Surface Transportation Board gets earful on reciprocal switching

The two-day hearing on reciprocal switching this week may have held more questions than answers, with the Surface Transportation Board posing questions about where to allow reciprocal switching and how long it would take, among many other issues.

The board has been taking public comments on how to move forward with reciprocal switching, which is when a shipper has access to one freight railroad but seeks access to a nearby competing freight railroad to cultivate a competitive pricing environment. President Joe Biden’s July 2021 executive order recommended that the board look further into the issue.

This week’s STB hearing was to take comments on whether it should move forward on its existing proposal for reciprocal switching detailed in a notice of proposed rulemaking from July 27, 2016, or if it should modify the proposal in light of precision scheduled railroading and changing market dynamics since the proceeding was initiated more than 10 years ago.

The purpose of developing a rule “is not to deluge the board with cases. The better outcome would be that by modifying the balance between shippers and railroads, better private behavior will be encouraged and so the cases won’t be brought. That would be the ideal outcome,” said Surface Transportation Board Chairman Marty Oberman.

Shippers: Reciprocal switching provides way to address service issues in real time

One question about reciprocal switching is what the bar should be to allow it. The current bar of demonstrating anticompetition, in addition to inadequate service, may be too high and take too long, shippers argued before the board Tuesday. They said reciprocal switching could allow shippers to address service problems in real time.

In a PowerPoint presentation from the first panel Tuesday, shippers argued that the reciprocal switching could offer “non-rate benefits” such as incentivizing railroads to negotiate contract service terms and promoting more efficient routing decisions, as well as requiring railroads “to consider the impact of operating decisions on customers they currently take for granted.”

Shippers also contend that the railroads’ arguments for which routes are more efficient are based on the railroads’ costs and don’t take into account shippers’ costs, which is pertinent because shippers say the railroads have been shifting a growing share of their historical costs to shippers since 1985.

Having clear standards to follow can help shippers judge the outcome or potential outcome, especially since there hasn’t been much precedence using the current rules and their definition of what qualifies as anticompetitive behavior, shippers said.

Shippers also said they would still have to satisfy other conditions for reciprocal switching, such as showing that it’s in the public interest via a cost-benefit analysis.

“Our companies see meaningful benefits where reciprocal switching is already available,” said Jeff Sloan, senior director of transportation and infrastructure for the American Chemistry Council. Sloan was referring to existing reciprocal switching arrangements that came from legacy contracts or railroad merger conditions.

“The board’s proposed rule presents new opportunities to obtain these benefits at additional production sites. Without a doubt, ACC members hoped that this added element of competition will help to moderate rail rates,” Sloan said.

One other issue is to determine what impact reciprocal switching would have on passenger rail operations, said Federal Railroad Administration Administrator Amit Bose.

The U.S. Department of Transportation supports fair access and wants to understand the impacts on supply chain flow as it currently stands versus under a switching rule, Bose said.

Railroads: Reciprocal switching would make operations more complex

But the railroads argued that allowing reciprocal switching would add operational complexity. Questions about where the railroads should provide access to reciprocal switching, as well as at what distances from terminals should reciprocal switching be permitted, were among the many issues raised.

Reciprocal switching could also lengthen the time for a shipment to move from point A to point B because of the time it would take to conduct a switch, railroads said.

“I do think it’s worth the time to develop a rule that has wider spread support because in the long run, that’s more likely to be effective than to proceed with a rule that’s going to face additional challenges before it can be implemented in its intended purpose,” said Michael Rosenthal, counsel for Union Pacific (NYSE: UNP).

BNSF Chief Marketing Officer Stevan Bobb contended that allowing reciprocal switching to be used in a way that resembles open routing would make it more challenging for the railroads to determine where to invest in expanding network capacity as well as plan for interchange activity and infrastructure needs.

“Pursuing inefficient routes and the idea of lower rates or better service for one shipper will result in less frequent interchanges at points where market forces and sound operating principles would otherwise dictate,” Bobb said. “The service offerings that have driven our growth over time would be incompatible with a switching regime that ignores commonsense operational efficiencies and market realities.”

Forcing BNSF (NYSE: BRK.B) to establish new interchange locations could draw capacity away from other parts of BNSF’s network, Bobb said. “The success of our agricultural shuttle network is only possible because it generates enough traffic density to justify allocating locomotives and maintaining crew bases at more remote parts of the BNSF network.”

Representatives with Canadian Pacific warned that the ability of CP to accommodate reciprocal switching in Canada shouldn’t be perceived as a testimony for its potential success in the U.S.

Reciprocal switching in Canada, where it is known as interswitching, has worked because the practice has been around since the early 1900s and the railroads have built their networks to take interswitching into account.

“A railway network is a complex thing on its own, and interswitching magnifies this complexity by increasing the amount of interaction between separate railroads. Canada’s Class I railroads have had years to develop solutions that help to reduce this complexity and to help to mitigate some of the inefficiencies inherent in interswitching,” said Tyme Wittebrood, CP director of regulatory finance.

“Canada’s regulators have permitted CP and CN to apply creativity and ingenuity to resolve operational problems as the volume of interswitching traffic has grown beyond anything that was contemplated when Canada’s regulated interchanges were first established,” Wittebrood said. He also argued that economic regulations work best when they provide an incentive to compete.

To watch a recording of the two-day hearing, click here.

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