U.S. Senate 2014 Freight rail service: improving the performance of America’s rail system

Preface. This Senate hearing is mainly full of oil and grain industry leaders bashing the rail industry and asking Senators to do something about it. But the railroad industry is four times more energy efficient than trucks, and not guilty of the accusations, as you’ll see in the testimony of Hamberger, head of the Association of American Railroads.

Unlike autos, trucks, aircraft, and shipping, the rail industry is not subsidized by the government, even though it uses less oil per ton than all of these modes but shipping, and reinvests more its profits than nearly all other industries to maintain their infrastructure.  That leaves little extra to add on miles of rail track.  If we’re going to spend money on infrastructure, then the government should subsidize rail, perhaps it would even pay for itself since there would d be fewer trucks on the road wasting fuel and damaging roads.

But that won’t happen, because businesses and citizens must have things right now. Trucks can deliver just-in-time, unlike rail, but often arrive half empty with just what’s needed, often returning empty.

After fossils decline, it will be hard to imagine a time when there was too much STUFF like oil, grain, and  iron ore for railroads to move. Oh how we will rue the waste of diesel fuel some day!

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Derrick Jensen, Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report

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Senate 113-616. September 10, 2014. Freight rail service: improving the performance of America’s rail system. U.S. Senate hearing.

Edward R. Hamberger, President & CEO, Association of American Railroads We have problems. We did not see the surge in traffic coming. Many of our customers did not, either. In fact, last August there were over 50,000, grain cars in storage. And then in the fourth quarter the demand hit. The weather—you mentioned it, Mr. Chairman. Yes, it snows every year. But this particular year in Chicago was a record cold and record snow. We are a network industry. One-third of our traffic originates, terminates, or transits through Chicago. When Chicago has problems, the entire network—it ripples through the entire network.

In August 2014, just last month, we moved more merchandise overall than we have since October 2007, before the recession. So the economy is coming back. We hope to move 17 million new automobiles this year. On the intermodal side, we’re going to take 13 million trucks off the road as we grow intermodal at 7% this year. But we have problems. We did not see the surge in traffic coming. Many of our customers did not, either.

Cal mentioned average rail rates spiking and he’s right. They have gone up, according to this chart, over the last several years, all the way back to where they were in 1988 in inflation-adjusted terms, 17% below where they were in 1981. So they’ve spiked all the way back to where they were in 1988. One of his employees testified on

As volumes increase, a number of factors make rail networks exceedingly complex to plan and manage.

  • Trains of a single type can often be operated at similar speeds and with relatively uniform spacing between them. This increases the total number of trains that can operate over a particular rail corridor. This situation, however, is relatively rare.
  • Far more common is for trains of different types—with different lengths, speeds, and braking characteristics—to share a corridor. When this happens, greater spacing is required to ensure safe braking distances and to accommodate different acceleration rates and speeds. As a result, the average speed drops and the total number of trains that can travel over a rail corridor is reduced.
  • Service requirements. Different train types and customers have different service requirements. For example, premium intermodal trains demand timeliness and speed; for bulk trains (e.g., coal or grain unit trains), consistency and coordinated pick-up and delivery is the priority; customers who own their own rail cars will want railroads to implement strategies which help them minimize fleet-related costs, for example by maximizing the number of ‘‘turns’’ (loaded to empty to loaded again) the rail cars make; passenger trains require high speed and reliability within very specific time windows; and so on.
  • The need for safe operations is ever present, and proper line maintenance is essential for safe rail operations. In fact, because of higher rail volumes and a trend toward heavier loaded freight cars, the maintenance of the rail network has become even more important. Railroads have no desire to return to the days when maintenance ‘‘slow orders’’ (speed restrictions below the track’s normal speed limit) were one of the most common causes of delay on the rail network. That’s why maintenance is one of the most important parts of any railroad operating plan. It necessarily consumes track time that otherwise could be used to transport freight.
  • Traffic volumes are not always foreseen. When planning their operations, rail roads use past experiences, customer-provided forecasts, economic models, and other sources to produce their best estimate of what demand for their services will be well into the future. Railroads use those traffic forecasts to gauge how much equipment, labor, and other assets they need to have on hand. As with any prediction of future events, these traffic forecasts are imprecise predictors of markets. After a certain amount of traffic growth beyond what was anticipated, available resources will be fully deployed, and additional assets (some requiring long lead times—see below) will be needed.
  • Traffic mix. The U.S. and global economies are constantly evolving. Firms— even entire industries—can and do change rapidly and unexpectedly. The collapse of the construction industry when the housing bubble burst in 2007 and the recent rapid growth in ‘‘new energy’’ production are just two examples. These broad, often unanticipated economic changes are reflected in changes not only in the volumes (see above paragraph) but also in the types and locations of the commodities railroads are asked to haul. If the commodities with rail traffic declines traveled on the same routes as commodities with traffic increases, the challenges these changes presented to railroads’ operating plans have less impact. However, when traffic changes occur in different areas—as is usually the case and certainly has been the pattern in recent years—the challenges to railroads’ operating plans are magnified.
  • Resource limitations. Like firms in every industry, railroads have limited resources. Their ability to meet customer requirements is constrained by the extent and location of their infrastructure (both track and terminal facilities) and by the availability of appropriate equipment and employees where they are needed. Terminals—where trains are sorted, built, and broken down, similar in certain respects to airline hubs—are a case in point. If a train cannot enter a terminal due to congestion or some other reason, then it must remain out on a main line or in a siding where it could block or delay other traffic. The ability of a terminal to hold trains when necessary and to process them quickly is one of the key elements in preventing congestion and relieving it when it does occur. Thus, one of the most important factors in increasing capacity for the rail network is enhancing the fluidity of terminals. Unfortunately, terminals are often one of the more difficult areas in which to add capacity, in part because they are frequently in, or near, urban areas. Expansion generally means high land and, potentially, high mitigation costs. Even in less urban areas, a rail terminal is rarely considered positive by nearby residents, and its development or expansion to accommodate freight growth is usually the subject of intense debate.
  • Need for long lead times. It’s an unfortunate reality that many of the constraints railroads face—particularly those involving their physical network— usually cannot be changed quickly. For example, it can take close to two years for locomotives and freight cars to be delivered following their order; six months or more to hire, train, and qualify new employees; and several years to plan, permit, and build new infrastructure. Rail managers must use their best judgment as to what resources and assets will be needed, and where, well in the future. Usually, this process works well, but when those judgments are off, serious problems can ensue. When these judgments must also deal with the uncertainties of rapid and historically unstable market changes, such as the recent emergence of energy products moving by rail, the probability of successful forecasting is even further reduced. On a related point, firms in every industry walk a fine line when it comes to capacity. Generally speaking, if firms take too long to bring back idled capacity or to build new capacity, they risk shortages and lost sales. That’s the case in terms of some rail operations right now. On the other hand, if firms build capacity on the hope that demand will increase, they risk that the demand will not materialize and they will be saddled with added, and wasted, costs. Like other firms, railroads must balance these risks, and different railroads may come to different decisions as to how much ‘‘surge capacity’’ is needed and where to locate such capacity on their networks.
  • Railroads are networks. Last, but not least, the significance of the network as pects of rail operations cannot be overemphasized. Disruptions in one portion of the system can quickly spread to distant points. Railroads are not unique among network industries in this regard—weather problems at one airport can quickly cause problems at many other airports, for example. But unlike airline networks, where the overnight hours can usually be used to recover from the previous day’s problems, rail networks operate 24 hours a day, 7 days a week. Thus, incident recovery must be accomplished at the same time that current operations are ongoing and while the other factors mentioned above continue to come into play. That’s why, in extreme cases, recovery in rail networks can take months. The winter of 2013/2014 is one such extreme case that is discussed further below.

Much of the recent increase in crude oil production has occurred in North Dakota, where crude oil production rose from an average of 81,000 barrels per day in 2003 to close to a million barrels per day today. Most of North Dakota’s crude oil output is transported out of the state by rail.

Rail has a critical role in delivering these crucial benefits to our country. As recently as 2008, U.S. Class I railroads originated only 9,500 carloads of crude oil. By 2013, that had grown to 407,761, equal to around 11 percent of U.S. crude oil production.

That said, one must be careful when looking to ascribe blame to crude oil for the service problems railroads are currently facing, which, as discussed below, became especially acute during and after this past winter. As Chart 6 shows, Class I railroads originated 229,798 carloads of crude oil in the first half of 2014, up 11.7% (24,058 carloads) over the 205,740 carloads originated in the first half of 2013. That’s a considerably slower rate of growth compared with 2011 and 2012 trends. Crude oil accounted for just 1.6% of total Class I carload originations in the first half of 2014. Moreover, the 24,058 more originated carloads of crude oil in the first half of 2014 works out to less than 1.5 new train starts per day, on average. Surface Transportation Board data indicates that there are approximately 5,000 train starts per day. Thus, recent new crude oil train starts are a small fraction of total train starts nationwide.

By comparison, in the first half of 2014 Class I railroads originated 182,425 more carloads of ‘‘miscellaneous mixed shipments’’ (most intermodal is in this category), 118,500 more carloads of grain, 84,118 more carloads of coal, 41,310 carloads of crude industrial sand (this includes frac sand), 24,735 carloads of motor vehicles and parts, 20,949 more carloads of chemicals, and 18,246 more carloads of dried distillers grain (DDGs, a byproduct of ethanol production used as animal feed) than in 2013.

Rather than saying that crude oil is crowding out other traffic, it is more accurate to say that, right now, on some railroads, on some lines, rail capacity is a scarce resource. But as noted earlier, infrastructure creation takes time, even for urgent programs. For the time being, on congested rail lines, all commodities railroads are hauling are competing with each other for available capacity.

Coal Traffic Has Been Higher Than Anticipated. In addition to leading to sharply higher crude oil production, the ‘‘shale boom’’ has also led to sharply higher natural gas production and, consequently, lower natural gas prices from what they once were. That has made electricity generated from natural gas much more competitive vis-a`-vis electricity generated from coal. However over the past 18 months or so, not only has the coal share of U.S. electricity generation stopped falling, it’s actually risen, as utilities that had been generating electricity from natural gas switched back to lower-priced coal. According to the U.S. Energy Information Administration, in the first half of 2013, coal accounted for 764 million megawatthours of U.S. electricity generation, equal to 39.1% of the total. In the first half of 2014, coal accounted for 806 million megawatthours, or 40.1% of U.S. electricity generation. This past winter in particular, the price of natural gas spiked, leading to greater than expected demand for coal and the sharply higher rail coal volume

Extreme Weather Wreaked Havoc on Railroads, Especially in Chicago. The railroad ‘‘factory floor’’ is outdoors and nearly 140,000 miles long. As such, railroading is arguably more susceptible to weather-related problems than any other major industry.

Extreme weather events, particularly sustained extreme weather events, can wreak havoc on rail operations. For example, extremely cold weather can force railroads to dramatically shorten the length of their trains, while snow accumulation can make it difficult to keep rail yards functioning. In much of North America, this past winter was one very long, very severe extreme weather event, with both record cold temperatures and record precipitation. While this past winter was unusually harsh in much of the country, it was especially so in the Chicago area. Chicago has been a crucial nexus in the North American rail network for over a century. Today, nearly 1,300 trains (500 freight and 760 passenger) pass through the region each day. In fact, around one-fourth of the Nation’s freight rail traffic passes through or near Chicago. As such, when railroading becomes difficult in Chicago, it quickly becomes difficult throughout the rail network. According to the National Weather Service, Chicago experienced its coldest four- month period on record between December 2013 and March 2014, with an average temperature of 22 degrees and a record number of days (26) at zero degrees or below. Chicago’s 82 inches of snow this past winter was the third-highest in history and well over double the annual average of the previous 20 years. Moreover, during ordinary winters, there is usually time between storms to do some clean-up. Railroads typically ensure that their winter staffing levels are adequate to deal with these problems. However, that was often not the case this year due to short intervals between storms. In Chicago, for example, once the bad weather started, there was never a real opportunity for railroads to get their operations back to normal before the next severe cold spell or winter storm hit. The problems in Chicago and elsewhere in the Midwest were compounded by the fact that the severe weather occurred unusually far south this year so that the geography needing relief was much larger. Usually, the southern regions have served as relief valves during northern disruptions, and early last winter diversion of trains into this region was being planned, where possible. However, that outlet was not generally available

Much of the past winter. For example, a series of ice storms in a band between Atlanta and Memphis made it unsafe, sometimes impossible, for train crews to get to work in this region or for maintenance crews to properly tend to the many day-to-day problems requiring resolution in a properly operating railroad. The result was rail congestion in an area which has typically been available to relieve problems created by winter weather further north. Now, it’s true that, as some rail critics have charged, ‘‘winter comes every year,’’ but to claim that this past winter was typical is to be disingenuous. I respectfully submit to you that, if we had a ‘‘normal’’ winter this year, the capacity challenges we have seen would likely be at a significantly lower level. We should also remember that the challenges which have faced rail operations in many key areas were further exacerbated by widespread, regional spring flooding that was largely the result of the severe winter. As noted above, when capacity is constrained, disruptive incidents are more common and recovery takes longer than when the network is not fully utilized. In a nutshell, that explains why the events of this past winter continue to affect rail operations today.

Current Service Issues Are Not a Good Reason to Increase Government Control of Rail Operations. It is unfortunate that some groups are seeking to take advantage of the current rail service problems to advocate for far-reaching changes to the regulatory regime under which railroads operate that would result in a much greater government role in freight rail operations. That would be a profound mistake.

Railroads are the best way to meet this demand, and they’re getting ready today to meet the challenge. They will continue to reinvest huge amounts back into their systems, as long as a return to excessive regulation does not prevent them from doing so.

In short, it would force railroads—through what amounts, in one way or another, to price controls—to lower their rates to favored shippers at the expense of other shippers, rail employees, and the public at large. Billions of dollars in rail revenue could be lost each year. Artificially cutting rail earnings in this way would severely harm railroads’ ability to reinvest in their networks. The industry’s physical plant would deteriorate; essential new capacity would not be added; and rail service would become slower, less responsive, and less reliable at the very same time that rail customers are demanding more rail capacity and more reliable rail service. It makes no sense whatsoever to enact public policies that would discourage private investments in rail infrastructure when our Nation needs more of it.

We are also making investments to prevent accidents.  In the area of prevention, we are doing increased inspections of rail. We’re putting roadside detectors out so that when a train goes by we can actually detect acoustically if there is a bearing defect. We also have laser beam readers to try to see cracks in the wheel before the wheel splits apart. And obviously maintaining the track and maintaining the bridges is high on the agenda as well.

Senator HOEVEN. The point I want to make is this: The railroads need to bring more resources to meet the needs in North Dakota. We have a growing state and we’re moving not only ag products right now—we’ve got the harvest that’s under way, so we’ve got more coming—but with energy and with growth in other areas, manufacturing and so forth in our State, we need more capacity on the part of the railroads. They need to bring more cars, more locomotives, more people. And they need to build more track. Right now the need is particularly critical for our ag shippers, both because of the current backlog and because we’ve got harvest under way. So we need it for coal and for oil and gas and for other commodities as well, but it is a very acute problem right now for our farmers.

BNSF has put forward a very substantial resource plan to address the need. That includes $5 billion of investment this year all in for the whole system. It means about 500 locomotives, 5,000 new railcars, 250 more workers in North Dakota, about $400 million in additional track in North Dakota. So it is a substantial commitment. So we need to monitor that and make sure that that happens and that that investment does meet the need. They cover about, I would say, 75% of the volume in our state.

CP needs to make that same commitment. I’ve had the CEO of CP in Minot, North Dakota. We had a meeting. They talked about investing $150 million over the next year. But they have not provided us with a specific resource plan. Also, they’re working on changing their ordering system for shippers ordering cars. That may work, but it’s got to be fair. They can’t cancel orders on shippers, and it needs to be a transparent process so that we understand how it works and so that we have accurate reporting.

Senator HEITKAMP. This continues to be a problem in Montana as well, Minnesota as well, our producers are in dire straits. This isn’t just about who gets preference and having your feelings hurt. This is about the very real economic consequences of what’s happening in farm country in our state and across the Northern Tier across the board. Burlington Northern I think in many ways gets it, that this is a permanent problem, we’re going to continue to ship crude by rail, we’re going to continue to see bumper crops and soybeans denigrate very quickly, and we’ve got to get them to market. So as dire as that is, as that pile of wheat is, if those were soybeans basically what you’ve done is you’ve condemned that crop. So, understanding that we go into freeze with that pile, that has huge economic consequences to those producers.

I think it’s a matter of whether the STB believes this is permanent, whether this is a one-time glitch in the system or whether we’re going to have a need for a permanent increased buildout. I happen to believe we need a permanent increased buildout. Given the history of siting pipelines in this country, we’re going to continue to move oil on the rails. Your committees have already discussed the safety issues. But we’re at 1.1 million barrels a day pretty much in North Dakota. We think that’s going to grow another 20, 30 percent. Where is that oil going to move? It’s going to move on the tracks. It’s going to move in pipelines, but it’s also still going to move on the tracks.

I tell you that the big concern that I have is that still what we’re hearing is they don’t get that this is a permanent problem and needs huge amounts of capital infusion in order to solve it.

The CHAIRMAN. I initially took an interest in rail policy after hearing from West Virginia shippers who expressed frustration with high rates and poor service. That began 30 years ago and my progress has been measured in quarter-inch segments. That’s how much progress we’ve made on this. They have been highly frustrated about high rates and poor service. What you probably don’t know, however, is that these complaints were in place 30 years ago, as they are today. And yet here we are today trying to confront the same issues that have plagued shippers for several decades. The rail industry looks far different than it did 30 years ago. Competition in the industry has decreased. Before enactment of the Staggers Act in 1980, there were approximately 40 large railroad companies. Today that figure would be closer to seven, so competition is down, and profits are up. In passing the Staggers Act, Congress recognized the need for a robust freight rail system. The Staggers Act was a big favor in many respects to the industry because it recognized that they had to spend capital in order to be able to do the system properly. Well, they got the capital, but they haven’t necessarily used it properly. That law made sweeping regulatory changes which gave the railroad industry an opportunity to improve its finances and the ability to compete against other transportation modes. So that part they like a lot. The Staggers Act also sought to provide, and I quote, ‘‘the opportunity for railroads to obtain adequate earnings to restore, maintain, and improve their physical facilities while achieving the financial stability of the national rail system.’’ Well, make no mistake; in that regard, the Staggers Act has worked. In 2010, I released a Commerce Committee majority staff report which found four Class I railroads that dominate the railroad rail shipping market and that they are achieving returns on revenue and recognizing operating ratios that rank them among the most profitable businesses in the entire United States economy. I released a follow-up majority staff report last November which corroborated the 2010 findings: that freight railroads continue to set new financial records on a quarterly basis, and these companies continue to raise their dividends and buy back record amounts of stock. So cash is not the problem. But not everybody is as well as they are. In this world we’re meant to have sort of a balance, those who transport, those who are shipping. There has to be some kind of balance. The STB hasn’t found a way to do it. We can’t get anything to do it to pass. But again, not everybody is doing so well. Many of the witnesses here today have struggled to remain competitive as rail service declines and rates increase, and the situation continues to get worse. For several months now, the agricultural, coal, chemical, and automotive industries, among others, have been experiencing serious service delays on rail, sometimes on the order of months. You can’t blame everything on the winter. You just can’t do that, sorry. It’s not just industry. Passengers are also feeling the effects. Amtrak’s long distance trains around the country are being severely delayed. Whether it has been extreme winter weather, a surge in Bakken crude oil production, a recovering economy, or a combination of factors, we must do more to move our grain to market, coal to power plants, automobiles to consumers, and passengers to their destinations than we currently are. For many shippers this is their livelihood and it’s too important to not do anything. Therefore I look forward to hearing from the railroads on what is being done to alleviate these freight logjams as soon as possible, and I hope I don’t hear the phrase ‘‘We need more money in order to build better infrastructure for the future,’’ because I already have that, buddy.

JOHN THUNE, U.S. SENATOR FROM SOUTH DAKOTA. I only wish we could figure out a way to directionally drill up into the oil in North Dakota to bring it down into South Dakota. But I have often said that North Dakota has oil, Wyoming has coal, Montana has some of both, and in South Dakota we have pheasants. But we also raise a lot of agricultural commodities. We raise corn, wheat, and soybeans, and we have to have a way to get that to the marketplace, and that requires railroads, the most efficient way to move freight like agricultural commodities.

In South Dakota alone, this year’s harvest and what remains of last year’s is expected to exceed the statewide grain storage capacity by as much as 18%. Grain has already been stored on the ground. That was the wheat harvest that occurred earlier this year. What’s so alarming is that it happened early in the crop year and we’ve got much larger corn and soybean harvests coming this fall. Projections from the U.S. Department of Agriculture estimate that South Dakota’s 2014 wheat harvest is going to be at 108 million bushels, a 14% increase over the three-year average, and soybean and corn crops are also expected to be unusually large, potentially record-setting. Even with these high yields the increased negative basis due to inadequate transportation and the inability to timely move these crops from grain-handlers could result in more than $300 million in lost value to South Dakota corn, wheat, and soybean producers.

As winter approaches, ethanol plants will also become vulnerable to rail delays. Because of the nature of ethanol production, plants cannot simply be shut down during winter months. South Dakota ethanol producers, like Glacial Lakes and Redfield, rely on adequate services to prevent pipes from freezing and major structural damage to their operations.

In addition, South Dakota’s Big Stone Power plant has indicated that they’re running below capacity because they simply can’t get enough coal to fuel the most efficient operation. Coal stockpiles are alarmingly low and rail service simply hasn’t provided adequate coal supplies.

The Surface Transportation Board has taken several steps to address these rail service challenges, including issuing a number of orders designed to increase transparency. On June 20, the Board issued a grain order to provide additional transparency and ensure both Canadian Pacific and Burlington Northern Santa Fe Railroads had plans for reducing their grain car backlogs. While the STB has been working hard to address the current rail service issues facing South Dakota and other states in the Northern Tier of the United States, this crisis has highlighted some of the inefficiencies that currently exist at the STB. On Monday, Chairman Rockefeller and I introduced Senate Bill 2777, the Surface Transportation Board Reauthorization Act, which is a first step in addressing these inefficiencies so that the STB can better assist shippers and railroads when problems arise.

ARTHUR NEAL, DEPUTY ADMINISTRATOR, TRANSPORTATION AND MARKETING PROGRAM, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE

USDA’s current analysis indicates grain production and grain stocks this harvest season are expected to exceed permanent grain storage capacity by an estimated 694 million bushels in seven States, which include South Dakota, Indiana, Missouri, Illinois, Ohio, Michigan, and Kentucky. This level of storage capacity shortage is higher than any year since 2010, which had an 805 million bushel shortfall in permanent storage capacity distributed throughout the top 14 grain-producing states. Because 2013 grain is reportedly still in storage and waiting to be moved before the 2014 harvest, it is critical to move as much of the 2013 grain crop as quickly and efficiently as possible. USDA is concerned that railroad service to grain shippers may not recover in time for the 2014 harvest. Should this happen, grain elevators could run out of storage capacity, grain could be stored on the ground and run the risk of spoiling

USDA’s current analysis indicates grain production and grain stocks this harvest season are expected to exceed permanent grain storage capacity by an estimated 694 million bushels (3.5% of the expected U.S. record harvest) in 7 states, which include—in decreasing order of storage capacity shortage—South Dakota, Indiana, Missouri, Illinois, Ohio, Michigan, and Kentucky. This quantity is the equivalent of 173,500 jumbo covered-hopper rail cars, 13,219 barges, 881 15-barge tows, or 762,600 truckloads.

JERRY D. COPE, PRESIDENT, SOUTH DAKOTA GRAIN AND FEED ASSOCIATION AND MARKETING MANAGER, DAKOTA MILL & GRAIN

South Dakota and ag are very closely linked. It’s our number one industry. We rank in the top ten of the major crops produced in the United States. However, our state is landlocked. The railroads are our lifeline, our link to the economy. Right now we’re served by two railroads, the Burlington Northern Santa Fe and the Rapid City, Pierre, and Eastern. Without them, our farmers don’t have an economy, don’t have a life.

When it comes to things like quality, we’re having some problems with South Dakota wheat, but if elevators are full we don’t have any room to blend or clean that grain, so that grain faces a risk of not even being marketable.

We could invest in storage, but the problem we run into with that is investments of millions of dollars are made based on railroad predictability. If we have to weigh the costs versus the risk and we can’t rely on the railroad, then do we actually invest the dollars?

Destination markets are often beyond the practical reach of trucks making rail service a critical lifeline for the livelihood and economic well-being of our state. South Dakota exports the majority of the crop production by rail to terminals in the Pacific Northwest, the Gulf of Mexico, livestock feeders in the Southwest and flour mills in the eastern half of the United States. Approximately 45% of the corn grown in SD is processed in state. The refined ethanol and corn by-products are exported by rail to population centers in the west and east and the by-products to feed markets across the country. Over 75% of the wheat, soybeans, sorghum, sunflowers and birdseed grains are exported by rail either to domestic markets or for export.

CALVIN (CAL) DOOLEY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN CHEMISTRY COUNCIL

The American business of chemistry is the second largest customer of the U.S. rail freight system. Thanks to the shale gas revolution here in the United States, we’re going to see the most dramatic increase in our production in history, and we’re going to be even more reliant on freight rail transportation.  The consolidation among Class I railroads has left only seven in operation today, with four rail companies controlling almost 90% of all shipments. Today, more than three-quarters of U.S. rail stations are served by only one rail company. And unlike the 1980s when many railroads were grappling with bankruptcy, today’s railroads are in a strong financial position. The consolidations are correlated to significant increases in rail rates. Rates increased more than 93 percent between 2002 and 2012, three times the rate of inflation.

Senator KLOBUCHAR. We are a major producer of taconite. As you can imagine, the Great Lakes shipping season is very short because of weather.   It’s going to close for shipping in just a few months. we have 2 million tons of iron ore pellets that we want to send out and make money for our country and get more jobs, that are just sitting there in a pile. I hope that you would be willing to look into this, because we have a situation where winter is coming and we have only a finite shipping time.

The Chairman. Mr. Hamberger, last fall my staff prepared a report, as I indicated, on the financial condition of the largest Class I freight rail companies. It was based on the public financial information that your companies share with your investors. It found that your companies are setting records for earnings and operating ratios almost every quarter. It found that your companies are generating record higher earnings for your shareholders. It also found that your companies are buying back record amounts of stock shares, which also rewards your shareholders. You pretty much get what you want and stop what you want around here, it has been my experience over 30 years. So the question I’m going to ask you is, you’re doing a great job for your shareholders. What about these folks sitting to your right? Why can’t your companies do a better job for their customers? Why are shippers not benefiting from the excellent, extraordinary financial condition of freight railroads?

Mr. HAMBERGER. We believe that the appropriate study, the appropriate metric of profitability, of how well you’re doing economically, is the return on invested capital. We are an incredibly asset-rich, asset-based industry, $180 billion, and that’s just book value, of assets in the ground in the network. We believe that the appropriate metric is a return on invested capital. We are at 7.74% return on invested capital. The Fortune 500 is 12.93%. So we are a little bit over halfway, toward what the Fortune 500 average is of return on invested capital.  We need to be able to improve that return on invested capital.

With respect to the dividends and share repurchases—and this is material that was just filed last Friday over at the STB by Union Pacific, so I’m using Union Pacific data—for their free cash-flow, 63.2% is going to capital expenditures, 14.7% to dividends, 22.1% to share repurchases. For the S&P 500, those numbers are 44.8% for capital expenditures, 21.7% — 50 percent more for dividends, and share repurchases of 33.6% versus 22%, again 50% more, and that’s the S&P 500. So we think that we are in fact spending 63.2, at least for Union Pacific, on investments to serve our customers.

The CHAIRMAN.  You can’t go to trucks because it would destroy the highway system. I know that from coal trucks in West Virginia.

Jay Rockefeller, National rural electric cooperative assoc.   

NRECA is the national service organization for more than 850 Distribution and 65 Generation and Transmission (G&T) not-for-profit rural electric utilities that provide electric energy to over 42 million people in 47 states.

The testimony to follow provides background on rail service delivery issues from Dairyland, Sunflower and Arkansas Electric Cooperative Corporation.

Low sulfur Powder River Basin (PRB) coal is the primary fuel source for Dairyland and a number of other base-load generation facilities

Reliable delivery service is necessary to ensure coal is available in sufficient quantities to produce power to meet demand. Coal delivery problems require Dairyland to use higher cost generation and/or purchase power on the open market, often at a premium, to meet members’ energy needs. Dairyland currently owns 250 rail cars and leases six more. They lease a full train set (about 125 rail cars) for shipments to the Mississippi River terminal in Iowa. The combined coal deliveries in any given year range from 2.0–2.4 million tons, or roughly 130–160 train loads.

Approximately 90–100 train loads are delivered to JPM annually. Average turnaround time (ATT) is defined as the time it takes for a train to make a round trip from the mine to the offload site and back again to the mine. Prior to 2014, ATT averaged six to eight days, which generally meets the fuel needs for the JPM plant. The station can unload an average train set in about six hours which provides three to four days of generation. In preparation for supply disruptions, the goal is to have between 30 and 50 available days of operation on hand to sustain reliable generation.

Two barges provide one day of generation. In order to meet Dairyland’s generation needs for its’ members throughout the year it is critical to have reliable rail and barge transportation from carriers. To prepare for supply disruptions Dairyland’s goal is to have 165–195 available days of operation on hand prior to the end of October to provide generation for the winter. Since the Upper Mississippi River usually freezes, the typical barge delivery season is from March through October, roughly 30 to 35 weeks.

To equal one train set of coal 630 truckloads would need to be delivered, equating to 87,000–104,500 truckloads to deliver their annual supply.

Rail shipments to the Southeast Iowa Mississippi River terminal since March had not built inventory at a rate to keep pace with barge shipments to Genoa needed to meet power generation. If this trend had continued, Dairyland’s Genoa power plant would have run out of coal and would be unable to generate power after January 2015.

AECC holds ownership interests in the White Bluff plant at Redfield and the Independence plant at Newark, each of which typically uses in excess of 6 million tons of PRB coal each year. In addition, AECC holds ownership interests in the Flint Creek plant at Gentry and the Turk plant at Fulton, each of which typically uses about two million tons of PRB coal each year.

PORTLAND CEMENT ASSOCIATION.  Cement is to concrete what nails are to wood. It acts as the glue that builds our bridges, roads, dams, schools and hospitals. The distribution of cement often occurs over hundreds of miles, and it must be done with carefully timed precision. A disruption in rail transportation and distribution can greatly influence the efficient delivery of cement; this can result in projects being delayed or cancelled. Rail carriers are vital to the movement of cement, representing approximately 65 percent of cement movements on a per ton basis.

AMERICAN BAKERS ASSOCIATION.  ABA advocates on behalf of more than 1,000 baking facilities and baking company suppliers. The baking industry generates more than $102 billion in economic activity annually and employs more than 706,000 highly skilled people.

Bakers are dramatically affected by the decrease in efficiency as they depend on timely shipments from millers for their flour needs. Hard Red Spring Wheat is used as a primary ingredient to most breads and specialty baked goods. The majority of Hard Red Spring Wheat is grown in Montana, North Dakota, South Dakota and Minnesota, all states that are land locked and dependent upon the railroads for shipping grain to end users across the country. While shipping wheat by truck is always suggested as an alternative, it would take four trucks to equal the capacity of one grain rail car, making trucking much less efficient than rail service. In addition, there is not enough trucking capacity in the U.S. today to make up for rail inefficiencies, making rail a critical lifeline for the baking industry. Bakers are captive to the railroads due to the inability of grain millers to gain access to Hard Red Spring Wheat by any means other than rail.

Bakers typically only have two to three days’ worth of flour storage on premises. When shipments of flour from millers are delayed due to backlogs in wheat shipments by rail to the milling facility, bakers struggle to find alternative flour sources. In some cases, bakers have shut down lines and reduced staff to accommodate for a lack of flour to bake products. Finished product has also been delayed when being shipped to the marketplace due to delays in fulfilling product orders and in intermodal transport.

M & G Polymers is a leading producer of polyethylene terephthalate (‘‘PET’’) resin in North America with our principle domestic production facility located in Apple Grove, WV. We employ 144 and generate circa $500,000,000 in annual revenues at our Apple Grove facility. Unfortunately, we are served at our facility by a single railroad, the CSX Railroad. Our customers want to receive our PET ‘‘pellets’’, which are used to make plastic bottles by soft drink manufacturers and others, by rail and penalize us significantly economically if our products cannot be delivered by rail.

 

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