Shipper group says reciprocal switching proposal could save rail users up to $1.2 billion a year

A leading shipper group said today that rail customers would save between $900 million and $1.2 billion a year in freight costs if the federal government adopted the group's proposal governing reciprocal switching between the nation's four major railroads.

The National Industrial Transportation League (NITL), in unveiling a 160-page report supporting its July 2011 proposal, said new switching rules would provide badly needed service alternatives to so-called captive shippers, companies that cannot use another mode of transportation or even another railroad to move their traffic.

Under reciprocal switching, a railroad, for a fee, switches carload freight to another railroad to give a captive shipper access to facilities it might not otherwise reach. The switching charges are paid by the receiving railroad. The customer pays the originating railroad, which would build the switching fee, and perhaps an additional amount, into its overall charges to compensate it for the revenue foregone by switching the traffic to its rival for carriage.

The NITL proposal would allow a captive shipper or receiver to gain access to a second rail carrier if the customer's facility is located within a 30-mile radius of an interchange where regular switching occurs. Only true captive customers—defined by NITL as a business with no alternatives from other railroads or other modes— could qualify. The switch would not occur if the affected railroad could prove the practice would be unsafe or is unfeasible or harmful to existing rail service, the shipper group said.

NITL said the 30-mile interchange distance is not "set in stone," adding that captive customers can qualify for switching opportunities if they have, or can develop, a viable interchange with two Class I carriers within a reasonable distance of the shipper's facilities.

The cost-savings forecast by NITL was based on a government formula known as the "Revenue Shortfall Allocation Method," or RSAM. Developed by the Surface Transportation Board (STB), the federal agency overseeing the rail industry, the formula measures the average mark-up a railroad would charge all of its "potentially captive" traffic to earn what the agency would deem to be adequate revenue on the movement.

NITL hired a consulting firm to analyze the STB's confidential database of waybills to assess the economic impact on shippers and carriers. The group also retained a second firm to assess the switching environment in Canada, where the practice is required by law. Bruce Carlton, NITL's president and CEO, said in a press briefing today that the Canadian model has been in place for decades and has worked well for shippers and carriers.

The four U.S. Class I railroads analyzed were CSX Corp., Norfolk Southern Corp., Burlington Northern Santa Fe railway, and Union Pacific Corp.

Under the 1980 Staggers Rail Act that deregulated the industry, the STB can order the creation of reciprocal switching agreements so captive shippers can have access to the services of a second railroad. However, Carlton said no captive shipper has ever gotten access to competition under the current rules, adding that it is why new rules are needed.

Carlton said the NITL proposal is not a bid to re-regulate the rail industry. He called it a focused and balanced effort to provide captive shippers with enhanced service alternatives. He said the railroads would benefit because the lower rates that would be spawned by the switching rules would result in more shipper traffic. Carlton added that railroads would be motivated to keep more of the traffic that might otherwise be switched. That would mean little, if any, switching would take place, he said.

The group has been pressing the STB for 18 months to begin a rulemaking into the case. The board declined to do so but created a docket (Ex Parte 711) to accept information from interested parties on the NITL proposal.

Holly Arthur, a spokeswoman for the Association of American Railroads (AAR), declined to comment, saying the AAR would wait until early next week to respond. The railroads have argued that shippers have alternatives to get their goods moved and that they have adequate redress. The association says that a move towards mandatory reciprocal switching would degrade service levels, add costs that would eventually be borne by shippers, and be tantamount to re-regulating the industry.

Lawrence H Kaufman, a long-time rail executive, consultant, and writer, said that the "math doesn't work" to support the NITL proposal, predicting that the railroads won't go along with an approach that effectively takes money out of one of their members' pockets.

One possible scenario, according to Kaufman, is that the originating railroad will raise shippers' rates to high levels in order to recoup foregone revenue. This in turn would cause angry shippers to descend on Capitol Hill to demand Congress address the issue of sky-high rail charges, which could put the industry on a slippery slope toward re-regulation. That scenario, he believes, would suit NITL just fine.