President Joe Biden’s executive order targeting the maritime and railroad industries, among others, calls for enhancing competition for shippers. One of the issues that the July order directs the Surface Transportation Board to examine is reciprocal switching. The board can do this by beginning a rulemaking or reinvigorating an earlier proceeding on the issue.
Broadly speaking, reciprocal switching occurs when a shipper has access to one freight railroad but wants access to use a nearby competing freight railroad in order to cultivate a competitive pricing environment. A shipper can get that access at an interchange between the two railroads. Shippers have argued that reciprocal switching provides captive shippers — those that have access to only one railroad — with access to competing railroads.
Reciprocal switching as a ‘right’ in Canada
Unlike the United States, interswitching in Canada has existed for decades, according to Joseph Schulman, transportation economist and principal consultant at CPCS, a management consulting firm specializing in infrastructure. Reciprocal switching is known as interswitching in Canada.
The regulation’s history began in the early 1900s as an effort to restrain the overbuilding of railways, not as an avenue for competitive access, as it is viewed today, Schulman said.
“Back in the early 1900s, there were no trucks, airplanes or cars. Railways were revolutionary, and had the potential to revolutionize transportation. People were building railway lines all over the place, and they weren’t viable because the economy was not that developed and the population wasn’t that large. But still, people were building railways left and right,” Schulman said.
So, “the original purpose of that was to restrain the overbuilding of railway lines by giving the shipper located on one line access to a second railway so that someone else wouldn’t come along and build a new railway line in that area,” he said.
Today, interswitching looks like this: A shipper is located on one freight railway line, and it is within 18 miles (30 kilometers) of an interchange where there is a competing railway. A shipper may elect to access the competing railway at the point of interchange.
By law, the railway is obligated to perform this action. The shipper pays the switch fee to the incumbent railway to get access to the competing railway. That fee, which is the cost to haul from the origination point to the interchange, is established by the Canadian Transportation Agency, which oversees interswitching. Interswitching can also occur between a destination and an interchange.
The effect of this access is that it can put competitive pressure on the railways, Schulman said.
“This is a right that the shipper has. If a railway, for example, refuses, the shipper can go to the regulator and request an interswitching order,” Schulman said. The rail industry accepts interswitching as a “fact of life,” he said.
A high bar in the US
Although federal agencies in Canada and the U.S. seek to harmonize rail regulations, that effort generally applies to safety issues and not economic regulations.
Indeed, in the U.S., reciprocal switching exists but the requirements to get it are different.
“On a conceptual level, reciprocal switching and interswitching have the same objective, and that is to provide a captive shipper with access to a nearby competing railroad,” said Jeff Moreno, a partner at Thompson Hine who has represented shippers. The incumbent railroad switches the traffic over to the competing railroad so that there can be competition for the long haul or the line haul between the two railroads, Moreno said.
But “from a practical matter, the workings are very different legally,” Moreno said.
In the U.S., reciprocal switching can only be obtained by a shipper through a proceeding before STB. However, the bar to obtain reciprocal switching was set so high that it’s been over 30 years since the last case was filed with the board, according to Moreno.
Also, the two railroads involved in the reciprocal switching would set the switching fee. If the railroad cannot agree what rate to set, STB would set the rate, according to Moreno.
In the past 10 years, some shipper groups have been seeking to lower the bar, as seen in the STB proceeding Ex Parte 711, according to Moreno and to EP 711 filings. The recent spotlight from the Biden order has renewed interest in addressing the issue before the board.
That said, there are locations in the U.S. where the railroads have voluntarily entered into reciprocal switching agreements. The majority of them were created out of railroad mergers. For instance, in the 1990s, in both the Union Pacific-Southern Pacific and the Burlington Northern-Santa Fe mergers, large geographic territories went from two lines to one. To get approval from STB, UP and BN gave each other trackage rights for hundreds of miles, and they also agreed to a flat switch fee.
Reciprocal switching in the U.S. is also occurring under some legacy agreements that predate the mergers.
While U.S. shippers would likely embrace a move to the Canadian model, it’s unlikely STB will do that under the existing statutory framework. That would require action by Congress, according to Moreno. However, that doesn’t mean that STB can’t pursue lowering the bar, Moreno said.
What do PSR and train lengths have to do with it?
As STB potentially grapples with reciprocal switching, one question that could come up is how service would be affected, especially in light of precision scheduled railroading, an operational model adopted by almost all of the Class I railroads in which the railroads adhere to a fixed operational schedule. Some have questioned whether additional switches could hinder the railroads from keeping their scheduled runs or whether the switches would exacerbate existing service problems.
“Most rail customers — including those served by only one railroad — do not need STB regulatory protection because market forces ensure competitive rates and service,” the Association of American Railroads (AAR) said in an August paper on reciprocal switching. The trade association representing the freight rail industry has cautioned against overregulation, including regulation related to reciprocal switching.
“Advocates of forced access seek below-market rate levels for their traffic at the expense of other customers and the fluidity of the network. Forced access is a form of backdoor rate regulation that would actually hinder U.S. commerce and increase the costs of consumer goods,” AAR said.
Meanwhile, in Canada, another question could be whether longer trains affect the ability of shippers to utilize interswitching. The Class I railroads have been seeking to deploy longer trains for some traffic, such as grain, as a means to expand network capacity and maximize operational efficiencies. But the number of interchanges that can handle longer trains, such as 100-car trains, is limited, making interswitching more suited to manifest traffic than to unit trains because manifest trains tend to be made up of different consignments which can be split up, according to Schulman.
“I don’t have answers to those questions, but it seems to me that those are things that people could look into,” Schulman said.