STB to hold hearings on grain shipments

Trains Magazine General Discussion
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STB agrees to review charges to captive markets

(The following article by Peter Johnson was posted on the Great Falls Tribune website on October 12.)

GREAT FALLS, Mont. – The federal Surface Transportation Board will conduct a hearing on Nov. 2 in Washington, D.C., to discuss concerns involving shipping of grain by rail.

One of those topics figures to be whether railroads charge unfair rates to shippers in so-called captive markets like Montana. A captive market is where shippers are served by just one railroad.

Board chairman Chip Nottingham announced the hearing Wednesday at a meeting in Great Falls after spending several hours Tuesday meeting with Montana agricultural leaders.

The hearing will be at 10 a.m. in Room 760, the STB hearing room, at its headquarters in the Mercury Building, 1925 K St. N.W., Washington, D.C.

Nottingham also said the regulatory agency will study possible overcharging and alternative methods of helping captive shippers that were suggested by a new Governmental Accountability Office report.

U.S. Sen. Conrad Burns, R-Mont., who invited Nottingham to Great Falls and called for the GAO study along with seven other senators, welcomed the STB chairman’s pledge to look into the issue of railroads overcharging captive shippers.

Burns said he was pleased that progress seems to be occurring on a crucial issue to Montana farmers and other shippers.

“In agriculture, especially in states like Montana without competitive shipping, we sell wholesale, buy retail and pay the freight both ways,” Burns said.

He said he does not want to go back to the days when railroads were more regulated, but said the STB has not done a good job in its role of setting fair and reasonable rates in areas that lack rail competition.

“The board also has a habit of holding hearings rather than taking action,” Burns said, saying it is typical of Washington agencies that suffer from "paralysis

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Ladies and Gentlemen…The GAO report:

http://www.gao.gov/new.items/d06898t.pdf#search="%20"GAO-06-898T%20""

Please note that the writer for the Great Falls Tribune has taken it upon himself to redefine a “captive Shipper” to include any lumber yard served by the Wisconsin & Southern. Why do journalists do this? Why can’t they write the story straight?

In the GAO report you’ll find the definition to be an entity that lacks a “reasonable” transportation alternative. The alternative certainly doesn’t have to be a railroad, trucks move freight just fine. In fact, they move a lot more of it than the railroads do.

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Peter Johnson says nothing about Wisconsin. He does refer exclusively to railroad competition and in most other contexts, he would be incorrect. In the context of a Montana story in a Montana paper about Montana wheat shippers, he happens to be exactly correct because, as the GAO report confirms, Montana wheat shippers are captive by any definition a reasonable person would care to use, and by the standards used by the ICC, STB, and every federal court that has looked at it.

In that regard, he is no more inaccurate, and indeed, far more accurate in the context than you were when you claimed that the federal courts struck down the ICC finding that Montana shippers were specifically captive, a claim you made that was, in fact, false. Why do you always do this? Why can’t you get the story straight?

I was either the News Editor or Managing Editor when Pete had his first reporting job. I don’t recall now which, but I recall him as a diligent and honest reporter, and he did a good job when he moved into an editing position as well. We were putting the paper to bed late one night when the AP machine “went off,” signifying an important story was coming over the wire. Pete was standing next to me when we learned that Saigon had fallen to the North Vietnamese Army. I authorized print shop crew overtime – talk to me sometime about management and unions – and we rewrote our front page.

Pete Johnson has been prac

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As I stated on the other economic thread, I have read the GAO report and found it educational yet a bit frustrating. There really doesnt seem to be a clearcut method of addressing the overcharge issue at this time.

The R/VC is flawed, as pointed out by the report. Any productivity gains are to be split with the shipper. It appears that the new threshold is the 300% R/VC figure, based on their language. That seems to be the figure they find most threatening.

Personally, I think that at some point in time any Federal funding for railroad capacity will be tied to captive shippers and passenger trains. It will make an interesting decision making process in the board rooms, won’t it?

The more I think about it, the R/VC 180% had to have been set up as it was intentionally. The process discourages rate review. The Staggers Act gain the rails a pass to get their acts together. Interestingly the rates overall have reduced over time.

Interesting topic

ed

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This is a good place to start a discussion on what reforms are needed, if any, to the STB process for rate reasonableness. I notice in the report the GAO is wisely carful not to define a capitve shipper to closely. They use “proxies” with BEA’s served by one railroad or r/c ratios over 180. If this logic was taken to a point the GAO does not intend a bookstore in Albuqureqe would be captive because the were only served by the BNSF even though all of their shipments came in by truck. As another example, their are many chemical shipments moving from the Houston Ship Channel at r/c ratios > 180 even though the shipper is served by two railroads. Many of these same shipments would move by truck or barge or barge/truck or swapped out if the rail rate gets too high.

The STB is still going to need to look at each situation to decide if their is a reasonable amount of competition from other railroads, modes, markets or products. As an example WV coal must compete with other coal sources from all over the world. When the NS or CSXT set rates to tidewater the cost of coal from Austrailia, S. Africa, etc. into Shanghi is a very important issue.

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The r/c 180 threshold was set by negotiations between the NIT League and the AAR when Staggers was passed in 1980. That was over a quarter of a century ago and the railroads had lots of unsued capacity so costing based on incremental costs was useful. Today many lanes are at capacity. If you are a shipper wanting to put a new batch of 25 cars a week over a sold out line you do not want to pay the incermental cost to take your shipments. Paying for single track to double track for 25 cars per week gets very expensive.

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The 180% R/VC standard is based on marginal cost theory, not incremental costs which, judging by your use of it, you mean to include fixed costs.

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We and our customers used marginal and incremental as synoyms. It was not a theory but generating paid freight bills for my employer. The Staggers negotiators were the Class I CEOs and a dozen or traffic managers from firms like DuPont, ADM and US Steel. I don’t think they made the distinction either.

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Well, the shipper that has those 25 carloads that has to pay for the second mainline isn’t paying just marginal costs if he’s carrying the cost of the second mainline. That’s a fixed cost carried by the system. His marginal cost is no different than the marginal cost of an identical train on the existing mainline. The fully distributed costs at that point in time, if apportioned out, would be higher for both shippers if the second mainline has to be built to accomodate the second shipper, but their marginal costs have no reason to be different.

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I for one, would find this an interesting discussion. I hope it doesn’t stall out over semantics.[;)]

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I agree Murph.

It is clear that certain issues need to be addressed, on both sides. Bob made a very good point about 180% being a hurdle at a point in time that is much different than today.

I agree with Michael that the 25 extra cars per week shouldnt go to provide revenue for the 2nd mainline. It would be quite an investment to increase your capacity…would want to make sure of it before approving that project.

ed

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What really happens is that you go to Finance Department to get on the list of capital projects. They will want to what will be the profitablility of the new traffic you can handle because you have gone from one track to two tracks. They will also want to take a look to see if operating costs will go down. Then they do their rate of return number crunching and you see how competitive your project is with the other projects looking for funding. The problem is the project list is a lot longer than what the Finance people can raise money for.

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Bob:
I see your point. It would have to be a combination of increases in revenue plus a reduction of unit costs. It would be interesting to see one of those proposals and the simulations and economic models used.

That is what i find interesting about Rob Kreb’s big gamble on the BNSF’s transcon line. He made the case for the investment and then waited and waited and waited…finally it came. Did he make the correct choice? Short term…probably not. The stock got pummelled by the Wall Street crowd. Long term???without a doubt the right choice.

ed

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I think you’re right.

They’re going to raise the rates to ration the capacity. Sell it to the highest bidder.

But they’ll want more of that high revenue freight, so they’ll add capacity. But they’ll add it incramentally by picking the low hanging fruit first. They’ll work on the worst bottlenecks first and then go on down the list adding capacity as traffic and finances warrent.

Building extra railroad capacity is a risky thing. If you buy real estate you might loose money on your investment, but you’ll be able to get some money out. The cost of building that track is sunk and aside from the scrap/resale value of the rail, it’s totally commited and you can’t pull it out. If the traffic doesn’t materialize as projected you just peed away several hundred million dollars.

What’s happening is a logical, reasoned, business like ap

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Without being forced to, by the Government, would railroads and captive shippers be able to work out some compromise on freight rates, that everybody could live with? What incentives would each side have, to negotiate in good faith?

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My [2c] - I seriously doubt it. The railroad is likely going to try for the cost of operating the line as a stand-alone, while the shippers are going to push for averaging the cost over the entire system, including those high-density, money-making mainlines. Both have arguable positions.

But why limit this to just Montana grain shippers? I live near over 100 miles of track with ‘captive shippers’ - there’s only one railroad here, and the odds of another railroad building in are so slim as to be nonexistant (yes there are trucks, but this is about railroads). In fact, word has it that the current railroad is looking to get out of running the line. What percentage of shippers fall into this realm? Seventy-five? Eighty?

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Yes, and they have.

First, there is a need to understand that in any marketing/distribution channel there is a natural conflict between any buyer and any seller. The buyer naturally wants a lower price and a better good and/or service. The seller naturally wants a higher price and less of an offering in terms of the good and/or service being sold.

This conflict is good because it creates a friction that leads to inovations that improve the channel. Each member is always searching for a better way.

In our salient example, Montana wheat, the BNSF’s incentive to compromise is the need to see that the farmers (wheat ranchers?) survive in business and continue to produce wheat for the railroad to haul. The wheat ranchers? incentive to compromise is to have a railroad that can move their wheat efficiently.

Unfortunately, the politicains are involved. Their incentive is to get/retain power.

Let the market work it out. People on all sides will be PO’d because they didn’t get what they wanted and they had to compromise. But it will be a far better solution than the government could come up with.

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No. Timing is everything on investments, and it doesn’t matter that “some day” something may finally generate revenue. When “some day” is in fact defines whether an investment is a good one or not – a positive or negative IRR.

Rob Kreb’s “investments” generated increased fixed charges and decreased income. The internal rate of return was enormously negative and will remain negative for all time. Had the same investment been made in 2001 or later, the IRR would have been positive.

But, it wasn’t, and that investment represents a substantial and permanent net financial loss to the Burlington Northern SF Railway.

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They did negotiate and they did compromise. They agreed on the 180% R/VC standard as a fair delineation of captivity and rate reasonableness and when the burden was supposed to shift to railroads.

The marginal cost ratio standard was reached as a compromise through negotiation and enacted by “politicians” without change as what the shippers and rail industry had agreed on.

Then one of the parties breached the agreement.

Guess which one.

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To do this would be classified as “fully alocated cost”. This was one of the passenger railroads favorite tools to justify abandonments and train off petitions. Finally, the ICC (and also the STB) forced these “bad actors” to use the realistic value of “avoidable costs” which were the value of the incremental costs that the railroad would directly save. For example, it costs more to maintain track for ClassV than it does for Class III. That difference would be an example of avoidable costs.

These 25 cars per week in our example, requiring a capacity increase that would be a second track - to have the rate set to “fully pay” for that expansion would be a “fully allocated cost”. The next shipper to add traffic to that line would not pay for that capacity expansion and you can be sure that the original shipper paying that full allocation is going to object – fiercly.

Fully alocating costs has its place. Rates is not one of them.