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Rising rail transportation rates limit US manufacturers

03.14.2014  |  Stephany Romanow,  Hydrocarbon Processing, 

Keywords: [chemical] [coal] [plastics] [utilities] [glass] [rail cars] [freight charges]

By STEPHANY ROMANOW
Editor

A new report on freight-rail rates prepared by Escalation Consultants finds that the premiums on rail shipments soared by 90% from 2005 to 2011, despite a drop in demand.

This new research shows that many domestic producers who depend on rail transportation are affected by high rates and the problem is getting worse. The report, released on behalf of organizations representing manufacturers, farmers, utilities and other rail stakeholders, explains the detrimental impact of soaring freight rail rates and outlines a renewed effort to pass freight rail policy reforms. 

The groups represented include the Alliance for Rail Competition, American Chemistry Council, American Forest and Paper Association, Chlorine Institute, Consumers United for Rail Equity, National Industrial Transportation League, National Rural Electric Cooperative Association, and the Steel Manufacturers Association.

“The release of this new compelling economic research puts a spotlight on a growing problem that farmers and other producers in the US have been enduring for many years,” said Terry Whiteside, chairman of the Alliance for Rail Competition, a group that represents shippers of agricultural commodities, coal, chemicals and other bulk commodities. “We hope policymakers understand that the negative effect of this problem goes beyond our ability to keep making what we need at home—it’s also about what families pay for food and electricity.”

“This new research underscores the dramatic impact that the lack of access to competitive freight rail service can have on US producers. Basic economics classes teach the link between supply and demand. However, the freight rail industry has continued increasing rates and achieving record profits during a large economic downturn because of the lack of competition,” said Steve Sharp, President of Consumers United for Rail Equity, a coalition that represents a large cross-section of freight rail customers who are dependent on freight railroads for their transportation needs. “This cost premium gets passed along to consumers in the form of higher prices.”

Rate premiums soar for US manufacturers

Using data submitted by the railroads and maintained by the federal government, Escalation Consultants published a report that examined rail rates for commodity shipments in 2005 and 2011 (latest data available). To determine the premium manufacturers pay on each shipment, Escalation Consultants calculated the railroads’ variable cost and the revenue-to-variable-cost ratio (RVC) for more than 39 million carloads of rail traffic. RVC is an important indicator because traffic with rates greater than 180% RVC is subject to potential Surface Transportation Board (STB) review for being unreasonably high. The report found the following:

  • In 2011, more than half (57%) of all rail rates exceeded 180% RVC
  • From 2005 to 2011, the total rate premium paid by commodity shippers increased 90% even though carload volume declined by 1.1%
  • As a result, the total rate premium paid by commodity shippers in 2011 exceeded $16 billion (B)
  • The commodity groups with the largest total rate premiums were coal ($5.2 B), chemicals and plastics ($4.5 B) and transportation equipment ($1.2 B);
  • Many rates were far above the STB’s jurisdictional threshold of 180% RVC; for example, nearly one quarter (23%) of rates exceeded 300% RVC, or three times the railroad’s variable cost.

“It didn’t matter what was shipped, where it was shipped or even how much was shipped. The research found that few American manufacturers are spared from soaring freight rail rates,” said Jay Roman, President of Escalation Consultants. “Given that rate increases are clearly not driven by increased demand, this type of pricing behavior is not indicative of a competitive marketplace for freight rail service.”

Research demonstrates urgent need for policy reforms

The study was released as Congress and the STB continue to explore freight rail policy reforms. While freight rail rates are skyrocketing and rail competition is dwindling, US freight rail policy has not kept up with the times. With the release of today’s research, shippers urge Congress and the STB to act swiftly.

The US National Industrial Transportation League president Bruce Carlton said the data is further evidence that key reforms, including competitive switching, are needed to help restore free market forces. 

“The STB is currently considering a proposal on competitive switching, and we hope the Board will act quickly on this modest, common-sense proposal that reduces the need for government intervention and introduces some free-market forces into the freight rail system,” said Carlton. “This would be a positive first step toward removing barriers to competition and in doing so would help both US railroads and a wide range of their customers, including automobile, chemical, glass, paper, fertilizer and steel manufacturers.”

“Domestic producers across many different sectors of our economy share a common problem, and we are committed to finding reasonable and meaningful solutions for both shippers and railroads,” said Cal Dooley, CEO of the American Chemistry Council (ACC). “For American manufacturers to succeed in the global marketplace so we can continue to invest and contribute to the creation of jobs in the US, we must all compete. This means that policymakers must reform the STB to be more efficient and effective and must allow the marketplace to lead by enacting policies such as competitive switching.”



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