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Rail News Home Federal Legislation & Regulation

February 2010

Rail News: Federal Legislation & Regulation

Elevating the dialogue, raising the bar (Pat Foran, Context, February 2010)


Uncertainty may continue to reign as the political winds of change blow (and blow hard) in Washington, D.C., but constructive dialogue should rule the rhetorical roost while The Surface Transportation Board Reauthorization Act of 2009 wends its way through Congress, or so rail and shipper advocates, and committee staffers and aides who represent the lawmakers who sponsored S. 2889 told me last month (see this month's Cover Story).

Not that there won't be an inflammatory exchange or two as the parties attempt to work through lingering issues (think: antitrust). This is hard ball, after all. Support of an idea, process or communication style is never guaranteed. But I feel it with every D.C. visit I make: Rail is now an integral part of this country's strategic planning mix. It's been true, in theory, for years ... but now it's happening, in practice. That alone has had an effect on the way stakeholders and lawmakers articulate their respective positions. They've elevated the dialogue, in part, because the bar's been raised.

"Really, we've got to get this bill out of the way, with everything else that is going on," a Congressional staffer told me, citing a surface transportation bill that would feature a freight title. "Everybody understands that we've got to get this done."

In keeping with the "elevated dialogue" theme, a requisite Larry the Cable Guy reference has been extracted from this space.

Rail rate hikes not a market power trip, study says

Speaking of dialogue and the need to keep it constructive: Rail rates have steadily increased since 2004, including a steep climb in 2008, but the price hikes were driven by fluctuating fuel prices and other costs, and not by a "greater exercise of railroad market power over captive shippers," according an updated Surface Transportation Board (STB)-commissioned study conducted by Christensen Associates Inc. and released Feb. 1.

"An Update to the Study of Competition in the U.S. Freight Railroad Industry," which includes railroad data from 1987 through 2008, determined that a greater share of rail traffic moved at rates less than 180 percent of variable costs in 2007 and 2008 than in 2005 and 2006. Variable costs include fuel, labor and other non-capital expenses. Preliminary data shows rail rates fell last year, according to Christensen. The study also found that the large productivity gains in the 1980s and 1990s — when railroads shed excess lines, reduced crew sizes and streamlined operations — no longer are enough to offset rising operating costs.

"Because the railroad [industry] has remained approximately revenue sufficient in recent years, we re-emphasize one of our original conclusions: Providing significant rate relief to some shippers will likely result in rate increases for other shippers or threaten railroad financial viability," Christensen concluded.

"Railroads have been telling policymakers that what they need is certainty, especially during times of such economic uncertainty," said Association of American Railroads President and CEO Ed Hamberger in a prepared statement, adding that the report "validates that competition in the nation's railroad industry has been able to thrive for the last 20-plus years under market-driven policies overseen" by the STB.

Christensen released its initial report for the STB in November 2008. However, shippers raised concerns that the report's study period ended in 2006 and did not include subsequent years of "rapidly escalating rates," according to the STB.

Tax food for thought

Attention, railway supply company owners: Thinking of selling your business? 2010 could a good year to do it, says Russell Warren, senior vice president of EdgePoint Capital Advisors L.L.C., an investment banking firm.

At 15 percent, the current tax rate for long-term capital gains is the lowest it's been in 75 years, says Warren, whose firm is listed in our 10th Annual Finance & Leasing Guide. But Congress will raise it for all transactions closing after Dec. 31. "That's when the Bush rate cuts expire automatically, bringing it back to 20 percent," he says.

A bill now in the House includes a 5.5 percent surtax on individuals whose income is more than $500,000, including gains, Warren says. That combined long-term capital gains rate would be 25.5 percent, and it could be even higher starting in 2011.

"All of this means that a company will need at least 13.4 percent more EBITDA for its shareholders to take home the same proceeds if it does not complete a transaction by Dec. 31, 2010," he says.


Pat Foran, Editor



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