New Data, Same Old Problem When it Comes to Rising Rail Freight Rates and Declining Service

May 6, 2015

The growing challenges brought by the lack of access to competitive freight rail service are all too clear to any American farmer or manufacturer that depends on railroads to ship or receive products. In order to better understand the negative impact of skyrocketing rail freight rates, Escalation Consultants conducted new research to quantify the rate premiums paid by shippers across all sectors of the economy.

Using publicly available data submitted by the railroads and maintained by the federal government, Escalation Consultants examined rail rates for commodity shipments in 2005 and 2013 (latest data available). Escalation Consultants calculated the railroads’ revenue-to-variable cost ratio (RVC) for each carload, which is an important indicator used by the Surface Transportation Board (STB) to evaluate rail rates.

To determine the rate premium for each commodity, Escalation Consultants compared the average rate for shipments below 180% RVC (those assumed by the STB to be competitive) and the average rate for shipments above 180%  RVC (those potentially non-competitive and subject to STB jurisdiction).

Dramatic Rate Increases

The study found that rail freight rates have doubled over the past decade—more than three times the rate of inflation and three times as much as truck rates have increased. Specifically, the research shows that—

• The total rate premium paid by commodity shippers in 2013 was almost $19 billion.
• Many rates were far above the STB’s jurisdictional threshold of 180% RVC; for example, nearly one quarter of rates exceeded a 300% RVC, or three times the railroad’s long term variable cost.
• From 2005 to 2013, the total rate premium paid by commodity shippers increased 121%, while the carload volume declined by 2.4%.
• The result is that even though the number of carloads declined between 2005 and 2013, there was a 38.6% increase in the number of carloads with premium rates.

Bottom Line

Everyone agrees that railroads need to make a fair return from their investments and we need a healthy freight rail system. But there are two key points to consider:

• Protecting the financial health of the railroads must be balanced with the ability of U.S. manufacturers and farmers to invest and compete in a global economy.
• All shippers should have access to affordable and reliable service.

Based on these two considerations, the current system is not up to par. Shippers are paying much higher rates for increasingly unreliable service. It’s time for policy makers to do more to promote rail competition and to ensure that the STB has the tools to effectively balance the needs of railroads and the needs of American producers.

Until then, rising rates will continue to go unchecked by market forces and there will be no incentive to provide better service to rail customers.

This guest post is by Jay Roman, President of Escalation Consultants, Inc.