Competitive Switching: Making the Switch to a More Competitive, Healthy Freight Rail System

March 25, 2015

How adopting competitive switching can benefit railroads and their customers

Freight rail competition is becoming a growing issue over the past several years.  Why is that?

One of the biggest challenges facing rail customers today is that many have access to only one major railroad. That obviously gives the railroad unique pricing power that you don’t find in competitive markets.  That issue is challenging enough. But even worse, government policies actually block access to railroads in the event a competitive option is available nearby, which has led to severe consequences for rail customers and our economy. Between the rising costs of shipping and the poor service, the issue is making it harder for American businesses to compete in a global economy. In essence, this issue has reached a tipping point.

How exactly are government policies protecting railroads?

Almost every company in America must compete to get business.  Right now, outdated government rules shield railroads from participating in a competitive bidding process. These rules require the shipper to file complex legal cases with impossible standards that have never been met, effectively denying shippers the option of choosing to have their freight transferred to a competing rail carrier even if one railroad’s track intersects with a competing railroad track at an interchange point. This gives railroads dramatic market power, and leaves American shippers with few options.

What is “competitive switching” and how can it provide shippers more options?

The competitive switching proposal before the Surface Transportation Board (STB) will give rail customers that are served by a single major railroad the ability to seek competing bids for service from a nearby railroad when available.  Sometimes referred to as “reciprocal switching,” this will introduce a small measure of competition into the freight rail system and bring market forces to bear on freight rail pricing and service where none exists today.

Specifically, shippers would be able to obtain competitive switching when the shipper or its customer can demonstrate that its facility is served by only one Class I railroad, that there is a lack of effective competition, and that there is or can be a working rail interchange within a reasonable distance (i.e., 30 miles) of the shipper’s or receiver’s facility.  If the switch is shown to be unsafe or harmful to other customers, the railroad can block it. And there is no “free lunch” for the shipper–they would have to pay an appropriate “access” fee to cover the railroad’s costs.  In short, shippers just want access – not free access – but access for which they are willing to pay the railroads.

What would this reform mean for all of the stakeholders involved – shippers, other customers, and the freight railroads?

This policy can be beneficial to all stakeholders.  More freight rail competition would be good for American manufacturers, farmers, and other producers. It will help make them more competitive in a global economy.  We’ve seen business surveys where facility operators stated that freight rail costs are so high, it makes more financial sense to import products from abroad.  This is not a sustainable way for American businesses and workers to remain competitive in a global economy.  As for the railroads, more competition can help spur more efficiency and greater freight rail volume.  This isn’t a new concept.  Competitive switching works effectively for both railroads and their customers in Canada.

How can policymakers make this happen?

The STB needs to move forward with competitive switching reform.  Congress also needs to pass Senators Thune and Nelson’s bipartisan legislation that would reform the STB and make it more efficient.

This guest blog post is by Bruce Carlton, President and CEO, of The National Industrial Transportation League.