UPS Reciprocal Switching Comments to the STB Surprise Shippers

The prospect of the Surface Transportation Board adopting its proposed reciprocal switching rule for railroads became a bit murkier after parcel delivery giant UPS came out in opposition to it.

Specifically, UPS told the STB it would shift shipments away from the railroads and onto highways if rail service declines. “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 in comments on the proceeding.

UPS also told the STB in no uncertain terms that its experience in other contexts led it to conclude the implementation of reciprocal switching will result in decreased network velocity, diminished capital investments by railroads, and deteriorating rail intermodal service levels.

The board issued its proposal rulemaking in July in response to a petition filed by the National Industrial Transportation League six years earlier. It drew overwhelming support from shipper and rail customer groups, and just as strong pushback from the nation’s largest railroads and their chief lobbying group, the Association of American Railroads.

Reciprocal or competitive switching occurs when a railcar from one railroad is interchanged on the tracks of another railroad to arrive at a customer’s siding for loading or unloading freight.

At September’s Intermodal Expo in Houston, top rail executives said that if they are required to adopt such a practice it would prove to be so costly it would damage their ability to make enough money for financing needed infrastructure improvements, resulting in reduced service quality.

In addition, the railroads have managed to persuade several right-wing organizations to write a letter to Congress supporting AAR’s view that permitting reciprocal switching amounts to reregulation and will take us back to the “bad old days” before passage of the Staggers Act in 1980.

Led by the Competitive Enterprise Institute, the groups endorsing AAR’s position are the American Conservative Union, Campaign for Liberty, John Locke Foundation, The Maine Heritage Policy Center, National Taxpayers Union, R Street Institute, Taxpayers Protection Alliance and the Grassroots Institute of Hawaii, which for some unexplained reason feels called upon to comment on interstate rail regulation on the Mainland.

Shippers dispute the AAR claim that competitive switching will damage the profitability of Class 1 railroads or that it is the first step to pre-Staggers Act reregulation. They also accuse the railroads of threatening “the sky is falling” type warnings of imaginary consequences that in reality would never materialize in order to scare the unwary and intimidate the STB.

“According to the experts, if approved by the STB competitive switching will have minimal impact if any, and won't take effect for several years into the future and on a case-by-case basis,” notes Paul Delp, president of Lansdale Warehouse Co. and co-chairman of the International Warehouse Logistics Association Transportation Advisory Committee (formerly the Rail Council).

“The Class 1 railroads are losing coal and oil unit trains but still can’t think creatively and will guard their turf at all costs. The two Canadian Class 1s have operating ratios in the 50s and have had competitive switching for years,” Delp says. He points out that both in Canada, where competitive switching has regularly taken place for more than 100 years, and under the STB’s proposal, railroads are directly compensated for every car they are required to switch.  

“In the U.S. the Class 1 railroads have operating ratios in the 60s, which is remarkable in the transportation world, but they’ve cut service, furloughed crews, and parked cars and locomotives while increasing rates on linehaul and accessorial charges like demurrage,” asserts Delp, who also is president of the American Chain of Warehouses and active in shipper groups supporting the proposal.

One such group, the Rail Customer Coalition, observes that the STB is simply adhering to direction provided by Congress in recent rail reform legislation. “Current regulations, such as the board’s archaic policies that prevent customers from requesting to switch their cargo from railroad to another, actually shield the railroads from competing with one another. The problem isn’t re-regulation; it’s existing regulations that are nearly 40 years old,” RCC says.

Rail Costing Controversy

In a separate STB proceeding shippers slammed a consulting company’s report on the board’s handling of rail rate cases which recommends that the board maintain the status quo in regard to Stand Alone Costing formulas.

STB chairman Daniel R. Elliott III said the board soon will adopt changes recommended by the report, which include holding earlier technical conferences, formalizing the prioritization calls that need to be made, and formalizing the staff training program.

However, the Rail Customer Coalition says the failure to support changes in the SAC procedures “embraces the status quo.” The group also points out that the consulting group commissioned to produce the report, InterVISTAS, has represented the railroads in the past and that their report failed to include outside input from rail customers.

“The effort to improve the integrity of the STB’s rate review process is too vital to be undermined by such an incomplete and poorly-developed report,” said American Chemistry Council president Cal Dooley in separate comments. “Despite clear direction from the STB, InterVISTAS conducted its report by focusing on rail profitability, while disregarding the need to justify high rates entirely.”

RCC notes that the report was commissioned by the STB in June 2015, seven months before Congress provided a new policy direction for the STB regarding rail rate regulation when it unanimously passed the Surface Transportation Reauthorization Act in December 2015.

RCC also notes that the STRA mandated an independent study of the handling of rate cases be conducted by the Transportation Research Board of the National Academy of Sciences. The resulting TRB report called the board’s current rate review process arbitrary and unreliable and said it should be replaced with a “faster, sounder and more reliable tool that compares disputed rates to those charged in competitive rail markets for comparable shipments.”