Great Expectations: Railroads and U.S.

Economic Recovery

TABLE OF CONTENTS

I. Executive Summary

II. 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

III. Great Expectations – Railroads Weather the Recession

The Current Downturn
Impacts on Railroad Employment
Railroad Equipment

IV. 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

V. 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

VI. Conclusion

VII. More Information

Additional Background Resources
Contact Information

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Great Expectations: Railroads and U.S. Economic Recovery

I. EXECUTIVE SUMMARY

Freight rail drives America’s economy and touches the lives of most Americans every
day. From steel to housing to agriculture, from manufacturing to small business, freight
rail is the common thread that allows businesses to thrive. It provides American
industries access to global markets and American consumers with goods from around
the world.

The vast 140,000 miles of coast-to-coast rail network enables a company in New
England to ship its products to a buyer in California, or to a port where a ship can take it
to a foreign market. Freight rail moves coal to hundreds of power stations across the
country to generate electricity for millions of people. Rail helps keep prices low for all
kinds of consumer and industrial products, because freight rail shipping rates are so
competitive.

But rail is under attack. 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. What’s more, these changes threaten
high paying American jobs with freight rail companies, as well as job creation in other
areas 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, ease
highway congestion, and provide the foundation for new high-speed and intercity
passenger rail around the country. But these public benefits are in danger if proposed
regulatory and legislative action in Washington, D.C. comes to pass.

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

This report underscores the importance of a healthy freight rail system to our nation’s
economy. 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.

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Great Expectations: Railroads and U.S. Economic Recovery

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 the
ways 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 use
more 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 firms
throughout the economy.

Every freight rail job supports another 4.5 jobs elsewhere in the economy. This does not
include the countless jobs provided by rail customers that benefit from the cost
effectiveness of shipping their products by rail.

Freight railroad employees are among America’s Chart 1

most highly compensated workers. In 2008, the Average Compensation in the Freight Rail
184,000 U.S. freight railroad employees, roughly Industry is Far Higher Than Average
80 percent of which are union employees, earned $105,000
(U.S. Freight RRs vs. All U.S. Workers)

average wages of $68,200 and fringe benefits of

$90,000
$27,100, for total compensation of $95,300 (see Benefits
$75,000
Chart 1).
$60,000
Benefits
By contrast, the average wage per full-time $45,000 Wages
employee in the U.S. in 2008 was $50,900 and $30,000 Wages
average total compensation was $62,600. $15,000

$0
Rail employees are covered by the Railroad RRs U.S. Average
Retirement System, instead of Social Security. In Data are 2008. Source: AAR, Bureau of Economic Analysis

fiscal year 2008, some 600,000 beneficiaries,

including retired railroad employees and their survivors, received more than $10 billion
in retirement and survivor benefits from the Railroad Retirement System.

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Great Expectations: Railroads and U.S. Economic Recovery

Lower Prices For American Consumers

Chart 2
Thanks to the cost-effectiveness of America’s Railroad Rates* vs.
freight railroads, the food, electricity, clothes, Prices of Common Consumer Goods
(Current Dollars, % Change 1981-2008)
and countless other goods that all of us buy
every day cost less than they would if rail were +160%

not involved. +137% +135%

+121%

Changes in rail rates compare very favorably

+76%
with changes in the prices of most things we +68% +65%
buy (see Chart 2).

Average rail rates were 49 percent lower in +5%

2008 than in 1981 (see Chart 3). That means RR

Bananas Gasoline Bread Chicken Eggs Potato Postage
Rates
Chips
the average rail shipper can move twice the
*Avg. revenue per ton-mile. Source: Bureau of Labor Statistics, AAR
freight today for the same price it paid 27 years
ago.

In fact, America’s freight railroads are the most Chart 3

affordable in the world. According to World
Average Inflation-Adjusted U.S. Freight Railroad
Bank data, average U.S. freight rail rates are
Rates Are Half What They Were in 1981
half those in China and Japan, and 50 to 75
(Class I Revenue Per Ton-Mile, All Commodities)
percent below those in major European 7.0¢
6.5¢
countries. Railroads’ cost effectiveness 6.0¢
provides a huge competitive advantage for 5.5¢ Railroad rates are down 49% since the
5.0¢ Staggers Act restored reasonable
American businesses in the global marketplace. 4.5¢ balance to railroad regulation.

That, in turn, means more American jobs. 4.0¢

3.5¢
3.0¢
In 2003, the American Association of State 2.5¢
2.0¢
Highway and Transportation Officials (AASHTO) 1.5¢
estimated that if all freight rail traffic were 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Source: AAR
shifted to trucks, rail shippers would have to
pay an additional $69 billion per year.

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Great Expectations: Railroads and U.S. Economic Recovery

Easing Congestion, Lowering Emissions

America’s freight railroads have been “going green” for decades. Because railroads
reduce 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, since Chart 4

greenhouse gas emissions are directly tied to Since 1980, Railroads Have Doubled Freight Volume
fuel consumption. According to a recent But Consumed the Same Amount of Fuel
(Index 1980 = 100)
independent study prepared for the Federal 200
Railroad Administration (FRA), railroads are 175 RR Fuel Consumed*

on average four times more fuel efficient 150 Railroad Volume**

than trucks. 125

100
75
Since 1980, railroads have nearly doubled
50
how much freight they move — while using 25
virtually the same amount of fuel. In 2008, 0
U.S. freight railroads moved a ton of freight '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. Source: AAR
an average of 457 miles per gallon of fuel – an
increase of 94 percent in efficiency since
1980. (See Chart 4)

That means moving freight by rail instead of truck reduces greenhouse gas emissions by
on average 75 percent. If just 10 percent of long-distance freight now moving by truck
moved by rail instead, annual greenhouse gas emissions would fall by more than 12
million tons. That’s equivalent to taking 2 million Chart 5
cars off the road or planting 280 million trees.
Freight Railroads Account for Well Under 1% of
Railroads’ fuel efficiency gains have meant U.S. Greenhouse Gas Emissions
sharp reductions in rail-related greenhouse
gas emissions. In 2008 alone, America’s
freight railroads burned 3.7 billion fewer
Non-
gallons of fuel and emitted 41 million fewer Transportation
tons of carbon dioxide than they would have Sources
Trucking
72.4%
if their fuel efficiency had remained constant 5.7%
Freight RRs
since 1980. From 1980 through 2008, U.S. 0.7%
Passenger
freight railroads consumed nearly 52 billion Transportation* Other Freight
fewer gallons of fuel and emitted 579 million 19.8% Transporters
1.3%
fewer tons of carbon dioxide than they would
have if their fuel efficiency had not improved. Transportation-Related
*On-road vehicles, aircraft,
recreational boats, passenger rail Not Transportation-Related
Data are 2007. Source: EPA
According to the U.S. Environmental
Protection Agency (EPA), freight railroads

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Great Expectations: Railroads and U.S. Economic Recovery

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

Finally, railroads also reduce the huge costs associated with highway gridlock. A typical
freight 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, and
2.8 billion gallons, or three weeks’ worth of gas per traveler. Lost productivity, cargo
delays, 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 will
cut particulate emissions by up to 90 percent and nitrogen oxide emissions by up to 80
percent. Railroads are working with manufacturers toward meeting these new
standards, which while yielding emissions reductions of other harmful pollutants also
will dampen fuel efficiency gains.

Private Investments Support America’s Rail Network

Trucks, airlines, and barges operate over highways, airways, and waterways that the
government provides and taxpayers subsidize. By contrast, America’s privately owned
freight railroads use their own funds to pay the overwhelming majority of the costs to
maintain tracks, bridges, tunnels, signals, terminals,
and other infrastructure. Chart 6

Capital Expenditures as a % of Revenue

Since 1980, America’s freight railroads have spent for Various U.S. Industries: Avg. 1997-2006

some $460 billion on infrastructure and equipment Average all manufacturing 3%

— more than 40 cents out of every revenue dollar Food manufacturing 2%
Petroleum & coal products mfg. 3%
— to maintain, modernize and expand their Machinery manufacturing 3%
systems. Motor vehicles & parts mfg. 3%
Wood product mfg. 3%
Fabricated metal product mfg. 3%
Freight railroads have even kept reinvesting during Chemicals manufacturing 4%
Plastics & rubber products mfg. 4%
the recession, spending more on their systems in Paper manufacturing 4%
2008 than ever before. Rail reinvestments were Computer & electr. product mfg. 5%
down only slightly in 2009 from the previous year’s Nonmetallic mineral product mfg. 5%
Electric utilities 13%
record pace and in 2010 are expected to remain Class I Railroads 17%
about equal to 2009.
Note: Utilities are 1999-2006
Source: U.S. Bureau of the Census, AAR, EEI
Rather than require significant taxpayer support,
railroads actually significantly contribute to our

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Great Expectations: Railroads and U.S. Economic Recovery

state and local treasuries. In 2008 alone, the nation’s major railroads paid $625 million
in state and local property taxes on their infrastructure. Short line railroads paid
millions 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 year
for which data are available), the average U.S. manufacturer spent 3 percent of revenue
on capital expenditures. The comparable figure
for U.S. freight railroads was 17 percent, or more Chart 7
than five times higher (see Chart 6). RR Spending on Way & Structures vs.
State Highway Agency Spending - 2007
($ billions)
Likewise, in 2008, railroad net investment in Total
plant and equipment per employee was 1. Texas $10.96
2. Florida $6.09
$738,000— nearly eight times the average for all 3. California $5.43
U.S. manufacturing ($96,000). Union Pacific $4.16
BNSF $4.05
4. New York $3.88
The four largest major U.S. railroads spend far 5. Pennsylvania $3.79
6. Illinois $3.51
more on capital outlays and maintenance of track 7. Michigan $2.65
and roadway than the vast majority of state 8. North Carolina $2.51
CSX $2.49
highway agencies spend on their highway 9. $2.30
Georgia
programs. For example, only Texas, Florida, and 10. Ohio $2.25
California highway agencies spend more on 11. New Jersey $2.08
Norfolk Southern $2.07
highway construction and maintenance programs
Data include capital outlays and maintenance
than Union Pacific and BNSF each spend on their expenses. Sources: FHWA, AAR
networks. CSX and Norfolk Southern are in the
top 11 compared with all states. (See Chart 7)

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Great Expectations: Railroads and U.S. Economic Recovery

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 Chart 8
there is demand for the products that
railroads haul. In other words, if America There Is a Close Relationship Between Economic
Growth and Freight Railroad Traffic
is not building or buying, railroads are not
$14 1.9
hauling.
$13

Trillions of Revenue Ton-M iles

R eal GDP (Trillions of $2005)
Real GDP
1.7
That is why rail traffic is a solid gauge of $12
(left axis)

the health of the overall economy. Gross RR Ton-Miles

(right axis)
Domestic Product, considered the single $11 1.5

most conclusive indicator for the health of $10

the economy, is closely related to freight 1.3
$9
rail traffic. (See Chart 8)
$8 1.1
Beginning around 2003 and 2004, a 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: Bureau of Economic Analysis, 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, since railroads are on average
four times more fuel efficient than trucks.
• A surge in U.S. imports and record U.S. agricultural exports boosted rail
shipments to and from ports.
• A rise in natural gas prices caused power plants to burn more coal to generate
electricity, and most coal is shipped by rail.
• Railroad investments in capacity, innovations and use of technology led to
service improvements and enhanced reliability.

By 2006 America’s railroads were carrying more freight than ever before, with four
months 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 auto
sectors that caused drops in carloads of lumber, wood, autos and auto parts. Still, 2007
was 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 exacerbated
the decline in the economy already under way. By December 2008, U.S. rail carload
traffic was 21 percent lower than it had been two months earlier; intermodal traffic,

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 Great Expectations: Railroads and U.S. Economic Recovery

covering truck trailers and shipping containers, in December 2008 was down 24 percent
from 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 down
16.1 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 AAR
data 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’s
intermodal 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 today
remains well below 2008 levels.
Chart 9 Chart 10
Average Weekly U.S. Rail Carloads: All Commodities Average Weekly U.S. Rail Intermodal Traffic
360,000 260,000
2006 250,000
2007 2007
340,000 2006
240,000

320,000 230,000

220,000
2008
300,000
210,000
2008 Jan. 2010
280,000 200,000
2009 2009
190,000
260,000
Jan. 2010
180,000

240,000 170,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Data are weekly average originations for each month, are not seasonally adjusted, exclude U.S. 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 operations of CN and CP, and reflect revisions from original reporting. Source: AAR

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 it
bottoms out. 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.

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Great Expectations: Railroads and U.S. Economic Recovery

The Impact on Railroad Employment

Chart 11
Railroads, like other businesses, are Class I Railroad Employment: Jan. 2002 - Dec. 2009
working to balance expenses with 170,000
revenue levels below what they were a
165,000
couple of years ago. The drop in rail traffic
the industry is experiencing has meant a 160,000

sharp decline in rail revenue, which in 155,000

turn has led to a reduction in the railroad
150,000
workforce.
145,000
As in other industries, rail employee
140,000
counts are mainly a function of the level 2002 2003 2004 2005 2006 2007 2008 2009
of business — i.e., how much freight is Data are not seasonally-adjusted and do not include non-Class I carriers. Source: STB

being hauled. Class I freight railroad

employment reached its recent peak in November 2006 before beginning a downward
trend. As of December 2009, rail employment was down nearly 21,900 from then (see
Chart 11).

The Impact on Railroad Equipment

Chart 12
Excess rail cars are placed in storage
while they are not needed. When the Freight Cars in Storage on North American Railroads:
Actual and Percentage of Total Fleet
economy is healthy and railroads are 525,000 34.0%

31.9% 31.9%
busy, around 2 percent to 3 percent of 500,000 31.5% 31.1%
30.4%
32.0%

freight cars might be in storage. As of 475,000 29.4%

28.8% 28.8% 28.7% 30.0%

450,000 28.2%
Feb. 1, 2010, 440,000 freight cars were 27.5%
425,000
28.0%

in storage, equal to 28 percent of total 400,000 26.0%

rail cars. (See Chart 12) 375,000 24.0%

350,000
22.0%

325,000
Likewise, during the recession railroads n/a
300,000 20.0%

have had to park several thousand Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
'09 '09 '09 '09 '09 '09 '09 '09 '09 '09 '10 '10
locomotives that are not needed to haul
Data are as of the first of the month; % are cars stored as % of total fleet. Source: AAR
freight. They too will return to service
when 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.

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Great Expectations: Railroads and U.S. Economic Recovery

IV. GREAT EXPECTATIONS – New Challenges Ahead

Moving more freight and people by rail is good for our national economy and good for
our environment. But just as a runner cannot run as fast when injured, railroad
performance will be hamstrung by Chart 13
legislation and regulations that threaten
Unfunded Mandates Just From 2005-2009
healthy revenue levels, inject unnecessary
Will Cost More Than $13 Billion
uncertainty, or permit excessive
government interference in day-to-day rail
operations.
Locomotive
emissions
Today, the industry faces a confluence of PTC $2.4 billion
$10 billion Other*
unique challenges in Washington, D.C., as $0.9 bil.
the regulatory environment has shifted to
become more government-centric and less
market-driven. Railroads are currently
facing more than $13 billion in costs
*Includes conductor certification, reflectorization, event recorders,
associated with complying with new locomotive crashworthiness, cab noise, escape respirators, TIH
chain of custody, training, and other regulations. Source: AAR
regulations that have been enacted since
2005. (See Chart 13) These challenges greatly threaten the economic viability of rail and
all the public benefits it provides to American industries and consumers.

Railroads are working with key policymakers, rail customers, 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.

The Call for Expanded Passenger Rail

The Obama Administration has put tremendous emphasis on the importance of rail to
our nation’s economic recovery. Throughout his campaign, then-candidate Obama
often 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 in
America (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 gas
emissions. It also was aimed at generating desperately needed jobs to help stimulate
our nation’s economic recovery.

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Great Expectations: Railroads and U.S. Economic Recovery

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 somewhere
else beyond our borders. Building a new system of high-speed rail in America will be
faster, 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 grants
for projects in 31 states that include 13 high-speed rail corridors under the High-Speed
Intercity Passenger Rail Program.

The Foundation for Passenger Rail

Today, freight railroads are successful partners with passenger railroads all across the
country. 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 Amtrak
operates. In addition, millions of commuter rail trips each year operate over tracks or
rights-of way owned by freight railroads.

This movement of passengers takes place over

the same network that supports the movement “It is the inherent efficiency
of rail transportation that
of goods for nearly every industrial, wholesale,
enables freight railroads to
trade, retail, agricultural and mining based do something that is
business sector of our nation’s economy. Today, expected of no other form
railroads account for 43 percent of intercity of transportation: maintain
freight volume – more than any other mode of their infrastructure, add
transportation. capacity, host passenger
operations, and pay local
Policy Implications property taxes on their real
estate.” – FRA National Rail
Plan, October 2009
The President’s Vision outlines that with the
exception of some express high-speed rail
projects, 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 ensuring
America’s economic engine keeps running while providing the foundation for President
Obama’s Vision for high-speed rail. As FRA has noted publicly, 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.

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Great Expectations: Railroads and U.S. Economic Recovery

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, including
trucks, 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 rail
labor, suppliers, customers, communities, and the FRA; and in cutting-edge research and
development.

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

Chart 14 Chart 15

RRs Are Safer Than Most Other Industries Rail Accident & Injury Rates Have Plunged
(Injuries Per 200,000 Employee-Hours) 12
7
Air
Transp. 10
6
Food & Injuries Per 200,000
5 8 Rail Employee-Hours:
All Bev.
Down 82% 1980-2008
All Mfg. Stores
4 6
Water Private Trucks
Transp. Industry Agric.
3 Constr. 4
RRs Mining
2 Train Accidents Per
2 Million Train-Miles:
Down 72% 1980-2008
1
0
0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08
Data are 2008. Source: U.S. Bureau of Labor Statistics 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-by-
inhalation (TIH) materials.2

PTC describes technologies designed to automatically stop or slow a train to avoid

certain 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 especially
hazardous if released. Under the RSIA, all freight rail tracks that carry passengers must be
PTC-equipped, 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.

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Great Expectations: Railroads and U.S. Economic Recovery

collisions, derailments caused by excessive speed, unauthorized incursions by trains

onto sections of track where repairs are being made, and movement of a train through a
track switch left in the wrong position.

Expanded Mandate, Expanded Costs

According to the January 2010 FRA final rule on PTC implementation, freight railroads
will have to spend more than $5 billion to install PTC systems, plus an additional $700
million each year thereafter for their maintenance. 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 benefits of PTC will be significantly lower than its costs. 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. In other words, railroads will incur approximately $20 in PTC
costs for each $1 of PTC benefits.

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

Railroads are committed to complying with the Congressional PTC mandate, but this
well-intended legislation will have negative unintended real-world consequences. 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, and is about equal to what
they’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 Health
Administration (OSHA), an agency of the U.S. Department of Labor. Safety in the rail
industry, however, is regulated mainly by the FRA. Funding for OSHA and the FRA
typically comes from general appropriations. However, 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. 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 eliminated
them in 1995. Since then, there have been a number of legislative efforts to reintroduce
the 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 capacity
growth. The remainder has been devoted to replacing assets already in place.

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Great Expectations: Railroads and U.S. Economic Recovery

proposed, key Congressional committees acting on a bipartisan basis have rejected

them.

These fees have again been proposed in the Obama Administration’s proposed 2011
budget, 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 and
increasing in subsequent years.

Policy Implications

Because railroads have limited funds to devote to infrastructure projects, expenditures

on PTC or FRA user fees will therefore drain funds that otherwise would have provided
for other projects that would increase rail capacity, improve service, provide
environmental benefits, and enhance safety. Further, no budget — whether it’s a
household, a government or a business — is unlimited, even for something as important
as safety.

Safety improvements can not be advanced if resources are spent on programs or

requirements that do little to improve safety, or if unfunded mandates lock up
resources 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 the
highways, 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 railroad
industry, it was taking a leap of faith. At the time, the nation’s rail infrastructure was
crumbling, with more than 47,000 miles of track operating at reduced speeds because
of unsafe conditions. Railroads had billions of dollars in deferred maintenance, and the
term “standing derailment,” when stationary railcars simply fell off poorly maintained
track, 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 hindering
efficient, 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 adequate
revenues 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 have
the government set their rates. Railroads also were allowed to enter into confidential
contracts voluntarily negotiated with shippers. Meanwhile, government regulators
retained authority to protect shippers against anti-competitive railroad behavior,
ensuring that railroads are held accountable for their actions.

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Great Expectations: Railroads and U.S. Economic Recovery

Since 1980, railroad productivity has increased 144 percent, average rail rates have
fallen 49 percent, rail accident rates are down 72 percent, rail freight traffic has nearly
doubled, 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 recession
and emerged positioned for growth.

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, it also provided rail customer protections. The
Surface Transportation Board (STB) is the independent federal agency with jurisdiction
over railroad mergers and other rail-related issues, including oversight of rates in cases
where there is no effective rail competition.

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

Despite enjoying the tremendous public and business benefits from the railroad
industry’s self-propelled gains, 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. 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.S. rail network.

Disconnect with Marketplace Reality

These proposals are not supported by

what is happening in the marketplace. In
fact, an independent study conducted at
the request of the STB determined that
competition in the industry is working,
and that while there have been
incremental rail rate increases in recent
years, these increases are in line with
overall increased costs.
“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.S.
Freight Railroad Industry and Analysis of
Proposals that Might Enhance
Competition, Christensen Associates Inc.,
January 2010.

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 Great Expectations: Railroads and U.S. 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. Nonetheless, 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.

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. Without a level of certainty in the marketplace and the ability to
earn adequate returns, railroads will be unable to attract the capital needed to build
and 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 unintended
consequences from climate change legislation. Pending climate change legislation in
Congress, as well as EPA’s attempt to regulate greenhouse gases under the current
Clean Air Act, threaten the future of America’s coal industry – and the freight rail
industry’s single largest customer segment.

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.
Coal generates close to half of America’s electricity, and railroads haul more than 70
percent of it. In 2008, coal accounted for 45 percent of freight rail tonnage and 23

Chart 16 Chart 17

Average Weekly U.S. Rail Carloads of Coal % Change in U.S. Rail Carloads of Coal From Same
160,000 Month Previous Year: Jan. 2006 - Jan. 2010
15%
2008
150,000 2006 10%

5%
140,000
0%
130,000 2007
-5%
2009
-10%
120,000 Jan. 2010 was down 12.1% from Jan. 2009
Jan. 2010
and down 15.0% from Jan. 2008.
-15%
110,000
-20%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 2007 2008 2009
Data are weekly average originations for each month, are not seasonally adjusted, exclude U.S. Data are based on originations, are not seasonally adjusted, exclude U.S. operations of CN and
operations of CN and CP, and reflect revisions from original reporting. Source: AAR CP, and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

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Great Expectations: Railroads and U.S. Economic Recovery

percent of revenue for Class I railroads. All told, railroads originated 7.7 million carloads
of coal in 2008 — enough to meet the electricity needs of every home in America. (See
Charts 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 largest
customer segment due to climate change legislation. In 2009, America experienced
reduced demand for electricity not only because of the weakened economy, but also
because 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 turn
means railroads hauled less coal than any year in recent history. The charts below show
coal stockpiles in the U.S. electric power sector. Note the huge run-up in stockpiles
since early 2009 (see Chart 18).

Policy Implications Chart 18

Coal Stockpiles in the Electric Power Sector:
Railroads have invested tens of January 2003 - November 2009
billions of dollars in unique (Millions of Tons)
220
assets and rail network
200
infrastructure, such as the
180
tracks, signals and equipment
160
required to serve coal
customers. Over the years, 140

particularly when natural gas 120

prices were high, the federal 100

government pressured 80
2003 2004 2005 2006 2007 2008 2009
railroads to expand rail
Source: Energy Information Administration
capacity to serve coal. These
assets would be abandoned or greatly underutilized if America’s coal industry were to
be diminished.

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

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. If railroads lose a substantial share of their coal revenue and
cannot maintain and expand their network infrastructure investments, then their ability
to continue to take trucks off the roads, reduce highway congestion and lower
greenhouse gas emissions will be severely compromised.

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Great Expectations: Railroads and U.S. Economic Recovery

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 and
regulators 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 healthy
national 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. economic
recovery.

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 pay
nearly all of the costs of their tracks, bridges, and tunnels themselves. To keep their
existing networks in top condition and to build the new rail capacity that America will
need in the years ahead, railroads must be able to earn enough to finance their costs
and 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 by
substantial financial risk. 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, 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.”4

For this reason, adequate rail earnings are critical. If a railroad is not financially
sustainable over the long term, 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.

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

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

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Great Expectations: Railroads and U.S. Economic Recovery

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 equipment
and 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 and
reinvestments in their systems. (See Chart 21)

Chart 20 Chart 21

Class I Railroad Net Income: 2000-2008 Infrastructure and Equipment Spending*

($ billions) Per Mile ($000s)
$8.1 $240
Rail earnings have risen ...leading directly to
in recent years... $6.8 $220
$6.5 record levels of rail
reinvestments.
$200
$4.9
$180
$3.2
$2.5
$2.7 $2.7 $2.9 $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 - depreciation
Source: AAR Class I railroads only. 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.

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, 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 rail
investments, not just railroads themselves, should be eligible for the incentives. Tax
incentives are also appropriate to help cover the huge costs of the expanded PTC
mandate.

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

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Great Expectations: Railroads and U.S. Economic Recovery

Commerce data, every $1 of new rail infrastructure investment that would be

stimulated 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 $1
billion 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 be
renewed. Expired in 2009, this tax credit has enabled the creation of over 5 million track
worker-hours per year, and $330 million in annual track upgrades. The credit also
supports thousands of jobs in the timber, steel and track materials industries.

Many transportation experts, businesses, government policymakers, and others support

rail infrastructure tax incentives because they know rail expansion is in America’s best
interests. Supporters have included the American Association of Port Authorities, the
Alliance to Save Energy, the American Council for an Energy Efficient Economy, the
American 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 for
assessing a fiscal stimulus proposal — and a rail infrastructure tax incentive meets all
three.

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

Second, is it likely to be timely? Highways and other public works projects can take
years to plan and begin, and years more to build. Freight rail projects, however can be
started far more quickly, often in a matter of months. Moreover, tax incentives for
freight rail infrastructure investment would immediately stimulate additional
investment 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 disputes
the need for, and the economic benefits of, transportation capacity expansion. A rail
infrastructure tax incentive would yield immediate, positive economic benefits.

For a railroad considering whether to fund an expansion project, a tax incentive would
reduce the cost of the project, raising the likelihood that the project will be
economically viable and allowing the public benefits of the project to accrue more
quickly. The incentive would help worthwhile projects get built sooner, but would not
be enough to cause economically unjustified projects to go forward.

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Great Expectations: Railroads and U.S. 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. Through public-private partnerships, 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.

These partnerships offer a mutually beneficial CREATE: A Public Private Partnership in

way for railroads and governments to solve
critical transportation problems. For example,
some projects might provide a combination
of public benefits, such as decreasing
highway congestion by taking trucks off the
road, as well as benefits for freight rail, such
as enabling faster more reliable train
operations. In other cases, the public entity
contributes a portion of the initial investment
required to make a project feasible, with the
railroad responsible for funding all future
maintenance to keep the project productive
and in good repair.
Public-private partnerships also are provided
for in FRA’s high-speed and intercity
passenger rail program. Under FRA’s
program, 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, infrastructure capacity,
compensation and liability if they are to be
considered eligible for federal funding.
Policies like these recognize public-private
partnerships can support mutually beneficial
development 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 rail
network so that it can provide the literal
foundation for intercity passenger rail
expansion.
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. As the nation’s busiest rail freight
gateway and world’s third busiest intermodal
hub, Chicago’s rail network is crucial to the
local, regional and national economy.
The CREATE program is aimed at improving
passenger rail service, reducing motorist delays,
increasing safety, improving air quality, creating
jobs and ultimately providing the Chicago region
with public benefits valued at more than $3.8
billion. The program also preserves the
footprint for high-speed rail in the Midwest
region.
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, CSX, CN, CP, NS and UP. In the
Chicago area alone, railroads have spent more
than $1.2 billion over the past five years to
maintain and improve rail infrastructure.
Under the public-private partnership of CREATE,
railroads will pay for the business benefits they
gain from improvements to the rail network.
The government will pay for public benefits such
as grade crossing separations and commuter rail
improvements.

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Great Expectations: Railroads and U.S. Economic Recovery

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 in
developing carbon-capture-and-storage (CCS) technology. For example, 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.

However, uncertainty about the future of coal has required preliminary contingency
planning by railroads. Decreased demand for coal would result in stranded assets that
are 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 Adjustment
Assistance Proposal, 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. 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, 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 net
value of the climate change adjustment allowance on capital expenditures, including the
renewal or expansion of its rail infrastructure.

Contingent allowances would ensure that freight rail can continue to be a part of the
climate 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 no
need 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 in
revenue, allowances would simply ensure we can invest in our networks to meet
increased demand to move more people and goods by rail.

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Great Expectations: Railroads and U.S. Economic Recovery

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 and
affordable 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 to
provide these public benefits while sustaining private investment in the nation’s rail
network needed to facilitate our nation’s economic recovery.

However, 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. These changes are under consideration despite broad public view that is
increasingly 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 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;
• investment tax incentives that ensure railroads can continue to make the billions
of 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 do
not come at the expense of other critical safety and capacity enhancing projects;
• climate change policies that avoid unintended negative consequences that
threaten vital American jobs, 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.

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

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Great Expectations: Railroads and 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 each
month 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 industrial
production – 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 and
spokespersons, please contact:

Holly Arthur
AVP Public and Media Relations
202-639-2344
harthur@aar.org

AAR Communications
202-639-2100

Association of American Railroads Page 26 of 26