Federal report: Shippers concerned about freight railroad rates

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A Rochester & Southern train is shown hauling a string of freight cars at Caledonia, N.Y. According to a report from the Government Accountability Office, railroads prefer contract rates to tariffs.
TRAINS: Brian Schmidt
WASHINGTON — Freight contracts provide shippers and railroads flexibility but shippers are concerned about high rates, according to a Government Accountability Office report released last week.

Unlike tariffs, contracts offer the flexibility to customize rates and terms to a specific shipper, the GAO’s Freight Rail Pricing report found. Rates for shipments moved under tariff and contract are based on market factors, managers from BNSF Railway, CSX Transportation, Norfolk Southern, and Union Pacific told the government agency. Executives from the big four U.S. railroads said that in developing contract rates, a railroad will also examine factors specific to each shipper and may negotiate discounts in exchange for the shipper committing to provide a specified volume over the contract’s duration. According to railroad representatives, the volume commitments negotiated in a contract allow the railroad to more efficiently allocate its resources and ensure consistent revenues.

Selected shippers told GAO report writers that they can more efficiently manage multiple shipping routes under one contract because of the stability in rates over the duration of the contract. In contrast, tariffs may be preferred for smaller shipments. Despite the volume discounts contracts can offer, certain shippers said that contracts that include rates for multiple origin-to-destination routes can contain high rates on some routes. This is particularly an issue for captive shippers.

Shippers subject to contract rates they view as unreasonable cannot challenge those rates at the Surface Transportation Board because contracts are not subject to STB oversight. A railroad official said that a shipper may ask the railroad to switch rates the shipper views as unreasonable to a tariff. However, selected shippers said that tariff rates are generally higher than contract rates, so they are reluctant to forgo a contract with a mix of rates in favor of using a tariff.

While the STB process for reviewing tariff rates was designed, in part, to protect captive shippers from unreasonably high rates, selected shippers said the process is complicated, time-consuming, and expensive. In 2016, STB began to reform the tariff review process with the goal of improving its efficiency.

The GAO report is available online.

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