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Rail Report - Winter 2005

NGFA Urges STB to Provide More ‘Balanced’ Rail Oversight

The National Grain and Feed Association (NGFA), the nation’s largest organization of rail shippers and receivers of grain, feed and grain products, is urging the federal Surface Transportation Board (STB) to institute more balanced regulatory oversight of the rail industry, warning that U.S. agriculture confronts a “huge freight capacity challenge in the years ahead.”

In testimony prepared for delivery at an October 19 STB public hearing on the 25th anniversary of the Staggers Rail Act, the NGFA said the law had several positive outcomes, such as improving railroads’ profitability and flexibility to better compete for freight business with other modes. But, carriers have used that flexibility to concentrate an increasing share of rail assets into certain types of highly profitable traffic which has raised “major concerns about the future of rail service and the ability of U.S. agriculture to compete for needed rail freight capacity…at reasonable rate and service levels.”

Deregulation resulting from enactment of the Staggers Rail Act led to rail consolidation, with a sharp reduction in competitive routes and options for shippers and receivers of bulk commodities, reported NGFA. At the same time, the volume of commercial rail shipments of grain and other bulk agricultural commodities declined from 50 percent to 35 percent.

“Agricultural shippers continue to face difficulty in obtaining consistent or predictable rail service,” said NGFA President Kendell W. Keith. “While the railroads have become more efficient at moving grain volumes between points, through their use of shuttle and unit train operations…, there is concern whether this trend in declining rail volume will continue and how agricultural shippers can compete effectively with other industries for available rail service.”

The NGFA suggested that the STB “seriously consider” a shift in policy and legal interpretation of the Staggers Act away from focusing primarily on ensuring rail adequacy of carriers to providing rail customers with balanced, transparent and cost-effective recourse at the STB to challenge unreasonable rail practices and rates. “If there is a legitimate risk and/or cost for both parties – the shipper and the carrier – for bringing a case to the regulatory body (STB), there will be some degree of market discipline even in the absence of true or traditional market competition,” Keith said.

The NGFA said several trends in rail service and rates bear out U.S. agriculture’s concerns:

• The fastest-growing segment of rail traffic is intermodal, where train speeds exceed those for other types of movements by as much as 50 percent. The NGFA said the influx of intermodal traffic has made many agricultural movements “dispensable to the railroads, which either openly ‘demarket’ them through frankly stated disinterest or through prices designed to deter rail use.”

• To secure or maintain service, rail grain shippers have found it necessary to invest millions of dollars in private rail car fleets, rapid-loading facilities, track and other equipment. Private shipper-owned or leased cars now comprise 65 percent of the grain hopper car fleet, and 100 percent of tank cars used to haul vegetable oil, corn syrup, ethanol and other liquid agricultural products. Yet this shipper-controlled equipment often is the first to be idled by rail carriers if periodic capacity surpluses occur, the NGFA said.

• While published rail freight rates, as measured on a ton-mile basis and adjusted for inflation, declined until the late 1990s, those rates do not reflect the previously noted investments in rail cars and loading capacity that shippers and receivers have been required to make by carriers as a precondition for maintaining or securing rail service. Those factors make the actual trend in total “real” cost for rail transportation “less certain,” the NGFA said. Rail rates generally have been increasing, and very rapidly in some markets, as rail capacity shortages since the late 1990s have become more acute and prolonged, the NGFA added.

Rail carriers’ use of “differential pricing” (charging more for shorter-duration movements than longer shipments traveling on the same route) to discourage certain grain movements has been a “chronic and daunting” challenge for many small and captive shippers without competitively priced alternatives to rail, said the NGFA. The association noted that the STB currently does not provide a transparent, cost-effective process to allow agricultural shippers to challenge rail rates even when they exceed 180 percent of variable cost (the threshold set under the Staggers Act). “In many cases, railroad pricing policies have dictated ‘winners’ and ‘losers’ within the agricultural shipping community,” the NGFA said.

Fuel surcharges imposed by some carriers exceed the total cost of fuel for the average shipment, NGFA added. “Carriers’ ability to assess exorbitant fuel surcharges is another indication of a lack of effective competition among carriers and other modes, at least in the near term,” the NGFA said. However, the association did commend two rail carriers for “making attempts to address customer concerns” over fuel surcharges (the BNSF Railway for announcing it would shift to a mileage-based surcharge more directly related to fuel costs, and the Canadian National Railway for announcing two reductions in fuel surcharges since April).

As an example of how the STB could create a more balanced approach to rail regulation in the future, the NGFA cited the success of the agreement entered into in 1997 with the Association of American Railroads and individual carriers to utilize NGFA arbitration to resolve certain types of rail-related disputes. Disputes eligible for NGFA arbitration include those involving misrouting of railcars, bills of lading, rail contracts and leases involving rail-owned property.

“In an era of high profitability for rail carriers, to the extent that the STB could create that kind of balance in STB oversight and proceedings, we think the market would evolve toward more self discipline and improved market performance, and the level of friction between carriers and shippers would be reduced,” the NGFA said.

As for this fall’s grain harvest, the NGFA warned it likely will be “the most logistically challenging in the history of the Staggers Act.” This is a result of the combination of tight rail capacity, impediments to barge traffic from low water levels on the Upper Mississippi and Illinois Waterway, and hurricane-related transportation disruption. The NGFA noted that rail car premiums as high as $2,000 or more (equating to 50 cents per bushel for corn) have been charged in some markets “desperate” to secure rail equipment.

Rail Price-Service Gap Growing

The gap between rapidly-rising rail rates and what shippers see as service value seems to be growing, prompting rail shippers to seek alternatives, according to Morgan Stanley’s latest semi-annual shipper survey reported in The Journal of Commerce.

Survey respondents expect railroad rates to increase 5.6 percent over last year during the next six months, the largest expectation of higher rates reported since the company started the survey in May 2001.

“While we’ve been bullish toward railroad pricing power all year, even we were surprised by the magnitude of the rate increases railroad shippers expect as we had assumed pricing gains would moderate over the next year,” said Morgan Stanley analyst Jim Valentine.

The largest rate increases are predicted on Union Pacific Railroad and CSX -- which is not intuitive, Morgan Stanley reports, because these carriers are providing the worst service in the industry based on a sample of 300 shippers responding to the survey. Valentine said poor service by the railroads are related to their efforts to limit volume growth through price increases as they work to decongest their networks.

“In meetings with me two years ago, railroads were spending a third of their time going over plans to get trucks off the highway,” said Roger Nober, chairman Surface Transportation Board, to a Transportation Table audience in September. “Fast forward, and now they’re talking about how they’re metering demand through price.”

The scenario, says Nober, “has produced a new set of regulatory issues that question whether railroads are gaining too much market power.”

Railroads, which continue to move record amounts of freight, cite numbers that tell a different story.

“The nation’s freight railroads are hauling more freight than ever before and are charging less than they did 25 years ago to do it,” said Ed Hamburger, president, the Association of American Railroads.

“Since 1980, our productivity is up nearly 200 percent and yet our rates have dropped 60 percent, saving our customers $10 billion a year. This is largely due to the Staggers Act, which partially deregulated the industry and gives railroads a good foundation for meeting what is expected to be another record fall for rail freight transportation.”

BNSF’s Mileage-Based Fuel Surcharge Program To Begin in January

BNSF Railway Company has announced that its mileage-based fuel surcharge program will take effect for Coal and Agricultural Products customers January 1, 2006, as scheduled. An effective date for the mileage-based program for intermodal, automotive and other carload customers will be announced later.

“Customer feedback indicated that while a mileage-based fuel surcharge program is considered more fair and equitable than the current percentage-based program, some customers need more time to make adjustments to their own information systems to accommodate the new program,” said John Lanigan, BNSF’s executive vice president and chief marketing officer.

BNSF is making and testing the changes to its information systems required to implement the mileage-based fuel surcharge program, and expects to complete that process later this year.

Intermodal, automotive and carload customers other than Coal and Agricultural Products customers will continue to pay a fuel surcharge based on percentage of their freight transportation bills.

“As announced earlier this year, non-Rule 11 interline shipments also will continue to use the percentage-based fuel surcharge,” said Lanigan. “Currently, the system used by the rail industry to electronically exchange interline billing and settlement information cannot accommodate a mileage-based fuel surcharge.”

For Agricultural Products customers, the mileage-based fuel surcharge will reflect rail mileage between origin and destination points according to BNSF’s on-line rail mileage inquiry tool at http://www.bnsf.com/bnsf.was5/RailMiles/RMCentralController, instead of highway mileage as originally announced.

More information about the railway’s fuel surcharge programs and tables for both mileage- and percentage-based programs are available at http://www.bnsf.com/tools/prices/fuelsurcharge/index.html.

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