(erielack) Interline Switching

[Wdburt1_@_aol.com]

Randy Brown wrote:
 
> Interline revenue divisions were based on several factors, the most  
prominent of 
> which was mileage.  Shortlines were often better off taking the  flat 
switching charge
> rather than a smaller percentage of the line haul and having to  contend 
with all the 
> paperwork.  Besides, the line haul revenue could and did vary  with the 
commodity,
> whereas the flat charge was simply money in the till.
 
Randy raises an interesting point--the paperwork.  Before 1996,  revenues 
were settled among the participating carriers using a paper  system.  Right 
off, the term "settled" says something important:  Participants were so 
accustomed to complexity and opportunities for dispute  that they just assumed 
that each movement's allocation of revenue had  to be settled, i.e., 
negotiated--something that an outsider might assume would  be all agreed in advance.  
The system depended greatly on good faith,  personal relationships, and 
common knowledge.  Many movements were  repetitive, creating some natural 
checks and balances.
 
In 1996 the paper system was replaced nationwide by the interline  
settlement system (ISS), which automated revenue settlements.  ISS allows  for 
challenges and disputes, and these can drag on, but barring a  successful dispute 
the rate will settle according to the information on  file.  Short lines 
must have a bank account that the ISS clearinghouse can  either debit or 
credit depending on where their net balance ends up at the end  of each month.
 
Before ISS, Class I carriers like Conrail and  NS had converted many short 
lines to "switch settlement" or "handling  line" status using the argument 
that Randy advances above.  Those  short lines enjoyed fast, predictable 
payment and minimal paperwork.   There was another advantage not often 
mentioned: Their piece of the revenue was  concealed from local patrons.  Short lines 
were always vulnerable to  being bullied by abusive customers, so in some 
cases it was advantageous to let  the Class I handle the demurrage disputes, 
collections, etc. while keeping the  short line's revenue factor out of 
sight.  But as Class I railroads  became bigger and more remote, and short lines 
became stronger, many saw  disadvantages to being out of the loop when it 
came to rate negotiations and  problem resolution.  The rate-renegotiation 
frenzy and operating  chaos associated with the Conrail split highlighted this 
for many  short lines.
 
Compared to ISS, the old paper system had some pros and cons  for short 
line railroads connecting with EL and Conrail.  The main  questions were: 
 
1.)  Did the short line predominantly originate or terminate  traffic?
2.)  Were most shipments prepaid or collect (i.e. were charges billed  by 
the origin or destination carrier).
 
If your short line was predominantly inbound/prepaid (a situation  probably 
typical of most EL short lines), you did the work first and waited  to be 
paid by connecting railroads.  Same for outbound/collect.  Your  money didn't 
depend on whether the customer paid promptly, but the paper  settlement 
system often could run to sixty days.  The big railroads had the  use of your 
money during that time.  Compared to their much larger linehaul  revenue, 
what they owed you was tiny.
 
If you were predominantly outbound/prepaid or inbound/collect, you got to  
bill the entire move and paid the other carriers in due course.  Just like  
the big boys, these short lines had the collections burden but got to sit  
to on the revenue for weeks.  Consisting as it did of the overall revenue  
collected, that "float" was large relative to what the short line would 
actually  retain once it was settled.  Some short lines relied on it as a handy  
source of working capital, and some came a-cropper that way.   The late 1980s 
bankruptcy of one short line over this  issue served as a wakeup call that 
it didn't always work out, and stiffened  the resolve of the Class I 
railroads to take the float away.  They also  were determined to cut the ranks of 
specialized-knowledge clerks  required to process paper settlements.  
 
ISS abruptly eliminated the float in October 1996.  ISS  short lines also 
had to employ someone who was available every day to check the  status of 
settlements, lest they settle automatically because a time period  had run out. 
 This person, who previously might have run the engine or  fixed track 
while revenue settlement paperwork piled up, was now effectively  lashed to the 
computer.  If that was too great a burden, there was  always switch 
settlement.


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