President Joe Biden is pushing new rail regulations that lower rates for ag shippers, but major railroad companies say the rules designed to spur competition would increase their costs and ultimately backfire on customers.

Earlier this month, Biden signed an executive order asking the Surface Transportation Board to consider finalizing a proposed rule, originally issued in 2016, that would require the largest Class I railroads to participate in the practice known as competitive switching.

The idea is to allow shippers, such as grain elevators, served by a single railroad to get a competing bid from a second railroad in the same region. If the shipper opts for the second railroad, the first railroad would have to move the shipper's goods to the second carrier's line. The shipper would pay the cost of getting access to the second line. 

There are seven Class I railroads today — BNSF, Union Pacific, CSX, Canadian National, Norfolk Southern, Canadian Pacific, and Kansas City Southern — compared to around 33 companies in 1980, according to USDA. A Class I railroad is defined as operating with revenues of $490 million or more, according to the Federal Railroad Administration.

Max Fisher

Max Fisher, NGFA

The National Grain and Feed Association, which represents grain companies and elevators that rely heavily on railroads to get commodities to market, supports the order’s call for increased rail competition. NGFA Chief Economist Max Fisher said it should be beneficial for all types of shippers, end-users and ag producers. The group joined 29 other organizations in a letter to the STB last Wednesday urging the agency to finalize the 2016 rule.

“For agriculture, this means that shippers within a set number of miles from another railroad gain some additional competition by being able to ship on a competing line,” he told Agri-Pulse. “Hopefully, that will result in reduced rates.”

The STB is likely to limit the use of competitive switching to shippers who are within a certain distance of an interchange point with a second railroad, he said. 

For shippers that can't use competitive or reciprocal switching, the STB should make it easier for them to challenge rail rates they consider unreasonable, Fisher said. 

“There’s only been one rate case brought by an agricultural shipper in the last 40 years, and it took 18 years to resolve,” he said, calling the STB review process cumbersome and expensive.

The railroad provisions in the order could be especially beneficial to western corn and soybean producing states such as the Dakotas where there are fewer rail lines, said Mike Steenhoek, executive director of the Soy Transportation Coalition.

“If you only have one particular railroad that is serving your area, you can have very high rates and it can make your shipments quite expensive and no longer very competitive,” he told Agri-Pulse

The “reality is there are certain areas of the country where you do see more restricted options if you’re an agricultural shipper," he said. 

But the railroads strongly oppose the order. Ian Jefferies, CEO of the Association of American Railroads, said forced switching could backfire on shippers by reducing efficiency and discouraging railroads from investing in their lines. That would in turn divert traffic onto trucks, he said. 

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In comments filed in opposition to the 2016 proposal, AAR cited an example of a case where traffic was forced to move "significantly" off route to reach an efficient interchange location. In that instance, a Cargill facility in Sydney, Ohio, that was serviced directly by CSX, wound up paying an extra $600 a car to reach the best interchange point on the Norfolk Southern line in Marion, Ohio. For efficiency reasons, the Cargill cars had to be moved in the opposite direction on the CSX to an Indianapolis yard, where they were combined with other cars bound for the Marion interchange. CSX ultimately passed the higher cost on to Norfolk Southern, which in turn passed it to Cargill. 

NGFA's Fisher doesn't dispute that in some cases shippers may not get a lower rate from the second railroad, but at least they will have the option to get a bid, he said.

Paul Bingham, director of transportation consulting at IHS Markit, agreed that competitive switching would increase railroads' operational costs, in part by forcing the carriers to have crews and equipment at more locations than currently required.

Whether those higher costs get passed onto shippers will depend on how much competition there is from other railroads or from trucks or barges, Bingham said.

"If the railroads can’t competitively pass on the higher costs, they will experience lower margins on that business or take steps to exit that part of their business," he said.

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