NITL submits comments to STB for competitive switching proposal

Earlier today, the National Industrial Transportation League submitted its comments on the Surface Transportation Board’s (STB) Ex Parte 711, its July 2011 request 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.

NITL officials have stated 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 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.

In its comments, the NITL said 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 media briefing earlier today, NITL President and CEO Bruce Carlton said 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.”

Last July, the STB opened Ex Parte 711 and said it had a number of questions on the NITL proposal, which Carlton said were very fair questions, including:
-an impact analysis of the NITL proposal in terms of the effect on shippers and Class I railroads;
-how it would affect pricing, rates, and railroad revenues;
-how it would affect network efficiency; and
-it requested an access fee methodology

In order to do the legwork to get the feedback the STB was requesting of NITL, Carlton said that the STB would allow NITL to access its confidential waybill sample, which is part of a database that is available to the public and industry practitioners in a masked form, with confidential data not available to a user.

“The Board was not looking for a qualitative argument,” said Carlton. “It wanted a data-driven quantitative analysis to answer the questions about the impact of our proposal on shippers and carriers, which is what we have done [in the filing].”

And he added that the STB also asked NITL to look at the impact of changing the “30 mile” component, and using the 4‐year average Revenue Shortfall Allocation Methodology (“RSAM”) instead of the 240% R/VC. The RSAM measures the average mark-up that a railroad needs to charge for all of its potential captive traffic in order for that railroad to earn adequate revenues.

In its analysis, the NITL calculated what it called a competitive benchmark rate, which is what is moving on the rails with prices not set by competition but by market power. And the average competitive benchmark is added to the access fee and that total is compared to what was in the STB’s waybill sample.

“If a benchmark fee is $2,000 and the access fee is $300, then the competitive rate is $2,300, while the waybill sample shows $4,000,” said Carlton. “That $1,700 differential is the savings that our shipper could experience as well as the revenue loss the Class I carrier could experience.”

Talking that example a step further, Carlton noted how 2010 total gross revenue of the four U.S.-based Class I railroads was $52.92 billion, with the NITL’s competitive switching proposal yielding a savings of about $1.293 billion or 2.4 percent of total carrier revenue. And compared to 2010 carrier net revenue of $14.3 billion, he said the impact would be roughly 9 percent.

“We think this result is very much on the high side,” he said. “We are quite certain that when we were identifying the number of carloads—as a proxy for the number of shippers—we were quite certain it was on the high side, as it is a problem with the data. The data on the waybill does not tell you where somebody’s factory actually is.”

Association of American Railroads President and CEO Ed Hamberger said last December that reciprocal switching is not a positive for the Class I rails.

“Like NITL, we will be doing our best to try to show what the impact would be, not just from a revenue standpoint from a freight rail perspective but also on efficiency and the effect on service,” he said at the RailTrends conference hosted by Progressive Railroading Magazine and independent rail analyst Tony Hatch. “I am told that to spot a car after it is loaded and to bring it back into service on a single line can be as few as six discrete moves to that car. If you have mandatory reciprocal switching, that can grow to 16-to-20 moves. Each one of those moves is an opportunity for something to go wrong, and each move takes time and equipment and personnel and clogs up rail yards. We believe that EP 711 would have an adverse impact on revenues and operations.”