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AAR petitions STB for revenue adequacy calculation adjustment, addresses small shippers' 're-reg' call

The Association of American Railroads (AAR) has petitioned the Surface Transportation Board (STB) to adjust the way it measures railroads' revenue adequacy so the metrics conform to modern day financial practices and are consistent with the board's recently adopted rate case analysis standards.

The petition seeks the adoption of a rulemaking proceeding under which the STB would use replacement costs to determine whether freight railroads are earning adequate revenues. Under current rules, the board decides each year if a railroad is earning a return on its capital investment equal to rail industry's cost of capital.

Until now, the STB has used the depreciated book value of a railroad's assets to determine its capital investment base. As a result, railroads' revenue needs have been underestimated, the AAR said. Using replacement costs instead of book value to determine revenue adequacy would result in a more accurate estimate of the revenue railroads need to maintain their capital-intensive networks and expand infrastructure.

"This will give railroads the ability to better compete for capital in today's financial markets," said AAR President and Chief Executive Officer Edward Hamberger in a prepared statement. "Access to capital is key to our ability to grow and expand."

As is a deregulated rail industry. Imposing additional federal regulation on freight railroads would undermine roads' ability to reinvest capital in their infrastructure, Hamberger said in a letter sent to members of the House Small Business Committee, responding to a group of small shippers' rail "re-regulation" call.
"The Staggers Rail Act of 1980 partially deregulated the industry and gave railroads the opportunity to operate like most other businesses, rather than have regulators in Washington tell them what routes to use and what rates to charge," he wrote.

Since 1980, railroads have reinvested $420 billion in their systems. The results: improved service and safety, and nearly double their traffic volumes while average rates have dropped by more than 50 percent in inflation-adjusted terms, said Hamberger.

"Unfortunately, some rail shippers want the government to impose even more federal regulation on the railroads," he wrote. "Re-regulation would prevent railroads from earning enough to make the massive investments a first-class rail system requires."

Yesterday, the House Small Business Committee held a hearing to address rail's impact on rural small businesses and family farms, which depend on railroads to ship and receive products.

Rail rates have gone up as much as 80 percent over the years, which is undermining economic growth, according to testimony from a panel of rural entrepreneurs.
"An effective and affordable rail transport system is essential to the success of these entrepreneurs," said committee Chairperson Nydia Velázquez. "With our economy in a downturn, ensuring they can continue getting their products to market is more important than ever."
Railroads have been exempt from most anti-trust laws and the STB has failed to "curb many questionable practices," testifiers said.
"The nation's rail system may be overstretched, but that does not give massive transport companies license for unreliable service or price gouging," said Velazquez. "When Congress passed the Staggers Act, it did not intend for rail monopolies to develop."

Contact Progressive Railroading editorial staff.

More News from 5/2/2008