NITL asks Surface Transport Board to craft rules governing rail "reciprocal switching" agreements

Shipper group seeks competitive switching pacts among four largest railroads.

By Mark B. Solomon

The nation's leading shipper group said today it has asked the federal agency overseeing the nation'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 competitor and gives a shipper that is "captive" to one railroad for its traffic 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 a 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 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 either not feasible, unsafe, or would unduly hamper the ability of the carrier(s) to serve its shippers. The rail industry has 20 days to comment on the NITL proposal. The STB then has up to five months to determine if it will open up a rulemaking proceeding.

The proposal comes after two days of hearings late last month in Washington, DC, over rail competition issues. So-called "captive shippers" argued at the hearing—as they have for many years—that they are being victimized by monopolistic practices by the railroads that have led to inconsistent service and skyrocketing prices. They have asked Congress or the STB to reform the industry's practices.

Railroads argue that shippers generally have competitive service options for most of their traffic, that shippers have adequate redress before the STB, 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 re-regulate 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.

The hearings came amid a continued push by Sen. Jay Rockefeller, (D-W.Va.) to pass legislation calling for significant rail reform. Rail interests have called Rockefeller's actions tantamount to re-regulating the industry.

Despite his powerful position as chairman of the Senate Commerce Committee, Rockefeller acknowledged at the STB hearing that his efforts have scant support among other lawmakers and instead implored the STB to take action.

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.

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