STB Proposes Rule to Improve Poor Service for Captive Rail Movements

STB Proposes Rule to Improve Poor Service for Captive Rail Movements

STB Proposes Rule to Improve Poor Service for Captive Rail Movements (Docket EP 711)

The STB has issued a Notice of Proposed Rulemaking to provide rail customers with access to reciprocal switching as a remedy for poor service. The proposed regulations provide a streamlined path for obtaining a reciprocal switching agreement when service to a terminal area  shipper fails to meet any of three performance standards.

The proposed standards reflect a minimal level of rail service below which a shipper would be entitled to relief. Each standard provides an independent path for a petition to obtain a reciprocal switching agreement. The standards employ Board-defined terms which can be applied across all Class I rail carriers and their affiliated companies. To readily monitor and measure rail service the rule would require all Class I railroads to provide their customers with the historical data for these service metrics within seven days of a customer’s request. All three Service metrics would be standardized across all Class I railroads.

The three proposed service standards are:

  1. Service Reliability:

    • The measure of a Class I railroad’s success in delivering a shipment by the Original Estimated Time of Arrival (OETA) provided to the shipper. Actual performance would be compared to railroads OETA provided to the shipper over a lane for 12 consecutive weeks. One proposed approach would be that at least 60% of the shipments for a movement must arrive within 24 hours of the OETA for minimum service reliability during the first year after the rules effective date. This would increase to 70% during the second year after the rules effective date.

  2. Service Consistency:

    • The measure of a railroad’s success in maintaining, over time, the railroad’s efficiency in moving a shipment through the rail system. This standard is based on the transit time for a shipment. For loaded cars, unit trains and empties, a petitioner would be eligible for relief if the average transit time for a shipment increased by a certain percentage (potentially 20% to 25%) as compared to the average transit time for the same 12-week period during the previous year.

  3. Inadequate Local Service:

    • This service metric provides rail customers with information on all important first mile/last mile service. Local service would be deemed inadequate if the railroad had an Industry Spot and Pull (ISP) success rate of less than 80% over a period of twelve consecutive weeks in performing local deliveries and pick-ups. The ISP success rate measures whether the railroad provides service within its customary operating window for the affected shipper, which in no case can exceed 12 hours.   

Under the proposed rule a reciprocal switching agreement would be for a minimum period of two years and up to a maximum of four years.

The STB is to be commended for developing this process for assisting rail shippers with inadequate service. There are, however, several issues that need to be addressed and finalized in the proposed rulemaking:

  1. The percentages that are used to determine what is acceptable service in each of the three-service metrics.

  2. The reciprocal switching fee that the incumbent railroad is allowed to charge an alternate railroad. Setting switch fees based on the cost of service is being considered along with other options. Having pre-determined switch fees is a major part of the inter-switching regulations in Canada but pre-determined switch fees are not being considered in the STB’s proposed ruling.

  3. The STB has no authority over contract movements, and it needs to be determined if the proposed ruling would apply to traffic that is provided under rail transportation contracts.

  4. It needs to be determined whether the service metrics can consider performance data of railroads under rail contracts or are limited to service for tariff movements.

Comments on the proposed rulemaking are due by October 23, 2023. Rail shippers are encouraged to review the Proposed Rulemaking and submit comments to influence the final outcome of the regulation as this will likely have a big impact on a very large number of shippers.

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Reducing rates on captive rail movements blog

Reducing Rates on Captive Rail Movements – Part 2

Information on Your Railroad that Helps Reduce Rates on Captive Rail Moves

Most shippers agree there are certain things they must know about the railroads with which they do business. Shippers tend to agree they need to know what is happening with costs and rates at their railroads. Even if this type of information does not result in any type of benefit to their rates or services, it is simply required knowledge for a professional in rail transportation. Shippers have found the following railroad data to be very valuable in negotiations.

The Cost of Specific Movements

Shippers need to know the margin railroads make on their movements. This data can be valuable in answering the following types of questions.

  • How low could a rate go if a shipper had competitive alternatives?
  • What is the profitability of individual movements for a railroad?
  • How much combined profit do all of a shipper’s movements provide to individual railroads? (How important are you to a railroad?)
  • How much profit will a railroad lose if you take certain movements away and how much profit will it gain if you add movements?
  • How will the railroad’s costs change if you change the parameters of your movement?
  • And, frequently most important:
    • What the railroads RVC’s for your major movements are in relation to benchmark RVC’s for your commodities.

How Much of a Shipper’s Commodity is Carried by a Railroad

Do you represent 80% of the shipments of a commodity on a railroad, or only 1% of all its shipments? You need to know whether you are the railroad’s only opportunity for carrying a commodity to certain markets. If that is the case, you need to partner with the railroad to penetrate certain areas and that needs to set the tone for negotiations. If a shipper is captive to a railroad but is the only opportunity for that railroad to obtain market share in a region, then it makes no sense for the railroad to give the shipper monopoly level rates. Shippers need to point these opportunities out to their railroads and demonstrate that rate increases are not beneficial to either of their volume and profit objectives.

The Political Impact You Can Have on a Railroad

One of the best and least frequently used methods of increasing negotiation leverage with railroads is political pressure. Railroads frequently interact with state and local officials in areas where shipper’s offices are located. Understanding what a railroad needs from local officials and how your company can help or hurt the railroad’s efforts is a good source of leverage, which frequently goes unused.

On the national level, involvement with congressional representatives in Washington, as well as with the STB can make a shipper much more important to a railroad. The government regulates railroads, and the greater a shipper’s input and access to politicians and regulators, the greater its potential leverage with a railroad.

Escalation Consultants has developed political leverage for many shippers and what we have found is that there is a right way and wrong way to address rail issues with politicians. In addition, all politicians are not equal in the eyes of railroads, but if you do this properly you become more important to a railroad. To give an example, after generating political pressure we had a meeting with the railroad. In the meeting our client was told that it was not the largest shipper of its commodity on the railroads system, but it was now the most important shipper of the commodity. The takeaway from this example is that if you have the ear of someone that is important to a railroad, then you become more important to that railroad.

Click here to read: Reducing Rates on Captive Rail Movements – Part 1

 

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Reducing Rates on Captive Rail Movements

Using Information Within Your Company to Reduce Captive Rail Rates

Reducing Rates on Captive Rail Movements – Part 1

Shippers need to understand everything they have to put on the table in a rail negotiation. The more a shipper knows about the overall volume his company currently ships and will ship in the future, the greater its bargaining power. The following are some examples of in-house information that can be valuable in negotiations.

The Total Inbound and Outbound Traffic the Whole Company Moves on a Specific Railroad

A shipper needs to assess the company’s total market power with a particular railroad. This is especially the case if one traffic department manages inbound traffic and another outbound traffic, if different traffic departments handle different commodities, or if suppliers handle inbound traffic. You need to know the total dollars and volume your company represents to a railroad to understand your leverage and all of the options available to help or hurt a railroad’s profitability.

The Company’s Future Plans to Increase Market Share

Data showing how rail volume is projected to increase can be helpful in demonstrating that a railroad can be more profitable by holding rates down than by increasing rates, particularly when additional sales volume will not materialize with excessive rail rates.

How Much Freight Expenses Represent to the Sales Price of Commodities

Documenting a direct connection between rail rates and sales volume can provide an incentive for a railroad to minimize rate increases. The ratio of freight expenses to sales price over time is also helpful in tying rail rates to sales volume.

Past and Current Service Problems with a Railroad

Documenting service problems can be useful in rate negotiations if the railroad’s lack of service is already creating additional expenses for a shipper. The incentive for the railroad to correct service problems is increased if the railroad receives more carloads by improving transit times. Since the number of carloads you move can have a direct effect on the railroad’s cost for a movement, improving services can lower the railroad’s cost and increase the profitability under existing rates.

How Competitive Rail Traffic on Railroads can be Increased by Changing How You Deal with Railroads Internally

There are numerous ways this can be achieved, the following are a few pertinent points for shippers to consider.

  • Using Rule 11 movements vs Through movements to increase the total competitive carload volume on each railroad.
  • Having railroads quote rates through multiple gateways to increase the routing and pricing options for each movement  [3 pricing options, instead of 1 can be very beneficial].
  • If you produce the same product at multiple plants, use geographic competition to change the status of a movement from captive to competitive.
  • Determine if your customers can accept shipments by truck?

Many rail shippers don’t fare as well as they should in negotiations because their railroads know more about their business than the shippers’ transportation department. Transportation represents a big expense for most companies and every transportation department needs to be in the loop on issues related to sales volume, market share and projected plans for increasing market share. Without this information, money tends to be left on the table in rail negotiations, making it more difficult for a shipper to achieve its sales objectives and profit goals.

 

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How to reduce rail rates on captive moves

Details on How to Reduce Rail Rates on Captive Moves

Many rail shippers try to reduce their rail expenses. Those with the most leverage have the most success. The leverage shippers develop with their railroads ultimately determines whose rates increase and whose rates decrease.

From a marketing perspective, leverage with railroads determines whether your company operates at a competitive advantage or disadvantage in its markets. The most important part of any rail negotiation is, therefore, the leverage a rail shipper brings to the table.

Leverage enables a rail shipper to make demands on the railroad. Without leverage, shippers’ rates will tend to increase each year. On the other hand, with leverage, a shipper has much more control over the level of the rate structure for its movements.

To those not directly involved in shipping products by rail (like many in upper management), gaining leverage with a vendor may not seem like that big of a deal. However, once it is recognized that railroads frequently have no competition at the destinations where your products are delivered, the difficulty in obtaining leverage with railroads becomes all too clear. The very nature of the railroad industry makes it more difficult for shippers to obtain negotiating leverage.

However, it needs to be understood that just because you are captive to a railroad does not mean you aren’t able to create negotiating leverage. Many shippers miss out on opportunities to increase negotiation leverage as they don’t fully explore all their opportunities for generating leverage.

To create negotiation leverage with a railroad that believes it has monopoly power over your movements, you must educate that railroad on why it is wrong. To do this a shipper must understand all of its internal options, all of its railroad’s options, and the positive and negative impacts of changes in rates.

As an example, when Escalation Consultants first starts working with a shipper to better control rail expenses the first department we want to talk to, after the transportation department, is marketing and sales. This is because they hold information that can be instrumental in increasing negotiation leverage with railroads. This includes information on:

  1. Business that has been lost

  2. Markets that are not economical for your company to go after

  3. Alternate sourcing options

  4. Your customers ability to use logistic options other than rail

  5. The location of your competitors

In order for shippers to achieve success in controlling expenses on captive rail movements, they need to be creative. To do this effectively, the rail negotiating team will frequently require access to more internal and external information than is normally available in the transportation department.

The issues that work to improve negotiation leverage with railroads tend to be different for every company. However, what works best for every shipper tends to fall in the following areas:

  1. Information from within your own company

  2. Information on your railroads

  3. Intelligence on your primary competitors

  4. Information on potential alternate logistics and sourcing options

Details on each of these options for increasing negotiation leverage will be covered in future blogs. 

 

Click here for more information on Reducing Rail Rates on Captive Moves or to schedule a discovery call.

Improving Rail Rates on Captive Movements

A Regulatory Perspective: Improving Rail Rates on Captive Movements

Improving Rail Rates on Captive Movements

Large increases in railroad’s profitability are improving shipper’s leverage in rate negotiations on captive movements. This is happening because high levels of railroad profit are factored into the RSAM[1] data that the STB uses to determine the outcome of a 3-Benchmark Rate Challenge. Higher railroad profits result in the RSAM data improving the ability for a shipper to win a 3-Benchmark Rate Challenge. This strengthens negotiation leverage on captive movements. 

As an example, based upon the latest RSAM data, a rail shipper’s captive rates could be similar to competitor. However, they would be considered more than 25% above competitors’ rates in a 3-Benchmark Rate Challenge. This will be a big deal for many rail shippers.  

This blog is not intended to make you an expert on the calculation of the STB RSAM data or on everything that goes into a 3-Benchmark Rate Challenger. The intent of this blog is to provide: 

  1. A general understanding of how the 3-Benchmarks are calculated; 
  1. The impact high railroad profits can have on a shipper’s chance of success in a rate challenge; and, 
  1. The potential change in a shipper’s negotiation leverage on captive rail movements is due to the large increase in railroad profitability.  

Calculating the 3-Benchmarks 

The following benchmarks are used in a 3-Benchmark Rate Challenge. The STB calculates the values for Benchmarks 1 and 2. Shippers and railroads each calculate the 3rd Benchmark. 

Benchmark 1 – RSAM (Revenue Shortfall Allocation Mark-up Ratio) 

  • RSAM represents the average Revenue to Variable Cost Ratio (RVC) a railroad would need to generate from its rates on all captive traffic (traffic with RVC’s above 180%) to be revenue adequate. 

Benchmark 2 – RVC>180% 

  • RVC>180% represents the average RVC a railroad obtains from the rates for all of its captive traffic (traffic with RVC’s above 180%) 

Benchmark 3 – RVC-Comp 

  • RVC-Comp is the average RVC for movement rates that are comparable to the rate for the contested movement.[2]  

Importance of Recent Change in RSAM Values on Shippers Chance of Success in a Rate Challenge  

The latest RSAM data substantially improves a shipper’s ability to win a 3-Benchmark Rate Challenge. This is because the recent increases in railroad profitability put significant downward pressure on railroads’ RSAM values and significant upward pressure on its RVC  > 180% value. Thus, your rates could be comparable to competitors, but be considered 25% above these rates in a 3-Benchmark Rate Challenge. 

 

To be clear, shippers don’t necessarily need to initiate a 3-Benchmark Rate Challenge at the STB. However, shippers do need to understand that a railroad now has more to lose by not listening to a shipper’s concerns about rates and service on moves where there is a lack of rail competition. 

Schedule a quick discovery call to learn how to best navigate these recent increases in railroad profitability & changes in RSAM Values.

[1] RSAM is Revenue Shortfall Allocation Markup Ratio calculated each year by the STB.

[2] Comparable movement rates must have RVC’s above 180%.

Reasonable RVC's for Captive Rail Movements

Reasonable RVC’s for Captive Rail Movements

When looking at what a reasonable margin is for a railroad to make above its cost on captive rail movements you normally get a different answer from a shipper than from a railroad. A shipper logically wants to have a lower rate so it would want the Revenue to Variable Cost Ratio (RVC) for a move to be lower. The railroad benefits from higher rates, so it would normally want a higher RVC. It is therefore interesting to look at how a more neutral party looks at what a reasonable RVC is for captive rail movements.

The Surface Transportation Board (STB) regulates railroads, and it annually puts out two RVC values for captive movements on each Class I Railroad. These RVC values show:

  • RVC>180% 
    • RVC>180% provides the average RVC value each Class 1 railroad is getting from its rates for all of its captive movement (all moves with RVCs above 180%).
  • Revenue Shortfall Allocation Markup Ratio (RSAM)
    • RSAM represents the average RVC a railroad would need on all captive traffic (traffic with RVCs above 180%) to be revenue adequate.

The RVC>180% value provides the average markup above cost a railroad is obtaining on captive movements, while the RSAM value shows the average markup it needs to be revenue adequate.

It is interesting to look at these RVC values for the most current year available (currently 2021), but the historical change in these values is even more interesting.

Historical RSAM and RVC>180% Values for CSXT

The following table shows that between 2018 and 2021 CSXT’s RSAM value decreased 64.5% (243.5% – 179.0%). These yearly RSAM results are quite revealing as to the profitability of railroad movements. The RSAM values show that in order for CSXT to be revenue adequate in 2018, it needed an average RVC of 243.5% on all its captive movements (all moves with RVCs above 180%). The RSAM value decreased each year and by 2021 the average RVC CSXT needed on captive moves to be revenue adequate was only 179%. This 179% RVC RSAM value is less than the 180% Jurisdictional Threshold for captive movements.

The 179% RSAM value in 2021 is a significant indicator of the large increase in railroad profitability that has resulted from the rates and RVCs for CSXT captive movements over the 2018 to 2021 time period. In 2021, approximately 49% of CSX revenue came from movements with RVC’s above 180%.

Reasonable RVC's for Captive Rail Movements

In 2021 there is close to a 100-point difference between the average RVC CSXT is obtaining from its rates on captive movements and the RVC the STB shows that it needs on captive movements to be revenue adequate. It would likely be difficult for a shipper to negotiate rates for captive moves with RVCs below 180%. However, this type of data from a third party like the STB, impacts a shipper’s views on what is reasonable and the rates that are needed for captive movements.

This analysis is not meant to be critical of CSXT. CSXT’s values are simply being referenced for demonstration purposes. The values of other railroads are similar to those of CSXT. As an example, of the four major US railroads, only one has a 2021 RSAM value above the STB’s 180% Jurisdictional Threshold.

Click here to connect with Escalation Consultants’ for a historical summary of RSAM data for all Class I railroads.

Change in Competitive and Non-Competitive Rail Revenue

Improve Negotiating Leverage on Captive Rail Movements

Shippers Negotiating Leverage Has Just Improved on Captive Rail Movements. 

The amount of revenue that railroads receive from rates with Revenue to Variable Cost Ratios (RVC’s) greater than 180% has increased dramatically since 2004.            

Change in Competitive and Non-Competitive Rail Revenue

  1. Non-Competitive Rail Revenue (RVC’s >180%) has increased by 244% since 2004.

  2. This has resulted in a very large increase in railroad profitability.

  3. Shippers need to understand that very large rail profit can increase negotiating leverage with a railroad on captive movements.

To provide context to point 3, the new Revenue Shortfall Allocation Method (RSAM) data just released by the STB has improved shipper’s negotiation leverage on captive rail movements. The high level of railroad profit is factored into the RSAM data, and this improves a shipper’s ability to win a 3-Benchmark Rate Challenge at the STB.

Based upon the new RSAM data a rail shipper’s captive rates could be similar to competitors but be considered more than 25% above these rates in a 3-Benchmark Rate Challenge. This is a big deal!

To be clear, shippers don’t necessarily need to initiate  a 3-Benchmark Rate Challenge at the STB. However, shippers do need to understand that a railroad now has more to lose by not listening to a shipper’s concerns about rates and service on moves where there is a lack of rail competition.

Being smarter about your options improves a shipper’s ability to negotiate better rail rates for its movements. This is what the Rail Negotiation Seminar is about, and it is the reason this seminar is so highly recommended by rail shippers for rail shippers.

The Rail Negotiation Seminar is effective as it provides policies, strategies and negotiation practices that help reduce and better control your rail expenses. In addition, it keeps you current on changes in the marketplace as well as regulatory issues that can have a big impact on your rail expenses.Rail Negotiation Seminar Recommendations

For information on the Rail Negotiation Seminar and why this program is so important to shippers in the 2023 rail market, click the link below to obtain a brochure for the seminar.

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Percent Change in ALL-LF Index Before and After Error Adjustment

AII-LF: Check Your Index

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Check the Index You Use to Escalate Multi-Year Rail Contracts

 

The All-Inclusive Index- Without Fuel (AII-LF) is the primary index used to escalate rail rates in contracts. However, there are two versions of this index that are used to escalate rates and during rapid inflation. One index tends to increase more than the other. The graph shows:

  • Since 1Q2021 the AII-LF index Before Error Adjustment has consistently increased more than the AII-LF index After Error Adjustment.
  • The cumulative difference over the last eight quarters is 2.2% (17.4%-15.2%).
  • The difference over just the last quarter is 1.3% (4Q2022 to 1Q2023)
  • Shippers need to verify which version of the AII-LF index is being used to increase their rates.

All-Inclusive Index- Without Fuel (AII-LF) Changes Over Time

**This graph was generated using the Rail Cost Control program**

The Rail Negotiation Seminar is the most highly recommended program by rail shippers for rail shippers. The seminar is effective as it provides policies, strategies and negotiation practices that help reduce and better control your rail expenses. In addition, it keeps you current on changes in the marketplace that can impact your rail expenses, such as the changes referenced above in the ALL-LF indexes.

Thousands of rail shippers, from every industry that ships by rail, have attended the seminar over the years. Below are some of the observations they have made:

Rail Negotiation Seminar - ALL-IF: Check Your Index

** If you plan to attend the seminar, make sure to reserve your hotel room before EOD, Friday 2/10, to ensure your discounted room rate. Click the following link to lock in your discounted room rate: Rail Negotiation Seminar Hotel Reservations **

 

For more information on the Rail Negotiation Seminar, click banner below to download the brochure. 

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Change in RR's Inflation Premium Above Expenses

302% Increase In Rail Premiums Above Expenses

2023 Rail Negotiation Seminar Early Bird Pricing

The premium railroads make above their operating expenses, in inflation adjusted terms (Real Terms), has dramatically increased in recent years, but not in the more distant past.

Change in RR's Inflation Premium Above Expenses

The chart shows:

  1. Railroad profit, as measured by the difference between railroad’s Real operating revenue and expenses, increased 302% since 2004.
  2. Over the prior 19 years (1985 – 2004) Real rail profits fluctuated in some years, but cumulatively did not change.
  3. In Real Terms railroad profits simply kept up with inflation between 1985 and 2004.

The goal of effective rail negotiations is for a shipper to minimize rates that generate the type of results obtained by railroads in recent years by developing leverage to maximize the type of results obtained by shippers in prior years.

How shippers structure their rail negotiations has a big impact on their ability to control the cost of rail freight. The Rail Negotiation Seminar is a program that is structured to improve rail negotiations and stop shippers’ cost of rail freight from always increasing.  Don’t just take our word, check out the recommendations of past attendees to this program.  

Rail Negotiation Seminar Recommendations

Some important topics covered in the seminar that increase negotiation leverage:

  • Negotiation leverage not related to the competition for a movement
  • The benefits of being proactive and not reactive with railroads
  • Structuring the RFP to reduce cost by creating more pricing options
  • Optimizing your rail spend to increase negotiation leverage with railroads

Don’t wait to register – Early Bird pricing is available through January 31st! For more information about the Rail Negotiation Seminar, click banner below to download the brochure. 

2023 Rail Negotiation Seminar Brochure

STB’s Annual Rail Rate Index Study: A Deeper Dive

STB’s Annual Rail Rate Index Study: A Deeper Dive

As of he newly released STB Annual Rail Rate Index Study (Study) summarizes trends in freight rail rates between 1985 and 2019. The Study shows that inflation-adjusted Real Rail Rates have decreased 27% over the past 34 years. Because Real rail rates are lower now than in 1985, the STB Study may be read by some to imply that current rail rates are reasonable in relation to what they have been historically. Unfortunately, this is not an accurate conclusion, because the historical trend in rates provides an incomplete picture of the change in cost of shipping freight by rail.

 

To read the full article, click below:

STB’s Annual Rail Rate Index Study: A Deeper Dive