Differences in freight rail pricing between shippers and carriers are front and center in GAO report

A recent report issued by the Government Accountability Office (GAO) examined a topic near and dear to both railroad carriers and shippers, freight rail pricing.

Before looking at what the GAO issued, the subhead of its study–“Contracts Provide Shippers and Railroads Flexibility, but High Rates Concern Some Shippers”-in many ways, tells the story of what has been occurring on the tracks, pricing-wise, for years, and does so by doing a good job of presenting where each side is coming from, too.

And it would not be prudent to forget that Class I railroads pay much more on capital expenditures, and subsequently are much more capital intensive than other industries, spending, on average, 18 percent of revenue on capital spending compared to an average of 3 percent for all other manufacturing sectors, according to data from the Association of American Railroads (AAR).

Why is that important? Well, it serves as a backdrop to what is often viewed as an acrimonious relationship between railroad carriers and shippers, when it comes to the subject of pricing and rates.

The GAO noted that the Surface Transportation Board Reauthorization Act of 2015 had a provision for the GAO to review rail transportation contract proposals containing multiple origin-to-destination routes, with the report addressing similarities and differences in shipping freight under a tariff versus a contract and the potential views to using each, as well as views of selected stakeholders on the implications of shipping freight under a tariff versus a contract.

The GAO’s findings included:

• rail contracts and tariffs are similar but contracts offer the flexibility to customize rates and terms to a specific shipper, with contract and tariff rates based on certain factors like competition;
• on developing contract rates, a railroad will also examine factors specific to each shipper and negotiate discounts in exchange for the shipper committing to provide a specified volume over the contract’s negotiation, with carriers saying the volume commitments in a contract allow them to better allocate resources and ensure consistent revenues and shippers saying they can more efficiently manage multiple shipping routes under a single contract due to rate stability over the contract’s duration, whereas tariffs may be preferred for smaller shipments;
• captive shippers, those served by a single railroad without an economically viable alternative, have issues with contracts that have high rates for multiple origin-to-destination routes, even with volume discounts;
• the four largest Class I railroads say that they charge what shippers are willing to pay to cover infrastructure costs for the entire rail network, while some shippers content that combining captive and non-captive routes in a single contract can compel shippers to accept some unreasonable rates;
• shippers that view contract rates as unreasonable cannot challenge those rates at the STB, because contracts are not subject to STB oversight, but a rail official told GAO that a shipper can ask a railroad to switch rates the shipper views as unreasonable to a tariff, but shippers say that tariff rates are usually higher than contract rates and are reluctant to forgo a contract with mixed rates for a tariff; and
• shippers say that the STB process for reviewing tariff rates was designed, in part, for protecting captive shippers from unreasonably high rates, shippers maintain that the process is “complicated, time-consuming, and expensive

In many ways, these findings have a “more of the same” feeling to them, in that there is nothing truly groundbreaking to be sure, but, even so, the GAO does a very good job of presenting both sides of the story.

What’s more, railroad carriers and shippers, at the end of the day, really do need to collaborate effectively and efficiently to foster strong business and contractual relationships, so each side truly needs to be heard.

And, as previously reported, there still remains myriad calls echoed by certain members of Congress and railroad shipper groups to “re-regulate” the freight railroad industry on the grounds that there are multiple barriers to competitive access for captive shippers such as improving the rate challenge process at the STB, getting relief from what shippers view as monopoly pricing power held by the railroads, establishing the STB as an independent agency and giving the STB investigative authority, creating a strong rail customer service advocate to help resolve shippers’ concerns, and protecting rail shippers and maintaining reasonable rates in non-competitive situations, among others.

But from the railroads’ perspective, pricing power is a necessity, because in order to be able to make investments into their networks and infrastructure, railroads need to maintain their current pricing leverage, which has been firmly intact for more than16 years.

And railroad executives have been consistent in saying for years that the existing regulatory railroad environment has produced—for North American railroad shippers—a freight railroad system that is the envy of the world, adding that while it is not perfect to deprive the industry of its ability to earn its cost of capital could have a chilling effect on capital investments to support traffic growth and it could begin to reverse the great strides freight rail has made after Staggers in the areas of rail safety and service reliability.

And it goes on and on down the tracks. What are the next steps for freight rail pricing and relations between rail carriers and shippers going forward? Drop a line to Newsroom Notes with your take at [email protected].