Great expectations in hard times

Written by William C. Vantuono, Editor-in-Chief

The railroads will help the U.S. economy recover—if Congress doesn’t hinder them.

Throughout a distressing 2009, many analysts and economists, and not a few ordinary citizens, searched for any signs of economic recovery, seemingly in vain. Some had hearing keen enough to hear one voice repeatedly stressing the positives: the U.S. freight railroad industry.

True, rail freight suffered along with most other industrial, commercial, and service sectors, duly documented by Association of American Railroads weekly traffic reports. But AAR and the industry itself repeatedly noted that rail’s fundamental economic posture was sound, and would be a factor—if not the factor—leading the economy to recovery. AAR formalized its message in February, releasing “Great Expectations: Railroads and U.S. Economic Recovery,” to drive the point home.

As 2010 progresses, rail traffic is indeed recovering, appearing to set the stage for some form of economic rebound, strength yet to be determined. Still unclear is whether the freight rail industry’s pivotal role in that recovery will be more widely acknowledged. Indeed, congressional activities and focus in Washington at times seem more intent on punishing the industry for (or despite) its strong economic performance.

A convergence of benefits . . .

“Whether it’s by supporting millions of American jobs, keeping the things we buy and use more affordable, or easing traffic congestion and lowering greenhouse gas emissions, freight rail confers tremendous public benefits on society,” AAR says.

“Unlike all other modes of transportation, freight rail delivers these benefits with almost no taxpayer help”—no lightweight factor at a time when the specter of higher taxes (and/or, conversely, reduced services) looms across almost every facet of economic life.

Put simply: Efficiency. Economy. Environmentally benign. Freight rail is lean and green—and has been so even before the current economic difficulties arose. What’s not to like? “Since 1980, railroads have nearly doubled how much freight they move—while using virtually the same amount of fuel,” AAR states. Among other gains, “That means moving freight by rail instead of truck reduces greenhouse gas emissions by on average 75%.” That efficiency comes largely from within the industry, not the taxpayer, AAR says: “The four largest major U.S. railroads spend far more on capital outlays and maintenance of track and roadway than the vast majority of state highway agencies spend on their highway programs.” And those outlays spur job creation and retention. “Based on U.S. Department of Commerce data, freight railroads generate nearly $265 billion in total annual economic activity, and directly or indirectly support 1.2 million jobs, including rail suppliers and other manufacturing, retail, and service firms throughout the economy.”

Perhaps the most overlooked advantage rail offers is its cost efficiency bestowed on its customer base. “Average rail rates were 49% lower in 2008 than in 1981,” adjusted for inflation, AAR says. “That means the average shipper can move twice the freight today for the same price it paid 27 years ago.”

. . . matched by rising expectations . . .

Such prowess has triggered new demands on the freight rail industry. Some, such as the effort to revive the symbiosis of freight and passenger rail—particularly U.S. high speed rail—are a challenge the industry welcomes. “Striking the right balance as we grow both passenger and freight rail is key to ensuring America’s economic engine keeps running,” AAR stresses, while cautioning “the development of a world-class passenger rail system must not come at the expense of our country’s existing world-class freight rail systems.”

Industry groups including AAR, ASLRRA, and RSI are participants of OneRail, a freight/passenger coalition seeking to smooth out difficulties of shared use. And while many see a balancing act ahead, they also see passenger railroads as another customer, and partner, willing to work to the benefit of both.

Far more contentious is a disgruntled shipper segment disputing the freight industry’s cost benefits to its customers. Personified by CURE, this customer segment clamors for “changes in federal law and policy that would require railroads to provide more competitive pricing and reliable service. CURE’s goal is to hold railroads accountable to their customers and the public,” often through claims that individual shippers, or whole industry sectors such as chemical, paper/forestry, or electric utilities, suffer punitive fiscal charges.

AAR, reminding Congress of the benefits of partial deregulation generated by the Staggers Act of 1980, counters, “Railroads remain subject to most antitrust laws, including those that prohibit railroads from getting together to set rates, allocated markets, or unreasonably restrain trade. The few narrow antitrust exemptions available to railroads cover areas under [Surface Transportation Board] jurisdiction.” CURE counters by vaguely advocating “legislation to improve” STB. The targeting of STB by CURE is perhaps curious, considering (as AAR notes) “an independent study conducted at the request of STB determined that competition in the industry is working, and that while there have been incremental rail rate increases in recent years, these increases are in line with overall increased costs.”

. . . and a federal fixation on safety

The specter of rate re-regulation is still in flux (see Larry Kaufmann’s commentary), but Congress has already made its move in terms of safety, approving a largely unfunded mandate to install PTC on large segments of the U.S. freight rail network by the end of 2015. Congress ignored the data documenting rail as the safest mode of ground transportation, insisting that a very safe mode make itself safer. Says AAR, “For railroads, pursing safe operations is not an option—it’s an imperative. Today, railroads have lower employee injury rates than most other major industries.” Moreover, safety has improved year by year, “with 2008 the safest year on record for U.S. railroads,” AAR stresses, largely through its own internal motivation. What will the benefits of making a safe mode even safer cost the industry and its customers (the latter including passenger railroads, as they seek to expand)?

Offering an olive branch along with its concern, AAR says, “Railroads are committed to complying with the Congressional PTC mandate, but this well-intended legislation will have negative unintended consequences. The initial railroad PTC installation cost is roughly equal to what railroads spend in a typical year on all infrastructure-related capital spending.” That places much-needed capacity expansion plans (for a recovering economy seeking alternatives to highway congestion) at much risk. Safety is motherhood and apple pie, but at what price and for what gain? Says AAR, “The FRA estimates that . . . railroads will incur approximately $20 in PTC costs for each $1 of PTC benefits.” Is the industry to foot the whole bill? Charge Amtrak and passenger customers a pro-rated share? Charge its entire customer base, assuming it’s not thwarted by reregulation? Or should the federal government perhaps chip in its share?

The freight rail industry welcomes the great expectations sought by U.S. industry and U.S. government. Still elusive, however, is agreement on “balanced, market-driven policy initiatives that instead offer a better way forward to ensure freight rail can deliver on these expected public benefits.”

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