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Friday, February 01, 2013    

Lack of rail competition means higher rates for chemical shippers, ACC claims; rates are based on marketplace, AAR says


Higher freight-rail rates driven by a lack of access to competitive rail service are negatively impacting chemical and plastic shippers, as well as the U.S. economy, according to the American Chemistry Council (ACC), citing results from a new economic study and industry survey.

Using data submitted by railroads and maintained by the federal government, Escalation Consultants published a report that examines rail rates for chemical shipments in 2010 and 2005. The study found that the premium paid by chemical and plastic shippers for rates above the railroad's ratio of 180 percent revenue to variable cost (RVC) exceeded $3.9 billion in 2010, a 75 percent increase from 2005's level, ACC officials said in a prepared statement.

The study also determined that three-quarters of all U.S. chemical traffic in 2010 moved at rates that exceeded 180 percent RVC; many shipments moved at higher rates; and the premium for shipments of plastic materials exceeded $1 billion, the highest of any chemical commodity, they said.

The ACC estimates that reducing the rate premiums reported by Escalation Consultants would enable the chemical industry to increase economic output by as much as $6.8 billion.

"This new research shows that the lack of rail competition and rising rail freight rates are hurting the chemical industry's ability to meet customer needs, hindering investment decisions and harming our nation's economy," said ACC President and Chief Executive Officer Cal Dooley. "The railroads are important partners and must be economically strong for us to be successful, but current federal policies prevent many chemical production facilities from obtaining competitive freight rail service, leading to artificially high rates — and the problem is getting worse."

Meanwhile, the survey of chemical shippers and receivers conducted by Veris Consulting on behalf of the ACC found that more than two-thirds of chemical facilities reported being captive to a single Class I, and that rail rates, on average, for captive production facilities are 30 percent higher, ACC officials said. The survey also showed that seven out of 10 chemical shippers and receivers reported that captivity and associated rail rates and service problems hurt their ability to meet customer demand, while more than a quarter of the respondents reported captivity and associated rail rates and service problems hindered them from making domestic investments.

ACC officials are urging policymakers to "take a fresh look" at rail competition reform since increased rail-to-rail competition would allow free markets to determine fair rates, they said. Specific reforms would include requiring competitive switching to serve shippers in terminal areas and requiring railroads to provide reasonable rates over bottleneck segments.

However, Association of American Railroads (AAR) officials believe there is no validity to the ACC's claims about the rate data cited in its study.

"It is disingenuous or even irrelevant to call 180 percent RVC a premium, or imply it is some kind of a cap. The rates being charged today are based on the marketplace — just like chemical prices are based on their marketplace," said AAR Senior Vice President of Communications Patricia Reilly in a released statement. "The realities are that rail rates on average have dropped about 45 percent since 1980. Moreover, federal regulations do not give railroads an unfettered ability to raise their rates."

Rail rates above 180 percent RVC are subject to challenge for reasonableness at the Surface Transportation Board, and there already are federal regulations in place that allow shippers to ask the federal government to review those rail rates, she said.

"The irony is the very rules these groups propose could actually mean higher costs and lower efficiency across the entire rail network — having a negative effect for all rail shippers," said Reilly.

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