Moore on Pricing: Increase rail rate oversight?

Once again, major shippers are asking the U.S. Congress and the Surface Transportation Board to help them counterbalance the rail industry juggernaut with easily accessible rate reasonableness testing and service regulation (Senate Bill 2777). 

For shippers, there are two markets in rail—intermodal and bulk rail. Intermodal pricing is tempered by competition. And as a result of highway trucks as direct competitors and cross-country movements facing competition from the Panama Canal expansion, intermodal rail continues to see modest price increases.

Bulk commodities are largely dependent on rail. Many bulk shippers are served either by only one railroad or two competitors with suspiciously similar pricing. According to the American Chemical Council, and as reported in Logistics Management, rail rates have increased at three times the rate of inflation since 2001. 

For tank car shippers, the rapid move by the Department of Transportation to force an upgrade in rail cars to reduce ruptures in derailments is added cost on top of the rate increases. To introduce competition in bulk means water or pipeline if available, but both are very capital intensive. 

With only one viable mode available to them, these shippers are asking for relief anywhere they can get it. As a third-party logistics provider representing rail shippers for nearly ten years, my personal experience was that the few major railroads in North America have a bias toward having bulk shippers carry the cost increases that the railroads face despite the fact that many shippers provide their own rail equipment, inspections, and terminal services. 

The Association of American Railroads (AAR) is a very active Washington lobbying engine. Recent testimony by AAR representatives sought to assure Congress that all is working fine and market forces—de-regulation—has been very good for the health of U.S. railroads. They point to intermodal to demonstrate their major investments and moderate pricing. 

However, the recent rapid expansion in oil transportation by rail to and from newly developed domestic sources has exasperated the problem. Equipment shortages, crowded rail corridors, and a spate of crashes have made all rail movements subject to new scrutiny by communities across the country, and shippers are taking extra precautions, allowing more time for both delivery and return of empty cars. This negatively affects customer service and inventory levels.

This year, prices have been steady with inflation, however some have alleged that recent action in Congress to beef up rail pricing regulation has caused the rails to temper their annual quest for increases well above the rate of inflation. We note that with diesel prices essentially flat, it can be argued that this major contributor to inflation has provided relief this year. 

Whatever the cause for this short-term pricing moderation, shippers should not relax their push to rein in the oligarchy that is now North American rail. Shippers need to understand what’s driving prices in rail, and any competitive leverage should be researched, including re-regulation of pricing. 

Commercially, there are options including trading with competitors to supply each other’s customers in order to reduce transportation distances or the need for the use of rail. This can have the secondary effect of broadening the discussion with railroads about the total cost to serve and the needs of shippers to be competitive against alternate locations, commodities, and process options. But don’t forget, when a commodity is priced out of market due to transportation costs, everyone loses. 

While there is little hope for a quick solution to pricing pressures in rail, a start would be transparency in rail costs to serve these critical shippers.