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STB addresses ‘revenue adequate’ Class Is, reciprocal switching access

The Surface Transportation Board (STB) recently determined that five Class Is were “revenue adequate” in 2022.

The designation generally means those railroads achieved a rate of return equal to or greater than the board’s calculation of the average cost of capital for the freight-rail industry.

The STB determined that the 2022 railroad industry cost of capital was 10.58%. The board compiled a revenue adequacy figure for each Class I that was in operation as of Dec. 31, 2022.

The revenue adequate Class Is in 2022 and their respective rates of return are: BNSF Railway Co., 12.89%; CSX, 16.17%; Norfolk Southern Railway, 14.55%; Soo Line Corp. (including Canadian Pacific’s U.S. affiliates), 13.31%; and Union Pacific Railroad, 17.96%.

Grand Trunk Corp. (including CN’s U.S. affiliates) and Kansas City Southern Railway Co. achieved 2022 rates of return of 8.99% and 9.19%, respectively, so they were not deemed revenue adequate.

Meanwhile, the STB also has issued a notice of proposed rulemaking that focuses on providing shippers access to reciprocal switching as a remedy for poor rail service.

The proposed regulations would provide a streamlined path for the prescription of a reciprocal switching agreement when service to a terminal-area shipper fails to meet any of three performance standards: service reliability, service consistency and inadequate local service.

The proposed standards are intended to reflect a minimal level of rail service below which a shipper would be entitled to relief, and each standard would provide an independent path for a petitioner to obtain a prescription of a reciprocal switching agreement.

To enable shippers to monitor and measure their rail service, the proposed rule would require all Class Is to provide their customers with the historical data for the three service metrics within seven days of a customer’s request.

“In the past several years, and particularly since 2021, it has become clear that many rail customers nationwide have suffered from inadequate and deteriorating rail service. “For this reason, the board has determined to focus its efforts with respect to reciprocal switching on providing relief,” said STB Chairman Martin Oberman in a press release. “The board is proposing that one approach to improving rail service is to afford affected shippers the opportunity to obtain a reciprocal switch to a competing Class I when service falls below a standard set in the proposed rule.”

The STB has proposed a new, service-based approach that the Association of American Railroads (AAR) is reviewing to better understand its scope and possible impact on rail service and network fluidity, said AAR President and CEO Ian Jefferies in a prepared statement. The association plans to engage with the board “on this important matter,” he added.

“While the STB did not perform a cost-benefit analysis, any new regulation must be backed by data, narrowly tailored to address a specific and well-defined problem, and ensure benefits exceed costs,” said Jefferies. “Any switching regulation must avoid upending the fundamental economics and operations of an industry critical to the national economy — that Congress saved once by partially deregulating — and be subject to the highest level of scrutiny.”