by Richard L. Beadles

March 10, 2018

 

Introduction by Mark Perreault

     Retired railroad executive, and keen observer of Virginia railroads and state rail policy, Richard L. Beadles, has prepared a detailed critique of Virginia’s multi-modal transportation strategy focusing on freight and passenger rail in the Commonwealth. Beadles takes a long view, backward and forward, and raises tough questions on the future of both freight and passenger rail’s role in Virginia, and the effectiveness of the state’s policy attempting to promote utilization of rail as a means of mitigating highway saturation and costs.

 

    Beadles worries that current trends in the freight rail industry do not bode well for increasing rail’s role in moving freight or passengers in Virginia. Almost all main line railroads in Virginia are owned and controlled by two investor-owned private companies, CSX and Norfolk Southern, and almost all passenger trains in Virginia operate over these two lines. These two firms are         currently under unusually great pressure from Wall Street to maximize short term returns. This pressure discourages, if not precludes, the investments and service quality that would be necessary to move most truck traffic to the rail mode, and provide more frequent, reliable and higher speed passenger service. In fact, public funds set aside by Virginia for some such investments have not proven attractive to the two large freight railroads to the extent it was hoped.

 

     Beadles recognizes there has been some progress in Virginia for both freight and passenger rail in recent years, but he notes progress has been mixed and that even this progress may not prove lasting. The solution? Beadles does not claim to know, but counsels detailed study by a group of high-level thinkers and strategists to take an unfettered look at Virginia’s transportation policies and how these policies might be altered to produce better outcomes for the public.    Mark Perreault

Above: Richard L. Beadles, VRPI Founder


Is Rail Ever Going to be a

Winning Transportation Strategy for Virginia?

Have we bet on a Thoroughbred  or a Plug Horse?

By Richard L. Beadles

 

            After a century of more-or-less ignoring rail as a transportation option worthy of public policy support, the Commonwealth of Virginia has reversed course, and since the beginning of the 21st century has been aggressively supporting the development of rail transportation.  The writer of this paper has long been an advocate of this change in direction by the State, and has been until recently an active participant in the rail advocacy community.  He continues to believe that the overall transportation needs of coming decades will require the best that all modes can provide, including rail.  However, as the writer sees it, the once promising partnership between the Commonwealth and its investor-owned railroads appears to be fraying, largely due to changes in business priorities and operating objectives of some, if not all, of our operating partners.  With that in mind, this paper will seek to superficially address the totality of transportation in Virginia, our history of dealing with the railroads over the last three decades, the current state of affairs, as the writer sees it, and briefly discuss public needs and private ownership constraints.  Finally, we will attempt to conceptually identify some future public policy options designed to salvage and enhance the Virginia program.

 

            Is our Virginia rail revival losing steam?  A billion-dollar bet at Risk? The objective of this paper is to flash a cautionary signal, not throw up a stop signal.

            After nearly two-decades, and many changes in conditions, prudence in public policy and administration warrant objective reconsideration of the Commonwealth’s 21st century reliance, albeit limited, upon rail as a means of mitigating highway traffic saturation and costs.

            Why reconsideration?  It appears that the above-stated public policy objective continues to elude us. Some railroads have publicly declared diverging interests which raises questions about alignment and compatibility of partnership interests and arrangements in the future.

            It is time to take stock of the situation.  How does Virginia’s multimodal transportation strategy actually function today?  Is it anywhere close to optimum? Is rail an integral component, or an outlier?  Might there a better way to accomplish our publicly-stated multimodal objectives in transportation, with or without rail?          

For purposes of this paper, “rail” is a mode of transportation -- regardless of technology employed, or by whom capitalized, owned, funded, controlled, managed, and operated.  Transportation is the sum of all modes, including highway, aviation, public transit, inland and ocean water.

 

An overview of transportation as 2018 gets underway

            Rail is an important -- but generally not a dominant -- mode of transportation in comparison with highway and air.  It is quite challenging to make accurate comparisons of market share, particularly within Virginia.  Good statistics are hard to come by.  Federal Highway Administration news releases indicate that 3.2 Trillion Vehicle Miles were driven on U.S. roads in 2016 (the most recent year reported), the fifth increase in as many years following a short pause associated with the “Great Recession” of 2008-2011+. It is reasonable to assume that this applies to commercial trucking as well as private auto, and commercial motor coach travel.

 

            Commercial aviation is once again booming in terms of traffic as well as airline industry profits.  Eventually, we will have 2016-2017 information on modal share and changes in the distribution of market share from the U.S. Bureau of Transportation Statistics, but that might be several years yet. Using a local proxy for commercial aviation, we note that the Richmond Airport finished 2017 with a 2.6% increase in passenger traffic compared with the prior year.  But like rail freight, the local airport has gone a full decade seeking to better its previous record for passenger boarding.  Reportedly, the 2017 boarding record represented an 0.6% increase over the earlier record, established in 2007.

 

            Rail seems insignificant by comparison with highway and air transportation, but it makes important contributions at the margins.  If our public needs dictate that all modes should be developed to the maximum extent feasible, then rail cannot be ignored.

 

            We do know that rail freight carloads are on the increase again, after a decade of disappointing results.  According to the Association of American Railroads (“AAR”), total rail carloads, of the conventional type, were up 2.9% in 2017, compared with 2016, while rail intermodal loads were up 3.9%.  Due in large part to the decline of coal, rail freight traffic is only now beginning to recover to levels which were common prior to the Recession.  On the bright side, rail intermodal (we can’t tell about Virginia) was very robust in the final quarter of 2017, with some weeks setting records; for example the week ending December 23rd where rail intermodal, nationally, was reportedly up 11.3%.  That, however, is but a fraction of the year and is unlikely to be representative of future performance.

 

            Amtrak, which has been the only nationwide provider of intercity rail passenger travel since 1971, continues to set modest records for ridership and revenue, with the national inter-city passenger count for 2017 coming in at 1.5% above the previous fiscal year.  To the best of our knowledge, nobody maintains a complete record of Amtrak in Virginia.  Virginians for High Speed Rail says that Virginia Regional Amtrak trains posted a 1.9% gain in passengers handled over the prior year.   Do we know how many Amtrak passengers traveled “overhead” (through) as well as Virginia “on and off” passengers?  Amtrak’s so-called “long-distance” trains serving Virginia points are not State sponsored; however, they represent about one-half of all Amtrak trains moving to, from, and beyond the State.  Granted, intercity rail travel is minimal compared with commercial aviation, and infinitely small in volume compared with auto travel, but it is important and growing.  We do note some apparent revival in intercity bus service, for which Virginia data is not available to us, but the apparent trend is welcome.

 

            Virginia Railway Express (“VRE”) is the only commuter rail operation in the State, and continues to maintain, and annually slightly increase, its base of committed riders.  We do not have 2017 ridership data, but for FY 2018 planning purposes VRE was projecting average daily ridership of 18,200, which is more than double what the organizers of VRE anticipated two decades ago.  Like all transportation providers, VRE has wide swings in daily ridership, including peaks which range to 23,000, more or less.

 

            CSX and Norfolk Southern -- Virginia’s two largest “freight” railroads -- tend to view Amtrak and VRE as a detriment to their ability to attract highway-competitive cargo.  As noted above, rail intermodal – the method of transport offering rail the best potential for attracting highway freight – finished 2017 very strong due in part to an improving economy and to a scarcity of trucks.  The Wall Street Journal (“WSJ”,1/25/18) reports that truck brokers often have ten orders for trucks to every available rig.  Cost of truck service is going up sharply as demand outpaces supply.  The WSJ article only briefly mentions rail as an alternative, a footnote at best.  However, national rail intermodal finished 2017 with what the AAR describes as record performance.  Unfortunately, we do not have access to Virginia intermodal statistics.

 

            Truckers reportedly ordered about 37,000 big rigs in December 2017, while General Electric – historically one of the major builders of freight locomotives – announced plans to exit that business due to the poor market prospects for diesel locomotives, thousands of which are currently in storage at various places around the country. CSX, for example, says it has 900 locomotives and 20,000 freight cars parked, idle.  In the final months of 2017, CSX was in the process of dismantling the Company’s dedicated intermodal network.  How that will play out remains to be seen. Moreover, CSX is reviewing the viability of up to 8,000 miles of its system, slightly more than one-third, to determine whether to retain or remove these lines from the CSX system via sale, lease or possibly abandonment.

 

            Norfolk Southern is apparently a beneficiary of the CSX pull-back, at least in some traffic lanes, but NS has earlier done some of its own intermodal network service trimming.  Each of these railroads seems now to be operating a more cost/revenue disciplined network.  Praised by Wall Street, such intermodal strategy may or may not be compatible with the interests and objectives of the State of Virginia.

 

            Good rail market-share news comes in relatively small increments, and invariably is neutralized by offsetting bad news.  Over the years, we have watched rail retrench in market after market. Virginia has done a good job promoting commuter rail (Virginia Railway Express) and Amtrak regional intercity rail (in conjunction with Amtrak’s Northeast Corridor), but market acceptance has been good but not great.  [There are still too many empty seats being hauled up and down these corridors on our Amtrak trains.].  As previously noted, Virginians for High Speed Rail reports that our regional Amtrak service attracted 1.9% more passengers in 2017 than in the previous year.  Compare with RIC (“Richmond International”) Airport (+2.6%), and I-95 traffic (?). There are CSX service quality issues that explain some of this, but not all.  

 

            Last year was another marked by good news for the Port of Virginia (Virginia Port Authority or “VPA”), but intermodal rail service between Hampton Roads and the Midwest, and the Inland Port – the only significant rail intermodal service originating in Virginia – reportedly increased 3.4% whereas truck traffic was up 9% (the overall VPA unit count increased 7%).   Our rail intermodal port traffic is highly dependent upon international steamship routing strategies, service priorities and business contracts.  There are many options for the steamship companies. On the domestic side, there is hardly any rail intermodal service available to potential Virginia users.

 

            Overhead intermodal (generally between north and south), once highly touted by NS and CSX, is a mystery.  Truckers generally do not run empty miles. We see many empty rail hitches passing through Richmond. And, no one seems to have a handle on what used to be the bread and butter of rail merchandise business, the industrial “private siding” activity. Observations suggest that it has all but disappeared in most markets.

Rail service “R & D”?

            We wait in vain for some news, or even hint of news, concerning new rail highway-competitive freight service innovations or products.   Forget the late Hunter Harrison’s (CSX) so-called “precision freight service”.  Sure, there will be a few improvements in schedules, but a race to the bottom in quest of record low operating ratios virtually guarantees more poor service and lost business.  Recall the 8,000 CSX miles that are in jeopardy.  There is an almost infallible rule in railroad operations; namely, that at any given level of resources (train service, etc.) only so much of the network will function above average and the balance will function below average.  You can only perfect so much service at any point in time, but you can’t fix it all if a record low operating ratio is the controlling factor.  Unless the top line grows as result of new business revenue, resources tend to be constrained at any target operating ratio.  Wall Street’s expectations relative to operating ratios appear to be indifferent relative to rail market share aspirations.  See supplemental note at end of paper re operating ratios.

 

A Rail Veteran’s Lament
 

            The author of this paper is a long-retired railroad company employee, a long-time advocate of better public sector treatment of rail in terms of transportation policy; an advocate of incorporating more rail in long term transportation infrastructure planning and development; a champion of balanced economic incentives permitting viable rail solutions as one means of relieving overwhelmed domestic highway and air resources; and a critic of short-term Wall Street demands imposed upon “for profit” rail CEOs and their top executives.

 

            Since September, 1955 the writer has beat the drum for rail in almost every conceivable way, and in many roles – private and public – motivated by a sincere conviction that rail is good for America and that America should be good to rail --- whether freight, passenger commuter, light rail, etc.  There have been modest successes along the way, but at this late stage of the writer’s life, he can’t help but wonder how long rail can endure at the margins of transportation policy in the United States.  For certain, the problem is not just one of public policy makers in Washington and Richmond.  Plenty of dumb decisions have been made in rail executive suites, and we suspect some regrettable decisions are being made today in the offices of the nation’s Class ONE railroads.  (Amtrak is also a Class One Railroad).  Rail Labor must be cited for its mistakes, some of which doomed their own “brothers” to permanent unemployment.  And Wall Street-Types; they deserve their own paragraph of criticism, which will come in due course.

 

            In 1955 some of, or all of, virtually everything that came into or was shipped out of Richmond was moved by rail.  At that time, there were well over one hundred manufacturing and distribution operations served in the core of the region --- mostly “reciprocally-served (see note at end of paper) --by the five trunk line railroads then serving Richmond.  Railroads moved passengers, mail and express, Christmas trees, coal, department store goods, iron, steel, cigarettes, potato chips, canned goods, Florida and California fresh produce, and everything else.  In 1955 there was not a functioning Interstate Highway in Virginia.

 

            Richmond was a headquarters city to three railroad companies.  Rail employment in the Richmond area easily totaled 10,000 or more.  Railroad companies were heavily regulated by the federal and State governments, as were many of the regular-route trucking companies based here; however, much of trucking was largely unregulated.  No Hedge Fund had been seen nor heard of since the days of Robert R. Young (early 1950s; C&O, New York Central, et. al.).

 

            Railroad companies and their unions were gearing up to fight it out over unrealistically-high employee wage scales, work rules, and “featherbedding.”  Otherwise it was a calm and pleasant “Ozzie and Harriett” time under the watchful eye of a national hero president, Dwight D. Eisenhower. 

 

 Arrival of the Interstate Highway System

            Construction of the Richmond-Petersburg Turnpike in 1957-58 -- predecessor of I-95 then still in preconstruction planning -- signaled a major change in competitive transport economics, service levels and user preferences.  The writer of this paper has looked back at the decline of RF&P Railroad freight and passenger volumes between 1955-56 and 1960-61, as a proxy for the I-95 corridor.  The earlier years predated development of the Interstate Highway System, while the latter years begin to reflect substantial construction, at least in the I-95 corridor.  Rail user defections were dramatic.  Here was public policy working to the detriment of railroads.   We are not arguing that creation of the “Eisenhower Interstate” system was bad policy, but the federal government’s failure to recognize and seek to mitigate the negative impact upon rail was unfortunate, to say the least, and would soon have serious consequences in rail profitability and sustainability over the next two decades.  This was one – but certainly not the only – factor contributing to the future 1968-1970s Northeastern Railroad Crisis, e. g. Penn Central, Conrail, etc.

 

            The truth of the matter was that, at the policy level, we did not know what we were creating with the Interstate highway program.  Not only did it do violence to our cities, inducing and encouraging urban sprawl (most vehicle miles in any metro area appear to be sprawl commuters, not interstate drivers), but it sealed the fate of privately-owned-and-operated urban transit systems, and laid much of the groundwork for the rail crisis of the 1960s and 1970s.

 

Finally, Washington Responds

            The rail crisis of the 60s and 70s – many railroads were either broke or fast going broke by that time – was addressed by federal relief in the form of Amtrak (1971) and Conrail shortly after, by forced labor reforms and by the lifting of the burden of private commuter rail subsidies.  Think about it, the surviving private railroads got relief from virtually everything they had long identified as their problem, especially through Staggers Rail Act 1980 rail deregulation and subsequent replacement of the Interstate Commerce Commission with the Surface Transportation Board.  These cumulative and related changes in the regulatory landscape provided unprecedented freedom to expedite the rationalization of the national rail infrastructure network.  While not total, the rails also gained a significant measure of freedom to treat their customers more-or-less as they wished – particularly if such customers were “captive shippers”.  While this is still a matter of contention, it appears that the rails have generally gotten their way under the more- sympathetic S.T.B., successor to the repressive philosophy of the I.C.C.

 

Glory, Glory, Hallelujah

            The 1980s and Nineties Should Have Opened the Gates to Glory Land for the Rails,but challenges persisted.

            For a period of about 25 years (about 1980-2005), the financial health of the investor-owned freight railroads appeared to improve miraculously   This was partially the result of a round of major rail mergers, a roughly 50% reduction (withdrawal) of “invested capital”, meaning the abandonment and removal of what was then considered excess plant and equipment; and as result of labor concessions on “work rules”, but often at the cost of premium wages for the surviving personnel. Also helpful was sustained growth in the long-haul (see notes) transport of relatively-inexpensive, low Sulphur Powder River Basin (Wyoming) coal; plus increasing electric utility demand for Appalachian steam coal, augmented by the usual cyclical demand swings for export “metallurgical”  and “thermal” (see notes) coal.  Coal made rail CEOs look good, even if they had little to do with inducing it to move.  Intermodal rail, on the other hand, has been through many cycles of promotion, development and retrenchment, and that is still happening.  Such success as the rails have had with intermodal has largely been driven by growth of international container traffic from Pacific, Gulf and Atlantic ports to inland distribution centers.  Domestic intermodal has been a mixed bag.  Premium rail intermodal service — meaning high-horsepower, high cost, relatively fast rail corridor service – has generally not been attractive enough to induce shippers to pay commensurate premium freight charges.  The reality is that what passes for premium rail intermodal service today is often nothing more than the least time-sensitive highway cargo that the truckers divert to railroads when transit-time permits and truck capacity limitations require.   While we see UPS trailers on rail in the I-95 corridor, far more UPS traffic is observed on the highway, some of which was forfeited by participating railroads as result of rail corridor and service rationalization subsequent to the 1980s.

 

            Alas, glory was not to be found at the end of the 1980s/early 2000s rail deregulation era.   Who then could have anticipated that coal – long a mainstay of rail profitability – would face the headwinds that the first decade of the 2000s would bring, nor the dramatic and quite sudden decline of coal in the second decade of the 21st century.  Nor could anyone quite imagine the extent of the flight of rail-oriented industry, including distribution, from the urban core, long rail-served, to the outer periphery of the metropolitan Interstate ring(s), almost none of which was to be rail served.  Some smart young men, such as Mac Sanders of Conrail, once predicted that this would not matter, that rail/highway intermodal would continue to provide railroads access to this business, that the traditional boxcar unit of U.S. distribution would be supplanted by the intermodal trailer or container, still keeping rail in the game.  Sanders, in fact, was quoted in industry news as saying that by 2000, the box car would be dead, that the truck trailer and container would have completely eliminated any role for the once ubiquitous boxcar.  It is now 2018 and the boxcar is still with us – albeit in dramatically reduced numbers for special applications – but the rail intermodal option can rarely be spotted at suburban industrial distribution complexes. Finally, and perhaps the cruelest cut of all, the sudden demand for rail transportation of “frack-produced” crude oil – notably from North Dakota origins – which seemed to hold much promise, disappointingly turned out to be but a flash in the pan. Rail transport of most of this crude was supplanted by new pipelines, as well as by changes in global flows of oil.

 

If we could only get rid of those high-paid locomotive engineers

            There are those who now get excited about a predicted breakthrough in rail “productivity”—automated, crewless, freight trains if you will.  This will surely come in time, but not very soon.  The underlying rail problem which the post-1980s experience brought into sharper focus was this:  despite great strides in quality of rail main line track maintenance and improved rolling stock design, the 2018 Virginia rail infrastructure network still resembles, in many respects, the pre-Interstate road network of 1956. In fact, in many rail corridors—assuming they still exist—rail speeds and capacity have actually been reduced below 1956 levels.  Thus, rail starts off today at a great competitive disadvantage—at least fifty years behind highway transport standards of consistency of service and speed.  The sad reality is beginning to dawn.  Even without train crew costs, should we ever reach that utopian level of productivity, the rail mode generally cannot compete – in terms of flexibility and service quality – with highway transportation --- of either passengers or cargo unless: (a) the physical rail network undergoes a physical infrastructure transformation equal to or better than what the Interstate system provided highway users, and (b) rail operators are willing to commit themselves to fast, frequent, reliable schedules for the movement of both freight and  passengers. Neither of these conditions is currently viewed as remotely possible, for want of the huge outlay of capital required, in the first instance, and because of risk-averse rail CEOs  could not reasonably be expected to “take the heat from the Street” for what traditional industry analysts  would see as a backward step.

Naiveté of the “Dreamers”

            With maturation of the Interstates in Virginia by the 1980s, personified by the near take-over of I-81 by big rig trucks – mostly moving through Virginia – and the gridlock on I-95 largely caused by regional commuters  (later I-66, -I-64 and I-77 would also qualify for poster child status) , more people began to ask themselves — and their elected officials — a fairly obvious question:  Can’t the parallel rail lines in Virginia help by taking some of this traffic off the roads?

 

            The public liked the idea.  Many politicians embraced the concept.  Railroads were not sure.  Many veteran rail operating officials knew at once that the type of rail system service quality then, and still now, existing would not do the job.  First of all, a tremendous amount of capacity had been removed from the systems after the arrival of Amtrak and the elimination of trains that previously were operated by the railroads for their own account.  The day Amtrak took over (May 1, 1971), they discontinued about half the trains that the I.C.C. had previously forced the investor-owned railroad companies to operate.  When the passenger trains and U.S. mail traffic left the rail systems, the old operating discipline and resulting quality of service tended to deteriorate.  It is not just how much capacity one has, it is often how it is used.  Rail operations tended to get sloppy as time went on.

 

            Northern Virginia advocates of what came to be known as the Virginia Railway Express (“VRE”) commuter rail mustered considerable political pressure and brought it to bear upon Norfolk Southern and CSX (actually then still RF&P) to agree to commuter rail service to be operated by VRE, from Fredericksburg and Manassas to Union Station in Washington.  Neither railroad had any statutory obligation to oblige. However, NS had a unique situation, as it had diverted most of its freight from the former Potomac Yard Gateway in Alexandria to an alternative route via Manassas and Haymarket to Front Royal and then Hagerstown.  This yielded an underutilized double track railroad from Manassas to Alexandria.  RF&P still had some excess capacity, in places, and could generally accommodate some additional trains.  Even so, VRE service was inaugurated without an adequate commitment on the part of the public sponsors of VRE to fund construction of additional capacity commensurate with the new commuter operations.  Thus, the need for investment in rail infrastructure became the hue and cry of all concerned.  In other words, the public perception was that if the infrastructure needs issue was resolved, everything would be alright.  After about a decade VRE operations (VRE service started in 1992) many of the infrastructure fixes eventually got done using a combination of public funding sources, including Richmond-Washington Corridor improvement funding provided in the VA Transportation Act of 2000, a first in Virginia.  The VRE experience wetted the appetite of rail advocates for additional passenger rail service – both commuter and intercity.  At the same time, it raised cautionary barriers within the two primary railroads in Virginia; namely CSX and NS, neither of which had much enthusiasm for publicly-funded rail infrastructure and service projects.  There was one notable exception, involving intermodal freight moving inland from the Hampton Roads Port. [There were other exceptions of lesser significance, e.g. the short line financial assistance program and rail industrial access funding, but those two commanded less attention from the principal players.  See notes, relative to Virginia “short line” railroads].

 

            Washington-Richmond rail corridor improvements, together with Hampton Roads Port-related rail infrastructure and service initiatives, were the principal reasons the Commonwealth of Virginia eventually found a way to circumvent the 19th century (1870) constitutional prohibition against investing State funds in “works of internal improvements”.  Of course, roads had been exempted from such restriction much earlier, dating back to the 1902 constitution.  Eventually, the questionable (some thought) practice of funding rail infrastructure and services  was given cover of constitutionality by a more recent State Supreme Court decision (Montgomery County vs. DRPT) which essentially rationalized that if the rail investment were such as to afford relief to highways, then it would appear to pass muster.  Although the State Supreme Court decision in the Montgomery case came much later, one might very well point to the State Transportation Act of 2000 (see previous paragraph) as the turning point in Virginia public policy relative to rail.  Nevertheless, the possibility remains that Virginia’s rail program activity could yet be challenged on grounds that it may not yet have been adequately clarified, as indeed it should be by amendment to the constitution.

 

            There was evidence of a growing need for additional Amtrak service in Virginia, as well as for Virginia Port Authority-related rail infrastructure in Hampton Roads and on the two “freight” railroads serving the Port.  Norfolk Southern --- always more adept at turning the valves and pulling the levers of State appropriations --- made a big push for State funds, to augment some federal funding, then in hand to improve clearances on the former N&W main line between Roanoke, Bluefield and on to Columbus, Ohio.  There were many other rail infrastructure needs identified, but this so-called “Heartland Corridor” project of NS was easily understood because of its strategic connection to the Port of Hampton Roads and to Midwest destinations of international traffic.

 

            While Governor Baliles became known as “the Transportation Governor” for his 1986 special session and the resulting one-half cent increase on the State’s general sales tax, earmarked for transportation, he did little for rail except offering support for VRE.  Governor Gilmore symbolically recognized the importance of the Richmond-Washington rail corridor in a joint press release with Amtrak, and[R1]  signed the landmark Transportation Act of 2000, providing the very first investment of State dollars in main line intercity rail infrastructure.   However, It was Governor Mark Warner in the 2004-2005 time frame who appointed a Commission on the Future of Rail in Virginia, which with the Governor’s support recommended creation of a Rail Enhancement Fund (“REF”), subsequently authorized by the General Assembly. The REF provided – for the first time ever – a regular funding source of rail infrastructure.  Governor Tim Kaine followed with an ambitious expansion program to add Amtrak regional service to Lynchburg, Richmond and Norfolk.  Governor McDonald signed the all-important Intercity Passenger Rail Operating and Capital funding bill (“IPROC”), assuring the future of regional Amtrak Virginia service between Northeast Corridor points and Norfolk, Richmond, Newport News, Lynchburg and Roanoke. [Roanoke service was restored in late 2017 under the administration of Governor Terry McAuliffe].  However, the McAuliffe administration raided the Rail Enhancement Fund, to meet other State budget needs, because, in part, the two big freight railroads were not using all REF funds available.  While the REF does require a 30% match of funds by CSX and NS for their projects, the more worrisome thing was their apparent diminished appetite for new State grants to fund projects.  If a railroad believes they have maxed-out on improvements and business franchise development, this begs questions.

 

            While CSX and NS were always cautious about taking on additional State passenger train service, they initially had a long list of freight capital projects for which they eventually sought funding, or so it seemed, when there was only the Rail Enhancement Fund (prior to IPROC). After IPROC (passenger) funding became available, we begin to see disproportionately large demands for infrastructure improvements as a condition of agreeing to even a single passenger train addition to the mix of trains.  In fact, certain “freight” project funding grant applications lapsed, or where withdrawn, for lack of follow-through commitment by the freight applicants.  In the case of passenger project funded under IPROC, no match by the “host” freight railroad was required.  The capital cost associated with extending the Lynchburg train to Roanoke is a good example.  Were the freight railroads simply accomplishing their desired freight enhancement project funding by “piggybacking” on passenger service expansion; were they gaming the system?

 

            Needless to say, advocates of expanded intercity rail passenger and freight services (promoted by “the Dreamers”) were extremely gratified by the remarkable evolution in Virginia public transportation policy, to incorporate rail, over the years since 2000.  However, most of the leadership in the private rail advocacy community is reluctant to point out shortcomings for fear of jeopardizing future funding.  However, an objective critique of our history would find that the Dreamers’ vision of a viable role for rail – freight and passenger – has fallen short of what might have been expected to be achieved.  The writer admits to having been one of these “Dreamers”.  Most of us operated on the assumption that CSX, NS, and Amtrak, would all respond positively and aggressively to the unique Virginia rail policy and funding opportunities made possible by the legislative and gubernatorial support provided over the years from the Transportation Act of 2000 to IPROC in 2012, and beyond.  The troubling fact appears to be that both CSX and NS – and particularly CSX – have hardened rather than softened their stance relative to passenger trains.  Amtrak, which continues to be in a congressionally-imposed state of uncertainty, from year to year, has not been as aggressive in taking advantage of the Virginia opportunities as they might have been.  Most puzzling of all has been the apparent indifference of CSX and NS toward the cultivation of new cargo transport business opportunities.  Fundamentally, the current State rail program appears to be at odds with the controlling ownership of Virginia’s two major freight railroads.  This may or may not be entirely accurate, but it is worrisome to those of us who expected better.

 

Dreamers get an Education in Wall Street Control of Railroads

            What we have learned is that investor-owned, publicly-traded, railroad corporations do not have as much discretion as originally thought. Their CEOs and their boards of directors are obliged to respond to the dictates of those who control the majority of the company stock and who effectively dictate financial objectives. A CEO will not keep his (or her) job unless he delivers. Few, if any, of those controlling financiers know, or care, much about the transportation business in which the rail company is engaged.  What they know is that market appreciation of the publicly-traded shares is critical, and greater free cash flow must be generated (cash after debt service and taxes, out of which dividends are paid and capital improvements made, and stock repurchase programs are funded).  The company’s operating ratio is sacred (“OR”) (ratio, or percentage, of operating expense to revenue).  Pressure to drive down and maintain the lowest-ever OR is all too often the sum total of what these capital markets specialists care about.  Thus, one must reluctantly conclude that there is little chance that the freight market-share-increase objectives of rail service proponents can ever be fully reconciled with Wall Street. We may have an exception of sorts in the case of BNSF Railroad and Berkshire Hathaway (Warren Buffett).

 

            In the interest of further explanation, permit the writer to cite a personal example of how all this impacts even the small, independent, shareholder.  Norfolk Southern is major component of the writer’s personal stock portfolio, and that investment helps sustain me financially. While reviewing NS’ 4th Quarter financial and business results, which included some rather unsatisfactory service performance metrics, attributable, they say, to weather conditions (always a handy excuse), I noted that the dividend is to be increased 18%.  With share price of NS then near an all-time high, and the dividend increase coming, how much does one care about increase in dwell time, or slower over-the road freight trains speeds?  How much of the share price and of the dividend would we independent shareholders be willing to give up in order to have a better performing railroad?  The big boys of the “Street” care even less.

 

            And railroads are not unique in this regard.  Recently, United Airlines announced plans to add routes and seats in an aggressive attempt to gain market share.  Rather than applaud this move (which is analogous to that which some of us would like to see the freight railroads do), United shares plunged 11% the following day.  That was a “shot across the bow” of an overly aggressive management.  (WSJ 1/25/18).

 

The Hunter Harrison Effect

            The late Hunter Harrison, who – with his hedge fund backers — took CSX by storm in March, 2017 -- before his untimely death -- epitomized the best and worst of Wall Street influence on railroads. Like any large organization, railroads frequently need some fresh thinking and new approaches to how they operate.  Harrison, who rose from the ranks, was – depending upon whom you ask –  either a careless bully and a wrecker of what others had built, or a creative genius when it comes to productivity and efficiency in rail operations.  He left three railroads, prior to arriving at CSX, each more profitable and “efficient” – as Wall Street views such things – but with many unhappy customers.  We hear that Canadian National did not renew Harrison’s contract out of concern about customer relations. Those who have had a close-up view of the aftermath of Harrison’s revolutionary overhaul of these systems (Illinois Central/ Canadian National, and Canadian Pacific) generally say that the surviving lines are “but a shadow of their former selves”. Both CN and CP, and now CSX, we hear, have embarked upon some degree of customer-relations “repair” effort.  All this generally means that these railroads’ “franchise(s)” have been diminished.  Wall Street generally does not take note until it is too late. There are, of course, many who praise the legacy of Harrison. He was about to work his magic on CSX when he died.  His disciples – men (no women) Harrison brought with him to CSX – publicly assert that they are going to do just that. But Virginia has a greater stake in the outcome of the next chapter at CSX than many might realize, and we hope that Secretary of Transportation Shannon Valentine and others are paying close attention.

 

            What difference does this make?  Why should one care about a Harrison-like episode of “creative destruction”?  From a public policy perspective, such as that of the Commonwealth of Virginia, we need to ask whether the present and potential transportation utility represented by a CSX, for example, is really essential as part of the State’s multimodal transportation portfolio in order to meet the needs of the public?  Is it, or is it not, and to what degree? The answer to that question is a critical one for public policy makers.

 

            With breathtaking speed, the technology of highway freight and passenger transport promises to change in the decade ahead.  CSX and NS may, or may not, be essential to the future of transportation in Virginia. In the interim, we should ask whether CSX is still a common carrier in the traditional definition of the term; namely, holding itself out to respond to any reasonable transportation need, commercially or otherwise, provided of course that CSX is adequately and appropriately compensated for its service?  Does a CSX, or a NS for that matter, have characteristics of a public utility?  Has deregulation in U.S transportation gone too far? Those who may ask such questions would do well to revisit the regulatory environment existing prior to the 1980s, which had a great deal to do with the decline of rail.  A similar analysis is obligatory relative to public policy on transportation funding and competitive economics between the modes.  Is it even possible for a railroad to grow in the face of our socialized highway system?  When all one has to do is lease a tractor, hitch to somebody’s trailer, and head for the “on ramp” in order to be a trucker, how can railroads be expected to compete? The “level playing field” that the rail industry has so long sought is unlikely to materialize anytime soon, if ever.  Thus, the rail mode may be doomed to marginal competitive status.

 

            As of the present time, and to the extent that this writer is aware (and he may not be), nobody at either the federal or state levels of government seems to be looking critically at the issues raised in the preceding paragraph. This is unfortunate.

 

Rail’s reputation for arrogance and Indifference in relation to public Interest 

            Ask those public-sector representatives who have attempted to deal with representatives of investor-owned railroad companies, and they will likely tell you that they have never encountered more difficult, and sometimes arrogant, positions taken by railroads.  All too often that tends to also be the impression of freight customers, or potential customers, of railroads. While we would hope that not all such encounters are similarly characterized, the fact is that railroad people have an invisible chip on their shoulders.  It tends to be in the DNA of these companies, dating so far back in history that the modern-day perpetrator of such attitudes may not even know the history.  Few individuals “on the other side of the table” have much knowledge of “where railroads are coming from”.  It would require another paper of equal or greater length to fully explain, but railroads tend to feel that they have been neglected, abused and otherwise placed in an unnecessarily difficult competitive position, relative to other modes of transportation, as result of governmental action and/or inaction.  Rails tend to feel they have been put in a defensive situation where their only option is to fight their way out of such inferior competitive position with their own resources and effort, neither asking for nor expecting much help from Uncle Sam.  There are, and always have been, exceptions to this assertion. This history dates back to the “trust-busting” 1901 political strategy of Teddy Roosevelt.  It gained greater intensity with Woodrow Wilson in 1917 with his seizure of the railroads and culminates in the Interstate Highway Act of 1956 under Dwight D. Eisenhower’s administration. There is, of course, considerable subsequent history, which only recently reflects, to some degree, public policy recognition of the unique status of investor-owned-and-controlled railroads.

 

The fundamental problem:  Private ownership and control

of vital “public service” transportation infrastructure

            Near the end of Christmas week, 1917, with the Nation at war, President Woodrow Wilson seized control of most Class I railroads in the United States, and through an entity created and thereafter known as the U.S. Railroad Administration (“USRA”) proceeded to operate the major rail systems of the nation until the end of February, 1920.  This, of course, was justified by the President as part of the World War I transportation effort. Although presidents may have taken control of coal mines and steel mills during periods of national labor unrest, we know of no other instance of protracted direct, hands-on control of any U. S. industry comparable to the U.S.R.A experience.  Profitable railroads, such as RF&P and the Atlantic Coast Line (all now part of CSX), saw as much as two-thirds of their net operating income retained by the Government during this 26+ month period of federal control.  Worse yet because of longer term consequences – the director-general of USRA was exceedingly generous with rail labor, leaving the investor-owned rails with much higher wage scales with which to contend after return of the railroads to their owners.  Even more significant, for purposes of this paper, the January-February, 1920 congressional debate preceding return of the roads was the one and only time in rail history when public policy makers seriously debated the possibility of a permanent take-over of the U.S. rail system by the federal government.  That was indeed a serious proposal energetically promoted by rail labor (for obvious reasons), but more credibly-advanced and defended by the agricultural interests of the nation, representative of which declared that the farmers had no confidence in the private railroads previously serving them (mostly upper mid-west), nor the capitalist system of funding rail transportation.  Had it not been for the billion-dollar deficit run up by USRA, these proposals might have gotten even more sympathetic consideration, but President Wilson and a majority in congress wanted out of the railroad business as soon as possible.

 

            In retrospect, it is regrettable that the President did not permit a through-going congressional analysis of all relevant aspects of rail during 1920, because most U.S. railroad systems were in need of a major overhaul of network, operational and service aspects. USRA Director General McAdoo and his successor, Hines, recommended something of that nature, but Wilson wanted out of the rail briar patch into which he had gotten the Country.   In fact, the Transportation Act of 1920, which among other things facilitated the return of private railroads to their owners, sought without success to set in motion a subsequent consolidation effort under the auspices of the Interstate Commerce Commission.  Imbedded reluctance to change on the part of the Commission and self-preservation objections by individual private railroads, effectively killed that initiative. USRA did some sensible things during its control, which should have been continued by the private railroads during the 1920s, but they were not.  If there ever was a time when the basic U.S. rail network infrastructure should have been consolidated into one network under public control, as USRA attempted to do, and then thrown open to multiple private operator usage, similar to what USRA did in terminal areas, this was that time.  We bore the reader with this 100-year-old history because the consequences of failure then on the part of Wilson and his successors, and of the congress, to thoughtfully and comprehensively address the role of rail in a changing (increasingly highway-oriented) transportation environment, and to promulgate appropriate public policies to protect and develop the best features of rail transportation, leads us to the situation we confront today.  See notes for further discussion of “nationalization” vs. public ownership and control of the highway network, which of course is what the rails compete against today.

 

            Owners of about 100,000+/- miles of all U.S. rail route mileage (in 10,000 mile 20,000 mile and 30,000 mile systems), controlled by seven Class ONE freight railroads, each fiercely competitive between themselves, use most of this route infrastructure individually and exclusively (no others allowed on it) as leverage to dominate rail freight business they might not otherwise be able to control.  They know that in an open-access, open market-type competitive environment they would have to share the business.  On the other hand, each such railroad could, under an “open-access” system, conceivably gain access to business they would otherwise not have.  The big “Seven” defend this as being the most efficient means of insuring low cost transportation service and superior rail service.  On the other hand, some argue that such “exclusivity” of rail access deprives the national economy and the public at large of transportation options which could be highly beneficial.   At minimum, the contrast between “open-access” trucking via highway vs. “limited access” in rail transportation presents a glaring contradiction in public policy. Suppose, for example, that a theoretical  core U.S. rail network were thrown open, under reasonable commercial terms, to access by all seven Class ONE freight railroads, and to  major potential users such as FedX, UPS. J.B. Hunt, Schneider, Amazon and others, to be utilized to best advantage.  How many more trucks might be removed from our Interstate highways?  Many – perhaps most – objective observers would construe what we have today, in rail, as a legal monopoly situation, inconsistent with public interest. Railroad owners vigorously ague to the contrary.  Once again, the reason this arrangement exists dates back to 1920.  Neither the federal government, nor the railroads, have been willing to put the rail mode on the same, or similar, public access basis as highways and aviation.  Think about what this implies, relative to a CSX and NS.  It is apparently better to be a limited-scope infrastructure owner, with exclusive use of such infrastructure, than to be a competitive transportation marketing and logistics services company with nation-wide access.  To its credit, CSX once experimented with a modified version of “open access” and nation-wide service reach, only to quickly retreat.

 

            From a public policy perspective, one might fault the anti-competitive access strategy described in the preceding paragraph, but it makes all the sense in the world to a Class ONE owner, such as CSX, for example.  If CSX exclusively serves a major industrial customer that has few, if any, alternatives for the movement of its cargo, and if the only sure-fire avenue to enhance revenue is to jack up freight rates to the limit of customer, and Surface Transportation Board (“STB”) tolerance, then why in heaven’s name would CSX grant competitive access, or tolerate governmental action that has the effect of opening everything up to all, or even several, CSX competitors?  While this may make good business sense for CSX, from a narrow perspective, it is conducive to the type of indifferent customer service that many U.S. railroads, notably CSX, have a reputation for providing.

 

            All of this raises an interesting question; namely, are our railroads really transportation enterprises, or are they strategically-located  rail infrastructure owners who dabble in transportation when there is a match between a “captive shipper’s” requirements and rail resources conveniently available from the railroad?

 

Passenger Train Access to Investor-Owned Railroads’ Networks

            For 140 years – from the early 1830s to the early 1970s – passenger trains were an integral part of most intercity railroads’ business.  One reason, of many, was that the U.S. Post Office relied on railroads to handle much of the domestic intercity mail.  Beginning in the 1950s, and culminating in the late 1960s, the Post Office diverted mail formerly handled by rail to highway and air.  This move crippled much of the rail passenger network, already dealing with losses to superhighways and jet airplanes. With the mail traffic gone, much of the operating discipline went with it.  Nevertheless, a few railroads – including CSX predecessor Seaboard Coast Line – continued to give high priority to long-haul, luxury trains, believing that there was a future for that type of rail travel.  Amtrak – officially known as the National Railroad Passenger Corporation, or (“NRPC”) was created in 1970-71 in response to most railroads’ assertion that they were losing huge sums on passenger operations (generally correct) and that relief from lingering I.C.C. requirements to continue operating money-losing trains further weakened an already struggling private, investor-owned rail industry.  In addition, there were a few members of congress – inspired to some extent by rail passenger advocates --  who felt that it might be a mistake to allow the railroads to get out of the business entirely, that there might indeed be a future for passenger rail in certain corridors, principally in the so-called Northeast Corridor extending from Boston to Washington.  Amtrak took over most, but not all, intercity passenger service on May 1, 1971.  The late Graham Claytor, then CEO of Southern Railway (and later of Amtrak) was one of a few CEOs who opted not to have his company transfer its remaining trains to Amtrak.  Tom Rice, then CEO of Seaboard Coast Line, might have liked to follow suite, but he was pre-empted by RF&Ps decision to go with Amtrak.  The cost of joining Amtrak was, among other requirements, 50% of each railroad’s I.C.C. “Form A” passenger loss. [It was generally recognized that Form “A” losses were exaggerated to some extent; hence the 50% fraction.].  In consideration of such payment in cash to Amtrak, the railroads which joined were immediately relieved of their former statutory obligation to operate passenger train service, except as a service provider to Amtrak under a new standard form contract with NRPC. Obviously, there were many provisions of the 1971 contract, running both ways, but for all intents and purposes the joining railroads – since referred to as “host railroads” – were out of the passenger business and had no further obligation save for the conditions of the standard Amtrak (“NRPC”) contract.  It is worth noting that practically nobody expected intercity rail passenger service to grow.  In fact, the Nixon White House is said to have been persuaded to sign the legislation creating Amtrak only on the assurances that the whole thing would dry up and be gone in a few years.

 

            The point to remember is that “host” railroads bought their way out of a losing business proposition, and with the exception of serving reasonable operating needs of Amtrak, hopefully on a cost reimbursement basis, these railroads had NO further interest, and NO further obligation, to return to the passenger business.  This has never been fully appreciated by many rail passenger advocates. Moreover, it is doubtful that so-called host railroads would agree to the assignment of Amtrak’s rights, thus thwarting those in congress who advocate private, for profit, takeover of Amtrak service, even on a limited scope “demonstration” basis, as a first step to finally get rid of Amtrak.

 

            In light of the recent accident, involving Amtrak’s Silver Star, near Columbia, S.C., it is worth noting that the 1971 Amtrak (“NRPC”) contract, as amended, cuts both ways on liability.  In this instance, which apparently was caused by a CSX failure, Amtrak will likely be responsible for all claims for death and injury from its personnel as well as from passengers, and for repair and replacement of its locomotive and cars.  CSX, on the other hand, would typically be responsible for its own personnel, for damage to its track, locomotives and cars.  Host railroads have always claimed that they are not adequately compensated for the use of their tracks by Amtrak -- and they probably are not -- but they seldom acknowledge other extremely favorable terms and conditions, many of which we have omitted in this short summary.

 

            With all the bad-mouthing of Amtrak by its critics, the Company (a/k/a NRPC) has made good progress reducing its operating loss, to less than 10% of revenue—perhaps even better by now.  We believe that is the best such performance among all publicly-assisted, and funded, transportation operators. Arguably, the best CEO in American business and industry could not transform Amtrak into the high-level service provider that it aspires to be when it is so highly dependent upon the good will (often lacking) of the freight railroads, and the unwillingness of federal, state and regional governments to step up to their obligations relative to infrastructure upgrades and replacement.  The 100+ year old tunnels in Baltimore and under the Hudson River (on approach to Penn Station, New York) are good examples.

 

            Historically, there was never a question but that passenger trains were superior to freight trains – that was before May 1, 1971.  Traditionally, the operating timetable of each railroad, which was on the person or in front of every operating employee, displayed trains according to class, direction, leaving and arrival times, including at points along the route, and meeting places for opposing trains where that was physically required, plus much more. Passenger trains were “first-class” trains, as were some freight trains, but most freight was “second” or “third” class, etc.  Trains were superior to one another by reason of class, direction, etc.  Printed timetable authority could be, and generally was, temporarily modified by train dispatchers through the issuance and delivery of train orders, from time to time as circumstances required.  Trains were authorized to run late, meet at different places than indicated in the timetable, run in sections, run extra, etc. The book of operating rules, a mandatory item in every operating employee’s personal satchel, further defined authority and responsibility in every instance.  Prior to the installation of Centralized Traffic Control (“CTC”), beginning in the 1930s and after, the timetable and train order method generally dominated.  Train orders were communicated to “operators” at “block stations” and handed up or otherwise delivered to passing train crews.  After CTC came into wide use, the timetable and train order system could be, and was to some extent, supplemented by dispatcher discretion as to holding trains, meets, etc.  CTC signal and switch manipulation were remotely controlled by dispatchers, or operators, electronically at what are today referred to as “control” points.  In between such points trains operated on rules that had traditionally pertained to Automatic Block Signal (“ABS”) territory.  ABS was a safety system, but it was not a “control” system.

 

            Today’s Class I railroad employee timetables do not list any trains, nor their schedules.  Everything is up for grabs at the discretion of train dispatchers, or their supervisor.

 

            The point of this brief, layman’s, history of rail operating practices is that prior to the 1970s and 1980s, railroads generally observed and maintained well-defined priorities in the movement of trains.  Exceptions were always made to meet unusual circumstances, but passenger trains were at the top of the priority scale.  Nevertheless, freight trains of second-class were accorded only slightly lower priority than passenger.  Today’s frequent disregard for Amtrak passenger trains is not an accident, nor an occasional necessity.  It is a deliberate policy of many railroads, and runs counter to one of the fundamental obligations accepted by the “host” railroads as a condition of being relieved from providing passenger service themselves.  As most readers of this paper are aware, the issue of passenger train priorities is still in dispute, at the Surface Transportation Board and in the courts.   Failure to find mutually-satisfactory common ground, would condemn Amtrak service to inferior service levels forever, with all of the implications that follow.

 

Summing up, where do we stand?

 

1.  Growth in cargo-handling demands and personal mobility in Virginia’s previously- identified primary transportation corridors is certain to occur.  We use Interstate or U.S. route numbers as proxies for such corridors, e.g. I-95, I-81, U.S. 58, most of which have parallel rail lines which should also be considered in transportation improvement studies, but for lack of enthusiasm on the part of railroads and others, this is not automatically done by VDOT. How much and how soon growth-driven capacity-expanding investment will be required is understandably speculative, but it appears the VDOT assumes almost constant growth in highway capacity will be required and plans projects accordingly.  We do not fault VDOT for that approach.  However, it should also be incumbent upon decision-makers, at the Commonwealth Transportation Board, and above, to consider the implications of projects recommended under this VDOT practice.  Rail and other modal options, should be considered, and consciously rejected or incorporated.

 

1-A     According to recent news from Georgia, GDOT claims that trucks already handle 75% of surface freight tonnage moving in that state, and their forecast is that truck volume will double by 2040.  Virginia undoubtedly has similar figures.  When one strips out coal, nobody but the railroads themselves seems to have comparable rail “merchandise and intermodal” tonnage history, nor a rail industry forecast of further decline, or growth.  Some of these categories of   freight would seem to be susceptible to some degree of retro-highway-to-rail conversion.  This is critical information for Virginia transportation planning.  If it is available, it should be made public.

 

Note:  Rail “merchandise” traffic, as it has traditionally been defined, has largely been converted to highway transport, mostly all-truck, but some was retained in intermodal rail/truck service. What remains on the rails is usually basic industrial-economy raw materials, not as time-sensitive, and usually (but not always) of lower value.  This residual rail traffic is often that for which few viable alternative means of transport are available to the shipper, for a variety of reasons.  This class of shippers includes those informally classified as “captive shippers”. Some are highly critical of their rail costs and service and speak out before the Surface Transportation Board.  Others, feeling vulnerable to punitive reaction by the railroad upon which they depend, stifle their public comments.  Most, we speculate, would be highly receptive to a cost-effective, service-comparable (or better) transport alternative.

 

2.  While highway capacity is being continually added by VDOT, the physical, environmental and financial cost of highway capacity expansion grows more challenging with each passing year.  We have learned that this is also true for certain higher-speed rail passenger-oriented corridor enhancements, although rail capacity comes in incremental steps, some of which (e.g. “picking low-hanging fruit”) may be less daunting.  What is unique about rail is that historically, Virginia rail capacity has atrophied over the last four decades, and there are no guarantees, at present, that that trend will not continue.  This should be of great concern to Virginia transportation planners.

 

3.  Technology promises to bring some relief, in both highway and rail, but the juncture between technological advancement and commercial and social acceptance remains to be found.  What is fairly clear is that public investment in highway capacity, and in adjunct truck facilities, will be an on-going requirement.  Indeed, entirely new concepts, not necessarily related to technology, are now being discussed, such as dedicated truck-only highways (truck lanes we already have.).  Should the day come when trucks have below-cost (to them) access to dedicated rights of way, then it is likely that rail freight traffic will be further reduced to a fraction of what it is today, and the rail network could be expected to shrink accordingly.

 

4.  As noted above, existing rail capacity in Virginia has been in general decline since 1980, and before. While Virginia has, as noted at the outset of this paper, “rediscovered” rail, and has made significant public investments to enhance rail capacity, the sum of the Commonwealth’s efforts to date – now nearing one billion dollars --do not represent much more than pilot projects. There is no danger that existing highway capacity is going to be scuttled as a matter of public policy; just the contrary, but rail capacity could slip away almost unnoticed – for reasons that have little to do with transportation needs.

 

5.  It is likely that we will need some or all of our known transportation options, and perhaps some- yet unknown.  Conversely, should we lose more rail access and capacity, the challenge of providing for truck growth becomes more difficult, and costly, and less socially acceptable.

 

6.  Cooperation with railroad “partners” has been mixed.  We cannot be certain that anything accomplished to date will be of lasting utility.  Some public utterances by senior executives of Virginia railroads have been encouraging, but some others could be reasonably classified as outright negative as to future collaboration.

 

7.  Virginia’s laudable commitment to establishing and improving intercity rail passenger services has, we fear, inadvertently left some with the impression that rail freight is not as important.  We simply must do more, if possible, to promote and achieve real growth in rail freight.  As it stands today, rail passenger and freight interests are so closely entwined that the issues are inseparable.  Too few rail passenger promoters appear to fail to appreciate this critical point.  We must have a healthy rail freight operation in Virginia to enable passenger to prosper. Insofar as Virginia rail services are concerned, and under present arrangements, passenger services will never achieve their potential unless rail freight also prospers.

 

8.  However, the idea that investing in (adding) publicly-funded rail capacity improvements, in connection with enhanced passenger services, will automatically assure favorable attention to both passenger and freight by the investor-owned railroads, has not yet manifested itself as a predictable result.  Railroad companies are highly reflective of the personality and disposition of the CEO and his or her executive staff.  And, these personalities change.  We have seen that with NS, which having been alarmed by take-over threats from the same Hunter Harrison who later stormed into CSX, apparently felt compelled to “get tough”, both operationally as well as policy-wise, which concerns watchers of NS service, freight as well as passenger.

 

9.  There is currently no place in the business plans of our Virginia railroads for passenger service, and until there is, passenger will always be a stepchild of questionable ancestry.

 

10.  Our Virginia-sponsored Amtrak Regional intercity passenger trains do not appear to be operating close to their potential, expressed in terms of service performance, nor financial considerations.  Part of the problems is “host” railroad delay issues, but part of it is likely to be with the operator, Amtrak, and some of it no doubt resides at VA DRPT.  We have a long way to go, for reasons that this writer acknowledges and understands (up to a point), but these trains have the potential for being financially self-sustaining, excluding capital requirements. In fact, were we in total sync with the “host railroads” and the operator, these trains ought to be able to throw off enough money to induce the host railroads to take a “proprietary” interest in them.  That should be our goal.

 

11.  It is truly disappointing to see what appears to be a lack of aggressive (risk-taking) marketing of freight rail services.  As the old saying goes, “one can lead a horse to water, but you can’t make it drink”.  We have seen risk-taking efforts over the years, but Wall Street’s current obsession with achieving record low operating ratios, makes risk-taking hazardous to the CEOs.  One can understand – if not admire – timidity and risk-aversion on part of rail executive management

 

12.  Lack of a comprehensive federal transportation policy, that includes rail, continues to be a major handicap. This is not entirely the fault of the politicians.  Some influential railroad executives continue to have a negative bias relative to public funding, and especially Amtrak.  For example, the late Hunter Harrison was quoted last year, in connection with a potential public/private Baltimore tunnel improvement project, that he would rather not have public money because then “they want to tell you how to run your railroad”.  Note the emphasis on “my railroad”.  By and large the seven investor –owned Class ONE freight roads appear not to consider the public interest to be any of their concern. With a few exceptions, it is likely that Class ONE freight railroad lobbying on the “Hill” continues to emphasize rail’s ability to solve most of their problems if the government will just get out of the way.  This misguided mind-set has been a recurring theme of rail industry policy for most of the last 100 years.  Likely as a result, many members of congress generally do not appear to view rail as integral component of the national transportation system, a system which – with the exception of rail -- has received the full support, and financial assistance, of the federal government for the last 100 years.

 

13.  Virginia Department of Rail and Public Transportation (“DRPT”) is a critical element in achieving our hopes and dreams and in resolving, or at least mitigating, our frustrations with railroad matters in Virginia.  We have observed the unfolding (public view) history of DRPT since it was formed out of VDOT a quarter-century ago.  The “Agency”, as some of the DRPT folks refer to it, has gotten progressively stronger in terms of leadership, staff resources and, most importantly, it has had support from virtually all governors since the beginning of the 21st century.  Today, DRPT may be approaching the peak of its competency.  DRPT’s human resources are substantial, and its funding needs are potentially quite large. Can this combination of resources continue to be deployed to maximum advantage of the Commonwealth?  DRPT is still “an Agency” of State Government, not a semi-autonomous entity such as, for example, the Virginia Port Authority.  The nature of State government, as observed by this writer for 25 years, is that an “agency” is never going to have discretion to be but so innovative, creative or bold.  Agencies do what they are authorized to do by the General Assembly, as directed by their secretariat-level boss and ultimately the governor.  They do those things well, but they tend to have no more discretionary initiative than do the railroad personnel with whom they may be in discussions.  With all due respect, the lack of depth of specialized knowledge and understanding among legislators and senior administration officials, relative to this agency’s non-governmental counterparts – although quite understandable – can present problems, particularly when DRPT personnel are dealing with higher-paid, highly motivated defenders and protectors of non-governmental railroad company policy position(s).  There are, no doubt, exceptions, but DRPT leadership daily confronts very challenging situations.  Problems with the railroads, and their sub-optimal performance (as the writer perceives it), cannot be fixed solely by DRPT, nor by the Virginia Secretary of Transportation.

 

14.  Therefore, if our railroads are so disinclined, as this writer asserts, to fully develop their franchises for their own business reasons – not to mention, for public benefit reasons  – and if State government is not in position to persuade or otherwise induce investor-owned private railroad companies, operating in Virginia, to modify their contra-public positions, is there public justification for having spent or committed upwards of one billion dollars towards achieving a more ambitious, but apparently unachievable, role for the rail mode of transportation in our State?

 

            Our answer to the above question is an unequivocal “YES”, there are compelling reasons; there is too much potential value in rail – even in its diminished state today – to walk away now.  Remember that the only constant is “change”.   The public/private relationship with rail will inevitably change in the future as it has in the past.   Those who formulate public policy must be prepared to take advantage of future changes.

 

            That said, Virginia taxpayers are entitled to a better deal going forward.  Many of the arrangements negotiated by DRPT with railroads in order to achieve gubernatorial objectives have been out of balance in terms of public financial contributions to public benefits.  This has often been the “price” paid to accomplish some foreordained public objective in an environment in which the railroads tend to play the long game, taking the position that they don’t want or need the object of public interest, so if the public wants it, the public will have to pay and pay dearly, and we have.  We must be willing occasionally to step back and wait.

 

            We must remember that railroads periodically need State approval for something they want or need.  Virginia has had such opportunities in the past  – usually not pursued to public advantage  – and we will have them again in the future.  Every governor should have readily available to him or her, a list of potential “trades” when the occasion arises.  This will require a new dimension of staff work that is often not done, or if it is, it was a last-minute exercise.  Somebody in State government needs to become fully conversant with current rail issues – above the level of project activity -- and be prepared to anticipate future rail policy developments, at both State and Federal levels of policy-making.   That person, or persons, should seek to become as familiar with rail industry challenges, concerns and opportunities, as would a rail CEO or Wall Street investment banker.

 

            Without intent to criticize, we dare-say that none of the staffs of Virginia’s congressional  delegation – and probably not the offices of our two Virginia senators  either – have been fully briefed concerning Virginia’s acute interest in rail matters beyond the physical boundaries of the Commonwealth (WMATA excepted).   Replacement of Long Bridge (rail) across the Potomac River is an obvious illustration.  When the federal government, circa 1870, gave CSX’s predecessor the right to use this strategic crossing, it attached conditions.   Does anyone remember? What is CSX prepared to do, quid pro quo?  Baltimore rail freight and passenger tunnel(s) are yet another.  The near-certain future failure of the rail tunnels under the Hudson River -- the approach to Penn Station New York -- would undoubtedly force a reduction – possible the total elimination – of Virginia’s Regional Amtrak service.  The writer is not one who necessarily considers our rail network unsafe, but the network is bound together by many weak links, some of which could fail at any time.  Neither the so-called Trump infrastructure program, nor any other initiative of which we are aware, begins to address our nation’s rail needs.

 

            Within the rail transportation mode – which, by the writer’s reckoning, has long endured greater negative treatment at the hands of public policy makers than any other – Amtrak stands out as the most misunderstood, abused and mistreated.  Whether at the hands of a few ignorant congressmen (the pejorative is intentional) or unhappy travelers recovering from late and cancelled trains, our only nation-wide intercity rail passenger franchise operator has become the poster child for the wide-spread question: “Why doesn’t the U.S. have good rail service like the rest of the civilized world?”  The answer, in brief, is that our public policy makers, in Washington -- aided and abetted by some freight railroads – have not seen fit to enable Amtrak to prosper. 

 

            Yet intercity rail passenger travel demand has been confirmed in virtually every case of substantial improvement in rail service.  Virginia is one of the best examples.  While the Class ONE freight rail industry faults Amtrak for some of their capacity and congestion problems – often, but not always, a specious argument – Amtrak is about all that has kept rail in the public discussion.  Where Amtrak trains operate over freight railroads (“host railroads”) such railroads tend to be better maintained, with greater capacity – for both freight and passenger, than they might otherwise have been, and such lines generally permit higher-speed operation of both freight and passenger trains.  In Virginia, the Gordonsville-to-Clifton Forge section of Buckingham Branch’s Richmond & Allegheny route illustrates this very point.  The State of Virginia has apparently given this section of railroad extra weight in deciding upon the merits of “host railroad” Rail Enhancement Fund (REF) (and “short line”) grant requests.  Thus, having Amtrak vs. not having Amtrak would, one would think, be a plus. 

 

            Currently, failure to complete the long-delayed nation-wide Positive Train Control (“PTC”) installation project has emerged as a looming crisis.   Ironically, Amtrak and many Class ONE freight railroads appear to be far ahead of some publicly-owned-and- operated commuter lines, such as New Jersey Transit. Were this important safety system an aviation project, the Federal Aviation branch of U.S. D.O.T. would have mostly likely taken care of it years ago.  Instead, in 2008, congress made it the responsibility of mostly-private railroads. PTC is a splendid example of an “unfunded mandate”. A year-end (2018) deadline for PTC to become operational is fast approaching.  Will congress grant yet another extension, or provide supplemental funding to the lagging commuter roads?  Amtrak is threatening to suspend some service on routes without operational PTC.  This may include some Virginia service.

 

What, then, shall we do?

            Education is critical task Number ONE.  Although absolutely essential to our economy and social order, transportation — across the full range of modes — is not well understood.  Our auto and truck culture has produced generations of Americans who think those options, plus commercial aviation, are about the only ones from which the public can choose.  Most of these people – and we are talking about well-educated, relatively affluent, citizens –  likely think that highway costs are fully recovered from federal and state fuel and related “user” fees.  Billions of dollars annually come out of the general funds of the U.S. treasury in order to sustain the so-called “Highway Trust Fund”.  Like autos and trucks, aviation has now had a 100-year history of federal, and state, support, much of it associated with “defense” and world trade considerations. Think Boeing in terms of U.S. balance of trade, and Newport News Shipbuilding and Dry Dock Company as a major defense contractor. General aviation has always had a free, or nearly free, ride.  Now, with private jets having become as ubiquitous as Uber-dispatched autos, we read that the corporate jet owners and users, as a group, pay only about 1% of air-traffic-control costs, but represent over 10% of the user demands on the system.  Think about the last Super Bowl, and the 1,000+ private jets descending on host city airports.  Spend an hour in spring and fall beside the Intracoastal Waterway and observe the parade of luxury yachts moving between Florida and the Northeast, none of which pay anything close to the public cost of maintaining and operating this waterway.  All of this, and more, has come about because public policy-makers – primarily at the federal level of government – have made conscious (we hope) decisions to facilitate and implement that which has been described in this paragraph.  By no means is this a “free market”.  It is a “managed” market, with strong socialistic characteristics.  The contrast with rail — which DOD has largely abandoned as a domestic transporter of military impedimenta and personnel — could not be more glaring, especially with regard to Amtrak.

 

            While most of this paper has been devoted to intercity freight and passenger rail, a similar policy-deficit problem exists with urban “transit”. Richmond, for example, lacks an adequate regional transit system. As this is written, some residents of the U.S. Route ONE (a/k/a, Jefferson Davis Corridor), in Chesterfield County (only one of half-dozen similar corridors in the Richmond Metro area) beg for public transportation.  Ironically this same corridor has witnessed an evolution of transportation options over much of the 19th- 20th century, ranging from a primitive 1816-era toll turnpike, to 1838 steam trains, to 1901 electric interurban trollies, and 1936 bus service — none of which remain.  What happened to these transportation options?  They lost out to the automobile and “free” roads, and to Interstate 95 (originally the Richmond-Petersburg (toll) Turnpike of 1956-58 vintage.). Granted, most people aspire to drive, or be driven in private, or for-hire, automobiles, but we are seeing as close as Northern Virginia that if all personal mobility depended on automobiles, few of us – however affluent – would succeed in getting where we want to go in a timely manner.  Things have to change, starting at the public-policy level of local jurisdictions, such as Chesterfield County.

 

            Of course, the first transportation artery in the above-described corridor was the tidal James River, which continues to this day to function as a modest avenue of trade, commerce, and as a venue for recreational boating, but none of that comes free.  The U.S. Army Corps of Engineers annually budgets between four and five million dollars to cover the cost of James River dredging and other navigational aids.  This writer considers himself a friend of the James, environmentally as well as commercially.  This highlights another contrast in public policy.  Our elected representatives are willing to subsidize well-heeled users of the James, both personal and commercial, but not the low-income folks who want transit in the Jefferson Davis highway corridor. The fact that the James River continues to be a transportation resource is the direct result of federal policy and funding decisions. It is easier, it seems, to include James River navigation funding in a huge U.S. Corps of Engineers’ appropriation, than it is for Chesterfield Supervisors to fund transit.

 

            The point of all this is that public policy decisions – not just advances in transportation technology – created what we have in Virginia today, and public policy makers will define and establish what we are destined to have in the future.  It is for that reason that education of policy-makers, and opinion shapers in other leadership positions, is essential.  No less important is the participation of voting citizens in the transportation planning and funding process.  The latter step is often critical to the design, funding and development of a full range of energy-efficient, environmentally sustainable, transportation modal options.  This may not always prove favorable to rail, but we must get the facts and allow the facts to better inform transportation policy!

 

If rail is deemed to be an essential element of Virginia transport and mobility,

How do we preserve, maintain and enhance rail as a viable option for the future?

 

            In Virginia, and in adjoining states, only governors can provide the leadership to see that this is done.  It is worth recalling that rail development progress in the Commonwealth, over the past two decades, has been a direct result of gubernatorial initiative(s) with support coming from both Republicans and Democrats.  Some governors of some other states have, to varying degrees, done likewise.  There would be no more effective community of voices (which we do not yet have assembled) than a major appeal to congress by the chief executives of Virginia, Maryland, North Carolina and West Virginia, acting in concert.

 

            Currently, Virginia is fortunate to have a Secretary of Transportation, and a Governor, who might conceivably be favorably disposed to appoint a “Blue Ribbon” transportation-for-the-future commission to evaluate current trends in all modes of transportation, along with relevant macro-economic, demographic, social and environmental factors, all for the purpose of reconciling traditional responses to transport and mobility requirements with resources potentially available.   In the process, equitable accommodation of both commercial and citizen interests might require some new thinking.  Ideally, such a commission would recommend the best or better combination of solutions, not just respond to parochial modal “demands”. Distinguished members of such a commission, with appropriate staff support, would be asked to recommend broad transportation strategies, together with preliminary cost estimates, contrasting those costs with anticipated revenue sources.  Innovative recommendations concerning new revenue sources should be considered and addressed. The time horizon we envision might be 2020-2050.

 

            We are aware of the effort to accomplish something similar through the recent VTrans studies; however, it is this writer’s observation and opinion that there was not much innovation incorporated in the outcome.  If we have only technocrats from all the modes furnishing their off-the-shelf partisan forecasts – convened by uninspiring consultants using national data from the past – we are unlikely to get anything but more of same.  Therefore, were such a “Blue Ribbon” panel appointed and convened, we would envision fewer transportation “experts”, and more big-picture strategists.  We would prefer to see invited participants from Google, and Amazon — even Elon Musk — together with other leaders noted for futuristic thinking.  Our past practice has too often devolved upon the usual compliment of mid-level representatives from VDOT, DRPT, the Port, UPS, Maersk, CSX, NS, (to name but a few without prejudice), etc.  If we only hear from the practitioners involved in current planning and development we can predict that the outcome will look very much like the past.

 

            Much has changed since former Governor Mark Warner’s 2005 Commission on Rail in the 21st century.  Autonomous vehicle technology, including trucks, truck convoys and dedicated “truck-ways”, plus revolutionary new concepts in merchandise marketing, distribution and delivery; fewer independent international ocean shipping lines making fewer port calls, mega ships; drones, Uber and Lyft; demand toll pricing on highways in Virginia, and much more.  Intercity rail has been particularly destabilized in recent years by two hedge-fund attacks, one on Norfolk Southern and the other on CSX, the latter resulting in a very hostile take-over of one of Virginia’s two most important “partners” in intercity rail development.  The rail “world” has changed dramatically. Virginia’s position relative to collaborative Class ONE initiatives is now speculative at best, and quite worrisome to many.

 

            The CSX situation seems to grow more troubling every day.  Your writer is not alone in expressing alarm.  Despite CSX executive and corporate communications efforts to allay such concerns – most significantly those registered by captive shippers – it is difficult to find encouragement from our perspective.  Pragmatically, those customers of CSX, and maybe NS, have the strongest argument for stabilization of the alleged service failures and freight-rate gouging said to be occurring.  There are groups of rail shippers – customers if you will – who are actively seeking relief from the Surface Transportation Board. However, the STB is not functioning as it should due to vacancies on the Board, and perhaps for other reasons as well.  Surely, there are such aggrieved shippers here in Virginia worth hearing.  Has anybody inquired of them on behalf of the Commonwealth of Virginia?  Finally, rail labor – a group that conservative Virginia business leadership has always been wary of – is now expressing alarm about operational safety issues they attribute to the Harrison take-over of CSX.  How real is this issue?  Rail industry safety – including that of Amtrak – has certainly become a notorious subject in the media within the last year or more.  Shouldn’t the State of Virginia be interested enough to ascertain the facts?

 

            At a minimum, we need a clearer picture of the future of highway and rail, in particular, as well as the interaction between the two.  The Virginia rail development program which got its start in the Warner administration (2005) may or may not still be appropriate.  It is possible that Virginia is contemplating funding rail to a greater extent than will be justified in the future.  On the other hand, it may be that Virginia needs to do more to develop rail, if rail can produce results commensurate with public investment, and competitive with other modes.  That is the essence of the writer’s personal concern.

 

Who should be the messenger?

            That’s THE question.  We all know about access and how it is traditionally obtained.  Above all, the messenger must have conviction about his or her mission, as well as recognized personal credibility, plus “status”.  He or she need not be a person associated with transportation.  If the messenger genuinely feels the object of his mission is on behalf of the broad public interest, that would be a valuable asset.  In more eloquent words that these, we don’t care whose special interest ox is gored and whose is fattened, so long as the people of the Commonwealth of Virginia are well served. Rail advocates – or aviation, or highway, transit or ports – would likely be ineffective in undertaking the mission.

 

            The essence of our suggestion is to have a group of high-level thinkers and strategists take an unfettered look at how Virginia plans, funds, develops, promotes and delivers transportation services, and to recommend how the process might be reformed in order to achieve a more sustainable, more efficient, and more socially-acceptable system that better serves all constituent interests.

 

            Virginia has been through somewhat similar exercises in the past, but it seems appropriate – given rapid changes in transportation – to undertake to do it again.

            Needed:  a team to formulate search criteria and then recruit candidates for the messenger role.


Supplemental Notes 

 

Nationalization of railroads:  We know of no one today who seriously advocates nationalization of railroad companies.  While this approach enjoyed considerable support, and received some congressional consideration in 1919 and 1920, the concept is currently dormant and unlikely to be revived here in the U.S.  What is talked about in some circles – again without traction – is a quasi-public entity – call it an infrastructure company — privately operated under the auspices of the federal department of transportation, that would acquire control of all, or major portions, of the core of the U.S. rail network.  This has been proposed on a much smaller scale with regard to the Northeast Corridor and found to be difficult to accomplish, even when most of the Corridor is already owned and controlled by Amtrak.   Nevertheless, until such time a competition can be reintroduced into U.S. intercity rail service – both passenger and freight – we will be limited to the kinds of monopolistic opportunism prevalent today among the seven major U.S. Class ONE railroads.  As a result, the rail mode of transportation operates well below its maximum theoretical utility in the U.S.

 

Deregulation; U.S. railroad network, and shipper access, prior to 1980 and after:  The so-called Staggers Act of 1980, which ushered in the era of railroad deregulation, marked a fundamental change in rail freight transportation competition.  Prior to 1980, and before a series of major mergers, there were hundreds, perhaps a thousand, interchange points between the nation’s railroads.  While there were some locations (Hopewell, VA, for example) where two railroads directly served the same shippers, each road providing switching service over the same tracks, most shippers, even then, were physically served by only one railroad.  However, because of the availability of so many interchange points between railroads, and because, at the base level of the rail rate and division (of revenue) system, a shipper could specify the routing of his freight via almost any and all interchanges physically available.   However, most favorable freight rates were often restricted to certain routes. This may have been good for rail competition, but it was terrible from an efficiency standpoint.  For example, from Hopewell, VA to Martinsburg, WV, the former Allied Chemical plant at Hopewell could “route” a carload of chemical product: SAL (Richmond); RF&P (Potomac Yard, Alexandria); Southern Railway (Strasburg Jct. VA); and B&O to Martinsburg.  While this was a very circuitous route, it gave two intermedia railroads a “piece” of the business.  Alternatively, Allied Chemical could have routed its tank car of chemicals: N&W to Shenandoah, Jct. WV; and B&O to Martinsburg.   Today, neither Strasburg, nor Shenandoah, Jct. is physically open as an interchange point.  Instead, if the shipment is tendered to SAL’s successor at Hopewell, CSX, it will travel all the way to Martinsburg via CSX (but still over the former RF&P to reach the former B&O.).  N&W’s successor, Norfolk Southern, which had a competitive route to reach the former B&O at Shenandoah, Jct. is likely unable to participate via any other “open” interchange.  NS has likely outmaneuvered CSX in many other comparable situations.  The railroads think they are better off, but some shippers disagree, as many former competitive routing options have been eliminated.  The key to how rail freight moves today is which road originates the load, and which terminates that load.  If the same carrier originates and terminates the shipment, it is almost certain that no other railroad is going to participate in the movement.  Thus, current arguments by some shippers that rail competition has been eliminated, or at least greatly diminished.  The Association of American Railroads, on the other hand, asserts that all this has actually strengthened and preserved rail service.  As usual, there is truth to both arguments.

 

Reciprocal Switching: Prior to the flight of rail-served industry – especially distribution – to the suburbs, many rail customers tended to be concentrated in or near the urban core of cities.  We can’t speak for the nation, but in Virginia, notably Richmond and Hampton Roads, each served by multiple “line-haul” railroads, there was an established reciprocal switching zone.  At Richmond, all five of the line-haul carriers placed and pulled freight cars at industry served by them, for account of any of the other roads.  In Hampton Roads, this practice was greatly facilitated by the Norfolk-Portsmouth Belt Line Railroad, which was owned in equal shares by all eight or nine line-haul carriers serving the larger region.  Being located in the reciprocal switching zone, defined more by listing in the switching tariff than by a map, was a coveted status for rail shippers, as it afforded maximum access to rail competition.  As shippers moved “out of town” so to speak, the serving railroad – if there was one – made sure to indicate that such locations was not “open” to reciprocal switching.  While there is still a small amount of reciprocal switching, the practice has largely been eliminated, and with it competitive rail freight service.

 

Operating Ratios and an obsession with driving OR to the lowest level possible:  As explained in the body of this paper.  A railroad’s operating ratio (“OR”) represents the fraction – expressed as a percentage – of gross revenue consumed by operating expenses.  It goes without saying that the lower the better, unless the quest for an unrealistically low OR leads to a situation where an otherwise viable business is ultimately transformed into what might uncharitably called a liquidation strategy.  Increasing “free cash flow” is largely, but not exclusively, the primary objective of lowering ORs.  Since taxes and debt service have a superior claim on cash, free cash flow is essentially what remains for discretionary uses, including corporate dividends, stock repurchase programs and capital expenditures.  We note that the most successful businesses are generally not the ones with the lowest OR.  If franchise enhancement and business development are among the primary corporate objectives currently being pursued, it is a virtual certainty that the enterprise’s OR will not be the lowest among its peers.  Conversely, if your company has an unusually low OR, they may not have a sustainable business plan.  This is best illustrated by what appears to be occurring at CSX today.  The new management at CSX, while openly obsessed with achieving an unrealistic long-term OR, has announced an increase in the dividend, a greatly reduced capital expenditure (“CAPEX”) budget, and an aggressive stock repurchase program.  In the opinion of this writer, the current CSX strategy will require, as the management team appears to acknowledge, shrinking and downgrading the franchise – rather than developing it – and lowering the prior management’s standards of maintenance of the network.  Note:  The new executives claim that even with a lower CAPEX budget, they will keep track maintained, but the railroad industry has a long history of executives who have tried and failed to deliver, with sometimes most regrettable consequences.  We remain highly skeptical.

 

Influence of the “Wall Street-types”:  As we have recently seen, with the surprising collapse of GE stock, it is difficult for even the better informed corporate watchers to actually know what is going on inside a large corporate enterprise.   And so it is with those on Wall Street, and elsewhere, who attempt to follow railroad stocks.  The writer’s limited experience and exposure acknowledged, it is nonetheless apparent to him that the “analysts” know little more than what they are told by the corporate finance and investor relations folks upon whom they depend.  The job of the corporate types is, of course, to convey good news, not bad.  A railroad analyst, like all others, depends upon access and information.  We have seen an example in the past where an analyst  who dared to produce a critical analysis was “punished” by limitations on access and cold-shoulder treatment by the very corporate finance folks from whom the coveted “straight scoop” is thought to otherwise be obtainable.  We are also aware of at least one long-surviving rail industry “expert” from the “Street”, who habitually “puts lipstick on the pig” so to speak.  If anyone really wants to know what is going on where the business of the company is actually transacted, he or she should talk with the crews who actually perform and deliver the transportation service.  But this could jeopardize the career of the analyst, and perhaps even the rank-and-file employee who is daring enough to tell it like it is.  To sum up, it is this writer’s personal opinion that a high-level of skepticism is in order when reading accounts of management’s “investor-day” in New York (CSX’s of March 1 being a good example.)  The corporate line may be honest in an aspirational sense, but the story spun by the presenters is often at odds with reality on the tracks.

 

Short Lines: As Class ONE railroads shed branch and secondary lines over the last three decades, the so-called “short lines” stepped in to acquire many of the jettisoned rail lines. On balance, this has probably been a good thing even though the disaggregation of rail system lines added some friction to the overall network.  The best true “short line” in Virginia – based upon local ownership, management and dedication to advancing the rail mode of transportation – is the Buckingham Branch Railroad (“BBRR”), owned and operated by the Bryant family.  However, the term “short line” hardly applies to the BBRR because it operates well over 200 miles of important Virginia rail infrastructure.  No other short line in Virginia approaches the importance and status of BBRR.  Two Virginia short lines are a locally-owned,  poultry feed carrier, Shenandoah Valley Railroad, and the other, a barely-alive remnant of the former Pennsylvania Railroad on the Eastern Shore.  All others, to our knowledge, are owned, and or operated, by big railroad corporate parents; namely, the surviving but now nominal Norfolk-Portsmouth Belt Line (“NPBL”), owned by Norfolk Southern and CSX, or lines of Genesee & Wyoming (“G&W”), which operates in more states than either CSX or NS.  The most important G&W operation in Virginia is the 27-mile long Commonwealth Railroad, which functions as the connection between Virginia Port Authority’s International Gateway terminal and CSX and NS in Suffolk.  G&W also operates the 56-mile North Carolina & Virginia (most of which in North Carolina) serving the important Nucor Steel mill near Tunis, N.C.  In addition, G&W operates the 69-mile long Chesapeake & Albemarle (most of which is also in N.C.), extending down to Elizabeth City.  Virginia short line operators organized themselves earlier than the Class ONE carriers in pursuit of State financial assistance, initially under the banner of “rail preservation”.  There is no question but that Virginia short lines are an important adjunct to the larger roads, and to the State’s economy.  They have shown themselves capable of attracting and serving new rail customers. However, some of the grants made to short lines by DRPT appear questionable.  The most notorious example is that of the so-called Norfolk-Portsmouth Belt Line, owned by our two Class ONE freight railroads.  The Belt Line functions as in integral part of those two large, prosperous, systems, and in the view of this writer there is little or no justification for public funding going into the NPBL.  On the other hand, the BBRR’s operation of the CSX-owned 200-mile line between Richmond, Charlottesville, Staunton and Clifton Forge is important for reasons extending far beyond current levels of business.  The line not only needs to be preserved for strategic public transportation purposes, it needs additional public investment in order to enhance its utility. One significant problem with public funding of the CSX-owned line is the fact that ultimately it could revert to CSX.  BBRR needs to own the line. Finally, operators such as BBRR and G&W represent Virginia’s best line of defense against future Class ONE system rationalization plans.  This assumes, however, that they can obtain access to more than one connecting railroad, if one is available, and make fair and equitable commercial arrangements with Class One connections.

 

Coal:  If a researcher had the time and access to all relevant historic records, it would be this writer’s guess that coal tonnage probably represented at least half of all freight traffic handled by rail in Virginia, from the 1830’s to the present time.  On a randomly-selected year-by-year approach, we have looked at coal vs. other-freight-traffic, using early 20th century State Corporation Commission (“SCC”) reports.  Even today, with a temporary revival of the export market, CSX and Norfolk Southern coal traffic, moving to Hampton Roads, dwarfs the tonnage associated with other rail freight traffic flows. This non-scientific search is the basis for the writer’s guesstimate. Yet, today, coal production and consumption are rapidly declining.   A possible exception might be metallurgical coal, used in steel production.  Domestic demand for thermal coal seems almost certain to virtually dry up altogether by mid-21st century.  Dominion Energy has closed, or has scheduled the phase out, of at least four major coal power plants in recent years, as well as number of smaller coal-fired plants, all of which have been rail-served.  In fact, by our reckoning, Dominion’s largest coal consuming plant, the Chesterfield power station, will soon be the only non-mine-mouth coal-burning Dominion power-producing station in their “Virginia” system.  It is highly unlikely that there will ever be another coal-fired plant constructed in Virginia, and very few elsewhere.  These changes are already having a significant impact upon Virginia railroads, and before we are done, the effect will likely be profound.  Already, in far southwest Virginia, CSX’s former Clinchfield Railroad, consisting of about 70 miles in Virginia, lies mothballed. Clinchfield was for years the rail equivalent of I-77, moving lots of coal and other traffic between the mid-west to the southeast.  Illinois and Indiana coal for South Carolina power plants now moves on CXS’s former C&O line to Richmond before heading south.  One cannot envision a long-term future for Norfolk Southern’s Clinch Valley line, and many others.  The former C&O James River route (now CSX) between Lynchburg and Richmond will undoubtedly become the object of future line retention or abandonment evaluation.  This is but a teaser of possible rail line rationalization possibilities.  So, the next time you hear a VDOT consultant tell about the millions of rail ton-miles attributable to coal, in the nation or in Virginia, remember that all of that is likely to change, faster than we want to think.  As for Hampton Roads coal dumping for export, that has always been cyclical, and it promises to get even more so with changing world demand for coal and sourcing options. We have always heard coal experts say that the U.S., as a world coal supplier, is the last tapped when supply is constricted, and the first cut off when the supply crisis passes.  We suspect Hampton Roads coal exports will continue for quite a while, with sharp ups and downs, but that business will not be with us forever.

 

Virginia Interstate Highways:  By interstates we refer, of course, to the federally-designated Eisenhower Interstate Highway system, of which there are said to be about 3,000 miles in Virginia.  Virginia railroad mileage also approximates 3,000 miles.  But there the similarities end.   The interstates represent our best highways, in terms of capacity and potential speed.  While our rail mileage, by comparison, combines some of the best and some of the worst railroad conditions.  As we have cautioned before in this paper, we do not regard our rail network as presenting any notorious safety risks.   However, as much one-third of current Virginia rail miles are relatively slow-speed, low-capacity, limited potential assets.  Even the best of Virginia rail network generally functions below theoretical capacity for reasons of economy of operations and maintenance.  However, the defining difference in potential utility is the fact that Virginia’s 3,000 miles of interstate are fed and relieved by a 60,000 mile State highway system, a network that never shrinks.  Moreover, the highway system facilitates and encourages development of additional demand for travel and transportation.  The contrast with rail, which has no rail feeder system (short line mileage already included), could not be more stark.   At best then, the potential for rail as a reliever of highway demand in Virginia appears to be low, at best.  In fact, the potential for movement of more people on rail, in lieu of highway, would appear to be better than for freight.  People get themselves to the rail station, and get themselves aboard, while cargo must be moved to the rail head, loaded on rail, transported, unloaded, and finally delivered to the ultimate point of consumption.

 

Transportation Facts and Statistics:  Throughout this paper the writer has used those facts and statistics most conveniently available to him.  Such facts and statistics may or may not coincide exactly with other sources.  Transportation statistics on the State level are difficult to obtain, although we are quite sure that VDOT has many more than the average citizen can readily access or even obtain with some effort.  Rail transportation statistics are notoriously difficult to come by, as the railroad companies construe even the most obvious “public” information as “proprietary”.  The reason for referencing early 20th century S.C.C. reports in an earlier note is that rail reporting to the S.C.C. and to DRPT has been greatly reduced over the years, the railroads claiming this to be an unnecessary burden.  Therefore, few know much about the rail business in Virginia, even though we have given them, or committed to give them, upwards of a billion dollars.  This great deficiency must be corrected if Virginia’s rail development program is to move forward to higher levels of public-private activity.


 

Disclaimer:  This paper is the work of Richard L. Beadles, who assumes sole responsibility for statements of fact and for assertions made.  Nothing herein should be ascribed to any other organization, including those rail advocacy organizations with which Beadles has in the past, or is now associated. Beadles’ motivation is simply to raise concern about the current state of the rail industry and the effectiveness of Virginia’s rail development program, which the writer and many others have long championed.  It has been Beadles’ impression that most rail advocates are fearful that closer examination of the Virginia rail program, administered by DRPT, might lead to a further reduction of available funding.  If Beadles could have his wishes fulfilled, we would improve and hopefully expand the State rail program.   However, we owe it to ourselves, and to the taxpayers of Virginia, to get the best results possible in return for our public investments.


BACK COVER PHOTO EXPLANATION

Amtrak train No. 94, Newport News to Boston, on reconstructed No. 3 track, Dumbarton O.G., north end of Acca Yard. Construction equipment preparing subgrade for “new” (actually restored 1945-1965) No. 4 track.  When completed in late 2018, tracks No. 2, 3, and 4 will be routed around the west side of the Yard, but we now understand that none of these tracks will be exclusively dedicated to passenger train movements.  Thus freight train interference with passenger may not be significantly reduced.  On the other hand, CSX will gain two additional former main tracks running through the middle of the Yard, unencumbered by passenger train interference.  At this point there appears to be more benefit for CSX than for Amtrak. We shall see.

 

 

 


FRONT COVER PHOTO EXPLANATION 

A southbound CSX intermodal train approaches Acca Yard on No. 3 track, at Dumbarton Road O.G., summer 2017.  Note: “O.G” refers to highway overpass, “over grade of railroad”.

CSX mixed freight on No. 1 track, preparing to depart northward.  Note predominance of covered hoppers, gondolas, and tank cars.  Very few boxcars.

Both freight trains about 10,000 + feet in length.

New concrete crossties, rail and turnout components, assembled on grade of former No. 4 track, awaiting lateral shift to replace existing No. 3 track structure.  Once that was done, another new track was constructed to represent No. 4 track, which was upgraded to “main track” status ostensibly to facilitate faster passenger train moves between Amtrak’s Staples Mill Road station (Hilliard Road O.G.) and “AY”, at the south end of Acca.   However, since substantial completion of “new” No. 4, we have noticed several CSX freight trains standing on this “by-pass” around the west side of Acca Yard while awaiting crew change.  This is a carry-over of past practice, and may be explained by the fact that the “AY” track reconfiguration is not yet complete.  If, however, regular use of the new “passenger” tracks by freights is contemplated, it would raise questions about representations that passenger trains will encounter less conflict with completion of the Acca-area project.

This $130 + million Improvement project extends from north of Hermitage Road (Henrico) at-grade crossing, north of Amtrak’s station, to a point south of Collier Yard, Petersburg, a distance of more than 30 miles.    Virginia is reportedly paying about $113 million of total.  Understand this large construction project was a requirement of CSX in order permit future addition of the second and third Amtrak trains to and from Norfolk.  However, it is obvious that many benefits accrue to CSX freight.  A win-win, provided CSX dispatching is equitable.

At and around Acca Yard, the new track arrangement was intended to separate, as far as possible, passenger trains and freight, and facilitate expedited movement of each, as result of flexibility derived from have additional routing options.   However, dispatching will determine how the new layout is utilized.  Given changed priorities at CSX, attributed to last year’s hostile take-over by the Harrison team, we will have to await the outcome.

So far, are things turning out as intended?  Time will tell, provided somebody is watching the CSX dispatching for and on behalf of Amtrak and the Virginia Department of Rail and Public transportation.

Photo and explanation by Dick Beadles.