Chemical shippers cry foul—again: while working closely to move vast volumes of critical freight safely, railroads and "captive" chemical customers remain far apart on rate and service issues - Industry Overview

Railway Age, Nov, 2002 by Luther S. Miller

In a letter to Louisiana Senator John Breaux, Dow Chemical President Michael D. Parker pointed out that while the chemical industry pays railroads nearly $5 billion a year to move 124 million tons of freight, "63% of all chemical facilities are captive to a single railroad."

"Dow, as the world's largest chemical and plastics producer, is experiencing first hand that captive shippers are paying the highest rates and receiving the poorest service," Parker told Senator Breaux, who is chairman of the Senate Surface Transportation Subcommittee. "Dow is captive to the same railroad at its four largest facilities," continued Parker. "It is well understood that being captive at a facility means rail freight costs about 30% higher than at facilities served by two railroads."

Dow's complaint was one of many that streamed into Senator Breaux's office after he announced this year's hearing on railroad service. This isn't the first time that captive shippers have asked for help from Congress, and it won't be the last. Railroads tend to dismiss such complaints as an assault pure and simply on the time-honored business practice of differential pricing. But captive customers insist that they're being under-served and overcharged in ways never intended by the Staggers Rail Act of 1980, nor by the Surface Transportation Board's approval of mergers that severely eroded rail-to-rail competition (particularly, for chemical shippers, the Union Pacific/Southern Pacific consolidation).

Solvay America President David G. Birney told Senator Breaux: "One of our major operations with thousands of railcars has seen an increase in the average transit time from 7 to 9 days on loads and from 10 to 15 days on returning empty railcars. This has forced it to add 250 cars at an annual cost of $1.7 million. To add insult to injury, railroads now claim that the chemical industry has too many railcars and have instituted punitive demurrage charges of up to $100/day for cars held out on their lines; shippers are left with no recourse because there are no competitive options available."

Sunoco Chemicals ships and receives 38,000 rail carloads annually. According to Senior Vice President Bruce Fischer, railroads "are willing to offer service accountability on select competitive movements, yet are unwilling to stand behind their service products on lanes where no competition exists. Our ability to deliver products competitively from two of our single-railroad served plants is hindered by the local carrier being inflexible on economic demands, often necessitating supplying a customer from a much more distant competitively served site producing the same products."

Petrochemical manufacturer BP, whose transportation costs add up to $110 million a year, put this into the record: "We have 80% of our business captive at origin or destination. One of our major businesses is significantly disadvantaged by lack of competitive access. Despite the efforts within the business to reduce manufacturing, site logistics, corporate overhead, and other supply chain costs, we continue to be faced with high rail costs. In this business alone, we pay an approximate premium of $9 million in rail freight annually, on a total spend of $35 million. This premium along with other competitive factors has caused BP to rationalize the business and shut down production sites and lines. Competition, much of which will be foreign in the future, requires us to have lower costs to compete. It is essential we have congressional support to allow us to be effective in meeting current and future competitive challenges."

Celanese Chemicals President Lyndon E. Cole said discriminatory pricing is going from bad to worse: "For Celanese, a freight premium of 30% to 40% is typically imposed at our plants without rail competition. This value gap is increasing, as railroads lower their prices in competitive markets and offset the revenue loss by increasing prices where they have no competition. Ultimately, this impacts decisions on where product is made, putting the economic viability of many existing plants and their communities at risk."

DuPont is "very concerned about the lack of competition in the rail industry," said Gerard L. Donnelly, Global Director, Logistics. Noting that the post-Staggers rail industry has "dramatically improved its overall financial situation," Donnelly said that "the competitive marketplace forces Congress had correctly relied on to 'regulate' the industry have all but disappeared." The result, he said, is "a less responsive and innovative rail partner and the imposition of a 'monopoly premium' in excess of 30% being imposed on captive shippers."

The build-out option, a condition imposed by the STB in approving the UP-SP merger, is one escape for captive shippers, though a costly one. A company that has taken this route is Basell North America, whose president, Charles E. Platz, represented not only his own company but the American Chemistry Council at the Senate hearing. Platz noted that Basell has production facilities in Lake Charles and Taft, La., as well as in Bayport, Texas, and Jackson, Tenn. "Basell is not captive at Lake Charles," said Platz. "But one of the railroads at that location [Union Pacific] does have a monopoly on rail service at Basell's Bayport facility. That railroad uses its market power to obtain leverage over our Lake Charles traffic. Because of this situation, Basell and three other shippers of chemicals have joined with another railroad [Burlington Northern and Santa Fe] to create San Jacinto Rail Limited, a partnership whose mission is to introduce and provide competitively priced rail service options. Although my company w ould prefer to invest in plastic resin production facilities rather than rail assets, current regulatory policies compel us to do so."