CEI tells Senate committee that railroad reciprocal switching is not the track to take

The case against freight railroad reciprocal switching is alive and well based on a letter from the Competitive Enterprise Institute (CEI), a Washington, D.C.-based non-profit libertarian think tank, to U.S. Senate Commerce, Science, and Transportation Committee Chairman John Thune and Ranking Members Bill Nelson and Corey Booker sent earlier this week.

“Unfortunately, some powerful industrial shipping interests have succeeded in opening a proceeding before the STB framed in the language of promoting ‘competition,’” CEI wrote The proposed rule regarding revised reciprocal switching rules that was opened by the STB would reverse three decades of precedent. The STB shockingly argues that its inability—and the inability of the Interstate Commerce Commission before it—to uncover any evidence of anticompetitive conduct on the part of the railroad industry justifies its call for eliminating the post-deregulation requirement that anticompetitive conduct be found before mandatory reciprocal switching could be imposed. The STB is in essence proposing to convict freight railroads for crimes the STB itself concedes they did not commit.”

The letter added that many industry observers have expressed concern that imposing forced reciprocal switching and reducing rate flexibility will come at the expense of network investment.

“This unprecedented action threatens railroads, shippers, and consumers with degraded service quality and higher prices on goods, which would naturally follow the resulting reduction in operational efficiencies and private railroad investment,” it stated. “Over the last 20 years, Congress has repeatedly rejected railroad re-regulation, regardless of political control. On numerous occasions, it has explicitly rejected attempts to eliminate the anticompetitive conduct requirement, recognizing that reducing private railroad investment is not in the public interest. We strongly urge the Committee and Subcommittee to put the re-regulation of freight railroads to bed for the foreseeable future by empowering new Board members who understand this basic economic reality.” 

CEI also called on the Senators to move forward on the process to appoint and confirm two new STB members and preferably vet nominees to ensure they have a sound understanding of the economic principles surrounding the freight railroad sector and who will reject what it called “misguided” efforts to re-regulate the United States freight rail sector.

As previously reported, 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. Reciprocal switching has been viewed as a hot button topic by freight railroad industry stakeholders since its inception.

NITL Executive Director Jennifer Hedrick said that her organization appreciates the groundwork the STB has laid out toward the development of a competitive rail marketplace, which will benefit all who utilize rail transportation.

And heads of myriad industry associations representing rail shippers were in lockstep with Hedrick, including Cal Dooley, president and CEO of The American Chemistry Council.

“Competitive switching is a commonsense reform that will finally put an end to an archaic system that has helped shield railroads from having to compete with one another and has allowed freight rail rates to nearly double in the past ten years,” Dooley noted.  We urge the Board to adopt a workable policy that will at long last provide shippers with greater access to competitive rail service.”

Other factors cited by those in favor of reciprocal switching included: competition being one of the fairest and most efficient ways to promote increased service, having a rail system that is more accountable to the U.S. marketplace and lead to a more dependable, efficient, and economical rail service for retailers and distributors of agricultural commodities and the rural communities they serve, and being able to provide more consistent delivery of raw materials, among others.

Conversely, those against reciprocal switching, maintain it is a step backwards on various fronts.

Association of American Railroads President and CEO Ed Hamberger said that 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.”

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 stemming from these proposed regulations 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.