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Surface Transportation Board takes next step toward adopting latest proposed reciprocal switching rule

November 9, 2023

Class 1 Railroads, News

A new reciprocal switching rule proposed by the Surface Transportation Board would entitle shippers to relief for poor service. – Cowcatcher Magazine

By TIM BLACKWELL/Cowcatcher Magazine

The Surface Transportation Board has begun weighing comments from shippers and railroads regarding a proposed rule that would give rail customers access to reciprocal switching as a remedy for poor service.

STB unanimously voted in September on The Notice of Proposed Rulemaking (NPRM) in Reciprocal Switching for Inadequate Service, Docket No. EP 711 (Sub-No. 2), a revision of a similar reciprocal switching solution STB offered in 2016 that never materialized.

The new rule would offer a streamlined path for the prescription of a reciprocal switching agreement when service to a terminal-area shipper fails to meet any of three performance standards by Class I carriers and their affiliates. Reciprocal switching allows rail shippers limited to one Class I railroad to access another through an interchange point of both railroads.

The comment period, extended 15 days after the Association of American Railroads filed a motion seeking more time, ended Tuesday. Replies will be issued by Dec. 6.

STB proposed standards to cover service reliability and consistency and inadequate local service. They would be standardized across all Class I carriers for the first time.

“The standards are intended to reflect a minimal level of rail service below which a shipper would be entitled to relief, and each standard would provide an independent path for a petitioner to obtain a reciprocal switching agreement,” STB said in a statement in September.

The rule would require all Class I carriers to provide their customers with the historical data for the service metrics within seven days of a customer’s request. The proposed rule also provides for affirmative defenses for service failures resulting from issues beyond the rail carrier’s control, such as natural disasters or actions of third parties.

Shippers say rule needs to be broadened

While comments are yet to be public, some shippers have said that the proposed rule should do more to encourage broad competition rather than penalize a railroad that is the only option for a shipper for poor service.

The American Fuel & Petrochemical Manufacturers (AFPM) said in a statement that it supports STB’s reporting of service metrics but wants STB to broaden the rule beyond limiting access to reciprocal switching to rail customers served by a single railroad. Even then, AFPM says, those customers, known as captive shippers, will only receive access after proving they are receiving poor rail service.

AFPM contends that reciprocal switching should be available in all instances where there is a lack of competition – “a dire reality the STB has repeatedly recognized in the current rail market.”

“In the absence of broad access to reciprocal switching based solely on lack of competition, the proposed service-based approach must be set appropriately,” said Rob Benedict, AFPM vice president of petrochemicals and midstream. “If the thresholds for railroad performance are set too low, it can be sure the railroads will improve no more than required, incentivized to do just enough to avoid reciprocal switching. The STB must set targets that incentivize good service, rather than codifying the poor service of the past.”

While the American Chemistry Council wishes STB would not limit reciprocal switching remedies to just poor service, the proposed rule is much needed because many member companies lack access to competitive rail service. The rule would provide a remedy when members are faced with unreasonable rates or service failures.

Nearly 80 percent of companies said access to reciprocal switching would help mitigate freight rail problems, according to a supply chain survey ACC conducted earlier this year. “Removing regulatory barriers to competition through reciprocal switching is one of the most important changes the STB can make to improve rail service and help prevent future problems,” said Jeff Sloan, senior director of regulatory and scientific affairs. “While it’s disappointing that the board is abandoning reciprocal switching as a mechanism to more broadly promote competition, we are hopeful that the revised proposal can offer meaningful relief to shippers when a railroad fails to meet objective service standards. We welcome the opportunity to work with the board on finalizing this long overdue reform.”

Important step in addressing service issues

STB says the proposed rule is an important step in addressing many freight rail service concerns established by stakeholders since 2016. That year, STB proposed a similar rule that would enforce reciprocal switching in anticompetitive service situations.

Since then, shippers, citing declines in rail service brought on by the pandemic and changes in rail operations, have routinely called for reciprocal switching.

STB chairman Martin Oberman said the reciprocal switching orders are a way to inject competitive alternatives into a rail network that has resulted in many rail customers being held captive to one Class I railroad.

“Nevertheless, despite the consolidation of the number of Class I carriers from approximately 40 prior to 1980 to the current six Class Is, no rail customer has succeeded in obtaining a reciprocal switching order in the last 40 years,” he said. “Indeed, because of what are perceived as insurmountable hurdles by the shipping community under the current regulatory structure, no rail customer has even sought a reciprocal switching order from the board since before 1990.”

He added that many rail customers nationwide have suffered from inadequate and deteriorating rail service in the past several years, particularly in 2021, as documented in an April 22 hearing. 

“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,” Oberman said.

Carriers will be held accountable for success in delivering a shipment by the original estimated time of arrival that the rail carrier provided to the shipper; efficiency in moving a shipment through the rail system; and performance of local deliveries (spots) and pick-ups (pulls) of loaded rail cars and unloaded private or shipper-leased rail cars within the applicable service window.

Reciprocal switching agreements would be for a minimum of two years and up to four years, depending on the evidence presented. 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.  If it fails to do so, the reciprocal switching agreement would remain in place.

Oberman said stakeholders can expect prompt action on this proposal.

Association of American Railroads president and CEO Ian Jefferies said the STB is offering a better option for shippers than it did seven years ago.

“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.”

The Freight Rail Customer Alliance welcomed the proposed rule, saying members have become increasingly concerned by the gap between the service data that the railroads report to the board and the level of service that shippers actually receive.

“This reciprocal switching proposal is consistent with FRCA’s longstanding policy goals and objectives to instill service competition and to provide shippers with better options to address systemic poor railroad service, especially under Precision Scheduled Railroading and continued supply chain challenges,” FRCA vice president Emily Regis said.

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