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Re: question for Dave Smith
Author: Dave Smith
Date: 01-13-2008 - 11:25
Sorry, I was in a grumpy mood when I wrote that. The word "perversion" is a bit too emotional for a rail economics discussion.
What I am refering to is the STB's benchmark for determining if a rail operation is sufficiently profitable. R/VC stands for the ratio of revenues to variable costs (variable costs are those which acrue with level of operations as opposed to fixed costs which acrue whether you run trains or not). The STB has determined that railroads must earn at least 180% of revenues to variable costs in order for a rail line to be economically viable. Anything above 180% is used as a benchmark for determining captivity by the STB, while anything below 180% is deemed to be internally subsidized by some other form of income. Whether one agrees with the 180% standard or not, if indeed it is a valid measure then it stands to reason that shippers being charged more than 180% R/VC are cross subsidizing those rail shippers being charged less than 180% R/VC.
When we add taxpayer subsidization used to rescue certain lines, it stands to reason that a rail operator's costs will be reduced, so the 180% standard can be reduced to reflect that subsidization.
One of the reasons I got kicked off the TRAINS.com forums at the behest of a Class I rail exec was that I kept insisting that this +-180% cross subsidization occurs, and furthermore most captive rail shippers happen to be domestic rail shippers (as exemplified by the four Oregon shortlines in question) while most overseas importers have access to multiple ports and thus multiple railroads, e.g. rail competition. There is a substantial "make or break" dynamic in play regarding US rail shippers when it comes to transporting their goods to market, in that the shipper who can access rates near or below that 180% benchmark can sell his goods slightly cheaper than that rail shipper plying the same goods who is paying closer to 300% R/VC. It is one of the causes of the outflow of US manufactering jobs overseas and/or the shutdown of certain US production facilities.
That's why it is my opinion that, if the State of Oregon deems these lines to be viable to the Oregon economy, they need to be aggressive in ensuring that the shippers on those lines are availed of dual rates and services from the two Class I connections aka UP and BNSF. Otherwise, any taxpayer money thrown at the problem without an end result of intramodal competition may end up being wasted.
What I am refering to is the STB's benchmark for determining if a rail operation is sufficiently profitable. R/VC stands for the ratio of revenues to variable costs (variable costs are those which acrue with level of operations as opposed to fixed costs which acrue whether you run trains or not). The STB has determined that railroads must earn at least 180% of revenues to variable costs in order for a rail line to be economically viable. Anything above 180% is used as a benchmark for determining captivity by the STB, while anything below 180% is deemed to be internally subsidized by some other form of income. Whether one agrees with the 180% standard or not, if indeed it is a valid measure then it stands to reason that shippers being charged more than 180% R/VC are cross subsidizing those rail shippers being charged less than 180% R/VC.
When we add taxpayer subsidization used to rescue certain lines, it stands to reason that a rail operator's costs will be reduced, so the 180% standard can be reduced to reflect that subsidization.
One of the reasons I got kicked off the TRAINS.com forums at the behest of a Class I rail exec was that I kept insisting that this +-180% cross subsidization occurs, and furthermore most captive rail shippers happen to be domestic rail shippers (as exemplified by the four Oregon shortlines in question) while most overseas importers have access to multiple ports and thus multiple railroads, e.g. rail competition. There is a substantial "make or break" dynamic in play regarding US rail shippers when it comes to transporting their goods to market, in that the shipper who can access rates near or below that 180% benchmark can sell his goods slightly cheaper than that rail shipper plying the same goods who is paying closer to 300% R/VC. It is one of the causes of the outflow of US manufactering jobs overseas and/or the shutdown of certain US production facilities.
That's why it is my opinion that, if the State of Oregon deems these lines to be viable to the Oregon economy, they need to be aggressive in ensuring that the shippers on those lines are availed of dual rates and services from the two Class I connections aka UP and BNSF. Otherwise, any taxpayer money thrown at the problem without an end result of intramodal competition may end up being wasted.
