Reciprocal Switching: Will “Captive Shippers” Find Relief in New STB Proposal?

When consumers aren’t happy with the services they receive, they typically have the option to move to a competitor who can better meet their needs. But shippers who rely solely on rail to get their goods from one destination to the next may not be so fortunate. In this context, “captive shippers” are those who must depend upon a single railway — and may have little recourse if rail service isn’t up to snuff.

 

That’s why many are eager to see if a new reciprocal switching proposal from the Surface Transportation Board (STB) may finally spell some relief.

 

What is reciprocal switching?

In our post on this topic last year, we cited a Railway Age resource in which author Frank N. Wilner defined reciprocal switching as the “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.”

 

He also noted 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 he said “involuntary” reciprocal switching was another matter.

 

FreightWaves’ Joanna March said reciprocal shipping 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,” noting that proponents underscore its benefits for captive shippers.

 

STB’s March 2022 public hearing on reciprocal switching

The STB revisited reciprocal switching last year due to President Biden’s July 2021 Executive Order No. 14036 that recommended a variety of “pro-competitive actions” — including 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…”

On March 15-16, 2022, the STB held a public hearing on the topic. However, as Marsh wrote in her follow-up FreightWaves article two days after the hearing concluded, the outcome seemed to be “more questions than answers.”

“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,” Marsh wrote.

She quoted STB Chairman Martin Oberman as saying then that the intent in developing an effective reciprocal switching rule was “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.”

STB proposes new reciprocal switching rule

 

Fast forward to today, when reciprocal switching is again making headlines.

On September 7, the STB announced that it issued a Notice of Proposed Rulemaking (NPRM) in Reciprocal Switching for Inadequate Service, Docket No. EP 711 (Sub-No. 2), “which focuses on providing rail customers with access to reciprocal switching as a remedy for poor service.”

“The newly proposed regulations would provide 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,” the STB said. “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. They are intended to be unambiguous, uniform standards that employ Board-defined terms and are consistently applied across Class I rail carriers and their affiliated companies.”

The three standards the Board proposes are related to service reliability, service consistency, and inadequate local service.

Service Reliability

The STB defines service reliability as “The measure of a Class I rail carrier’s success in delivering a shipment by the original estimated time of arrival (OETA) that the rail carrier provided to the shipper.”

More specifically, the STB says the OETA “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.”

Additionally:

• “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 seeks comment on other approaches, such as maintaining the required success rate at 60% permanently or raising it to higher than 70% after the second year.”

• “The Board notes that by phasing in a higher success rate over time it would be providing the Class I carriers with time to increase their work forces and other resources, or to modify their operations, as necessary, in order to meet the required performance standard.”

   

Service Consistency

 

The STB defines service consistency as “The measure of a rail carrier’s success in maintaining, over time, the carrier’s efficiency in moving a shipment through the rail system.”

More specifically, the STB notes that this standard “is based on the transit time for a shipment, i.e., the time between a shipper’s tender of the bill of lading and the rail carrier’s actual or constructive placement of the shipment at the agreed-upon destination.”

Additionally, “The NPRM proposes that, for loaded cars, unit trains, and empties, a petitioner would be eligible for relief if the average transit time for a shipment increased by a certain percentage—potentially 20% or 25%—as compared to the average transit time for the same 12-week period during the previous year.”

Inadequate Local Service

 

The STB defines inadequate local services as 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).”

The STB says the NPRM proposes that “a rail carrier would fail the standard if the carrier 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.”

Additionally, the ISP success rate would measure “whether the carrier provides the service within its customary operating window for the affected shipper, which in no case can exceed 12 hours. This service metric provides rail customers with the long sought-after information on all important first mile/last mile service.”

Additional key factors

Additional key factors in the proposed rule include:

• A requirement that “all Class I carriers…provide their customers with the historical data for these service metrics within seven days of a customer’s request” so rail customers can determine whether their rail service providers are meeting the standards

• A provision for “affirmative defenses for service failures resulting from issues beyond the rail carrier’s control, such as natural disasters or actions of third parties”

• A first-time requirement that “all three service metrics be standardized across all Class I carriers”

• A proposal to “make permanent certain data reporting requirements relevant to service reliability and inadequate local service currently being collected on a temporary basis in other dockets”

   

“The Board 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, though the Board seeks comment on whether a longer period is necessary to ensure the rule’s effectiveness,” the STB says. “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 going forward. If it fails to do so, the reciprocal switching agreement would remain in place.”

 

Additionally, the STB notes that it views this NPRM as an “important step in addressing the many freight rail service concerns expressed by stakeholders since 2016,” and “anticipates acting expeditiously on this proposal,” since it recognizes “the importance of finalizing the standards” proposed.

Chairman Oberman issued a comprehensive statement that helps to describe the “why” behind the new NPRM, which is available in the STB announcement.

 

The Board’s decision in Reciprocal Switching for Inadequate Service, Docket No. EP 711 (Sub-No. 2), may be viewed and downloaded here. This decision also closes Reciprocal Switching, Docket No. EP 711 (Sub-No. 1).

Comments on the NPRM are due by October 23, 2023, and reply comments are due by November 21, 2023.