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STB Tackles Rail Demurrage Issue Head On

Oct. 11, 2019
Agency proposes a new policy and two new rules to address complaints of railroad abuse.

In an effort to rein in rampant abuse of shippers by major railroads through unreasonable demurrage charges and fees, the Surface Transportation Board has proposed two regulations and a policy statement declaring that it will not tolerate exploitive practices in the future.

In the policy statement, the board stressed two fundamental principles that it encourages all rail carriers, shippers and receivers to keep in mind. First, demurrage rules and charges are not reasonable when they do not serve to incentivize the behavior of shippers and receivers by encouraging the efficient use of rail assets by returning railcars without unnecessary delays.

“In other words, charges should not be assessed in circumstances beyond the shipper’s or receiver’s reasonable control. It follows, then, that revenue from demurrage charges should reflect reasonable financial incentives to advance the overarching purpose of demurrage and that revenue is not itself the purpose,” the STB said.

Second, the board members asserted that “transparency and mutual accountability by both rail carriers and the shippers and receivers they serve are important factors in the establishment and administration of reasonable demurrage and accessorial rules and charges.”

The proposed policy statement addresses a number of key areas of concern raised by shippers during a hearing held earlier this year, including widespread problems associated with free time, bunching, overlapping charges, invoicing and dispute resolution, credits, notice of major tariff changes and warehouseman liability.

The three new proceedings issued on Oct. 6 are in addition to several others proposing to apply new standards to railroad costing and tariff increase approvals. The flurry of rulemakings and the policy statement were all issued in less than a month, a marked change from the board’s normally glacial pace.

To those who are not directly involved in managing rail transportation, the issues may sound arcane, but the changes in how major railroads have dealt with shippers have cost businesses dependent on rail transportation tens of millions of dollars to their bottom lines, and arise from a troubling change in how several major railroads choose to manage their operations.

The demurrage fee abuse arose as a consequence of the adoption of a radical railroad operations model called Precision Scheduled Railroading (PSR). In just over two years, at least three Class 1 railroads have adopted PSR, which calls for improving their stock prices by lowering their Operating Ratios through slashing costs and, where possible, raising rates and fees. They are known to include CSX, Union Pacific and Norfolk Southern.

The cost reductions have been achieved by sidelining cars and engines, laying off thousands of employees, shutting down railyards, lengthening trains and reducing service, including eliminating it on some lines and abandoning spur deliveries to shortline railroads.

Another side of the PSR revolution has involved generating new and substantial revenues by hiking demurrage and other fees, while redesigning billing practices to make it nearly impossible for shippers to avoid the demurrage fees. As a result, these fees have become a prime source of income for the railroads to boost their bottom lines—in spite of the fact that they were originally justified by the railroads as incentives for encouraging the prompt return of their equipment.

Since the problems arising from PSR reached crisis proportions in 2017, just months after CSX began implementing the operating model, the STB and Congress began holding a series of hearings where they have heard a litany of horror stories about the damage done to businesses.

These include an 800% increase in demurrage charges in six years, charging for time lost to “constructive placement” (a euphemism for a train stuck up the line the railroad is unable to move), and “free time” when detention charges are not assessed, shrunk to the point that it is physically impossible for the customer to turn the equipment around in time to avoid fees.

We now know that the STB was definitely listening to these horror stories that were reported by dozens of shippers during the hearings, which is shown by the extensive references to examples of abuse cited in shipper testimony that the board has included in its recent rulemaking and policy proposals.

‘The board is deeply troubled’

“The board is deeply troubled by these reports, which came from shippers and receivers in a broad range of industries that are highly dependent on rail service,” it declared. “The board expects to take all of the principles discussed in this proposed policy statement into consideration, together with all of the evidence and argument that is before it, in evaluating the reasonableness of demurrage and accessorial rules and charges in future cases.”

The proposed policy statement addresses a number of key areas of concern raised during this summer’s hearing on demurrage and accessorial charges and fees, including the bunching of shipments so they arrive in unpredictable numbers, and overlapping fees which result in shippers being charged twice for demurrage charges. (Bunching occurs when cars shipped at different times are consolidated into one train, which leads to overloading shipper sidings, causing increased demurrage charges.)

Other issues the STB addresses in the policy include invoicing and dispute resolution processes that are designed to make it impossible for shippers to seek recourse, railroads’ failure to grant credits when they mistakenly charge fees, lack of adequate notice of major tariff changes involving the fees, and warehouseman liability, where third parties are charged fees on shipments they handle but don’t own.

One of the proposed rules, Demurrage Billing Requirements, would require Class I railroads to include on or with their demurrage invoices specific, minimum information to help shippers and receivers verify charges, determine who is responsible for delays and evaluate whether and how they can expedite their handling of railcars.

The board even spells out in detail exactly what minimum information should be included with the invoice, and it is extensive.

Included are all unique identifying information (e.g., reporting marks and number) of each car involved. Also, shipment information, including date the waybill was created; status of each car as loaded or empty; commodity shipped (if the car is loaded); identity of the shipper, consignee or care-of party; and the origin station and state of the shipment.

Demurrage invoices also must include dates and times of the actual placement of each car and constructive placement of each car, if different from actual placement; notification of constructive placement to the shipper, consignee or third-party intermediary; and release of each car; and the number of credits and debits attributable to each car.

In addition, if adopted the new rule would require that Class I railroads send demurrage invoices directly to the shipper, instead of the warehouseman, if the shipper and warehouseman agree to such an arrangement and notify the railroad of that agreement.

The second rule proposal, Exclusion of Demurrage Regulation From Certain Class Exemptions, would clarify regulations governing exemptions for certain miscellaneous commodities, such as paper products and steel scrap, and boxcar transportation to make sure they clearly reflect that these exemptions do not apply to the STB’s regulation of demurrage practices and fees.

The board also proposes to revoke the exemption that currently covers certain agricultural commodities to make clear that the exemption does not apply to the regulation of demurrage related to the non-intermodal transportation of those commodities. (This proposal specifically excepts grain, soybeans and sunflower seeds because they already are subject to STB regulation).

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