GAO Finds Shippers Like Freight Contracts, But Are Wary of High Prices They Might Entail

Rail freight shippers are open to signing long-term contracts, but was resistant to the prices that might come with them.

train image2That was the conclusion of a U.S. Government Accountability Office study titled, “Freight Rail Pricing.”

The GAO said contracts would be similar to existing tariffs, but would offer the flexibility to customize rates and terms to a specific shipper.

“Both contract and tariff rates are based on market factors, such as competition, according to representatives from the four largest U.S. freight railroads (Union Pacific, BNSF, CSX and Norfolk Southern),” the GAO study said. “However, they noted that in developing contract rates, a railroad will also examine factors specific to each shipper and may negotiate discounts in exchange for the shipper committing to provide a specified volume over the contract’s duration.

Railroads say that the volume commitments negotiated in a contract allow them to more efficiently allocate resources and ensure consistent revenues.

Some shippers told the GAO that they can more efficiently manage multiple shipping routes under one contract because of the stability in rates over the duration of the contract.

Tariffs, on the other hand, might be preferred for smaller shipments.

What concerns shippers is that contracts with rates for multiple origin-to-destination routes might feature high rates on some routes.

“This is particularly an issue for shippers that are ‘captive’—that is, shippers served by a single railroad without an economically viable transportation alternative,” the GAO said.

For their part, railroads say they charge “what shippers are willing to pay to cover infrastructure costs for the entire rail network.”

However, the GAO found that some shippers say that combining captive and non-captive routes under one contract can compel shippers to accept some unreasonable rates.

“Shippers subject to contract rates they view as unreasonable cannot challenge those rates at the Surface Transportation Board because contracts are not subject to STB oversight,” the GAO report said.

Although railroads say that shippers can ask a railroad to switch to a tariff a rate that the shipper views as unreasonable, shippers counter that that tariff rates are generally higher than contract rates, so they are reluctant to forgo a contract with a mix of rates in favor of using a tariff.

The STB process for reviewing tariff rates is designed to protect captive shippers from unreasonably high rates, but shippers said the process is complicated, time-consuming and expensive.

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