Differing opinions prevail in lead up to STB’s reciprocal switching hearing

With the February 14 filing date for the Surface Transportation Board’s (STB) proposed reciprocal switching regulations earlier this week, various freight railroad stakeholders made their cases for and against the case for it in comments filed to the STB. A public hearing hosted by the STB on these regulations is scheduled for March 15 and 16 at the STB’s Washington, D.C.-based headquarters.

The STB’s proposed reciprocal switching legislation offered up in 2016 would allow a rail shipper to gain access to another railroad if the shipper makes certain showings. As defined by the STB, reciprocal switching is a situation in which a railroad that has physical access to a specific shipper facility switches rail traffic to the facility for another railroad that does not have physical access. And the second railroad compensates that railroad that has physical access in the form of a per car switching charge, with the shipper facility gaining access to an additional railroad.

STB officials said that this hearing will focus on the proposed reciprocal switching regulations in Reciprocal Switching Docket No. EP 711 (Sub-No. 1) et al (NPRM), which introduced new regulations under which it would exercise its statutory authority to require rail carriers to establish switching arrangements in certain circumstances. They added that the NPRM saw varied responses from industry stakeholders, noting that the STB has reviewed the existing record in this proceeding.

STB explained that under reciprocal switching, an incumbent carrier transports a shipper’s traffic to an interchange point, where it switches the rail cars over to the competing carrier. And it observed that the competing carrier pays the incumbent carrier a switching fee for bringing or taking the cars from the shipper’s facility to the interchange point, or the opposite way.

“The switching fee is incorporated in some manner into the competing carrier’s total rate to the shipper,” said the STB. “Reciprocal switching thus enables a competing carrier to offer its own single-line to compete with the incumbent carrier’s single-line rate, even if the competing carrier’s lines do not physically reach a shipper’s facility.”

In its comments, the Association of American Railroads (AAR) explained that, at the heart of the matter, shippers are asking the STB to adopt a forced, or competitive, switching rule in order to pay lower rates.

“The ostensible purpose of that rule is to force a carrier to offer switching services that the carrier has no reason to offer, and the shipper has no need for, because the carrier already has other ways of getting the shipper’s traffic from origin to destination,” said the AAR. “But shippers will demand reduced origin-destination rates, negotiating in the shadow of the threat of regulatory orders requiring those switching services, regulatory orders setting their prices and regulatory orders about how that switching must occur. [T]he end result would be to pad shippers’ profits at the expense of carriers.”

Other key points making the case against reciprocal switching cited by the AAR included:

  • the possibility of discouraging future investment by railroads;
  • the industries wanting the proposed rule have much higher returns on investment compared to their cost of capital than does the rail industry;
  • not because all shippers should pay the same rates, as there is wide agreement that differential pricing is necessary to the rail network’s future viability; and
  • additional switching means additional complexity and points of potential delay, among others

In comments provided to LM, AAR President and CEO Ian Jefferies said that AAR’s filing provides robust economic and legal analysis, making it clear that the Board must abandon its misguided forced switching NPRM.

“Along with a broad set of inputs from a diverse number of concerned stakeholders, it is clear that forced switching is widely opposed and would have myriad downsides, including negative impacts on efficiency, investment and the environment,” he said. “I hope the Board considers this input as it continues to deliberate this matter.”

The Intermodal Association of North America (IANA) was aligned with AAR in its filed comments, with IANA President and CEO Joni Casey noting that it encourages the STB to proceed methodically and with restraint as it contemplates a major market intervention in the form of the proposed “reciprocal switching” regulation.

Historically, IANA has opposed policies that substantially change the current laws under which freight railroads operate – including widespread forced switching like the 2016 Notice of Proposed Rulemaking (NPRM) recommends,” stated Casey. “Absent a definitive showing of market failure and a conclusive cost-benefit analysis, the efforts contemplated under this proposed rule are unjustified. We believe that the impact of forced switching to intermodal freight transportation would most likely be: a decline in rail infrastructure; decreased network velocity; a deterioration in domestic intermodal service; and an adverse impact on intermodal’s ability to compete with over-the-road trucking. These outcomes are troubling given the supply chain challenges that continue, both domestically and internationally.”

The National Stone, Sand & Gravel Association took a differing view in its comments, saying that the STB is seeking ways to improve the reciprocal switching remedy in line with the intent of Congress.

“These proposed rules also will ensure better rail service that is now crucial to the aggregates industry after the passage of the IIJA (Infrastructure Investment and Jobs Act,” it said. “NSSGA urges the Board to breathe life into this remedy that has been essentially dormant for decades and to provide rail shippers a method to counter the Class I railroads’ unabated market power over NSSGA member companies.”

As previously reported by LM, Martin Oberman, STB Chairman, said at the November RailTrends Conference hosted by Progressive Railroading and independent railroad analyst Anthony Hatch that the STB has had many discussions about EP 711 with industry stakeholders expressing, for the most part, diametrically opposed views on the subject.  

“It has become clear to me that this issue is too important and has significant improvement for improving the competitive playing field to just have these seemingly endless back and forth discussions between the STB, railroads, and their customers,” he said. “These issues ought to be aired publicly, the kinds of vigorous discussion such a hearing will bring. Since joining the STB, I have focused much of my attention on fomenting as much competition into the delivery of rail services as possible. Because, in our American system, almost always, more competition in business means better products, better prices, and a more thriving economy. I believe that the potential is there for a more accessible reciprocal switching mechanism to provide that answer to competition. Any railroad that is really providing that kind of service at fair prices should welcome such an environment.”

What’s more, Oberman offered up sentiment made by the late E. Hunter Harrison, whom led CSX, CN, and CP, at different points of his career, and engineered the concept of precision scheduled railroading.

Harrison, noted Oberman, viewed reciprocal switching as one of those regulations that are in place, but people don’t really take advantage of it because there is no need to if the individual carriers do their job.

“My view is, for years, that a lot of railroaders have been scared of the term open access and I don’t know why,” said Oberman citing Harrison. “What that says to me is all they are going to do is open up more competition and, with a very limited number of players in North America, it is important to keep that competitive balance. If an individual carrier…provides the right type of service for the customer at an appropriate fair price, we have nothing to worry about. If we do not provide the service, we should not be resistant to someone else coming in and providing that service.”

Oberman concluded his comments on reciprocal switching by noting that if reciprocal switching was good enough for Harrison—and it is good enough to be accepted as a condition in many parts of the U.S. networks that were subject to the mergers of the 1990s—then it ought to be good enough for the industry today.

About the Author

Jeff Berman, Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman

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