Cash Market Moves

STB Proposes Rule to Provide Competitive Rail Service

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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Class 1 railroads are not in favor of the Surface Transportation Board's proposal for new regulations governing reciprocal switching. Pictured is a Union Pacific train moving through Council Bluffs, Iowa. (DTN photo by Mary Kennedy)

Last week, after five years of study, the Surface Transportation Board proposed new rules for "reciprocal" or "competitive switching," which refers to a situation where a railroad that has physical access to a facility will switch rail traffic to that facility for another railroad that does not have physical access to that facility. The fees are then incorporated into the final rate the shipper pays. The idea behind the proposal is to allow all shippers another alternate for moving their commodities that may be cheaper and, in some cases, faster.

With a large corn and soybean crop looming, on top of a just-harvested high-yielding winter wheat crop and cheap grain prices across the board, any savings afforded to a shipper to move grain would be welcome. It's uncertain if that will be the case and how many shippers will benefit if the new rules are implemented.

The effort to draft new reciprocal switching rules began on July 7, 2011, when the National Industrial Transportation League (NITL) filed a petition to institute a rulemaking proceeding to modify the Surface Transportation Board (STB) standards for reciprocal switching. Following that action, STB took public comment and held a hearing on the issues raised in the petition.

On July 25, 2016, the STB stated on its website that it would grant NITL's petition and institute a rulemaking proceeding to modify the board's standards for reciprocal switching. "In this decision, the board proposes new regulations governing reciprocal switching which would allow a party to seek a reciprocal switching prescription that is either practicable and in the public interest or necessary to provide competitive rail service," the STB stated.

The Interstate Commerce Act makes three competitive access remedies available to shippers and carriers: the prescription of through routes, terminal trackage rights and reciprocal switching.

Competitive access generally refers to the ability of a shipper or a competitor railroad to use the facilities or services of an incumbent railroad to extend the reach of the services provided by the competitor railroad. Under reciprocal switching -- or as it is sometimes called, "competitive switching" -- an incumbent carrier transports a shipper's traffic to an interchange point, where it switches the cars over to the competing carrier, notes the STB.

According to the STB, "The competing carrier pays the incumbent carrier a switching fee for bringing or taking the cars from the shipper's facility to the interchange point, or vice versa, which is incorporated into the competing carrier's total rate to the shipper. Reciprocal switching thus enables a competing carrier to offer its own single-line rate to compete with the incumbent carrier's single-line rate, even if the competing carrier's lines do not physically reach a shipper's facility."

On April 4, 2014, the National Grain and Feed Association presented testimony on behalf of itself and eight other national agricultural producer and agribusiness organizations urging the STB to develop and propose revised competitive switching rules between Class I railroads that would be more conducive and accessible to captive agricultural rail shippers and receivers.

"During a March 25-26, 2014, public meeting, the agricultural organizations reiterated their conceptual support for a petition filed by the National Industrial Transportation League (NITL) to revise the STB's existing competitive switching rules. But the groups reiterated their contention that the NITL proposal falls far short of what would be needed to provide meaningful relief to captive agricultural shippers," said the NGFA.

After reviewing all comments prior to its July 25 decision to institute a rulemaking proceeding, the STB said: "We are concerned that reciprocal switching based on the proposed conclusive presumptions could have adverse effects on categories of shippers not eligible under NITL's proposal. If NITL's proposal places downward pressure on the rates of those shippers who are eligible, then there may be an incentive for railroads that cannot make up any shortfall to raise the rates of ineligible shippers or degrade service in an effort to cut costs."

"For these reasons, the board prefers a reciprocal switching standard that makes the remedy more equally available to all shippers, rather than a limited subset of shippers. Imposing reciprocal switching on a case-by-case basis would also allow the board a greater degree of precision when mandating reciprocal switching than is afforded under the approach advanced by NITL. We believe such an approach would allow the board to better balance the needs of the individual shipper versus the needs of the railroads and other shippers."

Here is a link to the full decision: https://goo.gl/…

RAIL INDUSTRY OPPOSES DECISION

On July 27, Association of American Railroads (AAR) President and CEO Edward R. Hamberger made the following statements in response to the Notice of Proposed Rulemaking (NPRM) by the Surface Transportation Board (STB).

"The freight rail industry acknowledges the complexities the STB had to take into consideration in arriving at this proposed rule, but, at the end of the day, the board should have dismissed the petition without further proceedings, as imposing new regulations like this are a step backward from the deregulatory path that has allowed railroads to make the capacity investments required to meet customer demand and further modernize a nationwide rail network that benefits shippers and consumers."

"The freight rail industry's position remains unchanged: forced access is an ill-conceived approach that compromises the efficiency of the entire network by gumming up the system through added interchange movements, more time and increased operational complexity."

"Forced access would be a step backwards for the supply chain in our country as railroads would ultimately require more resources to move the same amount of freight, which would impact operational efficiencies introduced under the Staggers Rail Act," added Hamberger.

Hamberger noted existing STB regulations already protect rail shippers as railroads voluntarily switch traffic under the current system, and by law, if freight can get from its origin to final destination only if it is carried by two or more railroads, railroads must cooperate to move the shipments.

The STB noted on its website that comments on the proposed rule changes are due by Sept. 26, 2016. Replies are due by Oct. 25, 2016. Requests for ex parte meetings with board members are due by Oct. 10, 2016, and meetings will be conducted between Oct. 25, 2016 and Nov. 14, 2016. Meeting summaries are to be submitted within two business days of the ex parte meeting.

Mary Kennedy can be reached at mary.kennedy@dtn.com

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(AG/CZ)