As the proverb provides, “Be careful for what you wish,” as wishes sometimes deliver unintended consequences. Railroads may have experienced a wishes backfire July 8 when the U.S. 7th Circuit Court of Appeals vacated a Surface Transportation Board (STB) Final Rule allowing for “reciprocal switching.”
Under certain circumstances where one railroad has a monopoly at origin or destination, the vacated rule would have forced competition by requiring that carrier to interchange affected freight traffic with a nearby competitor.
The rule was opposed by railroads, long averse to access regulations. It also drew criticism from some captive shippers (those lacking effective transportation alternatives to rail) who seek more aggressive economic regulation. It was a railroad challenge that begot the court decision. Railroads complained that the STB exceeded its statutory authority in publishing the rule, and that specific aspects of the rule were “arbitrary, capricious and unsupported by the record.”
Shippers more recently chose a separate tack of asking the Justice Department’s Antitrust Division to encourage the STB to go further—to excise a separate longstanding regulatory provision allowing for reciprocal switching. They view that provision as constraining their statutory rights to even greater regulatory relief than as provided by the STB’s now vacated rule.
The court mostly agreed with the railroads’ objections to the Final Rule. A crucial finding was a provision in the Final Rule that in evaluating whether to prescribe reciprocal switching as “in the public interest,” the Board did not use “a threshold finding of inadequate service.” The court rejected the Board’s view that such a finding is only one aspect of “a balancing of the respective interests of shippers, carriers and the public.”
Absent from the 7th Circuit’s unanimous ruling was any mention of the second standard under the reciprocal switching statute that allows the Board to order switching where it is “necessary to provide competitive rail service.”
Because the Board’s rule did not rely on the “necessary to provide competitive rail service” standard in the statute, the provision was not a subject of the railroads’ court challenge and was not considered by the court.
Shippers, however, may point to several cases cited by the court showing the “competitive rail service” standard distinct from the “public interest” standard—including one involving rate levels. Thus, shippers desiring lower rates as well as better service may seek in a subsequent STB rule—if there is one—reciprocal switching based on a lack of competition regardless of an inadequate service finding under the public-interest standard.
Although the now vacated Final Rule allowed the STB to prescribe a reciprocal switching remedy under the public interest standard where rail service is “inadequate,” the court faulted the STB for failing to provide a brightline determination of inadequate service—the court calling it “daylight” between what is adequate and what is inadequate.
The statute, said the court, authorizes the STB to order reciprocal switching based on “some actual necessity or compelling reason,” but failure to require evidence of inadequate service, rather than a balancing of interests, doomed the Final Rule. A fix here could contain risks for railroads who disfavor concrete definitions of service adequacy, as they may be used in common carrier obligation cases where railroads are liable for damages.
What shippers avoid—and which the court sidestepped as it was not asked to rule—are crucial questions that should have given, and should give in the future, the STB pause in writing a reciprocal switching rule. The questions are significant regardless of whether a reciprocal switching rule turns on service inadequacy or competition factors.
What if the second railroad chooses not to make a competitive offer to haul the traffic switched from the incumbent? The court observed that the Final Rule “simply requires the incumbent to offer a switch to a competing Class I carrier.” This is not academic, as with railroad duopolies in the East and West, near every situation where reciprocal switching might be appropriate finds but one competing railroad. Expect it to be painfully cognizant that what it does to a putative competitor today, the putative competitor may do to it tomorrow. Economists agree that to disrupt market power of a monopolist, a third competitor is required.
Additionally avoided by shippers are questions as to the junction points to be used for reciprocal switching; how the Board should determine whether the switching will harm shippers not subject to the switch; how maximum charges for switching are to be calculated; and whether the incumbent railroad is entitled to additional compensation.
The court’s vacating the STB’s Final Rule and remanding it for repair, gives the agency a clean slate—but to go where? Based on Chairperson Patrick Fuchs’ recent assemblage of an advisory team that Board sources told Railway Age is engaged in a “deep dive” on issues including competition and deregulation, railroads best brace for a new and—owing to court assistance they provoked—legally sound forced (their term) access rule.
As for captive shippers’ desire for a competitive (their term) access rule, they may yet be satisfied if the STB writes a new rule including competition standards, although an earlier competition-based rule, which the STB abandoned in 2023, was roundly criticized by shippers.
A shipper stakeholder, asking not to be identified, is not happy as to how the proceeding played out, telling Railway Age, “The shippers’ objective was a rule based on competition factors, but the STB drop-kicked that concept in September 2023 when opting for a service-inadequacy based rule.” Moreover, rail service has been improving since the service-related Final Rule was published in April 2024.
Bottom line is the court’s conclusion that “nothing in the Final Rule assures us that the Board will only impose a reciprocal switching agreement in circumstances where the incumbent rail service is inadequate. Indeed, the Final Rule’s text confirms that inadequate service is not a prerequisite to prescription, and the Board has reinforced the shortcoming by declining to adopt an affirmative defense relating to the adequacy of existing rail service.”
Notably, the National Industrial Transportation League, among the most aggressive in criticizing STB’s reciprocal switching rule, has a history of reaching bilateral agreements with railroads on contentious issues. Perhaps there is still time to do so and avoid another contentious STB and judicial proceeding.
Franklin D. Roosevelt’s White House counsel, Samuel I. Rosenman, was quoted in Railway Age in 1967 that “A dispute between individuals can be settled in one of three ways: By agreement, by outside determination, or by a fistfight behind the barn.” There remains time for railroads and shippers to forge a win-win agreement rather than leave determination to a third-party STB.
Railway Age Capitol Hill Contributing Editor Frank N. Wilner is author of “Railroads & Economic Regulation,” available from Simmons-Boardman books, 800-228-9670.
