STB rolls out proposed reciprocal switching regulations

New regulations focused around reciprocal switching were proposed by the Department of Transportation’s Surface Transportation Board (STB) yesterday.

The impetus for the proposed reciprocal switching regulations stems from a petition for rulemaking submitted by the National Industrial Transportation League in July 2011.

The STB said the proposed regulations would augment the availability of reciprocal switching, allowing a rail shipper to gain access to another railroad if the shipper makes certain showings.

And it added that these proposed regulations create an avenue for the STB to impose a reciprocal switching arrangement.

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.

In order for the proposed reciprocal switching to come to fruition, the STB said that a shipper must show that the arrangement is “practicable and in the public interest” or “necessary to provide competitive rail service.” STB’s findings would be based on evidence presented by the shipper and the railroad, while the existing standard that was adopted by the STB’s predecessor, the Interstate Commerce Commission in 1985 requires a showing that reciprocal switching is necessary to prevent an uncompetitive act. STB added that going back to 1985 nearly no requests for reciprocal switching have been filed and none have been granted.

The STB said comments are due by September 26, and replies are due by October 25.

“I thank NITL for bringing their reciprocal switching proposal to the Board for consideration and I am pleased that today we are granting that petition in part,” said Chairman Daniel R. Elliott III. “I encourage all stakeholders to participate in the notice and comment process and I look forward to meeting with them to hear their views directly.”

The NITL proposal would require a Class I rail carrier to enter into a competitive switching arrangement whenever a shipper—or group of shippers—demonstrates that certain objective operating conditions exist. The League is asking the STB to eliminate existing competitive access rules and precedents as they apply to reciprocal switching and replace them with the following conditions:

• the shipper’s or receiver’s facilities for which switching is sought are served by only one Class I rail carrier;
• there is no effective inter- or intramodal competition for the rail movements;
• there is (or can be) a “working interchange” between a Class I rail carrier and another Class I within a “reasonable distance” of the shipper’s facilities; and
• the proposal states that a competitive switching agreement shall not be imposed if either rail carrier can establish that the arrangement is not feasible, or unsafe or, that it would unduly hamper the ability of either carrier to serve its shippers

The Association of American Railroads (AAR) made its case against this proposal in comments filed with the STB in May 2013, explaining it could result in United States Class I railroads losing revenue up to 80 percent of their entire capital budgets.

Citing 2010 data from the STB, AAR officials explained that an annual revenue loss of up to $7.8 billion could result from rate reductions NITL is advocating for the benefit of a select group of shippers. And without this income, they said the freight rail industry could no longer invest the billions of private dollars needed to maintain and expand the nation’s 140,000-mile rail network. As LM has reported, since 2000, freight railroads have invested more than $110 billion in privately financed capital improvements to their networks.

And AAR President and CEO Ed Hamberger made the freight rail sector’s case agains these new proposed regulations.

“The freight rail industry acknowledges the complexities the STB had to take into consideration in arriving at this proposed rule, but, at the end of the day, the Board should have dismissed the petition without further proceedings, as imposing new regulations like this are a step backward from the deregulatory path that has allowed railroads to make the capacity investments required to meet customer demand and further modernize a nationwide rail network that benefits shippers and consumer,” he said. “The freight rail industry’s position remains unchanged: forced access is an ill-conceived approach that compromises the efficiency of the entire network by gumming up the system through added interchange movements, more time and increased operational complexity. The freight rail industry acknowledges the complexities the STB had to take into consideration in arriving at this proposed rule, but, at the end of the day, the Board should have dismissed the petition without further proceedings, as imposing new regulations like this are a step backward from the deregulatory path that has allowed railroads to make the capacity investments required to meet customer demand and further modernize a nationwide rail network that benefits shippers and consumers. The freight rail industry’s position remains unchanged: forced access is an ill-conceived approach that compromises the efficiency of the entire network by gumming up the system through added interchange movements, more time and increased operational complexity.”

The STB action does somewhat broaden shippers’ theoretical access to reciprocal switching by removing the requirement that the serving railroad must be acting in a non-competitive manner in order for the reciprocal switching remedy to be made available, explained Larry Gross, senior partner at freight transportation consultancy FTR.

“While the NITL petition that triggered the rulemaking contained a number of specific requirements that could trigger an STB mandate for reciprocal switching, the board preferred to leave things a great deal more vague, proposing to deal with each application on a case-by-case basis,” said Gross. “The decision seems to leave wide open exactly what information a shipper must provide in order to justify and support a petition for reciprocal switching access.  But the particulars may be clarified as a result of the comments received prior to finalization of the rule. In the absence of specific rules and criteria it would appear that the board will be taking on quite a burden in adjudicating each case on its own merits.”

Gross said that these proposed regulations are only significant to the extent that the railroads are willing to fiercely compete, noting it is far from clear that in any particular instance one Class I will be willing to get into a conflict with another because there are ample opportunities for payback across the system and both carriers may end up poorer as a result. 

“The industry has been pretty disciplined even in the face of dramatic traffic declines so I wouldn’t make an automatic presumption that even if the reciprocal switching rules are broadened that much traffic will shift as a result,” he said. “But it will likely keep the lawyers busy.”