I was under the impression that railroads are free to charge whatever rates they like in keeping with deregulation. Yet for some reason the STB has ruled against BNSF in the recent rate dispute involving BNSF and Basin Power. Now BNSF has to pay back millions to the power company in addition to cutting its rates back. What happened to the Staggers Act and deregulation?
Railways were not given freedom in the Staggers Rail Act of 1980 or the ICC Termination Act of 1995 to set whatever rate they wished. Those acts gave the ICC and the STB, respectively, authority to oversee rates where no effective competition exists.
This quote from the GAO website elaborates: “The Staggers Rail Act of 1980 largely deregulated the freight railroad industry, giving the railroads freedom to price their services according to market conditions and encouraging greater reliance on competition to set rates. The act recognized the need for railroads to recover costs by setting higher rates for shippers with fewer transportation alternatives. The act also recognized that some shippers might not have access to competitive alternatives and might be subject to unreasonably high rates. It established a threshold for rate relief and granted the Interstate Commerce Commission and the Surface Transportation Board (STB) the authority to develop a rate relief process for those “captive” shippers.”
Thanks Railway Man…so is BNSF obligated to continue serving that power plant at the lower rate or can they drop service to that plant if they deem it to be unprofitable or not profitable enough?
Yes to both questions.
However! Railways do not have the right to abandon service without STB approval. “Demarketing” by charging a rate the shipper cannot afford, or failing to maintain the track in serviceable condition, can be construed as an effective abandonment by the STB. If the railway decision is to discontinue service because it is insufficiently profitable, the railway must demonstrate to the STB that the service is indeed insufficiently profitable – the revenue it can reap will not cover operating, maintenance, and capital costs, plus return a reasonable return on investment. If that is affirmed by the STB, then any interested party (including a shipper or receiver on the line) has the right to offer to purchase the line or subsidize the service. The STB detemines the Going Concern Value and the Net Liquidated Value of the line, and the offeror has the right to purchase at whichever is greater.
I’ve kind of mumbled my way through this, so perhaps this document will be more clear. Page 11/12 describes abandonment. http://www.stb.dot.gov/stb/docs/So_You_Want_to_Start_Small_RR.pdf
RWM
Ulrich -
Here’s the link to and an excerpt from the STB’s decision:
http://www.stb.dot.gov/__85256593004F576F.nsf/0/3462AE0BD0F1E87085257561007799EF?OpenDocument
FOR RELEASE - 02/18/2009 (Wednesday) - No. 09-04
SURFACE TRANSPORTATION BOARD ORDERS $345 MILLION IN RATE RELIEF & DAMAGES FOR A CAPTIVE UTILITY PLANT
“The Surface Transportation Board issued a decision today granting an estimated $345 million in reparations and rate reductions from the BNSF Railway (BNSF) to Western Fuels Association, Inc. and Basin Electric Power Cooperative, Inc. (collectively, “the Utilities”). The Utilities had challenged the railroad transportation rates charged by BNSF to haul 8 million tons of coal each year from mines in Wyoming’s Powder River Basin to their electric-generating plant in Moba Junction, WY. The utility plant is captive to BNSF and provides electricity into grids serving consumers in Colorado, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, and Wyoming.”
"In today’s decision, the Board found the transportation rates BNSF charged the Utilities—which are now roughly six times the variable cost of providing service—to be unlawfully high. BNSF was ordered to lower its transportation rates by approximately 60%, as the Board’s stand-alone cost (SAC) test demonstrated that in 2009 the maximum lawful rate for this traffic cannot exceed a revenue-to-variable cost (R/VC) ratio of 240%. This results in the single largest award to a captive shipper by the Board. BNSF is obligated to promptly reimburse the Utilities for approximately $100 million in overcharges from 2004 through 2008.
Well, my folks’ stock may drop, but their/our electric company is one of the lawsuit winners, so our electric rate may go down. However, BNSF will probably appeal and the lawsuit will keep going on for many more years as it has already.
They are comparable, but the grocery store is doing much better. Suppose I run a grocery store, and every day I sell one item, a loaf of bread, for $1.01. My total cost of operations is $1.00 per day. So every day, I earn one cent on a working capital of $1.00, and every day my working capital is returned to me in whole and I reinvest it in another loaf of bread to sell the next morning. So, at the end of the year, I have earned $3.65 on a total investment of $1, or 3.65 times what I invested. (For simplicity, let’s assume a 0% discount rate). Now suppose you invest the same $1 every day in working capital in a consulting firm, and every month you turn out a design that you spent $30 to create and you sell for a 100% markup, or $60. You get your working capital back, and start over and repeat 12 times. Your return on your invested capital of $30 at the end of the year is $360, or 12 times what you invested. My grocery store gives me only a third as much return, but it took it me only a 1% profit margin to accomplish what it took you 100% to accomplish. Now, if I increase my profit margin to 3%, I’m doing just as good as you, plus my customers are cash and have to pay before I let them carry the bread out the door, and I’m still only risking $1 at a time.
RWM
RWM -
OK, good follow-up (and edit). But the grocery store doesn’t “turnover” all items daily - maybe the bread and fruit and other perishables, yes, but not the detergent or paper goods. So if we use a 3-day turnover average instead on your second example of the 3 % mark-up, what result ? Then your annual earnings are back to about where they were with the 1% mark-up - about 1/3 of the consulting business - although the other advantages in your last couple of lines are still there.
Wait a minute - what on earth are we doing discussing this ? [%-)] Oh, yeah - BNSF’s coal rates. Well, on first comparison that operation seems more like the grocery store than the consulting business - turn those locos every couple days, essentially cash customers (no credit risk [:D]), and although a huge investment base, only a small amount involved with each train.
- Paul North.
Maby it’s just my railfan way’s but I sort of feel bad for BNSF. I mean, having to pay millions of dollers back just beacause that some jury think’s that theay over charged Bastion Power.Butt I guess that if BNSF did something wrong thaey should have to pay.
Justin -
It wasn’t a jury that decided - it was the U.S. Surface Transportation Board, a 3-person specialized board that’s set up just to hear these kinds of cases, and only them.
Kind of like the difference between the fans at a football stadium and their opinion of a penalty flag thrown on a play, and the “zebras” (referees) ruling and “call” on the penalty.
- Paul North.
That’s a good comparison. I guess I should have read the post a little harder first. I guess that BNSF overcharged the company for coal shipping rates right?
RWM: Although its been years since I worked in a grocery store (as a teen) much of the product was on consignment in the big store but not as much for the small one. The consignment stuff was paid for on a replacement basis only. (Watch for shoplifting). Out of date pershiables returned with the proper credit. Soft drinks are consignment and usually bottlers set prices in concert with the store.
And they stock the shelves, pay for the shelf, and pay to get the eye-level shelf, too! As if anyone should be surprised that A&P, Kroger, and Wal-Mart created enormous fortunes for their owners.
RWM
I don’t think it is even remotely like the grocery business, because the investment is enormous, the risk the investment is sunk into the wrong piece of turf is substantial, the length of time it takes to return the investment is measured in years instead of hours, and the government gets to set the profit margin.
RWM
Does anyone have an idea of what rate was being charged for the movement (in terms of per trainload, per ton, etc)?
I havent time to look into the grocery industry, but their margins are far greater than 1%, and like RWM said, their cash flow is great, with payments in cash or equivilant and accounts payable that are longer. I will take a look a Kroger sometime this weekend.
The thing to remember is that business and industry will adapt to a model which works for them or fail. Capital always flows to industries in which there are high returns or the prospect of high returns.
ed
Few years ago (2005) when I was a vendor to the grocery store including Wal-Mart, Wal-Mart had a minimum markup of 30% (while the other grocery stores were around the 18-25% mark-up). Basically, If a vendor wanted to sell their product at Wal-Mart, the vendor would have to figure in what the cost of everything is, the profit they wanted to make and then add 30% to that price and cross their fingers that the price in the store is competitive while still showing a profit I delivered smoked fish and seafood the company I worked for and they had a huge freezer that stored hundred of tons of frozen seafood. The smoked fish (hundred of pounds) was another story since it basically had a “shelf life” once it left the smokers.
ed -
That kind of data appears to be buried deep in the STB’s actual decision, such as APPENDIX A - TRAFFIC VOLUMES AND REVENUES on pp. 33 - 34, and maybe elsewhere. Here’s the link to the on-line version of the document:
http://www.stb.dot.gov/decisions/readingroom.nsf/WebDecisionID/39709?OpenDocument
We’d have to divide the annual revenue figure by the annual coal figure to actually get it. The whole thing looks pretty fascinating to me - a “boatload” of cost statistics and rationales for same, all for a “fictional” railroad - so I just “bookmarked” it and will read it later, more leisurely. When I do, I’ll post the figure. If you get there first, please feel free to do so instead.
Real quick, it appears that for 2008, the WFA’s forecasted revenue appears to be $262.7 million for 64,697,981 tons = $4.06 per ton - but for how many miles ? And with what services and transit time guarantees , etc. ?
- Paul North.
Hey Paul:
Thanks for the link to the STB decision. I will read it later when I have a little time. Those types of analysis are interesting to read. I always enjoy reading those or company proxy statements…a little dry at times, but tons of details.
ed
BNSF has a response which I saw somewhere which says that STB changed its rules and reversed a prior decision in this case. Perhaps someone will find it and post it here. It would appear that this will be ongoing, or if permissible, settled by the parties.
The key word there is “may”, although I think it is unlikely electric rates will go down. The utility thinks much like the railway, they’ll just do what they can get away with.