changing times.
Just as the rail industry clamored for ICC regulation as relief from plummeting rates, the rail industry clamored for deregulation -- and was stunned when rates plummeted thereafter. Sometimes an economic historian might wonder just how well this industry understands its own business model.
The key point, however, is that rates were not entirely deregulated -- the 180% R/VC threshold is, in fact, a regulatory threshold, for the reasons discussed in the thread above. Just as under the ICC, the railroad then has to justify the rate if it is challenged by the shipper.
Is the STB doing any better of a job than the ICC did? Well, federal courts have already ordered a different standard of measure for rate reasonableness than that identified as appropriate by the economists who designed the system and as ordered by Congress. The system for making the determination has evolved into a cumbersome, very expensive, and time-consuming process.
It is beginning to sound like the ICC.
MichaelSol wrote: [For each major railroad in 2003, the average R/VC of captive and competitive traffic was as follows: RR ...Captive....CompetitiveBNSF... 215.6% 109.1%CSX... 186.8% 93.1%NS ...209.2% 102.3%UP ...210.4% 106.8%These are averages. A study I participated in two years ago showed that on BNSF for a given commodity there was a variation of 20% either way system wide in competitive areas and ranged from between 240% and 380% in captive areas. In other studies, BNSF's average has been as low as 101% R/VC for competitive traffic. It is inarguable that there is cross-subsidization occuring by even the narrowest definition of cross-subsidy.
[For each major railroad in 2003, the average R/VC of captive and competitive traffic was as follows:
Well, it won't surprise many of you to read that I strongly disagree with Mr. Sol, his numbers, his "study" and his conclusion.
When someone does a "study", or analysis, like this, a final step is to ask yourself "do my results make sense?" If they don't, there is a need to go back and check the methodology used.
Mr. Sol's conclusion of a sure thing "cross-subsidization" just doesn't make sense. No for profit corporation would willingly subsidize a customer. As Bob pointed out, in the past the government forced cross-subsidization through their economic regulation. But that's pretty well gone now so Mr. Sol's claim of voluntary cross-subsidization flies in the face of all reason.
Time to check things out. The first question is obvious. How did Mr. Sol classify customers as "Captive" or "Competitive". This is a very subjective thing, but he seems to have readily been able to put rail customers in two very distinct classifications. So my first question to Mr. Sol is: "What criteria did you use to classifiy rail shippers as captive vs. competitive?"
Datafever wrote:What is the definition of cross-subsidy?BobWilcox: It is a regulatory concept from decades ago.
BobWilcox: It is a regulatory concept from decades ago.
greyhounds wrote: Mr. Sol's conclusion of a sure thing "cross-subsidization" just doesn't make sense. No for profit corporation would willingly subsidize a customer...As Bob pointed out, in the past the government forced cross-subsidization through their economic regulation. But that's pretty well gone now so Mr. Sol's claim of voluntary cross-subsidization flies in the face of all reason.
Mr. Sol's conclusion of a sure thing "cross-subsidization" just doesn't make sense. No for profit corporation would willingly subsidize a customer...As Bob pointed out, in the past the government forced cross-subsidization through their economic regulation. But that's pretty well gone now so Mr. Sol's claim of voluntary cross-subsidization flies in the face of all reason.
Ford, GM, and Chrysler do it all the time. They admit it. They are clearing inventories, they are attempting to retain market share, sometimes they are simply driving up the risks of entry for prospective market entrants. Obviously, this is something you simply know nothing about, as you admit.
Cross subsidization is all over the place. I am not going to try and justify here what you should have learned in school, or especially at International Harvester which did it all the time. I will suggest this.
Go to the bookstore that handles business books.
Go to the section of books that are written by Michael Porter. I am simply using his name as an example because people genuinely familiar with management will instantly recognize his name as one of the foremost authorities on business strategy.
Go to the book entitled Competitive Advantage: Creating and Sustaining Superior Performance.
It is currently one of the best selling management books on the market.
Turn to Chapter 12.
The subtitles in that chapter are as follows:
CROSS SUBSIDIZATION
Conditions Favoring Cross SubsidizationRisks of Cross SubsidizationCross Subsidization and Industry EvolutionStrategic Implications of Cross Subsidization
Please read it. "It flies in the face of all reason," but it will educate you on the subject.
Then you can apologize.
MichaelSol wrote: greyhounds wrote: Mr. Sol's conclusion of a sure thing "cross-subsidization" just doesn't make sense. No for profit corporation would willingly subsidize a customer...As Bob pointed out, in the past the government forced cross-subsidization through their economic regulation. But that's pretty well gone now so Mr. Sol's claim of voluntary cross-subsidization flies in the face of all reason.Ford, GM, and Chrysler do it all the time. They admit it. They are clearing inventories, they are attempting to retain market share, sometimes they are simply driving up the risks of entry for prospective market entrants. Obviously, this is something you simply know nothing about, as you admit.Cross subsidization is all over the place. I am not going to try and justify here what you should have learned in school, or especially at International Harvester which did it all the time. I will suggest this. Go to the bookstore that handles business books. Go to the section of books that are written by Michael Porter. I am simply using his name as an example because people genuinely familiar with management will instantly recognize his name as one of the foremost authorities on business strategy. Go to the book entitled Competitive Advantage: Creating and Sustaining Superior Performance.It is currently one of the best selling management books on the market.Turn to Chapter 12.The subtitles in that chapter are as follows:CROSS SUBSIDIZATIONConditions Favoring Cross SubsidizationRisks of Cross SubsidizationCross Subsidization and Industry EvolutionStrategic Implications of Cross Subsidization Please read it. "It flies in the face of all reason," but it will educate you on the subject.Then you can apologize.
But you didn't answer the question. What criteria did you use to classify rail customers as "captive" or "competitive"?
greyhounds wrote: Well, it won't surprise many of you to read that I strongly disagree with Mr. Sol, his numbers, his "study" and his conclusion.When someone does a "study", or analysis, like this, a final step is to ask yourself "do my results make sense?" If they don't, there is a need to go back and check the methodology used.
Greyhounds once strongly argued that wheat rates had gone down over the past 25 years, and offered every misreading of every study he could lay his hands on, refusing even to read the explicit texts of the studies he cited to which stated that prices had gone up.
He was vociferous, adamant, expending a great deal of time and energy, even though he has no experience at all with the wheat industry or its rate history-- at one point selecting out of seven or so commonly used inflation indexes the only one that had nothing whatsoever to do with either railroads or agriculture to try and "prove" his point. It was all heat and no light. So much for appropriate methodology.
It was interesting then to see the October 6, 2006 GAO study which showed ... wheat rates had gone up, and in fact GAO singled them out as one of the few categories of rail traffic that had in fact gone up over that time.
So, it is interesting now to see that he has a methodology for "stepping back to check the methodology used."
Judging by the wheat rate example, I gather he has always considered himself exempt from the analytical process he describes as important.
In nearly every study I have ever seen, the 180% R/VC threshold is used as the measure of captivity for study purposes. The underlying econometric studies found captivity to exist in typical market settings of around 160% R/VC, but in any case, the 180% R/VC used was a "probable" in statistical terms, even though railroads got the benefit of the doubt when the statute, a political compromise, defined it as more of a "maybe."
I have no doubt the captivity study I cited above followed the industry standard terminology.
The study was published in Rail Price Advisor, an industry periodical published by Escalation Consultants, Inc. of Gaithersburg, Maryland. It has since been widely referenced elsewhere. CURE, naturally, references it on their website and maintains it there for permanent reference.
They have a more detailed chart from an earlier study there as well.
http://www.railcure.org/pdfs/captivitychart.pdf
With thousands of pages of testimony and commentary available which in many cases references the 2003 study, I have found no industry refutation of the either the methodology or the results.
By defining captivity as R/VC > 180%, then it is rather obvious that by definition the captive shippers will be paying a higher R/VC than the non-captive shippers. In fact, the average R/VC of those shippers who pay over 180% MUST be over 180%, while the average R/VC of those shippers who pay under 180% MUST be under 180%.
In fact, you would find similar results no matter where the line was placed - 140%, 200%, whatever.
Datafever wrote: By defining captivity as R/VC > 180%, then it is rather obvious that by definition the captive shippers will be paying a higher R/VC than the non-captive shippers. In fact, the average R/VC of those shippers who pay over 180% MUST be over 180%, while the average R/VC of those shippers who pay under 180% MUST be under 180%.In fact, you would find similar results no matter where the line was placed - 140%, 200%, whatever.
Here's the solution: JUST INTRODUCE INTRAMODAL COMPETITION SYSTEMWIDE! Then we can all dispense with these subjective, manipulatable definitions of what *real* rail captivity is.
No doubt, it would mean one thing if the average was 181% for captive shippers and the average 120% for competitive -- as opposed to 80% for competitive and 500% for captive.
It is true that in any study, the subject populations have to be defined somehow. It is also true that statistical measure of each population then describes only that population. But, that's how populations are compared.
greyhounds wrote: As Bob pointed out, in the past the government forced cross-subsidization through their economic regulation. But that's pretty well gone now so Mr. Sol's claim of voluntary cross-subsidization flies in the face of all reason.
To me, it is baffling when someone like Bob takes a position that is so contrary to actual business practice -- there is a genuine reality out there on matters such as this, and it had nothing to do with regulation per se. I just simply don't understand how someone can be so unaware and yet speak to the issue claiming a credibility on it.
And, it's not like you need to be running an actual business at the moment to be aware of it. Cross subsidization is described in nearly every strategic management book I have ever seen as an important business tool -- but one with sharp edges that can profoundly hurt the user... or innocent bystanders such as captive wheat shippers.
The sharp edges are the problem. Greyhounds inadvertently offers the explicit rationale for the 180% R/VC threshold. It's the "safety equipment" on this particular management tool.
Greyhounds is correct on one point. I am sure it was an accident. But, his idea of cross subsidization, when taken too far, does in fact "fly in the face of all reason."
Congress stated that the inquiry as to when cross subsidization does, in fact, "fly in the face of all reason" begins when the rate exceeds 180% R/VC.
Greyhounds' reasoning on the topic, that cross subsidization can be toxic is entirely true. And Congress has acted to limit such cross-subsidization. I accept the fact that Greyhounds believes the 180% R/VC threshold is entirely appropriate to limit extremes of cross-subsidization because, as he specifically states, at some point such cross subsidization is beyond all reason, and I fully agree.
Congress obviously agreed as well.
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).
MichaelSol wrote: Greyhounds once strongly argued that wheat rates had gone down over the past 25 years, and offered every misreading of every study he could lay his hands on, refusing even to read the explicit texts of the studies he cited to which stated that prices had gone up. He was vociferous, adamant, expending a great deal of time and energy, even though he has no experience at all with the wheat industry or its rate history-- at one point selecting out of seven or so commonly used inflation indexes the only one that had nothing whatsoever to do with either railroads or agriculture to try and "prove" his point. It was all heat and no light. So much for appropriate methodology.It was interesting then to see the October 6, 2006 GAO study which showed ... wheat rates had gone up, and in fact GAO singled them out as one of the few categories of rail traffic that had in fact gone up over that time.So, it is interesting now to see that he has a methodology for "stepping back to check the methodology used."Judging by the wheat rate example, I gather he has always considered himself exempt from the analytical process he describes as important.In nearly every study I have ever seen, the 180% R/VC threshold is used as the measure of captivity for study purposes. The underlying econometric studies found captivity to exist in typical market settings of around 160% R/VC, but in any case, the 180% R/VC used was a "probable" in statistical terms, even though railroads got the benefit of the doubt when the statute, a political compromise, defined it as more of a "maybe."I have no doubt the captivity study I cited above followed the industry standard terminology.The study was published in Rail Price Advisor, an industry periodical published by Escalation Consultants, Inc. of Gaithersburg, Maryland. It has since been widely referenced elsewhere. CURE, naturally, references it on their website and maintains it there for permanent reference.They have a more detailed chart from an earlier study there as well.http://www.railcure.org/pdfs/captivitychart.pdfWith thousands of pages of testimony and commentary available which in many cases references the 2003 study, I have found no industry refutation of the either the methodology or the results.
And so Mr. Sol continues to refuse to answer the question. What criteria did he use to define a "captive" rail customer vs. a "compeitive" rail customer in his "study".
There's no reason for an honest man to duck, bob and weave- an honest man will simply answer the question. He can quantify and qualify all he wants. There has been no call on my part for a "Yes/No" answer. But I did ask him directly how he classified rail customers as "captive" or "competitive".
And he don't say. Ask yourselves, are Sol's actions those of an honest man?
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?
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?
Nope, Mr. Sol said he "Participated" in the study. I ask a question and he don't answer.
Datafever wrote:Well, maybe it's just me, but my reading of his post is that there was only one study that he participated in, and that was one that identified levels of R/VC in "captive areas", something which could more easily be defined than "captive shippers".
That's exactly right. THAT study, which I did participate in, broke export wheat shipments down by origin and by carload category (1-25, 26-51, etc), and performed a multivariate analysis of both distance to ports and distance to the nearest competitor railroad or barge facility from the point of origin -- the point of origin being every grain elevator on the BNSF system.
We didn't have a R/VC definition for captivity or non-captivity, so I can't tell you that we used one since the study wasn't designed that way -- it was designed to show us where captivity occured as a geographical statistic. So, I guess my answer is that Greyhounds asked the wrong question -- we didn't define it, we let the results define it.
The bound volume of the study is at the office, and I am at home, so this is just from memory, but the distances described above were requested in blocks -- less than 300 miles, 300-500 miles, 500-800 miles, 800-1200, and 1200 and up, something like that. These were distances of both transit and nearest competitor, so while it would be difficult to find an origin 800 or 1200 miles from a competitor, for example, there were plenty of transit distances in that range. The less than 300 mile distance might have been broken down further -- I don't recall as we discussed a variety of alternatives and fiddled with any number of them. I think we ran one alternative at standard 200 mile increments as well, but I don't recall the data outcomes from that.
As I recall, the R/VC rate that we established for the under 300 mile competitor distance ranged from about 86% to about 106% for traffic traveling 800 miles or more. For grain traffic located between 500 and 800 miles, traveling 800 miles or more, the rate ranged between 240% and 380% R/VC. These represented the extremes of the R/VC data generated, clearly showed where the competitive and non-competitive locations were, with a 97% correlation in the 500-800 mile range between transit distance and the R/VC factor using regression analysis. The signficance of that to us was that it indicated virtually no outside influences of any kind on the rate -- i.e. competition -- at that level. Both the high degree of correlation and the very high R/VC ratios indicated to us that the rates were truly captive rates and that the shippers were truly captive shippers.
The lowest correlation was somewhere in the 57% range, for traffic in the 300-500 mile category -- again, if I am recalling correctly. We looked at a number of explanations for why rates varied so much in that specific range and ultimately decided that highway location appeared to be a significant factor in some areas and that trucks played a significant role in rate determination in some places and not others depending on the available highway system.
Our community is FREE to join. To participate you must either login or register for an account.