The U.S. Government Accountability Office found that tariff rates are generally more expensive than contract rates, but are usually more suitable for shippers with infrequent or small volume shipments.
The U.S. Government Accountability Office (GAO) conducted a study that shined light on the pros and cons of both contract rates and tariff rates in the rail freight industry.
In its report, GAO-17-166, the GAO analyzed Surface Transportation Board (STB) data from 2005 to 2014, and interviewed the Association of American Railroads, STB officials, representatives of nine shippers that use rail to ship a variety of commodities, and the four largest freight railroads – BNSF, CSX, Norfolk Southern and Union Pacific.
Most freight is shipped under contract rates, and some shippers have raised concerns with how railroads negotiate contracts that contain multiple origin-to-destination routes, the GAO said.
Although the STB has the authority to resolve rate and service disputes between shippers and railroads for regulated goods shipped under a tariff rate, it does not have the power to address rate and service disputes for freight shipped under a contract rate.
The GAO said that according to representatives from all four of the largest freight railroads, contract and tariff rates both reflect the characteristics of a given shipment, including the actual commodity being shipped, its origin and destination, and the route distance.
The railroads also said that market factors, such as competition, influence both contract and tariff rates.
Looking at the differences, tariff rates are generally more expensive than contract rates.
According to the GAO’s report, the railroads said that when contract rates are developed, a railroad will examine factors specific to each shipper, and may negotiate discounts in exchange for a shipper committing to provide a specified volume throughout the duration of the contract. This allows railroad companies to more efficiently allocate resources and insures consistent revenues, according to railroad representatives.
In addition, selected shippers told the GAO that they can more efficiently manage multiple shipping routes under one contract because of the stability of rates over the duration of the contract.
Although contracts can offer discounts in exchange for guaranteed volumes, some selected shippers said contracts that include rates for multiple origin-to-destination routes sometimes package in a mix of reasonable and unreasonable rates, according to the GAO report.
The report also said that according to some shippers, contract negotiations may be too long and costly for shippers with small shipment volumes, making tariffs the more suitable method for these shippers.
Looking at trends over the years, the GAO said freight by contract has increased. The GAO also said that two shipping associations representing coal shippers noted how contracts have become less negotiable and more standardized over the years. In addition, one railroad representative told the GAO that a railroad may administer thousands of contracts at any given time, so maintaining standard terms across contracts allows the railroad to more efficiently manage its company.
GAO: Contracts vs. tariffs for rail freight
