Manufacturers of the raw materials that go into the end products that American consumers rely on for daily living warned regulators that they may have no choice but to raise prices as a result of what they consider to be systematic overcharging by the railroads.
The first day of what was scheduled to be a two-day hearing (held at the U.S. International Trade Commission) on May 22-23 was marked by a litany of anecdotal evidence by shippers complaining of storage fees and extra handling charges that were being used by the railroads to generate a new source of revenue, instead of as fair compensation for storage space and use of their assets.
The railroads claim that the fees – knowns as demurrage and accessorial charges – are necessary to incentivize shippers to help railroads carry out precision scheduled railroading (PSR), a cost-cutting operational strategy that almost all of the major railroads have rolled out in some form over the past two years.
However, “these supplemental fees are an apparent and growing revenue opportunity for carriers, while it places a heavy, heavy burden on shippers’ costs, labor, and administrative overhead,” said Jeanne Sebring, a recently retired Director of Logistics for International Paper [NYSE: IP], North America’s largest rail boxcar shipper.
Sebring said International Paper saw railroad demurrage fees more than double to over $7 million in the first quarter of 2019, when compared to the first quarter of 2017 before the railroads began precision scheduled railroading.
“The focus on PSR, and the use of supplemental fees as part of it, only grows more cumbersome and expensive, and left unchecked it will continue to impact shippers, and by extension, the broader economy,” Sebring said.
The hearing was also marked by frustration on the part of the three-member Surface Transportation Board (STB), led by Chairman Ann Begeman, who was appointed by President Donald Trump in March 2018. Begeman, Vice Chairman Patrick Fuchs and Martin Oberman had a difficult time getting the railroads to justify their pricing policies and explain how they worked.
Asked by Oberman how much of CSX’s [NASDAQ: CSX] accessorial charge is compensation and how much is penalty, John Patelli, the railroad’s associate general counsel, said he didn’t want to reveal the breakdown for competitive reasons, and that “there are a variety of different costs associated with demurrage – it’s not an exact science.”
Because of the significant market power held by the railroads over shippers – particularly those that don’t have access to more than one railroad at a particular origin or destination, or where trucking is prohibitively expensive – Begeman was also concerned about the potential for retaliation by the railroads against shippers alleging railroad abuse.
“When we announced the hearing, I didn’t pause wondering if anyone besides the railroads – who asked to be here – would show up,” Begeman said. “The last listening session I attended, I learned later that every single participant had been contacted by the carrier in advance of the hearing not to come.”
The show of force from shippers unafraid to lay out their complaints in front of their rail carriers will not be lost on STB members when it comes to taking action on the accessorial and demurrage charge issue, surmised Michael McBride, who represents rail shippers before the STB as a partner with the law firm Van Ness Feldman.
“They realize it takes a lot for shippers to come forward and complain, because some have gotten their fees raised as a result of complaining,” McBride told FreightWaves on the sidelines at the hearing. “If the railroads do this to anyone else – if fees go up specifically directed at some of those participating here – they’re making a very big mistake.”
Rebecca Dye, a commissioner on the Federal Maritime Commission (FMC), provided the STB with an overview of her experience dealing with demurrage issues for overseas containers entering the U.S. domestic supply chain on the railroads.
When asked if she thought a task force similar to one she spearheaded at the FMC , which provided insight into demurrage issues in the port and intermodal rail sector, could be replicated for the rail carload sector, she was noncommittal.
However, she said after her testimony, “We’ve started a very productive collaboration with the STB, which I look forward to pursuing,” Dye told FreightWaves. “The good part is that we have a lot of commonality [with the STB], and it will be good for us to explore that.”