By Justin Franz
A week after the U.S. Surface Transportation Board issued a proposal to allow rail customers to seek service from competing railroads even if they are not directly served by them, the industry is still reviewing the recommendation. But so far unions and shippers are praising the idea, suggesting that it could break the Class I “monopoly” over many businesses that only have access to one major railroad.
“Reciprocal Switching” is what happens when a customer that is only served by one railroad arranges for another nearby railroad to move its traffic. However, the practice is rare in modern railroading. While shippers and trade groups have long said it would increase competition, Class I railroads (through their lobbying group, the Association of American Railroads) have said it would wreak havoc on the rail network by letting multiple railroads operate on one line (although that isn’t unusual elsewhere in the world). According to the STB, no rail customer has succeeded in obtaining a reciprocal switching order in the last 40 years. In fact, because of the perceived challenges of getting such an order, no customer has even attempted to request once since 1990. In 2016, the STB announced that it was going to make it easier for customers to gain access to multiple railroads, an idea that was quickly denounced by the industry.
But now the board has changed its tactics and is proposing new, uniform standards that the Class Is would have to maintain in order to avoid having the STB issue a reciprocal switching order to a customer. The hope is that the Class Is will ensure that their service does not drop below a certain level so that they never have to face a potential service order. The standards proposed by the board include “Service Reliability,” “Service Consistency” and “Inadequate Local Service.” In order to meet the Service Reliability standard, a railroad would have to meet its “original estimated time of arrival” (known as the OETA) 60 percent of the time over the course of 12 consecutive weeks. In simpler terms, the railroad would have to make sure carloads got to their destination when they said they would 60 percent of the time. That percentage could be increased over time as well. Service Consistency would mean a customer could not see its quality of service decline when compared with the past year. And the Inadequate Local Service standard would require railroads to commit to switching local industries regularly when they say they will. To enforce all of this, the railroads would also have to make more data and information available to its customers.
“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,” said STB Chairman Martin Oberman in a press release last week. “In my view, Congress provided the Board with the authority to issue reciprocal switching orders as one way to inject competitive alternatives into the rail network. 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.”
Shippers, railroads and other stakeholders have the chance to submit comments by October 23. Replies to comments are due about a month later on November 21. When exactly the STB would make a final ruling is unclear.
The new rules would likely encourage the industry to do better when serving customers and perhaps the railroads would self-regulate themselves better when it comes to getting carloads to their final destinations. While the new rules could streamline the process of issuing a reciprocal service order (which would last for a minimum of two years and a maximum of four years) it would also provide railroads the opportunity to defend themselves against such actions. For example, the railroads could claim the service disruption was the result of a natural disaster or the fault of a third party, thus preventing the order.
AAR announced shortly after the proposal was released that it was reviewing it, but that it believed any new rules should be narrow in focus.
“Any new regulation must be backed by data, narrowly tailored to address a specific and well-defined problem, and ensure benefits exceed costs,” said AAR President and CEO Ian Jefferies in a press release. “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.”
Unions said the new rules would prevent the railroads from making deep cuts to resources. Industry groups, like the National Association of Chemical Distributors and The Fertilizer Institute, also praised the new rule, saying in media releases that it would help customers in the long run get the service they need.
“U.S. businesses – including the companies who deliver the chemical ingredients essential to our daily lives – count on reliable, efficient, and dependable rail service. NACD has long advocated for reforms to the rail system that would enhance service and increase competition,” said NACD Senior Vice President of Regulatory Affairs Jennifer Gibson. “Competitive switching, or reciprocal switching – a process by which shippers currently served by only one major rail carrier can gain access to another rail carrier – will do just that, as long as there is a realistic threshold to obtain competitive switching approval.”