Railroads, NITL Clash Over Reciprocal Switching Proposal

The U.S. rail industry and the nation’s largest shipper group recently presented to the Surface Transportation Board widely disparate scenarios about what would happen if the rail regulatory agency mandated reciprocal switching for certain railroad customers.

The National Industrial Transportation League said the proposed rule change would “inject� a moderate amount of competition into the market without hurting service or railroads’ ability to invest in their networks. The Association of American Railroads, the industry’s main lobby group, flatly rejected that scenario, warning the nation’s rail regulatory agency that mandatory switching would help a small group of shipper at the expense of the larger customer base.

The great divide in opinion and research backing each side’s stance suggests the STB won’t rush to decide whether to pursue rulemaking forcing the railroads to give certain shippers access to a competing railroad’s line. The STB has the unenviable task of gauging the accuracy and merits of each side’s study, as both sides blasted each other for reaching spurious conclusions through their research. The likelihood of the STB making a decision soon on whether to pursue rulemaking, which the rail industry seeks to halt, is further decreased because the commission is missing a third member. President Obama’s nominee, Debra Miller, has yet to receive Senate confirmation.

There isn’t much pressure from Congress to pursue the rulemaking, other than from a few critics of railroads’ pricing power in the Senate. The two ranking members of the House Transportation and Infrastructure Committee last week voiced their concern with NITL’s proposal in a letter sent to the two STB board members. Besides, the STB has moved cautiously â€" or slowly, according to some â€" in addressing shippers’ concerns about competition, choosing sometimes to punt difficult decisions for further review.

“You can grant switching as long as it’s practicable and in the public interest or necessary to provide competitive rail service,� said Karyn Booth, lead counsel for the NITL, which filed the petition for rulemaking. “You have the discretion to make changes and the statute gives you that discretion, and it’s ludicrous to hear that the current rules are etched in stone and can never be changed.� Under the NITL proposal, a railroad would have to provide shippers with access to only one line access to another railroad’s line if it’s within 30 miles of the customer’s present or future loading spot. Only shippers that were charged by the “landlord� railroad a transport rate equal to or greater than 240 percent of the revenue-to-variable transport cost or that provide more than 75 percent of their volume to the carrier would be guaranteed reciprocal switching, according to the NITL proposal.

Using 2010 statistics, NITL estimates the rule change would allow shippers to annually switch only 1.44 million carloads, or 4.6 percent of total annual carload traffic. Shippers that have access to only one line, which refer to themselves as “captive shippers,� could gain about $900 million in annual transportation cost savings through the rule change, NITL said. Coal shippers, followed by chemical producers, have the most to gain through the proposed rule change.

NITL and AAR clashed on how mandatory switching would impact rail service. NITL President and CEO Bruce Carlton said mandatory reciprocal switching would not hurt rail service as only a tiny share of total freight would be subject to switching under the proposed rule. Booth told STB Chairman Daniel Elliott and Vice Chairman Ann Begeman that the U.S rail network, arguably the best in the world, has shown that it can handle freight shifts caused by weather changes and market shifts, so a small amount of additional switching wouldn’t roil the network.

The NITL study greatly understates how many switching moves the proposed rule would create, said William Rennicke, a noted rail analyst who spoke on behalf of AAR. Switching is a multi-step process that adds the risk of transit delays and injury to employees, he added.

“Some shippers would be near interchanges and enjoy lower rates through the proposal, but other shippers would be beyond a reasonable distance from the interchange,� said B. Kelly Eakin, a specialist in competitive product pricing who spoke on behalf of AAR. “Those other shippers would be left at a competitive disadvantage in their own markets.�

NITL said mandatory reciprocal switching wouldn’t impede the rail industry’s ability to invest in their infrastructure and shrugged off concerns that the proposed change was a form of re-regulation. Before the U.S rail industry was deregulated via the Staggers Act of 1980, rail service suffered as carriers failed to make enough money to maintain and expand their costly networks.

Unsurprisingly, the AAR sees the mandatory switching as unneeded regulation. The group told the STB that under NITL’s study, which AAR says underestimates the amount of switching a rule change would spur, the industry would lose about $7.9 billion in annual net income, or about 13 percent of U.S. railroads’ total net income. That sum equals about what railroads spent on capital projects in 2010, AAR said.

NITL modeled its proposed rule change on mandatory switching rules in Canada, which have been in place for more than 100 years. In Canada, roughly 40 percent of rail traffic is eligible but only between 10 to 17 percent actually is switched, Booth said. This is largely because Canadian National Railway and Canadian Pacific Railway find ways to lower pricing rather than turning the business away to each other. AAR contested the NITL research on Canadian switching, saying the statistics included intermodal traffic.

Phil Ireland, a former CP executive who spoke on behalf of AAR, told the STB board members that Canada’s mandatory switching model isn’t applicable to the U.S. First, Canada has had its rule for more than a century, allowing the carriers to operate and invest in their networks accordingly. Forcing U.S. carriers to do the same in a much shorter time frame could cause major strain on the network.

The markets are also very different, Ireland said. The Canadian population is one-ninth that of the U.S. and has half a dozen major cities, compared to the roughly 50 in the U.S. Additionally, the Canadian freight network is geared toward export and resource development, while the majority of freight hauled by U.S. railroads is for internal consumption.

Source: Journal of Commerce