STB introduces new service-focused reciprocal switching NPRM

Earlier today, 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, unanimously released a railroad service-focused Notice of Proposed Rulemaking (NPRM) focused on reciprocal switching.

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.”

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.

What was introduced today, in the NPRM, though, differs 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.

The three STB performance standards include:

• Service Reliability: The measure of a Class I rail carrier’s success in delivering a shipment by the original estimated time of arrival (OETA) that the rail carrier provided to the shipper, with the OETA to be compared to when the car was delivered to the designated destination and would be based on all shipments over a given lane over 12 consecutive weeks.  One proposed approach would be to set the success rate during the first year after the rule’s effective date at 60%, meaning that at least 60% of shipments arrive within 24 hours of the OETA, and increasing the success rate thereafter to 70%;
• Service Consistency: The measure of a rail carrier’s success in maintaining, over time, the carrier’s efficiency in moving a shipment through the rail system.  The service consistency standard is based on the transit time for a shipment, i.e., the time between a shipper’s tender of the bill of lading and the rail carrier’s actual or constructive placement of the shipment at the agreed-upon destination.  The NPRM proposes that, for loaded cars, unit trains, and empties, a petitioner would be eligible for relief if the average transit time for a shipment increased by a certain percentage—potentially 20% or 25%—as compared to the average transit time for the same 12-week period during the previous year; and
• Inadequate Local Service: The measure of a rail carrier’s success in performing local deliveries (“spots”) and pick-ups (“pulls”) of loaded railcars and unloaded private or shipper-leased railcars within the applicable service window, often referred to as “industry spot and pull” (ISP).  The NPRM proposes that a rail carrier would fail the standard if the carrier had an ISP success rate of less than 80%, over a period of 12 consecutive weeks, in performing local deliveries and pick-ups within the applicable service window.  The ISP success rate would measure whether the carrier provides the service within its customary operating window for the affected shipper, which in no case can exceed 12 hours.  STB said that this service metric provides rail customers with the long sought-after information on all important first mile/last mile service.

What’s more, STB said that in order for rail shipper customers to be able to readily monitor and measure their rail service, this rule would require Class I rail carriers to provide customers with historical data for service metrics within seven days of being requested by a customer. And it also noted that this would, for the first time, require the three service metrics to be standardized across all Class I carriers.

“The Board proposes that the reciprocal switching agreements would be for a minimum period of two years and up to a maximum of four years, depending on the evidence presented, though the Board seeks comment on whether a longer period is necessary to ensure the rule’s effectiveness,” said STB. “The reciprocal switching agreement could be terminated at the end of the prescribed period if the incumbent rail carrier proves to the Board that it can provide service meeting the pertinent minimum standard going forward.  If it fails to do so, the reciprocal switching agreement would remain in place. The Board views today’s NPRM as an important step in addressing the many freight rail service concerns expressed by stakeholders since 2016.  Recognizing the importance of finalizing the standards proposed in today’s NPRM, the Board anticipates acting expeditiously on this proposal.”

STB Chairman Martin Oberman said in a statement that going back to at least 2010, STB has been considering different ideas focused on reforming the current reciprocal switching regulations so captive shippers would have a practical and realistic opportunity to obtain a reciprocal switching order when warranted. And he observed that even though the number of Class I carriers has gone from 40 before 1980 to six today, not one rail shipper has been successful in obtaining a reciprocal switching order in the last 40 years, with no rail shippers having sought a reciprocal switching order from the STB since before 1990.

“The Board has determined to focus its efforts with respect to reciprocal switching on providing relief to rail customers suffering from poor service,” he said. “With the issuance of today’s NPRM, the Board is proposing that one approach to improving rail service is to afford affected shippers the opportunity to obtain a reciprocal switch to a competing Class I carrier when service falls below a standard set in the proposed rule. The new rule contains a distinct advantage over both the existing regulations and the proposal in the 2016 NPRM.  The proposed new rule sets specific, objective, and measurable criteria for when prescription of a reciprocal switching agreement will be warranted.  This rule will bring predictability to shippers and will provide Class I carriers with notice of what is expected of them if they want to hold on to their customers who might otherwise be eligible to obtain a switching order.  As a result, litigation costs to obtain a switch should be greatly reduced and petitions to obtain a switching order should be able to be litigated much more swiftly.”

Association of American Railroads (AAR) President and CEO Ian Jefferies offered up his organization’s take on STB’s NPRM in a statement

“The withdrawal of the ill-conceived 2016 forced switching proposal is a positive development, as the extensive record developed by this Board on that proposal clearly demonstrated that it was both unwise and unworkable,” he said. “In its place, the Board has proposed a new, service-based approach, which AAR is reviewing to understand its scope and possible impact on rail service and network fluidity. While the STB did not perform a cost-benefit analysis, any new regulation must be backed by data, narrowly tailored to address a specific and well-defined problem, and ensure benefits exceed costs. Any switching regulation must avoid upending the fundamental economics and operations of an industry critical to the national economy—that Congress saved once by partially deregulating—and be subject to the highest level of scrutiny. AAR looks forward to engaging with the Board on this important matter.”

Anthony Hatch, president of New York-based ABH Consulting, told LM that based on his initial thoughts on the NPRM, it could be beneficial for industry stakeholders, with the caveat that the net effect of it would be to add a little bureaucratic and operational complexity.

“But it would not be used a lot and would serve as sort of a soft cap on rates,” he said. “The STB cares about market power and service. For a big rail customer, say an annual rate increase was going to be 5%, the customer would come back and say it is applying for reciprocal switching, with the railroad then offering a 4% increase instead. This does not include freight moving under contract, as that takes it out of regulatory approval.”

With the new NPRM tied to service, Hatch said it is scaled up, with it proposing to set the success rate during the first year after the rule’s effective date at 60% and then potentially to 70%.

“Frankly, while nobody wants to have somebody looking over their back, like a regulator, this is something the railroads have to achieve anyway,” he said. “This is something they [railroads] say they are going to focus on, and the pivot to growth is really all about service. This is why they originally brought PSR (Precision Scheduled Railroading)…to be scheduled and regular. I find it kind of interesting that this is a way for the STB to monitor service. This actually adds to their oversight power, but in a way, it could potentially be a win-win. Like any company that makes any product, railroads don’t want to have government regulate how good your product or service is. I think it's this is a smart way for the STB to add to their power and in a way that you really should feel that while the railroad carries will argue against this, they want to achieve it.”

STB said comments on the NPRM are due by October 23, with reply comments due by November 21.