Media Center

Railway Age
Full or Zero Mileage Rates
By Harold B. Friedman

Its buyer beware when a railroad suggests that to simplify the billing process a real shipper should give up its private railcar mileage allowance. We are all in favor of rate simplification, especially in the rail industry, but many shippers don’t realize the price they pay when they move to zero mileage rates or don’t consider full-mileage rates as an option.

Zero-mileage rates are tariffs that account for a shipper supplying a railcar to the railroad. The allowance for use of the railcar is fixed and typically remains constant regardless of actual miles traveled or value of the railcar supplied.

Full-mileage rates reimburse shippers that provide a railcar, based on actual mileage traveled. Shippers are reimbursed for the car’s use as a credit from the carrier’s published tariff. Full-mileage rates were established to meet the needs of many shippers that purchased or leased their own cars. When the practice was adopted, it was expected to solve several problems. It provided the shipper with access to the types of cars it needed, saved the railroads the capital required to invest and provide cars, and resulted in a lower rate to the shipper. It also provided a reimbursement based on actual miles traveled and car value.

The calculation of the full-mileage rate paid for providing a car was and is typically based on the age and cost to build or rebuild the car. Every privately owned tank or covered hopper car has a value published in the RIC 6007(private car compensation rules) or similar carrier-issued tariff. Private car mileage rates are usually adjusted bi-annually. Private car owners are paid by the carriers for use of their cars. Leasing companies pass these payments on to lessees typically in the form of invoice credits. Payments or invoice credits are based on the established car rate multiplied by the miles the shipment actually moved from origin to destination, even of the car moved out of route.

Our firm recently prepared a comparative analysis of shipment costs using both full and zero-mileage rates. We analyzed 158 customer moves made in one quarter’s (three months) time. We compared zero-mileage costs with full-mileage costs at table miles, and full-mileage costs based on actual miles. In our analysis, the price paid, based on published zero-mileage rates, would cost 31% more than the available full-mileage rates after the mileage allowance was factored in for one quarter’s shipments. This is equivalent to $900 per move, per car. Mileage allowances are based on the car rate provided in the RIC 6007 multiplied by actual miles traveled under a specific load.

Other factors to take into consideration when making a decision regarding full vs. zero-mileage rates are actual miles a car travels vs. the intended miles, as shown in the routing on the bill of lading. For the convenience of many railroads, private cars are taken on a circuitous route from origin to destination. In a zero-mileage scenario, rail shippers are not reimbursed for those extra miles, although they bear the expense for the applicable lease cost, as well as car wear and tear. Our research shows that it’s not uncommon to see actual loaded miles 20% greater than book miles (i.e. railroad tabled miles). In our analysis, table miles were 26% lower. The actual mileage factor used in zero-mileage calculations may not represent the true value of the car provided. This is especially true if equipment has been upgraded recently, since many railroads base reimbursements on historical average values of 12 months or more.

Shippers also should factor in the following as part of a thorough full-mileage vs. zero-mileage analysis:

• Do you intend to drop old cars from your fleet and/or add new cars? If so, you will increase the average mileage reimbursement rate for your fleet if you have full mileage rates, since the newer cars will be worth more than the cars you’re replacing. If you have zero-mileage rates, you don’t receive additional reimbursements.
• Do you have full-mileage rates with a railroad for certain movements and zero-mileage rates for others? We suggest you assign the higher valued cars to your full-mileage rated moves that have the greatest distances between origin and destination to maximize mileage revenue.
• Have you had plant openings or closings or railroad abandonment’s or mergers resulting in added or dropped O/D pairs? This can result in a change to the actual mileage your cars travel. It also warrants a review of your full vs. zero decision.

Always consider the option of contracting with full-mileage rates vs. zero. You may be pleasantly surprised by the cost savings.