The Surface Transportation Board recently closed the comment period for rail stakeholders to file their thoughts on whether reciprocal switching should be considered as an option to address subpar rail service in the U.S.
And among the thousands of pages in filings to the board about the issue were dozens of suggestions and questions. How can regulators create a formula that can recognize when subpar rail service has occurred but can also account for unusual circumstances such as flooding? Should reciprocal switching be an option provided to all shippers, including those that ship commodities that have historically been exempt from regulations, such as crushed stone or scrap metal? And how could reciprocal switching affect collective bargaining agreements?
STB will be mulling over these questions over the next several weeks. Meanwhile, stakeholders’ responses to the filings will be due Dec. 6.
Reciprocal switching is a process that would grant a shipper with access to the network of another Class I railroad at an interchange, with the idea that the shipment would continue on the network of the competing Class I railroad because of lackluster service on the originating Class I railroad.
The board first heard the calls to allow reciprocal switching in the U.S. 12 years ago when the National Industrial Transportation League brought the issue before the board in July 2012.
Class I railroads respond to plan to establish a metric that could trigger a request for reciprocal switching
One theme weaved throughout the filings of the Class I railroad submissions was concern about what possible downsides could arise from creating a metric that measures when prescribed service levels drop for a certain stretch of time.
The Association of American Railroads “agrees that using service metrics to identify a potential service inadequacy worthy of further examination is an appropriate starting point” but has concerns about determining whether a situation warrants a reciprocal switching remedy.
“The goal should be to use metrics in the most effective way possible, so that the Proposed Rule is properly calibrated to draw attention to potential service inadequacies for which the remedy of a forced switch could potentially be appropriate and effective,” AAR said.
It said that “longer-term, severe service issues demand the Board’s intervention more than do transient, mild drops in performance. Similarly, lanes with unusually poor service levels are better candidates for the Board’s attention than those with service levels that may reflect only the inherent variability in railroad common carrier service levels.”
Canadian Pacific Kansas City (NYSE: CP) recommended that STB examine available data on actual rail service outcomes — including data that reflects high levels of service — and calibrate a metric that would be triggered only when situations truly warrant further examination.
But CPKC also warned the board that reciprocal switching “might inadvertently incentivize opportunistic behavior by some shippers” and STB should ensure that its deployment doesn’t lead “to an inappropriate restructuring of the rail network.”
CPKC also said data-related obligations under the proposed rule could cause the railroads to invest substantial time and investment since the railway’s internal data isn’t set up to provide shipper- and commodity-specific lane-by-lane metrics. CPKC recommended that STB set up technical workshops to understand the data-related requirements.
Eastern U.S. Class I railroad CSX (NASDAQ: CSX) also listed potential drawbacks to developing a model that could trigger a request for reciprocal switching, saying that a model that relies on dips below a predetermined service threshold over any 12-week period “is too mechanical and not a reliable way to identify actual service problems within a complex, interdependent rail network.”
Canadian railway CN (NYSE: CNI) said that the “proposed metrics, standing alone, cannot provide the needed context to evaluate service performance; rather, a more qualitative approach is needed to be consistent with the statutory requirements.”
Norfolk Southern (NYSE: NSC) said it “is under constant market pressure to improve its service product to meet its customers’ demands. Government imposition of a ‘serious remedy’ should be applied to only the narrowest set of cases where it can be shown that outcomes in unregulated markets are inconsistent with outcomes observed in competitive markets. Otherwise, the STB risks distorting markets rather than promoting them.”
Instead of relying heavily on a model to gauge times when service levels drop, the board should also compel a shipper to provide evidence showing a potential rail service inadequacy and give testimony about how reciprocal switching could actually address the problems, CSX said.
“The Board should require proponents of forced switching orders to demonstrate that the requested reciprocal switching would remedy the claimed service inadequacy. A service inadequacy cannot create a compelling need for forced switching if the forced switching would do nothing to resolve the inadequacy,” CSX said. “In the same vein, the current NPRM would allow a metric dip over any 12-week period of time to justify a forced switch — even months or years after the identified 12-week period. There can be no compelling need to force switching for a service inadequacy that has already been resolved.”
However, prior to STB ordering that a reciprocal switching remedy take place, the board should allow opportunities for the railroad and the shipper to address the situation, the railroads said.
STB should “encourage collaboration between railroads and their customers before prescribing switching by establishing a brief 30-day pre-filing period during which the incumbent can work to cure any service deficiencies. It would be in the interest of all shippers — both the complaining shipper and those who might suffer the unintended market consequences of regulatory intervention — to achieve better service, if possible, without the burdens that regulatory litigation imposes on them, the railroads involved, and the Board,” BNSF (NYSE: BRK-B) said.
Shippers: Reciprocal switching is a good start but STB still needs to address promoting rail competition
As the railroads argued against a one-size-fits-all approach to examining what conditions prompt a response that calls for reciprocal switching, shippers generally argued that the proposed rulemaking is a good first step toward addressing rail service. However, some shippers also expressed disappointment that the proposed reciprocal switching rule didn’t fully address the question of whether there is lack of competition, which is what shippers say is the heart of the matter.
The American Chemistry Council (ACC) “stands firmly behind efforts to foster rail competition and believes the STB’s framework could provide significant relief when railroads fail to provide adequate service to their customers,” said Jeffrey Sloan, ACC senior director of regulatory and scientific affairs, in a Monday news release on behalf of ACC, The Fertilizer Institute and the National Industrial Transportation League. “However, the Board’s proposed standards are too limited, potentially leaving our members with substantial operational challenges before qualifying for competitive service.”
The three groups are calling for increasing the minimum standard for on-time deliveries from 60% to 70%; adopting a stronger standard for service consistency; instituting more stringent measures for local car delivery and pickup service; and setting a minimum of five years for the duration of a reciprocal switching prescription “to provide a sufficient incentive for alternate carriers to offer competitive service.”
Some shippers disagreed with how the current proposed rule gets triggered only after a shipper experiences subpar service.
“A rail shipper would need to experience potentially devastating service for twelve weeks before they could even begin the process of seeking a reciprocal switching remedy. Poor rail service for just one week severely hurts operations and can even shut down a refinery or petrochemical facility, and rail shippers should not have to wait until service is unacceptable for a predetermined duration to have access to reciprocal switching,” Rob Benedict, AFPM vice president of petrochemicals and midstream for American Fuel & Petrochemical Manufacturers, said.
Benedict said AFPM “strongly advocates for broader access to reciprocal switching based solely on lack of competition given the utter lack of competition in the rail market. This 2023 NPRM is built on the premise that when faced with the fear of increased competition in the form of alternative access or reciprocal switching, railroads will do whatever it takes to avoid that outcome. This premise is concerning and yet another reason why broader access to reciprocal switching is needed.”
Whether to include short lines and exempt commodities
Some stakeholders argued that reciprocal switching should also apply to short-line railroads.
“Limiting the availability of reciprocal switching prescriptions to those situations that only involve Class I rail carriers or their affiliated companies means that Class I railroads could limit access to what would otherwise be an effective interchange location under the STB’s proposed rule. Given the large number of Class III carriers that operate as handling carriers for the Class I railroads, this situation is not unique to NMA members and their shipments. The STB should expand its proposed rule to cover Class II and Class III carriers,” the National Mining Association said in its filing.
But the American Short Line and Regional Railroad Association (ASLRRA) said short-line railroads should not be included in the rule in part because of the potential for high compliance costs.
“While a Class I carrier could potentially absorb a relatively small reduction in overall revenues due to mandated reciprocal switching, short lines cannot. Unlike larger railroads, the costs of short line railroads cannot be spread over a vast rail system or large customer base. All the freight revenues generated by customers on a short line are vitally necessary to sustain the financial viability of that line. The light density operations, coupled with high infrastructure costs and fewer customers, would render the loss of revenue from any one customer as a result of imposed reciprocal switching is devastating,” ASLRRA said.
NMA also called for expanding when and where STB can prescribe trackage rights in situations where the board is addressing local service issues.
NMA “believes that a significant portion of rail customers are not located within defined terminal areas, and instead have facilities along main line routes of service or on branch lines. These shippers suffer from poor rail service just as much as customers located in defined terminal areas and may, in fact, suffer more. This is because many rail shippers located within terminal areas may have access to transload facilities adjacent to alternative railroads and could avail themselves to alternative rail services with minimal extra costs.”
It noted that “in contrast, those shippers that are 50 to 100 miles from an alternative rail carrier cannot as easily reach transload facilities on other railroads. Therefore, the only way to remedy poor service in non-terminal areas is through access to another rail carrier via trackage rights on the incumbent railroad.”
The American Forest & Paper Association and the Institute of Scrap Recycling Industries were among the shippers of commodities that would be exempt from reciprocal switching but argued they also should have access to it.
“Although such commodities may have been exempted for reasons related to competition, that rationale should not extend to this rule which is by contrast explicitly designed to address universally poor service,” said the Private Railcar Food and Beverage Association (PRFBA). “PRFBA members move such exempt commodities and are united in asserting that if their transportation is excluded from this rule, they will continue to experience the shoddy service this rule is meant to address.”
The Virginia Port Authority said reciprocal switching should be expanded to provide ports with an opportunity to address service deficiencies, including “port congestion and inefficiency … regardless of commodity exemptions or contracts.” The port authority recommended that port facilities served by only one Class I railroad should have access to rail performance data as well as to reciprocal switching itself.
The Norfolk International Terminal at the Port of Virginia is serviced solely by Norfolk Southern, although CSX can move traffic to the terminal via the Norfolk and Portsmouth Belt Line Railroad, according to the port authority, while the Newport News Marine Terminal and the Richmond Marine Terminals are served solely by CSX.
But CN argued in its filing that STB lacks authority to regulate contract traffic and exempt traffic, thus the reciprocal switching proposal wouldn’t apply to those situations.
“While it is true that the Board retains jurisdiction over exempt traffic, jurisdiction does not equate to having the authority to regulate. Rather, the agency and the courts have been clear that exempt traffic is not subject to regulation,” CN said.
Unions say STB should focus instead on defining common carrier obligation
While union groups in their filings were supportive of shippers’ rail service issues, that support stopped short of advocating that STB adopt the proposed reciprocal switching rule.
That’s because of concerns over how the rule might affect collective bargaining agreements. The unions are also concerned that allowing railroads to use their own employees to perform work on the lines of a railroad covered by a different contract could infringe on workers’ current rights and cause the railroads to provide service based on who pays the lowest wages versus who provides the best service, said Eddie Hall, president of the Brotherhood of Locomotive Engineers and Trainmen.
Labor attorney Richard S. Edelman said the railroads may try to recoup any financial losses from reciprocal switching by shifting “some of those losses to their workers.”
“To the extent that an STB rule might require a railroad to act in a manner inconsistent [with] negotiated scope and seniority rules, that is highly problematic for the unions,” said Edelman, whose filing represented five rail unions.
What STB could do instead is ensure all labor agreements and seniority rights are being upheld, as well as eliminate the provisions related to trackage rights so that the reciprocal switching is performed by the railroad owning the right of way where the customer is located, according to Jeremy Ferguson, president of the International Association of Sheet Metal, Air, Rail and Transportation Workers – Transportation Division.
But since lack of rail competition and its effect on rail service are at the heart of why the board is looking at reciprocal switching as a potential solution, STB should focus on defining the common carrier obligation, union leaders said.
The common carrier obligation calls upon the railroads to provide rail service on a reasonable request. The federal statute came out of the Staggers Act of 1980, which deregulated the freight rail industry. Shippers — and some Democratic congressional leaders — have argued that revising the definition could help STB better address rail service issues.
“Enforcing a robust common carrier obligation, rather than relying on forced reciprocal switching agreements, would hold railroads collectively accountable for providing a higher quality of service and more effectively address many of the problems shippers continue to experience,” said Greg Regan, president of the Transportation Trades Department of the AFL-CIO.
Edelman said, “What is needed to remedy the service problems experienced by shippers under the new business model [of precision scheduled railroading] is [a] better definition of the common carrier obligation and better enforcement of that obligation; adoption of the proposed new regulations will not make a dent in those service problems.”