Reciprocal switching: STB hears views on a contentious rule 11 years in the making
3/21/2022
By Julie Sneider, Senior Associate Editor
For two days last week, railroad representatives and the shipper community hashed out their opposing views over what would — or should — happen to the nation’s freight-rail network if the Surface Transportation Board (STB) implements a proposed reciprocal switching rule.
The STB held the hearing on a long-held proposed rulemaking that calls for the board to exercise its statutory authority to require rail carriers to establish switching arrangements in certain circumstances.
The proposal would allow shippers served by a single railroad to request bids from a nearby competing railroad.
As described in January in the STB’s notice published in the Federal Register, reciprocal switching occurs when an incumbent carrier transports a shipper's traffic to an interchange point, where it switches the rail cars over to the competing carrier. 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 vice versa. The switching fee is incorporated in some manner into the competing carrier's total rate to the shipper.
On March 15, STB Chairman Martin Oberman began the hearing by noting the proposed rulemaking dates back to 2011, with an updated version reinstated in 2016. The proposal would update the current rule in place known as “competitive access.”
“It’s time for the board to confront the issue of reciprocal switching and reach a decision,” Oberman said.
“It’s time for the board to confront the issue of reciprocal switching and reach a decision.” — STB Chairman Martin Oberman stb.govThere’s been a downward trend in the quality and quantity of rail service, he added, while rates have increased 25% in inflation-adjusted dollars since the early 2000s, according to the board’s own studies. One way to avoid regulation of rates and service is to enhance the competitive landscape, Oberman said.
Shippers: Give competition a shot
The freight-rail industry, particularly the Class Is, have long fought the idea of regulators forcing them to implement reciprocal switching agreements with their customers. Shippers want the proposed rule because they believe it would increase competition between the railroads, which would lead to better service and more competitive pricing.
Some railroads already have switching arrangements with some shippers; in many cases, those situations stemmed from railroad mergers. However, reciprocal switching doesn’t currently apply to all shippers or at all rail locations, which is why many shippers have advocated for the rule’s adoption.
“In a highly consolidated and largely captive industry, this may be the best opportunity to create some semblance of rail-to-rail competition,” Max Fisher, chief economist for the National Grain and Feed Association (NGFA), told the STB. “Many of NGFA’s members are captive to one railroad and have little bargaining power in the absence of rail-to-rail competition.”
But the Association of American Railroads (AAR), the American Short Line and Regional Railroad Association (ASLRRA) and numerous Class Is explained why the STB’s proposed switching rules would do more harm than good for rail competition.
Among the railroads’ objections, the proposed rule is too broad and it would: make rail operations less efficient; influence market factors that would limit future growth; exacerbate network capacity issues and traffic bottlenecks; and force switching in locations with insufficient interchange or infrastructure.
Rail industry members who testified came from AAR, ASLRRA, BNSF Railway Co., Canadian Pacific, Union Pacific Railroad, Norfolk Southern Railway, CN and CSX, as well as consultants and policy experts hired by the industry to explain how forced switching would change the rail network.
AAR: ‘Misguided and dangerous’ proposal
In his testimony, AAR President and CEO Ian Jefferies underscored what he believes are “rock-solid fundamental truths” about reciprocal switching.
“The proposed rule would require one railroad to hand off business to a competitor even though that railroad has done nothing wrong,” Jefferies said.
Needless intervention by regulators into the “complex rail system” will lead to an increase in traffic bottlenecks and a decrease in volume and revenue for the railroads, which leaves them less capital to invest in rail infrastructure, according to AAR.
“Any action by the board to intervene in the market, absent any allegation of abuse, in order to provide some shippers with commercial leverage that the marketplace does not offer, is misguided and dangerous,” Jefferies said.
Also, shippers who want to petition the STB for a reciprocal switching case because they believe their rates are too high have other ways to pursue their legal protections. Therefore, the reciprocal switching role is unnecessary, AAR officials believe.
“Backdoor rate regulation is not better, it is worse,” Jefferies testified. “It will come at the expense of differential pricing, which is necessary for railroads to recoup their investments and continue to develop and sustain their networks. It will transfer wealth from railroads to shippers that are already significantly more profitable. Simply put, the proposal is unsound policy.”
Joining the AAR in its views are passenger railroads, economists, environmental advocates, labor groups, short lines, elected officials and organizations representing consumers and taxpayers, Jefferies noted.
The U.S. Class Is were united in their testimony in opposition to forced switching. UP Executive Vice President and Chief Financial Officer Jennifer Hamann emphasized how the proposed rule would have a financial and operational impact on a “fragile and complex” supply chain.
“Our goals and our customers’ goals are inextricably linked,” Hamann said.
As proposed, the STB rule would create inefficiencies in rail service, disrupt the fundamental investment model of the rail network and limit or prohibit the railroad’s potential for growth. The rule would enable customers to petition the STB for forced switching to meet their own short-term interests without regard for the broader supply chain, she said.
There’s a misconception by shippers that the new regulation would not make a difference to UP because it already performs reciprocal switching on its network, said UP Executive Vice President of Operations Eric Gehringer
“But that is not true. Each [switching] situation is narrowly tailored and mitigated in advance,” he said.
Not all crews are trained to perform switching operations, which can add 46 to 98 hours of delays. Requiring reciprocal switching wherever a shipper wants it “will degrade service,” Gehringer added.
While shippers’ desire for lower rates is natural, there are twin problems with the proposed rule, said Raymond Atkins of Sidley Austin LLP, who testified on behalf of NS and later for CSX.
“First, rate regulation is about striking the right balance between protecting the shipper from high rates and permitting the railroad to engage in differential pricing so that it can earn a reasonable return on profit of its investments,” Atkins told the board. “This backdoor attempt at rate regulation elevates the first goal and disregards the second.”
The second problem: The rule would cause the entire network to operate less efficiently so that a subset of shippers could have lower rates, he said.
“So, Norfolk Southern believes that if this proposal is about rates, then the board should and must regulate rates directly,” Atkins told the board. “If your concern is about service, well, this 2016 proposal is unlikely to help. It is more likely to make matters worse.”
At several points, STB members questioned the Class Is about their concerns that reciprocal switching would make rail service worse. It was shippers’ complaints about rail rates and service that prompted the STB to propose a reciprocal switching rule in the first place, board members said.
“This problem is self-inflected,” said STB Member Robert Primus in response to one Class I’s presentation. “We’re trying to solve a service and a rate problem that was brought to us by your customers. This issue has been here before us for 11 years and now you say you want to be part of the solution? Well, you’re not fixing the problem and this is what your customers have been telling you for 11 years.”
Meanwhile, ASLRRA representatives explained why short lines oppose the proposed reciprocal switching. They mentioned many of the issues Class Is expressed: The regulation would make freight railroading less efficient, complicate routing and decrease rail infrastructure investment.
If the STB does adopt the rule, the ASLRRA speakers argued it should continue to exclude all traffic served by short lines and offered suggestions to clarify that exclusion.
“While short lines often consider themselves shipper representatives and can see where the desire for this rule came from, we see this proposed rule as counterproductive and likely to cause more harm than good,” said ASLRRA President Chuck Baker. “We believe that the existing suite of STB remedies is sufficient to handle problematic cases and that the current balanced regulatory structure has resulted in the world’s premier freight rail network.”
Elliott: Post-PSR rail service is worse
Among those testifying on behalf of rail customers was former STB Chairman Daniel Elliott, who served as counsel to Private Railcar Food and Beverage Association (PRFBA) at the hearing. The group represents major food and beverage companies and manufacturers — such as PepsiCo., the Kraft Heinz Co., Molson Coors and General Mills — that rely on railroads to distribute their products. He was accompanied by Herman Haksteen, the association’s president.
“The people who are opposing this proposal don’t provide the railroads with revenue.” — PRFBA President Herman Haksteen (shown left, with former STB Chairman Daniel Elliott, shown right). STB/YouTubePRFBA members believe that changes to the freight-rail industry stemming from the Class Is’ adoption of precision scheduled railroading (PSR) over the past five years has exacerbated service problems for shippers, making the need for the proposed switching regulation “more compelling now than ever,” said Elliott.
“This operating model has resulted in massive job cuts across the U.S. rail system, eliminating large parts of the railroads’ institutional knowledge and experience needed to run one of the most complex networks,” he testified. “They also left the railroads woefully unprepared for upticks in traffic and other changes to the market.”
Elliott gave examples of PRFBA members’ rail rate and/or service problems that arose since PSR became common practice. In one instance, rail service delays caused by crew shortages led to interrupted production at a PRFBA member’s plants. The proposed reciprocal switching rule would help resolve such issues by increasing railroad-to-railroad competition, especially as the rail industry faces further consolidate from seven Class Is to six.
Another reason STB should adopt the proposed rule: It will generate more business for railroads, Elliott argued. If reciprocal switching leads to better rail service and more competitive rates, more shippers will want to move their business from truck to rail, he suggested.
Haksteen said none of the organizations that agree with AAR’s stance on reciprocal switching are railroad customers or shippers.
“The people who are opposing this proposal don’t provide the railroads with revenue, so it’s difficult to understand why we should put any weight behind those who oppose it,” Haksteen said.
He also noted rail carload traffic has been on the decline in recent years, suggesting the trend is due to customer dissatisfaction with rates and service.
“If you compare volume to 2017, carloads are down 11% and total tonnage is down 5%,” Haksteen said. “All other modes of transport are up: Trucks are up, air freight is up double digits. But the railroads’ carloads are down double digits. There has to be a logic behind that.”
Wrapping up, looking for solutions
Throughout the hearing, Oberman emphasized the board has not made up its mind about the need for reciprocal switching. However, at least two possible solutions emerged during the question-and-answer sessions that followed presenters’ testimony.
One is whether the board should adopt a rule that would require reciprocal switching at rail locations where some switching agreements are now in place.
Another idea, which surfaced during UP’s presentation, would have the STB convene a stakeholder committee that could find common ground on the service and rate issues that prompted the STB’s reciprocal switching proposal.
The stakeholders' group could be similar to the collaborative process regulators used to establish the current competitive access rule, suggested Michael Rosenthal of Covington & Burling LLP, who spoke on behalf of UP.
“I do think it’s worth taking the time to develop a rule that has wider-spread support,” Rosenthal said. “In the long run, that’s more likely to be effective than to proceed with a rule that’s going to face additional challenges before it could be implemented.”
Oberman said he appreciated UP’s idea.
“I’ve been waiting for a constructive suggestion,” he said. “Let’s see if people are interested in pursuing it.”
Later, as he adjourned the second of the two-day hearing, Oberman said there will be more time for ex parte communications between the board and interested parties on the proposed switching rule.
“It is my intent to move forward on this proposal one way or another,” he said. “And act on it.”
