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June 2008

Rail News: Union Pacific Railroad

The Rail Renaissance era is here to stay, presuming stakeholders figure out how to partner up (and pony up) to ensure there is enough rail capacity

By Pat Foran, Editor

Wick Moorman always knew rail’s day would come. “Many of the things that put our industry at a competitive disadvantage for so many years — particularly vis-à-vis highway transportation — weren’t going to wither away, but they had a certain half-life,” says Moorman, a railroader since 1970, and Norfolk Southern Corp.’s president since 2004 and chairman/CEO since 2006. “I always believed in the tremendous value and fundamental efficiency of our business — steel wheels on the steel rail. We saw it start in 2003. By 2004, it was real.”

Congested highways and crowded freight-rail mainlines. Access and transit challenges at ports, terminals and major transportation hubs. A recognition that rail is three times more fuel efficient than truck transport. They’ve all helped make the steel-wheels-on-steel-rail solution to what ails the North American transportation system look a whole lot better to a lot more people.

“Railroads are back in vogue,” says Kansas City Southern Chairman and CEO Mike Haverty.

And rail should remain all the rage, modally speaking, for years to come. The North American “Railroad Renaissance” is real and it’s sustainable, transportation industry stakeholders say — in part because it has to be.

“With freight volumes forecast to double by the year 2020, adequate rail capacity is essential as a part of an overall freight transportation strategy,” wrote Peter Gatti, vice president-policy for the National Industrial Transportation League (NITL), which represents more than 600 transportation companies and rail shippers, in an emailed response to Progressive Railroading questions regarding the challenges facing transportation stakeholders. “This will mean that users and suppliers must work more efficiently and communicate with each other more effectively than ever before.”

How will stakeholders — freight and passenger railroaders, and other transport operators, shippers, lawmakers, state and federal policy-shapers, the voting public — partner up and, ultimately, pony up? What’ll it really take to ensure rail capacity’s there come 2020?


For starters, it’ll require stakeholders to set aside self-interest and think “big picture” before beginning the freight mobility planning process. But it’ll also force rail leaders to put on their re-thinking caps and come up with more effective ways to tell — and sell — their story.

“We’re in a different world than our [CEO] predecessors,” says Jim Young, a railroader since 1978, Union Pacific Railroad’s president since 2004 and Union Pacific Corp.’s chairman since 2006. “The folks before us went through Staggers and the mergers, and were focused on wringing out efficiencies. That’s a different mind-set from the one we have today — we’re trying to deal with demand, the commuter issue, the environment, the NIMBY perspective. We’ll have to think much differently about the future.”

Adds Moorman: “We have a culture now that encourages challenging the status quo. We understand the world is changing. It can be difficult to find the time to step back, from a leadership perspective, but we have to.”

‘$40 billion short’

Nowhere is the need for re-examination and reflection more acute than in the infrastructure capacity arena. The demand projections and corresponding cost estimates speak for themselves:

  • U.S. freight volumes will at least double by 2020, according to a 2003 American Association of State Highway and Transportation Officials report.
  • U.S. railroads need to invest $135 billion over the next 30 years to address capacity constraints. Under current market conditions, railroads could invest $96 billion during the next 30 years to build more track, bridges, tunnels, signals, terminals and other facilities, leaving a funding gap of $1.4 billion per year, according to a study Cambridge Systematics completed last year for the Association of American Railroads (AAR). If the investment isn’t made, most of the increase in freight will move on highways, further stressing overburdened roads and bridges, AAR officials say.
  • The National Surface Transportation Policy and Revenue Study Commission concluded that freight rail capacity “needs to be expanded systematically over the next 15, 30 and 50 years” ... and that “freight rail market share should be increased,” wrote commission member and BNSF Railway Co. Chairman, President and CEO Matt Rose in an April 22 statement submitted to the Senate Committee on Commerce, Science and Transportation for a hearing on the commission’s “Transportation for Tomorrow” report issued in January 2008.

So, railroads will need to invest in infrastructure capacity, big time; and if the $10-plus billion Class Is have set aside for capital spending during each of the past two years is any indication, they’re off to a good start. Stakeholders are counting on them to keep it going. Private investment is “the key driver of freight rail network expansion” according to his fellow commission members, Rose wrote. The 12-member commission included representatives from federal, state and local governments; metropolitan planning organizations; transport-related industries; and public interest organizations.

Even so, Class I investments won’t be enough. They figure to shoulder 70 percent of what’ll be needed during the next three decades.

“We’re $40 billion short,” says AAR President and CEO Ed Hamberger.

To fill the gap, railroads have set their lobbying sights on infrastructure tax credit (ITC) legislation — the current iteration being the Freight Rail Infrastructure Capacity Expansion Act (S. 1125/H.R. 2116), which would provide a 25 percent tax credit for any business that invests in new track, sidings, intermodal facilities, locomotives or other rail infrastructure.

With the ITC, railroads would be able to spend up to 20 percent more, said AAR Senior Vice President of Legislation Obie O’Bannon during the industry’s March 13 “Railroad Day on the Hill.”

“If I could get the next president to push one thing, it would be to give the railroads this new 25 percent tax — it would help them restore double track, add new triple track and new GPS systems,” says longtime rail proponent Gil Carmichael, senior chairman of the Intermodal Transportation Institute and a former Federal Railroad Administrator. “We need to build this new high-speed freight and passenger system, and we need to do it in the next 25 years.”

Rail advocates also see potential in public-private partnerships (PPP). The idea: If there are public benefits to be had for an infrastructure venture, the public ought to kick in.

High-profile PPPs include the Alameda Corridor project, a 20-mile line that opened in 2002 and connects the ports of L.A. and Long Beach with downtown L.A. rail yards and the national rail system; and the Chicago Region Environmental and Transportation Efficiency (CREATE) Program, a PPP formed in 2003 comprising five Class Is, Metra, the city of Chicago and state of Illinois. The $1.5 billion program calls for developing four freight rail corridors and one passenger-rail corridor in the Chicago area to reduce train delays, relieve rail and highway congestion, shorten travel times for commuters, and improve air quality and public safety.

That freight railroads even are willing to consider publicly funded projects (and the strings attached to them) is a relatively recent phenomenon — and evidence, some believe, that rail leaders already have their re-thinking caps on.

“It used to be, when you mentioned the words ‘public money,’ the knives would come out,” says BNSF’s Rose, who began his rail career in 1981 and was named the Class I’s president and CEO in 2000. “Now, you have five railroads coming together in Chicago … and we’re developing things like the [NS] Heartland Corridor. Ten years ago, this industry was not capable of that. Now, everybody is talking about PPPs.”

They aren’t a panacea. As in any collaborative venture, some partners invariably end up picking up more of the tab.

“On the one hand, we were able to put CREATE together — on the other hand, it didn’t get the money it needed,” Rose says. “Meanwhile, there are probably 15 to 20 other corridors that could use a similar approach — rail relocations where you’ve got the whole public policy angle: concerns about emissions and fuel, where grade separations are needed. Those are the kinds of projects we need to figure out how to complete.”

Bottom line: Whether the investment’s private, public or a combination, most stakeholders just want to know that the investment will be made.

“To meet anticipated future growth, it is incumbent that all stakeholders highlight the need for public and private investment in infrastructure, the need to improve our intermodal connectors, and to integrate the nation’s rail system as part of the national freight transportation network,” wrote NITL’s Gatti. “Our future economic growth is dependent on this.”


That it is, and precisely why a group buy-in on at least a few of the how-we’ll-pay solutions is needed ASAP. To date, though, the consensus building has been ... well, slow. Take the ITC concept. Some stakeholders support it, as is; others, such as Consumers United for Rail Equity (CURE), say they’d consider backing it, provided the plan enacted was “focused ... and coupled with provisions that address the concerns of rail customers,” according to a position paper on CURE’s Web site. Specifically, CURE — which bills itself as a “coalition of freight-rail customers seeking changes in federal law and policy that would require railroads to provide more competitive pricing and reliable service” — says the ITC would need to be coupled with:

  • a provision that removes all of the railroad industry’s anti-trust law exemptions; and
  • a “defined, mandatory and enforceable ‘obligation to serve’ that is provided as new authority to the Surface Transportation Board,” which CURE maintains is failing in its mission to “ensure competition and protect rail customers from railroad monopoly power.”

“Most of the people we represent are commodity shippers who are captive to railroads,” says Bob Szabo, CURE’s executive director. “All these issues come together for these people. For them, railroads have as much unrestrained monopoly power as they did in the 1800s, and they want to change that.”

Railroads reject the notion that they enjoy wide-ranging immunity from anti-trust laws, or that they’re free of government oversight. They also oppose The Railroad Competition and Service Improvement Act of 2007 (S. 953/H.R. 2125), which the rail contingent refers to as “re-regulation,” and the Railroad Antitrust Enforcement Act of 2007 (H.R. 1650).

“You saw what happened to prices following deregulation — we went 23 to 24 years where real prices were going down,” KCS’ Haverty says. “All of a sudden, with fuel prices and driver shortage and demand for capacity, railroads for the first time have pricing power. To me, it’s basic economics — supply and demand. And now, railroads are more able to reinvest in capacity.”

But not if the aforementioned pieces of legislation are enacted.

“I know first-hand that if government regulation — economic, safety, security, environmental, labor — is not based in cost-benefit analysis and an understanding of the impact of implementation on re-investment, it will choke off private spending on expansion capital,” BNSF’s Rose wrote in his April 22 message to the Senate Committee on Commerce, Science and Transportation.

To the National Surface Transportation Policy and Revenue Study Commission, “rational regulatory policy is important to successfully promoting investment and productivity for all of the nation’s private-sector providers of transportation,” Rose added, and that “rational” point is one of the report’s “most important conceptual underpinnings.” But the rail-customer dialogue is going to have to be a lot more constructive if a rational approach is ever going to pass regulatory (or legislative) muster.

“To be candid, the relationships between the railroads and their customers could stand improvement,” wrote Gatti of NITL, which has yet to weigh in on the current ITC bill.

That doesn’t mean NITL and the rails aren’t making progress. They’re currently talking through “several operational and regulatory issues in an attempt to forge a consensus,” Gatti wrote.

“While differences over economic issues have prevented close collaboration to meet the challenges that lie ahead, the two sides working together have the best chance of succeeding,” he concluded.

The art of storytelling

The same logic applies when railroads and local communities need to collaborate. Given the local citizenry’s heightened interest in highway congestion and all things “green,” and its propensity to adopt a “NIMBY” approach to development, stakeholders will have plenty of opportunities to improve their partnering skills in the years ahead.

“During the last three or four years, the local community focus on railroads has been greater than it’s ever been,” says UP’s Young, citing the Class I’s experiences in California. “I think people’s perception of railroads is, at best, neutral. We have to work on telling a better story.”

How they tell it — from the way it’s framed to the tone message-senders use — matters. Their actions, or perceptions of same, will matter even more.

“One of the biggest problems the industry has had to face at times, quite frankly, is our own arrogance,” says KCS’ Haverty, who started as a brakeman in 1967 and took KCS’ reins in 1993. “With some of the customers, there’s still the old image of the robber barons back in the 1800s — there’s a perception that railroads are back, and that they’re gouging customers. We have to provide customers reliable service at a competitive price, or we’ll be back facing re-regulation.”

Rail leaders’ storytelling success/failure also will help frame an even bigger-picture discussion: what it’d take to develop a North American transportation policy/vision.

“Transportation policy is the key issue over the next five years,” Young says.

What could help jump-start the dialogue is that freight-rail execs now matter of factly push for passenger rail to be included. (“The ‘Rail Renaissance’ isn’t just about freight,” AAR’s Hamberger says.)

One problem: Although transportation’s significance isn’t lost on stakeholders, it isn’t a “top five” public policy issue.

“Only recently have you heard the word ‘infrastructure’ bleed into the conversation,” Rose says, adding that the transportation crisis might have to get worse before infrastructure rises higher on the collective psyche’s priority list.

It’ll get there, says ITI’s Carmichael, who for years has been promoting Interstate II, a high-speed plan calling for 30,000 to 40,000 miles of double and triple track in existing rights of way.

“In this new energy era we’re in, those freight right of ways, with all that capacity potential, are going to prove to be invaluable,” Carmichael says. “The railroad industry wants to be the big winner this century, and they’re going to go out and do it.”


Browse articles on rail capacity infrastructure capacity rail renaissance railroad renaissance Wick Moorman Mike Haverty Norfolk Southern Kansas City Southern KCS Union Pacific Jim Young

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