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Two chemical shippers turn to their customers to help foot transportation bills

Railroads and trucking firms long have added fuel surcharges to shippers’ freight bills to compensate for diesel cost escalations. But now, with diesel prices and surcharges at record levels, two chemical shippers are passing their staggering transportation costs onto customers through their own fuel surcharges — something I don’t remember occurring in my eight-plus years of covering the rail industry.

One of the largest chemical producers, Dow Chemical Co., will implement a temporary freight surcharge of $600 per rail move and $300 per truck shipment on Aug. 1. The surcharges will apply to North American chemical, hydrocarbon and plastic customers who require Dow to absorb transportation costs.

“We must restore margins in our businesses, both through price increases and the reduction of operating costs at certain production facilities,” said Dow Chairman and CEO Andrew Liveris, who referred to the surcharges as “extremely unwelcome, but entirely unavoidable” in a prepared statement.

Chemical shipper Oxea Corp. plans to implement the same surcharges on Aug. 1 for all rail and truck shipments within North America.

The surcharge isn’t a price increase and will be eliminated when fuel prices return to “normal levels,” said Oxea executive board member Miguel Mantas.

“We have made several rounds of tough negotiations with Oxea’s transportation providers,” he said. “However, current circumstances have forced us to pass a portion of these cost increases through to our customers.”

After checking other major chemical producers’ Web sites, I couldn’t find any additional announcements about temporary fuel surcharges. However, with U.S. diesel prices at $4.73 per gallon as of July 7 — up $1.88 per gallon since July 2007 — I’m sure some chemical companies will follow Dow’s and Oxea’s lead. Perhaps a number of shippers who move other commodities by rail and truck will, too.

Posted by: Jeff Stagl | Date posted: 7/9/2008

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Posted by Larry Kaufman on 7/9/2008 3:39:55 PM

Dow Chemical's decision to impose surcharges for transportation that it has been absorbing is a seemingly reasonable decision. First, it must have determined that it has sufficient market dominance to make the surcharges stick. More important, Dow is under no obligation to subsidize its customers. The real question will be whether Dow will accord the same logic to its rail service providers, recognizing their need to make a reasonable rate of return whether they have market dominance or not. We already know that the same utilities that demand minimum service standards and lower rates from their rail suppliers decline to give guaranteed service and pay reparations to their retail customers when they fail to perform as required. I think that's called hypocrisy.

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Posted by Dave Smith on 7/9/2008 6:30:57 PM

Didn't Dow also just win a major STB ruling for it's captive locations? CSX will have to reimburse Dow millions of dollars in overcharges. It's good to see that the STB has finally owned up to the competition caveats of the Staggers Act, and this ruling will certainly end once and for all the so-called "differential" pricing. I guess with this fuel surcharge and the STB ruling in it's favor, Dow gets two Christmases in July!

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Posted by Larry Kaufman on 7/10/2008 2:25:53 PM

Never let the facts get in the way of a preconceived prejudice. Another regular at his blog obviously believes in that aphorism. No, Dow didn't just win a major STB ruling for its captive locations. It did win an STB decision that CSX charged unreasonably high rates on several commodities moving in certain lanes. This was under the STB's new small shipments rules designed to make such rate complaints more feasible by not requiring that the complainant incur the cost of designing a mythical standalone railroad, as is the case in large shipment cases such as those pursued by Mr. Smith's electric co-ops. Mr. Smith states: "CSX will have to reimburse Dow millions of dollars in overcharges." He's technically correct, as the maximum refund under STB rules amounts to $1 million in each case, and there were three cases. Somehow, and I have no axe to grind for CSX, I don't think a $3 million refund will be the make or break for the railroad. Mr. Smith, in his anti-railroad screed, also says: "this ruling will certainly end once and for all the so-called "differential" pricing." He's wrong - as usual. The Staggers Act specifically authorizes differential pricing and nothing in the Dow decision takes that away from CSX or any other railroad. A complaining shipper still must have a rate that is in excess of 180% of variable cost AND establish that the carrier has market dominance (I have read the STB decision in Dow vs. CSX, and do not agree that Dow proved the latter, but then I'm not practicing before the STB.) Then, and only then, can the shipper try to persuade the STB that the challenged rate is unreasonably high. The end of differential pricing? Only in Dave Smith's dreams. Mr. Smith ends by suggesting that because of the small shipments case and its fuel surcharge, Dow will have two Christmases in July. I wonder if Dow customers will be at all happy having surcharges assessed. They do not have a government agency to which they can complain. Dow undoubtedly is smart enough to asses fuel surcharges only on its captive customers because any customer with a choice will take its business elsewhere. Rather than two Christmases in July, perhaps Dow is setting itself up to receive lumps of coal in its stocking?

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Posted by Larry Blazynski on 7/11/2008 12:53:39 PM

1) Dupont won the cases at the STB. To do so they had to demonstrate to the satisfaction of STB that CSX in fact had market dominance for transportation of the products involved in the lanes. 2)More an more, you will see firms posting surcharges, or raising prices frequently. If as a customer you do not like that, you can take that up with your supplier to mitigate or you can find another supplier, sometimes even in a another country. Can't do that with railroads for the most part. Maybe if you are shipping from a shared assets area to an industry on PTRA or EJE. Fundamental difference is shippers raise prices to cover increased costs for energy and materials. Railroads come with increases when rates are up for renewals with no justification other than "market level." Ask the RR rep how much costs went up...labor, materials...anything but fuel which is covered with surcharges. They don't/won't say because it doesn't matter. And the rate case decisions are telling the railroads it is OK to gouge if you gouge everyone at the same level. Has nothing to do with making too much money, so you get cut back. CSX was charging Dupont rates with higher R/VC levels than they were for similar moves with other shippers. Rates were cut back to fit in that region of R/VC ratios.

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Posted by Dave Smith on 7/11/2008 10:21:04 PM

Yep, it's DuPont, not Dow that won the captive shipper case with CSX, although all captive chemical shippers stand to gain from this ruling. I do believe that the case will have far reaching impacts that will benefit all captive shippers. Montana grain shippers stand to gain millions in reimbursements since they more than any other rail shippers have borne the onus of obscenely high captive rates. So is this the end of discriminatory differential pricing? Absolutely - If the STB does it's job and follows the letter of the law.

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Posted by Michael Willis on 7/12/2008 8:38:10 AM

The time is NOW for the return of Efficient ELECTRIC TRACTION in American railways,and to think that it was highly developed at the end of the 19th century!. Look at it this way, after more than 50 years of kerosine lighting the return of the electric light bulb would be very welcome, it would mean a great savings on matches too! With the USA close to spending close to $ 1,000,000,000 (one trillion dollars)for motor fuels in 2008, Richard Branson of Virgin Railways has compared the present OIL SITUATION to the crisis of WWI & WWII combined!

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Posted by Larry Kaufman on 7/14/2008 11:24:07 AM

In his zeal to applaud the STB decision in the DuPont/CSX small shipments litigation, Mr. Smith repeats in two consecutive posts at this blog the inaccurate view that the decision in favor of DuPont means the end of differential pricing. He's wrong, which comes as no surprise to regular readers of this blog. The Staggers Rail Act of 1980 specifically authorized railroads to engage in differential pricing, which is used by virtually every other industry. Utilities (Mr. Smith's industry) charge different rates of residential, commercial and industrial users, yet a kilowatt is no different regardless of which customer buys it. They quite properly charge their system fixed costs to their various customers based on their decision as to the customers' responsibility for fixed costs. Airline customers invariably find themselves sitting next to passengers that paid different fares. That is differential pricing, as the direct operating cost of the flight is the same. It's called yield management in the airline world, but any economist can assure Mr. Smith that it is differential pricing.

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Posted by Dave Smith on 7/17/2008 11:31:19 PM

Mr. Kaufman's analogy regarding differential pricing is very misleading. Yes, utilities regularly charge different rates for three basic customer groups: Residential, commercial, and industrial. However, if the utilities copied the railroads' differential pricing scheme, they'd charge vastly different rates within those three groups. Luckily for electric consumers, the utilities are regulated by the feds and the states to prevent such obscenities.

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Posted by Larry Kaufman on 7/18/2008 9:28:24 AM

Before anyone (someone) declares flatly that differential pricing by railroads is dead, killed by the STB in the DuPont small shipments complaint against CSX, it should be noted that CSX has appealed the STB decision to the U.S. Court of Appeals, claiming that the STB decision was no supported by the evidence. I learned a long time ago not to try to prejudge the courts or to make flat statements, but the fact that DuPont, by its own admission, agreed that there were trucking alternatives to service from CSX suggests that the market dominance finding by STB will be one of the points of the appeal. No market dominance, no regulatory right to complain that a rate is unreasonably high. Sort of like in basketball; no harm, no foul. I shall wait for the court to rule before making assumptions. Others might try the same practice.

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Posted by Larry Kaufman on 7/19/2008 11:48:15 AM

For those people (one, so far) who believe the STB small shipment rate decision in DuPont vs. CSX means the death of differential pricing, it should be noted that the reduced rate mandated by the STB remains north of 300% of variable cost. Some death!

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Posted by Larry Kaufman on 7/22/2008 10:45:54 AM

In his zeal to run from the truth, one regular at this blogpost makes the statement that utility customers are lucky that utility rates are regulated by the feds and states. I am unaware that the electric rates I pay are regulated by anyone other than the state PUC in the state where I reside, and just as so-called captive shippers like to accuse the STB of being a wholly-owned subsidiary of the railroads, I might claim that the CPUC is a wholly-owned subsidiary of Xcel Energy. And, if I were unfortunate to reside outside the area served by an investor-owned utility, I'd be served by an unregulated electric co-op. Perhaps the wholesale rates of co-ops are regulated by the feds, but I can assure this defender of electric utility rate-making practices that consumers are far less protected by government than utilities are protected by the STB. The point in all this silliness is that differential pricing is practiced by the vast majority of businesses. Railroads were denied the right to engage in such pricing prior to passage of the Staggers Rail Act of 1980, and the issue was quite thoroughly debated by Congress in developing Staggers. The utility employee who posits that utility customers are lucky, also has posited in a different blog that rail use of differential pricing has been killed by the STB's DuPont small shipments decision. Aside from a real likelihood that the DuPont ruling will be reversed on appeal (from CSX) by the Circuit Court of Appeals for the DC Circuit, neither the STB decision nor the DuPont rate complaint involved an attack on differential pricing. One should be careful about using blogs for screeds. They can get one into deep water and there always is a risk of drowning in deep water.

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