UPS warns it may pull traffic from rails if switching proposal succeeds

UPS Inc., the nation's largest transportation company and a major user of railroad service, has warned that it may be forced to pull traffic off of the rails should service levels deteriorate as a result of proposed regulatory changes governing how the rails exchange, or switch, their carload traffic.

In comments filed Wednesday with the U.S. Surface Transportation Board (STB), the federal agency that oversees what remains of rail regulation, UPS said the agency's proposal to implement a railcar switching scheme will compromise the velocity of the nation's rail network and force the railroads to incur significant capital costs that might hurt their service and raise prices.

"Ultimately, if rail intermodal service levels fall below UPS' time-in-transit obligation standards, we would have no business option" but to shift intermodal traffic back to the highway, UPS said.

Atlanta-based UPS moves about 3,000 containers and trailers on the rail network each day, and spends approximately $1 billion a year with the railroads. It has used the railroads for about 40 years, and was long considered the rail industry's single-largest intermodal customer. UPS ships the equivalent of 6 percent of the nation's gross domestic product. It also wields significant lobbying clout on Capitol Hill and with the federal agencies involved in transportation.

UPS would not be directly affected by the STB's railcar switching proposal, as it is aimed at shippers of bulk commodities that are captive to the railroads. However, Thomas F. Jensen, UPS' vice president of transportation policy, said in a phone interview today that the company is concerned that any fallout from rail-carload service problems would "bleed over" into the intermodal arena where UPS is a huge player.

With abundant measurement tools at its disposal, UPS would know if rail service levels were being impacted and, by extension, if its own commitments were being jeopardized, Jensen said.

Shipper and rail interests have been engaged in a five-year dispute before the STB over the need for new regulations governing the switching of carload traffic. In late July, the STB proposed to modify language to make it easier for shippers to prove the need for "reciprocal switching," where one railroad, for a fee, switches carloads to a rival carrier to give shippers access to facilities they might not otherwise reach.

Under the STB proposal, a shipper seeking reciprocal switching for its freight must show that the arrangement would be, in the agency's words, "practicable and in the public interest," or that it is "necessary to provide competitive rail service." The current standard, adopted in 1985 by the old Interstate Commerce Commission, the STB's forerunner agency, requires shippers to prove that reciprocal switching would be necessary to "prevent an anticompetitive act." Since 1985, almost no shipper requests for reciprocal switching have been filed, and none have been granted.

In July 2011, the National Industrial Transportation League, which represents industrial companies that are heavy rail users, proposed that a captive shipper or receiver—a business that can only use one mode or even just one railroad—be allowed to gain access to a second railroad as long as the customer's facility is located within a 30-mile radius of an interchange where regular switching occurs. The switch would not take place if the railroad faced with the revenue loss from switching could prove that the practice was unsafe or would impair existing rail service, under the NIT League proposal.

Rail interests and free-market advocacy groups have criticized the NIT League proposal and the STB's July decision as steps toward re-regulating an industry that has been free of most economic regulation since 1980, and which in the ensuing decades has dramatically improved its service and prospered without the need for taxpayer dollars.

Big shipper interests said the actions represent commonsense reform that will require railroads to compete with one another and free currently captive shippers from the twin burdens of high freight rates and less-reliable rail service.