No simple swap: Ins and outs of reciprocal switching on US railroads

A photograph of a two boxcara and a tank car on train tracks.

One of the executive orders President Joe Biden issued in July calls for the chairman of the Surface Transportation Board to consider reciprocal switching as a way to pursue competitiveness in the freight rail industry.

As FreightWaves wrote in August, reciprocal switching occurs when a shipper has access to one freight railroad but wants access to a nearby competing freight railroad in order to cultivate a competitive pricing environment. A shipper can get that access at an interchange between the two railroads. Shippers contend that reciprocal switching benefits captive shippers, or those that have access to only one railroad.

In Canada, reciprocal switching is an option that has existed for years and is known as interswitching.

But for reciprocal switching to become widely available in the U.S., regulators will have to consider the operational and financial impacts to the freight rail industry.

Reciprocal switching could be feasible in the U.S., although the ability to implement it would depend on the business case and the location, according to Jim Blaze, a railroad economist and Railway Age contributing editor.

“Open switching is neither a magic pill nor a dagger to the railroads’ neck,” Blaze said in an email to FreightWaves.

Some U.S. railroads actually have reciprocal switching agreements, as a concession born from railroad mergers. There are also some legacy agreements between shipper and railroads predating the mergers.

But potentially deploying reciprocal switching in a location that doesn’t already have that ability raises a number of issues.

First, there is the operational aspect. Although reciprocal switching could employ a complex series of car interchanges, with time delays and lots of in-series movements, there are alternative methods to accomplish a possible second carrier access to shippers, Blaze said.

Second, there is the question of whether it would make economic sense for the railroads to deploy reciprocal switching. Reciprocal switching could make financial sense for some railroads, depending on the situation and on how the railroad can find profit within those situations, Blaze said.

For instance, a second railroad might access a shipper by paying the primary railroad company a fee that covers track use wear and tear maintenance plus a coverage of track possession time, Blaze said. It would work like a trackage rights train movement that requires the payment of a toll or a bridge-like fee, he said.

“Smart businesspeople can figure out how to make it work. And a second railroad user of such access doesn’t get a free ride to such switching area shippers. Nope. The second carrier has to pay a series of handling (asset use like track use) fees,” Blaze said. “Some shippers will not get service because the profit margins to reach them might often be too thin to make it worthwhile for the second carrier to execute reliably and repeatedly ‘on a precisely scheduled’ basis. The results would be a mixed bag.”

But “smart operating and marketing people could sit down and make it work, if so instructed or ‘incentivized.’ Just hearing ‘no way and no how’ is to this old railroad economist intellectually boring. … You need to construct a pay-as-you-use-it model (spreadsheet) and apply to candidate locations. Something balanced as to both revenue shifts and user cost reimbursement,” Blaze said.

However, reciprocal switching’s potential operational complexity has been one of the main arguments against it.

The steps involved in reciprocal switching could lengthen the time it takes cargo to get from its origin to its destination, according to Nimesh Modi, CEO of drayage technology company BookYourCargo. For example, a transit time from New York to Los Angeles could increase from 15 days to 21 days, accounting for the time to conduct all the operational and safety measures reciprocal switching involves, he said.

The process “is not as easy as it looks … [since] it requires 68 steps for one railcar to complete the reciprocal interchange,” Modi said. “I am not even counting processes such as track maintenance, compliance, safety inspections etc. It’s a very tedious process.”

He continued: “There has to be operational coordination or an agreement in place to help the management team. There are so many things that are going to take some time to come into play, if not now. That is what I feel like right now. … It’s going to take some time.”

Infrastructure is key

While reciprocal switching has the potential to cause congestion and operational delays, it can also furnish customers with additional buying options since they will have access to more vendors. So, “the question is, which option is better?” Modi said.

Reciprocal switching could become an option in the future, provided that the railroads commit to building and setting up the physical and logistical infrastructure to do it.

“Infrastructure is the biggest question. Do the railroads have sufficient infrastructure to handle this, first of all,” Modi said. “Second of all, they have to find out a way to get all these railroads together to work towards this objective. That’s a big challenge because you’re dealing with railroads that have been working on their own for many years. Now, they have to coordinate all those railroads together.

“In my opinion, [reciprocal switching] would help in a longer run if this can be efficiently and properly done,” he added, although “It would not make sense if the infrastructure is not developed parallel to this idea.”

Gauging reciprocal switching’s long-term impact on rail’s competitiveness

As STB potentially takes up the issue of reciprocal switching, it should consider how the practice will impact the long-term competitiveness of the freight railroads, according to Clifford Winston, a senior fellow of economic studies with the Brookings Institute, a think tank.

The main competitor to the freight railroads will be autonomous trucks, and so STB should be doing everything it can to ensure that the railroads are in a position to compete against autonomous trucks in the future, according to Winston. That would mean not pursuing any mandate calling for reciprocal switching.

Autonomous trucks “can drive [the railroads] under for good. It’s not far-fetched to believe that. The trucks have a much greater advantage than rail in terms of labor savings. They’ll get the driver out of the seat, and they can run these flotillas. … The trucks can say, ‘Look, now that we’re autonomous and much safer, it really makes sense to start thinking more ambitiously about our productivity’ and say, ‘Hey we’re going to hook up a bunch of them, just like rail. And we want a private highway. We’ll finance it, and we can do anything railroads can do once we get a private highway,’” Winston said.

“Certainly autonomous trucks will be critical in intermodal operations, so rail may be around, but my point is, rather than micromanage rail over the next 20 years or so, I think it’s time for rail to focus on its automation and its operations and coming head to head with autonomous trucks,” said Winston, who also supports dismantling the STB because he sees other federal agencies as having the ability to fulfill the agency’s role as an antitrust and anti-competition regulator.

Winston added: “A fundamental problem with rail is just interconnections. Every time they have to move a shipment and deal with another carrier, stuff happens. At the same time, you’ve got trucks that can run all night if they’re autonomous. It’s not like they’re limited to 12-hour shifts. … That’s just going to make them that much more competitive and better on service. To the extent that rail can get that way, and I think they could with a much broader network when we think of North America, let them do it.”

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