Just how bad has the deterioration in rail service across the United States become?
- Grain elevators are full, sitting alongside trains that are also full and can’t move, leading to grain piling up beside the tracks.
- Plants and assembly lines have had to shut down because of lack of timely train service.
- Farmers are looking to “depopulate” their herds of cattle and flocks of chickens because of undelivered feed.
- Spring planting by farmers is delayed because fertilizer shipments have not been completed.
- Chemical shippers have been forced to resort to expensive truck services to haul chemicals that are needed for water treatment plants in towns and cities across the country.
- Gasoline and diesel components also must be trucked to refineries, driving up the costs of already expensive fuel supplies hit by inflation.
All of these were testified to at two days of Surface Transportation Board hearings at the end of April looking at the steadily worsening deterioration of rail service. The situation has gotten so bad that it has drawn the attention of the highest levels of the federal government and led the STB to take unprecedented regulatory action, proposing to direct specific rail service based on shipper complaints.
At the hearing, STB Chairman Martin J. Obermann also revealed that the board can be expected to act soon to inject more competition in the industry by finally granting shipper requests that railroads be forced to offer reciprocal switching.
The STB April hearings followed a board hearing about widespread rail service failures that took place in March.
Biden’s press secretary took note of the April 26 STB hearing, which began with remarks by Pete Buttigieg, who became the first U.S. Secretary of Transportation in history to testify before the STB.
Buttigieg used the opportunity to stress that the agriculture sector has been “significantly impacted by the railroad’s service delays, especially when it comes to obtaining the necessary amount of fertilizer and chemicals that are critical for the growing season.”
He was joined by Jewel H. Bronaugh, deputy secretary of Agriculture, who pointed out that grain elevators are being left full and farmers are unable to feed their livestock because of poor rail service, observations that were backed up later by several agriculture industry witnesses.
“It should not be up to the railroads to determine what their service levels should be,” Bronaugh said.
Also testifying was Carl W. Bentzel, a member of the Federal Maritime Commission, who testified that during the height of the delays caused by West Coast port congestion, railroad service failures served as a contributing factor to the turmoil.
At the height of problem, he said, Union Pacific stopped all intermodal service flowing from the California ports to Chicago for an entire week. But the intermodal situation has been bad and gotten worse for some time, Bentzel added.
“Unfortunately, the railroads have not been able to keep pace or take advantage of maritime growth. Case in point, last year railroads saw a reduction of 16.8% of intermodal rail service, this is at a time when international container volumes surged to a 21% growth. This is stunning.”
Cult of the Operating Ratio
Most of the witnesses at the hearing placed the blame squarely on adherence to what Wall Street analyst and former railroad executive Rick Paterson termed “the Cult of the Operating Ratio” (OR).
Over the last five years, the rail industry has been dominated by an operations model called Precision Scheduled Railroading (PSR), which seeks to lower OR. It was first adopted by CSX Transportation and then swept through the rest of the rail industry.
The PSR concept arose from the knowledge that weak federal regulation combined with regional monopoly market power allows rails to squeeze every last penny out of costs, while charging for indifferent (at best) rail service.
It was deployed by hedge fund managers seeking to take control of major railroads by persuading shareholders they could earn more on their investments if new management were allowed to impose PSR on the railroad and lower the OR, a crude measurement that compares direct operating expenses against revenue. An OR of 80, for example, means that you spend 80 cents of every dollar in revenue of costs.
Under PSR, OR is lowered by firing thousands of workers, sidelining large numbers of engines, closing transfer yards, abandoning spur line service to customer facilities and cutting back on other services considered high cost, including slashing intermodal service – which is really the only area where real growth opportunities exist for rails.
Basically, PSR is designed to cut operating costs to the bone and where possible, move them onto the shoulders of rail customers. This also became evident as the same railroads raised demurrage and accessorial fees, and then created situations in which their customers had to incur them because they could not return rail equipment on time.
The PSR concept worked as intended and railroad stocks have boomed. but at the same time, overall rail traffic declined and service quality steadily deteriorated. It turns out OR isn’t everything.
STB to Direct Service
The STB did not wait until after the hearing to act. A few days earlier it published a proposed rulemaking to amend its emergency service rules in a way that would provide relief for shippers when they require immediate assistance.
The board rule proposal also will clarify that it can act on its own initiative to direct emergency rail service and establish an accelerated process for dealing with acute service emergencies.
“The recent acute service issues have made clear the need for the board to provide the opportunity for shippers to receive swift action to ensure that the nation’s freight rail traffic continues to move,” the board said when it issued the proposed rule.
According to Oberman’s statement, “This proposed rule would make it possible for a shipper to receive relief in a short but reasonable amount of time during an emergency.”
He added, “Given the persistent and serious problems presently affecting freight rail service, it is important for the board to consider new approaches for providing much needed relief to rail customers, not only for the customers’ benefit, but for the well-being of the nation’s economy and all consumers.”
Oberman also stressed that this new rule is not intended to be a substitute for reciprocal switching, sought by rail shippers for years and which the board also currently has under active consideration.
Although strenuously opposed by railroads at the March STB hearing it was learned that the rails have regularly engaged in reciprocal switching among themselves since the rail mergers of the 1990s without telling anyone or allowing their customers to take advantage of the same practice.