Rail Rates Rock!

Trains Magazine General Discussion
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Rail rates rock state companies

(The following article by Marv Balousek was posted on the Wisconsin State Journal website on January 3.)

MADISON, Wisc. – Rail customers in Wisconsin say they’re struggling to pay higher shipping rates while national railroads report record- setting operating income.

Two electric utilities in the state say rising coal shipping costs caused them to boost electricity rates. A third is suing Union Pacific Railroad, claiming lack of service and excessive shipping charges going back to 2003. Higher rail shipping rates for ethanol, grain and paper also are affecting other Midwestern companies.

Railroad officials say higher operating income is needed for upgrading aging tracks and equipment to handle more freight and provide better service.

Rail rates are coming under increasing scrutiny. The state Public Service Commission held hearings last fall as part of a study of rail shipping rates. Sen. Herb Kohl, D-Wis., again plans to introduce a bill to remove antitrust exemptions that protect freight railroads from competition. The bill went nowhere last year, but this time Kohl is expected to chair the Senate’s Antitrust Subcommittee.

Badger CURE (Consumers United for Rail Equity), a coalition of about 40 rail shippers, was the first statewide organization to challenge rising rail rates. Spokesman John Sumi said the group wants the federal Surface Transportation Board, which regulates rail rates, to make it easier for shippers to challenge higher rates. If that doesn’t work, he said, the industry should lose its antitrust exemption.

“When railroads talk about their level of investment, these are big numbers,” Sumi said. “What of this investment is helping Wisconsin and the upper Midwest? Or, is the investment more aimed at taking containers off ships from China to Wal-Mart distribution centers?”

Dairyland Power Cooperative of La Crosse hiked its electricity rates

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While looking at it with extremely narrow viewpoint and being strictly a train lover I suppose one might thinkj that it is great that rails are hiking rates so much. But the RR’s don’t live in an economic vacume and as the economy cycles as it does, their volume’s rise and fall.

This means they end up coming back to customer’s they just got done telling to take or leave rate hikes of 10,15,20 and even 50%, and now try to put on the false face that they are business partners and friends and come grovelng for volume.

The big riff between competitive busness and the railroads (Essentially monopolies for the most part) is that competitive companies face loosing business unless they provide good products or services, with good customer service and problem resolution, proper billing and competitive pricing, if not the customer can easily shift to another supplier. The railrodas, particularly with captive customers and particularly when capacity is tight can charge what they want and it’s tough luck for the shipper, give lip service to service problems, ask the shipper to resolve the railroad’s flawed billing practices and then ask teh shipper to pay finance charges after fixing the RR accounting free of charge and many more things that infuriate shippers. If my company tried a fraction of the gimicks teh RR’s do we would have no customers in no time, but the railroads can get away with it.

Myself and another fello handle all rail issues for our company, 35 plants across teh US and Canada and our sle focus is taking every pound of freight off the railroads, be it raw material changes, source of purchase changes to allow trucking, truck backhauls, we are even looking at barge very seriously. We have a couple major raw materials that are very possibly going to come imported and replace previously railed raw materials. This adds to another problem, drastically increasing RR rates are adding to teh cost of manufacture in America

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While looking at it with extremely narrow viewpoint and being strictly a train lover I suppose one might thinkj that it is great that rails are hiking rates so much. But the RR’s don’t live in an economic vacume and as the economy cycles as it does, their volume’s rise and fall.

This means they end up coming back to customer’s they just got done telling to take or leave rate hikes of 10,15,20 and even 50%, and now try to put on the false face that they are business partners and friends and come grovelng for volume.

The big riff between competitive busness and the railroads (Essentially monopolies for the most part) is that competitive companies face loosing business unless they provide good products or services, with good customer service and problem resolution, proper billing and competitive pricing, if not the customer can easily shift to another supplier. The railrodas, particularly with captive customers and particularly when capacity is tight can charge what they want and it’s tough luck for the shipper, give lip service to service problems, ask the shipper to resolve the railroad’s flawed billing practices and then ask teh shipper to pay finance charges after fixing the RR accounting free of charge and many more things that infuriate shippers. If my company tried a fraction of the gimicks teh RR’s do we would have no customers in no time, but the railroads can get away with it.

Myself and another fello handle all rail issues for our company, 35 plants across teh US and Canada and our sle focus is taking every pound of freight off the railroads, be it raw material changes, source of purchase changes to allow trucking, truck backhauls, we are even looking at barge very seriously. We have a couple major raw materials that are very possibly going to come imported and replace previously railed raw materials. This adds to another problem, drastically increasing RR rates are adding to teh cost of manufacture in America

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Slotracer

I am a bit confused. You say that the railroads are a monopoly, which by defination means that they have no competition and there is no other service available to haul your freight. Then you report that you are shifting frieght to trucks and considering barge service because they are offering better rates and service.

May I ask which is it?

/s/ Retired transportation service and shipper person.

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Markets come and markets go…and woe be it to the corporation or industry that does not take advantage of the market when it gets the opportunity. Despite all the rail customers gnashing of teeth about rail rates…the rail industry as a whole has not earned its cost of capital since WW II. For the first time in my Baby Boomer life the railroads have some market power in being able to set compensatory rates and are taking advantage of it as any good business does.

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How many industries have?

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The salient point being made here is that the railroads are cross subsidizing overseas imports with those increased rates for domestic shippers. The CURE spokesman makes this perfectly clear. I doubt you’d have as much of an uproar if those rates were going 100% back into improving the coal and grain conduits. Instead, most of money from those rate increases is going to improve the ISO double stack corridors.

And therein lies the rub!

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Do we really have to go back to the modal preference debate here? Do the words “product differentiation” mean anything to you, or do you percieve such things to be inherently homogenous and elastic in terms of transportability?

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I knew this thread would bring the yahoos out…FOFLMAO…[8D]

LC

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And they are playing their favorite theme song…SSDD…

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Michael - I would like to know. How about a list of industries that have earned their cost of capital and a list of industries that have not earned a cost of capital? It will give you chance to show us what anaylitical skills you learned on your way to being awarded your bright and shiny brand new MBA.

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There are no such cross subsidies. You and Sol just keep saying there are - as if saying it makes it so. But you have not produced a hint of proof of one such “cross subsidy”

You might want to read this:

http://assets.wharton.upenn.edu/~faulhabe/cross%20subsidy%20analysis.pdf

Now go argue with “Perfesser Faulhaber” of “The Wharton School”.

For a cross subisdy to exist a service or product must be sold at below its incremental cost. And niether you nor Sol has one bit of evidence that one pound of freight is moving below its incremental cost on the US/Canadian railroad network.

BTW, there is a very huge Wal-Mart DC near Tomah, WI. C.U.R.E. is a hack political organization with the purpose of transfering money from the railroads to its members through the influence of public opinion and legislation.

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My purpose in asking the question was not to supply the answer, but to look to the basis for the assertion without doing the gentleman’s work for him. The answer might surprise him.

You could do the same. Perhaps you might start with Morningstar’s Cost of Capital Yearbook.

The endeavor might, for instance, save you the trouble of asserting that cross-subsidization was a regulatory phenomenon only, as you recently asserted, when in fact you were dead wrong.

Don’t know what motivates you …

As I have suggested specifically to you in the past, if you have a proposition to make, do your own homework and support your thesis accordingly. That’s the honorable thing to do.

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Did you get confused during the marketing course? Cause that is the part where I heard of “product differentation”

Here is a guy who actually has the job of deciding how his company goods are to be shipped and he has decided that he will use the mode that provides the better combination of price and service. Tell me how that is not a choice between competitors.

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The author states that the analysis is for a regulated company.

Intermodal is not regulated.

See: The Staggers Act.

Railroads are not barred from cross-subsidizing traffic, they are only barred from charging unreasonable rates to captive shippers in order to do so.

“In the paper, I use both incremental cost and stand-alone cost as tools to define subsidy-free prices. In brief, if the revenues of a regulated enterprise just cover total economic costs, then all prices are subsidy-free if the revenues of each service and each group of services is at least as great as the incremental cost of that service or group of services; equivalently, prices are also subsidy-free if the revenues of each service and each group of services is no greater than the stand-alone cost of that service or group of services. I show in the paper that under the assumption that revenues equal economic costs, these two tests for cross-subsidy are equivalent.” “CROSS-SUBSIDY ANALYSIS WITH MORE THAN TWO SERVICES,” Gerald R. Faulhaber. 2002.

It is a note to supplement a prior paper, and is unpublished. There is no peer review. Since the comments on the thread to which you are responding are in regard to intermodal activity, whic

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“Rail Rates Rock” … Try saying that as fast as you can!

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With or without drooling?

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Economic theory is nice and all, but what really matters is that the number of shippers has always been much larger than the number of railroads. And in our system of government that is the bottom line that counts the most.

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It is pretty much standard that anything manufactured or assembled today is coming from overseas. I took a pretty good look at the Christmas presents I purchased and found most items were.

Now, I ask you…is this because of the railroad lines built, or the manufacturers and retailers who are building/buying these products? The rail lines are there to transport and that is where the growth is today.

Had an interesting discussion with a customer recently. He is a very successful owner of a trucking company which distributes chemicals. He has built his own railyard south of Chicago and transfer the loads to trucks for delivery. He indicated more and more chemicals are being imported. I asked if it was due to the intermodal rates being lower. He looked at me and shook his head saying something to the effect there are almost no environmental laws in China and other parts of the world. Chemical companies, he stated, have moved to those areas to lower costs and basically have their way with the environment.

So, when CURE chemical members state their case that the rails are raping them…just what are they actually trying to accomplish when it appears their industry is moving in mass to areas where there are few laws and little enforcement?

ed

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Chemical manufactures that belong to CURE, Dow, etc., have had large chemcial plants in China for years. When they make a decision to supply a markt such Chicago with a particular product they will select from several plants in Asia, Europe and North America.