Shippers Claim Class One Railroads Fines are Unfair, Illogical, and Arbitrary

On May 22nd and May 23rd, the Surface Transportation Board (STB) held an Oversight Hearing on Demurrage and Accessorial Charges. Railroad customers objected to escalating fines across the country’s seven Class I carriers and referred to monopolistic, unfair, illogical, and arbitrary actions by most of the railroads.

Railroads

Railroads Demurrage Fines are Denounced as Unfair

However, Kansas City Southern (KCS) was singled out as the most customer friendly, a better word would be ethical, of the Class Ones. The members of the STB board spent some time asking why the other railroads could not emulate KCS’s practices to a greater degree.

What is Demurrage?

In logistics, demurrage is generally defined as a fine paid to a carrier for failing to load or unload a transportation asset – like a truck or ship – and then release the asset to service within an agreed upon amount of time. But the railroads are a bit different. 70% of railroad cars are owned or leased by shippers. 30 percent are “system owned” – owned by the railroad. Several shippers said that railroads had told them they don’t want to own these assets anymore and encouraged them to buy their own cars.

Railroads are fining shippers for not turning system cars quickly enough, but also for leaving cars on stretches of railroad outside the shipper’s yard for too long. Industry participants are referring to both types of fines as demurrage. Additionally, Norfolk Southern has a congestion charge, of $100 per car per day, that applies to all cars destined to a location that in the judgement of Norfolk Southern, is an excessive quantity of cars that congests their facilities and results in operating problems. These charges, which can range as high as $500 per instance, can result in the nation’s largest bulk shippers paying millions of dollars annually to the railroads.

Demurrage and Other Fines are Sharply Increasing

With the press toward precision scheduled railroading (PSR) in recent years, the railroads have stepped up their penalties against shippers tying up their assets and tracks. The fines have been increased in size and the amount of time allowed to turn the assets has decreased. At one railroad, the 2013 the fine was $50 a day per car. Today, it is $200. Meanwhile the time allowed to turn the cars went from 48 to 24 hours. In 2018, the Class 1 railroads collected $1.2 billion in demurrage.

Railroads generally defended the changes as being good for both the railroads and for shippers. By being able to keep cars in motion and “increase system fluidity” they could more fully utilize their assets and increase profitability. The move toward precision scheduled railroading (PSR) in recent years, has led to  stepped up penalties against shippers.

Shippers, the railroads argued, would benefit through quicker and more reliable service. As a result, they would not have to own as many cars and potentially not need to keep as much inventory. These fines are an “incentive” to get problem shippers to perform in a way that improves service for all their customers.

Shippers Denounce Demurrage Fines as Unfair and Arbitrary

But shippers pointed to the many ways the charges were illogical, punitive and arbitrary. The biggest issue was bunching. Shippers sought to order cars at a rate that matched their ability to load the cars. So, a shipper might be able to load 5 cars per day. This shipper seeks to order cars at a rate that matches their capabilities. For example, the shipper might order 5 cars for Monday, 5 for Tuesday, and 5 for Wednesday.  But not infrequently they receive no cars on Monday and Tuesday, and 15 cars on Wednesday. The shipper’s facility does not have the ability to process 15 cars in a day, so the inevitable result is demurrage caused by the railroads own service failure.

Further, it was argued, and not disputed by railroads, that bunching is inevitable even if all parties perform flawlessly. The natural variation in origins and destinations based on changing demand patterns, the impacts of weather, and changing transit times through cities, all contribute to bunching.

Fines are generated by the railroads IT systems without considering the capacity of shippers to handle loads, the actual ordering pattern of the shippers, and the number and timing of cars they delivered to the shipper. The onus is on the shipper to then seek “credit days” as recompense. But many shippers testified, and gave specific examples, of the process for resolving these disputes as being arbitrary and one sided.

Further, if shippers did not pay the fines, and continued to dispute them, they could be placed on “embargo” – meaning the railroad would refuse to carry their goods. One STB board member spoke of several shippers telling him privately that the railroads would “retaliate” against shippers who complained publicly or took their issues to court.

Not all Class 1 railroads have embraced precision scheduled railroading. Yet all the railroads, not just the PSR railroads, have moved to more fines. Just like in the airline industry, after the first airline started charging for bags, all the others followed suit.

It was also argued, that if the goal is to provide “incentives” to drive “system fluidity,” and trains end up bunched because one railroad has failed to deliver empty cars to an interchanged railroad in a timely manner, then railroads should impose demurrage fines on each other. This was an issue the railroads were extremely reluctant to discuss.

Railroads IT Tools are Sadly Deficient

Railroads also touted their online tools and the visibility provided by their systems. It was difficult to understand why they were so proud of their systems. When asked what percent of car trips met their original estimated time of arrival (ETA), the Union Pacific said it was 73 percent to within 8 hours of when ordered – which I read is if the car was ordered on Tuesday, they could bring it in on Monday after 4 pm and on Wednesday until 8 am and count the car as being on time. That is a loose window and their performance is still terrible.

The Norfolk Southern tried to finesse the question by saying their on-time early was above 90 percent. But shippers don’t want the cars delivered early, that just leads to demurrage.

Shippers scoffed at the quality of these systems. The estimated time of arrivals (ETAs) for when empty cars could be sent to a yard were not accurate; shippers were expected to look on their computers to see where their cars were. But because cars pass from one rail lines tracks to another, that meant looking in multiple systems. ETAs were at the mercy of the least accurate legs of the trip. And the amount of time cars spent at interchange yards being particularly hard to predict. And the whole idea that shippers should have to continually look online, instead of being provided updated ETAs, was viewed as being badly outdated.

Comments

  1. This Comment came in via email today.

    I thought I would offer my own assessment after decades of third person omniscient in the rail industry. This is one of the ways they drive off the less profitable traffic. It’s all a margins game. It has nothing to do with precision. It’s a focus on moving higher profit margin traffic and shedding the traffic with lower profit margins.

    Do I want my train to handle cars I make a 40% profit margin on or cars I only make a 15% margin on?

    If I can drive off all the low margin traffic, I can run fewer longer trains. The trains that are left are all hauling higher margin traffic. On top of this I got rid of locomotives, cars, and the employees that were needed to handle to lower margin traffic.

    Bless the Shortlines for taking up the cause…

    Thoughts?

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