STB issues service ‘directive’ to U.S.-based Class I railroad carriers

Railroad service issues remain front and center for the Washington, D.C.-based Surface Transportation Board (STB), an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers.

That was again made clear late last week, when it said it will direct and require certain railroads to submit service recovery plans and also additional data and regular progress reports on rail service, operations, and employment. And it added that the objective of these measures is to “to inform the Board’s assessment of further actions that may be warranted to address the acute service issues facing the rail industry and to promote industry-wide transparency, accountability, and improvements in rail service.”

STB said that this initiative will require all Class I rail carriers to submit specific reports on rail service, performance, and employment, adding that BNSF, CSX, Norfolk Southern, and Union Pacific are required to submit service recovery plans, progress reports, historical data, and participate in bi-weekly calls with STB staff.

This directive follows a late April hearing by the STB—“Urgent Issues in Freight Rail Service”—on what the STB called “severe rail service issues.”

“Our freight rail service hearing highlighted the grave concerns of shippers and others regarding freight rail service,” said Chairman Martin J. Oberman in a statement.  “While the railroads have faced certain challenges over the last few years, the evidence produced at last week’s hearing is overwhelming  that the railroads’ longstanding practice of reducing operating ratios by cutting employment levels, mothballing locomotives, and eliminating other essential resources are the central reasons  why farmers have been hours away from depopulating herds, manufacturing facilities have reduced operating hours, and shippers cannot get their products to market on time or receive essential raw materials for their companies.  These failures are harming the nation’s economy and, in my view, are contributing to the inflationary forces affecting food and fuel in particular.”

What’s more, prior to the hearing, STB issued a notice of proposed rulemaking (NPRM) that “amend emergency service rules to provide relief for shippers in situations that require immediate relief.”

STB added that a key part of this proposal is to clarify it may act on its own initiative to direct emergency rail service and to also establish what it called an accelerate process for acute service emergencies.

STB officials explained that going back over the last year, it has heard from industry stakeholders regarding inconsistent and unreliable rail service, explaining that “in recent weeks, rail service has become more unreliable, with most stakeholder concerns focusing on crew shortages and inability to move trains. What’s more, they added that it has received reports of other challenges, including: tight car supply and unfilled car orders; delays in transportation for carload and bulk traffic; increased origin dwell time for released unit trains; missed switches; and ineffective customer service. STB noted that these recent service issues have highlighted its need to provide shippers with the opportunity to receive swift action in order to ensure the nation’s freight rail traffic continues to move.

“Rob Benedict, Vice President of Petrochemicals and Midstream at the American Fuel & Petrochemical Manufacturers (AFPM), said, in comments submitted to the STB, that the railroads’ Precision Scheduled Railroading (PSR) practices, which require cargo to be ready when rail cars arrive for loading or risk being left behind, are largely responsible for the current chorus relating to railroad service issues.

“When Precision Scheduled Railroading (“PSR”) was first introduced in the United States in 2017, I clearly remember discussions I had with our membership on the potential benefits and pitfalls of the operating mode,” said Benedict. “At the time, there was some optimism, but mostly fears and concerns of how significant cuts in railroad operations and staffing would impact rail service, especially when faced with adverse situations. Unfortunately, our members’ worst fears have become the current reality. PSR has become ubiquitous in our already competition-constrained rail network, and we are faced with compounding adversity.”

Brooks Bentz, LM contributing editor and longtime supply chain consultant and practitioner, explained that the railroads have mounted a strong effort to embrace PSR, which gained traction largely from the purported success of it at CN. 

“The major thrust of this ‘magic pill’ has been a focus on driving down Operating Ratio, long the holy-grail benchmark of railroad operating efficiency,” said Bentz. “Wall Street eagerly latched on to this monolithic metric, which has incented rail carriers to continue pursuing the halcyon goal of cutting operating cost and improving margin, not for the benefit of their customers, but so Wall Street would speak kindly of them. The largest problem the industry is facing isn’t profitability now, but rather how it can build sustainable growth and profitability in the long-term…something Wall Street cares nothing about, but ultimately the industry must.”

But he observed that the opportunity is there for the taking, pointing out that the demographics in North America and the dearth of transportation capacity bode well for the future of railroading, if they can only sort out how to harvest the benefits. 

“The notion that you can economize your way to growth in profitability is misplaced,” he said. “The railroads need an aggressive approach to marketing their services and— and to enable it—a plan of strategic investment in long-term growth, which means more robust infrastructure and capacity and the supporting staffing and equipment to operate it. So, the bottom line is that more reporting on performance is putting a band aide on a hemorrhage.  It might make good press, but won’t materially change the outcome. A few years back, about the time he retired, Matt Rose [former BNSF CEO] issued a cautionary warning that the path the railways were on, if they weren’t careful, could easily lead to re-regulation, which was not a desirable outcome.  This warning is now coming home to roost.  No surprise there.  Let’s see if there’s a response to the challenge that will solve the problem without substantive government intervention.”    

In comments recently provided to LM, Association of American Railroads (AAR) President and CEO Ian Jefferies said that railroads speaking at the STB hearing have made it clear that service must be restored to a level their customers deserve and expect.

“This starts with addressing the labor shortage affecting the broad economy and railroads specifically,” said Jefferies.” Multiple railroads presented clear plans and goals for hiring new train and engine employees to get headcount levels in line with market demand for rail services – which remains strong. They are also adding power where appropriate and coordinating with customers. The industry has always understood its critical role in serving the U.S. economy. It is confident in its abilities to work alongside customers to remedy issues as the year progresses. While the AAR appreciates continued engagement with the policymakers, it must be said that both the Surface Transportation Board and Congress should proceed strategically and cautiously, particularly when considering structural policy shifts. Disruptions in service should not be used to justify long-sought measures such as forced switching, as such market intervention would only complicate network operations further at a time when the focus is resorting freight fluidity. While proponents may now argue new STB regulation will improve service, their longstanding justification for these policies has been to drive down rates to below-market rates. Policy should strike a balance and disregard the whims of opportunism.”