…and, them may purposely wring a dying LOB dry in order to support a more lucrative LOB. That is not cross subsidization, either. It’s just good busine
What does LOB stand for? Thanks
Groan, Well here we go again. Greyhounds started with his model assinging $1000 per car load of coal to fixed costs. Now he comes along and says, “(You can not allocate fixed cost to any specific movement - you have to cover them with your entire traffic base, but you can not allocate them. The only way the ethanol shows a loss is through the impossible allocation of fixed costs to the movement.)” So which is it, can you assign fixed costs to reveue cars or not? You cannot have it both ways.
So here is my plan. I will not read any more of your posts and thus will not be tempted to reply to any more of them. Perhaps that way you can keep a straight line of thought instead or bouncing around the spectrum in order to be contravailing.
Also, please note. Though containers have the potential to be loaded bidirectional the reality is the loaded movements eastward with imports far exceeds the loaded westbound boxes loaded with export or domestic product.
Line Of Business
My problem with this statement is that there seems to be a facile generalization for every scenario by which the posters propose how the “real world” works, then when faced with contrary evidence, an opposing facile generalization is substituted. The real world must be more elusive than alleged.
In this instance, congestion and capacity problems are undeniably on the intermodal corridors. Is that a reasonable test of the statement? Well, it ought to be – it represents a big chunk of business, the evidence is strong, and it ought to fit the proposition, in a rational world that is authentically market driven.
Yet, since the year 2000 the rail price index has increased approximately 25.7%, while intermodal rates have increased only 11.5%, among the lowest of all categories. Real growth in intermodal rates has represented a decline in the rates over the time period, even as costs have increased, and particularly both variable and fixed costs associated with the traffic.
With a declining rate even at capacity, will an increase in fixed costs to create additional capacity generate greater profit? Can an econometrician make a reasonable claim that the company will increase its profits? Well, according to your proposition, if capacity is increased – if a line has excess capacity – rates will be lower … yet rates are declining, even though at capacity, contrary to the proposition that rates should have increased because of the specific constraint of capacity as you specifically proposed.
Whew, you may have a logic in there somewhere, but perhaps the theory proposed doesn’t actually match reality very well – and
Could someone provide me with a definition of cross subsidization as it applies to railroad pricing?
In my mind, a LOB is only being cross subsidized if revenue is less than variable costs. From the posts on this thread, it appears that there are other definitions being used. Anyone?
The STB standard is 180% of revenue to variable cost. Thus, in the railroad context any rate structure which results in an R/VC of less than 180% is probably being cross subsidized by the rate structure in which revenues exceed variable costs by more than 180%. Compare that to your statement above, where you believe cross subsidization only happens when revenues are less than 100% of variable costs. For the record, the lowest R/VC ratio that I know of is 108%, so by your definition there is currently no cross subsidization taking place.
Whether the 180% measure itself is too arbitrary is another discussion altogether.
Thanks Datafever.
I am aware that the STB uses the 180% value to determine potential captive shippers (per Staggers), but I have not read anything that would indicate that the 180% value is used to define cross subsidization. Would you happen to have any links to information that would validate that?
If one shipper pays 181% R/VC and another shipper pays 179% R/VC, would you say that cross subsidization has taken place? If that were a valid criteria, then any shipper that paid a higher R/VC percentage would be cross subsidizing any other shipper that paid a lower R/VC regardless of the actual percentage.
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.
The reason that I brought it up is bec
Any box moving in either direction, loaded or empty, is a revenue move except for RR controlled equipment, which is a shrinking piece of the pie.
[quote user=“Datafever”]
I am aware that the STB uses the 180% value to determine potential captive shippers (per Staggers), but I have not read anything that would indicate that the 180% value is used to define cross subsidization. Would you happen to have any links to information that would validate that?
If one shipper pays 181% R/VC and another shipper pays 179% R/VC, would you say that cross subsidization has taken place? If that were a valid criteria, then any shipper that paid a higher R/VC percentage would be cross subsidizing any other shipper that paid a lower R/VC regardless of the actual percentage.
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.
The reason that I brought it up is because t
You seem to be throwing things my direction that I have never run across before. That doesn’t mean that you are wrong, it just means that my research hasn’t encountered what you are saying. Could you provide a reference or two to back this up?
From what I have read, revenue adequacy is determined by return on investment. Further, it is my understanding that when Staggers was originally proposed, 160% R/VC was going to be the cap. This was subsequently modified to 180% and then not implemented as a cap. If it had been implemented as a cap, then by what you said, no railroad could ever be revenue adequate.
The GAO does not use the 180% R/VC as a method for determining captive shipper status as an arbitrary measure. Staggers defines a “potential captive shipper” as one whose rate exceeds 180% R/VC. In other words, the term is a legal definition. For the GAO to willy-nilly use a different definition would be silly.
In so far as your definition being a more logical method, I am not convinced. Perhaps we could run through some scenarios and you could elaborate.
You know, these personal attacks out of Montana got old a long time ago.
I intentionally set up a simple situation where a rail line had only one movement. In that scenario, that one movement obviously had to carry the entire cost of the line, both fixed and variable cost.
I then introduced a second movement of freight that had to be sold below average cost to demonstrate that such a movement could be sold at a profit to the railroad company as long as it exceeded variable costs.
You now falsely accuse me of “assigning” the fixed cost in the initial situation. No, I didn’t “assign” them - but since there was just that coal business on the line, nothing else was there to carry those cost.
You evidently can’t/won’t understand this so you resort to personal insults. And I’m not ever going to forget your attack on me for my involvement in Greyhou
Here we go again, a personal attack about personal attacks… the topic is an interesting discussion, keep your announced personal vendettas that you keep dragging into these threads, and what you “are never going to forget,” to yourself. Back to the regularly scheduled economic discussion …
?
Well, fix my math if I am misunderstanding you.
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.
If that is not revenue adequate, there is not a Fortune 500 corporation that is going to make it. They’re all doomed.
I fear that you have taken my quote out of context. I was responding to a post that declared that 180% R/VC was the standard by which the STB determines if a railroad is revenue adequate.
You aren’t in charge and you’re not going to tell me what I can or can not say.
You’re right, there is no cross subsidization taking place.
The 180% figure is just a political compromise benchmark. A study found 61% of rail business to be priced below that figure. If a rail freight rate is below 180% of variable cost the traffic is deemed to be in a competitive situation and the rail customers have no legal standing to make a complaint about their rates.
If the rate exceeds 180% the customers may file with the Surface Transportation Board, which then could conduct an investigation. The shipper is “potentially” captive. But the rate may be well over 180% of variable cost and still be the result of competive factors.
It has nothing to do with cross subsidies.
The 180 rev/lrvc thing is only a legal thng. The Law Deparment thinks about it but it has virtually nothing to do with how the railroad and it’s customers do business with one another. In negotiating dozens of contracts with margins over 180% in never came up. Not once in 23 years!
This is misleading all the way around.
It is an important economic concept, written into law. The concept was designed by the economists who forcefully and successfully advocated deregulation but who also felt it was of utmost significance to have a marginal price formula to restrict monopolistic behaviors.
This was a regulatory alternative to placing railroads under the general jurisdiction of the Justice Department where general anti-trust law is enforced. The alternative to a straightforward marginal price constraint is constant re-examination on a case by case basis using the Herfindahl-Hirschman Index, or other more generalized measures of market control or market share, and imposing standard anti-trust remedies that other businesses in the United States are subject to.
In the case of railroads, the economists who devised the concept recognized the dangers of captive shippers and potential monopoly under deregulated conditions and advocated – in all cases of deregulation, not just railroads – a marginal price formula to ensure that, within a broad range of economic conditions, businesses could engage in differential pricing subject to an approximation of market restraints under those circumstances where genuine markets did not exist.
The 160% R/VC ratio was recommended based on economic studies. The rail industry successfully lobbied for the higher threshold of 180% R/VC.
The number of litigated cases involving shippers and railroads where the subject of the 180% R/VC threshold “came up” in the course of discussions – resulting in outright litigation – is lengthy.
Outside of litigation, the number of pa