What is the common practice in setting line haul rate if two or more railroads participate in the shipment? Do railroads discuss the rates, or set two rates independently and charge shipper the sum of two? Does the shipper need to negotiate and sign contracts with both railroads?
For decades the vast majority of interline moves took place under interline rates which were published in tariffs. Interline here means involving two or more carriers. The shipper and consignee agreed among themselves who would pay the freight. A bill of lading was issued at origin. If freight was prepaid, then shipper paid the freight, if collect then consignee paid the freight. The carrier that collected the freight charges paid the other participants. The divisions, that is who gets how much, had been worked out in rate bureau meetings and were often given as a percentage of the total.
The Staggers Act made collective rate making illegal by removing the protection previously provided from anti-trust statutes. Now divisions have to be individually negotiated among the involved carriers. Some traffic still moves on tariff rates, which are much like list price. Divisions have long since been nergotiated among the carriers based on origin, destination, and interchange point.
If a customer wants a rate to a new destination, the carriers need to establish a rate and route. This may be as simple as adding a new origin or destination to an existing rate authority (tariff, letter quote, or contract).
A customer may propose a "special deal" to the carriers. That is they want a rate reduction. The shipper or consignee will take their proposal to one of the railroads. If the market manager is interested, he will contact his compatriot on the other railroad and ask "What is your revenue requirement" for this commodity over that interchange based on this deal, meaning whatever committment the customer is willing to make to induce the railroad to make him a lower rate. If they agree to do something other than the standard division, they are making more work for both revenue accounting departments, so I suspect nonstandard divisions are rare. In either case the rate will almost certainly be a joint interline rare as a matter of mutual convience.
There is a process whereby each railroad quotes its own rate. A separate bill of lading, waybill and freight bill are required for each carrier involved. This is provided for by accounting "Rule 11" and is most often used with finacially untrustworthy short lines. Under Rule 11 each carrier will have its own rate authority. The shortline's will probably be a tariff item, since the carrier has total control of what its tariff says.
Another structure has become common in the case of "spin off" shortlines. Here the seller agrees to pay the buyer for its services, to absorb those costs in his rate, which is not disturbed by the transaction, and to make all rates for the joint service. Seller's market managers are instructed to cost the move as if it was entirely a seller's move. That is to ignore the short line fee, which is generally a flat per car fee.
Recall that under the interline settlement system, either the origin or destination carrier collects the entire through rate. I know of one case, and there are probably others, where the interline partners lost millions of dollars in revenue for work they performed when an independent short line with mostly origin traffic freight prepaid filed for bankruptcy while owing large interline balances.
Mac
Mac:Thanks for that description. I am an old "traffic guy" for an LTL carrier in the 1980s. In 1990 I moved on another industry and never looked back, but I still have a little "Rate Bureau DNA" in my blood.
I worked for what would be considered a "shortline" when compared to the rail industry. My employer was a local LTL carrier from Chicago to Northern Indiana and I negotiated and maintained rates and division of revenue splits with almost all the regional and national LTL carriers (CF, Roadway, Yellow, Holland, etc). Further, I was on the General Rate Committee of a regional Tariff Bureau (Central States). It was an interesting system of pricing and revenue divisions, to say the least.
Now, a few questions, if you do not mind...
1. What percentage of carload business today, would you guestimate, moves on tariff rates vs contract rates?
2. From what I read from your comments, there is no avenue to legally split tariff rates between two carriers....is that correct? That would be due to anti-trust issues. So, if that is the case, would tariff moves be only single line (or in the case of shortline, contract for origin/destination)? In other words, lets say there is a grain movement from North Platte, Nebraska to Pittsburgh, Pa over Chicago (UP/NS). If that moves by tariff (no negotiated rates) then would there be two rates and two bills? (UP to Chicago and NS from Chicago to Pittsburgh).
3. If there were a contract rate between NP and Pittsburgh, then there would be a single rate and billing with one carrier billing and collecting and then making a settlement to the other carrier....correct?
4. Does each contract rate then require a separate revenue split agreement between carriers, or are those generally grouped by common origin/destination points? ie...group all origins in Western Nebraska together and all western Pa together.
5. Lets say UP blocks this movement with other Pittsburgh region traffic into a block or train destined for Conway/Pittsburgh which bypasses all NS yards except for destination. Will UP generally negotiate a higher revenue split for the added yard service?
I am sure that more questions will arise, but those will be a good starting point. I am far more interested in the revenue aspect of a train than the motive power (unless old GP or F/E units then I truly foam at the mouth).
We havent even began discussing intermodal moves...
ed
MP173 Mac:Thanks for that description. I am an old "traffic guy" for an LTL carrier in the 1980s. In 1990 I moved on another industry and never looked back, but I still have a little "Rate Bureau DNA" in my blood. I worked for what would be considered a "shortline" when compared to the rail industry. My employer was a local LTL carrier from Chicago to Northern Indiana and I negotiated and maintained rates and division of revenue splits with almost all the regional and national LTL carriers (CF, Roadway, Yellow, Holland, etc). Further, I was on the General Rate Committee of a regional Tariff Bureau (Central States). It was an interesting system of pricing and revenue divisions, to say the least. Now, a few questions, if you do not mind... 1. What percentage of carload business today, would you guestimate, moves on tariff rates vs contract rates? 2. From what I read from your comments, there is no avenue to legally split tariff rates between two carriers....is that correct? That would be due to anti-trust issues. So, if that is the case, would tariff moves be only single line (or in the case of shortline, contract for origin/destination)? In other words, lets say there is a grain movement from North Platte, Nebraska to Pittsburgh, Pa over Chicago (UP/NS). If that moves by tariff (no negotiated rates) then would there be two rates and two bills? (UP to Chicago and NS from Chicago to Pittsburgh). 3. If there were a contract rate between NP and Pittsburgh, then there would be a single rate and billing with one carrier billing and collecting and then making a settlement to the other carrier....correct? 4. Does each contract rate then require a separate revenue split agreement between carriers, or are those generally grouped by common origin/destination points? ie...group all origins in Western Nebraska together and all western Pa together. 5. Lets say UP blocks this movement with other Pittsburgh region traffic into a block or train destined for Conway/Pittsburgh which bypasses all NS yards except for destination. Will UP generally negotiate a higher revenue split for the added yard service? I am sure that more questions will arise, but those will be a good starting point. I am far more interested in the revenue aspect of a train than the motive power (unless old GP or F/E units then I truly foam at the mouth). We havent even began discussing intermodal moves... ed
Ed,
I do not mind, to the extent I can answer accurately.
#1 WAG carload by tariff is probably in the 90+ percent range. Tariffs are easy to administer and most carload traffic does not need and will not support the complexity of contracts. The percentage is a guess, I have no data and I doubt there is any public source.
#2 Of course two carriers can legally split the revenue on a joint, or interline move, and they do thousands of times a day. What is illegal is the rate bureau method where competing carriers sit in one room and decide what lumber rates from the West Coast to Chicago, St. Louis, Memphis, and New Orleans are. That is the tariff bureau process you remember. That is collective rate making and is illegal. I see that my pevious post was less than clear on collective rate making, sorry.
The rest of your question was answered in my previous post about interline rates.
#3 Yes.
#4. I do not know that there is or is not anything about divisions in the contract itself. I suspect not, since the customers probably do not care much and carriers have no desire to disclose. There may be a division sheet attached to carrier copies of contract or they may use a general division agreement as between the two carriers. The contract will include a reference to the place the carrier's revenue accounting people can find the applicable division.
#5. Generally not. The division is what it is and to do so whould further complicate the accounting which is complex enough as it is.
If a good sized block moves daily it is no more work for UP to block to Pittsburg than to Chicago, but would require a class track assigned to the purpose. In practice, blocking beyond the interchange, or for interior points on the other guy, is largely on an "I will scratch your back if you scratch my back" basis. Each does a favor for the other, and the customer should get better service.
Mac, thank you for the detailed explanation.
Just to clarify, the main difference in rate setting pre- and post- Staggers Act is that now carriers can only discuss rates for joint service, but not for the markets they compete on. Am I right?
Another thing that is not very clear to me (due to my poor knowledge of rate setting), and also relates to what Los Angeles Rams Guy wrote. You keep talking about revenue split/devision negotiations. But is it really a devision negotiation, or more like both carriers set their rates and the resulting rate that shipper pays is just the sum?
As to the question of tarrif vs contract rates, according to GAO, "most freight ships under contract". They mention it here https://www.gao.gov/products/GAO-17-166
Daria,
Further yours of 11:11 today.
Paragraph 1 is correct.
Paragraph 2. Percentage divisions were the standard pre Staggers. Yes, rates can be constructed on a combination basis and the revenue division could be a bit different than the otherwise applicable percentage. If it is a through rate, the revenue must be divided among the participating carriers.
If it is Rule 11 rate, then there is no through bill of lading, waybill and freight bill. Here the division issue goes away but need two bills of ladings, two waybills and two freight bills. The vast majority of interline rail traffic moves on a through bill of lading.
The important issue is whether or not a thru bill of lading. If it is thru bill, then carriers need to divide the revenue. Whether they do that based on agreed standard percentage or specific percentage is up to the parties. Deviation from the standard percentage introduces complications, which is always a bad thing. I suspect each carrier has internal guidelines about deviations.
PNWRMNM For decades the vast majority of interline moves took place under interline rates which were published in tariffs. Interline here means involving two or more carriers. The shipper and consignee agreed among themselves who would pay the freight. A bill of lading was issued at origin. If freight was prepaid, then shipper paid the freight, if collect then consignee paid the freight. The carrier that collected the freight charges paid the other participants. The divisions, that is who gets how much, had been worked out in rate bureau meetings and were often given as a percentage of the total. The Staggers Act made collective rate making illegal by removing the protection previously provided from anti-trust statutes. Now divisions have to be individually negotiated among the involved carriers. Some traffic still moves on tariff rates, which are much like list price. Divisions have long since been nergotiated among the carriers based on origin, destination, and interchange point. If a customer wants a rate to a new destination, the carriers need to establish a rate and route. This may be as simple as adding a new origin or destination to an existing rate authority (tariff, letter quote, or contract). A customer may propose a "special deal" to the carriers. That is they want a rate reduction. The shipper or consignee will take their proposal to one of the railroads. If the market manager is interested, he will contact his compatriot on the other railroad and ask "What is your revenue requirement" for this commodity over that interchange based on this deal, meaning whatever committment the customer is willing to make to induce the railroad to make him a lower rate. If they agree to do something other than the standard division, they are making more work for both revenue accounting departments, so I suspect nonstandard divisions are rare. In either case the rate will almost certainly be a joint interline rare as a matter of mutual convience. There is a process whereby each railroad quotes its own rate. A separate bill of lading, waybill and freight bill are required for each carrier involved. This is provided for by accounting "Rule 11" and is most often used with finacially untrustworthy short lines. Under Rule 11 each carrier will have its own rate authority. The shortline's will probably be a tariff item, since the carrier has total control of what its tariff says. Another structure has become common in the case of "spin off" shortlines. Here the seller agrees to pay the buyer for its services, to absorb those costs in his rate, which is not disturbed by the transaction, and to make all rates for the joint service. Seller's market managers are instructed to cost the move as if it was entirely a seller's move. That is to ignore the short line fee, which is generally a flat per car fee. Recall that under the interline settlement system, either the origin or destination carrier collects the entire through rate. I know of one case, and there are probably others, where the interline partners lost millions of dollars in revenue for work they performed when an independent short line with mostly origin traffic freight prepaid filed for bankruptcy while owing large interline balances. Mac
I'm old and decrepit enough to have been involved in the rail industry's development of "Rule 11". The main reason it was developed was because of the increasing use of contracts following the 1980 Staggers Act. At the time, it was common for many railroads to make contracts covering only their part of an interline move, which they did not want to disclose to the other railroads in the route. Naturally, this created problems if the collecting and/or the settling carrier wasn't the contracting carrier (because the non-contracting carriers wouldn't know anything about the contract when they collected and settled the revenues).
Initially, there were two solutions considered. The first was an industry rule prohibiting the use of contracts for just a portion of an interline move, a solution which fell by the wayside pretty quickly. The second solution was to treat the contract portion of the move as a separate, local move on the contracting carrier (in other words, it would as if the on-junction for the contracting carrier was the origin of the shipment and the off-junction the destination. That didn't work either, because through movement waybilling was needed to properly move the shipments (blocking, etc.).
Rule 11 was the ultimate solution. With a Rule 11 shipment, the movement waybilling shows the full interline movement, so it can be properly handled by the participating carriers. But the revenues of the participating carriers are separately billed and collected from the customer, and do not go through the normal interline settlement process.
In my day, at least, Rule 11 was very commonly used for interline shipments between Class I railroads, not just movements with untrustworthy short lines. Some shippers, in fact, preferred to bid their traffic in Rule 11 segments rather than single factor, origin-destination interline rates. I suspect this practice may have declined in recent years due to mergers, but I don't know this as a fact.
daria Mac, thank you for the detailed explanation. Just to clarify, the main difference in rate setting pre- and post- Staggers Act is that now carriers can only discuss rates for joint service, but not for the markets they compete on. Am I right? Another thing that is not very clear to me (due to my poor knowledge of rate setting), and also relates to what Los Angeles Rams Guy wrote. You keep talking about revenue split/devision negotiations. But is it really a devision negotiation, or more like both carriers set their rates and the resulting rate that shipper pays is just the sum?
Wow, what a great discussion. A bit nerdy, but informative.
My next question is on the Rule 11 shipments...does the combination of the two (or more) rates compare favorably to a thru/joint rate? There is probably no way to determine that, but here is my basis for the question.
During my LTL days we would infrequently handle a shipment to a point in which we had no carrier which could handle the shipment to the destination, hence there would be 3 LTL carriers involved. This would involve a "combination of rates" in which there would be a thru rate from the origin carrier to the point of interchange to the 3rd carrier, then a local rate would apply.
Those "combination of rates" were always much higher than the thru rate. My guess is the Rule 11 rates would be higher, but that is just an assumption on my behalf.
The reasoning would be that the rail rates would include building in both an origin pickup (switch) and destination delivery (switch). When constructing transportation rates, the origin and destination final miles are very expensive....whether in rail or trucking. Lots of time consuming services at both ends. The Rule 11 shipments would eliminate two of those final mile services as there would be interchange...which would probably include an entire train or at least a large block.
Transportation buyers always complain about price...but that is their job.
Ed
Read Falcon 48's post of 11:57 today about creation of Rule 11, which I certainly did not know. It looks like another example of a saying I heard once from a wise railroad marketing man "Customers always want their unfair advantage."
In the case of two or more class 1 carriers I will not hazard a guess as to comparison of Rule 11 vs thru rates holding everything else constant.
In the untrustworthy shortline case the rate will be higher, unless the connecting class 1 chooses to absorb all or part of the shortline charges. My sense is that in most cases the class 1 will not. Given the small volume of traffic generally involved with untrustworthy short lines, the class 1 probably does not much care whether it participates in the traffic or not.
MP173 Wow, what a great discussion. A bit nerdy, but informative. My next question is on the Rule 11 shipments...does the combination of the two (or more) rates compare favorably to a thru/joint rate? There is probably no way to determine that, but here is my basis for the question. During my LTL days we would infrequently handle a shipment to a point in which we had no carrier which could handle the shipment to the destination, hence there would be 3 LTL carriers involved. This would involve a "combination of rates" in which there would be a thru rate from the origin carrier to the point of interchange to the 3rd carrier, then a local rate would apply. Those "combination of rates" were always much higher than the thru rate. My guess is the Rule 11 rates would be higher, but that is just an assumption on my behalf. The reasoning would be that the rail rates would include building in both an origin pickup (switch) and destination delivery (switch). When constructing transportation rates, the origin and destination final miles are very expensive....whether in rail or trucking. Lots of time consuming services at both ends. The Rule 11 shipments would eliminate two of those final mile services as there would be interchange...which would probably include an entire train or at least a large block. Transportation buyers always complain about price...but that is their job. Ed
Here's why. For many years, after the Staggers Act, the divisions that railroads earned from interline traffic were derived from the pre-Staggers Act divisions structures, many of which had been prescribed by the old ICC in the days of yore. A railroad with a "high" division might be willing to give up more of its revenue in a route in return for a volume guarantee than other railroads in the route that had a "low" division. This could be done, either by an "allowance" contract (i.e., one carrier paid an "allowance" to the shipper from its share of the interline revenue - essentially a rebate - in return for a volume commitment). Or it could be done through a Rule 11 combination rate. In either case, the "high" division railroad wouldn't want the economics of its deal disclosed to the other RR's in the route, because it would tell the other carriers in the route that the contracting carrier's division were probably too high. I would imagine that many of these incentives have vanished over the years, as divisions became more market based, and mergers decreased the number of carriers (particularly intermediate carriers) in interline routes, but I don't know this as a fact.
The "Rule 11" combination rate scenario should be distinguished from a "combination of locals", which would almost always be higher than a joint-through rate. The reason is that "local" rates are designed for traffic which both originates and terminates on the same railroad, so the costs of the originating and terminating services are built into the rate. Rule 11 rates, on the other hand, are designed for interline traffic, and usually cannot be used for a local move.
Clear as mud?
PNWRMNM Read Falcon 48's post of 11:57 today about creation of Rule 11, which I certainly did not know. It looks like another example of a saying I heard once from a wise railroad marketing man "Customers always want their unfair advantage." In the case of two or more class 1 carriers I will not hazard a guess as to comparison of Rule 11 vs thru rates holding everything else constant. In the untrustworthy shortline case the rate will be higher, unless the connecting class 1 chooses to absorb all or part of the shortline charges. My sense is that in most cases the class 1 will not. Given the small volume of traffic generally involved with untrustworthy short lines, the class 1 probably does not much care whether it participates in the traffic or not.
The real solution to "untrustworthy short lines" was a "handling carrier" arrangement, which you described in one of your earlier notes. In this kind of arrangement, the Class I makes the rates the shipper pays to and from points on the short line as if they were points on the Class I's own railroad (typically, the short line will not even appear in the rate documents the shipper sees) and collects the rates from the shipper. The Class I then pays the short line an agreed charge for every car the short line handles. Many short lines (not just "untrustworthy" ones) actually prefer this kind of arrangement, since it saves them a lot of back office work and makes it easier for shippers.
I realize that after my last few posts on this thread, either no one’s watching it anymore or the few left reading it are brain dead. But let me make one more observation on the off chance that there's somone looking at it who's still conscious.
Believe it or not, there was an underlying objective (really!!) to the seemingly byzantine way railroads structured interline pricing and settlement in the olden days before the Staggers Act, contract rates, etc., and much of what seems unnecessarily complicated today still reflects that objective.
The objective was simply this. A shipper making an interline shipment should only have to pay one freight bill and that bill should include all charges applicable to the shipment. The shipper shouldn’t have to pay separate bills from each carrier that participated in the movement. Rather, all of the charges for the shipment should be folded into one freight bill presented by one carrier, and the participating railroads then would split the revenues among themselves without involving the shipper.
This objective is very obvious from the way the line haul interline rates were usually structured and billed – typically a single factor interline rate billed and collected by one carrier, and then split among the participating carriers based on established divisions. And even when the rate for an interline shipment was some form of combination rate, the total rate would typically still be collected by one carrier and then split among the carriers, either “as made” (i.e., each carrier got the full amount of its individual rate) or by established divisions. And this treatment wasn’t limited to just the line haul rates. Suppose, for example, a switch move by a carrier which was not a party to the line haul rate was needed to complete delivery at the destination or make the pickup at origin. Typically the switch carrier wouldn't submit a separate bill to the shipper. Rather, the switch carrier would get paid by the line haul road that interchanged the traffic to/from the switch carrier. The line haul carrier would then either pass the switch charge on to the shipper in its line haul bill or “absorb” it (i.e., the line haul road would pay the switch carrier, but not pass the switch charge on to the shipper - if you've ever run across the term "absorbed switching"in RR pricing documents, this is what it means). Of course, there were exceptions to the “one bill per shipment” – some charges (like destination demurrage) might not be known at the time the shipment was billed. But the goal was achieve the “one bill” objective wherever possible.
In the modern era, “one bill per shipment” is not as important as it used to be. For a variety of marketing reasons, either shippers or carriers often prefer to separately establish and bill some of their charges (Rule 11 rates being a good example), and modern computer systems can easily handle this approach. But much of the system that’s in place today still harkens back to the days of yore.
Hopefully, if anyone reading this has insomnia, it will help you get to sleep tonight. Sweet dreams.
Falcon48 and Mac- Thank you for taking the time to share your knowledge and experience with the rest of us. I have been reading this thread and trying hard to wrap my head around the details. To me it is quite interesting. I view learning about things like this as being an opportunity to use the recreational side of my brain to learn things that I really don't need to learn, but find interesting. It's kind of like all the rather useless things I know about WWI battleships and WWII warplanes.
Thanks to Chris / CopCarSS for my avatar.
Falcon48I realize that after my last few posts on this thread, either no one’s watching it anymore or the few left reading it are brain dead.
Nah - you're good.
I think Byzantine is a good descriptor, though.
The inner workings of some of the "alphabet route" routings (some of which were done intentially) must have been, shall we say, interesting.
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
Murphy Siding Falcon48 and Mac- Thank you for taking the time to share your knowledge and experience with the rest of us. I have been reading this thread and trying hard to wrap my head around the details. To me it is quite interesting. I view learning about things like this as being an opportunity to use the recreational side of my brain to learn things that I really don't need to learn, but find interesting. It's kind of like all the rather useless things I know about WWI battleships and WWII warplanes.
Falcon48 Murphy Siding Falcon48 and Mac- Thank you for taking the time to share your knowledge and experience with the rest of us. I have been reading this thread and trying hard to wrap my head around the details. To me it is quite interesting. I view learning about things like this as being an opportunity to use the recreational side of my brain to learn things that I really don't need to learn, but find interesting. It's kind of like all the rather useless things I know about WWI battleships and WWII warplanes. What's useless about WWI battleships? Doesn't everyone need to know about the HMS Audacious?
What's useless about WWI battleships? Doesn't everyone need to know about the HMS Audacious?
Very interesting discussion. Can anyone enlighten me on how 2 mainline railroads -- let's say class I's -- determine the division of the joint line rate? I assume there are rules of thumb. Are the divisions typically distance-based?
As between two class I carriers, division will be by negotiaion as I stated in the second paragraph of my first resonse to the original question in this thread. There are rules of thumb, but they are not known to oursiders.
Divisions are almost never distance based because of terminal costs on each end. In very simple terms consider terminal costs to be fixed dollar amounts that do not varry with distance. Only after these costs have been paid, does it make sense to consider a mileage prorate for the balance.
Here is how it was done back in the 1980s in the LTL trucking industry which is similar in many ways to the carload traffic concepts being discussed.
Most of the interline agreements between carriers called out the method of revenue split. Often it was a flat percentage, particularly if there was a smaller carrier involved in handling the short haul. Often this would be 25%. This evolved to be more and more common as deregulation advanced in teh LTL industry.
However, the majority of revenue splits were based on "factors". These were based on common interchange points. Lets say common interchange points for Indiana originated shipments (which my company handled) were Chicago, South Bend, Ft. Wayne, and Indianapolis. Factors would be listed in a giant tariff type book to those locations from all Indiana points. These factors were 1st class rates from the 1930s, if I recall. A shipment from NW Indiana to Chicago would have a factor of 46 (I recall this). Lets say the shipment was destined for St. Louis. There would be a first class rate (factor) for Chicago to St. Louis. Lets say that factor was 110. Add the two - 46 plus 110 = 156. 46/156=29% to the shorthaul carrier and 110/156=71% to the long haul.
It was done using factor books at the time, but was possibly computerized after I left the industry in 1990.
My guess is something similar was used in the rail industry. It was not based on mileage but on "1st class rates" which would cover (theoretically) terminal costs, etc. Recall, very few LTL carriers went out of business during the regulated era...only post 1980 did those carriers drop like flies.
Hope this helps.
Since the enactment of the Staggers Act in 1980 most rates on recurring traffic are negotiated between the Shipper/consignee and the carriers involved from origin to destination. The carrier side of the contract will define the revenue splits. The customer side of the contract will define the rate, the required amount of traffic to get the rate and the service rquirements the carriers must uphold to stay clear of specified penalties for service failures.
The carriers with their efforts at PSR are doing their best to discourage 'loose car' merchandise railroading in favor of trainload traffic. Loose car railroading requires various switching events to provide service to both the shipper and the consignee. Switching events are discouraged by PSR.
Never too old to have a happy childhood!
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