Analysis & Commentary
The Surface Transportation Board (STB) has opened a proposed rulemaking aimed at imposing reciprocal switching on freight railroads, requiring them to allow competing rail companies’ equipment on their own lines when deterioration of the rail company’s service is bad enough to justify it.
Rail shippers have sought reciprocal switching for years, and a limited form of it had been offered by the board since 2016, but it had been of little help and was withdrawn by the STB in the same decision approving the new rulemaking proposal.
If there is any disappointment on the part of rail shippers, it stems from the fact that the board proposes to impose reciprocal shipping only in situations where service has failed to meet promised levels and not as a general practice. However, recent evidence suggests that at least some railroads have been quietly engaging in the practice without publicizing it, which may mute rail opposition to the proposal.
Calls from rail shippers for reciprocal switching grew louder after the Class I railroads embraced the Precision Scheduled Railroading (PSR) operations model in 2018. PSR was designed to boost stock prices by engaging in severe cost-cutting measures that included mothballing railcar fleets, closing down railyards and other facilities, and the wholesale firing of tens of thousands of employees.
One immediate result was severe deterioration in rail service, which drove up costs for customers and the economy, and continued to worsen over time. Railroads were able to get away with this in a way that no other industry could because they enjoy regional monopolies across the country with very little overlap in their service territories. This was made worse by their refusal for many years to allow rail traffic from other railroads to operate over their own lines.
The situation grew so bad that Congress acted to strengthen the STB’s regulatory hand and the board ordered major railroads to file regular service reports and meet certain service targets or face large financial fines for failing to do so. In mid-May 2022, the board told a congressional committee that it was close to permitting reciprocal switching.
In the Sept. 7, 2023, announcement, STB Chairman Martin Oberman did not mince words: “Since joining the STB nearly five years ago, it has become apparent to me that many of the ills of the national freight rail network stem from a lack of competition in the industry and the fact that many rail customers are captive to one Class I railroad. In my view, Congress provided the board with authority to issue reciprocal switching orders as one way to inject competitive alternatives into the rail network.”
He added, “One of the principal goals of the rule is to incentivize carriers to maintain sufficient resources—specifically work force and locomotives—so that they can meet at least the minimal service standards set by this rule. One hope is that the proposed rule will have the desired effect and that shippers currently receiving poor service will see service improve to the point that litigation before the board will not be necessary.”
May Not Be Opposed
Historically, the major railroads have fought tooth and nail against adopting reciprocal switching, managing to stop any meaningful adoption of it by applying the leverage their status as multi-billion-dollar corporations has granted them. But events in recent years have eroded that power.
First of all, the ravages visited on the economy by PSR have been so serious and widespread that they could no longer be ignored. The supply chain failures that made living through the COVID-19 pandemic so much worse for Americans also made it less acceptable for railroad management to keep ignoring calls for change.
Add to that unions and other critics who cited PSR as a cause of the threatened rail strike last December. That was when the public learned exhausted train crew members were granted only the barest minimum of sick leave and were so overworked following the colossal layoffs they couldn’t go home for holidays and their children’s birthdays, and were continuing to walk off the job in droves.
Soon after, safety concerns arose regarding the rail derailment and explosions in East Palestine, Ohio. Accusations were made by some rail unions and other members of Congress that PSR cost-shaving posed very real dangers to the general public.
Some in top rail management have rebelled against the PSR model, while others have been forced to measure the political cost of maintaining their fealty to its unyielding strictures. One who has spoken out and taken action is Jim Hinnrichs, the new president of CSX Transportation, who tellingly was hired outside of traditional rail management from Ford Motor Corp.
Ian Jefferies, president of the Association of American Railroads (AAR), had not had a chance to review the STB proposal in detail when he commented, “Any switching regulation must avoid upending the fundamental economics and operations of an industry critical to the national economy that Congress saved once by partially deregulating—and be subject to the highest level of scrutiny. AAR looks forward to engaging with the board on this important matter.”
Shipper groups were positive. “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 for the American Chemistry Council.
Jennifer Gibson, senior vice president of regulatory affairs for the National Association of Chemical Distributors, said, “NACD appreciates that the STB proposed rule not only provides a path for rail customers to access reciprocal shipping agreements but does so by establishing clear and measurable service metrics for reliability of on-time deliveries, consistency on transit time, and performance regarding local deliveries. NACD members have experienced severe delays in each of these areas in recent years.”
Rob Benedict, vice president of petrochemicals and midstream for the American Fuel & Petrochemical Manufacturers, responded, “Reciprocal switching would present railroads with a simple decision: provide better service to customers or risk losing their business to a competitor.”
He called the proposal “a good start with potential to make the rail system more efficient and responsive to consumers by shining a light on bad service through clear reporting of metrics,” but said he was disappointed that “it would limit reciprocal switching to captive shippers who experience service failures instead of making it available broadly to promote competition industry-wide.”
Laying Down the Gauntlet
In its Sept. 7 announcement following a unanimous vote, the STB sought public comment on its proposed rulemaking, stating, “The proposed 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 prescription of a reciprocal switching agreement.
The three standards are:
Service Reliability: The measure of a Class I rail carrier’s success in delivering a shipment by the original estimated time of arrival (OETA) provided by the railroad to the shipper. Measurement would be compared to when the car was delivered to the designated destination and would be based on all shipments over a given lane over 12 consecutive weeks.
One proposed approach would be to set the success rate during the first year after the rule’s effective date at 60%, meaning that at least 60% of shipments arrive within 24 hours of the OETA, and increasing the success rate thereafter to 70%.
The board also is seeking comment on other possible approaches, such as maintaining the required success rate at 60% permanently or raising it to higher than 70% after the second year.
Service Consistency: The measure of a rail carrier’s success in maintaining, over time, the carrier’s efficiency in moving a shipment through the rail system. The service consistency standard is based on the transit time for a shipment, that is, the time between a shipper’s tender of the bill of lading and the carrier’s actual or constructive placement of the shipment at the agreed-upon destination.
Inadequate Local Service: The measure of a rail carrier’s success in performing local deliveries (“spots”) and pick-ups (“pulls”) of loaded railcars and unloaded private or shipper-leased railcars within the applicable service window, often referred to as “industry spot and pull” (ISP).
A rail carrier would fail the standard if it had an ISP success rate of less than 80%, over a period of 12 consecutive weeks, in performing local deliveries and pick-ups within the applicable service window. The ISP success rate would measure whether the carrier provides the service within its customary operating window for the shipper, which can never exceed 12 hours.
“This service metric provides rail customers with the long sought-after information on all important first mile/last mile service,” the board explains. So that rail customers will be able to readily monitor and measure their rail service, the rule would require all Class I carriers to provide their customers with the historical data for these service metrics within seven days of a customer’s request.
The board also proposes that the reciprocal switching agreements would be for a minimum period of two years and up to a maximum of four years, depending on the evidence presented, although the STB is seeking comment on whether a longer period is necessary to ensure the rule’s effectiveness.
