STB railroad competitive switching hearing kicks off today

The Department of Transportation’s Surface Transportation Board’s (STB) public hearing “Petition for rulemaking to adopt revised competitive switching rules” kicked off today after being cancelled last fall due to the federal government shutdown.

The proposal for railroad competitive switching was established in July 2011, when the National Industrial Transportation League (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.

Various industry stakeholders, including shippers, railroads, analysts, and government officials will be speaking at the hearing today and tomorrow.

As previously reported, 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

The Association of American Railroads (AAR) made its case against this proposal in comments filed with the STB last May, explaining it could result in United States Class I railroads losing revenue up to 80 percent of their entire capital budgets.

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.

“This proposal is a solution looking for a problem,” Association of American Railroads (AAR) President and CEO Edward R. Hamberger said in a statement issued this week. “Railroads already voluntarily switch traffic when it makes economic sense for all parties.  Freight railroads are among those American industries with very high fixed costs, as they operate on infrastructure they own, maintain and continuously upgrade. Since 1980 alone, average inflation adjusted rail rates are down 42 percent, while railroads have spent more than $550 billion to build, maintain and upgrade track, signals, bridges, tunnels, and equipment. But this proposal would undermine the benefits all rail customers have seen thanks to these investments, and would all but ensure a return to the days when most rail customers were unhappy.”

The AAR’s top executive also pointed out that other existing STB regulations provide various options if a shipper believes its rates are unreasonable, noting that of the 46 shipper complaints filed with the STB since 1996, 37 of the complaints were decided in favor of shippers or settled through commercial negotiations.

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.
“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, 2013, 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 2013 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.”

The American Chemistry Council (ACC) is clearly in the NITL’s corner. This week, it cited this report, which was released by Escalation Consultants on behalf of various rail shipper groups, including, the Alliance for Rail Competition, ACC, NITL, American Forest and Paper Association, Chlorine Institute; Consumers United for Rail Equity; National Industrial Transportation League; National Rural Electric Cooperative Association; and the Steel Manufacturers Association, indicated that the premium on rail shipments increased 90 percent from 2005-2011, even though demand dipped and rail market forces lessened.