Federal Agency Weighs Turning Back Clock on Freight Rail, Economy

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By Edward R. Hamberger

Since 1998, Ed Hamberger has served as president and chief executive officer of the Association of American Railroads (AAR), the world's leading railroad policy, research and standard setting organization for freight railroads of the U.S., Canada and Mexico, as well as Amtrak. With more than forty years of combined experience in private legal practice and the legislative and executive branches of the United States government, Hamberger, considered one of Washington's most-effective transportation policy advocates, works with member railroads to ensure the continued viability of America's railroad industry. Hamberger has also served as an appointed member of the Private Sector Advisory Panel on Infrastructure Financing and as a member of the Presidential Commission on Intermodal Transportation. Most recently, he served on the Blue Ribbon Panel of Transportation Experts, after being appointed by the National Surface Transportation Policy and Revenue Study Commission.

The U.S. freight rail industry is among the most successful comeback stories in American history.

By providing safe, reliable and cost-effective transportation for goods and services, U.S. freight rail is the envy of the world. And through its massive spending in rail infrastructure--over $575 billion since 1980--it is considered an exemplar of how private companies can provide sweeping public benefits.

Freight rail's remarkable record is all the more striking given the depths from which it rose. The resurrection and subsequent flourishing of private U.S. freight rail companies, many of which had hovered near bankruptcy, is a case study in thoughtful government leadership.

Indeed, the success is due to the foresight of government leaders who unleashed the transformational power of the marketplace through partial deregulation.

Partial deregulation 35 years ago laid the foundation for the industry's success. And subsequent federal involvement in rail economics honored the belief that a developed nation required a top-notch freight rail system to enable economic growth--and that it was best provided by private companies in control of their resources rather than government.

STB Ponders Sweeping Changes

A substantial risk is emerging to the foundations of an industry so integral to the U.S. economy. The threat has nothing to do with the business cycle or interest rates or other economic forces. Rather, a federal agency is considering changes that could have sweeping and lasting impact--not only on the rail industry, but on the industries it serves across the U.S. economy.

That agency is the Surface Transportation Board, which has jurisdiction over railroad rates, rail service issues and rail restructuring transactions such as mergers and rail line construction.

Pressured by a small group of interest groups that represent large companies, the STB is weighing new regulations that would have the effect of curbing rail efficiency and cutting investment in rail infrastructure needed to stay competitive with other modes of transportation. The regulations would be a disaster for an industry so central to a U.S. economy on the rebound. These proposals would create an uneven playing field by undermining the industry's ability to compete with other transportation modes.


The efficiency of the entire network will be compromised by forcing new, unpredictable operations.

 


Interest groups that represent large industries have asked the federal government to require railroads to turn over the traffic from the lines they have built to their competitors and force inefficient rail operations. It's indefensible on its face to force railroads that have risked billions of dollars building, maintaining and optimizing their networks to open their system to competitors. Moreover, the efficiency of the entire network will be compromised by forcing new, unpredictable operations that will disrupt operations. Ultimately, most shippers will be disadvantaged by the costs and disruptions of reciprocal shipping move through the system. A few politically connected shippers may benefit, but most others won't.

Another threat is the de-facto re-imposition of federal price controls on railroads. An STB proceeding on July 22-23 broadly addresses the subject of railroad revenues and the proper role of government in the freight rail industry. The Board should not constrain railroad revenues because they are deemed “adequate” under standards adopted thirty years ago. Rather, the Board should support railroad prosperity and growth, while protecting individual shippers from abuses of market power, just as the law currently provides.


The STB should endorse the concept that revenue “adequacy” is a floor, not a ceiling, on railroad revenues.

 


The STB should endorse the concept that revenue adequacy is a floor, not a ceiling, on railroad revenues and that it is in the public interest for railroads to strive for continued improvement in financial performance. Why? Because that money is plowed back into the U.S. rail network to expand freight rail capacity and nurture the growing U.S. economy, and to make essential safety upgrades.

The impact of Board decisions could spread well beyond the scope of the immediate stakeholders and affect the interests of the general public because innumerable industries and millions of consumers depend on high-quality freight railroad performance. Make no mistake--that high quality would be put at risk if proposals limiting rail revenue (and thus investment in infrastructure) are enacted.

What's at Stake

It is well worth underlining how partial deregulation specifically impacted freight rail and the U.S. economy at large--because this is what is at stake as the STB considers efforts to re-regulate the industry.

Partial deregulation enabled massive private investment by railroads allowing rail productivity to surge since 1980. It led to lower rates that attracted large volumes of new traffic, with freight rail competing head on against other modes of transportation such as trucking, pipelines, air cargo and barges, and providing real choice for American companies. Since partial deregulation and the ensuing competition, railroads have won market share--they already account for close to 40 percent of our nation's intercity freight ton-miles--more than any other mode of transportation.

The resurgent railroads provided the foundation for rapid growth in intermodal containerized trains, which have facilitated remarkable growth in U.S. trade across multiple industries. The combination of ample cash flows and efficiencies created a transportation powerhouse that propelled other U.S. industries and the gross domestic product to new heights.

Railroad private capital investments in property, infrastructure, technology and equipment have helped improve service, safety, fuel efficiency--bringing benefits to American businesses and consumers from coast-to-coast.

Investments in new technologies and more efficient operating practices have yielded tremendous environmental benefits, lowering greenhouse gas emissions by an average of 75 percent. Trains today are roughly four times more fuel efficient than trucks, and on average can move one ton of goods 479 miles on a single gallon of fuel.

Our nation's economic prosperity and ability to compete successfully in the global marketplace require vibrant, effective freight railroads. But to be viable, especially in the face of projected increases in freight transportation demand in the years ahead, railroads must be able to both maintain their existing infrastructure and build the substantial new capacity required to handle the additional traffic they will be called upon to haul.

If artificial regulatory restraints are put into place that restrict rail earnings, rail spending on infrastructure and equipment will shrink. The result won't be pretty. Either taxpayers will have to make up the difference or the industry's physical plant will deteriorate, needed new capacity will not be added, and rail service will become slower, less responsive, and less reliable.

Private Investment Yields a Safer, More Efficient Network

The U.S. freight rail network is now safer, more efficient and more affordable than ever before. The reason is because rail companies have earned enough to plow billions of dollars back into the nationwide network--for such priorities as upgraded track, new locomotives and freight cars and thousands of new employees of which 1 in 5 have served in the military.

At the same time, American companies have greatly benefited from the record rail investments. Rail rates are lower today than when the government stepped back from the day-to-day running of railroads, and shippers can move twice as much freight for roughly the same price as in 1980.

As our economy evolves, railroads will be called upon to make additional investments in their networks to provide safety upgrades, to expand capacity and to hire more employees to stay competitive.

For that to happen, appropriate public policies must be in place. And key among those policies should be that for reasons of international competitiveness, safety, and economic growth, the United States has a critical and growing need for investment in freight rail infrastructure. Federal policy should recognize that we will need more private capital investment, not less. The proposals being considered at the STB would inhibit investment.

The bottom line is this: new regulations that tinker with freight rail revenue adequacy could undermine the success that has been forged over the last several decades and set the industry on a path toward failure.

If America wants to remain a global economic leader, if U.S. government officials want to ensure energy independence through rail transportation of crude oil, if U.S. companies want to ship their products to new markets and create jobs, then the STB shouldn't take a giant step backward and put that all at risk.

(Click image to enlarge.)

DER graphic 7/22/2015