With Railway Age since 1992, Bill Vantuono has broadened and deepened the magazine's coverage of the technological revolution that is so swiftly changing the industry. He has also strengthened Railway Age's leadership position in industry affairs with the conferences he conducts on operating passenger trains on freight railroads and communications-based train control.
By Scott T. Matheson, CFA, CPA
Senior Director, Investment Research,
CAPTRUST Financial Advisors
On Nov. 3, Warren Buffett announced his company’s intention to acquire BNSF. He commented on CNBC that “[the acquisition is] an all-in wager on the economic future of the United States.” Based on BNSF’s ties to the economy, we agree that Buffett’s decision is predicated on faith in eventual economic recovery.
The BNSF story is indicative of the railroad industry in general. As market analysts, CAPTRUST pays close attention to railroad trends, as freight data and company earnings reports/outlooks can provide tangible assessments of economic trends, particularly consumer demand. The preliminary Gross Domestic Product (GDP) release within the U.S. for the quarter ended Sept. 30 indicated that consumption continues to account for more than two-thirds of U.S. economic output, making consumers a key variable in economic growth—and an important gauge for the railroad industry’s health.
Here are few of the variables we think are critical to gauge the U.S. consumer’s health. In aggregate, we are seeing some modest improvements in each factor:
Unemployment: September’s unemployment rate stood at 10.2%, according to the Bureau of Labor Statistics. This figure is expected to rise is coming months and we are looking for stability in the latter part of 2010.
Credit availability: The U.S. consumer has relied on easy credit to facilitate spending over the past three decades. In spite of the substantial aid provided to financial institutions from the federal government, banks are not eager to extend loans to the average consumer, but we are seeing some pickup in available credit.
Housing: Home prices, as measured by the Case Schiller 20 City Composite, are down 32% since July 2006. While the U.S. has experienced several recent month-over-month increases in prices, we foresee a gradual recovery and stabilization within residential real estate.
The U.S. dollar: From early March 2009 to early November 2009, the U.S. dollar declined more than 15% vs. a trade-weighted basket of global currencies. The direction of the U.S. dollar is important to watch as it is not only impacts the volume of goods U.S. consumers import, but also as it impacts the volume of exports when U.S. goods look cheap to overseas buyers. Both these factors affect rail traffic.
Preliminary third-quarter U.S. GDP exhibited some economic growth that may mark the recession’s end, a positive for the economically-sensitive railroad industry. However, given the established importance of the consumer and considering the challenges outlined above, while we believe the U.S. is on the road to recovery, we expect it to be a slow and bumpy ride.
Rail operators should continue to monitor the challenges facing the U.S. consumer as they seek to assess the health of the U.S. economy in an ultimate effort to understand the impact to their bu.s.inesses, but we do see the glass as half full and are encouraged by increased U.S. export demand.
Scott Matheson oversees the investment research of CAPTRUST Financial Advisors, a 20-year-old independent investment research and retirement plan advisory firm that is headquartered in Raleigh, N.C.
A friend of mine, a camp counselor as a teenager, often recounts an early learning experience. He was in charge of 10 eight-year-old boys. His primary disciplinary phrase was “if you do that one more time . . .” The phrase had no conclusion and never a real consequence. Two days into the camp session, the threat was repeated when the boys were violating a no-talking rule during a mandatory afternoon rest hour. Immediately one of his more precocious and perceptive wards popped up from his bunk and said, “Talk, talk, talk. When are we are going to get some action around here?”
2010 is going to be a year of action in Washington, D.C., and for the short line railroad industry it will be both eventful and challenging.
The short line rehabilitation tax credit (45G) expired at the end of 2009 and must be extended retroactively in 2010. The short lines have done their usual stellar job in setting up the legislation. To date we have secured more than 50% of the House (247) and the Senate (52) as co-sponsors. We are particularly proud that the sponsorship is almost evenly divided between Democrats and Republicans. In today’s Washington, that is rare.
The extension passed the House in late 2009 but was pushed aside by the health care debate in the Senate. The longer Congress waits to act, the more difficult it is for short lines to do the planning and make the material purchases associated with the certainty of the tax credit’s availability. If Congress holds up passage to the end of this year, even if it makes it retroactive to Jan. 1, 2010, it will have lost a real opportunity to maximize the job creating potential of the credit. The time to act is now.
Sen. Jay Rockefeller spent the better part of 2009 trying to hammer out compromise legislation on the issues surrounding railroad regulation. His legislation was approved by the Senate Commerce Committee in late December and now awaits action by the full Senate and, subsequently, by the House. This isn’t what the industry ever would have sought and the short lines, along with the Class I’s, have worked with the Senator to minimize the harm to our franchises.
In fairness, Sen. Rockefeller and his staff have devoted substantial time and effort to address our concerns, and the legislation does incorporate numerous changes advanced by the railroad industry. We are continuing those efforts as the legislation proceeds. Unlike past years, Congress likely will act on a final bill this year.
In 2009, Congress passed a new rail safety bill, and in 2010 the Federal Railroad Administration is implementing hundreds of requirements contained in that new law. The vast majority of these requirements will add significantly to our cost of doing business—in Washington lingo, unfunded federal mandates.
PTC, Hours of Service, enhanced bridge inspections, and dozens of other regulatory decisions will be made in 2010. The short line industry’s goal is to reduce the burden through the regulatory process and to convince Congress to provide a fair level of government funding for what remains.
SAFETEA-LU, which authorized federal surface transportation spending and established most modal transportation policy, expired in 2009. Reauthorization was discussed, but no action was taken, so the status quo was extended. The legislation is largely a highway and transit funding bill, but two items affect the railroad industry: truck size and weight limits, and funding for highway grade crossings. Many in the trucking industry seek to increase size and weights, and some congressmen seek to tear down the wall that prohibits state DOTs from using grade crossing funds for general highway repairs. Fighting both efforts will be a high priority for the short lines in 2010.
The SAFETEA-LU bill is traditionally a six-year bill funded primarily through the gas tax. Most observers believe that adequate surface transportation funding requires an increase in the gas tax, so passing this bill before the 2010 election be difficult.
Keith Hartwell is President of Chambers, Conlon &Hartwell, is Managing Member of the Board of CC&H subsidiary firm Seneca Group, and the firm’s lead lobbyist for the American Short Line and Regional Railroad Association.
By Anthony D. Kruglinski
Our regular readers know that
in addition to being a Contributing Editor at Railway Age, I am the President
of Railroad Financial Corp., a financial advisor that works only in the rail
industry. Several weeks ago, Railroad Financial Corp. celebrated its 21st
birthday, and I had the opportunity to explain to a new acquaintance what my
I explained that during the
first five years of RFC’s existence, the majority of our financial dealings
involved buying and selling and financing and refinancing older railcars and
locomotives. The late 1980s and the early- to mid-1990s were mostly taken up
with extending the lives of existing rail equipment. (There were certainly
new cars and locomotives built and financed, but most of RFC’s customers at
the time were shortlines and regional railroads, not Class I railroads.)
The mid-1990s through 2007 or
so saw more new rolling stock being built and fewer cars and locomotives
rebuilt or remanufactured. At the time, we reported in Railway Age that
end-users of railcars and locomotives were voting with their checkbooks in
favor of new modern equipment rather than to continue to plow more money into
What’s happened recently?
While RFC is still financing new cars, the vast bulk of our activity—well in
excess of $1 billion in equipment last year—involved restructuring existing
leasing agreements to attempt to wring more efficiency from existing
Sometimes we find ourselves
working for a bankrupt entity seeking to restructure its operating lease
fleet. Other times we work for financially healthy lessees who are seeking to
lower their rental costs by trading term (longer) for rate (lower).
The point is that during the
past 21 years we have gone from extending the lives of various types of
railcars and locomotives, to building almost exclusively new equipment to,
today, very little building any equipment of any kind.
We are all, more or less,
sitting around waiting for developments:
• New cars are being built,
but in numbers that are 25% or 30% of the numbers built only a few years ago.
• Locomotive OEMs are not
inking any sizeable North American new locomotive orders. (Why would they
when there may be as many as 10,000 locomotives in storage?)
• Depending on how you do
your count (do you count cars awaiting the scrapper?), there may be as many
as 500,000 cars stored in North America.
• Several large lessors
reportedly are interested in selling some or all of their railcar and
locomotive fleets, but not at material discounts. The cars they do want to
sell are off lease; no one wants them.
Almost nothing is happening,
except that RFC is making a reasonably good living restructuring and
reformatting existing transactions involving railcars and locomotives to save
Those of you who wait for
this column’s annual predictions saw they did not come in December, January,
or February. For now, I think that the big prediction for 2010 is for more of
the same. That’s the first time that I have ever predicted that! But I can’t
leave 2010 alone without some prognosticating, so here we go:
Operating lessor sales: I
predict that there will be significant sales of operating leasing fleets
during 2010. Nothing much has happened since the last fleet sale at the end
of 2008, but I believe that several new investors are interested in making a
foray into the acquisition of operating leased rail equipment. The situation
just needs a bit of a push. What could that be? Foreclosure by lenders who
have the opportunity to do so, due to payment or other defaults. The need for
cash that’s required by one or more large diversified financial entities that
would cause them to sale rail equipment at a modest discount. A decision by
private equity investors to finally make investments they have been contemplating
for several years.
Scrapping equipment: The next
time there is an upward blip for the price of scrap steel, look for tens of
thousands of railcars and locomotives to be scrapped. Owners of these items
must face that many of these units will never go back into service. Surprisingly,
the cost of storage is now also becoming an issue.
Planning for EPA Tier 4
locomotives: While the Environmental Protection Agency’s Tier 4 locomotive
emissions regulations and 2015 are still a ways off, locomotive manufacturers
and high-horsepower end-users have to think about compliance. Here are some
of the questions that the railroads are asking:
• What should I do with my
existing high-horsepower locomotives? Should I invest in rebuilding some or
all of them now or should I cut my losses and start scrapping them as soon as
• EMD and GE are apparently
fielding two different solutions for Tier 4. The GE product reportedly uses
an aftermarket scrubber using urea. The EMD unit appears to continue to use
the existing technology adapted for Tier 4. Planning needs to get started,
but what planning?
That’s the best I can do this
By Douglas John Bowen, Managing Editor
Dallas gets it. It’s expanding its existing light rail
transit network, augmenting regional rail, and bolstering existing Amtrak
service, even as it faces the bumpy realities of advancing high speed rail.
Texas’ second-largest city has a real-world, practical hold on matters mixed
with a vision of what can be. Combine those elements with the ubiquitous
optimism and “can-do” attitude all Texans seem to carry, and you have a potent
force much of the U.S. would do well to emulate.
And please forget “right” or “left”; in this case; Dallas is
front and center, in some ways perhaps the ambitious edge of the current U.S.
passenger rail renaissance.
My latest trip to Dallas in late January only reaffirmed
this, even as I delighted over the passenger rail progress the city has
notched. More than many places, Dallas residents and officials, be it DART
President Gary Thomas or a taxicab driver, mix that powerful Texas pride with a
practical “what’s up in your town” inquiry. Where other cities pump up
boosterism to an extreme, Dallas (I’ve found) seeks real information. “We’ve
got this problem; do you? How are you guys dealing with it?” reflects an
honesty, an open-mindedness, that bodes well both for urban rail transit and
any future HSR development.
DART President Thomas and his staff are justly proud of the
agency, and it shows. But more than they might know or sense, DART is a pointed
refutation of the naysayers insisting passenger rail transit will not work and
does not affect development, that it’s meant for only us “rat-grey New Yorkers”
(in author Tom Wolfe’s words) who don’t know any better. It’s bolstered and
energized Dallas’ downtown, a downtown long ignored per many U.S. “cities” but
reasserting itself as a real place with a real purpose.
I base that not just on the gracious guided tour of new
construction provided me by DART Director, Media Relations Morgan Lyons—a task
he performed with relish and with obvious pride—but on my own multiple trips on
DART’s Red and Blue lines. I saw “those people” (commuters) but also saw
students, shoppers, and travelers with other purposes, generating on-off
traffic for many stations along the routes.
One of those stops is at Union Station and the Reunion
Center complex, served by DART, Trinity Rail Express (TRE) regional rail
service linking Dallas with Fort Worth, and Amtrak. In the 1980s, a refurbished
Union Station stood more as a monument to the past—almost a mausoleum—with few
passengers coming or going. Not anymore; it may not yet be 30th Street Station
in Philadelphia, but rail passengers now are in evidence throughout much of the
day. A modest four Amtrak trains
per day don’t do Dallas justice. But it’s
more than six trains a week and, along with TRE’s presence and DART
service, the station is set to welcome whatever HSR (or even just HrSR) might
That last component won’t arrive immediately. Advocates
gathering at the historic Magnolia Hotel for the 6th Annual Southwestern Rail
Conference, “Turning Vision into Reality” Jan. 29, were clearly disappointed when FRA Deputy
Administrator Karen Rae, the luncheon speaker, affirmed what the group already
had heard the day before: Texas wouldn’t get the big bucks for any HSR project,
at least in the first round. Rae delivered the “bad” news as diplomatically as
she could, saying, “Should you be disappointed and concerned? You should be
focused” on proceeding with HSR cohesively.
Indeed, even before Rae addressed the group, Texas DOT
Executive Director Amadeo Saenz allowed that the state needed a “comprehensive”
approach to HSR, noting Texas submissions to FRA during 2009 were “fractured”
into nine distinct projects or pieces. But Saenz remained upbeat, noting TexDOT
now has a Rail Division to guide the state “in focusing on a comprehensive
[statewide] rail plan.” The words and labels matter, Saenz said: “Not too long
ago, we all were ‘the highway department.’”
Beyond accepting reality, and vowing (in Saenz’s words) that
“we learned from what we did” and perhaps didn’t do, Texas HSR advocates also
showed their magnanimous side to the FRA “winners.” Those assembled bore no
demonstrative grudge in congratulating California, Florida, and Chicago-St.
Louis for their first-round fiscal victories. Many took time to congratulate conference moderator Fritz
Plous, a Chicago resident and longtime rail advocate, for Chicago’s successful
HrSR bid, something perhaps Rep.
John Mica (R-Fla.) could learn to emulate rather than acting as a sore winner.
In Dallas, they get it. Here’s
hoping they get the real thing, HSR, real soon.
By Richard F. Timmons
President, American Short line
and Regional Railroad Association
In the midst of unprecedented and historic regulatory changes demanding our attention and resources during the past year, short line railroads had the safest year in our history!
In the past 18 months, challenging new laws and regulations have swept across our industry, demanding investments, time, and new procurement, as well as customer and union acceptance. These changes will be felt during the next decade as we strive to comply with numerous phased-in requirements intended to enhance railroad safety across the industry. While many of these initiatives have merit, the difficulty is how to pay for them. These unfunded mandates will prove to be a significant burden in the years ahead, one that must not intrude on our daily safety focus.
These ongoing requirements notwithstanding, the questions of why and how our segment of the railroad industry has achieved this significant safety milestone are worthy of consideration. The continuous rail industry focus on every aspect of safety is the backbone of the dramatic downward trend for all railroads in terms of injuries and fatalities. This safety conscious orientation began about 20 years ago and has proven its value through years of steady improvements.
And while no fatality or injury is ever acceptable, the reduction in both categories over the years is commendable and demonstrates the wisdom of the determined approach that railroads, large and small, have applied to safety. This focus and determination to reduce accidents, injuries, and fatalities started at the senior levels of management and has ultimately been embraced by every functional level in the railroad industry. The perseverance of rail leadership to protect employees, the public, and rail resources, and the improved metrics-based approach used to understand weakness in our systems, receives the bulk of the credit for the dramatic safety changes in the railroad industry.
For 2009, Class II and III railroads logged a total of 26,160,055 employee hours over 52,000 miles of railroad. Operating on that system, 563 short lines experienced 1 fatality and 441 injuries. This is a 7% reduction in fatalities and a 25% reduction in injuries from 2008 with just 17% fewer hours operated. This is a record for the short line industry and a tribute to the competence of those railroaders at every level that are responsible for such impressive results.
But this has been a challenging path we have traveled over a number of years. I believe there are many contributing factors that have made this record possible. As mentioned earlier, the consistent safety focus and the measurements developed to assess progress have made clear to management and employees where we stood and what demanded our attention and resources year over year.
The obvious shortcomings described by an annual analysis prompted numerous training initiatives from both internal short line resources as well as partnerships with the Class I community and TTCI. In addition, the American Short Line and Regional Railroad Association sponsored programs and classes, and in partnership with the FRA hosted a variety of training events over the years that were necessary for compliance. Additionally, ASLRRA provided templates, documents, procedures, programs, and on-site safety assessments to assist small railroads in continuously working to improve their safety posture.
Possibly the most effective safety initiative was the establishment of the ASLRRA Safety and Training Committee. This body of short line railroad members has been instrumental in creating products, programs, and safety policies that contributed significantly to the improved safety performance of small railroads. Their individual and collective contributions have been invaluable.
The difficult and challenging work of this committee coupled with its involvement with the ASLRRA Safety Awards recognition program each year has served to highlight individual and short line railroad company performance, and rewarded those members and companies whose efforts have paid off with improved annual results.
At the end of the day, these exceptional outcomes boil down to people. Railroaders are responsible for these results, and their professionalism, training, awareness, and dedication to doing their jobs correctly every day under all conditions make for safe operations. The results are evident. We will continue to strive to achieve these high standards in the coming months and years. There is no alternative for railroaders and their companies because safety our the first priority.
By Jerry Vest
Almost 20 years ago, federal surface transportation policy changed for the better. Enactment of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) meant the days of Congress simply passing a “highway bill” were over. Since then, Congress has expanded the multimodal focus of surface transportation public policy. An integrated approach allows for better policy decisions through the reauthorization process, with each mode recognized for its own strengths and role in ground transportation.With the most recent surface transportation bill, SAFETEA-LU, up for renewal, discussions include the national limits on truck sizes and weights. This issue could have a dramatic and possibly unintended impact on the future health of ground transportation in the U.S. A handful of trucking companies and freight shippers are seeking to include in reauthorization higher federal highway truck weight and size limits. Their arguments are simply not good public policy.First, proponents of heavier and larger trucks suggest that by allowing such trucks, fewer trucks will be on the roadways, producing less highway congestion, less pollution, and fewer accidents. These claims are not based on the properties of bigger trucks themselves, but on the idea that fewer total trucks will be required to move freight.But as demonstrated by diversion studies done in 2007 by Carl Martland of the Massachusetts Institute of Technology and in 2009 by TTX Co., a tremendous diversion of freight from rail to truck would occur with increased federal weight and size limits. According to the Martland study, allowing a 97,000-pound national weight limit would divert 44% of all merchandise traffic handled by short line and regional railroads to trucks. The TTX study found that larger trucks would divert almost 25% of all carload and intermodal rail traffic (excluding coal and ores), resulting in 330 billion new truck ton-miles every year. “Bigger but fewer” trucks also fails from a historical perspective: Following every national truck weight limit increase in modern history, more, not fewer, trucks have appeared on our highways.Second, advocates of heavier and larger trucks imply highways will see very little impact. One proposal calls for a third rear trailer axle for tractor-trailers carrying 97,000 pounds, claiming this will result in less pavement damage than a similar 80,000-pound truck with a standard rear tandem trailer. Pavement experts appear to be divided on this, but one can ask: If another trailer axle reduces pavement wear, why don’t trucking companies promoting this view simply add another axle to their 80,000-pound trailers immediately? But there is no doubt that heavier trucks will exacerbate deterioration of roadway bridges, problematic for states facing significant inventories of roadway bridges rated as “substandard.” Heavier trucks will simply make this problem worse.Third, many highway safety experts strongly disagree with the idea that bigger trucks are as safe as current trucks. Both the International Brotherhood of Teamsters and the Owner-Operator Independent Drivers Association have issued warnings of the safety hazards presented by heavier trucks. Law enforcement agencies across the country, including the National Troopers Coalition and the National Sheriffs’ Association, have formally declared their opposition to bigger trucks. And when higher federal CAFE standards result in smaller and lighter passenger vehicles, heavier trucks sharing public highways ignores the laws of physics, placing all of us driving on the national highway network at a higher level of risk of harm in a truck-auto accident.Finally, federal officials should not overlook the negative impact bigger trucks would have on our multimodal system. The Martland and TTX diversion studies make clear that a substantial reduction in freight rail shipments would occur. This has been confirmed at the state level, when increases in weight allowances on state roads created an almost immediate loss of rail traffic for some short line railroads. The Government Accountability Office understands this, quoting USDOT statistics in stating, “[L]arger trucks weighing over 100,000 pounds pay only 40% of their costs. From an economic standpoint, this relationship between revenue and cost distorts the competitive environment by making it appear that heavier trucks are a less expensive shipping method than they actually are and puts other modes, such as rail and maritime, at a disadvantage.”This is not simply a “railroader vs. trucker” fight. Most people appreciate the role trucking plays in our national economy. But favoring a handful of shippers and trucking companies with cheaper rates or lower costs is not good public policy. Continuing, without change, the current national weight and size limits on all federal highways is the right policy decision, one that all of us need to support.Jerry Vest is Vice President, Government and Industry Affairs for Genesee & Wyoming Inc., which owns and operates short line and regional railroads in the U.S., Canada, Australia, and the Netherlands.
By Tony Kruglinski, Financial Editor
As readers of this column already know, the rail industry has enjoyed more than 30 years of seemingly limitless financing of its equipment needs by banks, insurance companies, and operating lessors. The result? Of the nearly 1.6 million railcars in North America, more than 60% of them are owned by non-railroads and leased to railroads and other industry participants under a variety of financing structures. The costs inherent in these financings have also been regularly subsidized by Uncle Sam as the owners have made use of the depreciation deductions that come with ownership of the equipment and passed a portion of the benefits on to the lessees in the form of lower rents—all in all, a win/win situation for all involved.
However, the financial crisis we have just weathered and a series of pending regulatory changes are likely to severely impact the amount and/or cost of this kind of financing available to the industry in the coming years.
The 25th Anniversary Edition of Railroad Financial Corporation’s Rail Equipment Finance Conference, set for March 6 -9, 2011 in Palm Springs, Calif., is set to tackle this thorny issue of financial capacity for the next generation of rail equipment finance, along with regular agenda items profiling the status of the North American railcar and locomotive fleets.
Since many of our readers won’t be journeying to Palm Springs to be with us, we thought we would use this month’s Financial Edge to at least point out the issues involved in this financial conundrum so that you can track its development in your own situation.
Shrinkage of the operating lessor pool: Perhaps the most easy to observe evidence of a change in the circumstances facing rail equipment operators who do not wish to own their rolling stock is the reduction in the number of operating lessors willing to make substantial purchases of railcars and locomotives for lease to third parties. While the absolute number of rail equipment lessors has only shrunk slightly, the number of players willing to write a big check to take over a large order for an end-user seeking operating lease financing is down materially.
Why? The financial crisis has rocked several of them back on their heels to the point that they are still in the market but seeming reluctant to write big checks. The impact of this situation is somewhat muted at this time by the slow market in new building for railcars and locomotives. The issue, we believe, will become more apparent when the market for new building comes back in the next couple of years and the number and appetite of the operating lessors willing to make big equipment bets has shrunk.
Will this create a huge problem for the industry? Will rents rise materially to compensate for these changes and to lure new players into the market? Will end-users end up purchasing equipment for cash or with debt financing? These are all questions that we intend to examine in March.
Regulatory changes due to impact finance leasing: Over the past months and years, we’ve used this column to highlight pending regulatory changes likely to impact banks and other financial institutions that have been big players in the financing leasing market, which has supported billions of dollars in finance leasing for the rail industry. (With a finance lease, the lessee usually controls the future of the equipment at lease end. Not so with operating leasing, where the lessor recovers the equipment for release.)
For instance, we have warned that capital requirements inherent in the capital adequacy rules generally referred to as Basel II would have a significant impact on long-term leveraged financing leasing (the cheapest type of finance lease available to lessees due to its inherent low-cost debt component).
What’s happened during the past year or two? Virtually all leveraged leasing to the rail industry has been replaced by single-investor leasing (more expensive due to the absence of a low-cost debt component). You can still get your deal financed, but it just costs you more.
We are also awaiting the impact of as-yet-to-be-finalized changes to the account rules relating to just who records what assets and liabilities on its books relative to the kinds of finance transactions that have been the mainstay of rail equipment finance in North America.
The impact of these rule changes will likely be massive. What will these changes likely be when the rules are finalized? How will lessors and lessees react and tailor their transactions as a result? Most important, will the economics of finance leasing change for the worse? These are all questions that, as yet, have no answers, but we are sure to shed further light on them at Rail Equipment Finance 2011. We invite you to join us for this discussion and others that can shape the way you will be doing business in 2011 and beyond. See www.railequipmentfinance.com for information on the conference.
By Mike Ogborn
The Surface Transportation Board is about to embark on a series of hearings that could result in major changes in the railroad industry, including the way railroads compete, price their service, and make capital investment decisions.
The first hearing will be held in February and will review the long-standing exemptions for boxcars, commodities, and TOFC/COFC rate and commodity exemptions. The second hearing will be held in May and will “explore the current state of competitiveness in the railroad industry and possible policy alternatives to facilitate more competition,” including competitive access, bottleneck rates, terminal access, and reciprocal switching.
This announcement comes on the heels of an unsuccessful attempt by the Senate Commerce Committee to draft compromise legislation on these subjects in the 2010 Congress. While we do not know what the end product of these hearings will be, we do know that they will be wide-ranging and deal with issues that go to the heart of the railroad industry’s ability to compete for business and to adequately invest in its infrastructure.
The short line railroad industry will be full participants in these hearings. We have put together an internal process for developing and presenting our position on each issue so as to do everything we can to protect the interests of all short line railroads.
Most important, we will make a substantial effort explaining to the STB how short line ratemaking and service practices work, and how those things are weaved into the fabric of our relationship with the Class I’s.
These are very complex subjects, but a number of simple principles will guide our response to these hearings.
If we are not the problem, do not make us part of the solution. Short line railroad pricing and service practices are not the reason this debate is taking place. Applying blanket solutions to short line railroads will have virtually no impact on the outcome, but will have significant impact on the financial viability of our small businesses.
Short line railroads contribute to competition. The vast majority of short lines were created to preserve or enhance rail service where it otherwise was going to be abandoned or severely restricted. More than 300 of the nation’s 545 short lines connect to two or more Class I carriers, and this provides a significant competitive advantage to short line-served shippers. Enacting regulations that reduce our revenues will severely restrict our ability to maintain and rehabilitate these competitive alternatives.
Short line railroad transactions were predicated on established economics. Short line buyers purchased a given amount of traffic and a presumed rate. The goal is always to earn enough to improve and grow that service, and virtually all of today’s short lines have done so. Many of the ideas being discussed in the debate could destroy the economics of our transactions.
For instance, mandated terminal access would allow another carrier to service our best customers for a trackage rights fee. A typical trackage rights fee is no more than the direct cost associated with maintaining a particular segment of track. That is not what the short line owner paid for in the first instance, and allowing that to occur will turn these transactions upside down to the detriment of all the remaining shippers on the line.
A reduction in Class I investment and service will hit short lines hard. To the extent regulatory changes result in reduced Class I investment and service, those reductions will occur first on those line segments with the least traffic—where most short lines operate. This will reduce our traffic and our revenues, and we will in turn be forced to reduce investment and curtail service.
It is no secret that the impetus for these hearings is the unsuccessful effort of Sen. Jay Rockefeller (D-W.Va.) to craft a compromise piece of legislation during the 2010 Congress. While the short line railroad industry had serious concerns with portions of that legislation, it needs to be noted that Sen. Rockefeller was attentive to those concerns.
Sen. Rockefeller and the Commerce Committee devoted substantial time listening to and understanding short line positions. In many instances portions, of the proposed legislation were altered to address those concerns. In every instance, they did their very best to understand the intricate financial and operating relationships between the big and small railroads.
We sincerely appreciate that effort and we hope the STB will give us that same consideration.
Mike Ogborn is Managing Director of OmniTRAX, Inc., a transportation management company that provides management services to 17 short line railroads and other transportation companies in Canada and the United States.