Union Pacific pausing embargo program after scrutiny from regulators, shippers

Union Pacific’s chief executive has told federal regulators the railroad will pause its use of embargoes in order to give the congestion-alleviation practice a “hard look.”

UP (NYSE: UNP) had gotten flak from shippers, labor officials and the Surface Transportation Board for a dramatic increase in the number of embargoes it has issued this year and last year. The scrutiny came to a head last week when the board held a hearing last Tuesday and Wednesday on why the number of UP’s embargoes has grown from 27 in 2017 to 662 in 2021 and 886 as of October 2022.

“I appreciate the feedback we received from our customers and the Board. I assure you, we are taking a hard look at our use of congestion-related embargoes,” UP President and CEO Lance Fritz said in a Friday letter addressed to the board. “To facilitate that hard look, we are immediately pausing any additional embargoes under the pipeline inventory management program we began in November. The Board and our customers can expect to hear more from us on this subject in the coming days.”

Last week, some shippers suggested UP has not fulfilled its common carrier obligation because of the magnitude of the embargoes that it has employed in recent years. The common carrier obligation binds freight railroads by law to carry freight, provided that the tendered agreement has reasonable terms and conditions.

If railroads are failing to meet their common carrier obligations, that could open them up to lawsuits from shippers, according to last week’s hearing.

Actions STB and UP could take to avoid future embargoes

In addition to questions about whether UP was meeting its common carrier obligation, one of the other underlying themes from last week’s hearing was whether UP and other Class I railroads truly desire to increase rail volumes on the U.S. network.

STB Chairman Marty Oberman said that he has observed a disconnect within the rail industry between wanting rail volumes to grow but not taking sufficient enough action to grow those volumes. The practice of embargoes is one of those measures that end up inhibiting shippers’ ability to put more products onto rail, he said.

“I think national policy is for freight rail to grow. How can customers grow their businesses if you’re telling them, ‘You’re putting too much stuff onto the rails’?” Oberman said.

One thought from board members was whether there are any actions that STB can take that would incentivize the freight railroads to increase the capacity so that the railroads can grow their volumes.

“I’m beginning to feel that … you have more business than your system can handle. You are probably doing your level best to optimize the operations of your system, except the market you’re in really doesn’t give you the incentive to grow as fast as your business could grow. You’re not a supermarket with people lined up outside,” said STB member Karen Hedlund. “And so while ‘I’m going to double the footprint of my supermarkets so that the guy down the street doesn’t steal it from [me]’ [makes you] protected from competition, you have customers that don’t have anywhere else to go. And I’m really concerned about that.”

Hedlund continued, “And I don’t know that the answer is necessarily, you know, the board can make a finding that you’re in violation of the common carrier obligation and let all your customers sue you and at some point that will annoy your investors. But we, I think, have to figure out how to make the entire system work better, not just for Union Pacific but for all the other railroads — and for the economy.

“I’m committed to working with you and the rest of the industry to see if we can come up with a solution that gives the railroads the appropriate incentives to make the investments they have to make, not only in personnel but in infrastructure,” Hedlund said.

Meanwhile, STB suggestions to UP included giving shippers a more accurate timeline for how long an embargo might last, as well as providing to shippers clearer standards on appropriate transit times and trip plan compliance. That might be achieved through the software program that UP used in deciding when and where to place an embargo.

When UP designs its transportation plan, it keeps five critical resources in mind: employees, locomotives, freight cars, line of road and terminals, according to Fritz. Line of road is the trackage between terminals.

Fritz acknowledged in his opening statement last Wednesday that inadequate staffing at UP contributed to service disruptions earlier this year as well as to recent embargoes.

“This year has proved challenging. Our network is not operating at the levels our customers expect and deserve, in large part 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,” Fritz said.

UP pointed to improving train speeds and a 39% decrease in the number of trains holding for crews between mid-April and early December.

But having 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,” Fritz said.

When this happened during the year, UP reached out to customers to reduce excess private car inventory, and UP removed its system cars from the network. While these measures incrementally improved key performance metrics, those metrics were not improving fast enough and more action was needed, he said.

“The decision to embargo a customer facility is not one we take lightly, or without engaging the customer beforehand. An embargo is a last resort. Union Pacific uses embargoes to control traffic movements temporarily when we believe they are needed to address congestion, to help customers receive shipments and respond to other existing or threatened physical or operational impairments,” Fritz said. “When we impose these temporary restrictions on some traffic, our objective is to facilitate the movement of all traffic, that is to better serve all of our customers.”

UP officials shied away from saying that the cuts to head count were because of precision scheduled railroading, a method that UP and other Class I railroads adopted within the last five years to streamline operations.

But should a recession or other event occur that would cause a downturn in volumes, UP would consider other measures before furloughing employees. That would include trying to create more predictability in the work schedule for train and engine crews, as well as designing operations to be more nimble with changes in workforce availability, Fritz said.

“We definitely want to address sick leave, and certainty and time off in terms of scheduling. … There’s a host of ways we can get there. There’s economics that are available to make it happen. And we are committed to making that happen this coming year,” Fritz said.

Meanwhile, shippers and other stakeholders said last week that the embargo situation was unlike anything that the industry has experienced.

“At a magnitude that I cannot recall since the big mergers were completed, and — Chairman Oberman to answer your question — in my 35 years of being involved in this industry, I’ve not seen anything like this,” said Richard Edelman, an attorney representing six rail unions.

Edelman argued that UP’s employment data submitted to the board conflicts with union data reflecting the number of craft employees. Union data shows that head count within various categories of craft employees has been flat or down year over year in October at UP, Edelman said, alluding to written testimony that he submitted Dec. 12. As a result, not only are there not enough crews to run the trains, there are not enough mechanics to inspect and repair locomotives.

Compounding the issue is running longer trains when network infrastructure is unable to accommodate that length in certain areas, he said.

“It’s really rather simple. If you don’t have enough people to provide and support the service, then you can’t adequately provide the service. By now we’re all aware, the Class Is, including UP, rather brutally reduced their workforces for several years,” Edelman said.

Subscribe to FreightWaves’ e-newsletters and get the latest insights on freight right in your inbox.

Click here for more FreightWaves articles by Joanna Marsh.