Regulator Examines Railroads for Hitting Customers With Late Fees

Government looks into fairness of penalties for being slow with freight pickups

Federal regulators are scrutinizing fees imposed by Norfolk Southern Corp. , Union Pacific Corp.and other railroads that are meant to get their customers on board with new procedures to operate more efficiently.

The large U.S. railroad operators are overhauling operating plans to streamline the movement of locomotives and railcars across their networks, emulating the turnaround plan implemented during the past two years at CSX Corp. , which operates a rail network in the Eastern U.S.

To encourage customers to go along, railroads are imposing fees when customers take too long to unload railcars, don’t have their facilities ready to pick up shipments and take other actions that could cause slowdowns on the rail network.

The Surface Transportation Board, which oversees freight rail service and rates in the U.S., is examining the practice. Chairwoman Ann Begeman said that while the body understands the need to improve service, it questions the fairness of a system in which shippers can get hit with fees but railroads aren’t penalized when their service is subpar.

“I just want to make sure they’re commercially fair to the shippers they’re serving,” Ms. Begeman said at a recent industry conference.

The railroads say they do offer credits to shippers when they are late to pick up railcars.

But the STB plans to track the fees more closely. Ms. Begeman has requested that all of the large railroad operators provide quarterly reports on how much they’ve tallied from the fees. 

The STB has followed the spread of so-called precision scheduled railroading since Chief Executive Hunter Harrison began implementing the strategy at CSX before he died in 2017. The abrupt changes to the Jacksonville, Fla.-based railroad operator—including layoffs, closed facilities and idled equipment—initially caused gridlock across the network that delayed deliveries and disrupted the operations of some factories. 

The STB fielded complaints from shippers about service, held regular meetings with railroad executives and convened a hearing in October 2017 about the problems and CSX’s response. CSX’s service has improved over the past year, as it has moved more product at faster speeds with fewer assets.

However, other railways, notably Union Pacific, have struggled with additional volumes and crew shortages that have caused service issues and congestion on parts of their networks. 

Now they are following CSX with their own plans to improve service. Union Pacific, based in Omaha, Neb., in October began a new operating plan based on precision scheduled railroading.

Norfolk Southern, which competes with CSX in the Eastern U.S., in February plans to detail operational changes as well.

But as those changes take place, shippers have questioned the fees, which some view as a way to make money rather than improve service.

Paul Verst, chief executive of Verst Logistics Inc., a provider of warehousing and transportation based in Walton, Ky., reached out to the STB after Norfolk Southern, which provides rail service to his warehouses, proposed cutting the amount of time to unload cars from 48 to 24 hours before a $150-a-day fee would kick in. Previously, the fee was $100.

He saw the new fee structure, which went into effect Jan. 1, as purely a way to generate revenue. Sometimes he may need more time to unload cars because the railroad will drop off more cars than expected, he said.

“What they’re asking us now is not fair and reasonable,” Mr. Verst said.

In a letter to the STB, Norfolk Southern CEO James Squires said the new fee structure is intended to encourage quicker unloading of railcars so they can be put back in use and keep the railroad running smoothly. He said Norfolk Southern will increase the credits it will provide customers if the railroad experiences problems.

“We are demonstrating to them our increased confidence in our service product, which should in turn cause them to further improve asset utilization, creating a virtuous cycle,” Mr. Squires wrote.

Other rail shippers say the higher fees are an undue burden, given the problems they have endured, and they are encouraged by the STB taking a closer look.

Shippers “have not yet really seen the benefits to these operational changes but they certainly have suffered the service problems and are seeing new costs being added on,” said Jeff Sloan, senior director of regulatory and technical affairs for the American Chemistry Council, a trade group. “It seems awfully one-sided.”

Write to Paul Ziobro at Paul.Ziobro@wsj.com

Story published at wsj.com

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