AAR Report on US Railroads and Ecnomic Recovery 2010

8/7/2019 AAR Report on US Railroads and Ecnomic Recovery 2010

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Great Expectations: Railroads and U.S. Economic Recovery

Association of American Railroads of 26

I. EXECUTIVE SUMMARY

Freight rail drives America’s economy and touches the lives of most Americans everyday. From steel to housing to agriculture, from manufacturing to small business, freightrail is the common thread that allows businesses to thrive. It provides American

industries access to global markets and American consumers with goods from aroundthe world.

The vast 140,000 miles of coast-to-coast rail network enables a company in NewEngland to ship its products to a buyer in California, or to a port where a ship can take itto a foreign market. Freight rail moves coal to hundreds of power stations across thecountry to generate electricity for millions of people. Rail helps keep prices low for allkinds of consumer and industrial products, because freight rail shipping rates are socompetitive.

But rail is under attack. Congress and the Administration are weighing sweeping changesto the freight rail industry that could have a direct and negative impact on Americans inthe form of higher costs for goods and services. What’s more, these changes threatenhigh paying American jobs with freight rail companies, as well as job creation in otherareas such as housing, manufacturing and agriculture, which railroads help support.

American industries and consumers have great expectations of our nation’s railroads:competitive shipping rates, fuel efficiency, reduce greenhouse gas emissions, easehighway congestion, and provide the foundation for new high-speed and intercitypassenger rail around the country. But these public benefits are in danger if proposedregulatory and legislative action in Washington, D.C. comes to pass.

These changes are under consideration as Americans are increasingly leery of excessivegovernment intervention in the marketplace, especially if it stifles job growth during arecession, when jobs are so desperately needed.

This report underscores the importance of a healthy freight rail system to our nation’seconomy. It also outlines what’s at stake and provides a roadmap to ensure that the railnetwork remains viable as our nation struggles to emerge from the deepest recession ina generation.





II. GREAT EXPECTATIONS – Railroads and America’s Economy

From one end of the country to the other, the U.S. is connected by the most efficient,affordable, and environmentally sound freight rail system in the world. The list of theways that freight railroads promote economic growth and improved quality of living is

tremendous.

Whether it’s by supporting millions of American jobs, keeping the things we buy and usemore affordable, or easing traffic congestion and lowering greenhouse gas emissions,freight rail confers tremendous public benefits on society. Unlike all other modes of transportation, freight rail delivers these benefits with almost no taxpayer help.

Railroads and Jobs

Based on U.S. Department of Commerce data, freight railroads generate nearly $265

billion in total annual economic activity, and directly or indirectly support 1.2 million jobs, including rail suppliers and other manufacturing, retail, and service firmsthroughout the economy.

Every freight rail job supports another 4.5 jobs elsewhere in the economy. This does notinclude the countless jobs provided by rail customers that benefit from the costeffectiveness of shipping their products by rail.

Freight railroad employees are among America’smost highly compensated workers. In 2008, the184,000 U.S. freight railroad employees, roughly80 percent of which are union employees, earnedaverage wages of $68,200 and fringe benefits of $27,100, for total compensation of $95,300 (seeChart 1).

By contrast, the average wage per full-timeemployee in the U.S. in 2008 was $50,900 andaverage total compensation was $62,600.

Rail employees are covered by the Railroad

Retirement System, instead of Social Security. Infiscal year 2008, some 600,000 beneficiaries,including retired railroad employees and their survivors, received more than $10 billionin retirement and survivor benefits from the Railroad Retirement System.

$0

$15,000

$30,000

$45,000

$60,000

$75,000

$90,000

$105,000

RRs U.S. Average

Data are 2008. Source: AAR, Bureau of Economic Analysis

Average Compensation in the Freight RailIndustry is Far Higher Than Average

Wages

Benefits

Wages

Benefits

(U.S. Freight RRs vs. All U.S. Workers)

Chart 1





Lower Prices For American Consumers

Thanks to the cost-effectiveness of America’sfreight railroads, the food, electricity, clothes,and countless other goods that all of us buy

every day cost less than they would if rail werenot involved.

Changes in rail rates compare very favorablywith changes in the prices of most things webuy (see Chart 2).

Average rail rates were 49 percent lower in2008 than in 1981 (see Chart 3). That meansthe average rail shipper can move twice thefreight today for the same price it paid 27 yearsago.

In fact, America’s freight railroads are the mostaffordable in the world. According to WorldBank data, average U.S. freight rail rates arehalf those in China and Japan, and 50 to 75percent below those in major Europeancountries. Railroads’ cost effectivenessprovides a huge competitive advantage forAmerican businesses in the global marketplace.That, in turn, means more American jobs.

In 2003, the American Association of StateHighway and Transportation Officials (AASHTO)estimated that if all freight rail traffic wereshifted to trucks, rail shippers would have topay an additional $69 billion per year.

+135%

+76%

+121%

+65%

+160%

+137%

+68%

+5%

Gasoline Chicken PotatoChips

RRRates

Railroad Rates* vs.Prices of Common Consumer Goods

(Current Dollars, % Change 1981-2008)

*Avg. revenue per ton-mile. Source: Bureau of Labor Statistics, AAR

Bananas Bread Eggs Postage

Chart 2

1.5¢2.0¢2.5¢3.0¢3.5¢4.0¢

4.5¢5.0¢5.5¢6.0¢6.5¢7.0¢

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Average Inflation-Adjusted U.S. Freight RailroadRates Are Half What They Were in 1981

Source: AAR

(Class I Revenue Per Ton-Mile, All Commodities)

Railroad rates are down 49% since the Staggers Act restored reasonable

balance to railroad r egulation.

Chart 3





Easing Congestion, Lowering Emissions

America’s freight railroads have been “going green” for decades. Because railroadsreduce highway gridlock, fuel consumption, greenhouse gas emissions, and pollution,they are the most environmentally sound way to move freight.

Fuel efficiency is one reason for this, sincegreenhouse gas emissions are directly tied tofuel consumption. According to a recentindependent study prepared for the FederalRailroad Administration (FRA), railroads areon average four times more fuel efficientthan trucks.

Since 1980, railroads have nearly doubledhow much freight they move — while usingvirtually the same amount of fuel. In 2008,U.S. freight railroads moved a ton of freightan average of 457 miles per gallon of fuel – anincrease of 94 percent in efficiency since1980. (See Chart 4)

That means moving freight by rail instead of truck reduces greenhouse gas emissions byon average 75 percent. If just 10 percent of long-distance freight now moving by truckmoved by rail instead, annual greenhouse gas emissions would fall by more than 12million tons. That’s equivalent to taking 2 millioncars off the road or planting 280 million trees.

Railroads’ fuel efficiency gains have meantsharp reductions in rail-related greenhousegas emissions. In 2008 alone, America’sfreight railroads burned 3.7 billion fewergallons of fuel and emitted 41 million fewertons of carbon dioxide than they would haveif their fuel efficiency had remained constantsince 1980. From 1980 through 2008, U.S.

freight railroads consumed nearly 52 billionfewer gallons of fuel and emitted 579 millionfewer tons of carbon dioxide than they wouldhave if their fuel efficiency had not improved.

According to the U.S. EnvironmentalProtection Agency (EPA), freight railroads

025

50

75

100

125

150

175

200

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

RR Fuel Consumed*

Railroad Volume**

Since 1980, Railroads Have Doubled Freight VolumeBut Consumed the Same Amount of Fuel

(Index 1980 = 100)

*in freight service **revenue ton-miles Data are for Class I railroads. Source: AAR

Chart 4

Passenger

Transportation*19.8%

Non-Transportation

Sources72.4%

Trucking5.7%

Freight RRs0.7%

Other FreightTransporters

1.3%

*On-road vehicles, aircraft,recreational boats, passenger railData are 2007. Source: EPA

Transportation-Related

Not Transportation-Related

Freight Railroads Account for Well Under 1% ofU.S. Greenhouse Gas Emissions

Chart 5





today contribute just 0.7 percent of total U.S. greenhouse gas emissions, far less thantrucks (5.7 percent) and passenger transportation (19.8 percent) (see Chart 5).

Finally, railroads also reduce the huge costs associated with highway gridlock. A typicalfreight train carries the load of more than 280 trucks, easing wear and tear on our

nation’s highways.

According to the 2009 Urban Mobility Report by the Texas Transportation Institute,highway congestion annually costs $87 billion just in wasted travel time and wasted fuel.Each year, travelers lose 4.2 billion hours, equal to nearly a full week per traveler, and2.8 billion gallons, or three weeks’ worth of gas per traveler. Lost productivity, cargodelays, and other costs add tens of billions of dollars to this already huge tab.

In March 2008, the EPA issued stringent new locomotive emissions standards that willcut particulate emissions by up to 90 percent and nitrogen oxide emissions by up to 80percent. Railroads are working with manufacturers toward meeting these newstandards, which while yielding emissions reductions of other harmful pollutants alsowill dampen fuel efficiency gains.

Private Investments Support America’s Rail Network

Trucks, airlines, and barges operate over highways, airways, and waterways that thegovernment provides and taxpayers subsidize. By contrast, America’s privately ownedfreight railroads use their own funds to pay the overwhelming majority of the costs tomaintain tracks, bridges, tunnels, signals, terminals,and other infrastructure.

Since 1980, America’s freight railroads have spentsome $460 billion on infrastructure and equipment— more than 40 cents out of every revenue dollar— to maintain, modernize and expand theirsystems.

Freight railroads have even kept reinvesting duringthe recession, spending more on their systems in2008 than ever before. Rail reinvestments were

down only slightly in 2009 from the previous year’srecord pace and in 2010 are expected to remainabout equal to 2009.

Rather than require significant taxpayer support,railroads actually significantly contribute to our

Capital Expenditures as a % of Revenuefor Various U.S. Industries: Avg. 1997-2006

Average all manufacturing 3%

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 1999-2006Source: U.S. Bureau of the Census, AAR, EEI

Chart 6





state and local treasuries. In 2008 alone, the nation’s major railroads paid $625 millionin state and local property taxes on their infrastructure. Short line railroads paidmillions of additional dollars in property taxes.

The massive investments railroads must make in their systems reflect the extreme

capital intensity of their business. Railroads are at or near the top among all U.S.industries in terms of capital intensity. In fact, from 1997 to 2006 (the most recent yearfor which data are available), the average U.S. manufacturer spent 3 percent of revenueon capital expenditures. The comparable figurefor U.S. freight railroads was 17 percent, or morethan five times higher (see Chart 6).

Likewise, in 2008, railroad net investment inplant and equipment per employee was$738,000— nearly eight times the average for allU.S. manufacturing ($96,000).

The four largest major U.S. railroads spend farmore on capital outlays and maintenance of trackand roadway than the vast majority of statehighway agencies spend on their highwayprograms. For example, only Texas, Florida, andCalifornia highway agencies spend more onhighway construction and maintenance programsthan Union Pacific and BNSF each spend on theirnetworks. CSX and Norfolk Southern are in thetop 11 compared with all states. (See Chart 7)

Total1. Texas $10.962. Florida $6.093. California $5.43

Union Pacific $4.16BNSF $4.05

4. New York $3.885. Pennsylvania $3.796. Illinois $3.517. Michigan $2.658. North Carolina $2.51

CSX $2.499. Georgia $2.3010. Ohio $2.2511. New Jersey $2.08

Norfolk Southern $2.07

RR Spending on Way & Structures vs.State Highway Agency Spending - 2007

($ billions)

Data include capital outlays and maintenanceexpenses. Sources: FHWA, AAR

Chart 7





III. GREAT EXPECTATIONS: Railroads Weather the Recession

Like other U.S. industries, railroads have suffered during the economic downturn.Freight rail is a “derived demand” industry – demand for rail service occurs when

there is demand for the products thatrailroads haul. In other words, if Americais not building or buying, railroads are nothauling.

That is why rail traffic is a solid gauge of the health of the overall economy. GrossDomestic Product, considered the singlemost conclusive indicator for the health of the economy, is closely related to freight

rail traffic. (See Chart 8)

Beginning around 2003 and 2004, anumber of factors in addition to economicgrowth led to an increase in rail freightvolume:

• Rising fuel costs led to increased demand for rail, since railroads are on averagefour times more fuel efficient than trucks.

• A surge in U.S. imports and record U.S. agricultural exports boosted railshipments to and from ports.

• A rise in natural gas prices caused power plants to burn more coal to generateelectricity, and most coal is shipped by rail.

• Railroad investments in capacity, innovations and use of technology led toservice improvements and enhanced reliability.

By 2006 America’s railroads were carrying more freight than ever before, with fourmonths that year registering the highest-volume months in U.S. railroad history.

The Current Downturn

While the current recession officially began in December 2007 rail traffic that year was

down slightly from 2006’s record levels – due primarily to dips in the housing and autosectors that caused drops in carloads of lumber, wood, autos and auto parts. Still, 2007was the second highest-volume year in history for America’s freight railroads.

In 2008, rail traffic was relatively stable until the fall, when the credit crisis exacerbatedthe decline in the economy already under way. By December 2008, U.S. rail carloadtraffic was 21 percent lower than it had been two months earlier; intermodal traffic,

$8

$9

$10

$11

$12

$13

$14

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

R e a l G D P

( T r i l l i o n s o f $ 2 0 0 5 )

1.1

1.3

1.5

1.7

1.9

T r i l l i o n s o f R e v e n u e T o n - M

i l e s

There Is a Close Relationship Between EconomicGrowth and Freight Railroad Traffic

Sources: Bureau of Economic Analysis, AAR

Real GDP(left axis)

RR Ton-Miles(right axis)

Chart 8





covering truck trailers and shipping containers, in December 2008 was down 24 percentfrom where it was in October 2008 (see Chart 9).

This decline in rail traffic carried over into 2009, when U.S. rail carload traffic was down16.1 percent compared with 2008 and down 18.2 percent compared with 2007. Last

year’s carload total was the lowest for U.S. railroads since before 1988, when the AARdata series begins.

Meanwhile, U.S. intermodal traffic totaled 9.9 million trailers and containers in 2009,down 14.1 percent from 2008 and down 17.7 percent from 2007. The industry’sintermodal total in 2009 was the lowest for U.S. railroads since 2002 (see chart 10).

As of February 2010, many economists believe the economy is likely technically out of the recession. 1 While economic recovery may be on the horizon, freight rail traffic todayremains well below 2008 levels.

1 The National Bureau of Economic Research (NBER) officially determines when a U.S.recession starts and ends. A recession begins just after the economy peaks and ends when itbottoms out. Because the peak and trough can only be determined after the fact — oftenmonths after the fact — it is often unclear when an economy begins a new growth cycle orends one.

Chart 9

240,000

260,000

280,000

300,000

320,000

340,000

360,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Weekly U.S. Rail Carloads: All Commodities

2006

2009

2008

Data are weekly average originations for each month, are not seasonally adjusted, exclude U.S.operations of CN and CP, and reflect revisions from original reporting. Source: AAR

2007

Jan. 2010

170,000

180,000

190,000

200,000

210,000

220,000

230,000

240,000

250,000

260,000


Average Weekly U.S. Rail Intermodal Traffic

20062007

2009

2008


Jan. 2010

Chart 10





The Impact on Railroad Employment

Railroads, like other businesses, areworking to balance expenses withrevenue levels below what they were a

couple of years ago. The drop in rail trafficthe industry is experiencing has meant asharp decline in rail revenue, which inturn has led to a reduction in the railroadworkforce.

As in other industries, rail employeecounts are mainly a function of the levelof business — i.e., how much freight isbeing hauled. Class I freight railroademployment reached its recent peak in November 2006 before beginning a downwardtrend. As of December 2009, rail employment was down nearly 21,900 from then (seeChart 11).

The Impact on Railroad Equipment

Excess rail cars are placed in storagewhile they are not needed. When theeconomy is healthy and railroads arebusy, around 2 percent to 3 percent of freight cars might be in storage. As of Feb. 1, 2010, 440,000 freight cars werein storage, equal to 28 percent of totalrail cars. (See Chart 12)

Likewise, during the recession railroadshave had to park several thousandlocomotives that are not needed to haulfreight. They too will return to servicewhen traffic levels increase. At around$2 million per locomotive and roughly $80,000 per railcar, that means the industry has

assets worth approximately $43 billion now standing idle.

140,000

145,000

150,000

155,000

160,000

165,000

170,000

Class I Railroad Employment: Jan. 2002 - Dec. 2009

Data are not seasonally-adjusted and do not include non-Class I carriers. Source: STB

2002 2003 2004 2005 2006 2007 2008 2009

Chart 11

28.2%

28.8%29.4%

30.4%31.1%

31.9%31.9%31.5%

27.5%

28.8% 28.7%

300,000

325,000

350,000

375,000

400,000

425,000450,000

475,000

500,000

525,000

Mar'09

Apr'09

May'09

Jun'09

Jul'09

Aug'09

Sep'09

Oct'09

Nov'09

Dec'09

Jan'10

Feb'10

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

Freight Cars in Storage on North American Railroads:Actual and Percentage of Total Fleet

Data are as of the first of the month; % are cars stored as % of total fleet. Source: AAR

n/a

Chart 12





IV. GREAT EXPECTATIONS – New Challenges Ahead

Moving more freight and people by rail is good for our national economy and good forour environment. But just as a runner cannot run as fast when injured, railroadperformance will be hamstrung by

legislation and regulations that threatenhealthy revenue levels, inject unnecessaryuncertainty, or permit excessivegovernment interference in day-to-day railoperations.

Today, the industry faces a confluence of unique challenges in Washington, D.C., asthe regulatory environment has shifted tobecome more government-centric and less

market-driven. Railroads are currentlyfacing more than $13 billion in costsassociated with complying with newregulations that have been enacted since2005. (See Chart 13) These challenges greatly threaten the economic viability of rail andall the public benefits it provides to American industries and consumers.

Railroads are working with key policymakers, rail customers, and other industrystakeholders to help ensure that America can realize the full potential benefits of ahealthy national rail system that enhances our economic competitiveness and meetsour future transportations needs.

The Call for Expanded Passenger Rail

The Obama Administration has put tremendous emphasis on the importance of rail toour nation’s economic recovery. Throughout his campaign, then-candidate Obamaoften drew a connection between transportation infrastructure investment and jobs,environmental benefits and long-term national energy policy.

Shortly after taking office, President Obama announced the Vision for High Speed Rail inAmerica (Vision). This blueprint for expanded high-speed and intercity passenger rail

recognized that railroads confer tremendous public benefits on society – including improved mobility, livability, reduced highway congestion and lower greenhouse gasemissions. It also was aimed at generating desperately needed jobs to help stimulateour nation’s economic recovery.

Locomotiveemissions$2.4 billion

Other*$0.9 bil.

PTC$10 billion

Unfunded Mandates Just From 2005-2009Will Cost More Than $13 Billion

*Includes conductor certification, reflectorization, event recorders,locomotive crashworthiness, cab noise, escape respirators, TIHchain of custody, training, and other regulations. Source: AAR

Chart 13





When he announced his Vision on April 16, 2009, President Obama said:

“This is America. There's no reason why the future of travel should lie somewhereelse beyond our borders. Building a new system of high-speed rail in America will befaster, cheaper and easier than building more freeways or adding to an already

overburdened aviation system – and everybody stands to benefit.”

Less than one year later, the federal government awarded $8 billion in stimulus grantsfor projects in 31 states that include 13 high-speed rail corridors under the High-SpeedIntercity Passenger Rail Program.

The Foundation for Passenger Rail

Today, freight railroads are successful partners with passenger railroads all across thecountry. With the exception of the Northeast Corridor between Boston and Washington,D.C., freight railroads own some 97 percent of the 22,000 miles over which Amtrakoperates. In addition, millions of commuter rail trips each year operate over tracks orrights-of way owned by freight railroads.

This movement of passengers takes place overthe same network that supports the movementof goods for nearly every industrial, wholesale,trade, retail, agricultural and mining basedbusiness sector of our nation’s economy. Today,railroads account for 43 percent of intercityfreight volume – more than any other mode of transportation.

Policy Implications

The President’s Vision outlines that with theexception of some express high-speed railprojects, intercity passenger rail operations will involve at least some shared track.However, each high-speed rail corridor is unique and comes with its own set of opportunities and challenges.

Striking the right balance as we grow both passenger and freight rail is key to ensuringAmerica’s economic engine keeps running while providing the foundation for PresidentObama’s Vision for high-speed rail. As FRA has noted publicly, the development of aworld-class passenger rail system must not come at the expense of our country’sexisting world-class freight rail system.

“It is the inherent efficiency of rail transportation that enables freight railroads todo something that isexpected of no other formof transportation: maintaintheir infrastructure, add capacity, host passenger operations, and pay local

property taxes on their real estate.” – FRA National Rail Plan, October 2009





0

2

4

6

8

10

12

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08Source: FRA

Rail Accident & Injury Rates Have Plunged

Injuries Per 200,000Rail Employee-Hours:Down 82% 1980-2008

Train Accidents PerMillion Train-Miles:

Down 72% 1980-2008

Constr.

WaterTransp.

Mining

Agric.

AirTransp.

AllMfg.All

PrivateIndustry

Food &Bev.

Stores

Trucks

RRs

0

1

2

3

4

5

6

7(Injuries Per 200,000 Employee-Hours)

Data are 2008. Source: U.S. Bureau of Labor Statistics

RRs Are Safer Than Most Other Industries

The Safety Mandate

For railroads, pursuing safe operations is not an option — it’s an imperative. Today,railroads have lower employee injury rates than most other major industries, includingtrucks, barges, airlines, agriculture, mining, manufacturing, and construction — even

lower than food stores. (See Chart 14)

Freight railroads have made significant investments in safety: in infrastructure,equipment, and technology; in extensive employee training; in cooperation with raillabor, suppliers, customers, communities, and the FRA; and in cutting-edge research anddevelopment.

The overall U.S. rail industry safety record is excellent, with 2008 the safest year onrecord for U.S. railroads. From 1980 to 2008, the train accident rate fell 72 percent, therail employee injury rate fell 82 percent, and the grade crossing collision rate fell 79percent. Preliminary data suggest that 2009 will be even safer in each of these safetycategories. (See Chart 15)

The Rail Safety Improvement Act of 2008 (RSIA) requires Class I freight railroads by 2015to install positive train control (PTC) systems on tracks that carry passengers or toxic-by-

inhalation (TIH) materials.2

PTC describes technologies designed to automatically stop or slow a train to avoidcertain accidents. In general, PTC technology is intended to prevent train-to-train

2 TIH materials are liquids, such as chlorine and anhydrous ammonia, which are especiallyhazardous if released. Under the RSIA, all freight rail tracks that carry passengers must bePTC-equipped, and all Class I freight rail tracks over which 5 million or more gross tons of railtraffic is transported and carry TIH must be PTC-equipped.

Chart 14 Chart 15





collisions, derailments caused by excessive speed, unauthorized incursions by trainsonto sections of track where repairs are being made, and movement of a train through atrack switch left in the wrong position.

Expanded Mandate, Expanded Costs

According to the January 2010 FRA final rule on PTC implementation, freight railroadswill have to spend more than $5 billion to install PTC systems, plus an additional $700million each year thereafter for their maintenance. The FRA estimates that the netpresent value of the total costs of PTC to railroads over 20 years will be between $10billion to $14 billion.

The benefits of PTC will be significantly lower than its costs. The FRA estimates that thenet present value of PTC-related rail safety benefits over 20 years will be between $440million and $674 million. In other words, railroads will incur approximately $20 in PTCcosts for each $1 of PTC benefits.

Perhaps most perplexing are the regulations the FRA put forth to implement the PTCmandate. These regulations include several new provisions that are over and above thestatutory requirements and add hundreds of millions of dollars to railroads’ costs, yetwill not improve safety in any meaningful way.

Railroads are committed to complying with the Congressional PTC mandate, but thiswell-intended legislation will have negative unintended real-world consequences. The$5 billion initial railroad PTC installation costs is roughly equal to what railroads spend ina typical year on all infrastructure-related capital spending, and is about equal to whatthey’ve spent over the past five years combined on network capacity expansion. 3

FRA Safety User Fees

Safety in most U.S. industries is regulated by the Occupational Safety and HealthAdministration (OSHA), an agency of the U.S. Department of Labor. Safety in the railindustry, however, is regulated mainly by the FRA. Funding for OSHA and the FRAtypically comes from general appropriations. However, from 1991 until 1995 freightrailroads paid fees to the FRA to cover many of the costs associated with the FRA’s railsafety program. Railroad payments during this period totaled approximately $159

million, equivalent to around $215 million in today’s dollars.

Recognizing that these fees were really nothing more than taxes, Congress eliminatedthem in 1995. Since then, there have been a number of legislative efforts to reintroducethe fees and to expand their scope. Each time FRA safety user fees have since been

3 In recent years, roughly 20 percent of rail capital spending has been devoted to capacitygrowth. The remainder has been devoted to replacing assets already in place.





proposed, key Congressional committees acting on a bipartisan basis have rejectedthem.

These fees have again been proposed in the Obama Administration’s proposed 2011budget, at a rate of $50 million per year. According to the Administration’s budget, this

fee would cover the costs associated with FRA rail safety inspectors, starting in 2011 andincreasing in subsequent years.

Policy Implications

Because railroads have limited funds to devote to infrastructure projects, expenditureson PTC or FRA user fees will therefore drain funds that otherwise would have providedfor other projects that would increase rail capacity, improve service, provideenvironmental benefits, and enhance safety. Further, no budget — whether it’s ahousehold, a government or a business — is unlimited, even for something as importantas safety.

Safety improvements can not be advanced if resources are spent on programs orrequirements that do little to improve safety, or if unfunded mandates lock upresources that would have a more pronounced impact on safety if spent elsewhere.Policies such as these increase the cost of rail service and drive more traffic to thehighways, where the safety record is far less favorable than it is on the rails.

The Threat of Expanded Government Regulation

When Congress passed the Staggers Rail Act of 1980, largely deregulating the railroadindustry, it was taking a leap of faith. At the time, the nation’s rail infrastructure wascrumbling, with more than 47,000 miles of track operating at reduced speeds becauseof unsafe conditions. Railroads had billions of dollars in deferred maintenance, and theterm “standing derailment,” when stationary railcars simply fell off poorly maintainedtrack, was commonplace.

Resisting the urge to flex expanded regulatory muscle or prescribe an industry bailout,Congress eliminated with the Staggers Act many regulations that were hinderingefficient, cost-effective freight rail service. Congress put the emphasis on the railroads’ability to find their way through to recovery.

Perhaps most importantly, Congress recognized the industry’s need to earn adequaterevenues to build and maintain the nation’s rail network. Under the Staggers Act,railroads were given authority to base their rates on market demand, rather than havethe government set their rates. Railroads also were allowed to enter into confidentialcontracts voluntarily negotiated with shippers. Meanwhile, government regulatorsretained authority to protect shippers against anti-competitive railroad behavior,ensuring that railroads are held accountable for their actions.





Since 1980, railroad productivity has increased 144 percent, average rail rates havefallen 49 percent, rail accident rates are down 72 percent, rail freight traffic has nearlydoubled, and railroads have reinvested some $460 billion back into their systems.Return on investment, which had been falling for decades, rose to 4.4 percent in the

1980s, 7.0 percent in the 1990s, and 8.0 percent from 2000 to 2008.

Today, railroads are a vital, self sustaining industry that has weathered the recessionand emerged positioned for growth.

Greater Government Involvement

While the Staggers Act removed many of the government controls which werepreventing competition from driving down rates while supporting returns adequate toyield reinvestment in the network, it also provided rail customer protections. TheSurface Transportation Board (STB) is the independent federal agency with jurisdictionover railroad mergers and other rail-related issues, including oversight of rates in caseswhere there is no effective rail competition.

In addition, railroads remain subject to most antitrust laws, including those that prohibitrailroads from getting together to set rates, allocate markets, or unreasonably restraintrade. The few narrow antitrust exemptions available to railroads cover areas under STB jurisdiction.

Despite enjoying the tremendous public and business benefits from the railroadindustry’s self-propelled gains, some rail shippers continue to call for new legislationthat would in effect force railroads to lower their rates to certain large shippers andvastly expand the role of government in the day-to-day running of railroads. They alsoseek to repeal key elements of the Staggers Act that have made it possible for theindustry to sustain itself and support the U.S. rail network.

Disconnect with Marketplace Reality

These proposals are not supported bywhat is happening in the marketplace. Infact, an independent study conducted at

the request of the STB determined thatcompetition in the industry is working,and that while there have beenincremental rail rate increases in recentyears, these increases are in line withoverall increased costs.

“Providing significant rate relief tosome shippers will likely result inrate increases for other shippers or

threaten railroad financial viability” – A Study of Competition in the U.S.Freight Railroad Industry and Analysis of Proposals that Might EnhanceCompetition, Christensen Associates Inc.,January 2010.





Policy Implications

Much of what is being proposed in legislation that would dramatically change theexisting railroad regulatory structure relies entirely on the STB’s interpretation of newand incredibly complex economic regulations and legal processes. Nonetheless, it is

clear that these proposed policies would affect the industry’s ability to meet thenation’s call for expanded passenger rail and increased demand to move more freight byrail.

These proposals – whether they call for vastly expanding the role of the STB or repealingrailroads’ limited antitrust exemptions – attempt to mandate lower rates for someshippers and would increase regulatory uncertainty during times of tremendouseconomic uncertainty. Without a level of certainty in the marketplace and the ability toearn adequate returns, railroads will be unable to attract the capital needed to buildand maintain the nation’s rail network.

Climate Change Policy and Rail’s Coal Business

Railroads are a part of the climate change solution, yet may suffer unintendedconsequences from climate change legislation. Pending climate change legislation inCongress, as well as EPA’s attempt to regulate greenhouse gases under the currentClean Air Act, threaten the future of America’s coal industry – and the freight railindustry’s single largest customer segment.

The impact of climate change policies on the railroad industry cannot be weighedwithout first examining the impact such policies would have on America’s coal industry.Coal generates close to half of America’s electricity, and railroads haul more than 70percent of it. In 2008, coal accounted for 45 percent of freight rail tonnage and 23

110,000

120,000

130,000

140,000

150,000

160,000


Average Weekly U.S. Rail Carloads of Coal

2006

2009

2008


2007

Jan. 2010

-20%

-15%

-10%

-5%

0%

5%

10%

15%

% Change in U.S. Rail Carloads of Coal From SameMonth Previous Year: Jan. 2006 - Jan. 2010

2006 2007 2008 2009Data are based on originations, are not seasonally adjusted, exclude U.S. operations of CN andCP, and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

Jan. 2010 was down 12.1% from Jan. 2009 and down 15.0% from Jan. 2008.

Chart 16 Chart 17





percent of revenue for Class I railroads. All told, railroads originated 7.7 million carloadsof coal in 2008 — enough to meet the electricity needs of every home in America. (SeeCharts 16 and 17)

However, current events dampening the coal market offer a glimpse at what might

happen should freight railroads see a reduction of business from this single largestcustomer segment due to climate change legislation. In 2009, America experiencedreduced demand for electricity not only because of the weakened economy, but alsobecause of milder weather trends and low natural gas prices. (See Charts 15 and 16)

The result is higher stockpiles of coal in the U.S. electric power sector. This in turnmeans railroads hauled less coal than any year in recent history. The charts below showcoal stockpiles in the U.S. electric power sector. Note the huge run-up in stockpilessince early 2009 (see Chart 18).

Policy Implications

Railroads have invested tens of billions of dollars in uniqueassets and rail networkinfrastructure, such as thetracks, signals and equipmentrequired to serve coalcustomers. Over the years,particularly when natural gasprices were high, the federalgovernment pressuredrailroads to expand railcapacity to serve coal. Theseassets would be abandoned or greatly underutilized if America’s coal industry were tobe diminished.

Today, there are tremendous stakes for railroads as they weigh the impacts of asignificant reduction of coal business. One in every five railroad jobs, and one in everyfour revenue dollars is related to the movement of coal.

Both Congressional and EPA regulations affecting climate change and the future of thecoal industry have the potential to undermine all of the positive environmental benefitsprovided by freight rail. If railroads lose a substantial share of their coal revenue andcannot maintain and expand their network infrastructure investments, then their abilityto continue to take trucks off the roads, reduce highway congestion and lowergreenhouse gas emissions will be severely compromised.

Chart 18

80

100

120

140

160

180

200

220

Coal Stockpiles in the Electric Power Sector:January 2003 - November 2009

(Millions of Tons)

Source: Energy Information Administration

2003 20052004 2006 2007 2008 2009





V. GREAT EXPECTATIONS – The Path to U.S. Economic Recovery

In order for our nation’s railroads to aid the U.S. economic recovery, lawmakers andregulators should support polices that:

1) do no harm to the financial viability of the self-sustaining railroad industry, and

2) bolster the industry’s ability to attract investments needed to sustain a healthynational rail network and thousands of high paying American jobs .

The following offers a framework for ensuring these two equally critical goals are met,paving the way forward for a healthy rail network that can support U.S. economicrecovery.

Eliminate Uncertainty, Preserve Rail Network Investment

As noted earlier, trucks, airlines, and barges operate over highways, airways, and

waterways that the government provides. By contrast, America’s freight railroads paynearly all of the costs of their tracks, bridges, and tunnels themselves. To keep theirexisting networks in top condition and to build the new rail capacity that America willneed in the years ahead, railroads must be able to earn enough to finance their costsand attract investors. Reduced investments mean a decrease in growth and loss of additional freight rail jobs.

Because U.S. freight railroads are privately owned and must finance the vast majority of their infrastructure spending themselves, capacity investments are accompanied bysubstantial financial risk. As the Government Accountability Office noted in a recentreport:

“Rail investment involves private companies taking a substantial risk which becomesa fixed cost on their balance sheets, one on which they are accountable tostockholders and for which they must make capital charges year in and year out forthe life of the investment.” 4

For this reason, adequate rail earnings are critical. If a railroad is not financiallysustainable over the long term, it will not be able to make capacity investments tomaintain a healthy rail system needed to make additional investments in thereplacement or expansion of infrastructure required by growing demand.

While the financial health of many of America’s freight railroads has improved sincebeing partially deregulated, rail profitability has suffered in the current downturn. Railearnings allow railroads the ability to make investments that are needed to keep theirtrack and equipment in top condition, improve service, and add the new rail capacity

4 Government Accountability Office, Freight Railroads: Industry Health Has Improved, butConcerns About Competition and Capacity Should Be Addressed, October 2006, p. 56.





that America will need for expanded freight and passenger service in the years ahead.(See Chart 20)

In 2008 railroads spent more than ever before on their infrastructure and equipmentand kept re-investments at a high level in 2009. There is a very high positive correlation

— meaning that when one is up, the other is too — between rail earnings andreinvestments in their systems. (See Chart 21)

This Congress and the Administration must exercise care and balance when consideringchanges to the economic regulatory system that has given rise to the rail renaissance.

Rail Infrastructure Tax Incentive

In order to help ensure that tomorrow’s rail network will be able to handle the freightand people of tomorrow — and stimulate the economy at the same time —policymakers should enact tax incentives for projects, such as new track, bridges,tunnels, and intermodal facilities that expand freight rail capacity.

Railroads support legislation that calls for a 25 percent tax credit for capital investments

used to grow the nation’s rail network. All businesses that make capacity-enhancing railinvestments, not just railroads themselves, should be eligible for the incentives. Taxincentives are also appropriate to help cover the huge costs of the expanded PTCmandate.

Railroads’ best estimate of the cost of a freight railroad infrastructure tax incentive is afew hundred million dollars per year — not insignificant, to be sure, but the stimulatorybenefit to the economy would be much greater. In fact, based on U.S. Department of

$2.5 $2.7$3.2

$2.7 $2.9

$4.9

$6.5$6.8

$8.1

'00 '01 '02 '03 '04 '05 '06 '07 '08

Class I Railroad Net Income: 2000-2008($ billions)

Source: AAR

Rail earnings have risen in recent years...

Chart 20 Chart 21

$120

$140

$160

$180

$200

$220

$240

'00 '01 '02 '03 '04 '05 '06 '07 '08

Infrastructure and Equipment Spending*Per Mile ($000s)

*Capital spending + maintenance expenses - depreciationClass I railroads only. Source: AAR

...leading directly to record levels of rail reinvestments.





Commerce data, every $1 of new rail infrastructure investment that would bestimulated by a tax incentive would generate more than $3 in total economic output.

Thus, $300 million in additional freight rail capacity investment would result in nearly $1billion in overall economic stimulus. Moreover, each $1 billion of new rail investment

induced by the tax incentives would create 20,000 jobs.

In addition to the freight rail tax incentive, the expired short line tax credit should berenewed. Expired in 2009, this tax credit has enabled the creation of over 5 million trackworker-hours per year, and $330 million in annual track upgrades. The credit alsosupports thousands of jobs in the timber, steel and track materials industries.

Many transportation experts, businesses, government policymakers, and others supportrail infrastructure tax incentives because they know rail expansion is in America’s bestinterests. Supporters have included the American Association of Port Authorities, theAlliance to Save Energy, the American Council for an Energy Efficient Economy, theAmerican Society of Civil Engineers, Hewlett Packard, the National Mining Association,the National Retail Federation, the U.S. Chamber of Commerce, and many others.

In a January 2008 report, the Congressional Budget Office lists three main criteria forassessing a fiscal stimulus proposal — and a rail infrastructure tax incentive meets allthree.

First, the CBO asks, is it cost effective? The budgetary cost of a rail infrastructure taxincentive is small compared with the stimulating benefit to the economy.

Second, is it likely to be timely? Highways and other public works projects can takeyears to plan and begin, and years more to build. Freight rail projects, however can bestarted far more quickly, often in a matter of months. Moreover, tax incentives forfreight rail infrastructure investment would immediately stimulate additionalinvestment and employment by rail suppliers as they responded to increases in multi-year capital projects by the rail industry.

Third, how certain are the economic impacts of the proposal? Virtually no one disputesthe need for, and the economic benefits of, transportation capacity expansion. A railinfrastructure tax incentive would yield immediate, positive economic benefits.

For a railroad considering whether to fund an expansion project, a tax incentive wouldreduce the cost of the project, raising the likelihood that the project will beeconomically viable and allowing the public benefits of the project to accrue morequickly. The incentive would help worthwhile projects get built sooner, but would notbe enough to cause economically unjustified projects to go forward.





CREATE: A Public Private Partnership inAction

The Chicago Region Environmental andTransportation Efficiency Program – or CREATE– is a project of national significance that wasformed in 2003 when the State of Illinois andCity of Chicago joined with passenger and

freight railroads serving the region to identifycritically needed improvements to the Chicagoregion’s rail and highway transportationinfrastructure. As the nation’s busiest rail freightgateway and world’s third busiest intermodalhub, Chicago’s rail network is crucial to thelocal, regional and national economy.

The CREATE program is aimed at improvingpassenger rail service, reducing motorist delays,increasing safety, improving air quality, creating

jobs and ultimately providing the Chicago regionwith public benefits valued at more than $3.8billion. The program also preserves thefootprint for high-speed rail in the Midwestregion.

The vast majority of Chicago’s rail infrastructureis privately owned and maintained by the sixmajor freight railroads that operate in the area– BNSF, CSX, CN, CP, NS and UP. In theChicago area alone, railroads have spent morethan $1.2 billion over the past five years tomaintain and improve rail infrastructure.

Under the public-private partnership of CREATE,railroads will pay for the business benefits theygain from improvements to the rail network.The government will pay for public benefits suchas grade crossing separations and commuter railimprovements.

Public-Private Partnerships

For intercity passenger rail expansion to take hold in this country – at higher or trulyhigh-speed – public-private partnerships must exist between the host freight railroadsand passenger rail sponsors that protects the business needs and responsibilities of both

parties. Through public-private partnerships, governments can greatly expand the use of rail while only paying for the public benefits – while railroads pay for the businessbenefits they gain from improvements to the rail network.

These partnerships offer a mutually beneficialway for railroads and governments to solvecritical transportation problems. For example,some projects might provide a combinationof public benefits, such as decreasinghighway congestion by taking trucks off theroad, as well as benefits for freight rail, suchas enabling faster more reliable trainoperations. In other cases, the public entitycontributes a portion of the initial investmentrequired to make a project feasible, with therailroad responsible for funding all futuremaintenance to keep the project productiveand in good repair.

Public-private partnerships also are providedfor in FRA’s high-speed and intercitypassenger rail program. Under FRA’sprogram, states applying for federal grantsfor high-speed or intercity passenger railprojects are required to have writtenagreements with the host freight railroads onissues such as safety, infrastructure capacity,compensation and liability if they are to beconsidered eligible for federal funding.

Policies like these recognize public-private

partnerships can support mutually beneficialdevelopment of passenger and freight rail.They are a critical first step to making higher-speed passenger rail a reality in America,while preserving the health of the freight railnetwork so that it can provide the literalfoundation for intercity passenger railexpansion.





Preserve Coal, Enact Railroad Contingency Allowances

Railroads’ first priority in climate change policies is support for a robust coal industry.The reasons are simple:

• 1 in every 5 railroad jobs is coal related• 1 in every 4 railroad revenue dollars is coal related

Railroads support policies that enable greater use of coal, such as investment indeveloping carbon-capture-and-storage (CCS) technology. For example, the ObamaAdministration recently called for creation of an interagency task force that wouldfacilitate the development of five to 10 commercial demonstrations of CCS technologyby 2016.

However, uncertainty about the future of coal has required preliminary contingency

planning by railroads. Decreased demand for coal would result in stranded assets thatare uniquely suited to serving coal customers – coal cars, dedicated rail lines, facilities,and some locomotives.

The railroad industry developed a legislative solution, called the Rail Carrier AdjustmentAssistance Proposal, which would provide payments beginning in 2018 to any railroadthat experiences a decrease in revenues as a result of enactment of climate changelegislation. The proposal would direct the Secretary of Transportation to determinewhether any decrease in total revenue ton miles in coal is the result of a shift caused bythe legislation from coal to other sources of energy at a facility that mines, produces,processes or uses coal to generate electricity or manufactured goods.

If granted, the railroad would be obligated to invest the full amount of the after-tax netvalue of the climate change adjustment allowance on capital expenditures, including therenewal or expansion of its rail infrastructure.

Contingent allowances would ensure that freight rail can continue to be a part of theclimate change solution. However, such allowances are simply “just-in-case.”

If a robust coal industry is preserved, and there is no loss of coal, there would be noneed for allowances for railroads. However, if there is a loss of demand for coal,

resulting in billions of dollars in stranded coal-related assets and a concurrent loss inrevenue, allowances would simply ensure we can invest in our networks to meetincreased demand to move more people and goods by rail.





VI. Conclusion

America has great expectations of freight railroads – continue to take trucks off the road,reduce highway congestion, lower greenhouse gas emissions, provide safe andaffordable movement of people and goods, all while avoiding having to rely on taxpayer

funds. Public policy makers simply have come to expect freight rail will be able toprovide these public benefits while sustaining private investment in the nation’s railnetwork needed to facilitate our nation’s economic recovery.

However, these public benefits are in danger of diminishing if certain regulatory andlegislative proposals that greatly expand the role of the federal government becomereality. These changes are under consideration despite broad public view that isincreasingly leery of government intervention in the marketplace, especially if it stifles job growth during a recession, when jobs are so desperately needed.

There are balanced, market-driven policy initiatives that instead offer a better wayforward to ensure freight rail can deliver on these expected public benefits:

• market-based policies that enable railroads to attract private capital necessary tobuild and sustain the nation’s passenger and freight rail network;

• investment tax incentives that ensure railroads can continue to make the billionsof dollars each year to build, maintain and expand the nation’s rail network;

• safety regulations based on critical need and true safety benefits, and which donot come at the expense of other critical safety and capacity enhancing projects;

• climate change policies that avoid unintended negative consequences thatthreaten vital American jobs, and

• public-private partnerships that ensure a new national high-speed and intercitypassenger rail system is not developed at the expense of the nation’s world-classfreight rail network.

Supporting such policies will ensure freight rail can meet America’s great expectationsfor U.S. economic recovery.




VII. For More Information

To learn more about railroad economics – including freight rail traffic, the movement of commodities, intermodal movements, and other key data – please visit www.aar.org .

AAR also issues a monthly Rail Time Indicators report, released the second week of eachmonth which includes a video summary presented by a member of the AAR Policy &Economics team. The report combines rail traffic data with more than 15 key U.S.economic indicators – including consumer confidence, housing starts and industrialproduction – offering a snapshot of how rail traffic data reflects the broader U.S.economy.

For additional background or to arrange interviews with key AAR experts andspokespersons, please contact:

Holly ArthurAVP Public and Media [email protected]

AAR Communications202-639-2100

AAR Report on US Railroads and Ecnomic Recovery 2010

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