Varying opinions on the tracks regarding STB’s adopted reciprocal switching rule

Feedback regarding the recent adoption of the reciprocal switching rule by 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, could be viewed as mixed.

Reciprocal switching has long been a prevalent topic in freight railroad 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 final rule is comprised of three performance standards, including: a service reliability standard, for Original Estimated Time of Arrival (OETA) measuring a Class I rail carrier’s success in delivering a shipment on time; a service consistency standard for transit time, measuring a rail carrier’s success in maintaining, over time, the carrier’s efficiency in moving a shipment through the rail system, from origin to destination; and Industry Spot and Pull, which measures a rail carrier’s success in performing local deliveries (spots) and pickups (pulls) of loaded railcars ands unloaded private or shipper-leased railcars during the planned service window.

The Washington, D.C.-based National Industrial Transportation League (NITL) voiced its opposition to the new rule, calling it a “missed opportunity.” NITL has an invested voice in reciprocal switching, as it submitted a petition for reciprocal switching rulemaking in 2011, which 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.

NITL said its petition sought to improve efficiency and innovation and address challenges by replacing current regulations—requiring shippers to prove “competitive abuse” to obtain a reciprocal switching remedy, which it called “a bar so high that no shipper has ever succeeded in getting a favorable ruling by the STB”—with a new rule that would restore the option for captive shippers to obtain competitive switching relief as authorized by Congress.

“The League appreciates that the rule improves the service metrics as compared to the Board’s original proposal and requires the Class Is to permanently report to the Board certain service performance data as advanced by NITL,” said NITL Executive Director Nancy O’Liddy. “However, the League is concerned that the Board did not fully utilize its existing statutory authority to partially revoke exempt commodities nor seek additional authority from Congress allowing contract movements to benefit from the rule. NITL looks forward to working with the Board, Congress, and its members in implementing this rule. This rule, however, demonstrates the continued difficulty the STB has in providing more useful oversight in a timely fashion and in an environment. of continued rail carrier consolidation and supply chain challenges. Congressional action is likely needed.”

Larry Gross, president of Gross Transportation Consulting, described the adopted STB rule as service-centric.

“It should provide an additional incentive for the Class I’s to maintain good service levels to their customers,” he said. “But for those who were hoping that the STB would open up the network to competition as a way to keep rail rates in check are no doubt disappointed.”

And supply chain consultant and LM contributor Brooks Bentz said it is worth questioning how much of an impact the rule will have, saying that the service-focused approach is novel, with the caveat that the reporting requirements and analytics will be time-consuming and the results likely to be subject to debate.

“If I’m the current serving carrier I don’t relish the idea of introducing competition (who would?),” said Bentz. “Prices seldom rise when a competitive force arrives, so I’m faced with providing the same service for less money.  Of course, as a shipper, competition resulting in lower cost is good news.  The same tug-of-war between shippers and carriers has been going on since the Phoenicians began hauling amphorae of wine to Rome 3,000 years ago.”

It has taken more than a while the state of the reciprocal switching rule to get to this point. Are all stakeholders pleased with the STB’s final rule? Probably not. But, at the same time, it provides some clarity going forward. While it is too soon to know what its ultimate impact will be on freight railroad operations, seeing things move forward can be viewed as a positive.