Rail Negotiating Best Practices

Best practices in rail rate and service negotiations begin with planning and analyzing your situation, what it is and what it can be. Actual negotiations will flow logically if you are properly prepared.

Darrell Luther

A transportation professionals’ mantra is generally to obtain the highest quality and least cost transportation solutions for their company. In the waste and recycling industries there are generally a host of transportation requirements and corresponding solutions available. Picking the best combination of solutions can be a real challenge.

In this article we’ll focus on providing guidance to those who find themselves in that middle ground moving municipal solid waste, scrap, construction and demolition debris, recycled goods and other general waste commodities from either a transfer station or fixed origin to a landfill, recycler or processing facility via rail.

Preplanning and Preparation

When it comes to rail transportation rate and service negotiations, preplanning should be your first course of business. Oftentimes we find the waste and recyclables gathering and disposal process and end use negotiations taking precedence with little regard to rail transportation price tradeoffs.

Rail negotiating best practices begin with the creation of a list of items that pertain to your situation and encompass taking a broad based point of view analyzing those items that can better position your company for more favorable rail rates and service.

To be effective in rail negotiations you first need to understand your situation as it pertains to the rail situation and then attempt to understand the railroads situation as it pertains to your business. Always keep in mind that your end goal should result in the best rail rate and service package combination available.

Physical Facility and Rail Corridor Relationship

Rail negotiations preparation starts with a fairly straightforward analysis. This analysis is best conducted by asking yourself a series of questions that will disclose your company’s current rail strengths, weaknesses and opportunities. A series of questions designed to lead you through the preplanning and preparation stages include the following:

  • Where are your origin facilities located, what are their physical rail related characteristics, do they interchange with one or a multitude of railroads and how does your facility(s) physically interchange with the railroad? Facility location in this case is only relevant in its relationship to rail access. Whether you have one or a multitude of facilities, the value of having access to two or more rail carriers is often worth double digit percentage rail rate discounts when compared to single rail access points.

  • What should you do if you have one or a number of captive rail facilities? In this case you need to dig deeper and understand the situation from the railroads point of view. Is there an option to bundle facilities and drive more rail traffic to a rail carrier thru a Rule 11 rate structure to interchanges that are more favorable to a select rail carrier? Is the existing rail traffic in the lanes you want to use at, under or over the current rail line capacity? Does the railroad want more traffic on a particular lane or not? How will your traffic effect the current rail operations for a particular rail line segment? The next logical step is determining the volume impact that your rail traffic will have on the rail line segment. How many railcars per day, week, etc. can you offer to the railroad? Is there an opportunity to bundle the volume thru one or more origin locations?

Volume in railroading is an interesting phenomenon. One would think that more overall volume is better for obtaining a better rail rate. Generally this is true but in some rail corridors this isn’t the case. Providing sufficient volume to fill out an existing train can result in better rail rates than providing a level of rail volume that causes the railroad to put on another train start that results in a train that runs fewer rail cars than the train makeup and corridor its running in can physically haul. Consider that a railroad dedicates sufficient crew and power to a specific traffic lane to theoretically transport the maximum trailing tons (i.e. number of loaded cars) that configuration can pull over a given lane. Anything less are wasted resources and the customer usually ends up paying via rates for empty train space.

A good tool to help provide a general guideline to the railroads cost and train capacity requirement for a particular lane is the use of the Uniform Rail Costing System (URCS). URCS is the Surface Transportation Board (STB) railroad general purpose costing system that estimates variable and total costs for Class I U.S. railroads. This information is updated annually. URCS will give you general variable railroad cost information but should only be used for guidance.

Up until this point we’ve taken a rather macro viewpoint of a rail transportation situation. We’ve determined whether or not the loading or destination facility(s) is open to one or more rail carriers, we’ve studied rail line configuration at a high level to understand if there are Rule 11 pricing opportunities, we’ve reviewed specific origin or destination locations to determine how they physically interchange with the railroad, we’ve taken a look at overall volume and the breakdown of that specific volume on particular rail lines and we’ve obtained general railroad variable cost information for our intended rail lanes and volume offerings. We’ve also generated a host of questions that need to be answered before proceeding with any actual negotiations. How does one go about answering these questions?

Existing Pricing

Take a look at current pricing for your commodity. In many cases rail transported commodities will be governed by publicly available tariff pricing for a particular Standard Transportation Commodity Code (STCC). These prices are generally available on Class I railroad Web sites. In many cases you’ll need to sign up for the railroads Web site. After you find your STCC, you’ll want to take a look at all tariffs in place that govern your commodity. What you’re looking to do is to obtain an understanding of differential pricing in specific corridors for the number of cars, junction routing to support Rule 11 or through route decisions and geographic differences to determine capacity in a particular corridor or geographic area (e.g. Northeast U.S. versus Southwest U.S.). You can than reconfigure this information in to train size and rate per ton mile information that will give you comparative information to your situation.

You should also be sure to understand any accessorial charges, such as demurrage, use of railroad supplied or private equipment, private car storage, track space requirements, etc. that will impact your business. These are all key pricing points that will impact your ability to obtain favorable rail rates and service.

Service Requirements

Don’t assume the service requirements you have in mind and the service that will be provided by the railroad will match up. If you expect to be negotiating rates and service for an existing facility talk with your local serving railroad train operations personnel to best understand the service parameters the railroad will provide. They often can provide you with enough meaningful information that you can understand the entire train handling process from origin to destination without engaging in negotiations. This approach also applies to any of your receiving facilities as well. It’s important to be armed with as much information as possible before entering into actual negotiations. If you are working with a Greenfield site or are acquiring a new facility (origin or destination) it’s a good practice to ask your railroad sales representative to provide you with the railroad service planning department analysis as it pertains to your situation.

Putting it All Together

Adequate preparation for rail rate and service negotiations is very similar to putting together a complex jigsaw puzzle. Any missed piece and you’re off course and back tracking to a point of stability.

Best practices in rail rate and service negotiations begin with planning and analyzing your situation, what it is and what it can be. The access to rail carriers and compilation of geographic area and train service density in a corridor, how your business fits in the model of the railroad, understanding rates and service for pre-existing like-type business in that corridor or other geographic locations, volume and service requirements from your perspective coupled with volume and service capabilities that the railroad can and will offer, impacts of accessorial charges and provision of service are all pieces of the puzzle that must be conjoined. Actual negotiations will flow logically if you are properly prepared.

Darell Luther is president of Forsyth, MT-based Tealinc Ltd., a rail transportation solutions and railcar leasing company. Darell’s career includes positions as president of DTE Rail and DTE Transportation Services Inc., Fieldston Transportation Services LLC, managing director of coal and unit trains for Southern Pacific Railroad and directors positions in marketing, fleet management and integrated network management at Burlington Northern Railroad. Darell has more than 24 years of rail, truck, barge and vessel transportation experience concentrated in bulk commodity and containerized shipments. He can be reached at (406) 347-5237, via e-mail at [email protected] or visit www.tealinc.com.