January 22, 2016

Economic headwinds reinforce the need for balanced regulation

Written by  Edward Hamberger, president and CEO, Association of American Railroads
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THE US economy is wrestling with the prospect of a tempered outlook for the first part of 2016, highlighting that while North America's freight railways might do well in good times, they assume huge risk when the economic tables turn.

A year ago, railfreight was carrying record levels of nearly all commodities. Now that is trailing downwards as some groups - including intermodal - have fallen off, indicative of a cooling economy. A year ago crude oil shipments were climbing as an essential element in US energy independence. Now oil volumes are declining as the global price of oil has fallen.

When the economy wanes, the railways are left with hundreds of millions of dollars in stranded assets no longer required by rail customers. The railways take the hit for the track and other infrastructure no longer in use - not the taxpayer. That's because unlike almost all other transport infrastructure, rail infrastructure is funded by private companies.

HambergerBy building and maintaining the coast-to-coast railfreight network, the railways ensure that the US economy functions efficiently and effectively and that millions of commuters have reliable transport where commuter trains access our networks.

But the nation's current economic plight - underscored by stranded rail assets - provides a sobering reminder for federal regulators keen on ensuring a robust freight rail network in 2016, even in tough times: if regulators want railways to continue to take financial risk and invest in infrastructure to support American industry and employment, the industry needs balanced regulations that do not impede the railways' ability to generate revenue.

In 2016 the rail industry will continue to press the Surface Transportation Board (STB) on several key issues. In a throwback to a long-lost era of government intervention in private industry, the STB is weighing proposals that would cap revenue and leave railways with much less money to expand and modernise the rail network.

A handful of interest groups and some companies want the STB to reverse years of success and interpret "revenue adequacy" as a directive to constrain railfreight revenues. They want the STB to cut their transport costs through direct government intervention at the expense of the greater good. They want the STB to institute price controls on freight railways.

The reason most economists, and policy makers for that matter, are sceptical about price controls is that they distort the allocation of resources. What that means for the rail industry is very simple: if rates are capped, revenue falls. That in turn will curtail the amount of funding railways can reinvest back into their networks, and these are huge sums, averaging about $US 25bn annually in recent years and $US 600bn cumulatively since 1980.

By misapplying the concept of "revenue adequacy" and cutting revenue, the STB would inhibit further modernisation of the 225,000km network to meet shipper demands as effectively as they can now.

Another ill-conceived proposal under consideration would require railways to provide competitors with access to their infrastructure. In 2016 the freight railways will argue that it's indefensible to force companies that have risked billions of dollars building, maintaining, and optimising their networks to open their infrastructure to competitors.

Moreover, the efficiency of the entire network will be compromised by forcing new, unpredictable shipping patterns that will disrupt operations. Ultimately, most shippers will be disadvantaged as the costs and disruptions of reciprocal shipping move through the system. A few politically connected shippers may benefit, but most others will not.

PTC a priority

Last year the industry worked to extend the federally-mandated deadline for the installation of positive train control (PTC). The end of 2015 was an unworkable deadline which didn't reflect the scale of this mammoth technological undertaking. The industry has been ringing the alarm bell for years on this.

The new deadline approved by Congress is one that the railfreight industry will assuredly meet: it calls for installation of PTC on 100% of our network by 2018, followed by two years of real-world testing and validation to ensure it works as advertised. The bottom line is that PTC will be fully implemented on Class 1 railways by 2020.

CSX Train ChemicalThe deadline change in no way reflects a lessening commitment to PTC. America's railways are committed to implementing a nationwide PTC system that will strengthen an already safe rail network.

Safety is always the first and highest priority of the railfreight industry in whatever is transported and nowhere is safety more of a focus in 2016 than in the transport of crude oil. The railways are setting the highest possible standards for oil transport safety. They have done top-to-bottom reviews and improved on some of their crude oil transport operations, while last year federal regulators issued new regulations on moving crude oil.

In announcing the new safety rules, transportation secretary Mr Anthony Foxx praised the safety record of the freight railways. "The truth is, 99.9% of these shipments reached their destination safely," he said.

If getting even closer to perfection is the quest, then a major goal in 2016 should be pressing for a fleet of the safest tank wagons money can buy.

Many industries, including railfreight, support a requirement for tank wagons to incorporate thermal insulation - ceramic jackets over the tank shell - sufficient to provide up to 800 minutes of protection. This type of technology is readily available in the commercial marketplace and is already in use on tank wagons carrying flammable gases.

The Federal Railroad Administration summed up the importance of a healthy railfreight network as something which is "essential to American businesses, households, and communities." It took decades to achieve that status and decades of massive investment by the industry in rail infrastructure. It also took carefully considered regulations and effective and thoughtful legislation to allow that steady flow of capital into the rail network.

If the railways are to make the investments necessary to ensure that the United States remains a global economic leader, the message to regulators and legislators in 2016 is that they must continue to take a balanced approach.

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