Great Expectations: Railroads and U.S. Economic Recovery

TABLE OF CONTENTS

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Executive Summary Great Expectations – Railroads and the American Economy Railroads and Jobs Lower Prices for Consumers Private Rail Investments Support America’s Rail Network Easing Congestion, Lowering Emissions Great Expectations – Railroads Weather the Recession The Current Downturn Impacts on Railroad Employment Railroad Equipment Great Expectations – Challenges Ahead The Call for Expanded Passenger Rail The Safety Mandate The Threat of Expanded Government Regulation Climate Change – Policy Implications for Coal Great Expectations – The Road to Recovery Eliminate Uncertainty, Preserve Rail Network Investment Rail Infrastructure Tax Incentive Preserve Coal, Enact Railroad Contingency Allowances Public Private Partnerships Conclusion More Information Additional Background Resources Contact Information

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Association of American Railroads

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freight rail is the common thread that allows businesses to thrive. D. But rail is under attack. EXECUTIVE SUMMARY Freight rail drives America’s economy and touches the lives of most Americans every day.000 miles of coast-to-coast rail network enables a company in New England to ship its products to a buyer in California. This report underscores the importance of a healthy freight rail system to our nation’s economy. comes to pass. These changes are under consideration as Americans are increasingly leery of excessive government intervention in the marketplace. Rail helps keep prices low for all kinds of consumer and industrial products. reduce greenhouse gas emissions. From steel to housing to agriculture. Economic Recovery I. Freight rail moves coal to hundreds of power stations across the country to generate electricity for millions of people. which railroads help support. when jobs are so desperately needed. especially if it stifles job growth during a recession. But these public benefits are in danger if proposed regulatory and legislative action in Washington. these changes threaten high paying American jobs with freight rail companies. What’s more. as well as job creation in other areas such as housing. Association of American Railroads Page 3 of 26 . or to a port where a ship can take it to a foreign market. American industries and consumers have great expectations of our nation’s railroads: competitive shipping rates.S. It also outlines what’s at stake and provides a roadmap to ensure that the rail network remains viable as our nation struggles to emerge from the deepest recession in a generation. fuel efficiency. Congress and the Administration are weighing sweeping changes to the freight rail industry that could have a direct and negative impact on Americans in the form of higher costs for goods and services.C. manufacturing and agriculture.Great Expectations: Railroads and U. and provide the foundation for new high-speed and intercity passenger rail around the country. from manufacturing to small business. It provides American industries access to global markets and American consumers with goods from around the world. because freight rail shipping rates are so competitive. ease highway congestion. The vast 140.

freight rail delivers these benefits with almost no taxpayer help.600. All U. and directly or indirectly support 1. Chart 1 Average Compensation in the Freight Rail Industry is Far Higher Than Average (U. roughly 80 percent of which are union employees. This does not include the countless jobs provided by rail customers that benefit from the cost effectiveness of shipping their products by rail. and service firms throughout the economy.000 $45. Whether it’s by supporting millions of American jobs. Economic Recovery II. Unlike all other modes of transportation.S. In fiscal year 2008. for total compensation of $95. the 184.000 $75. including rail suppliers and other manufacturing. Bureau of Economic Analysis Retirement System.S. By contrast. Freight RRs vs.000 $15. Department of Commerce data.100. In 2008.S.S.S. including retired railroad employees and their survivors. Workers) $105.S. retail. Railroads and Jobs Based on U. freight rail confers tremendous public benefits on society.300 (see Chart 1).Great Expectations: Railroads and U. some 600.000 $0 Benefits Benefits Wages Wages Rail employees are covered by the Railroad RRs U. Every freight rail job supports another 4.200 and fringe benefits of $27. affordable. earned average wages of $68. The list of the ways that freight railroads promote economic growth and improved quality of living is tremendous. in 2008 was $50. Freight railroad employees are among America’s most highly compensated workers. received more than $10 billion in retirement and survivor benefits from the Railroad Retirement System.5 jobs elsewhere in the economy.000 U. Association of American Railroads Page 4 of 26 .000 $90. the average wage per full-time employee in the U. or easing traffic congestion and lowering greenhouse gas emissions. freight railroad employees.000 beneficiaries. and environmentally sound freight rail system in the world.2 million jobs. is connected by the most efficient. instead of Social Security. freight railroads generate nearly $265 billion in total annual economic activity.S. keeping the things we buy and use more affordable. Average Data are 2008. Source: AAR.000 $30.S. GREAT EXPECTATIONS – Railroads and America’s Economy From one end of the country to the other. the U.000 $60.900 and average total compensation was $62.

5¢ 1981 (Class I Revenue Per Ton-Mile. 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: AAR Association of American Railroads Page 5 of 26 . According to World Bank data.0¢ 3.S. In 2003.5¢ 5.0¢ 4. means more American jobs.5¢ 6.0¢ 5.5¢ 3. Changes in rail rates compare very favorably with changes in the prices of most things we buy (see Chart 2).0¢ 1. That. electricity. Railroads’ cost effectiveness provides a huge competitive advantage for American businesses in the global marketplace. average U. % Change 1981-2008) +160% +137% +121% +135% +68% +76% +65% +5% RR Rates Bananas Gasoline Bread Chicken Eggs Potato Postage Chips *Avg. and countless other goods that all of us buy every day cost less than they would if rail were not involved. In fact. the food.Great Expectations: Railroads and U.5¢ 4. Freight Railroad Rates Are Half What They Were in 1981 7. rail shippers would have to pay an additional $69 billion per year. Economic Recovery Lower Prices For American Consumers Chart 2 Thanks to the cost-effectiveness of America’s freight railroads. clothes. in turn.5¢ 2.S. revenue per ton-mile. All Commodities) Railroad rates are down 49% since the Staggers Act restored reasonable balance to railroad regulation. That means the average rail shipper can move twice the freight today for the same price it paid 27 years ago. Railroad Rates* vs. and 50 to 75 percent below those in major European countries. Average rail rates were 49 percent lower in 2008 than in 1981 (see Chart 3). Source: Bureau of Labor Statistics. Prices of Common Consumer Goods (Current Dollars. freight rail rates are half those in China and Japan.S.0¢ 2. AAR Chart 3 Average Inflation-Adjusted U. the American Association of State Highway and Transportation Officials (AASHTO) estimated that if all freight rail traffic were shifted to trucks. America’s freight railroads are the most affordable in the world.0¢ 6.

S. Source: AAR RR Fuel Consumed* Railroad Volume** That means moving freight by rail instead of truck reduces greenhouse gas emissions by on average 75 percent. In 2008. since greenhouse gas emissions are directly tied to fuel consumption. they are the most environmentally sound way to move freight.S. recreational boats. America’s freight railroads burned 3. U.7 billion fewer gallons of fuel and emitted 41 million fewer tons of carbon dioxide than they would have if their fuel efficiency had remained constant since 1980. U. passenger rail Data are 2007. Since 1980. From 1980 through 2008. freight railroads Freight Railroads Account for Well Under 1% of U. fuel consumption. aircraft. freight railroads consumed nearly 52 billion fewer gallons of fuel and emitted 579 million fewer tons of carbon dioxide than they would have if their fuel efficiency had not improved. In 2008 alone. freight railroads moved a ton of freight an average of 457 miles per gallon of fuel – an increase of 94 percent in efficiency since 1980. (See Chart 4) Chart 4 Since 1980. greenhouse gas emissions.Great Expectations: Railroads and U.4% Trucking 5. Environmental Protection Agency (EPA).3% *On-road vehicles.S. According to a recent independent study prepared for the Federal Railroad Administration (FRA).S. Economic Recovery Easing Congestion. According to the U.7% Passenger Transportation* 19.8% Freight RRs 0.7% Other Freight Transporters 1. That’s equivalent to taking 2 million Chart 5 cars off the road or planting 280 million trees. annual greenhouse gas emissions would fall by more than 12 million tons. railroads are on average four times more fuel efficient than trucks. Lowering Emissions America’s freight railroads have been “going green” for decades. railroads have nearly doubled how much freight they move — while using virtually the same amount of fuel. Railroads Have Doubled Freight Volume But Consumed the Same Amount of Fuel (Index 1980 = 100) 200 175 150 125 100 75 50 25 0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 *in freight service **revenue ton-miles Data are for Class I railroads. Fuel efficiency is one reason for this. Because railroads reduce highway gridlock. and pollution. Railroads’ fuel efficiency gains have meant sharp reductions in rail-related greenhouse gas emissions.S. If just 10 percent of long-distance freight now moving by truck moved by rail instead. Greenhouse Gas Emissions NonTransportation Sources 72. Source: EPA Transportation-Related Not Transportation-Related Association of American Railroads Page 6 of 26 .

terminals.7 percent) and passenger transportation (19. Rail reinvestments were down only slightly in 2009 from the previous year’s record pace and in 2010 are expected to remain about equal to 2009. product mfg.Great Expectations: Railroads and U. In March 2008. railroads also reduce the huge costs associated with highway gridlock. Industries: Avg. By contrast. equal to nearly a full week per traveler. Machinery manufacturing Motor vehicles & parts mfg.8 billion gallons. America’s freight railroads have spent some $460 billion on infrastructure and equipment — more than 40 cents out of every revenue dollar — to maintain. modernize and expand their systems. which while yielding emissions reductions of other harmful pollutants also will dampen fuel efficiency gains. and other costs add tens of billions of dollars to this already huge tab.S. According to the 2009 Urban Mobility Report by the Texas Transportation Institute. Rather than require significant taxpayer support. airways.S. railroads actually significantly contribute to our Capital Expenditures as a % of Revenue for Various U. cargo delays. travelers lose 4. signals. Paper manufacturing Computer & electr. greenhouse gas emissions. Electric utilities Class I Railroads 3% 2% 3% 3% 3% 3% 3% 4% 4% 4% 5% 5% 13% 17% Note: Utilities are 1999-2006 Source: U. Fabricated metal product mfg. highway congestion annually costs $87 billion just in wasted travel time and wasted fuel. and barges operate over highways. or three weeks’ worth of gas per traveler. Railroads are working with manufacturers toward meeting these new standards. easing wear and tear on our nation’s highways. 1997-2006 Average all manufacturing Food manufacturing Petroleum & coal products mfg. and waterways that the government provides and taxpayers subsidize. Since 1980. Chemicals manufacturing Plastics & rubber products mfg. Wood product mfg.7 percent of total U.S. tunnels. far less than trucks (5. the EPA issued stringent new locomotive emissions standards that will cut particulate emissions by up to 90 percent and nitrogen oxide emissions by up to 80 percent.2 billion hours. EEI Association of American Railroads Page 7 of 26 . Bureau of the Census. airlines. Lost productivity. Each year. bridges. America’s privately owned freight railroads use their own funds to pay the overwhelming majority of the costs to maintain tracks. Chart 6 and other infrastructure. AAR. A typical freight train carries the load of more than 280 trucks. and 2. Private Investments Support America’s Rail Network Trucks. Nonmetallic mineral product mfg. Freight railroads have even kept reinvesting during the recession.S. Economic Recovery today contribute just 0. spending more on their systems in 2008 than ever before. Finally.8 percent) (see Chart 5).

05 BNSF 4. $2. $6.Great Expectations: Railroads and U. Florida.2007 ($ billions) Total 1.S. In fact.49 CSX 9. AAR Association of American Railroads Page 8 of 26 .000— nearly eight times the average for all U.000). Railroads are at or near the top among all U. the average U. in 2008. the nation’s major railroads paid $625 million in state and local property taxes on their infrastructure. Sources: FHWA. from 1997 to 2006 (the most recent year for which data are available).09 Florida 3. Texas $10.96 2. $2. CSX and Norfolk Southern are in the top 11 compared with all states. Short line railroads paid millions of additional dollars in property taxes. or more RR Spending on Way & Structures vs. $2. manufacturing ($96.S. and California highway agencies spend more on highway construction and maintenance programs than Union Pacific and BNSF each spend on their networks. For example.08 New Jersey $2.65 Michigan 8.16 Union Pacific $4. $3. than five times higher (see Chart 6). manufacturer spent 3 percent of revenue on capital expenditures. freight railroads was 17 percent. industries in terms of capital intensity. $3.S. only Texas.51 North Carolina $2.07 Norfolk Southern Data include capital outlays and maintenance expenses. $5. railroad net investment in plant and equipment per employee was $738. (See Chart 7) State Highway Agency Spending .88 New York 5.43 California $4. In 2008 alone. $2.S. The massive investments railroads must make in their systems reflect the extreme capital intensity of their business.51 Illinois 7.S.30 Georgia 10. railroads spend far more on capital outlays and maintenance of track and roadway than the vast majority of state highway agencies spend on their highway programs. $3. Likewise. Economic Recovery state and local treasuries.79 Pennsylvania 6. The comparable figure Chart 7 for U.25 Ohio 11. The four largest major U.S. $2.

In other words. railroads are not $14 1. By December 2008. AAR number of factors in addition to economic growth led to an increase in rail freight volume: • Rising fuel costs led to increased demand for rail. rail traffic was relatively stable until the fall. Still.Great Expectations: Railroads and U.S. 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 auto sectors that caused drops in carloads of lumber.3 $9 $8 1. • A surge in U. imports and record U.9 hauling.5 1. industries. Association of American Railroads Page 9 of 26 Trillions of Revenue Ton-M iles R eal GDP (Trillions of $2005) $13 . Gross Domestic Product.7 $12 $11 $10 1. a Sources: Bureau of Economic Analysis. (See Chart 8) Real GDP (left axis) RR Ton-Miles (right axis) 1. considered the single most conclusive indicator for the health of the economy. GREAT EXPECTATIONS: Railroads Weather the Recession Like other U. wood. when the credit crisis exacerbated the decline in the economy already under way. Freight rail is a “derived demand” industry – demand for rail service occurs when Chart 8 there is demand for the products that There Is a Close Relationship Between Economic railroads haul. U. agricultural exports boosted rail shipments to and from ports. Economic Recovery III. 2007 was the second highest-volume year in history for America’s freight railroads. railroad history.1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Beginning around 2003 and 2004. since railroads are on average four times more fuel efficient than trucks. and most coal is shipped by rail. That is why rail traffic is a solid gauge of the health of the overall economy.S.S. innovations and use of technology led to service improvements and enhanced reliability. autos and auto parts. is closely related to freight rail traffic. if America Growth and Freight Railroad Traffic is not building or buying. rail carload traffic was 21 percent lower than it had been two months earlier.S. In 2008. with four months that year registering the highest-volume months in U. • Railroad investments in capacity.S. railroads have suffered during the economic downturn.S. intermodal traffic. • A rise in natural gas prices caused power plants to burn more coal to generate electricity. By 2006 America’s railroads were carrying more freight than ever before.

000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 240. exclude U. operations of CN and CP.000 180. Association of American Railroads Page 10 of 26 .000 Jan.000 230. in December 2008 was down 24 percent from where it was in October 2008 (see Chart 9). 2010 2009 2008 280.S.000 2009 Jan.000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data are weekly average originations for each month. operations of CN and CP. intermodal traffic totaled 9. down 14. railroads since 2002 (see chart 10). and reflect revisions from original reporting. Last year’s carload total was the lowest for U. exclude U. Source: AAR 1 The National Bureau of Economic Research (NBER) officially determines when a U. The industry’s intermodal total in 2009 was the lowest for U. rail carload traffic was down 16.000 250. when the AAR data series begins.S. Rail Carloads: All Commodities 360.7 percent from 2007. Chart 9 Average Weekly U. recession starts and ends. As of February 2010.2 percent compared with 2007. Because the peak and trough can only be determined after the fact — often months after the fact — it is often unclear when an economy begins a new growth cycle or ends one.S. 2010 190. freight rail traffic today remains well below 2008 levels.1 percent compared with 2008 and down 18.S.000 220. railroads since before 1988. Meanwhile.S. Rail Intermodal Traffic 260.000 210. are not seasonally adjusted. many economists believe the economy is likely technically out of the recession.000 200.1 While economic recovery may be on the horizon.1 percent from 2008 and down 17.000 2006 2007 340.000 300.000 2006 2007 Chart 10 Average Weekly U.000 170. Economic Recovery covering truck trailers and shipping containers.Great Expectations: Railroads and U.S. This decline in rail traffic carried over into 2009.S.9 million trailers and containers in 2009.000 260.S. A recession begins just after the economy peaks and ends when it bottoms out.S. Source: AAR Data are weekly average originations for each month. are not seasonally adjusted. and reflect revisions from original reporting. when U.000 320. U.S.000 2008 240.

0% 325. The drop in rail traffic the industry is experiencing has meant a sharp decline in rail revenue. are working to balance expenses with revenue levels below what they were a couple of years ago.000 425.000 24. like other businesses.000 375.000 145. around 2 percent to 3 percent of freight cars might be in storage.7% 28. 20.000 400. Class I freight railroad employment reached its recent peak in November 2006 before beginning a downward trend.000 per railcar.0% 350.8% 28. They too will return to service when traffic levels increase.000 As in other industries. 2010. 440. during the recession railroads 300. At around $2 million per locomotive and roughly $80.000 freight cars were in storage.000 counts are mainly a function of the level 2002 2003 2004 2005 2006 2007 2008 2009 of business — i. 2002 .5% 31. The Impact on Railroad Equipment Excess rail cars are placed in storage while they are not needed.2% 28.0% 27.0% 30..4% 29.000 165.4% 28.0% 32. rail employment was down nearly 21. Economic Recovery The Impact on Railroad Employment Chart 11 Railroads.5% 26.0% Feb '10 Association of American Railroads Page 11 of 26 .000 150. rail employee 140.000 have had to park several thousand Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan '09 '09 '09 '09 '09 '09 '09 '09 '09 '09 '10 locomotives that are not needed to haul Data are as of the first of the month.0% 34.000 n/a Likewise.S.000 475. Source: STB being hauled.000 500.1% 30. (See Chart 12) Chart 12 Freight Cars in Storage on North American Railroads: Actual and Percentage of Total Fleet 525. As of Feb. When the economy is healthy and railroads are busy. Source: AAR freight.Great Expectations: Railroads and U.9% 31. Class I Railroad Employment: Jan. how much freight is Data are not seasonally-adjusted and do not include non-Class I carriers.Dec.8% 28. that means the industry has assets worth approximately $43 billion now standing idle. As of December 2009.900 from then (see Chart 11).000 450. % are cars stored as % of total fleet.9% 31.000 160. which in turn has led to a reduction in the railroad workforce.000 155. 2009 170.e.000 22. equal to 28 percent of total rail cars. 1.0% 31.

livability. Railroads are currently facing more than $13 billion in costs *Includes conductor certification. the industry faces a confluence of Other* $10 billion unique challenges in Washington. reduced highway congestion and lower greenhouse gas emissions. It also was aimed at generating desperately needed jobs to help stimulate our nation’s economic recovery. rail customers. event recorders. cab noise. Source: AAR regulations that have been enacted since 2005. Economic Recovery IV. But just as a runner cannot run as fast when injured.C. TIH chain of custody. associated with complying with new locomotive crashworthiness.9 bil. the regulatory environment has shifted to become more government-centric and less market-driven. President Obama announced the Vision for High Speed Rail in America (Vision). (See Chart 13) These challenges greatly threaten the economic viability of rail and all the public benefits it provides to American industries and consumers.4 billion Railroads are working with key policymakers.. GREAT EXPECTATIONS – New Challenges Ahead Moving more freight and people by rail is good for our national economy and good for our environment. then-candidate Obama often drew a connection between transportation infrastructure investment and jobs. as $0. and other regulations. environmental benefits and long-term national energy policy. inject unnecessary Will Cost More Than $13 Billion uncertainty. The Call for Expanded Passenger Rail The Obama Administration has put tremendous emphasis on the importance of rail to our nation’s economic recovery. PTC Today. Locomotive emissions $2.Great Expectations: Railroads and U. This blueprint for expanded high-speed and intercity passenger rail recognized that railroads confer tremendous public benefits on society – including improved mobility. training. Shortly after taking office. Throughout his campaign. escape respirators. or permit excessive government interference in day-to-day rail operations. D. reflectorization. and other industry stakeholders to help ensure that America can realize the full potential benefits of a healthy national rail system that enhances our economic competitiveness and meets our future transportations needs. railroad performance will be hamstrung by Chart 13 legislation and regulations that threaten Unfunded Mandates Just From 2005-2009 healthy revenue levels. Association of American Railroads Page 12 of 26 .S.

However. Association of American Railroads Page 13 of 26 . Policy Implications “It is the inherent efficiency of rail transportation that enables freight railroads to do something that is expected of no other form of transportation: maintain their infrastructure. host passenger operations. add capacity.S. railroads account for 43 percent of intercity freight volume – more than any other mode of transportation. the development of a world-class passenger rail system must not come at the expense of our country’s existing world-class freight rail system. Today. There's no reason why the future of travel should lie somewhere else beyond our borders. retail. This movement of passengers takes place over the same network that supports the movement of goods for nearly every industrial. freight railroads own some 97 percent of the 22.Great Expectations: Railroads and U. intercity passenger rail operations will involve at least some shared track. In addition. Building a new system of high-speed rail in America will be faster. freight railroads are successful partners with passenger railroads all across the country.” Less than one year later. As FRA has noted publicly.000 miles over which Amtrak operates. Striking the right balance as we grow both passenger and freight rail is key to ensuring America’s economic engine keeps running while providing the foundation for President Obama’s Vision for high-speed rail.C. the federal government awarded $8 billion in stimulus grants for projects in 31 states that include 13 high-speed rail corridors under the High-Speed Intercity Passenger Rail Program. agricultural and mining based business sector of our nation’s economy. With the exception of the Northeast Corridor between Boston and Washington.” – FRA National Rail Plan. cheaper and easier than building more freeways or adding to an already overburdened aviation system – and everybody stands to benefit. 2009.. Economic Recovery When he announced his Vision on April 16. wholesale. President Obama said: “This is America. trade. D. millions of commuter rail trips each year operate over tracks or rights-of way owned by freight railroads. The Foundation for Passenger Rail Today. and pay local property taxes on their real estate. each high-speed rail corridor is unique and comes with its own set of opportunities and challenges. October 2009 The President’s Vision outlines that with the exception of some express high-speed rail projects.

and all Class I freight rail tracks over which 5 million or more gross tons of rail traffic is transported and carry TIH must be PTC-equipped. and the FRA. pursuing safe operations is not an option — it’s an imperative. PTC technology is intended to prevent train-to-train TIH materials are liquids. railroads have lower employee injury rates than most other major industries. rail industry safety record is excellent. (See Chart 14) Freight railroads have made significant investments in safety: in infrastructure. Today. Source: U. (See Chart 15) Chart 14 RRs Are Safer Than Most Other Industries (Injuries Per 200. in extensive employee training.S. suppliers.S. Chart 15 Rail Accident & Injury Rates Have Plunged 12 10 8 6 4 2 Train Accidents Per Million Train-Miles: Down 72% 1980-2008 Injuries Per 200. Under the RSIA. railroads. and technology. in cooperation with rail labor.2 PTC describes technologies designed to automatically stop or slow a train to avoid certain accidents. and construction — even lower than food stores. the rail employee injury rate fell 82 percent. agriculture. Stores Trucks Agric.Great Expectations: Railroads and U. the train accident rate fell 72 percent. Economic Recovery The Safety Mandate For railroads. Air Transp. equipment. all freight rail tracks that carry passengers must be PTC-equipped. In general. customers. airlines. From 1980 to 2008.S. manufacturing. Preliminary data suggest that 2009 will be even safer in each of these safety categories. The overall U. with 2008 the safest year on record for U. including trucks. barges. such as chlorine and anhydrous ammonia. RRs All Mfg. and in cutting-edge research and development. Food & Bev.000 Rail Employee-Hours: Down 82% 1980-2008 All Private Industry Constr. Bureau of Labor Statistics '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 Source: FRA The Rail Safety Improvement Act of 2008 (RSIA) requires Class I freight railroads by 2015 to install positive train control (PTC) systems on tracks that carry passengers or toxic-byinhalation (TIH) materials. Mining 0 Data are 2008. mining.S. and the grade crossing collision rate fell 79 percent. which are especially hazardous if released.000 Employee-Hours) 7 6 5 4 3 2 1 0 Water Transp. communities. 2 Association of American Railroads Page 14 of 26 .

and movement of a train through a track switch left in the wrong position. Association of American Railroads Page 15 of 26 . Economic Recovery collisions.S. Expanded Mandate. however. Recognizing that these fees were really nothing more than taxes. unauthorized incursions by trains onto sections of track where repairs are being made. but this well-intended legislation will have negative unintended real-world consequences. Railroads are committed to complying with the Congressional PTC mandate. there have been a number of legislative efforts to reintroduce the fees and to expand their scope. is regulated mainly by the FRA. yet will not improve safety in any meaningful way. These regulations include several new provisions that are over and above the statutory requirements and add hundreds of millions of dollars to railroads’ costs. Safety in the rail industry. derailments caused by excessive speed. Railroad payments during this period totaled approximately $159 million.Great Expectations: Railroads and U.3 FRA Safety User Fees Safety in most U. The $5 billion initial railroad PTC installation costs is roughly equal to what railroads spend in a typical year on all infrastructure-related capital spending. Each time FRA safety user fees have since been 3 In recent years. equivalent to around $215 million in today’s dollars. and is about equal to what they’ve spent over the past five years combined on network capacity expansion. However. In other words. The FRA estimates that the net present value of the total costs of PTC to railroads over 20 years will be between $10 billion to $14 billion. The remainder has been devoted to replacing assets already in place. The FRA estimates that the net present value of PTC-related rail safety benefits over 20 years will be between $440 million and $674 million. Congress eliminated them in 1995. from 1991 until 1995 freight railroads paid fees to the FRA to cover many of the costs associated with the FRA’s rail safety program.S. Perhaps most perplexing are the regulations the FRA put forth to implement the PTC mandate. roughly 20 percent of rail capital spending has been devoted to capacity growth. The benefits of PTC will be significantly lower than its costs. industries is regulated by the Occupational Safety and Health Administration (OSHA). railroads will incur approximately $20 in PTC costs for each $1 of PTC benefits. Funding for OSHA and the FRA typically comes from general appropriations. an agency of the U. Since then. Department of Labor. freight railroads will have to spend more than $5 billion to install PTC systems.S. plus an additional $700 million each year thereafter for their maintenance. Expanded Costs According to the January 2010 FRA final rule on PTC implementation.

Meanwhile. Congress recognized the industry’s need to earn adequate revenues to build and maintain the nation’s rail network. expenditures on PTC or FRA user fees will therefore drain funds that otherwise would have provided for other projects that would increase rail capacity. railroads were given authority to base their rates on market demand. Association of American Railroads Page 16 of 26 . even for something as important as safety. Railroads had billions of dollars in deferred maintenance.Great Expectations: Railroads and U. was commonplace. Under the Staggers Act.S. provide environmental benefits. Resisting the urge to flex expanded regulatory muscle or prescribe an industry bailout. Railroads also were allowed to enter into confidential contracts voluntarily negotiated with shippers. These fees have again been proposed in the Obama Administration’s proposed 2011 budget. where the safety record is far less favorable than it is on the rails. this fee would cover the costs associated with FRA rail safety inspectors.” when stationary railcars simply fell off poorly maintained track. improve service. Policy Implications Because railroads have limited funds to devote to infrastructure projects. and the term “standing derailment. starting in 2011 and increasing in subsequent years. ensuring that railroads are held accountable for their actions. At the time.000 miles of track operating at reduced speeds because of unsafe conditions. Economic Recovery proposed. or if unfunded mandates lock up resources that would have a more pronounced impact on safety if spent elsewhere. The Threat of Expanded Government Regulation When Congress passed the Staggers Rail Act of 1980. According to the Administration’s budget. Congress put the emphasis on the railroads’ ability to find their way through to recovery. Policies such as these increase the cost of rail service and drive more traffic to the highways. a government or a business — is unlimited. at a rate of $50 million per year. Further. and enhance safety. the nation’s rail infrastructure was crumbling. Safety improvements can not be advanced if resources are spent on programs or requirements that do little to improve safety. with more than 47. Perhaps most importantly. cost-effective freight rail service. largely deregulating the railroad industry. Congress eliminated with the Staggers Act many regulations that were hindering efficient. it was taking a leap of faith. no budget — whether it’s a household. government regulators retained authority to protect shippers against anti-competitive railroad behavior. rather than have the government set their rates. key Congressional committees acting on a bipartisan basis have rejected them.

self sustaining industry that has weathered the recession and emerged positioned for growth. and that while there have been incremental rail rate increases in recent years. Disconnect with Marketplace Reality These proposals are not supported by what is happening in the marketplace.0 percent from 2000 to 2008.Great Expectations: Railroads and U.0 percent in the 1990s.. average rail rates have fallen 49 percent.S. Freight Railroad Industry and Analysis of Proposals that Might Enhance Competition. Today. railroad productivity has increased 144 percent. In fact. Association of American Railroads Page 17 of 26 . which had been falling for decades. Christensen Associates Inc. allocate markets. and railroads have reinvested some $460 billion back into their systems.S. some rail shippers continue to call for new legislation that would in effect force railroads to lower their rates to certain large shippers and vastly expand the role of government in the day-to-day running of railroads.S. The Surface Transportation Board (STB) is the independent federal agency with jurisdiction over railroad mergers and other rail-related issues. including those that prohibit railroads from getting together to set rates. rose to 4. rail freight traffic has nearly doubled. it also provided rail customer protections. Greater Government Involvement While the Staggers Act removed many of the government controls which were preventing competition from driving down rates while supporting returns adequate to yield reinvestment in the network. January 2010. railroads remain subject to most antitrust laws. They also seek to repeal key elements of the Staggers Act that have made it possible for the industry to sustain itself and support the U. railroads are a vital. Return on investment. rail accident rates are down 72 percent.4 percent in the 1980s. Economic Recovery Since 1980. these increases are in line with overall increased costs. 7. rail network. In addition. Despite enjoying the tremendous public and business benefits from the railroad industry’s self-propelled gains. and 8. The few narrow antitrust exemptions available to railroads cover areas under STB jurisdiction. or unreasonably restrain trade. an independent study conducted at the request of the STB determined that competition in the industry is working. including oversight of rates in cases where there is no effective rail competition. “Providing significant rate relief to some shippers will likely result in rate increases for other shippers or threaten railroad financial viability” – A Study of Competition in the U.

Without a level of certainty in the marketplace and the ability to earn adequate returns.S. The impact of climate change policies on the railroad industry cannot be weighed without first examining the impact such policies would have on America’s coal industry. exclude U. These proposals – whether they call for vastly expanding the role of the STB or repealing railroads’ limited antitrust exemptions – attempt to mandate lower rates for some shippers and would increase regulatory uncertainty during times of tremendous economic uncertainty.S.000 2008 Chart 17 % Change in U. yet may suffer unintended consequences from climate change legislation. railroads will be unable to attract the capital needed to build and maintain the nation’s rail network. as well as EPA’s attempt to regulate greenhouse gases under the current Clean Air Act. Rail Carloads of Coal 160. and reflect revisions to original reporting. In 2008. and reflect revisions from original reporting. are not seasonally adjusted. Pending climate change legislation in Congress.000 Jan. Source: AAR -20% 2006 2007 2008 2009 Data are based on originations. Climate Change Policy and Rail’s Coal Business Railroads are a part of the climate change solution. 2008. Nonetheless. Rail Carloads of Coal From Same Month Previous Year: Jan.S. operations of CN and CP.S.000 2006 140. 120. 2010 15% 10% 5% 0% 150.000 2007 2009 130. exclude U. Source: AAR Weekly Railroad Traffic Association of American Railroads Page 18 of 26 .0% from Jan. and railroads haul more than 70 percent of it. coal accounted for 45 percent of freight rail tonnage and 23 Chart 16 Average Weekly U. 2010 -15% Jul Aug Sep Oct Nov Dec 110.Jan.S. 2009 and down 15. 2006 . it is clear that these proposed policies would affect the industry’s ability to meet the nation’s call for expanded passenger rail and increased demand to move more freight by rail.Great Expectations: Railroads and U. operations of CN and CP. are not seasonally adjusted. Coal generates close to half of America’s electricity.1% from Jan. threaten the future of America’s coal industry – and the freight rail industry’s single largest customer segment. 2010 was down 12.000 -5% -10% Jan.000 Jan Feb Mar Apr May Jun Data are weekly average originations for each month. Economic Recovery Policy Implications Much of what is being proposed in legislation that would dramatically change the existing railroad regulatory structure relies entirely on the STB’s interpretation of new and incredibly complex economic regulations and legal processes.

but also because of milder weather trends and low natural gas prices. America experienced reduced demand for electricity not only because of the weakened economy.7 million carloads of coal in 2008 — enough to meet the electricity needs of every home in America. reduce highway congestion and lower greenhouse gas emissions will be severely compromised.November 2009 (Millions of Tons) billions of dollars in unique 220 assets and rail network 200 infrastructure. Economic Recovery percent of revenue for Class I railroads.S. current events dampening the coal market offer a glimpse at what might happen should freight railroads see a reduction of business from this single largest customer segment due to climate change legislation. there are tremendous stakes for railroads as they weigh the impacts of a significant reduction of coal business. the federal government pressured 80 2003 2004 2005 2006 2007 2008 2009 railroads to expand rail Source: Energy Information Administration capacity to serve coal. If railroads lose a substantial share of their coal revenue and cannot maintain and expand their network infrastructure investments. electric power sector. All told. These assets would be abandoned or greatly underutilized if America’s coal industry were to be diminished.S. and one in every four revenue dollars is related to the movement of coal.Great Expectations: Railroads and U. Today. signals and equipment 160 required to serve coal 140 customers. Note the huge run-up in stockpiles since early 2009 (see Chart 18). Over the years. electric power sector. In 2009. This in turn means railroads hauled less coal than any year in recent history. The charts below show coal stockpiles in the U. Association of American Railroads Page 19 of 26 . One in every five railroad jobs. Policy Implications Chart 18 Coal Stockpiles in the Electric Power Sector: Railroads have invested tens of January 2003 . (See Charts 15 and 16) The result is higher stockpiles of coal in the U. such as the 180 tracks. Both Congressional and EPA regulations affecting climate change and the future of the coal industry have the potential to undermine all of the positive environmental benefits provided by freight rail. then their ability to continue to take trucks off the roads. 120 particularly when natural gas 100 prices were high. (See Charts 16 and 17) However.S. railroads originated 7.

S. freight railroads are privately owned and must finance the vast majority of their infrastructure spending themselves. Rail earnings allow railroads the ability to make investments that are needed to keep their track and equipment in top condition. and tunnels themselves. Freight Railroads: Industry Health Has Improved. October 2006. Economic Recovery V. economic recovery. and barges operate over highways. Reduced investments mean a decrease in growth and loss of additional freight rail jobs. Preserve Rail Network Investment As noted earlier. airways. rail profitability has suffered in the current downturn. economic recovery. capacity investments are accompanied by substantial financial risk.Great Expectations: Railroads and U. improve service. trucks. While the financial health of many of America’s freight railroads has improved since being partially deregulated.S. but Concerns About Competition and Capacity Should Be Addressed.”4 For this reason. and waterways that the government provides. paving the way forward for a healthy rail network that can support U. it will not be able to make capacity investments to maintain a healthy rail system needed to make additional investments in the replacement or expansion of infrastructure required by growing demand. 56. Association of American Railroads Page 20 of 26 . Economic Recovery In order for our nation’s railroads to aid the U.S. airlines. lawmakers and regulators should support polices that: 1) do no harm to the financial viability of the self-sustaining railroad industry.S. p. one on which they are accountable to stockholders and for which they must make capital charges year in and year out for the life of the investment. GREAT EXPECTATIONS – The Path to U. Because U. America’s freight railroads pay nearly all of the costs of their tracks. The following offers a framework for ensuring these two equally critical goals are met. By contrast. railroads must be able to earn enough to finance their costs and attract investors. and add the new rail capacity 4 Government Accountability Office.S. adequate rail earnings are critical. and 2) bolster the industry’s ability to attract investments needed to sustain a healthy national rail network and thousands of high paying American jobs . bridges. If a railroad is not financially sustainable over the long term. As the Government Accountability Office noted in a recent report: “Rail investment involves private companies taking a substantial risk which becomes a fixed cost on their balance sheets. To keep their existing networks in top condition and to build the new rail capacity that America will need in the years ahead. Eliminate Uncertainty.

1 Chart 21 Infrastructure and Equipment Spending* Per Mile ($000s) $240 $220 $200 . such as new track. bridges. Department of Association of American Railroads Page 21 of 26 . Tax incentives are also appropriate to help cover the huge costs of the expanded PTC mandate. There is a very high positive correlation — meaning that when one is up.7 $2.. to be sure.depreciation Class I railroads only.leading directly to record levels of rail reinvestments. should be eligible for the incentives. and intermodal facilities that expand freight rail capacity.S. not just railroads themselves. Rail earnings have risen in recent years.7 $2.5 $2. but the stimulatory benefit to the economy would be much greater. (See Chart 21) Chart 20 Class I Railroad Net Income: 2000-2008 ($ billions) $8.8 $180 $3. (See Chart 20) In 2008 railroads spent more than ever before on their infrastructure and equipment and kept re-investments at a high level in 2009.9 $6.2 $2. based on U. Source: AAR Source: AAR This Congress and the Administration must exercise care and balance when considering changes to the economic regulatory system that has given rise to the rail renaissance.S. Rail Infrastructure Tax Incentive In order to help ensure that tomorrow’s rail network will be able to handle the freight and people of tomorrow — and stimulate the economy at the same time — policymakers should enact tax incentives for projects. All businesses that make capacity-enhancing rail investments. $4. In fact.9 $160 $140 $120 '00 '01 '02 '03 '04 '05 '06 '07 '08 '00 '01 '02 '03 '04 '05 '06 '07 '08 *Capital spending + maintenance expenses . Railroads support legislation that calls for a 25 percent tax credit for capital investments used to grow the nation’s rail network. the other is too — between rail earnings and reinvestments in their systems. Railroads’ best estimate of the cost of a freight railroad infrastructure tax incentive is a few hundred million dollars per year — not insignificant.Great Expectations: Railroads and U. Economic Recovery that America will need for expanded freight and passenger service in the years ahead..5 $6.. tunnels..

however can be started far more quickly. raising the likelihood that the project will be economically viable and allowing the public benefits of the project to accrue more quickly. the American Society of Civil Engineers. Thus. $300 million in additional freight rail capacity investment would result in nearly $1 billion in overall economic stimulus. steel and track materials industries. the expired short line tax credit should be renewed. but would not be enough to cause economically unjustified projects to go forward. The credit also supports thousands of jobs in the timber. Hewlett Packard. the American Council for an Energy Efficient Economy. the CBO asks. the U. and years more to build. Third. Economic Recovery Commerce data. Moreover. every $1 of new rail infrastructure investment that would be stimulated by a tax incentive would generate more than $3 in total economic output. Freight rail projects. the National Retail Federation. is it cost effective? The budgetary cost of a rail infrastructure tax incentive is small compared with the stimulating benefit to the economy. how certain are the economic impacts of the proposal? Virtually no one disputes the need for. this tax credit has enabled the creation of over 5 million track worker-hours per year. transportation capacity expansion. In addition to the freight rail tax incentive.Great Expectations: Railroads and U. Moreover.S. tax incentives for freight rail infrastructure investment would immediately stimulate additional investment and employment by rail suppliers as they responded to increases in multiyear capital projects by the rail industry.S. often in a matter of months. Chamber of Commerce. In a January 2008 report. is it likely to be timely? Highways and other public works projects can take years to plan and begin. Supporters have included the American Association of Port Authorities. businesses. First. the Congressional Budget Office lists three main criteria for assessing a fiscal stimulus proposal — and a rail infrastructure tax incentive meets all three. government policymakers. each $1 billion of new rail investment induced by the tax incentives would create 20. Expired in 2009. the National Mining Association. positive economic benefits. and the economic benefits of. A rail infrastructure tax incentive would yield immediate.000 jobs. Many transportation experts. a tax incentive would reduce the cost of the project. and others support rail infrastructure tax incentives because they know rail expansion is in America’s best interests. Association of American Railroads Page 22 of 26 . the Alliance to Save Energy. The incentive would help worthwhile projects get built sooner. and many others. and $330 million in annual track upgrades. For a railroad considering whether to fund an expansion project. Second.

while preserving the health of the freight rail network so that it can provide the literal foundation for intercity passenger rail expansion. Under the public-private partnership of CREATE. Under FRA’s program. As the nation’s busiest rail freight gateway and world’s third busiest intermodal hub. reducing motorist delays. railroads will pay for the business benefits they gain from improvements to the rail network. some projects might provide a combination of public benefits. In the Chicago area alone. Policies like these recognize public-private partnerships can support mutually beneficial development of passenger and freight rail. For example. They are a critical first step to making higherspeed passenger rail a reality in America.Great Expectations: Railroads and U. The CREATE program is aimed at improving passenger rail service. such as decreasing highway congestion by taking trucks off the road.S. These partnerships offer a mutually beneficial way for railroads and governments to solve critical transportation problems. CREATE: A Public Private Partnership in Action The Chicago Region Environmental and Transportation Efficiency Program – or CREATE – is a project of national significance that was formed in 2003 when the State of Illinois and City of Chicago joined with passenger and freight railroads serving the region to identify critically needed improvements to the Chicago region’s rail and highway transportation infrastructure.8 billion. Chicago’s rail network is crucial to the local. such as enabling faster more reliable train operations. governments can greatly expand the use of rail while only paying for the public benefits – while railroads pay for the business benefits they gain from improvements to the rail network. Public-private partnerships also are provided for in FRA’s high-speed and intercity passenger rail program. the public entity contributes a portion of the initial investment required to make a project feasible. In other cases. as well as benefits for freight rail.2 billion over the past five years to maintain and improve rail infrastructure. Economic Recovery Public-Private Partnerships For intercity passenger rail expansion to take hold in this country – at higher or truly high-speed – public-private partnerships must exist between the host freight railroads and passenger rail sponsors that protects the business needs and responsibilities of both parties. compensation and liability if they are to be considered eligible for federal funding. The government will pay for public benefits such as grade crossing separations and commuter rail improvements. Through public-private partnerships. states applying for federal grants for high-speed or intercity passenger rail projects are required to have written agreements with the host freight railroads on issues such as safety. improving air quality. railroads have spent more than $1. with the railroad responsible for funding all future maintenance to keep the project productive and in good repair. CN. The program also preserves the footprint for high-speed rail in the Midwest region. NS and UP. CP. creating jobs and ultimately providing the Chicago region with public benefits valued at more than $3. The vast majority of Chicago’s rail infrastructure is privately owned and maintained by the six major freight railroads that operate in the area – BNSF. infrastructure capacity. Association of American Railroads Page 23 of 26 . regional and national economy. increasing safety. CSX.

such as investment in developing carbon-capture-and-storage (CCS) technology. the railroad would be obligated to invest the full amount of the after-tax net value of the climate change adjustment allowance on capital expenditures. Enact Railroad Contingency Allowances Railroads’ first priority in climate change policies is support for a robust coal industry. Economic Recovery Preserve Coal. such allowances are simply “just-in-case. including the renewal or expansion of its rail infrastructure. dedicated rail lines. 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. facilities. allowances would simply ensure we can invest in our networks to meet increased demand to move more people and goods by rail. if there is a loss of demand for coal. the Obama Administration recently called for creation of an interagency task force that would facilitate the development of five to 10 commercial demonstrations of CCS technology by 2016. Contingent allowances would ensure that freight rail can continue to be a part of the climate change solution. Decreased demand for coal would result in stranded assets that are uniquely suited to serving coal customers – coal cars. and there is no loss of coal.” If a robust coal industry is preserved. However. If granted. which would provide payments beginning in 2018 to any railroad that experiences a decrease in revenues as a result of enactment of climate change legislation.S. processes or uses coal to generate electricity or manufactured goods. uncertainty about the future of coal has required preliminary contingency planning by railroads. and some locomotives. The railroad industry developed a legislative solution.Great Expectations: Railroads and U. there would be no need for allowances for railroads. called the Rail Carrier Adjustment Assistance Proposal. However. resulting in billions of dollars in stranded coal-related assets and a concurrent loss in revenue. For example. Association of American Railroads Page 24 of 26 . However. produces. The proposal would direct the Secretary of Transportation to determine whether any decrease in total revenue ton miles in coal is the result of a shift caused by the legislation from coal to other sources of energy at a facility that mines.

There are balanced. However. maintain and expand the nation’s rail network. when jobs are so desperately needed. provide safe and affordable movement of people and goods. Economic Recovery VI. and public-private partnerships that ensure a new national high-speed and intercity passenger rail system is not developed at the expense of the nation’s world-class freight rail network. all while avoiding having to rely on taxpayer funds.Great Expectations: Railroads and U. lower greenhouse gas emissions. Association of American Railroads Page 25 of 26 .S. Supporting such policies will ensure freight rail can meet America’s great expectations for U. economic recovery. These changes are under consideration despite broad public view that is increasingly leery of government intervention in the marketplace. safety regulations based on critical need and true safety benefits. Public policy makers simply have come to expect freight rail will be able to provide these public benefits while sustaining private investment in the nation’s rail network needed to facilitate our nation’s economic recovery. market-driven policy initiatives that instead offer a better way forward to ensure freight rail can deliver on these expected public benefits: • • • • • market-based policies that enable railroads to attract private capital necessary to build and sustain the nation’s passenger and freight rail network. Conclusion America has great expectations of freight railroads – continue to take trucks off the road.S. climate change policies that avoid unintended negative consequences that threaten vital American jobs. and which do not come at the expense of other critical safety and capacity enhancing projects. especially if it stifles job growth during a recession. these public benefits are in danger of diminishing if certain regulatory and legislative proposals that greatly expand the role of the federal government become reality. reduce highway congestion. investment tax incentives that ensure railroads can continue to make the billions of dollars each year to build.

intermodal movements.org.org AAR Communications 202-639-2100 Association of American Railroads Page 26 of 26 . the movement of commodities.Great Expectations: Railroads and U. AAR also issues a monthly Rail Time Indicators report.aar. For More Information To learn more about railroad economics – including freight rail traffic. please contact: Holly Arthur AVP Public and Media Relations 202-639-2344 harthur@aar. Economic Recovery VII. released the second week of each month which includes a video summary presented by a member of the AAR Policy & Economics team.S. For additional background or to arrange interviews with key AAR experts and spokespersons. and other key data – please visit www. economy.S.S. The report combines rail traffic data with more than 15 key U. economic indicators – including consumer confidence. housing starts and industrial production – offering a snapshot of how rail traffic data reflects the broader U.

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