DC Velocity - August 2011

The nation’s leading shipper group has asked the federal agency overseeing U.S. railroads to adopt new rules governing the practice of “reciprocal switching.” Under reciprocal switching, a railroad, for a fee, transports the cars of one of its competitors and gives a shipper that is “captive” to one railroad access to another that might not otherwise reach its facilities.

In a petition filed with the Surface Transportation Board (STB), the National Industrial Transportation League (NITL) asked the agency to require each of the four “Class I” carriers—industry lingo for the nation’s four largest rails—to enter into competitive switching agreements whenever a shipper or group of shippers can demonstrate that certain operating conditions exist to justify the arrangement.

According to the petition, shippers or their advocates must prove that a shipper’s or receiver’s facilities:

▪ Are served by only one Class I carrier,

▪ Have no effective intermodal competition for the rail movements, and

▪ Have an already existing “working interchange” (or the potential to develop one) with two Class I carriers within a reasonable distance of the shipper’s facilities.

The NITL proposal adds that a competitive switching agreement will not occur if either rail carrier can establish that the arrangement is not feasible, is unsafe, or would unduly hamper the ability of the carrier to serve its shippers.

The proposal came after two days of hearings in late June over rail competition
issues. So-called “captive shippers”
Railroads contend the STB already has
an adequate grievance process that
shippers can access at much lower
expense than ever before. The rails
argue that shippers have competitive
service options for most of their traffic,
and that a move toward reciprocal switching would degrade service and add costs
that will eventually be borne by shippers.

In a statement, NITL President J. Bruce Carlton said the proposal is not intended to reregulate the rail industry but to restore balance between railroads and captive shippers. “The new approach we are seeking would be a first step toward correcting that imbalance,” said Carlton. He added that “no shipper has ever succeeded in gaining access to a competitive rail line in today’s regulatory framework.” Officials at the Association of American Railroads were unavailable for comment.

In a research note, Ed Wolfe, a long-time transport analyst and head of New York investment firm Wolfe Trahan, said an agency mandate of reciprocal switching would lead to an increase in competition, which would negatively affect rail pricing and margins over the long term.

Wolfe said, however, that reciprocal switching would be a better alternative for the rails than “bottleneck pricing,” which would force the railroads to lower their rates, especially on high-margin coal shipments. ;