Freight rail service problems are worse than previously believed and more widespread, and the Surface Transportation Board (STB) needs support from Congress to take strong actions to stem what is becoming a nationwide crisis, shippers recently informed a congressional committee.
On July 25, Rep. Dan Lipinski (D-IL), chairman of the House Subcommittee on Railroads, Pipelines and Hazardous Materials, convened what he termed “a shipper roundtable” instead of a formal hearing, where seven rail shipper executives offered insight into their experiences, but no witnesses from the railroads spoke.
Lipinski said the session was held because committee members had been hearing from shippers about the serious service problems they are enduring, including generally poor service reliability and quality along with the imposition of high rates and unfair demurrage fees and accessorial charges.
“The railroad industry has changed a lot since 1980 [when rail deregulation legislation was enacted], especially over the past five years,” Lipinski noted. “Efficient and cost-effective shipping is key to American companies’ ability to compete and grow in the global economy.”
The service issue initially arose on the CSX rail system in 2017 when Wall Street hedge fund managers maneuvered to install as CEO Hunter Harrison. He then imposed an operations model called Precision Scheduled Railroading (PSR) on the railroad before his death at the end of that year.
Under the PSR model, CSX strove to slash costs by laying off thousands of employees, closing freight yards and mothballing equipment. The goal was to shrink the railroad’s operating ratio, which caused investors to boost the CSX stock price. Shippers say this was accomplished by pushing those costs onto them and, ultimately, onto consumers.
Other railroads eventually came under pressure to emulate Harrison’s PSR model, and according to the shipper witnesses, after they also adopted it service reliability deteriorated to the point where it is damaging their businesses’ ability to compete and in some cases forcing them to shut down production lines.
“Vultures on Wall Street”
Veteran Rep. Pete DeFazio (D-OR), who is chairman of the subcommittee’s parent body, the House Transportation & Infrastructure Committee, was quite emphatic about the current situation when he spoke at the session. “I am very concerned about the legacy of the now-departed Hunter Harrison and what he did to CSX with Precision Scheduled Railroading and which is now being adopted by Union Pacific.”
DeFazio pointed out that one result of PSR is that railroads like UP are now routinely running trains that are three miles long or longer. He took note of Federal Railroad Administration chief Ron Batory’s proposal to allow railroads to switch from two-man to one-man operating crews. “We asked him, with these three-mile long trains if there is a problem with the brakes on the second-to-the-last car, how long does it take for the engineer to get to the rear of the train, and he answered: about an hour. This is of tremendous concern.”
DeFazio also asserted, “I do not want the vultures on Wall Street destroying the precious asset that is rail transportation in the United States. It is the envy of much of the world, but we shouldn’t let a bunch of jerks on Wall Street who are just trying to improve short-term profitability ruin it.”
Many of the horror stories the shippers relayed to the subcommittee paralleled those that were revealed during two days of hearings held by the STB last May. What was new is that more Class 1 railroads have embraced PSR, damaging service quality everywhere the scheme has been imposed, and the shippers present said service failures have risen to the level of crisis in their frequency and severity.
“A combination of poor service and rising costs over the last few years is not only unacceptable; it falls in the category of unimaginable,” offered Mike Amick, senior vice president for Paper the Americas, International Paper. On several occasions production lines at plants he manages have had to be shut down because of rail delivery failures, and the ever-present prospect that it could happen again remains a constant concern.
Other shippers have been shocked by the lack of communication and outreach by the railroads imposing these sweeping changes. The witnesses assured Congress they would have been willing to work with rail management to implement operational improvements but only learned about the changes after they happened. In many cases, massive staff cuts also left them with no one to communicate with when service failures occur.
Another significant problem arises from demurrage fee hikes, Amick said. “Since the adoption of PSR, International Paper has seen our demurrage more than double to over $7 million. At one of the facilities I manage, that number has gone up 39 times.” Witnesses at the May STB hearing also pointed to these fee hikes serving as excuses for boosting rail revenue instead of incentivizing more efficient equipment handling.
Supporting STB Actions
Ross Corthell, vice president, transportation for the Packaging Corporation of America, cited the regional monopolies created by Class 1 railways during the wave of mergers that took place in the 1990s as a factor. Today 90% of rail freight in this country is hauled by just four Class 1 railroads, including 80% of grain and oil seed shipments. “The extreme consolidation has fostered unreasonable practices, significant rates and lack of attention to service, particularly at the local level,” he declared.
Corthell, who also was testifying in his capacity as rail committee chairman for the National Industrial Transportation League, added, “NIT League members have become increasingly frustrated with the power imbalance of the Class 1 railroads.”
Randy Gordon, president of the National Grain and Feed Association, also laid the blame squarely on PSR. “Some have said PSR means doing less with less. For our sector, PSR has resulted in increasingly arbitrary, abrupt and disruptive changes to our operating plants and service schedules, often negating tens of millions of dollars in customers’ investments in their facilities, track space and other infrastructure that the railroads insisted that they make in order to continue to have rail service.”
The situation has gotten so bad, Gordon revealed, “that many ag shippers believe now that they are at the tipping point on whether they can rely on cost-effective, competitive rail service.”
Emily Regis, fuels resource administrator for the Arizona Electric Power Cooperative, who also represented the Freight Rail Customer Alliance (FRCA) at the hearing, said, “PSR lowers costs and operating ratios for the railroads and increases returns for their stockholders and bonuses for their management, but it means worse service, higher costs and cost shifting for customers.”
One of the ironies is that recent stumbles by CSX, the railroad that pioneered implementation of PSR, is giving pause to some on Wall Street. The railroad is projecting a decline in revenues for 2019 and missed its second quarter projections. The biggest revenue decline in the second quarter was in intermodal, which fell 11%. Intermodal also is one the few business segments where the railroad faces direct competition with over-the-road trucking.
At one point during the shipper roundtable session Rep. Eleanor Holmes Norton (D-DC) asked the shippers what they wanted Congress to do? Gordon said Congress should provide strong support for the STB taking actions needed to bring the railroads into line. “I think the board members are genuinely committed to trying to change and address some of these issues—to the degree you can be supportive of the board fulfilling its statutory function, that is greatly appreciated,” he said.
STB Chairman Ann Begeman and several other board members were present at the session to hear that exchange and the shippers’ testimony, but it remains to be seen how willing they will be to take such decisive actions.
The current STB was strengthened by legislation Congress passed in 2015 to provide it with more tools for dealing with railroads following a nationwide rail service crisis that found crops rotting next to tracks because of several railroads’ failure to provide adequate train service.
That law also expanded the STB from three to five board members and provided it with greater flexibility in how it regulates the way railroads make rates. Earlier this year, a task force made up of STB staff issued a report recommending that the board embrace a series of initiatives intended to simplify and speed up the process by which shippers can challenge railroad tariff increases.
One thing the hearing was not about, Lipinski stressed, was overturning many of the positive changes created by the 1980 Staggers Rail Act that substantially deregulated the industry. Several of the shippers testifying also agreed and said they were not calling for turning back the clock to the pre-1980 regulatory regime, although in recent years only one person has called for looking at such a possibility even in general terms.
However, Gordon did call for Congress to seriously consider re-opening the National Transportation Policy that was embedded in the nearly 40-year-old Staggers legislation.
“We think it could take another fresh look at some point in time to better balance the need for railroads to earn revenues—and we all need them to do that and run efficiently—but also balance the need for competition and commercial fairness in some of these practices,” he said. “That’s a longer-term issue for Congress to maybe take a look at somewhere down the road.”