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 exam
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 (varia
Also note within the second sentence “…in theory …”.
[quote user=“Datafever”]
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 (varia
Frankly, the GAO recognizes that there are situations where other modes of transportation compete with rail. It would be sloppy of them not to. The GAO does not consider that all modes of transportation are always competitive with rail. But they do recognize that certain commodities can be shipped by alternative means for certain distances. And they also recognize that rail competes against rail where multiple service providers are present.
Rail and truck compete fiercely in certain arenas. To imply that rail and truck never compete is to completely ignore the business that has gone from rail to truck for its entire transport. It would also be to ignore that the DOT has allotted monies to various rail upgrades in order to reduce truck traffic in certain areas.
What may have confused you is that the paragraph that I cut and pasted was in the much larger context of shippers that have access to only one railroad, that is to say, where there was no rail-rail competition in effect.
[quote user=“greyhounds”]
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 ca
[quote user=“arbfbe”]
[quote user=“greyhounds”]
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
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
?.
The thread was about cross subsidization of traffic, in effect the railroad “taxing” one shipper with higher rates to cover more of the fixed costs to allow anothe
No they’re not. They’re not specifically related to anything. Cost per mile of what?
[quote user=“arbfbe”]
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 fix
[quote user=“arbfbe”]
The thread was about cross subsidization of traffic, in effect the railroad “taxing” one shipper with higher rates to cover more of the fixed costs to allow
Except, that’s the theory, not the real world. Look at intermodal.
It has been demanding the most capacity and growth resources. Nearly all new construction goes to meeting intermodal demand. Enormous resources are being required, compared to, say, wheat. Yet, wheat pays the highest prices, and is one of the few categories of freight rates that GAO found had increased, rather than decreased, since Staggers.
“Rail transportation companies [have] carload rail prices standing 31.0% higher than they were five years ago. … In contrast, intermodal service prices were [only] 13.1% higher than they were in 2001.”
Elizabeth Batz, “Pricing Across the Transportation Modes,” Logistics Management, 5/1/2006.
“Seems” like rates ought to be a function of capacity – problem is in offering a rational explanation why they obviously aren’t – and why other freight is paying the cost – cross-subsidizing – of the enormous investment required for intermodal.
There is no cross subsidy.
Investment decisions by companies are made using projections of the discounted (for risk and time value of money) cash flow into the future. Cash flow is a function of margin (revenue less cost) and volume. Intermodal produces less margin but much more volume. A 240 container stack train will produce gross revenue of around $120 for every mile it moves. And if it’s loaded with international containers, the railroad will have no equipment ownership expense outside the locomotives. (they will pay per diem and mileage on the well cars.)
And those containers will produce that revenue in both directions, unlike a grain car. A grain car goes back empty at no revenue. The containers can be revenue loads both ways.
No rational firm will cross subsidize any line of business (exception: start up lines of business that are projected to produce positive cash flows in the future.) To maintain otherwise is to maintain that railroad management is acting irrationally. They’re not.
To maintain they are is what is irrational. There is no cross subsidy.
You seem to be insinuating that RR mgt has no idea what their the ROI is for their capital projects. That they’d “steal” huge sums of money from profitable LOBs to sink into marginal intermodal business. As if they have no idea of their margins. Really!
To state the obvious:
Wheat is lousy business. It only moves when the price is right and then EVERYBODY wants their wheat moved. Asset productivity is lousy. BNSF has the right idea with their capacity auctions.
Intermodal is steady, growing, very profitable business, on the whole. A
[quote user=“oltmannd”]
You seem to be insinuating that RR mgt has no idea what their the ROI is for their capital projects. That they’d “steal” huge sums of money from profitable LOBs to sink into marginal intermodal business. As if they have no idea of their margins. Really!
To state the obvious:
Wheat is lousy business. It only moves when the price is right and then EVERYBODY wants their wheat moved. Asset productivity is lousy. BNSF has the right idea with their capacity auctions.
Intermodal is steady, growing, very profitable business
[quote user=“MichaelSol”]
[quote user=“oltmannd”]
You seem to be insinuating that RR mgt has no idea what their the ROI is for their capital projects. That they’d “steal” huge sums of money from profitable LOBs to sink into marginal intermodal business. As if they have no idea of their margins. Really!
To state the obvious:
Wheat is lousy business. It only moves when the price is right and then EVERYBODY wants their wheat moved. Asset productivity is lousy. BNSF has the right idea with their capacity auctions.
Intermodal is steady, growing, very
Or it does, if the capacity constraint is something different. My point is, your generalization was one of those generalizations that is true or isn’t true, depending on [fill in the blank].
Don’t know how it is in your part of the country, but the BNSF grain fleet is utilized almost continuously. You may not think that 20 year old (average), paid-for equipment, operating at between 15 and 20 cycles annually is good business – and ag generates the highest carload revenue of any marketing group.
Asset productivity is very good in this instance on this railroad. Compared to the labor intensive handling required for intermodal, a shuttle grain train is almost an entirely automated process.
Well, sure, all generalizations fail somewhere. If they didn’t we’d call them laws.
Conversion of grain from loose car to unit shuttles and/or large blocks is certainly a good thing as is BNSF’s capacity management scheme for grain.
I’m not so sure why you think intermodal is labor intense. The terminals are capital intense but the gate, inspection, positioning and loading are not labor intensive -15 to 20 man minutes per box total.