Reciprocal Switching and the STB Public Hearing

The March 15-16 public hearing of the Surface Transportation Board (STB) to revisit a 2016 proposal about reciprocal shipping rules could end up making a big impact for both proponents and opponents across the rail-shipping landscape.

Those in support of changes to reciprocal switching rules include the Rail Customer Coalition (RCC) and the National Industrial Transportation League (NITL). The Association of American Railroads (AAR) opposes changes that would make reciprocal switching a requirement. Here, we’ll take a look at the perspectives of each—as well as those of former and current STB officials.

What is reciprocal shipping?

In Railway Age’s “A Primer on Reciprocal Switching,” author Frank N. Wilner says reciprocal switching “means that a railroad with sole physical access to a shipper facility transfers shipper freight cars to a near-by junction point with a second competing railroad. The second railroad pays a compensatory per-car switching fee.”

From the shipper perspective, Freightwaves describes reciprocal shipping like this: “Reciprocal switching occurs when a shipper has access to one freight railroad but wants access to a nearby competing freight railroad in order to cultivate a competitive pricing environment.”

Wilner says that in the hearing, the STB will “consider finalizing a long-pending, shipper instigated rulemaking that could loosen the standard for imposing a competition enhancing Reciprocal Switching remedy created by Congress in 1980.”

Noting that the proceeding is officially referred to as Ex Parte No. 711 (Sub-No. 1), Wilner writes that “The remedy is intended to create two-railroad competition at origin or destination shipper facilities physically served by only one railroad. The remedy has never been imposed, however, with shippers alleging a too-difficult to meet evidentiary standard—that a railroad is engaging in anticompetitive behavior. The standard was established in 1985 by STB predecessor Interstate Commerce Commission (ICC).”

He also describes the opposition to potential changes now: “Railroads oppose any loosening of the standard, alleging that doing so would undermine a railroad’s ability to price differentially…, create operational inefficiencies, discourage future investment in rail infrastructure and equipment, and unnecessarily and unjustly transfer ‘wealth’ from railroads to rail customers.”

Wilner notes that reciprocal switching is nothing new, since railroads “have long voluntarily switched cars on behalf of each other where they find it economically justified.” But “involuntary” reciprocal switching is another matter.

And why is the STB revisiting reciprocal switching now?

Because of President Biden’s July 2021 Executive Order No. 14036 that recommended a variety of “pro-competitive actions” that include reciprocal switching.

Specifically, the section of Executive Order No. 14036 that addresses this issue includes this guidance: “(n) To further competition in the rail industry and to provide accessible remedies for shippers, the Chair of the Surface Transportation Board (Chair) is encouraged to work with the rest of the Board to: (i) consider commencing or continuing a rulemaking to strengthen regulations pertaining to reciprocal switching agreements pursuant to 49 U.S.C. 11102(c), if the Chair determines such rulemaking to be in the public interest or necessary to provide competitive rail service…”

Rail Customer Coalition

The Rail Customer Coalition (RCC) describes itself as “a large collection of trade associations representing a broad cross section of manufacturing, agricultural, and energy industries that depend on the railroads to deliver reliable and affordable service in order to remain competitive in a global market. …RCC members are major transportation stakeholders and the largest users of freight rail. They account for more than half of the total volume of cargo shipped by rail and generate more than three quarters of the revenues collected by the railroads.”

In a February 11th letter to the STB regarding reciprocal switching, RCC members outlined their support for the Board’s “proposed rules to provide railroad customers with greater access to reciprocal switching.” Here are a few highlights from the letter:

The RCC letter ends with this request: “We urge the Board to finalize reciprocal switching rules and to consider further steps that will at long last provide shippers with greater access to competitive rail service. Such actions will help achieve the Staggers Act’s vision of a healthy and competitive freight rail system.”

The National Industrial Transportation League

The National Industrial Transportation League (NITL) describes itself as “the nation’s oldest and largest freight transportation association” with a “rich history.” The NTL says that “From its beginnings in 1907 when economic regulation ruled our industry through the present, the League has been in the forefront of changes that have helped shape our nation’s commercial freight transportation system. From rail, to motor carriage, through ocean transport and air commerce, the League has been a proven leader in representing shippers’ interests. …”

The NITL has been deeply involved in the reciprocal switching issue over the years and submitted new comments to the STB on February 14th in the form of a two-part testimony. According to the NITL’s summary, “Part I challenges railroad arguments that the record is stale and needs updating by demonstrating that, if anything, developments over the past five years have strengthened the case for reciprocal switching. Part II responds to multiple topics that rail industry stakeholders have raised in ex parte meetings and their utter failure to rebut the facts and testimony presented in response to their objections to reciprocal switching. …”

American Association of Railroads (AAR)

Although the RCC and NITL support changes to reciprocal switching rules, the American Association of Railroads (AAR) has a different view, saying that “Forced switching is forced inefficiency” in reference to the potential change: “The Surface Transportation Board (STB) — the agency that oversees freight railroad economic regulations — may force railroads to turn over traffic to competitors. This forced switching rule would slow rail operations and hurt shippers, consumers, the environment and the economy. Such market intervention is widely opposed and lacks justification.”

The AAR provides a fact sheet outlining its perspectives on reciprocal switching. The following provides a snapshot of some of the highlights:

The AAR also says that “forced switching” would have a “negative domino effect,” that would “hinder U.S. commerce and increase the costs of consumer goods.”

Additionally the AAR says that when rail efficiency is threatened, the ripple effect negatively impacts:

In the following video, the AAR provides its explanation of how the reciprocal switching process works.

Surface Transportation Board

Perspectives from past and current STB officials may provide some insight regarding the future of reciprocal switching. In a recent Freightwaves interview, Daniel Elliott, former chairman and member of the STB, talked about the history of reciprocal switching and the STB, as well as “issues STB should keep in mind” in preparation for the hearing.

In the interview, Elliott discussed his involvement with reciprocal switching over the years, how the industry and market conditions have changed, and why he thinks it’s a good idea to revisit it now.

“The general opinion is if the parties out there that have the right to use that provision of the act don’t [actually] use it, then it’s ineffective even if people disagree about how good or bad it is. …My opinion was if you aren’t using the provision, then something doesn’t seem to be working right and it needs to be looked at,” Elliott said.

Elliott talked about how originally, the intent of Congress in creating the statute was for reciprocal switching to be a “mechanism to introduce competition in the industry in certain instances.”

However, as the health of the rail industry improved over the years, Elliott said the perception has been that “it doesn’t work,” and that shippers would like to have a mechanism they feel is effective and that aligns with the original congressional intent.

“So this is an opportunity for those shippers to get competition through the statute as Congress intended at the time,” Elliott said.

He also described how he views the role of the STB in this context: “That’s what I think the STB is there for: There’s a balancing act between allowing the railroads to make adequate revenues so they can properly invest in their infrastructure, while also making sure that the shippers — [those] where the market doesn’t work because a railroad has market dominance — have some kind of ability to get competition. I think this is part of what Congress had in mind for that balancing act.”

After discussing additional dynamics and proposals in play, Elliott also pointed out that voluntary reciprocal switching is already taking place and is something that railroads “do very well already and will continue to do well…”

He also said that the changes being considered could end up creating more efficiency overall: “…this could be an opportunity for growth. It may open up more efficient routes where the shipper that’s captive might have a better route to their facility through another railroad. So it may actually make the system more efficient in certain situations.”

Additionally, “…there’s kind of a general concern that the rail industry has gotten consolidated to the point where competition is lacking in certain situations, and this would be a place to introduce or strengthen competition,” Elliott said.

In his Railway Age article, Wilner cited a similar sentiment about competition concerns from current STB Chairperson Martin J. Oberman. Wilner wrote that in response to the executive order, Oberman said, “I have previously stated my concerns with the sufficiency of competition in the rail industry and my interest in exploring ways the Board can improve the rail industry’s competitive landscape in order to ensure fairer pricing. Accordingly, while underscoring that the STB is an independent agency and that maintaining its independence is vital, I welcome the nationwide policy contained in this new Executive Order.”

A March 1st STB press release provided details about the hearing, and on March 14th, the STB issued an additional decision with an updated list of hearing participants.