Proposed reciprocal switching rule takes aim at inadequate railroad service (updated)

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WASHINGTON – Shippers who suffer from inadequate railroad service would be able to gain access to a second carrier under a new reciprocal switching rule that the Surface Transportation Board proposed today.

The board unanimously voted to approve the 51-page notice of proposed rulemaking, which it said would provide a streamlined path for access to reciprocal switching when service to a terminal-area shipper fails to meet any one of three performance standards.

The proposed standards, the board said, would set a minimum level of rail service – below which a shipper would be entitled to seek a reciprocal switching agreement with another railroad. The “unambiguous, uniform standards” would be applied to Class I railroads, the board said.

The proposed 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 that the rail carrier provided to the shipper.

The original ETA 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 original estimate, and increasing the success rate thereafter to 70%.

The board said it is seeking 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. 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, in order to meet the required performance standard, the board said.

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, measured from 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. 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 measure of a rail carrier’s success in performing local deliveries and pick-ups of loaded railcars and unloaded private or shipper-leased railcars within the applicable service window, often referred to as industry spot and pull.

The board proposes that a railroad would fail the standard if the carrier had a spot and pull 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 spot and pull 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.

More Service Data

So that rail customers can monitor and measure their rail service, the rule would require all Class I railroads to provide customers with the historical data for these service metrics within seven days of a customer’s request. The proposed rule also contains exceptions for service failures resulting from issues beyond the railroad’s control, such as natural disasters or actions of third parties.

The proposed rule also would require all three service metrics be standardized across all Class I carriers for the first time. The board also proposes to make permanent certain data reporting requirements relevant to service reliability and inadequate local service currently being collected on a temporary basis.

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. The board said it seeks comment on whether a longer period is necessary to ensure the rule’s effectiveness.

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.

The board said the proposed rules are an important step in addressing freight rail service concerns that shippers have expressed since 2016, when the board first considered revising reciprocal switching rules. The board said it would act swiftly with the current proposal.

“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,” STB Chairman Martin J. Oberman said in a statement. “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.”

No railroad customer has successfully obtained a reciprocal switching order in the last 40 years, he noted. “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,” Oberman said.

The board has been considering various reciprocal switching proposals since 2010.

“In the past several years, and particularly since 2021, it has become clear that many rail customers nationwide have suffered from inadequate and deteriorating rail service. These problems were documented in detail in the hearings conducted by the Board in April 2022,” Oberman said.

“For this reason, the Board has determined to focus its efforts with respect to reciprocal switching on providing relief to rail customers suffering from poor service,” he added.

“The new rule contains a distinct advantage over both the existing regulations and the proposal in the 2016 NPRM,” Oberman said. “The proposed new rule sets specific, objective, and measurable criteria for when prescription of a reciprocal switching agreement will be warranted. This rule will bring predictability to shippers and will provide Class I carriers with notice of what is expected of them if they want to hold on to their customers who might otherwise be eligible to obtain a switching order. As a result, litigation costs to obtain a switch should be greatly reduced and petitions to obtain a switching order should be able to be litigated much more swiftly.”

Oberman said one goal of the proposed rule is to provide an incentive to railroads to maintain sufficient workforce and locomotive resources so that they can meet the minimum service standards.

“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,” he said.

The board’s decision notes that regulators are considering whether granting terminal trackage rights would be an appropriate remedy for proven failures of local service.

Comments on the proposed rule are due by Oct. 23, with reply comments due by Nov. 21.

The Association of American Railroads said it was reviewing the proposed rule but welcomed its tailored approach to reciprocal switching.

“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,” AAR CEO Ian Jefferies said in a statement. “ 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 proposed regulation should be subject to a cost-benefit analysis, the AAR said, to ensure that the benefits exceed the costs.

“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,” he said.

Shipper groups have long sought broader access to reciprocal switching, which allows a customer to request that its shipments be diverted to another railroad at a the nearest interchange point. U.S. railroads have opposed broader access to reciprocal switching, arguing that it would snarl operations and be a disincentive to invest in rail infrastructure. Canada has had interswitching regulations for decades that allow most customers to have access to Canadian National and Canadian Pacific Kansas City.

Chemical producers – who are among the most rail-dependent shippers – welcomed the decision but said it was a mixed bag.

“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 at the American Chemistry Council, an industry trade group. “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.”

More than 77% of companies responding to the chemistry council’s supply chain survey earlier this year said that access to reciprocal switching would help mitigate freight rail service problems.

The National Industrial Transportation League, which petitioned the STB for broader reciprocal switching regulations in 2011 as a way to increase competition in the rail industry, said the proposed rules unveiled today would help shippers who experience service issues.

“NITL is especially pleased that this proposal would require the permanent railroad reporting of First Mile- Last-Mile (FMLM) data which the Board initiated a couple of years ago when addressing Urgent Issues in Rail Service, Docket No. EP-770. NITL requested that the Board collect FMLM data in a joint association August 2020 Letter of Concern,” the shipper group said in a statement today.

Emily Regis, vice president of the Freight Rail Customer Alliance, said, “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.”

The group, which represents agriculture, chemical, electric utility rail customers, also applauded the new service data requirements. “FRCA members have become increasingly aware of and concerned by the gap between the service data that the railroads report to the Board and the level of service that shippers actually receive in the real world,” spokeswoman Ann Warner says.

Private Railcar Food and Beverage Association President Herman Haksteen said the proposed rule “is a great step in ensuring our shippers get good rail service at all their locations, even single served locations. PRFBA looks forward to the positive impact this will have on rail service.”

Note: Updated at 11:56 p.m. Central Time with comment from American Chemistry Council. Updated at 2:03 p.m. Central Time with comment from the National Industrial Transportation League. Updated at 3:30 p.m. with comments from the FRCA and PRFBA.