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Poor Rail Service, New Tariffs and Increased Rail Rates? Why is it Happening and What Can Be Done?

This was the subject of my presentation to the Ferrous Division at the ISRI governance meeting in Austin. Metal recyclers are all dealing with poor rail service and rate issues. Typical service issues consist of cars arriving late or not at all, more arriving than can be handled by the customer, or cars arrive with trash forcing the shipper to reject or unload the car. Up to now, most shippers have simply accepted the assumption that there is nothing that can be done other than to accept the poor service and the increased rates. Because of the lack of response from railroads, shippers have tried to find ways to work around the lack of service. Recent tariff changes to shorten or eliminate Credit Days, to increase demurrage charges, and to add a new Prepared for Service rule, along with the increasing rates and the reduction in service have had a significant impact on scrap metal companies. Combine these impacts with the shortage of alternative motor carrier service, as well as higher motor carrier rates, shippers are becoming more frustrated with the lack of competitive ways to ship. Shippers have invested heavily in property and equipment to use railroads as an important part of their business and this makes it even more difficult to switch to another shipping mode. The issue is not just impacting scrap metal businesses, but many industries.

These complaints, among others, are the basis for the formation of the Rail Customer Coalition, a large collection of trade associations representing a broad cross section of manufacturing, agriculture, and energy industries that depend on the railroads to deliver reliable and affordable service in order to remain competitive in a global market. The Coalition supports “practical regulatory reforms that would allow greater access to competitive freight rail service and that would make the STB operate more efficiently and effectively for all stakeholders.” The recent tariff changes for accessorial charge, as well as the difficult service rules and decreased service, are all part of the new service model called Precision Scheduling Railroad (PSR).

What is PSR?

The PSR was first created and used by Hunter Harrison on the Illinois Central Railroad around 1993, which then merged with Canadian National (CN) in 1998. PSR is claimed to be the reason Mr. Harrison was able to turn around the Illinois Central Railroad and CN. The basic principles of PSR include fewer hub-and-spoke operations, fewer hump yards, more rigid scheduled trains, tighter adherence to those schedules, quick turnaround of equipment (including a tougher stance on demurrage for equipment held by a recipient) and fewer workers. The model promotes less equipment, automation synchronization, and larger unit trains. The goal is to operate more efficiently with less locomotives and labor, thereby improving operating ratios. 

There are five core principles that have been repeated by other railroads moving to this model: 

1. IMPROVING CUSTOMER SERVICE 

2. CONTROLLING COST 

3. OPTIMIZING ASSET UTILIZATION 

4. OPERATING SAFELY 

5. VALUING AND DEVELOPING EMPLOYEES.

While one of the core principles of PSR is to improve customer service, it seems apparent that the improved service they refer to is for customers that fit in the PSR model and not the customers that cannot adapt to the large unit trains and synchronized service. Recent articles in the financial news explain that Wall Street is pushing the railroads to adopt the PSR model to improve their operating ratios. The Union Pacific Railroad (UP) officially adopted the PSR model in its shareholders meeting in September 2018. There are numerous articles by railroad experts and financial analysts about not only UP adopting this model but also Norfolk Southern, CSX, and Kansas City Southern. As discussed below, the PSR model seems to run contrary to a railroad’s common carrier obligation.

What can be done?  

Railroads are regulated as common carriers and are statutorily required to provide reasonable rates and service. The Surface Transportation Board (STB) is the federal agency that enforces federal laws and regulations on railroads. The level of regulation has changed like a pendulum over the past 150 years swinging from minimal regulation to heavy regulation to minimal regulation and possibly back soon. In 1887, the Interstate Commerce Act formed the Interstate Commerce Commission (ICC) to assure that railroads provide reasonable rates and service. Regulations increased in the 1920s and 1930s requiring railroads to prove the reasonableness of the rate and to provide equal service on their lines.

By the 1970s, motor carriers were providing sufficient competition to railroad service and the regulatory pendulum began to swing to less regulations. Congress began to relax regulations, allowing rail carriers to set rates on a competitive basis without significant oversight by the ICC. In 1980, the Staggers Act, along with the Motor Carrier Act, deregulated motor carriers and partially deregulated the rail industry. The Staggers act created the STB allowing the Board to hear complaints about rail rates and service. Under the new rules, rail rates and service can be challenged when it is established that the railroad had market dominance. The Staggers Act also allowed some commodities to be generally exempt from regulation, leaving only a few matters, like demurrage, to be regulated. The pendulum swung fully to the unregulated side for scrap metal commodities in 1996, when, based on a joint request by the scrap metal industry, and the Association of American Railroads, the STB exempted scrap metal from rate regulation which allowed railroads to freely negotiate rates virtually without oversight. Scrap metal shippers had limited rights to file complaints on rates and service on the basis of railroad market dominance. 

In 2011, the regulatory pendulum seemed to begin its swing back towards regulating railroad service and rates when the STB initiated a waybill study to examine if there was enough competition to support the exemptions. In 2016, based on the waybill study, the STB issued the EP 704 Notice of Proposed Rulemaking proceeding to remove the exemption for 5 commodities including scrap metal. ISRI filed comments in support of removing the exemption for scrap metal. Due to having only 2 of 5 members on the STB, the matter has been pending for the last two years. The STB now has 3 of 5 members and could start ruling on its backlogged matters soon.

Many shippers believe that the PSR model limits service to shippers that cannot take advantage of the method of service using unit trains and conflicts with the railroads’ common carrier obligation to provide reasonable service. Shippers also believe that the constant rate increases are not justified and are unreasonable. Shippers have become reliant on railroads and have set up operations based on their reliance on rail service. As the railroads continue to decrease their level of service and increase rates, shippers are force to look to motor carriers to handle the freight. The problem is that there is not enough competition from motor carriers to take care of shippers’ needs and motor carrier service is not available for long haul routes. If motor carrier service is available, rates are typically significantly higher. This has had a significant impact on the ferrous scrap metal industry. 

Under the current status of the regulations, shippers of exempt commodities have the right to file a complaint with the STB against the railroad for an unreasonable practice regarding car use but not on rates unless the exemption is revoked for that case. Shippers believe that case law supports the position  that demurrage charges, credit days, and prepared for service rules is considered car use and subject to this challenge. Scrap metal shippers could have a limited opportunity to challenge rates until the exemption is removed. 

In 2018, the STB sent several letters to the UP and NS expressing concern new tariff changes and about the declining service under the PSR model. The UP and NS responded to the STB in a letter explaining that the “new Accessorial charges are a last resort applied to a small percentage (less than seven percent of the total invoices issued) of our billing for customers who are making the supply chain less efficient, more costly and less reliable for everyone.” In other words, the railroads want force train the shippers to adopt the model, or not get service. Based on comments from many shippers, it seems that there could be much more than 7 percent of the shippers that are experiencing service issues due to the PSR model.

In January 2019 during a “fireside chat” at the annual National Railroad Construction and Maintenance Association conference, Matt Rose, retired Executive Chairman of BNSF expressed his concern that the under PSR model, the rail roads are not providing required service as Common carriers.

 “We have this common-carrier obligation to provide freight service to all customers in all markets,” said Rose, “And what we’re doing in PSR is we’re redefining what we’re willing to accept in the freight railroad industry on certain lanes. And I really do believe we’re going to get in a lot of trouble by doing that. “What the [Surface Transportation Board] allows us to do is what we call price differentiate,” he said, illustrating with an example of airline passengers in adjacent seats who may have paid significantly different fares depending on when they bought the ticket. “We get that same right, but we have to carry you from Point A down here to Florida. If the airlines say, ‘We’re not going to provide service to that market,’ I think they’d get in trouble. I think the freight rails will get in trouble doing that. “… When you start redefining markets, I think then the federal policy makers will look at this, and quite frankly, they will not be happy with us.”  Quoted from an article by David Lassen January 7, 2019 in Trains Magazine.

Several Trade associations, including ISRI, have formed task forces to study the problem. Solutions include overturning the exemptions from railroad regulations and opposing the recent tariff changes. ISRI has formed steering committee that is looking at its options.

Any questions about these efforts, or if you want to participate in these efforts, you should contact Billy Johnson at ISRI. 

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