DOJ Weighs in on Reciprocal Switching

The U.S. Department of Justice (DOJ) has submitted comments to the Surface Transportation Board (STB) on reciprocal switching, in advance of STB’s March 15-16 hearing on the subject that has divided freight railroads and many of their major customers.

DOJ, which filed its comments on Feb. 28 (download below), commended the STB for “working to improve competition in freight rail service by considering whether to require certain reciprocal switching agreements among railroads.”

STB first proposed reciprocal switching regulations in 2016 (download below), following The National Industrial Transportation League’s (NITL) petition for rulemaking submitted in July 2011. A 2021 Executive Order on competition encouraged STB to review them.

This potential STB decree means “that a railroad with sole physical access to a shipper facility transfer (switch) a shipper’s cars to a junction point with a second (competing) railroad,” explains Railway Age Capitol Hill Contributing Editor Frank N. Wilner. “The second railroad pays a compensatory per-car switching fee whose reasonableness is determined by the STB.

“To obtain reciprocal switching—known as ‘interswitching’ in Canada, where it has been in use for more than a century—the shipper must prove to the STB that the reciprocal switch is feasible and necessary to enhance competition.”

DOJ in its Feb. 28 filing called the STB’s proposed reciprocal switching rule “a well-tailored first step,” and provided three reasons for supporting it:  

1. The proposed rule would expand access to and increase the “likelihood of direct competition. … In its recent Notice, the Board noted that commenters also believe the Board’s proposal would, among other things, ‘foster competition among rail carriers at a time when (due to mergers and acquisitions) shippers’ rail transportation options are limited’ and ‘promote competition and efficiency in the U.S. economy overall.’” Even if reciprocal switching is mandatory, “a shipper will receive competitive bids only if there is another railroad nearby willing to make a competitive offer to carry the freight.” DOJ noted, however, that shippers have raised concerns that “when they can obtain an offer for switching, the proposed rate is often prohibitive. This is likely due to one of two possibilities. First, railroad A may set the costs for switching too high for railroad B to make a competitive offer. Second, railroad B may choose not to make a competitive offer against one of its few rivals to minimize competition between railroad A and railroad B.” That’s why, DOJ wrote, the proposed rule would not be a “substitute for remaining vigilant against consolidation and other conduct that harms competition or further reduces the number of alternatives available to shippers.”
2. The proposed rule is not “burdensome,” and can be supported by Class I railroads. Canadian Pacific and Canadian National are already subject to Canada’s interswitching requirement on much of their track, DOJ noted. “A number of shippers with facilities in Canada have reported using this mechanism to enjoy the benefit of rate competition on long-haul routes. There is every reason to believe a similar system would benefit captive shippers in the United States along with their customers, suppliers, and ultimately the American public.”
   While U.S.-based railroads have argued that “mandatory reciprocal switching would be too burdensome, would harm rail traffic, and would decrease incentives for investment,” such concerns “are exaggerated. … U.S. railroads already provide each other with reciprocal switching on a bilateral, voluntary basis with regularity and without the railroads’ asserted parade of horribles coming to pass. Expanding an activity railroads perform hundreds of times daily is not a serious threat to the operation or financial health of the rail industry. In fact, following the adoption of the interswitching regime in Canada, both Canadian National and Canadian Pacific enjoyed increased freight revenue and higher net income while service also improved.”
   DOJ noted, too, that as STB Chairman Martin J. Oberman “recently recognized, ‘since 2010, the [Class I railroads’] owners have taken home more than an astounding $183 BB ($196 BB in inflation adjusted dollars) in buybacks and dividends, far more than the $138 BB ($150 BB in inflation adjusted dollars) spent on the [railroads’] infrastructure.’” Adding the proposed reciprocal switching rule “may require additional investment and may trim these profits, dividends, and stock buybacks, but it will hardly constitute a serious threat to the operation and financial health of the rail industry.”
3. “Reciprocal switching minimizes the need for complex rate regulation. Increased implementation of switching should increase competition and reduce the need for time-consuming and costly rate cases or the imposition of more complicated rate-ceiling methodologies. For shippers to enjoy the benefit of this competition, however, railroad B cannot be hamstrung by onerous and opaque reimbursement requirements that turn a true alternative into a false choice. Although the Department defers to the Board’s superior rate-regulation expertise, we strongly encourage the Board to develop a transparent, streamlined rate structure along the lines proposed by the National Industrial Transportation League that would compensate railroad A sufficiently and protect the investments railroad A has made in its physical infrastructure without rendering railroad B offers uncompetitive.”

For the railroad industry’s take on the issue, read “AAR to STB: Reciprocal Switching a ‘Wealth Transfer to More-Profitable Entities’”

FURTHER READING:

• Reciprocal Switch Peril Grows
• Reciprocal Switching’s Potential Impact on Passenger Rail