Decision by U.S. District Court vacates STB’s reciprocal switching rule

While the Washington, D.C.-based Surface Transportation Board (STB), an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers, announced the adoption of final reciprocal switching rules in April 2024, a decision made earlier this month by the United States Court of Appeals for the Second Circuit subsequently vacated the rule.

Reciprocal switching has long been a prevalent topic in industry circles. As previously reported by LM, STB’s previously proposed reciprocal switching legislation offered up in 2016 would allow a rail shipper to gain access to another railroad if the shipper makes certain showings. As has been defined by the STB, reciprocal switching is a situation in which a railroad that has physical access to a specific shipper facility switches rail traffic to the facility for another railroad that does not have physical access. And the second railroad compensates that railroad that has physical access in the form of a per car switching charge, with the shipper facility gaining access to an additional railroad.

When the final reciprocal switching rule was adopted, STB officials said that under this final rule, railroad shipper customers within a terminal area that have access to only one Class I rail carrier may petition the STB to order a reciprocal switching agreement when the customer’s rail service falls below specified levels. It added that Board-prescribed reciprocal switching agreements will allow shippers or receivers to gain access to an additional line haul carrier, while still allowing the incumbent carrier to compete for the customer’s traffic. It also stated that reciprocal switching orders by the Board will be for a minimum of three years and a maximum of five years, also noting that it considers the reciprocal switching rule to be a significant step in incentivizing Class I railroads to achieve and maintain higher service levels on an ongoing basis by permitting a competing line haul carrier to offer better service to win the customer’s business.

This rule was challenged in court by Class I railroad carriers, CSX and Union Pacific, and Canadian National subsidiaries Grand Trunk Corporation and Illinois Central Railroad Company on various grounds, including: exceeding the STB’s authority under the Staggers Rail Act of 1980, governing reciprocal switching; and overstepping the STB’s ancillary powers, calling them arbitrary and capricious.

“As presented to us, the rail carriers do not challenge the application of the Final Rule in any particular instance,” the judges said in the decision. “Indeed, as far as we are aware, the Board has not yet prescribed a reciprocal switching agreement under the procedures adopted in the Rule. The carriers instead seem to challenge the Final Rule more on its face, inviting us to conclude that the Board’s promulgation of the Rule itself exceeds the authority Congress conferred in the Staggers Rail Act to order reciprocal switching.”

And they added that this dispute stems from Class I railroad service-related “widespread concerns,” especially coming out of the pandemic, which led to an April 2022 STB hearing. Which then led to the STB requiring Class I railroad carriers to submit service recovery plans explaining the specific actions each carrier planned to take to improve its service, as well as the STB issuing a Notice of Proposed Rulemaking for comments on a new set of regulations focused on improving service by increasing competition.  

Tony Hatch, principal of New York-based ABH Consulting, explained that opinion, is notable, in that the final rule was what he called service-focused.

“Everybody can argue about pricing power, but your service is your service,” he said. “And railroads want their service to be better too,  and have actually have aligned stakeholders, which I thought was very smart of [Former STB Chairman] Marty Oberman. And so to break that up, I don't know whose best interest that is, you know. The second thing is reciprocal switching, and the conclusions of these kind of things is really coming into play now, because that is a possible enhanced competition solution to any still unlikely, but higher for potential transcontinental M&A activity.”

An Association of American Railroads spokesman told LM that the Court’s decision reinforces the intent of Congress in the Staggers Act and provides a strong foundation for the Surface Transportation Board’s future deregulatory actions.

“The ruling affirms that forced switching orders cannot be justified solely on a generalized notion of the ‘public interest,’ but must be supported by evidence of ‘some actual necessity or compelling reason,’” he said. “This decision ensures that regulatory authority is exercised within its proper bounds.”