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Rail Chief Defends Service-Throttling Embargoes

Union Pacific boss Lance Fritz was grilled by regulators on the railroad’s surging use of embargoes in more recent years as the Surface Transportation Board (STB) pushed for answers during a two-day hearing that ended Wednesday. 

The railroad’s use of embargoes, which totaled 886 in the first 10 months of this year, came under scrutiny by the STB. The agency, which mostly regulates the railroads, has been eyeing the period from 2017, when Union Pacific issued 27 embargoes, to the current day. The sharp increase began in 2018, when embargoes rose more than 400 percent. It increased nearly 200 percent between 2018 and 2019 to 413 embargoes. The following years, 2020 and 2021, saw the railroad issue 251 and 662 embargoes, respectively. 

Fritz and other Union Pacific executives went before regulators explaining the embargoes—an option used to temporarily halt certain shipments due to weather, congestion or other impediments to movement—were the result of excess railroad car inventory. 

“This year has proved challenging,” Fritz told the board on Tuesday. “Our network is not operating at the levels our customers expect and deserve. In large part, it is because one of our critical resources, employees, was out of alignment. We did not have enough crews and did not have them in the right places at the beginning of the year.” 

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The CEO said the company has hired more than 1,400 workers this year, saw trains delayed by crew shortages fall 39 percent between mid-April and Dec. 2, train speed up by 13 percent and inventory reduced by 22,000 cars. 

“As cycle time slowed earlier this year, some customers reacted by adding more cars into the system,” Fritz said. “That’s a natural reaction, but it contributed to our challenges and delayed our full network recovery. Excess freight car inventory disrupts the alignment of our network resources. It requires us to use more crews and more locomotives to handle the same amount of business and it produces congestion on our lines of road and in our terminals.” 

In response, Union Pacific began contacting customers in November about voluntarily reducing excess cars based on a formula determining targets for customers. The railroad said it contacted 310 customers, with 230 of those companies working with Union Pacific on a reduction plan. For the 81 companies that did not respond, the company issued an embargo with permits that limited, but did not completely stop, shipments. 

“This year, the substantial majority of UP’s embargoes addressed excess cars accumulating in serving yards,” Union Pacific executive vice president of operations Eric Gehringer told the STB. “UP has been careful to ensure that our serving yard embargo process is data driven, narrowly tailored and equitable to all customers. Our process is not designed to limit traffic. Customers can order as many cars as they can process and we do not stop customers from releasing outbound cars. Embargoes only occur when customers allow excess inbound cars to accumulate in our serving yards.” 

Oberman brought up shipper testimony during the hearing, arguing those companies hadn’t changed their inventory loads for several years and, yet, were subject to embargoes. He further pressed Union Pacific about why the embargoes were used so infrequently in 2017. 

“If you go back to our operating statistics, our customer service metrics in the back half of 2017 and the first half of 2018, they were not good in comparison to where we are even today,” Fritz said. “Our freight car velocity is better. Our train planning and compliance is better. To and from industry is better. So, the inventory was getting in the way. We did not use embargoes at that time to the extent we use them today to remedy that situation and as a result our service product suffered for quite some time. It was actually one of the key factors in deciding we were going to design our network differently, which was when we adopted PSR [precision scheduled railroading].”

PSR is an operational strategy for the railroads aimed at creating greater efficiencies and what the carriers would argue is better service. Labor unions are among the critics of the concept, arguing implementation has led to safety and service issues. 

Lantz defended the use of PSR and argued against the suggestion that implementing this model helped lead to worker layoffs and, ultimately, service issues. 

“By January of ’19 you were up to 31 and then it was off to the races during 2019,” Oberman said of the embargo count, attempting to draw a link between UP’s implementation of PSR and the rise in embargoes. 

Fritz countered by saying PSR removed “excess work out of the network” once the company eliminated what the CEO characterized as barriers to better customer service.

“For sure, we have fewer employees than we did prior to implementing PSR,” Fritz said. “Our goal in implementing PSR was not to reduce employees; it was to reduce excess work in the network.”  

The STB hearing came on the heels of a recently ended contentious collective bargaining process between carriers and a dozen unions. The railroads and some of the unions had been deadlocked on terms related to sick paid time off. The issue was resolved when Congress stepped in earlier this month to pass legislation forcing workers to accept the tentative agreements on the five-year contract running through 2024.