STB announces adoption of final reciprocal switching rules

Focusing on promoting adequate railroad service, the Washington, D.C.-based Surface Transportation Board (STB), an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers, stated it has unanimously adopted a final rule to implement new regulations at 49 CFR part 1145. Which it said “sets forth a path for shippers and receivers to petition the Board for the prescription of a reciprocal switching statement.

Reciprocal switching has long been a prevalent topic in industry circles. As previously reported by LM, STB’s previously 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 has been 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 under this final rule, railroad shipper customers within a terminal area that have access to only one Class I rail carrier may petition the STB to order a reciprocal switching agreement when the customer’s rail service falls below specified levels. It added that Board-prescribed reciprocal switching agreements will allow shippers or receivers to gain access to an additional line haul carrier, while still allowing the incumbent carrier to compete for the customer’s traffic. It also stated that reciprocal switching orders by the Board will be for a minimum of three years and a maximum of five years, also noting that it considers the new reciprocal switching rule to be a significant step in incentivizing Class I railroads to achieve and maintain higher service levels on an ongoing basis by permitting a competing line haul carrier to offer better service to win the customer’s business.

The adoption of this final rule follows a September 2023 railroad service-focused Notice of Proposed Rulemaking (NPRM) focused on reciprocal switching issued by the STB, entitled “Reciprocal Switching for Inadequate Service.” STB explained that this NPRM addresses providing freight railroad shippers “with access to reciprocal switching as a remedy for poor service.”

What was introduced in that NPRM differed from the previous incarnation, in that the STB’s proposed reciprocal switching regulations offer what it called a streamlined path for the prescription of a reciprocal switching agreement when service to a terminal-area shipper does not meet any of three performance standards. Which it said are geared towards reflecting a “minimal level of rail service below which a shipper would be entitled to relief, with each standard providing an independent path for a petitioner to obtain prescription of a reciprocal switching agreement,” adding that the standards “are intended to be unambiguous, uniform standards that employ Board-defined terms and are constantly applied across Class I carriers and their affiliated companies.

STB said the performance standards included in the final rule include:

• Reliability: Original Estimated Time of Arrival (OETA). The service reliability standard measures a Class I rail carrier’s success in delivering a shipment on time. The rail carrier success will be judged based on the estimated time of arrival that the rail carrier provided when the shipper tendered the bill of lading for shipment or, in the case of an interline move, when the incumbent rail carrier receives the shipment from a delivering carrier. The OETA would be compared to when the car was delivered. The reliability standard will increase from 60% to 70%; (2) the definition of “delivery” will be clarified for purposes of interchange; (3) the reliability standard will measure early arrivals as well as late arrivals, in each case with a 24-hour grace period; (4) the reliability standard will be clarified for cross-border traffic; and (5) the reliability standard will only apply individually to each lane of traffic to/from the petitioner’s facility;
• Service Consistency: Transit Time. The service consistency standard measures a rail carrier’s success in maintaining, over time, the carrier’s efficiency in moving a shipment through the rail system, i.e., the time it takes for a shipment to travel from its origin to its destination. The Board adopted the service consistency standard that was proposed in the NPRM using a 20% standard. The Board also: (1) modifies the definition of delivery to better reflect custom and practice; (2) clarifies how it measures transit time performance on international lanes; (3) adds a three-year measure of 25% to guard against excessive cumulative increases in transit time; (4) creates an absolute floor for both the one-year and three-year measure of 36 hours; and (5) provides that the service reliability standard only applies to individual lanes of traffic to/from the petitioner’s facility; and
• Inadequate Local Service: Industry Spot and Pull (ISP). The third performance standard—ISP—measures a rail carrier’s success in performing local deliveries (“spots”) and pick-ups (“pulls”) of loaded railcars and unloaded private or shipper-leased railcars during the planned service window. The Board adopts the local service standard that was proposed in the NPRM using a 12-hour work window. The Board also: (1) increases the local service standard to 85%; (2) extends the period during which a 90% standard would apply to two years when a rail carrier unilaterally reduces service; (3) clarifies how success in spotting “spot on arrival” railcars will be measured; and (4) clarifies that the local service standard does not apply to unit trains or intermodal traffic. Data Production and Implementation: The Board adopts the data collection it proposed in the NPRM. All six Class I rail carriers must begin reporting based on the new, standardized definitions of OETA and ISP.

STB added that it also requires Class I railroads to provide, within seven days of receiving a request from a shipper or receiver, all individualized performance records necessary for that shipper or receiver to file a petition under part 1145.

STB Chairman Martin J. Oberman wrote in a statement that the STB took a crucial step to lifting decades-old barriers to reciprocal switching for captive shippers, noting that this adopted rule has broken new ground in the effort to provide competitive options in an extraordinarily consolidated rail industry. And he added that no reciprocal switching orders have been issued since before 1985, and none have even been sought since 1989.

“The rail network of 1985 is a far cry from that of today, and significant change is overdue,” said Oberman. “Given the repeated episodes of severe service deterioration in recent years, and the continuing impediments to robust and consistent rail service despite the recent improvements accomplished by Class I carriers, the Board has chosen to focus on making reciprocal switching available to shippers who have suffered service problems over an extended period of time.”

Oberman also said that this new reciprocal switching rule provides access to competition where there was none, also noting that the STB is allowing competition between carriers to be the driving force for better service, “rather than heavy handed dictates by the Board.”

“Indeed, the approach of the new rule furthers the transportation policy mandated by Congress in the Staggers Act –‘to ensure the development . . .of effective competition among rail carriers’ and to ‘minimize the need for Federal regulatory control.’ I hope that the Class I carriers will heed the call of this rule and not only improve their service levels but maintain them consistently over time. If they do, they will be fulfilling their critical obligations to both their customers and the public, while at the same time minimizing the need for the Board to enact even more far-reaching regulatory requirements.

The adoption of the final rule was endorsed by Lael Brainard, National Economic Advisor for the President’s National Economic Council.

“This unanimous rule will help keep our supply chains moving on time and lower the cost of shipping goods for thousands of businesses across the country from farmers to manufacturers,” said Brainard. “In turn, businesses who depend on freight rail should pass savings on to consumers and give them a better deal.”

In a statement provided to LM, the Association of American Railroads (AAR) said that while it reviews this lengthy and complex final rule, it is important to note that from the outset, railroads have been clear about the risks of expanded switching and the resulting slippery slope toward unjustified market intervention.  

“In the proposed rule, the STB was prudent to reject previous proposals that amounted to open access,” it said. “As we review the impacts of this new rule, it remains true that the well-functioning freight market will almost always achieve better outcomes than bureaucratic mandates.  As such, railroads will continue to invest billions each year to enhance safety and service for the benefit of our vast mix of customers.”

The adopted final reciprocal switching rule will take effect 120 days from the date of its publication in the Federal Register, STB said.