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UPS Opposes Competitive Switching

aa-11-15-16UPS told the Surface Transportation Board it is likely to pull its freight out of rail intermodal transportation and move it back to the highways if competitive switching on railroads is mandated.

The nation’s largest transportation company told the STB its experience in other contexts leads it to believe implementation of reciprocal switching will result in slowed rail network velocity, less capital investment by railroads in their infrastructures, and deterioration of rail intermodal service levels.

“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 filed with the board.

It’s a bit difficult to understand what the railroads are so frightened of, given that under the STB proposals each competitive switching arrangement would be reviewed on an individual basis. In addition, each case would be subject to a lengthy and expensive review and appeals process (AA, 8-15-16, P. 5).

“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,” observes Paul Delp, president of the American Chain of Warehouses who also is active in shipper groups that support the board’s proposal.

“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 1’s have operating ratios in the 50’s and have had competitive switching for years,” he notes.

Both in practice in Canada and the STB’s proposal call for the railroads to be directly compensated for every car they are required to switch, notes Delp, who also is president of Lansdale Warehouse Co.

He also serves as co-chairman of the International Warehouse Logistics Association’s Transportation Advisory Committee (formerly called the IWLA Rail Council).

“In the U.S. the Class 1 railroads have operating ratios in the 60’s, 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,” Delp adds.

The Rail Customer Coalition, points out 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 asserts.

Rail Costing Study Slammed

In another development shipper groups criticized an outside study of how railroad rate cases are handled that was commissioned by STB. The study, which was conducted by the InterVISTAS Consulting Group at the behest of the STB, was termed “flawed and poorly developed” by the RCC.

The STB received the rail rate procedures report in June 2016 but didn’t publicly release it until late September.

The consultants were asked to review the board’s stand-alone cost (SAC) rate reasonableness methodology in rail rate cases.

After releasing the InterVISTAS report, STB Chairman Daniel R. Elliott III announced that the board soon will release SAC processing guidelines to implement several of the June 2015 report’s recommendations.

However, the changes Elliott said are in the works appear to be primarily procedural, including the holding of early technical conferences, formalizing the prioritization of the many calls that need to be made in rate cases, and formalizing the agency’s rate case staff training program.

“Although our rate decisions have been well-reasoned and fully defensible, I am committed to further improving the board’s ability to deliver rate case decisions in an efficient manner,” he said.

The InterVISTAS report was the topic of a public economic roundtable held by the board on Oct. 25 which included discussions only by government and university economists.

Although it is evident that the board has fully embraced the report’s recommendations, Elliott said it will gather additional comments at a public hearing to be scheduled sometime in the near future.

“Unfortunately for all rail stakeholders, the report fails to offer any new ideas for improving how the STB operates and embraces the status quo,” the RCC said in its critique.

It pointed out that InterVISTAS has represented the railroads in the past, stressing that the report doesn’t reflect any outside input from rail customers.

The coalition also notes that the report was commissioned long before Congress provided a new direction in rail regulation for the STB by unanimously passing the Surface Transportation Reauthorization Act in December 2015.

Congress also directed the board to commission a separate independent study that was conducted by the Transportation Research Board.

TRB called the 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.”

“The STB should not waste any more precious time on a report that fails to provide solutions for the very real and ongoing freight rail issues that are plaguing manufacturers, farmers and energy producers across America,” the coalition said.

The American Chemistry Council agreed with the coalition. “ACC strongly urges the STB to dismiss this faulty report, which failed to follow the board’s direction and was performed by a consultant that has a history of working on behalf of the railroads,” Council President Cal Dooley told the board.

“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.”

The STB is obligated to ensure that a railroad can make sufficient profit, Dooley admitted, but it also must ensure that rail customers without competitive options don’t face unreasonably high rates.

“Despite clear direction from the STB, InterVISTAS conducted its report by focusing on rail profitability, while disregarding the need to justify high rates entirely,” he pointed out.

Association of American Railroads President Ed Hamberger said the report “rightly credits partial deregulation as the driver of today’s healthier freight rail industry.”

He declared that seeking reregulation by changing rate review procedures is bad policy at a time when railroads are dealing with a permanently changed customer base and uncertain economic headwinds which increase the demand for intensive capital investment in the freight rail network.

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