Thursday, May 30, 2013

AAR fires at NITL over forced switching proposal

Written by  William C. Vantuono, Editor-in-Chief
Like a U.S. Navy destroyer unleashing all of its weapons simultaneously, the Association of American Railroads has launched a strongly worded attack on the National Industrial Transportation League’s proposal to the Surface Transportation Board for “forced switching,” also known as “mandated access,” “mandatory switching,” and “forced competition.”

“America’s privately owned Class I freight railroads could lose revenue [equivalent] to 80% of their entire annual capital budgets if a forced competition scheme proposed by NITL was adopted,” AAR said in comments filed May 30 with the STB. AAR’s comments were filed in STB proceeding Ex Parte 711, “Petition for Rulemaking to Adopt Revised Competitive Switching Rules.” CLICK HERE to download the full 183-page document.

AAR, in its formal filing, called the NITL’s interswitching calculations “erroneous and misleading,” and full of “incomplete information.” An excerpt:

“The Board could not possibly conclude on the record created in this proceeding that it has any reason to move forward and propose switching rules based on the NITL proposal. Most [who filed comments] did not even attempt to develop an analysis of the proposal’s potential impact. Some commenting parties (USDA, National Grain and Feed Association) chose to look only at the impact of the NITL proposal on limited segments of the freight rail sector. And NITL, the leading proponent of mandatory switching, sought to create the false impression of a limited impact on railroads and on the rail network by ignoring fundamental elements of its own proposal. USDOT excluded from this analysis certain categories of traffic that the NITL proposal appears to cover on its face and that NITL included in its own analysis. AAR and its member railroads are the only commenters to try to assess the impact of the actual rule changes that NITL proposed, and AAR’s evidence does not support further proceedings
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Mark FaganThe AAR enlisted several prominent economics and public policy experts to strengthen its ammunition. Among them is Mark Fagan (top photo), a founding member of management consulting firm Norbridge Inc., an Adjunct Lecturer in Public Policy at Harvard University’s Harvard Kennedy School, and a former Senior Fellow at the school’s Center for Business and Government. An excerpt from his submission:

“Rate reductions are not in themselves public benefits. NITL and some supporters of the NITL proposal have argued in this proceeding that rates will decline for shippers who will be able to access multiple railroads as a result of mandatory switching. However NITL ignores that for mandated access to result in value creation, the lower rates produced by mandated access must be accompanied by sustained productivity gains cost reductions, which in turn lead to growing rail share. In other words, rate reductions in themselves may benefit shipper recipients of those reductions, but they do not on their own create public value. A transfer of funds, without more, from a railroad’s pocketbook to a shipper’s pocketbook yields no public value. NITL has not shown public value flowing from rate reductions.
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Ed Hamberger“Based on 2010 data supplied by the STB, AAR reports that an annual revenue loss of up to $7.8 billion could result from rate reductions NITL is advocating for the benefit of a select group of shippers,” said AAR President and CEO Edward R. Hamberger (pictured, at bottom). “Without this income, the freight rail industry could no longer invest the billions of private dollars needed to maintain and expand the nation’s 140,000-mile rail network. Since 2000, freight railroads have invested more than $110 billion in privately financed capital improvements to their networks. The industry’s capital expenditures in 2010 were $9.77 billion.”

AAR provided grim numbers upon which to base its argument, pointing to “the fact that the NITL forced switching proposal requires far more railcar switching and handling to move the same amount of goods, and could affect an estimated 7.5 million carloads annually, each having an estimated revenue loss to the railroads of $1,044 per carload, according to NITL’s own calculation. Besides the revenue impacts, mandatory switching can also lead to local service disruptions, degraded rail service throughout the system, and a decline in rail productivity. Railroads would ultimately require more resources to move the same amount of freight, reintroducing many of the network inefficiencies that have been eliminated over the past three decades,” since the 1980 Staggers Act that partially deregulated the railroads.

Hamberger continued with the heavy ammo: “NITL would like the railroad industry and users of the rail network to assume enormous risk to benefit a few powerful shipping groups. This is an attempt to favor a few Fortune 500 companies at the expense of the many American businesses that rely on freight rail. Dramatically curtailing capital spending by the railroads on infrastructure, as the NITL proposal would do, is clearly not in the public interest. The railroads’ financial viability not only makes possible the billions of dollars they invest each year so taxpayers don’t have to, but is key to maintaining a rail network that is this country’s supply chain powerhouse. Take away the continued ability of the railroad industry to fund capital improvements to infrastructure and equipment, and you cause irreparable harm to a critical national asset.”

“The fact that NITL does not recognize that its proposal for mandated switching would add inefficiency to the U.S. rail network should give the STB serious pause,” Hamberger concluded. “The STB should be concerned about promoting, not degrading, conduct that enhances the rail efficiency that makes our customers competitive in world markets and goods affordable for all Americans. NITL’s proposal would seriously jeopardize the U.S. rail network’s operational efficiencies and productivity improvements that took more than three decades of hard work, investment, and innovation to sharpen and refine.”

This is a war that has been waged, in varying degrees of intensity, since Staggers was passed. It has intensified in recent years as railroad profits—accompanied by massive increases in capital investment, measurable improvements in safety and service quality, and implementation of state-of-the-art technology—have risen. This present battle in the “war over the rates” appears to be larger than a skirmish. Only time will tell if NITL’s latest attack will be blown out of the water.