STATEMENT OF JENNIFER MACDONALD ASSISTANT VICE PRESIDENT GOVERNMENT AFFAIRS ASSOCIATION OF AMERICAN RAILROADS BEFORE THE

Transcription

1 STATEMENT OF JENNIFER MACDONALD ASSISTANT VICE PRESIDENT GOVERNMENT AFFAIRS ASSOCIATION OF AMERICAN RAILROADS BEFORE THE NATIONAL CONFERENCE OF STATE LEGISLATURES TRANSPORTATION COMMITTEE APRIL 25, 2008 Association of American Railroads 50 F Street NW Washington, DC

2 Introduction On behalf of the members of the Association of American Railroads (AAR), thank you for the opportunity to discuss freight railroads. AAR members account for 75 percent of U.S. freight railroad mileage, 92 percent of employees, and 95 percent of revenue. Comprehensive, reliable, and cost-effective freight rail service is critical to your states and to our nation. Operating in 49 states (all except Hawaii), freight railroads serve nearly every industrial, wholesale, retail, agricultural, and mineral-based sector of our economy. And in the words of the former Railways Adviser at the World Bank (and one of the world s foremost authorities on global rail operations), Because of a market-based approach involving minimal government intervention, today s U.S. freight railroads add up to a network that, comparing the total cost to shippers and taxpayers, gives the world s most cost-effective rail freight service. Our economy cannot prosper in an increasingly-competitive global marketplace if our freight railroads are unable to meet our growing transportation needs. Having adequate rail capacity is critical to meeting those needs. Railroads must be able to both maintain their extensive existing infrastructure and equipment and build the substantial new capacity that will be required to transport the large amount of new traffic that will be generated in the years ahead. I respectfully suggest that members of this committee, your colleagues in state governments throughout the country, and other policymakers in Washington and elsewhere have critical roles to play. Indeed, policymakers should take steps that assist and, just as importantly, not take steps that hinder railroads in making the investments needed to provide the current and future freight transportation capacity our nation requires. Overview of U.S. Freight Railroads Freight railroads are critical to America s economic health and global competitiveness. They move 42 percent of our nation s freight (measured in ton-miles) everything from lumber to vegetables, coal to orange juice, grain to automobiles, and chemicals to scrap iron and connect businesses with each other across the country and with markets overseas. Railroads also directly contribute tens of billions of dollars each year to states economies through wages, purchases, retirement benefits, and taxes. U.S. freight railroads are, with minor exceptions, privately-owned and operated, and the vast majority of the tracks over which they operate are owned, built, maintained, and paid for by the railroads themselves. In fact, each year railroads invest up to $20 billion to construct and Association of American Railroads Page 1 of 24

3 maintain their equipment, tracks, and other infrastructure, and pay hundreds of millions of dollars to state and local governments in property taxes on it. By contrast, railroads primary competitors trucks and barges operate on government-provided highways and waterways and pay only a fraction of the damage and other costs associated with their use of their publicly-provided rights-of-way. The seven Class I U.S. freight railroads account for most of the industry s mileage, employees, and revenue. Ranging in size from 3,200 to more than 32,000 miles operated and from 2,700 to more than 53,000 employees, Class I railroads typically operate in many different states and concentrate largely on long-haul, high-density intercity traffic lanes. There are also more than 550 non-class I freight railroads, ranging in size from tiny operations run by volunteers over a few miles of track to regional railroads not far from Class I size. Most non-class I railroads operate in one or two states and are especially important in rural areas, where they connect local communities to the national rail network. U.S. freight railroads have approximately 197,000 employees. With average total compensation in 2006 of $93,000, freight railroading is one of America s highest-paying industries. What Freight Railroads Carry Class I Carloads Originated (millions) America s freight railroads move 33 vast amounts of just about everything over a 30 Class I carloads originated rose 47 percent from 1990 through ,000-mile network. Coal, used mainly in electricity generation, is the most important single commodity carried by U.S. railroads. In , it accounted for 44 percent of Class I rail tonnage and 21 percent of revenue. Source: AAR Freight Commodity Statistics Other major commodities carried by rail include chemicals, including industrial chemicals, ethanol, plastic resins, and fertilizers; grain and other farm products; non-metallic minerals such as phosphate rock, sand, and crushed stone and gravel; food products; steel and other metal products; forest products, including lumber, paper, and pulp; motor vehicles and parts; waste and scrap materials, including scrap metal and scrap paper; and much more. Association of American Railroads Page 2 of 24

4 Intermodal (the movement of shipping containers or truck trailers by rail and at least one other mode of transportation, usually trucks) has been the fastest growing rail traffic segment. Rail intermodal transports a huge range of consumer goods everything from bicycles to auto parts, lawn mowers to glassware, greeting cards to bottled water Source: AAR U.S. Rail Intermodal Traffic: (Millions of Trailers and Containers) Intermodal has been the fastest growing major segment of the U.S. rail industry for many years. and increasing amounts of industrial and agricultural products as well. It combines the doorto-door convenience of trucks with the long-haul economy of railroads. Rail intermodal traffic has quadrupled in the last 25 years, rising from 3 million trailers and containers in 1980 to more than 12 million units in 2006 and Every intermodal trailer or container that moves by rail means one less truck on An Upward Trend in U.S. Rail Traffic Weekly Carloads + Intermodal Units (000s) Trend Line your states highways. In 2006, America s railroads moved more freight than ever before. Rail traffic Jan Mar Excludes U.S. operations of Canadian railroads. Source: AAR Weekly Railroad Traffic was down slightly in 2007 (mainly due to the problems in the housing and auto sectors). Even so, U.S. railroads moved more freight in 2007 than in any previous year except The Cost-Effectiveness of U.S. Freight Railroads After more than 90 years of increasingly-oppressive regulation that brought the U.S. freight railroad industry to the brink of ruin, the Staggers Rail Act of 1980 freed railroads to compete more effectively in the transportation marketplace. Staggers gave freight railroads the opportunity to operate like most other businesses in terms of deciding for themselves how to use their assets and price their services rather than have regulators in Washington tell them what routes to use and what rates to charge. Railroads responded to Staggers by sharply raising their productivity and passing most of these productivity gains to shippers. Association of American Railroads Page 3 of 24

5 The result? Average freight rail rates have fallen 54 percent in inflationadjusted terms from 1981 to This means that the average rail shipper can move twice as much freight today for the same inflation-adjusted price as 25 years ago. Today, in fact, U.S. freight railroads Average Inflation-Adjusted U.S. Freight Railroad Rates Are Less Than Half What They Were in 1981 (Class I Revenue Per Ton-Mile, All Commodities) Adjusted for Inflation (Down 54%) Not Adjusted for Inflation (Down 6%) '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07p p - preliminary Source: AAR are the most cost effective in the world. According to World Bank data, average U.S. freight rail rates are half those in China and Japan, and two to four times lower than in major European countries. Their cost effectiveness U.S. Freight Rail Rates Are the Lowest in the World (Index U.S. = 100) is a major reason why the U.S. freight U.S. Canada Russia rail industry is the envy of the world. China Japan The freight railroad experience is France Italy also substantially different from the South Africa Spain experience in other U.S. network industries. India Since 1995, for example, the average price Germany of electricity (not adjusted for inflation) is up 42 percent nationwide; local telephone Data are 2005, adjusted for purchasing power parity. Source: World Bank Average Prices: RRs vs. Other Network Industries service, up 84 percent; and cable television, 350 (Indexed 1985=100) up a whopping 218 percent. Over this 300 Cable TV period, average rail rates (not adjusted for inflation) are down 2 percent Local Telephone Electricity 100 Do some shippers pay more than 50 Railroads they d like for rail service, and have rates 0 for some rail customers increased over the '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 RR = Class I avg. revenue per ton-mile Cable TV = CPI cable & satellite television, U.S. city avg. Electricity = U.S. avg. revenue per kwh, all sectors Telephone = CPI telephone service - local charges Sources: Bureau of Labor Statistics, Energy Information Admin., Association of American Railroads past couple of years? Yes. All of us pay more than we d like to for some things. But the unavoidable truth is that in order to expand infrastructure and service, railroads must like every other business in a free market economy 1 Measured in revenue per ton-mile. Association of American Railroads Page 4 of 24

6 obtain from their customers the resources necessary to support the growth their customers want. Moreover, in aggregate, the added costs to rail customers associated with recent rail rate increases do not come close to matching the tremendous savings most rail customers have experienced over the years due to railroad cost effectiveness. Freight Railroads Offer Huge Public Benefits In addition to their cost effectiveness, freight railroads offer enormous public benefits: Fuel efficiency Railroads are three or more times more fuel efficient than trucks. In 2007, U.S. freight railroads, on average, moved a ton of freight 436 miles per gallon of fuel. If just 10 percent of the long distance freight that moves by highway moved by rail instead, fuel savings would exceed one billion gallons per year. Greenhouse gases Greater use of freight rail offers a simple, p - preliminary Source: AAR inexpensive, and immediate way to p meaningfully reduce greenhouse gas emissions without harming the economy. Because of railroads fuel efficiency, every ton-mile of freight that moves by rail instead of truck reduces greenhouse gas emissions by two-thirds or more. Highway congestion Highway gridlock costs $78 billion per year just in wasted travel time (4.2 billion hours) and wasted fuel (2.9 billion gallons), according to a recent Texas Transportation Institute study. But since a typical freight train carries the freight of several hundred trucks, railroads help reduce highway congestion RRs Help Reduce the High Cost of Highway Gridlock $80 $70 $60 $50 $40 $30 $20 $10 On Average, U.S. Freight Railroads Move a Ton of Freight 436 Miles Per Gallon of Fuel Cost of Highway Congestion* (Billions of 2005 Dollars) The cost of highway congestion is up 383 percent in inflation-adjusted terms since As all of you know, building more $0 highways is incredibly expensive *Cost of wasted travel time and wasted fuel. Source: Texas Transportation Institute and time consuming. Freight railroads, though, significantly reduce the costs of maintaining existing roads and the pressure to build costly new roads. The American Association of State Highway and Transportation Officials (AASHTO) estimated a few years ago that if all rail freight were shifted to trucks, it would cost governments an extra $128 billion for highway improvements. Association of American Railroads Page 5 of 24

7 Pollution The Environmental Protection Agency estimates that for every ton-mile, a typical truck emits roughly three times more nitrogen oxides and particulates than a locomotive. Other studies suggest that the rail advantage is even greater. Safety The U.S. rail industry s safety record is excellent and continues to improve 2006 and 2007 were the safest years ever for U.S. railroads. Railroads are safer than most other industries and than other modes of transportation. Freight Railroad Profitability Over the past couple of years, U.S. freight railroads have achieved financial results that are much better than their results since the 1970s. In 2006, U.S. railroads carried more freight than ever before, and their net income was higher than ever before as well. Railroads enjoyed relatively good financial results in 2007 as well. But these financial results need to be kept in context. Statements about railroads record profits usually ignore the fact that rail profitability historically has been quite poor. Thus, an improvement from earlier years may be a record, yet still fall short of the earnings achieved by most of the other industries against which railroads compete for capital. In fact, rail industry profitability has consistently lagged most other industries and that is still the case today. Return on equity (ROE) is a commonly-used measure of profitability. (It measures how much a company earns within a specific period in relation to the amount invested in its stock.) According to data compiled by Value Line (a financial information firm), the ROE for the U.S. freight railroad industry in 2006 was 14.0 percent possibly the best ROE it has ever had. Even Though the Rail Workplace is 140,000 Miles Long, Railroads Are Safer Than Most Other Industries Number of Industries RRs Return on Equity*: Rail Industry vs. Other Industries Lost Workday Injury & Illness Rates Per 100 Employees: 2006 All Private Industry Mining Inland Water Transp. Source: U.S. Bureau of Labor Statistics Agric. Constr. Grocery Stores All Mfg. # of industries with an ROE higher than the rail industry # of industries with an ROE lower than the rail industry Air Transp. Trucks p *net profit divided by year-end shareholders' equity p - preliminary Source: Value Line Association of American Railroads Page 6 of 24

8 By contrast, the median ROE in 2006 for the 88 industries (encompassing around 1,700 firms) for which Value Line calculates ROE was 16.5 percent 18 percent higher than the rail figure. In fact, in 2006 railroads ranked tied for 58 th among the 88 industries for which Value Line calculates ROE. Value Line data for 2007 indicate that the railroad median (14.0 Rail Industry Profitability* Lags Most Other Industries 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Median All Industries Railroads p *Return on equity (net income divided by year-end shareholders' equity.) p - preliminary Source: Value Line percent) will again fall short of the median for all industries (16.0 percent). In other words, while recent years may have been the best financial years ever for railroads, they have not been sufficient to bring railroads even to the mid-point among all industries. It is hard, therefore, to take seriously the charge made by some that railroads are earning excessive profits. It is noteworthy that some of the industries that claim to be most captive to rail have much higher profitability rates than railroads do. The ROE for the chemical industry, for example, is typically far higher than the ROE for the rail industry. 25% 20% 15% 10% 5% 0% The Chemical Industry is Far More Profitable Than the Railroad Industry ROE Chemicals* ROE Railroads p *Consists of basic chemical, diversified chemical, and specialty chemical industries combined p - preliminary Source: Value Line The Focus Must Be on Capacity Expansion Our future economic prosperity depends on the viability and effectiveness of our freight railroads. But to be viable and effective, especially in the face of huge projected increases in freight transportation demand over the next 20 to 30 years, railroads must be able to invest adequately in their networks. This point is especially important today. Since the Staggers Act, U.S. freight railroads have worked off large amounts of excess capacity. On some rail corridors and locations, excess capacity no longer exists. Looking ahead, as their traffic continues to grow, railroads will Association of American Railroads Page 7 of 24

9 increasingly need to concentrate on building new capacity and finding ways to better utilize their existing capacity while continuing to maintain and replace their existing capacity. The massive investments railroads must make in Capital Expenditures as a % of Revenue their systems reflect the extreme capital intensity of for Various U.S. Industries: Avg railroading. In fact, railroads are at or near the top among Average all manufacturing 3% all U.S. industries in terms of capital intensity. From 1997 to 2006, the average U.S. manufacturer spent 3 percent of revenue on capital expenditures. The comparable figure for U.S. freight railroads was 17 percent, or more than five times higher. Likewise, in 2006, railroad investment in plant and equipment per employee was $662,000 eight times the average for all U.S. manufacturing ($84,000). Finally, it might surprise you that the four biggest Class I railroads spend far more on capital outlays and maintenance of their track and related infrastructure than the vast majority of state highway agencies spend on their respective highway Food manufacturing 2% Petroleum & coal products mfg. 3% Machinery manufacturing 3% Motor vehicles & parts mfg. 3% Wood product mfg. 3% Fabricated metal product mfg. 3% Chemicals manufacturing 4% Plastics & rubber products mfg. 4% Paper manufacturing 4% Computer & electr. product mfg. 5% Nonmetallic mineral product mfg. 5% Electric utilities 13% Class I Railroads 17% Note: Utilities are Source: U.S. Bureau of the Census, AAR, EEI RR Spending on Way & Structures vs. State Highway Agency Spending: 2006 ($ billions) Total 1. Texas $ Florida $ California $4.19 Union Pacific $4.17 BNSF $ New York $ Pennsylvania $ Illinois $3.30 CSX $ Michigan $ North Carolina $ Ohio $2.14 Norfolk Southern $ Georgia $1.88 networks. Only the highway agencies of Texas, Florida, and California spend more on roadway capital and maintenance than Union Pacific and BNSF each spend on their networks. CSX and Norfolk Southern are in the top ten compared to all states as well. In short, freight railroading simply cannot be done on Data include capital outlays and maintenance expenses. Sources: FHWA the cheap. Highway Statistics Table SF-12 and AAR analysis of R-1 annual reports. The long-term forecast is for freight rail traffic to trend steadily higher. The U.S. Department of Transportation recently forecast that freight railroad demand will rise 88 percent by If the increase in rail traffic in the 15 years following 2006 simply matches the rate of growth over the 15 years prior to 2006, by 2021 Class I carriers will be originating approximately 41 million carloads up from 32 million in The magnitude of the looming freight rail capacity issue was also out by a recent study by Cambridge Systematics, a prominent economic consulting firm. The purpose of the study, which Association of American Railroads Page 8 of 24

10 focused on 52,000 miles of primary rail corridors, was to estimate the cost of the expansion in capacity necessary for U.S. railroads to handle the 88 percent increase in freight rail traffic forecast by the DOT for The study found that if rail 2035 If No Improvements Made capacity needs are not properly addressed, by 2035 some 16,000 miles of primary rail corridors nearly one-third of the 52,000 miles covered in the study will be so congested that train flows would be Below capacity Near capacity unstable and congestion and service At capacity Above capacity delays would be persistent and substantial. Because the rail system is so interconnected, this outcome would mean that the entire U.S. freight rail system would become, in effect, disabled. Railroads Are Working Hard to Increase Capacity U.S. freight railroads are working hard to address the host of factors that influence the fluidity and resiliency of their operations. For example, railroads have been spending record amounts to improve the quality and quantity of their asset base, including track, Class I Infrastructure and Equipment Spending* locomotives, and freight cars. Class I Per Mile of Road Owned: $220,000 railroad capital spending in 2007 was a $200,000 record $9.2 billion, up from $5.9 billion in $180, If maintenance expenses are included $160,000 in addition to capital spending, from 1980 $140,000 through 2007 U.S. freight railroads have $120,000 $100,000 invested approximately $420 billion p *Capital spending + maintenance expenses - depreciation p - preliminary Source: AAR more than 40 cents out of every revenue dollar on their tracks, related infrastructure, and equipment. In 2006 and 2007, Class I railroads devoted nearly $20 billion each year to these purposes. In addition, railroads have been aggressively hiring and training new employees. Class I railroads had 11,000 more employees in December 2007 than they did in December Association of American Railroads Page 9 of 24

11 Technology has always played a key role in expanding rail capacity. Signaling systems have become more sophisticated; trains have become longer and heavier; locomotives have become more powerful and more reliable; and track structures have become more robust and thus less prone to outages for maintenance or because of failure. Freight railroads have always been at the forefront in the use of computers and information technology, and today railroads are rapidly expanding their use of these technologies to improve efficiency and the fluidity of their operations, thereby adding capacity without adding more infrastructure. Policymakers Can Help Address the Rail Capacity Funding Gap Freight railroads will continue to spend massive amounts to improve and maintain their systems. But even with their improved financial performance, funding constraints will likely prevent railroads from meeting optimal future rail infrastructure investment needs entirely on their own. This funding shortfall means that many rail projects that would otherwise expand capacity and improve the ability of our nation s farms, mines, and factories to move their goods to market, speed the flow of international trade, relieve highway congestion, reduce pollution, lower highway costs, save fuel, and enhance safety will be delayed or never made at all. I respectfully suggest that it is in our nation s best interest to ensure that optimal freight railroad capacity enhancements are made. Policymakers can help address the rail capacity funding gap in several ways: Rail Infrastructure Tax Incentives. S. 1125/H.R (the Freight Rail Infrastructure Capacity Expansion Act of 2007) now before Congress calls for a 25 percent tax credit for investments in new track, intermodal facilities, yards, and other freight rail infrastructure projects that expand rail capacity. All businesses that make capacityenhancing rail investments, not just railroads, would be eligible for the credit. The stimulatory benefit of a rail infrastructure tax credit (ITC) would be great. U.S. Department of Commerce data indicate that every dollar of freight rail infrastructure investment that would be stimulated by a rail infrastructure ITC would generate more than three dollars in total economic output because of the investment, purchases, and employment occurring among upstream suppliers. We estimate that new rail investment induced by a rail ITC would generate approximately 20,000 new jobs nationwide. A rail ITC addresses the central challenge of how to move more freight without causing more highway gridlock or environmental degradation. A partial list of organization that support a rail infrastructure tax credit is attached as Appendix 1. Short Line Tax Credit. Since 1980, more than 375 new short lines have been created, preserving thousands of miles of track (much of it in rural areas) that may otherwise have been abandoned. In 2004, Congress enacted a 50 percent tax credit ( Section 45G ) for Association of American Railroads Page 10 of 24

12 investments in short line track rehabilitation. The focus was on assisting short lines in handling the larger and heavier freight cars that are needed to provide their customers with the best possible rates and service. Since the enactment of Section 45G, hundreds of short line railroads rapidly increased the volume and rate of track rehabilitation and improvement programs. For example, the replacement of railroad ties, a key component of handling heavier cars, has increased by half a million ties per year in both 2005 and 2006 as a result of the credit. Unfortunately, Section 45G expired in Pending legislation in Congress (S. 881/H.R. 1584, the Short Line Railroad Investment Act of 2007 ) would extend the tax credit and thus preserve the huge benefits it delivers to virtually every state in the country. Public-Private Partnerships. Public-private partnerships reflect the fact that cooperation is more likely to result in timely, meaningful solutions to transportation problems than a go-it-alone approach. Without a partnership, projects that promise substantial public benefits in addition to private benefits are likely to be delayed or never started at all because it would be too difficult for either side to justify the full investment needed to complete them. In contrast, if a public entity shows it is willing to devote public dollars to a project based upon the public benefits that will accrue, the private entity is much more likely to provide the private dollars (commensurate with private gains) necessary for the project to proceed. Partnerships are not subsidies to railroads. Rather, they acknowledge that private entities should pay for private benefits and public entities should pay for public benefits. In many cases, PPPs only involve the public contributing a portion of the initial investment required to make an expansion project feasible with the railroad responsible for funding all future maintenance to keep the infrastructure productive and in good repair. Say No to Reregulation. Reregulation would prevent railroads from earning enough to make the massive investments a first-class rail system requires. Under reregulation, rail earnings, and therefore rail spending on infrastructure and equipment, would plummet; the industry s existing physical plant would deteriorate; needed new capacity would not be added; and rail service would become slower, less responsive, and less reliable. (This issue is discussed further below.) Public investment in freight rail infrastructure projects is justified because the extensive benefits that would accrue to the general public by increasing the use of freight rail such as reduced highway gridlock, cleaner air, and reduced greenhouse gas emissions would far exceed the costs of public participation. Railroad Deregulation Beginning with passage of the Interstate Commerce Act in 1887, regulators in Washington eventually came to control nearly every aspect of U.S. railroad operations. By the 1970s, the cumulative effect of decades of stifling government control, growing competition from trucks and barges, and changing shipping patterns had nearly crippled the rail industry. Association of American Railroads Page 11 of 24

13 Freight rates and accident levels were rising, rail infrastructure was crumbling, numerous railroads were bankrupt, and the industry s rate of return on investment averaged 2 percent less than a child typically earned on her savings account. Congress, in essence, had two choices: it could nationalize the railroads, at a continuing cost of untold billions of dollars, or it could give railroads the opportunity to compete in the free market. As noted earlier, Congress wisely chose the free market and passed the Staggers Act. By passing Staggers, Congress recognized that, to survive, railroads needed a new regulatory system that allowed them to decide for themselves what routes to use, what services to offer, and what rates to charge. The Staggers Act did not completely deregulate railroads, however. The Surface Transportation Board (STB), an independent agency within the U.S. Department of Transportation, still has the authority to set maximum rates or take other actions if a railroad is found to have market dominance or to have engaged in anti-competitive behavior. More recently, the STB has taken a number of steps aimed at improving the accessibility of its rate-relief process, including for small shippers. Thus, the Staggers Act established a safety net, which still exists, to address the needs of rail customers for whose traffic railroads face no effective competition. The Staggers Act has been a great success for railroads and their customers. It has allowed railroads to reinvest hundreds of billions of dollars back into their systems; greatly improve service and safety; and increase traffic volumes, productivity, and profitability while sharply lowering their rates. Railroad Reregulation U.S. Freight Railroad Performance Since Staggers (1981 = 100) Productivity 200 Volume 150 Staggers Act passed October Revenue 50 Rates 0 '64 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 Source: AAR Despite the tremendous gains from railroad deregulation, some rail critics want government regulators to once again have authority over wide areas of rail operations. In fact, groups like Consumers United for Rail Equity (CURE) have been calling for the reregulation of U.S. freight railroads for 25 years. Today, they support H.R. 2125/S. 953, the so-called Railroad Competition and Service Improvement Act of 2007, now before Congress. Association of American Railroads Page 12 of 24

14 CURE says the bills would ensure rail customer access to rail competition, ensure a workable rate challenge process...for those rail customers without access to transportation competition, and clarify and enforce the railroad obligation to serve. These benign-sounding objectives conceal what the bills would actually do: use what amounts to price controls to deny railroads potentially billions of dollars in needed revenue each year. This would significantly reduce the rail industry s earnings making it difficult, if not impossible, for them to maintain their existing networks, much less pay for the substantial new rail capacity that transportation experts, public policy officials, and shippers themselves recognize our country desperately needs. What would be the result if the CURE bills passed? Reduced rail capacity, higher shipping costs, more trucks on already-overcrowded highways, increased highway spending to handle the additional truck traffic, and more pollution and greenhouse gas emissions in states across the nation. Railroads do not oppose competition. There is plenty of it out there already, either between two or more railroads or from trucks and barges. And where the marketplace cannot support more than single railroad service, legal safeguards exist to protect against anticompetitive railroad behavior. Groups calling for railroad reregulation perpetuate the misperception that the only competitive force that matters is rail-to-rail competition, and claim that service to a shipper by a single railroad is equivalent to unconstrained market power. This claim is a fallacy. It ignores the fact that railroads face extensive competition for the vast majority of their business including cases where a shipper is served by only one railroad. Moreover, rail-to-rail competition develops where demand justifies it. Stated another way, it is not economically feasible for two railroads to serve every shipper because many markets do not have sufficient traffic to sustain that level of competition. Claiming that every market can sustain two railroads just because some markets can is like saying that every city can support two major league baseball teams just because New York can. Indeed, the overwhelming number of rail customer facilities are, and always have been, served by only one railroad, because the economics never justified service by more than one railroad. The world that some rail critics imply once existed multiple railroads chasing every, or nearly every, customer has never existed. Association of American Railroads Page 13 of 24

15 Below are several other myths disseminated by proponents of railroad regulation, and the facts you should know: Myth: Ours is a [freight] rail system that does not meet the needs of the 21 st century. Fact: Ours is a freight rail system that every other country in the world would love to have. It is the best for shippers in price and service, best for employees in compensation and safety, and best for the public in reduced pollution and highway gridlock. Prior to the Staggers Act, excessive regulation nearly destroyed the rail industry. Reregulation would take railroads back to that troubled era. If it became law, the rail industry s physical plant would deteriorate; essential new capacity would not be added; and rail service would become slower and less reliable. Proponents of regulation don t even try to explain how railroads, in the face of the huge revenue loss they would confront from reregulation, could possibly make the massive ongoing investments in rail capacity our nation desperately needs. America has a great freight rail network. It just needs more of it, and reregulation will not help achieve that. Myth: Freight railroads have not invested in their infrastructure or even done appropriate maintenance. Fact: To the contrary, America s freight railroads today are in their best physical shape ever. As noted earlier, since 1980 U.S. freight railroads have spent approximately $420 billion on capital expenditures and maintenance expenses related to their infrastructure and equipment, and have spent more in recent years than ever before. Studies show that railroads will have to increase spending by billions of dollars each year to meet future demand. By drastically reducing rail earnings, reregulation would make this impossible. Myth: Freight railroads are exempt from the nation s antitrust laws. Fact: Railroads are subject to most antitrust laws, including those that prohibit railroads from getting together to set rates, allocate markets, or unreasonably restrain trade. The few narrow antitrust exemptions available to railroads cover areas subject to the jurisdiction of the Surface Transportation Board. In other words, there is comprehensive government oversight of railroad competition issues: the oversight is simply divided among different government agencies. The implication that railroads can operate as they wish, subject to neither antitrust scrutiny nor any other government oversight, is flat-out wrong. Myth: Major U.S. railroads today possess unrestrained monopoly power over many rail customers, localities and portions of states. Fact: The vast majority of rail shippers, including most of those served by only one railroad, are able to negotiate competitive rates for rail service. Railroads face significant competition even for commodities that some claim are captive to railroads. For example, only around 15 percent of U.S. electricity is generated by power plants that depend solely on a single railroad for coal; trucks and barges move more grain than railroads; and the chemical industry s own data show that railroads account for just 21 percent of chemical transport. This isn t a monopoly it s competition at work. Association of American Railroads Page 14 of 24

16 Myth: The Government Accountability Office, in an October 2006 report, found both a lack of competition in the rail industry and a lack of focus on this issue by the STB. Fact: The GAO summed up its report in this way: Without a doubt, rates have decreased for most shippers, and most shippers are better off in the post-staggers environment than they were previously. This outcome suggests that widespread and fundamental changes to the relationship between the railroads and their customers are not needed. Myth: High rail coal transportation costs are passed through directly to electricity customers. Fact: Railroads help keep electricity prices low. From 1981 to 2005 (the most recent year for which data are available), inflation-adjusted average rail coal rates fell 61%. That means that the average electric utility today can move two railcars of coal for less than the price it paid to move just one 25 years ago! Myth: Class I rail mergers since 1980 have led to increased shipper captivity. Fact: In 1980, a typical Class I railroad served only a limited geographic region. For freight to move long distances, it usually had to be handed off (or interchanged ) from one railroad to another. Interchanging is costly and inefficient similar to a car buyer having to buy the car body from one supplier, the engine from another, and the windshield and tires from a third. Rail consolidation since 1980 has been a market-driven effort to reduce costs through the creation of larger, more efficient networks akin to allowing more buyers to purchase a complete car from a single dealer. By reducing the significant delays, inefficiencies, and expenses associated with interchanging traffic, and by often reducing travel distances, consolidation has extended the considerable benefits of singleline service to more shippers, for more commodities, over longer distances while opening up new markets for shippers in the process. Moreover, as a result of conditions placed on every major post-staggers rail merger, every shipper that had multiple railroads serving it prior to the merger still had multiple railroad service after the merger. Myth: Interchange commitments (sometimes called paper barriers ) are anti-competitive. Fact: Since 1980, Class I railroads have sold or leased thousands of miles of rail lines to non- Class I carriers who could operate the lines more efficiently. In some of these transactions, the parties involved voluntarily agreed to a lower (often zero) initial cash component in exchange for a commitment by the new railroad to interchange future traffic mostly or solely with the selling railroad. These commitments create win-winwin situations: they allow non-class I railroads to acquire and operate lines they otherwise could not afford; they allow Class I railroads to concentrate their limited resources on higher-priority lines; and shippers retain responsive rail service on lines that would otherwise receive low investment and service priority or be abandoned altogether. Interchange commitments do not diminish competition: the competitive position of shippers on a rail line sold or leased with an interchange commitment is no different after the transaction than it would have been if the transaction had never happened. Association of American Railroads Page 15 of 24

17 Passenger Railroads Our nation s privately-owned freight railroads are successful partners with passenger railroads all across the country. Around 97 percent of the 22,000 miles over which Amtrak operates are owned by freight railroads, and hundreds of millions of commuter trips each year occur on commuter rail systems that operate at least partially over tracks or right-of-way owned by freight railroads. Freight railroads recognize the potential national benefits of a strong national passenger rail system. The key question is: under what circumstances can freight and passenger interests advance this worthy goal? As noted earlier, because of substantial and sustained traffic increases, U.S. freight railroads are moving more freight than ever before, and demand for freight rail service is projected to grow sharply in the years ahead. Passenger rail growth would come on top of growth in freight traffic. That s why, going forward, capacity will likely be the single most important factor determining our ability to provide the high quality rail service that will be essential for both freight and passengers. While recognizing existing Amtrak statutory authority regarding use of freight railroadowned facilities, the AAR has developed principles which we believe should govern new passenger rail use of freight-owned facilities: Freight railroads should not be forced to give passenger railroads access to their property; rather, access should be voluntarily negotiated. Freight railroads should be fully compensated for the use of their assets by passenger trains. Freight railroads should be adequately protected from liability. Freight railroads should not be asked to pay for capacity increases needed to accommodate passenger service. These principles are grounded in the tremendous importance of freight railroads to America s producers and consumers. Freight railroads lower shipping costs by billions of dollars each year and produce an immense competitive advantage for our farmers, manufacturers, and miners in the global marketplace. If passenger railroads impair freight railroads and force freight that otherwise would move by rail onto the highway, those advantages would be squandered. Moreover, highway gridlock would worsen; fuel consumption, pollution, and greenhouse gas Association of American Railroads Page 16 of 24

18 emissions would rise; and our mobility would deteriorate outcomes that are completely contrary to the goals of expanding passenger rail in the first place As part of its work, the National Surface Transportation Policy and Revenue Study Commission received a report from the Passenger Rail Working Group (PRWG), which provided a long-term vision for passenger rail development in this country. The authors of that report should be commended for helping policymakers focus on the important issue of intercity passenger rail. Freight railroads appreciate that the PRWG concurs that passenger rail progress must be complementary to not in conflict with freight rail development. We believe that future passenger rail initiatives, especially on the scale envisioned by the PRWG, will increasingly require separate assets dedicated to passenger operation, rather than the incremental initiatives most typical of past passenger rail expansion. This more visionary approach would enable faster and more reliable passenger service, and would minimize the substantial operational, engineering, legal, and other impediments that often hinder the ability of freight railroads to accommodate passenger trains. This approach will be costly, but so will any approach to meaningfully enhancing passenger rail. Policymakers must understand that no passenger system in the world pays for its operating and capital expenses solely from the fare box. But there are substantial public benefits from high speed intercity passenger rail. Freight railroads believe that the public benefits of a truly attractive and competitive national passenger rail capability will exceed public costs, and look forward to working with all appropriate parties to make those benefits a reality. Conclusion The current system of rail regulation allows shippers to pay the lowest possible rate consistent with a privately-owned rail system. It makes no sense to destroy the best freight rail system the world has ever seen in order to move toward a discredited system that failed in the past and would fail again in the future. Instead, policymakers at all levels of government should focus on helping to ensure that railroads (both freight and passenger) have the capacity they need to meet our nation s growing transportation needs. As the NCSL Transportation Committee moves to update its rail regulation policies, the AAR urges an approach that will foster the expansion of the nation s freight rail system in the years ahead. To this end, the AAR respectfully submits in Appendix 2 specific language changes for the Committee s consideration. Association of American Railroads Page 17 of 24

19 Appendix 1 Supporters of S. 1125/HR 2116, the Freight Rail Infrastructure Capacity Expansion Act of 2007 Alliance of Automobile Manufacturers Alliance to Save Energy American Apparel & Footwear Association American Association of Port Authorities American Council for an Energy- Efficient Economy American Society of Civil Engineers Arch Coal American Short Line and Regional Railroad Association Associated Industries of Florida Association of Metropolitan Planning Organizations BTI Center Point Properties Chevron Phillips Chemical CONSOL Essroc Evergreen Foundation Coal Corporation Georgia Port Authority Headwaters, Inc. Hewlett-Packard Intermodal Association of North America International Association of Refrigerated Warehouses International Warehouse Logistics Association Iowa Department of Transportation and Department of Economic Development International Refrigerated Transportation Association Jacksonville Port Authority Kane Environmental Inc. Maersk Line Michaels Stores National Association of Railroad Passengers National Association of Regional Councils National Mining Association National Retail Federation Nike Owens Corning Plum Creek Port of Hampton Roads Port of Oakland Port of Portland Port of Seattle Port of Tacoma Port of Vancouver Portland Cement Association Railroad-Shipper Transportation Advisory Council Railway Supply Institute Retail Industry Leaders Association Robbins Reload Inc. South Carolina State Ports Authority Target TXU Corporation U.S. Chamber of Commerce Waterfront Coalition Virginia Port Authority Virginians for High Speed Rail Association of American Railroads Page 18 of 24

20 Appendix 2: Suggested Changes to NCSL Rail Regulation Policy The National Conference of State Legislatures recognizes viable passenger and freight railroad systems are essential to achieving a balanced intermodal transportation system and ensuring personal mobility, the free flow of commerce and national security. Rail must have the same financial security provided the other modes of transportation, such as highways, transit, aviation and waterways. NCSL strongly supports a dedicated source of federal funding for passenger rail service. The federal government has the responsibility to take the lead in ensuring a cost-effective, fuel efficient, secure and economically sound rail transportation system. A viable rail system offers the opportunity to alleviate traffic congestion; provide alternatives in land use planning; provide a transportation alternative to highway and air travel, especially during periods of national crisis; and address environmental concerns. The increasing mix of freight, commuter and intercity passenger rail on shared tracks and rightsof-way demands that concerns over liability and costs be rationally reviewed within the context of federal legislation. Fair and equitable standards for assessing costs, risks and priority usage are a necessary component of furthering the nation's rail network for passengers and freight. NCSL supports a strong role to be played by the federal government in facilitating the introduction of technology that may mitigate costs and risks. Passenger rail progress must be complementary to not in conflict with freight rail development. Freight railroads should be fully compensated for the use of their property by passenger trains. Absent voluntary agreement, freight railroads should not be forced to give passenger railroads access to their property and freight railroads should not be expected to subsidize passenger rail. The federal government also should support research and development of advanced rail technology such as high-speed rail and maglev. Federal support should include oversight of possible impediments to passenger rail services resulting from freight-rail ownership of trackage. The federal government should facilitate the resolution of problems between states and freight rail regarding scheduling and on-time performance of passenger rail that is affected by freight Association of American Railroads Page 19 of 24

21 traffic. Future large-scale passenger rail initiatives will increasingly require separate assets dedicated to passenger operation, rather than the incremental initiatives most typical of past passenger rail expansion. Such an approach would minimize the substantial operational, engineering, legal and other impediments that often hinder the ability of freight railroads to accommodate passenger trains. NCSL encourages Congress to repeal that portion of the Surface Transportation Board Act of 1995 that exempts railroad companies from all local and state laws. Financing NCSL urges the federal government to support the need for increased railroad capacity for the movement of both passengers and freight. provide a dedicated source of funding for rail service. Rail is an important mode of transportation for passengers and freight. Rail is vital to the national economy and provides significant public benefits as an eco-friendly mode of transportation. and homeland security and must be financed with a secure, dedicated source of federal funding. NCSL urges the federal government to provide federal funding for research and development in advanced rail technologies, such as high-speed rail and maglev. NCSL also urges the federal government to provide funding to assist states in public/private partnerships to improve and enhance freight rail service in states. Such options as grants, guaranteed loans, tax exempt bonds, and targeted federal investment will facilitate the deployment of this technology in the United States. Federal policy should encourage U.S. technology development and production while incorporating the technology developed by non- U.S. companies. The present state volume cap on bond financing with exemption form federal taxation imposes an artificial restraint on the use of such bonds for rail projects. Additionally, NCSL urges the federal government to allow states flexibility to use a portion of their allocation from the Highway Trust Fund to finance rail projects and service. Passenger Rail Amtrak and other passenger rail providers -- The continued economic viability of Amtrak and other passenger rail providers is in the national interest. The federal government should provide a funding source for the states to implement cost-effective, efficient Association of American Railroads Page 20 of 24