p 4p 6P 7

3Q2015 Rail Rate Gouging Gauge. . . . . . . . . .Benchmarking Steel Ingots. . . . . . . . . . . . . . . .1Q2016 RCAF. . . . . . . . . . . . . . . . . . . . . . . . . .

Obtaining Rail Cost ReductionsManagement Wants

These are interesting times for transportation depart-ments. Due to weaknesses in the economy, many compa-nies are telling their Transportation Department that theymust reduce rail expenses. These cost reductions tend tobe in the hundreds of thousands of dollars at smaller railshippers and in the millions at larger shippers.

Escalation Consultants is frequently involved in assistingcompanies in reducing their cost of rail freight and we arereceiving inquiries from a number of companies abouthow to best achieve the cost reductions management isdemanding. This article provides some direction fortransportation departments looking to reduce rail costs fortheir rail movements.

To start out the process of reducing rail expenses youneed to understand two basic issues:

1. To get a better rate structure from railroads youmust do something different than what you arecurrently doing with railroads. This is a prettylogical rule that people frequently try to ignore be-cause people tend to be resistant to change. Tochange your rate structure, you must change howyou negotiate with railroads, because if you don’tchange what you do, it will be difficult to get rail-roads to change what they do.

2. Every company’s situation is different. Thismeans that the specific process for reducing rail ex-penses at one company will likely be different fromthe process that will be most effective at anothercompany. However, the fundamental issues thatneed to be analyzed to determine the best path tofollow in reducing and better controlling rail ex-penses tend to be similar at each company.

A number of the fundament issues that need to be an-alyzed and become a part of a negotiation strategythat will create different dynamics in a rail negotia-tion are included in Illustration 1, on page 2. Theseissues become the building blocks for strategic planningdeigned to obtain better rates for rail movements.

(Continued on page 2)

February 2016Volume 25, Number 2

RAIL PRICE ADVISOR

Inside this issue

The Rail Intelligence Newsletter

STB is Late in Releasing ValuableInformation for Shippers

The passage of the Senate Bill 808, the Surface Transpor-tation Board (STB) Reauthorization Act, was approvedby voice vote in the House of Representatives on Decem-ber 10, 2015 almost six months after its passage by theSenate. The Bill hopes to improve processes and proce-dures at the STB and to make the agency proactive and tothat end will increase Board Members from three to five.

Unfortunately passage of the legislation did not includeany additional funds to enable the agency to become pro-active, to staff two new Board Member positions or tobetter do any of what it’s supposed to do better. This allleads into the things shippers look for the STB to do.

There are two important STB functions for rail shippers:

Presides over rate disputes; and,

Provides information used by shippers to evaluateand help mitigate rates.

Concerning rate disputes STB procedures for large RateCases have only been successful for unit train shippersand would need to be modified to be of help to merchan-dise traffic. DuPont filed a Rate Case for Chemical ship-ments of manifest traffic for 138 lanes and 26 commodi-ties, but the Stand Alone Cost methodology is complex,convoluted and does not lend itself to manifest trafficshipments with multiple origin/destination pairings ormore than one commodity. As a result, DuPont has notbeen successful with its Rate Cases.

The number of unit train shippers able to file a case hasbeen greatly diminished due to the reduction in coal ship-ments, caused by lower natural gas prices and increasedgovernment regulations regarding the burning of coal. Asa result the STB’s importance to shippers is centered on

(Continued on page 3)

2 No reproduction in any form is permissible without written authorization.

RAIL PRICE ADVISOR

Obtaining Rail Cost Reductions Management Wants (Continued from page 1)

Many things need to be considered in an effective rail negotiation, but all issuesthat are analyzed do not have the same objective. The rail negotiating wheeldemonstrates this. In the negotiation wheel, analysis that can be performed andactions that can be taken are on the outside of the wheel and the resultsachieved from these actions are on the inside of the wheel.

For example, if you benchmark your rates (position 2 on the wheel) this is doneto determine reasonable rates for your movements. If this analysis shows thatyour rates are higher than competitors’ rates (position 3) in a market this demon-strates that rates must be reduced as they are causing you to be put at a competi-tive disadvantage in the marketplace. The result in the middle of the wheel istherefore, “demonstrate why rates must be reduced”.

When other issues on the outside of the wheel support the same result thisincreases your leverage for obtaining better rates for your traffic. For exam-ple, if your rates are higher than competitors (position 3) your position in negotia-tions gets even stronger if your rates impact your business in the following ways:

Loss of business to competitors’ (position 5);

Loss of business to imports (position 6); and,

Where you invest capital to maintain and increase capacity and where youdon’t invest capital (position 7).

All of these types of issues demonstrate why rates must be reduced and increase ashippers’ leverage in negotiations with its railroads. The more action items you

can use to support your negotia-tion, the greater your chance ofsuccess in obtaining the rates youneed for your traffic. Please notethat most of the action items onthe outside of the wheel havebeen left blank as a review ofall actions is too big of a topicfor an article.

A shipper has the strongest posi-tion when he can bring all of thethings on the inside of the negoti-ation wheel into its negotiationposition with railroads. Thosepeople that have attended Escala-tion Consultants’ Rail Negotia-tion seminar know that we arevery big on shippers developingtheir “Story” for rail negotia-tions. This is because the Storycontains a shippers’ position forwhy it needs rates at a specificlevel and the reasons why a rail-road should agree to those rates.The rail negotiation wheel pro-vides a good roadmap for devel-oping that story.

The most effective negotiationposition will address issues thatcan obtain each of the results onthe inside of the negotiationwheel. If a shippers’ position candemonstrate some or all of thefollowing issues, it will havemore effective negotiations withrailroads.

Proper rates for movements;

Why rates must be reduced;

Traffic that will be put atrisk (increased competition)if you can’t get reasonablerates for your movements.

In addition, if you can make yourmoves more important to rail-roads (positions 15 & 16) yourchances of success can increasedramatically. If you have the earof people that are important to

One problem shared by all of these tools is the lack ofimportance placed upon the data by the STB as reflectedin its lack of interest in processing and making these dataavailable in a timely fashion. Years ago, the STB prede-cessor agency, the Interstate Commerce Commission,issued the updated URCS, the Waybill and the RVC datafor a year by October or November of the following year.Now the deadline has drifted to the following January.

These three sources of data: the Waybill, URCS and theRVC databases are all iterative processes, computed an-nually by the STB, yet their completion takes longer nowthan it did ten or twenty years ago? The products havenot expanded, they are the same now as then. In theFebruary 2014 Rail Price Advisor, Escalation Consultantsexplained that the release of the 2013 Waybill data wasdelayed. Two things to note:

1. The release of the data on a timely basis is a recur-ring problem for the STB that hurts shippers and,

2. In 2014 the delay was caused by Berkshire Hatha-way’s purchase of the BNSF, an extraordinary prob-lem. Today, there are no extraordinary problems orevents.

Perhaps, historic delays act to reset the clock for the newdeadline. The problem is, the Waybill sheds some lighton rail rates in the marketplace and the lack of rate trans-parency is a problem that hampers shippers when negoti-ating and evaluating rates. The delay can be costly forrail shippers.

Theoretically, the Waybill could be compiled and updat-ed on a quarterly or monthly basis. Currently, railroadsprovide the data for the Waybill electronically on an on-going basis throughout the year to Railinc, one of theSTB contractors that compiles the data. Another con-tractor, ALK, computes the mileage and checks for rout-ing errors. The new Waybill was finally released on Jan-uary 15, 2016, which means that it took the STB approxi-mately six or seven months to release after receiving thedata for the Waybill. It is difficult to understand this longdelay as the Public Use Waybill has no costing data, andcould be compiled quarterly, monthly or on an ongoingbasis as the data are given to the contractor by the rail-roads.

Many shippers and economists believe that to havemarket efficiency there needs to be access to timelymarket information. The Waybill is the principalsource for this information. The best source of infor -

(Continued on page 4)

STB is Late in Releasing ValuableInformation for Shippers (Continued from page 1)

the information it supplies to help shippers better dealwith railroads that have monopoly and oligopoly powerover their traffic.

The biggest commercial problem shippers have in dealingwith monopoly railroads is a lack of rate transparency.The best help available in providing rate transparencyis the Public Use Carload Waybill Sample (Waybill).The Waybill is one of three sources of information gener-ated by the STB that are very important for shippers re-garding rate transparency:

The Uniform Rail Costing System (URCS);

The Carload Waybill Sample; and,

The Expanded Version of the Commodity RevenueStratification Report (RVC).

3No reproduction in any form is permissible without written authorization.

RAIL PRICE ADVISOR

railroads you become more important to railroads.This makes it important for a railroad to act promptly onyour problem.

These are the types of issues that are analyzed and actedupon in strategic planning. When the negotiation wheel isused effectively, a shipper will have more productive ne-gotiations with railroads and have a much better potentialfor obtaining a rate structure that will keep it competitivein its markets.

How to address all of the actions and results included inthe negotiating wheel is a very important topic for everyshipper to understand. We find that the success of railnegotiations hinges on a shippers ability to obtain theresults on the inside of the negotiation wheel. Using theleverage you obtain from the negotiation wheel is es-pecially important now as the drop in rail volumes,employment and stock prices are giving shippers thepotential to have greater leverage in their negotiationswith railroads.

How to best use and analyze all of the issues contained inthe negotiating wheel will be covered in depth in Escala-tion Consultants’ next Rail Negotiation seminar. We ex-pect a lot of interaction on negotiation wheel issues be-tween rail shippers and presenters at the seminar. Wehope you can make it to the Rail Negotiation seminar inTampa to help determine your best negotiating positionwith your railroads.

4

RAIL PRICE ADVISOR

STB is Late in Releasing ValuableInformation for Shippers (Continued from page 3)

mation for determining if rates are reasonable and thevolumes moving by rail into markets is the Waybill,which makes the annual delay in releasing this infor-mation detrimental to shippers.

Figure A provides an example of how shippers can useWaybill data to determine how their rates stack up to oth-er companies’ rates. This graph includes rates for Plasticmovements between Houston TX and Atlanta GA andshows the “Shipper’s Movement” is very high in relationto others in this traffic lane. The shipper’s movement ismore than one standard deviation above the average formovements into this market region. This type of rate in-formation can be very valuable to rail shippers and that isthe reason so many carload shippers use the Waybill tohelp benchmark rates for their movements.

Determining market price through rail bids is fre-quently not effective as railroads have monopoly oroligopoly market power over their customers. As aresult, the Carload Waybill Sample is a very valuable toolprovided by the STB that helps provide rate and volumetransparency. For shippers, the STB being tardy in itsrelease of data is a problem and continually being moreand more tardy each year, is a bigger problem.

The STB is adhering to schedules for release of Way-bill data that were established when computer punch-cards were used to run programs. The delay in re-leasing the Waybill is costly for rail shippers as data be-comes dated very quickly. Hopefully, leadership at theSTB will run with the Congressional mandate to becomea proactive agency and improve its efficiency in releasingthe Waybill.

No reproduction in any form is permissible without written authorization.

3Q2015Rail Rate Gouging Gauge

The Rail Rate Gouging Gauge (RGG) contained in Fig-ure B shows the shippers most impacted by railroads’ rateactions between the third quarters of 2014 and 2015. TheRGG graphs the ten highest percent increases in ratesfor commodities on all Class I railroads in the thirdquarter 2015. This data is analyzed down to the five-digit Standard Transportation Commodity Code (STCC).

Figure B shows that BNSF, CSXT and NS all had twocommodities with rate increases that made the RGG’s topten. UP had the highest average rate increase for a com-modity between the third quarters of 2014 and 2015 at59.0% for STCC 37422 – Freight Train Cars. It is im-portant to note that only CN and SOO had no commodi-ties in the RGG top ten.

Table 1, on page 5, shows a further breakdown for whatis happening with rates as it contains the five commodi-ties with the largest rate increases on each U.S. Class Irailroad. This table shows the industries that have beentargeted for the largest rate increases on each railroad.Please note that in order to avoid volatility in percentchanges in rates that can occur on commodities with asmall number of movements the values in Figure B andTable 1 exclude commodities with less than 6,000 car-loads per quarter.

Chemicals and Allied Products (STCC 28) and Pulp, Pa-per & Allied Products (STCC 26) seem to be springingup a lot in Table 1. All of these commodities or subsetsare listed for almost every rail carrier. Eleven of the thirty

(Continued on page 6)

5No reproduction in any form is permissible without written authorization.

RAIL PRICE ADVISOR

Table 1

The Rate Gouging GaugeCommodities Hit Hardest with Rate Increases

(3Q2014 - 3Q2015)

STCC3Q2015Carloads

3Q2015Tons

% Chg.Tons

% Chg.$/Ton

BNSF

422-Trailers, Returned Empty 138,476 593,788 -0.3% 14.4%301-Rubber Tires or Inner Tubes 6,031 89,738 17.5% 9.4%20421-Prepared Feed/Animal/Fish/Poultry 9,945 939,116 -8.8% 4.5%263-Fibreboard/Paperboard Pulp Board 10,060 742,207 13.7% 2.7%39-Misc Products Mfg. 6,747 67,959 7.5% 0.0%

CNUS

2819-Ind Inorganic Chemicals 11,407 1,048,660 5.4% 7.1%2912-Liquefied Gases/Coal/Petroleum 9,602 650,443 13.6% 5.6%209-Misc Food Rations/Kindred Prod 10,494 971,693 4.6% 4.7%3295-Nonmetallic Earths/Minerals 7,624 737,426 -12.2% 3.9%263-Fibreboard/Paperboard Pulp Board 10,042 684,430 3.0% 3.8%

CSXT

37422-Freight Train Cars 13,465 335,377 27.8% 19.3%411-Miscellaneous Freight Shipments 11,900 107,891 -12.5% 17.9%363-Household Appliances 11,805 153,442 6.8% 7.2%441-Freight Forwarder 13,089 194,080 4.6% 6.8%2812-Potassium/Sodium Compounds 18,479 1,781,697 -3.8% 4.7%

KCS

363-Household Appliances 6,949 80,336 -10.3% 18.7%2812-Potassium/Sodium Compounds 7,828 792,502 1.0% 11.7%422-Trailers, Returned Empty 7,610 2,233 -0.9% 9.5%29913-Petroleum Coke 9,568 1,017,597 -6.0% 5.9%281-Industrial Inorganic/Organic Chemicals 17,970 1,650,746 1.7% 5.5%

NS

422-Trailers, Returned Empty 141,616 203,900 -13.8% 31.7%307-Misc Plastic Products 10,774 130,981 5.0% 12.7%363-Household Appliances 8,695 80,222 -16.5% 7.5%01132-Corn Exc. Popcorn 27,204 2,839,226 -4.0% 3.4%26217-Special Industrial Paper 11,326 237,371 6.7% 2.2%

SOO/ CP

26-Pulp/Paper/Allied Prod 6,659 403,375 -13.1% 9.0%291-Products of Petroleum Refining 8,760 667,949 -10.6% 8.0%01137-Wheat Ex. Buckwheat 18,179 1,823,713 0.1% 0.5%461-Misc Mixed Shipments 42,636 668,114 -10.7% -2.5%28-Chemicals or Allied Products 38,361 3,486,843 -5.2% -5.5%

UP

37422-Freight Train Cars 39,346 81,203 -13.3% 59.0%20923-Soybean Cake/Flour/Grits/Meal 15,559 1,579,058 17.3% 8.3%263-Fibreboard/Paperboard Pulp Board 19,240 1,409,481 0.4% 6.3%327-Concrete/Gypsum/Plaster Prod 6,929 668,631 -13.6% 5.2%28184-Alcohols 26,547 2,355,428 -4.4% 3.6%

Source: Railroad's quarterly QCS filings to the STB as contained in Rail Rate Checker.

Note: Commodities with less than 6,000 carloads in a quarter are excluded from the ranking.

6 No reproduction in any form is permissible without written authorization.

RAIL PRICE ADVISOR

3Q2015 Rail Rate Gouging Gauge (Continued from page 4)

-five commodities listed for the Class I railroads are fromSTCCs 28 and 26 commodities; indicating that thesecommodities have been targeted for rate increases.

Knowing if the commodities you ship are incurring thebiggest rail rate increases is valuable. Informing yourmanagement of the level of rate increases being im-posed by railroads to all of its customers of your com-modity can be critical to a transportation departmentunder pressure from management to better controlcosts. It is always good to be able to paint a picture ofwhat you are up against in the marketplace.

Many companies are complaining about large rate in-creases from railroads, but up until the RGG these rateincreases have not had a face when talking to regulators,politicians, shipper’s upper management and railroads.The RGG helps put a face on what shippers are upagainst with rail rates in the marketplace and whichrailroads are most aggressive with rate increases on theircustomers.

The RGG is not intended to indicate that railroads arebreaking any law or regulation with their rates. TheGouging Gauge is intended to show where shippers arebeing hurt the most by railroads with the rate structure fortheir movements.

Note - Rates for over 4,000 commodities were analyzed on the sevenClass I railroads to form the RGG. Most commodities with more thana 20% change in carloads were eliminated from the RGG to avoidvolatility in rate changes. Rate changes in the RGG are provided atthe three and four-digit STCC code level when a more detailed codedid not have 6,000 carloads or when carloads changed by more than20% for a more detailed code.

The data in the RGG may be broken down further by examining theCommodities by Railroad segment of the Rail Rate Checker internetdatabase program.

Benchmarking Steel Ingotinto the Cleveland OH Market

The Cleveland-Akron OH (BEA 055) region is a robustrail market for Steel Ingot with slightly over 19,928 car-loads delivered in 2013 according to the Public UseWaybill Sample. The largest supplying region is thePhiladelphia-Wilmington (BEA 012) area which sentover 9,800 carloads to Cleveland in 2013. The supplyingregions and carloads shipped into the Cleveland-AkronOH region from 2011 to 2013 are listed in Table 3.

The average rate per car for the Pittsburgh Region (BEA053) increased 36.5%, which was the largest increase inthe rate per car for any region; but the Pittsburgh rate percar was the lowest for 2013, $2,580. Carload volume forPittsburgh, Chicago (BEA 064) and the Northeast RailTerritory 1 all decreased from 2012 to 2013; in fact theoverall Cleveland Steel Ingot market decreased by 13%from 22,881 to 19,928 carloads. Chicago carloads de-creased from 3,120 in 2012 to 1,760 in 2013, a decreaseof 1,440 cars Philadelphia seems to have capitalized onChicago’s loss.

Figure E, on page 8, tracks the 2013 shipments of SteelIngots from all regions serving Cleveland for 2013 ascaptured by the 2013 Waybill Sample.

The rate per car and distance per move are tracked on thevertical and horizontal axis the average rate per car for allshipments and one standard deviation above and below

(Continued on page 8)

Purpose of the Rate Gouging Gauge

The Rate Gouging Gauge (RGG) shows the commodi-ties hit hardest with rail rate increases. This ranking ofrail rate increase puts a face on what shippers are upagainst with rail rates in the marketplace. The RGG isbeing produced as an aid to help rail shippers, regula-tors, trade associations and other interested parties bet-ter understand what is happening with railroad's largerate increases in the marketplace.

Table 3

Change in Carloads by Origin Area forSTCC 33121-Steel Ingot to the Cleveland-Akron Market

2011 2012 2013

MostRecent

Avg. Rate

Philadelphia-Wilmington 4,589 7,855 9,848 $4,148

Southeast Territory 2 1,440 600 4,120 $6,439

Mid-West Territory 3 2,120 1,680 2,240 $5,720

Chicago-Gary-Kenosha 3,200 3,120 1,760 $3,427

Northeast Territory 1 840 2,466 1,200 $3,334

Pittsburgh 280 320 680 $2,580

Ontario 80 $4,110

Birmingham 2,120 5,240 0

Canada/Mexico Territory 4,120 1,200 0

Cleveland-Akron 1,464 360 0

Quebec 40 0

Southwest Territory 4 40 0

Total 20,213 22,881 19,928 $4,632

7No reproduction in any form is permissible without written authorization.

RAIL PRICE ADVISOR

1Q2016 RCAF Index

The Association of American Railroads (AAR)forecasts the first quarter 2016 Rail Cost Adjust-ment Factor Unadjusted for Productivity (RCAF-U) to be 0.864 representing a 0.2% increase fromthe fourth quarter 2015 index value.

The first quarter 2016 RCAF-U is a projected indexwhich has corrections for previous forecast errorsincluded in its value. The All-Inclusive index(RCAF-U before forecast error adjustment) de-creased 0.3% between the fourth quarter 2015 andthe first quarter 2016. The corrections for pastforecast errors caused the RCAF-U to increase0.2%.

Table 2 lists the components and values of theAAR forecast of the first quarter 2016 All-Inclusive Index (AII), the RCAF-U and the RCAF-A.

Figure C shows the percent change in the RCAF-Uand the All-Inclusive Less Fuel Index in relation toa 3% annual increase over the last nine and a quar-ter years (2007 through 1Q2016). When reviewingthis graph keep in mind that if a contract is escalat-ed by the RCAF-U it would not have a fuel sur-charge, but a contract would likely have a fuel sur-charge when escalated by the All-Inclusive LessFuel Index (AII-LF) or a 3% increase.

Figure D shows that for the four quarters betweenthe first quarters of 2015 and 2016 the change inDepreciation had the largest increase of all compo-nents of the RCAF (3.4%), while Fuel Expensesdecreased by 38.1% and Interest decreased by18.6%.

Table 2

AAR Forecast For The Rail Cost Adjustment Factor

2014Weight

4Q,15Forecast

1Q16Forecast

PercentChange

Labor 31.7% 403.6 417.7 3.5%

Fuel 20.9% 210.8 191.2 -9.3%M&S 5.2% 264.8 246.9 -6.8%Equipment Rents 5.4% 214.7 214.3 -0.2%

Depreciation 12.6% 223.5 226.0 1.1%

Interest 1.5% 57.5 57.5 0.0%

Other 22.7% 218.2 215.5 -1.2%

All-Inclusive 88.5 88.2 -0.3%

Preliminary RCAF 0.885 0.882 -0.3%

Forecast Error Adjustment -0.023 -0.018

RCAF (Unadjusted) 0.862 0.864 0.2%

All-Inclusive Less Fuel 102.4 104.1 1.7%

Productivity

2.3462 2.3502

RCAF (Adjusted) 0.367 0.368 0.3%

PAF-5 2.4890 2.4932

RCAF-5 0.346 0.347 0.3%

Wage Index 72.1% 357.6 360.1 0.7%

Supplements 27.9% 579.8 626.1 8.0%

Labor Index 419.6 434.3

Labor Index (Linked) 403.6 417.7 3.5%

Adjustment Factor

8 No reproduction in any form is permissible without written authorization.

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Benchmarking Steel Ingots into Cleveland OH Market(Continued from page 6)

the average are displayed by lines through the middle ofthe graph.

Shipments from Pittsburg and the Northeast are the clos-est to the Cleveland region and have some of the lowestrates per car on the graph. Chicago moves are designatedby the large X and have rates that range below one stand-ard deviation below the average to rates above one stand-ard deviation above the average. Philadelphia originmovements all hover around the average. The highestrates belong to movements from the Southeast regionwhich are the farthest distance from Cleveland, rail Terri-tory 2. These movements are likely from South Carolinaand Alabama.

Please note, some Chicago shippers are above one stand-ard deviation above the average rate, much higher thanother Chicago moves, higher than Philadelphia movesthat travel slightly longer distances and are equal to

movements that travel twice the distance from the South-eastern US. This graph provides verification that the car-rier is putting a shipper with a high rate from Chicago ata competitive disadvantage compared to suppliers fromother regions into the Cleveland market.

The Rail Negotiation Seminar changeshow companies negotiate with railroads.

Learn new strategies for:

Increasing yourcompetitive rail traffic

Optimizing yourrail spend

Identifying and quantifyingcost reductions to go after

Using competitors toreduce your rates

Rail Negotiation SeminarApril 26-27, 2016 DoubleTree Guest Suites Tampa, Florida

Rail volumes, employment and stock prices are down; the seminar showswhat this means to your negotiations and rates. The seminar focuses on:

Determining and obtaining reasonable rates for your traffic; Effective ways to improve negotiations with railroads; Stopping your rates from always increasing; Reducing rates on captive movements; and, Making your moves more important to railroads

This seminar has become the industry standard for improving shippers’ railnegotiations.

Special Presentation:Reducing Costs by Improving Your Rail OperationsImproving car utilization, stopping demurrage expenses, reducing mainte-nance expenses and improving service to your customers are all possible. Thisseminar will show you how!

To receive a brochure or further information call Escalation Consultants at 301-977-7459 or visitEscalationConsultants.com

This is the most highly recommended negotiation seminar for rail shippers

Rail markets are changing dramatically. The Rail Seminar showshow to best take advantage of these changes