Railroads free, leave us be!

Written by William C. Vantuono, Editor-in-Chief
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Freedom from excessive regulation helped transform the freight railroads into the most cost effective of all transportation modes. There’s no reason to change that.

For most transportation in America, it’s too much like checking in at the Hotel California, where, as the Eagles sang, “you can check out any time you like, but you can never leave … We are all just prisoners here, of our own device.” That device is government financial and political dependency.

Our federally financed highway system is crumbling under heavy truck loads worsened by insufficient repair and reconstruction funding. Our federally financed Air Traffic Control System is dependent on obsolete vacuum-tube technology, requiring inefficient greater spacing of aircraft. New pipeline construction is a prisoner of politics. Ocean port automation is retarded by politically protected labor unions. And public-purse-reliant Amtrak operates over federally owned Northeast Corridor infrastructure dating to the 1930s.

The exception is the privately owned freight railroad industry, itself once bound to a form of government dependency—harsh economic regulation—that retarded renewal, crushed creativity, kindled bankruptcy filings, alienated investors, exasperated customers and darn near made freight railroads another ward of the state as they are too essential to fail without inflicting substantial national economic harm.

No longer are freight railroads analogous to playwright Samuel Beckett’s forlorn characters Vladimir and Estragon—endlessly awaiting Godot while muttering, “nothing to be done.” Freight railroads, in contrast to highways, the Air Traffic Control System, pipelines, ocean ports and Amtrak, were largely freed from government dependency 35 years ago. Credit recognition of market-based solutions and the private sector investments they propagate.

Return from the brink

The road back to financial self-sufficiency was neither easy nor immediate for railroads. The outcome forms a case study in the underlying evils of excessive economic regulation and the societal benefits of market forces.

After the 1980 Staggers Rail Act provided railroads the means to break free of overly restrictive economic regulation, the steps were tentative. For many years, freight railroads were reluctant to test the limits of their long awaited economic freedom. Eventually, small steps led to larger steps. Finally, enormous strides. Indeed.

No longer stunning Congress with bankruptcy filings and unrelenting public-purse spending requests, less shackled freight railroads effectively use market-based tools to figure out, on their own, how to meet customer demand at lower cost; attract private capital for maintenance, renewal and capacity expansion; and avoid destructive work stoppages—all the while providing a 236,000-strong work force with job security and solid middle-class wages and benefits, especially as measured against other blue-collar industries.

Congressional lawmakers should read, mark, inwardly digest and take credit for this result. Were there more such points of light as is the legacy of the Staggers Rail Act, Congress’ approval rating would not register, as it does, lower than a snake’s belly in a wagon rut.

One needn’t be a poet laureate to understand the harmonic cadence of the confirming data. Since partial economic deregulation of railroads in 1980, every consequential railroad productivity and safety measurement has turned northward as rail freight ton-miles (a standardized measurement across all modes) have climbed some 90%.

Rail fuel efficiency more than doubled; the cost of rail freight loss and damage declined 90%; more than 13 million truck trailers and containers are taken off the highway annually to travel by rail; train accident and rail employee injury rates are down 80%; more than half a trillion dollars has been invested in improved and expanded rail plant and equipment (more than $100 billion invested in the past four years); and inflation-adjusted average rail rates are down 42%. In fact, American freight railroad rates are less than half the railroad rates charged in major European nations.

Privately owned and operated freight railroads have become the most cost effective of all transportation modes, capturing 40% of freight ton-miles, but only a 10% share of total freight revenue.

Where nearly a quarter of the nation’s freight railroad plant was operated in bankruptcy prior to partial deregulation, with the industry then in danger of nationalization, all major railroads today are approaching the adequate revenue mark required to attract and retain private-sector investment. Such was the intention of Congress as expressed in the National Transportation Policy rewritten as part of the Staggers Rail Act.

A loud minority

Such a narrative now would be unnecessary were it not for a minority of highly vocal shippers—many international conglomerates and domestic industries considerably larger and more profitable than railroads—that seek to restore greater government involvement in railroad business decisions.

This minority of shippers seeking restoration of government micro-management of railroads might, in the short term, obtain for them lower freight transport costs and feather their personal retirement nests with appreciative bonuses. History, however, well records the longer term negative impact on efficient rail service. Substituting bureaucratic decision making for market responsive decisions serves only to spook private-sector investors. Such was the case before railroads were largely freed from government dependency; such would be the case were federal micro-management of railroads restored.

At the core of the railroad renaissance is one of the most scarce commodities—private sector investment, which has funded new technology allowing elimination of the costly to operate and dangerous caboose; implementation of remote control yard operations; and rapid development of Positive Train Control that monitors and controls train movement using computers, transponders and the Global Positioning System (GPS).

Additional private sector investment has been used by railroads to purchase higher-horsepower, more fuel-efficient and technologically advanced locomotives; to fund track improvements; and permit infrastructure expansion to handle steadily increased freight demand that is further expected to grow by one-third over the next several decades.

Were investors sent conflicting signals—such that Congress is going to change the rules and revert to micromanaging railroad decision making—the substantial risk would be that these investors would again abandon railroads and pursue no shortage of alternative global investment opportunities. Where a government harness can serve quickly to retard investment, restoring investor confidence is a far more difficult and lengthy endeavor, as history has shown.

The railroads’ largest customers—electric utilities at the forefront of demands that Congress restore micro-management of railroads—have a different message when it involves their own investment needs. Florida Power & Light told its own regulators, “If we can’t make an attractive investment for the shareholder, then we are going to have a very difficult time going in the marketplace and competing for [investment] dollars.”

Where assets are long-lived, investors seek steady and secure returns—predictability. Consider: Since the Staggers Rail Act was passed in 1980, it has remained largely intact as written. The Railway Labor Act continues to shine as a manual for labor peace, as there has not been a national railroad shutdown in more than two decades. Moreover, a compensation package that places railroad workers in the top 6% of wage earners nationwide, and provides a generous industry-financed, defined-benefit pension with a lower retirement age than Social Security, assures a low turnover of employees; higher levels of training and skills; and impressive workforce productivity.

Less intrusive economic regulation allows railroad management to develop best practices, unimpeded by bureaucratic oversight that slows decision making in an economy requiring nimble business assessments and reactions.

STB as referee

Rather than micro-manage marketing and pricing decisions as regulators did for almost a century prior to the Staggers Rail Act, the STB now plays a role more akin to a football referee, calling infractions of broad regulatory principles. In today’s more efficient regulatory environment, railroad management is freer to choose actions best responsive to ever and faster-changing market conditions.

This does not leave the most vulnerable shippers without grievance redress. For shippers demonstrating few or no effective alternatives to rail transportation—such as trucks or barges—the STB has authority to lower rates, order reparations and mandate the use of an offending railroads’ tracks by another rail carrier. Over the past decade, these so-called captive shippers who have filed grievances with the STB have prevailed more often than have the defending railroads.

The STB has under way efforts to simplify and make less costly the assessment and resolution of captive shipper complaints. Arbitration and mediation are being made available in lieu of formal court-like procedures before the STB that require shippers to employ accountants, attorneys, economists, professional engineers and other experts to spar almost endlessly with railroad witnesses, and then replay that exorbitantly expensive process in a federal court.

Additionally, the STB has ruled that product competition (the ability of an electric utility to substitute natural gas for coal) cannot be used by a railroad to defend itself against allegations of unreasonable coal rates. As for chemicals and other shippers whose business involves multiple origins and destinations, the STB is assisting in analyzing truck rates between those myriad origin and destination points to help determine, at less cost to the complainant, the reasonableness of rail rates.

In economics, there is always a trade-off. Government involvement in private-sector decision making creates an uncertainty about the expectations of future returns on investment. Should investors perceive new uncertainty, their response will be twofold. Stockholders, who own the railroad, will demand some of their capital be returned through higher stock dividends and buybacks of stock. Lenders will demand higher interest rates. Both ways, new investment is slowed, service suffers and operating and capital costs increase.

Thus, the appropriate question is whether railroads are earning a sufficient return on invested capital to satisfy investors whose horizon is long-term. In writing the Staggers Rail Act, Congress instructed regulators “to maintain and revise as necessary standards and procedures for establishing revenue levels … [that] permit the raising [of new capital] and cover the effects of inflation.”

The STB now uses a test measuring rate of return on original asset cost, when the real cost to replace, say, a 75-year-old asset is considerably more. A 10% return on an asset costing $1 million in 1940 is equivalent to less than a 1% return today, as the inflation-adjusted cost to replace that asset is some $17 million in 2015 dollars.

Shippers argue that accelerated depreciation of assets increased rail costs, lowered profits and allowed higher maximum rates. Shifting to replacement costs would have shippers paying for those assets a second time, as most have decades of life remaining and may never be replaced.

The STB should probe the impact of shifting to replacement costs, including the difficulty of estimating them for assets having decades of life remaining, and how much higher the cost of capital and freight rates might rise were replacement costs used.

Congress has enough public-purse challenges without risking actions that again send railroad investors fleeing, placing yet another burden on the general taxpayer.

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