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Railroads risk market share by charging shippers excessive fees

The Surface Transportation Board (STB) held two days of hearings on accessorial and demurrage charges last week.

What’s the strategic game theory play here? The railroads that are utilizing precision scheduled railroading (PSR) seem focused on changing customer behavior through aggressive penalties. According to testimony before the STB, this is being done at the railcar level when the railcar is in the possession of a shipper.

Hypothetically, protecting secret cost allocations at the railcar level and micromanaging revenues from penalties isn’t strategic. It may even chase more rail customers away.

A different market view of the STB’s hearings…

Shippers and third-party logistics providers participated along with multiple Class 1 railroads.

The technical subjects included reciprocity, or the lack thereof; operational bunching of traffic; carrier capacity charges; and the question of how well (or not) the freight railroad network is performing.

The public policy theme focused on those six railroads that are currently using or are in the process of implementing PSR.

More than 22 parties submitted written documents to the STB prior to the hearing.  

Shippers and receivers (railroad customers) believe that various service and payment terms have been quickly introduced and appear unreasonable in the face of a lack of better service.

Freight customers argue that they have not received tangible benefits from the change to PSR.  But their payments to the railroads have gone up.

Normally, shipper testimony is full of adjectives and adverbs that vaguely describe “perceived economic harm.” Yet upon further technical review, the customers’ testimony actually was well documented with statistical evidence of costs increasing significantly – without a balance in improved service quality.

To this rail economist, the logic is that a cost shifting is occurring from the railroads to the customers.

Demurrage and accessorial charges

The complaints are of excessive demurrage and accessorial charges. Customers are also occasionally being charged a congestion fee because of railroad network problems that only railroad managers can resolve – certainly not their customers.

What is demurrage? Historically,  demurrage was a maritime term – users of a vessel were charged extra fees beyond the charter rates when that vessel and its cargo was not efficiently handled.  

Often the use of demurrage and detention charges get used legally and logistically slightly differently in the maritime, trucking and railroad sectors. Demurrage and railcar rentals are really a complex and unique business sector. Many skilled railway people see it as a black hole best left to a few technicians.

How is it calculated and applied? Think of it in simple terms as a surcharge above the basic rate.

If cargo in a railcar arrives at its final receiver (customer) destination and is not unloaded and the railcar then made available as an empty railcar for another customer within a set number of days of allowed free time, then demurrage charges are added. The charges accumulate day by day until the car is released by the customer.  

Demurrage charges can apply also to outbound shipments. They can also apply to railcars that are from the railroad’s pool fleet of freight cars or to private railcars owned or leased by freight shippers or the receivers.

Want to understand the formulas?  

Then you have to examine both the contract nominal freight rate (tariff) and also examine a series of accessorial charge publications. The formulas vary among the railroads. It’s cumbersome at best.

The railroads counter that the charges are necessary to create better network fluidity, better freight car utilization, and of course to support their return on assets and their operating margins.  

They claim that demurrage fees are minor – ranging from about 1 percent of Union Pacific’ total freight revenues to almost 3 percent of CSX’s total freight revenues.

However, some daily demurrage fees are in the $250 range and up. That’s a significant surcharge considering what the daily lease rates typically are for railcars.  

When asked by STB members what the breakdown is between the penalty and the productivity numbers, the railroad attorneys and other railroad witnesses demurred or remarked that the information is a trade secret.

What were the customers’ counter-claims?

Customers testified that they are not yet seeing either precision or high percentage on-time railcar delivery as promoted by the PSR carriers.

Here are the basic railroad service faults (from the customers’ perspective):

1) Bunching of railcars that were supposed to arrive smoothly and in right-size lots as ordered and as promised by the rail companies through scheduled railcar trip plans.

2) Bunching and poor inventory arrival deliveries now require shippers to spend their capital to expand their local plant/factory holding tracks if they are to continue rail service and avoid demurrage. That’s a burden not envisioned when they originally signed up for rail service.

3) To control over-billing requires shippers to set up expensive auditing programs. That wasn’t in the original contracted supply chain rail service.

4) A few carriers are charging a vague network congestion fee that covers their dispatching rail network costs somewhere.

Here are a few business case examples from the hearings.

Consolidated Scrap Resources testified that the demurrage fees paid to Norfolk Southern increased by as much as 560 percent per month in 2018. Prior to January 1, 2019, Norfolk Southern did not charge demurrage and storage fees to customers receiving service less than five days per week. That has changed.

Norfolk Southern offered no calculations to show customer benefits in annual railcar cycle loads per year. The railroad only offered standard system-wide care on line and yard-to-yard speed and terminal dwell changes – but nothing that translates directly to a customer inventory movement improvement.

Archer Daniels Midland (ADM) supplies about 28,000 of it own railcar assets and argued that there is a need for reciprocal standards when the shipper is providing the railcars.

ADM made the point that the purpose of demurrage should be to improve the utilization of all equipment, including customers’ private tank or hopper railcars.

The ADM representative told the STB that railroads will not guarantee their service, and under existing railroad demurrage programs, there is no incentive for railroads to improve their service. That’s an interesting point.    

Resolution?

It’s a relatively new group of STB commissioners.  Will they evaluate the data with an eye to offering a balanced set of metrics whereby these charges can be balanced against the clearly higher financial gains reported to railroad shareholders?

Is there a precedent decision, regulation or ruling made by the Interstate Commerce Commission (which preceded the STB in regulating the railroads) to guide the STB commissioners?

Does the STB have a staff experienced in railroad economics and operations for a deep dive analysis of the conflicting data? The staff of the Interstate Commerce Commission used to be large. The STB staff is rather small.  

Strategically, there might be another outcome to consider. Most shippers and receivers will have the long-term option of continuing to convert more of their supply chain movements to transportation by truck.  

Trucking clearly sets the benchmark for precision delivery, with tight delivery and pick-up schedules.

Whatever the demurrage resolution, this simple graph suggests the real strategic threat.


As a percentage of shipper payments (carrier revenues), trucking already commands about 92 percent of the general cargo movement. The railroads’ market share is pretty small.

Conclusion

The market is a tougher mistress than the regulator.

Micro-managing margin yields in the face of declining market share might not be in the interest of the railroads survival.    

Realizing where railroad managers sit in the competitive food chain should trigger a survival instinct that brings the parties together.  

Something greater is at risk. Let’s hope that all the parties, including the Surface Transportation Board members, don’t overlook the strategic while focused on the tactical.

What say you, FreightWaves readers and colleagues?

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Jim Blaze

Jim Blaze is a railroad career economist with an engineering background and a strategic analysis outlook. Jim’s career spans 21 years with Consolidated Rail Corporation (CONRAIL), 17 years with the rail engineering firm Zeta Tech Associates, 7 years with the State of Illinois Department of Transportation in Chicago urban goods movement research, and two years studying what to do with the seven bankrupt and unrecognizable Northeast railroads at the federal agency USRA. Now primarily a teacher and writer, Jim likes to focus on contrarian aspects of the railroad industry.

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