The Surface Transportation Board is considering a revived mandate for freight railroads, which would add new inefficiencies to supply chains.
The Surface Transportation Board is considering a revived mandate for freight railroads, which would add new inefficiencies to supply chains.
O n Monday, Karen Hedlund, President Biden’s nominee for the Surface Transportation Board, was sworn in to her post. The five-member board, which regulates railroads, now has three Democrats and two Republicans. That will make it easier to take up an Obama-era regulatory proposal that has languished for years: reciprocal switching.
At a time when supply chains are already stressed and transportation needs to be made easier, this mandate would add a new stressor to the mix.
Reciprocal switching means making one rail network available to competitors. Here’s a description from the proposed rule in the Federal Register:
Under reciprocal switching, an incumbent carrier transports a shipper’s traffic to an interchange point, where it switches the rail cars over to the competing carrier. The competing carrier pays the incumbent carrier a switching fee for bringing or taking the cars from the shipper’s facility to the interchange point, or vice versa.
Freight-rail networks in the U.S. are privately owned and operated. The railroad that owns the network gets to decide who uses it. Switching is often necessary to move goods and happens already by agreements between railroads. But the reciprocal-switching proposal being considered by the STB in a hearing on March 15–16 would take that power away from railroads and put it into bureaucrats’ hands.
The first notice of proposed rulemaking on reciprocal switching is from 2011. Nothing was done until 2016, when the STB formally proposed reciprocal-switching regulations. The proposals were ignored when Republicans had a 3–2 advantage on the STB under President Trump. Reciprocal switching resurfaced in President Biden’s July 2021 executive order on competition as a measure “to further competition in the rail industry and to provide accessible remedies for shippers.” Let’s consider those aims.
Competition in the rail industry is somewhat unusual because, unlike air travel, sea travel, or road travel, the infrastructure is privately owned. Railroads own the tracks, and they get to decide who uses them. That creates the potential for “captive shippers,” rail customers located along one railroad who only have one choice if they want to ship by rail.
Promoting competition and protecting shippers have been major reasons for the regulation of railroads from the very beginning. The Interstate Commerce Commission (ICC) was the first independent federal regulatory agency, and it was created in 1887 partly in response to farmers who felt taken advantage of by railroads. The ICC set rates and chose which railroads operated which routes, making railroads one of the most-regulated industries in the country.
Railroads were deregulated in 1980 with the passage of the Staggers Act, around the same time airlines and trucking were deregulated. Consolidation followed, with railroads snapping up less-efficient competitors and reducing the number of Class I railroads in the U.S. from 40 in 1980 to today’s seven.
Simply counting the number of competitors in one sector is an antiquated way to do antitrust. Since the passage of the Staggers Act, and despite all of that consolidation, freight rates have declined, costs to the railroads have decreased, and innovation has increased. It has also made the freight-rail industry economically self-sufficient. There were fears in the ’70s that freight rail would have to be nationalized just like passenger rail was in 1971 with the creation of Amtrak. Because of deregulation, freight rail has become profitable, and those fears no longer have merit.
One big advantage of economically self-sufficient freight railroads is maintenance. You’ll notice that freight rail hardly enters the infrastructure conversation in the U.S. That’s because freight railroads maintain their own tracks quite well. The railroads maintain their tracks well because they have the money to do so, and they alone suffer the consequences if they are in poor condition. Mandated reciprocal switching wouldn’t affect track ownership, but it would reduce the incentive to maintain the tracks because it would spread the burden of poor maintenance across multiple competitors.
When considering rail competition, one must also consider competition with other modes of transportation. Railroads don’t just compete with each other; they also compete with trucking companies. If a shipper has only one rail option, but five trucking options, it isn’t really a “captive shipper.” If President Biden wants to increase competition, he could waive, and call on Congress to repeal, the Jones Act and allow another mode of transportation, water, to become competitive in more markets. Representatives Mike Lee (R., Utah) and Tom McClintock (R., Calif.) have already introduced repeal legislation in Congress.
All things considered, the effects of rail consolidation haven’t been bad for shippers or railroads. As a brief from the International Center for Law and Economics says, “Shippers pay appropriate market rates, innovation is pursued aggressively, and infrastructure is maintained. If regulators were to act on the belief that a certain minimum number of Class I railroads is needed to foster competition, they would risk undercutting benefits to end-customers and shippers alike.”
Mandating reciprocal switching wouldn’t undo all of the progress of deregulation in one move, but it would certainly be a step backwards in the direction of the ICC-era regulation that nearly ruined the American freight-rail sector. Freight railroads sometimes allow other railroads to access their networks now, but they do so when it makes economic sense based on privately negotiated agreements. Replacing that with mandates from Washington bureaucrats will not be an improvement.
When reciprocal switching was proposed under the Obama administration, freight railroads were not the only ones to oppose it. UPS also opposed it. UPS uses all modes of transportation to deliver parcels and is one of the rail industry’s largest customers. It said in a 2016 letter that “implementation of a new reciprocal switching scheme will lead to decreased network velocity, diminished capital investments into the freight rail network, and deteriorating rail intermodal service levels.” It also warned that in the face of reduced rail efficiency, it would be forced to use trucks to transport more goods, which is worse for the environment, safety, and highway traffic congestion.
The union representing rail employees, SMART-TD, also opposed reciprocal switching. Their reasoning had nothing to do with efficiency (they care little for that in any context). Their concern, from a 2016 letter, was that reciprocal switching would disrupt collective-bargaining agreements. “It is not clear which entity’s employees would be performing the work where reciprocal switching is required, and, where such employees are not employees of the incumbent railroad, what familiarization training might be applied,” said SMART-TD in comments to the STB in 2016. The union was also concerned that if the railroads took a revenue hit because of reciprocal switching, it could result in pay cuts or layoffs.
Reciprocal switching wouldn’t affect passenger rail directly, but Amtrak was also concerned because it has to share tracks with freight trains in most of the country. “Implementation of reciprocal switching likely will require additional freight operations to move trains and freight cars to different and additional interchanges,” the 2016 letter from Amtrak said. “Additional switching operations needed to interchange freight traffic may increase rail network congestion that could adversely affect Amtrak trains.”
This puts President Biden in a tricky spot because, as Veronique de Rugy noted for NR in October, Delaware-based DuPont supports reciprocal switching since it is a major shipper of chemicals. By calling for reciprocal switching in his executive order on competition, Biden might be putting the home-state interests of “Uncle Dupie” above his professed love for Amtrak.
By calling for reciprocal switching, though, Biden is certainly putting the interests of shippers above his professed desire to ease the supply-chain crisis. The American transportation system needs to have inefficiencies taken away, not added, by federal regulators. The new Democratic majority on the STB will have the ability to mandate reciprocal switching if it wants. In view of the economic effects, and especially in the present environment, it should not.