Rail demurrage, accessorial fees ‘death by a thousand cuts’
Date: Thursday, May 23, 2019
Source: American Shipper
American shippers tell Surface Transportation Board that they’re unfairly charged for new, unrealistic cargo equipment deadlines established by the Class I railroads’ network changes.
The Class I railroads — in an effort to fine-tune their freight-sprawling North American networks — have stepped up their issuance of demurrage and accessorial charges to shippers during the past two years.
These charges, which range from $60 to $500 per instance, can result in the nation’s largest bulk shippers paying millions of dollars annually to the railroads.
Brad Hildebrand, vice president of global rail and barge for Cargill, called the charges “death by a thousand cuts” during a hearing on railroad demurrage and accessorial charges before the U.S. Surface Transportation Board (STB) on Wednesday.
The agency, which oversees the competitiveness of the nation’s railroad industry, is considering whether to take regulatory action against the way railroads are now assessing demurrage and accessorial charges against shippers.
Demurrage in the railroad industry has been around for more than 100 years and was put in place by the industry as a way to prevent railcars from being held too long by shippers. However, with the press toward precision scheduled railroading (PSR) in recent years, the railroads have stepped up their penalties against shippers tying up their assets and tracks.
By January, all seven Class I railroads, for example, updated their tariffs to reflect demurrage charges for private or shipper-owned/leased railcars. Those fees currently range from $60 to $150 per day, according to shippers and their trade associations.
Until recently, most railroads granted 24 to 48 hours of free time to shippers before assessing demurrage or storage charges on equipment. The new tariffs eliminated free time, resulting in near immediate assessment of demurrage fees for many rail shippers.
“That means when a private car, whether empty or loaded, arrives at the yard of the delivering railroad on day one, the receiver, if a closed-gate facility, has until midnight of that same day to order the car for delivery to its plant on the next local train before storage charges begin to accrue. It doesn’t matter if the railroad notifies the receiver of the car’s arrival at 12:01 a.m. or 11:59 p.m.; the shipper only has until midnight. In theory, the receiver could have less than a minute to place that car order to avoid storage charges,” explained John Bode, president and CEO of the Corn Refiners Association, in his testimony to the STB.
On top of the demurrage, shippers have experienced an increase in various accessorial charges involving the handling of railcars on the Class I railroad networks.
According to CSX, the main drivers for demurrage charges are intermodal terminal storage/premise use, carrier car demurrage and private car storage, while accessorial charges mostly come in the form of intermodal per diems on shipper use and detention of railroad-owned equipment, customer switching services and special train services, such as the transport of heavy or large shipments.
“Prior to 2017, CSX did not consistently update or enforce its accessorial and demurrage tariff items,” Arthur Adams, the railroad’s vice president of sales and customer engagement, told the STB board members. “As a result, CSX absorbed customer inefficiencies, which served as a disincentive for customers to invest more in their plant capacity and appropriately manage their inventory.”
He added that the changes to CSX’s tariffs in 2017 and 2018 “properly incentivized customers to manage their pipelines more efficiently and turn cars faster. This helped spur improvements in operational performance, network fluidity and capacity, which in turn has led to more efficient service for CSX customers.”
Rail shippers, however, told the STB that they’re not seeing any significant improvement in rail service and view the increased assessments of demurrage and accessorial charges — mostly on their privately held or leased railcars — as just another way for the railroads to increase their financial bottom lines.
“Without a shipper’s investment in these private railcars [now accounting for more than 70 percent of nationwide rail equipment fleet], this freight in most cases would not move by rail,” said Herman Haksteen, president of the Private Railcar Food and Beverage Association. “It seems counterintuitive to penalize shippers that bring valuable assets and significant revenues to the railroads.
“The railroads continue to drive their own efficiency and profitability goals,” Haksteen said. “Unfortunately, these are not new efficiencies. They are simply passing on more costs to their customers, either directly through rates and demurrage and accessorial charges or through inefficiencies they are creating at the shippers’ and receivers’ expense. The same shippers, who invested in railroad equipment to help the railroads handle more volume and earn more revenue, are now being penalized by the subsequent revenue-producing policies of the railroads.”
Some large rail shippers have dedicated staff to auditing and protesting against railroads who they believe unfairly charged them demurrage or accessorial charges. For example, International Paper, which has two employees dedicated to reviewing these charges, successfully disputed more than $2 million in demurrage and other fees from the railroads in 2018, said Jeanne Sebring, the paper manufacturer’s director of logistics for North America.
Many smaller shippers, however, told the STB that they have limited recourse to dispute these charges from the railroads.
Consolidated Scrap Resources, based in York, Pa., watched its average monthly demurrage fees from Norfolk Southern Railway Co., which exclusively serves its Harrisburg facility, increase from between $1,500 and $2,700 per month during 2015, 2016 and 2017 to about $11,300 per month in 2018. That amount has now risen to more than $23,000 per month during the first quarter of 2019.
“[NS] never took the time or did the due diligence about the disparate impact their tariff imposition would have,” said Ben Abrams, Consolidated Scrap’s president and CEO. “NS simply imposed their tariff, unchecked, demanding that after doing business a certain way for years, customers now have to substantially reconfigure their operations or pay huge penal charges to the railroad.”
Even large shippers have faced resistance when attempting to be compensated by the railroads for their service failures.
“In 2018, we had an individual railcar ‘lost’ on a Class I railroad for 121 days. A normal transit time of seven days turned into 121 days, and our claim for car hire relief was denied,” said Terry McDermott, director of supply chain for rail at Bunge North America. “We received no compensation with a comment from the railroad that ‘service is not guaranteed.’”
Railroad executives during the STB hearing admitted that their heightened imposition of demurrage and accessorial charges has resulted in some pain for shippers, but they reiterated that the measure is essential to driving efficiency across their networks.
Union Pacific Corp. said during the past three years that its total average annual charges for demurrage and accessorial charges has been $212 million, or about 1 percent of its total operating revenue. For the first quarter of 2019, the railroad collected $71.6 million related to these charges, compared to $62 million for the same quarterly period last year.
“The reduction of free time to unload cars from 48 hours down to 24 hours, intermodal storage and the implementation of the bulk train tariff drove the increase in demurrage charges year over year,” said Kenny Rocker, UP’s executive vice president of marketing and sales.
The railroad executives at the STB hearing contended that the rise in demurrage and accessorial charges is merely short term and should diminish as shippers become oriented to precision scheduling railroading.
“Although these charges have increased, we hope that increase is temporary because the intention is to improve service, not drive cost increases for our customers,” Rocker said.
The National Industrial Transportation League, which represents some of the nation’s largest rail shippers, urged the STB to take “a variety of actions to ensure that demurrage, storage and accessorial charges are reasonable and commercially fair,” including investigating the fairness of the demurrage and accessorial fees applied to shippers and initiating rulemakings that will require railroads to extend free time on equipment and “publish clear, prompt and fair processes for billing and dispute resolution.”
“Quite frankly, the railroads may need a nudge to remind them that they have customers to serve, and in many scenarios, their customers do not have another rail option to effectively ship commerce,” Bunge North America’s McDermott said.
Regulatory discussions about abusive use of demurrage and accessorial fees by the railroads mirrors a similar ongoing investigation by the Federal Maritime Commission for ocean containers. The nation’s air freight forwarders also have become increasingly outspoken about what they view to be unfair demurrage and accessorial fees imposed on them by the airlines when attempting to drop off and retrieve cargo from congested airports.