AAR makes its case against NITL competitive switching proposal

In comments filed with the Surface Transportation Board this week, the Association of American Railroads (AAR) made its case to nix a proposal from the National Industrial Transportation League (NITL) that the AAR said could result in United States Class I railroads losing revenue up to 80 percent of their entire capital budgets.

In July 2011, the NITL requested to the STB that it adopt new rules regarding reciprocal switching between Class I railroad carriers, formally known as Petition for Rulemaking to Adopt Revised Competitive Switching Rules, Ex Parte 711.

The NITL proposal would require a Class I rail carrier to enter into a competitive switching arrangement whenever a shipper—or group of shippers—demonstrates that certain objective operating conditions exist. The League is asking the STB to eliminate existing competitive access rules and precedents as they apply to reciprocal switching and replace them with the following conditions:
-the shipper’s or receiver’s facilities for which switching is sought are served by only one Class I rail carrier;
-there is no effective inter- or intramodal competition for the rail movements;
-there is (or can be) a “working interchange” between a Class I rail carrier and another Class I within a “reasonable distance” of the shipper’s facilities; and
-the proposal states that a competitive switching agreement shall not be imposed if either rail carrier can establish that the arrangement is not feasible, or unsafe or, that it would unduly hamper the ability of either carrier to serve its shippers

Citing 2010 data from the STB, AAR officials explained that an annual revenue loss of up to $7.8 billion could result from rate reductions NITL is advocating for the benefit of a select group of shippers. And without this income, they said the freight rail industry could no longer invest the billions of private dollars needed to maintain and expand the nation’s 140,000-mile rail network. As LM has reported, since 2000, freight railroads have invested more than $110 billion in privately financed capital improvements to their networks.

“NITL would like the railroad industry and users of the rail network to assume enormous risk to benefit a few powerful shipping groups,” said AAR President and CEO Edward R. Hamberger in his prepared comments to the STB.  “This is an attempt to favor a few Fortune 500 companies at the expense of the many American businesses that rely on freight rail.

What’s more, the AAR noted how the NITL’s forced switching proposal (the NITL refers to it as competitive switching) requires far more railcar switching and handling to move the same amount of goods and could affect an estimated 7.5 million carloads annually, with each having an estimated revenue loss to the railroads of $1,044 per carload according to NITL’s own calculation.

On top of the revenue impacts, the AAR said that mandatory switching can also lead to local service disruptions, degraded rail service throughout the system, and a decline in rail productivity.

“Railroads would ultimately require more resources to move the same amount of freight, reintroducing many of the network inefficiencies that have been eliminated over the last three decades,” the AAR said.

But the NITL has a different take on the situation.

“From our perspective, this would introduce a measure of head-to-head competition, between the Class I railroads in the U.S.,” said NITL President and CEO Bruce Carlton at last December’s Rail Trends conference in New York, sponsored by Progressive Railroading magazine and independent railroad analyst Tony Hatch.  “This petition is built on a discussion of competitive switching and the rights, privileges, and responsibilities that are wrapped around the whole subject of switching. This is about competition, it is not about regulation or re-regulation. We continue to say and we do want a strong, profitable, well-functioning freight railroad industry. Shippers need it and depend on it and it is a mutual goal with our railroad friends.”

In its comments on ExParte 711 filed with the STB in March, NITL said that the League is asking the STB to “abandon its existing rules on switching and decision precedents, pointing out that no captive shipper had ever succeeded in gaining access to a second potentially competitive rail carrier under existing rules.”

The NITL said at the time that its proposal would inject reasonable competition into the captive freight rail market for the benefit of shippers without economically harming the nation’s Class I railroads.

In a March 1 media briefing, Carlton said that in its July 2011 filing, NITL asked the STB to repeal its current competitive switching rule that the STB and its predecessor the ICC (Interstate Commerce Commission) has been working under for the reason that those rules do not work and did not work to provide competitive access for shippers that are captive to one railroad.

“We proposed an orderly new rule that would require competitive switching under certain conditions,” said Carlton. “We based our request for this rule and its structure on a survey of [NITL] members that told us what they needed and wanted. Switching was very important to them. And we based it on the record of Ex Parte 795, with the STB asking what the state of competition is in freight rail today, and about 30 witnesses in the shipper community told them…it was bad and that rail-to-rail competition for a captive shipper simply does not exist in the United States.”

The STB, said Carlton, asked these 30 witnesses to give them some concrete ideas, or specific proposals, which is what he said NITL did for competitive switching.

And he added that the proposal NITL provided to the STB meets the statutory standards of the Staggers Rail Act of 1980, which deregulated the freight railroad industry and put freight rail back on a financially sound basis.

Carlton observed that an element of the Staggers Act maintains that shippers need to be able to reply on reciprocal switching as a competitive balance between the market power that stronger railroads would have, but it did not work at all, which served as the impetus for NITL’s proposal to get rid of the existing approach for competitive switching and submit this new approach.

“Our proposal is very narrowly-conceived,” he said. “It is not an automatic. It is conservative and balanced and based on a set of rules that can be implemented very easily.”