aashto freight rail study support services (2018) · • freight rail is crucial to the...

AASHTO Freight Rail Study Support ServicesAugust 2018

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Acknowledgements

Thanks to our Council on Rail Transportation for their hard work in readying this report, with special recognition to the following members:

• Richard Jankovich, Connecticut DOT• Robert Lee, Florida DOT• Kristin Brier, Indiana DOT• Katherine England, Indiana DOT• Michael Riley, Indiana DOT• Amanda Martin, Iowa DOT• Diane McCauley, Iowa DOT• Edward McFalls, North Carolina DOT• Paul Worley, North Carolina DOT• Matt Dietrich, Ohio DOT• Louis Jannazo, Ohio DOT• John Jay Rosacker, Oklahoma DOT• Pete Burrus, Virginia DOT• Jeremy Latimer, Virginia DOT• Stephen Smiley, Virginia DOT• Chris Smith, Virginia DOT• Katelyn Dwyer, AASHTO

We would also like to thank WSP USA Inc. for the development and production of this report.

© 2018 by the American Association of State Highway and Transportation Officials. All rights reserved. Duplication is a violation of applicable law.

ISBN: 978-1-56051-711-5 Pub Code: FRBL-2-OL


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Contents

Background to This Document ...................................................................................................................... 1

Purpose of This Document ............................................................................................................................ 2

Are the Findings of the 2002 Report Still Valid? ........................................................................................... 2

Chapter 1: Benefits of Freight Rail and Increasing Freight Rail Market Share .............................................. 3

Background ............................................................................................................................................... 3

Parameters Used to Estimate the Benefits of Rail .................................................................................... 4

Safety ........................................................................................................................................................ 4 Pavement Maintenance ........................................................................................................................ 6

Pollutant Emissions ............................................................................................................................... 7

Congestion ............................................................................................................................................ 9

Shipper Savings ....................................................................................................................................... 10

Growing Rail Mode Share ....................................................................................................................... 11 Approach ............................................................................................................................................. 11

Impacts of Mode-Shifts ........................................................................................................................... 14 Comparison to 2002 Freight Rail Bottom Line Report ........................................................................ 15

Chapter 2: Changes to the Rail Industry since the 2002 Freight-Rail Bottom Line Report ......................... 17

Rail Traffic Trends ................................................................................................................................... 17

Financial Performance ............................................................................................................................ 19

Capital Expenditures ............................................................................................................................... 23

Short Line Railroad Trends ...................................................................................................................... 24 Chapter 3: The Impact of Rail Service Issues by Industry ........................................................................... 26

Differing Industry Concerns Regarding Rail Service ................................................................................ 26 Types of Rail Service ............................................................................................................................ 26

Rail Service Patterns ........................................................................................................................... 30

Equipment Ownership and Type ........................................................................................................ 32

Shipper Size and Location ................................................................................................................... 35

Customer Relationship with the Railroad Industry ............................................................................. 38

Relative Reliance on Rail ..................................................................................................................... 42

Summary of Factors that Influence Rail Needs ....................................................................................... 44

Illustrations of How Industries Use Rail .................................................................................................. 48

Summary of Implications ........................................................................................................................ 48 Chapter 4: Parameters for State-Railroad Public Private Partnerships (P3/PPP) ....................................... 50


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Role of Public and Private Investment and Areas Where Joint Funding Can Be Appropriate ................ 50

Joint Funding Opportunities ................................................................................................................... 51 Public/Private Partnerships and Private Returns ................................................................................ 53

Funding and Financing ........................................................................................................................ 59

Projects that Must be Funded and Projects that Might be Funded ................................................... 59

PPPs beyond Railroads ........................................................................................................................ 60

Conclusions—Role of PPPs .................................................................................................................. 60

How Railroads Evaluate Infrastructure Investments .............................................................................. 61

Maintenance, Rolling Stock, and Government Mandates .................................................................. 62

Evaluating Expansion and Other Special Projects ............................................................................... 65

Projects Best Suited for Public Private Partnerships .......................................................................... 69

Assessing Likelihood Project Would Have Been Privately Funded without Public Support ............... 70

Differences between Class I and Class II/Class III Evaluations of Infrastructure Projects .................. 72

Conclusions: How Railroads Evaluate Infrastructure Projects ............................................................ 72

Assessing the Public Need for a Project .................................................................................................. 72 Public Sector Approaches to Evaluating Freight Projects ................................................................... 72

Examples of Evaluation Methodologies .............................................................................................. 74

Drivers of Public Benefits .................................................................................................................... 78

Quantification of Benefits ................................................................................................................... 80

Deficiencies of Benefit/Cost Analysis .................................................................................................. 82

Public and Private Benefits ................................................................................................................. 82

Economic Impacts ............................................................................................................................... 82

Project Monitoring .............................................................................................................................. 83

Best Practices in Evaluating the Public Benefits of Projects ............................................................... 84

Case Studies of Public/Private Partnerships ........................................................................................... 84

Crescent Corridor (2009–ongoing) ..................................................................................................... 85

Heartland Corridor (2007–ongoing) ................................................................................................... 87

Heartland Co-Op ................................................................................................................................. 89

Garden City and Great Bend Transload Facilities ............................................................................... 90

Colton Crossing ................................................................................................................................... 92

Port of Tucson Container Export Rail Facility ...................................................................................... 95

Wrap Up—Assessing PPP Opportunities ................................................................................................ 96


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Figures Figure 1: National Freight Plan Modal Forecast ......................................................................................... 13

Figure 2: Mode-Shift Scenarios from Truck to Rail ..................................................................................... 14

Figure 3: Ton-Miles of U.S. Freight by Mode (Millions) .............................................................................. 17

Figure 4: Cumulative Percent Change in Rail Traffic since 2000 ................................................................. 18

Figure 5: Railroad Revenue per Ton-Mile in Constant 2011 Dollars ........................................................... 20

Figure 6: Railroad Operating Ratio .............................................................................................................. 21

Figure 7: Comparison of Class I Railroad Industry Rate of Return on Net Investment and STB Cost of Capital ............................................................................................................................................. 22

Figure 8: Cumulative Percent Change in Railroad Stock Prices and S&P 500 since June 30, 2000 ............ 23

Figure 9: Railroad Capital Expenditure (Millions 2011 Dollars) .................................................................. 24

Figure 10: Short Line and Regional Railroad Revenue per Mile in Constant 2011 Dollars, Carloads per Mile ........................................................................................................................................ 25

Figure 11: Manifest Train ............................................................................................................................ 27

Figure 12: Unit Grain Train .......................................................................................................................... 28

Figure 13: Intermodal Train ........................................................................................................................ 29

Figure 14: Percentage Change in Weekly Average Carloads, Containers, and Trailers Originated by Month by Major U.S. Railroads .............................................................................................................. 32

Figure 15: North American Box Car Fleet (000’s) ....................................................................................... 32

Figure 16: Guidelines for Rail Service to New or Modified Industry Locations on Union Pacific’s Mainline ........................................................................................................................................ 38

Figure 17: Average Train Speed by Train Type—Miles per Hour ................................................................ 40

Figure 18: Average Dwell Time at Origin for Unit Train Movements—Hours ............................................ 41

Figure 19: Class I Railroad and Genesee & Wyoming, Inc. Estimated 2017 Capital Expenditure Budgets (Billions) ........................................................................................................................................ 51

Figure 20: Venn Diagram of Public/Private Partnerships ........................................................................... 52

Figure 21: Framework for Public and Private Funding Freight Rail Infrastructure Projects ....................... 53

Figure 22: Capital Expenditure as % of Revenue for Various U.S. Industries, Average 2011-2015 ............ 62

Figure 23: Categories of Capital Expenditure ............................................................................................. 62

Figure 24: The Railroad Capital Planning Process ....................................................................................... 66

Figure 25: Priority Matrix for Railroad Investments ................................................................................... 67

Figure 26: Project Categories Most Suitable for Public Investments, Where Impact and Need Are Viewed from the Railroad’s Perspective .............................................................................................. 69

Figure 27: Heartland Co-Op ........................................................................................................................ 89

Figure 28: Great Bend Transload Ribbon Cutting ....................................................................................... 90


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Figure 29: Colton Crossing .......................................................................................................................... 92

Figure 30: Port of Tucson Ribbon Cutting ................................................................................................... 95

Tables Table 1: Truck Crash and Rail Accident Totals .............................................................................................. 5

Table 2: Truck Crash and Rail Accident Rates per 10 Billion Ton-Miles, 2014 .............................................. 5

Table 3: Monetized Accident Costs ............................................................................................................... 6

Table 4: Valuation of Truck Pavement Damage ............................................................................................ 7

Table 5: Truck Emissions Rates ..................................................................................................................... 7

Table 6: Rail Emissions Rates ........................................................................................................................ 8

Table 7: Rail Fuel Efficiency ........................................................................................................................... 8

Table 8: Comparison of Truck and Rail Emission Rates ................................................................................ 8

Table 9: Non-CO2 Emission Costs ................................................................................................................. 9

Table 10: Social Cost of Carbon at 3 percent Discounting (2015 $ / metric ton) ......................................... 9

Table 11: Valuation of Truck Marginal Congestion Cost, 2015 $ ................................................................ 10

Table 12: Calculation Assumptions ............................................................................................................. 12

Table 13: Impacts of Mode Shifts over 30 Years ......................................................................................... 15

Table 14: Social and Private Benefits of Mode Shifts over 30 Years Discounted @ 7% (Millions) ............. 15

Table 15: Comparison between 2002 Freight Rail Bottom Line Report and Current Update .................... 16

Table 16: Changes in Freight Rail Tonnages 2000–2015 ............................................................................ 19

Table 17: Loaded Transit Times, Variability, and Total Cycle Times by Rail Service ................................... 27

Table 18: Usage of Unit Train Service by Industry ...................................................................................... 29

Table 19: Potential Modal Comparative Advantage by Market ................................................................. 29

Table 20: Industry Usage of Rail Services ................................................................................................... 30

Table 21: 2014 Average Percent Absolute Change in Carloads Originated by Commodity from Western Trunk Line Territory for Commodities over 400,000 Carloads ............................................ 31

Table 22: Car Ownership by Car Type, 2013 ............................................................................................... 34

Table 23: Car Ownership by Shipper Industry ............................................................................................ 35

Table 24: Canadian Shippers by Size and Traffic Volume ........................................................................... 36

Table 25: Volume by Location of Typical Shipper ....................................................................................... 37

Table 26: Rail Modal Share for Moves over 500 Miles (Rail Percentage of 2015 Tons Shipped) ............... 43

Table 27: Relative Industry Reliance on Rail for Long-Distance Shipments ................................................ 44

Table 28: Summary of Factors that Influence Industry Railroad Needs ..................................................... 45


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Table 29: Relative Importance of Rail Needs by Industry ........................................................................... 47

Table 30: Railroad Service Strategies .......................................................................................................... 54

Table 31: Railroad Service and Investment Strategy .................................................................................. 55

Table 32: Public Role Depending on Profitability and Risk ......................................................................... 55

Table 33: Sample Projects and Private Sector Profitability ........................................................................ 57

Table 34: Sample of State Project Evaluation Methodologies .................................................................... 78

Table 35: Monetary Values Performance Measures, Translation Parameters, Monetary Values per Unit ........................................................................................................................................... 81

Table 36: Colton Crossing Performance Measures, Targets, Status as of 2014 ......................................... 93


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Background to This Document In 2002 AASHTO published the Freight-Rail Bottom Line Report (2002 Report). That report found that:

• If all freight carried by rail were shifted to trucks, this would add 92 billion vehicle-miles-of-travel to the highway system and cost federal, state, and local transportation agencies an additional $64 billion over a 20-year period.

• With the assumption that all freight carried by rail were shifted to trucks, railroad customers would pay an additional $1.4 trillion in freight charges over a 20-year period.

• Freight rail is crucial to the competitiveness of U.S. industries in international trade, and provides environmental health and safety benefits, and is vital in the event of national emergencies.

• Freight rail productivity had increased since the deregulation of the industry in 1980 and freight rates had fallen, but productivity gains and competitive rates were not sufficient to rebuild rail market share and provide railroads with sufficient revenue for investment in required assets.

• Rail productivity improvements had primarily accrued to shippers and the economy in the form of rate reductions, rather than to the railroads and their investors. Railroads were profitable enough to operate but could not cover their capital costs, let alone grow rapidly.

• Without investment from external sources, railroads were projected to lose market share. • Relatively minor investments in the rail network would be more than compensated by resulting

public benefits. • Traditionally, public participation in rail system investments addressed local issues: grade

crossings, branch lines, and commuter rail service. There was a need to treat the key network capacity issues: nationally significant corridor choke points, intermodal terminals and connectors, and urban rail interchanges.

• A “market-driven evolution” of the freight rail system would relieve little of the projected congestion on the highway network, whereas a “public-policy-driven” expansion could produce a rail industry that provides cost-effective transport needed to serve national and global markets, relieve pressure on overburdened highways, and support local social, economic environmental goals.

• This requires a new partnership between railroads, the states, and the federal government.

Whether the 2002 Report was influential or whether it simply reflected prevailing sentiments, the publication of the study was followed by a number of high-profile partnerships similar to that which the report prescribed, including,

• Intermodal rail clearance and capacity improvement projects, such as the Heartland Corridor, National Gateway, and Crescent Corridor initiatives;

• Major rail-rail crossing improvements such as the Colton Crossing and Tower 55 initiatives; • The Chicago Region Environmental and Transportation Efficiency Program to de-bottleneck

Chicago; • Numerous individual intermodal-related public/private partnerships across the nation.


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Purpose of This Document The primary purpose of this document is to revisit the earlier report to determine if the earlier findings are still valid given the changes to the economy and rail industry that have occurred over the intervening decade and a half since publication of the report, and to provide further guidance to the role of freight rail public/private partnerships. Additional questions to be explored are:

• Which industries are most impacted by publicly funded improvements to rail infrastructure? • When are public/private partnerships appropriate, and how can states assess public/private

partnerships?

Are the Findings of the 2002 Report Still Valid? In the most important aspects, yes, the findings of the 2002 Freight Rail Bottom Line Report are still valid.

• Relatively minor investments in rail infrastructure yields major public benefits. This will be explored in Chapter 1 of this report.

• There is still a role for the public/private partnerships for nationally significant rail network projects, although this may not necessarily be a top priority.

However, much has changed since the 2002 Report. At the time rail traffic volumes seemed to be growing relentlessly. Since that time, freight volume trends are less consistent, and overall rail volumes are much the same as they were back then. Another important development has been what industry watchers refer to as the “Railroad Renaissance”. Class I railroads of today exercise more pricing power, are more profitable, and are better able to invest than was the case in 2002. These changes are explored in Chapter 2 of this report.

Because it is no longer necessarily valid to assume that Class I railroads require public sector support to supply adequate general network capacity, it is important to consider the value of public/private partnership across different types of freight rail projects. For some industries, railroads’ mainline capacity may not be shippers’ top concern. Chapter 3 of this report explores how different shippers experience the rail industry in different ways and how different shippers benefit from different types of rail infrastructure projects.

A more nuanced approach toward public/private partnership is now required to evaluate public/private partnership opportunities. It cannot automatically be assumed that all potential partnerships are appropriate. In some cases, projects may best be funded by the private sector alone. Chapter 4 explores the parameters of when public/private partnerships are appropriate and provides state agencies with tools to assess potential opportunities.


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Chapter 1: Benefits of Freight Rail and Increasing Freight Rail Market Share Background Rail is a key component of many shippers’ supply chains. When railroad transportation options are not available or perform poorly, this harms the competitiveness of U.S. industry. Conversely, a well-functioning U.S. rail network supports economic development. Rail connects locations within the U.S. to international markets. For example the Association of American Railroad estimates that railroads carry about a third of U.S. exports.1 Economic development officials frequently distinguish between “tradable” and “non-tradable” industries. Tradable industries are those that are subject to international competition, while non-tradeable industries are not subject to international competition. The primary tradable industries are agriculture, forestry, and fishing; mining; and manufacturing. These are also the industries that are in many cases heavily reliant on rail. Therefore, rail is a key component of the competitiveness of U.S. industry in international trade.

Rail also provides public benefits. When shippers make modal decisions, their decisions not only impact the direct supply chain costs of bringing goods to market, but the public at large also faces costs as a consequence of the decisions that shippers make. Some freight modes emit more air pollutants than others, or have a higher tendency to cause accidents and loss of human life. These social costs have a direct and measurable impact on society, although they are mostly invisible to shippers because they are not reflected in the prices paid in transportation markets.

The Government Accountability Office (GAO) has estimated that the per-ton-mile social costs of trucking are six times greater than for rail.2 This finding echoes a long history of studies that have shown that rail has substantially lower social costs, in total, than trucking.3,4,5,6

1 Association of American Railroads, “The Economic Impact of America’s Freight Railroads,” May 2015, https://www.aar.org/data/economic-impact-americas-freight-railroads. 2 GAO, (2011), A Comparison of the Costs of Road, Rail and Waterways Freight Shipments That are Not Passed on to Consumers. 3 Frokenbrock, D. J. (1998) External Cost of Truck and Rail Freight Transportation, The University of Iowa Public Policy Center, Transportation & Vehicle Safety Policy. 4 Winebrake, J. J., Corbett, J. J., Falzarnano, A., Hawker, J. S., Korfmacher, K., Ketha, S., and Zilora, S. (2008), Assessing Energy, Environmental, and Economic Tradeoffs in Intermodal Freight Transportation, Journal of the Air & Waste Management Association 58 (8), 1004-1013. 5 Deloitte Access Economics (2011). The True Value of Rail, the Australasian Railway Association, June 3rd 2011. 6 TRC Consulting (2013). Maintaining a Track Record of Success: Expanding Rail Infrastructure to Accommodate Growth in Agriculture and Other Sectors


https://www.aar.org/data/economic-impact-americas-freight-railroads/

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Parameters Used to Estimate the Benefits of Rail The U.S. Department of Transportation (USDOT) has provided guidance to states regarding appropriate parameters for evaluating rail projects since the federal government first became involved with railroad preservation in the late 1970’s and early 1980’s. The Federal Railroad Administration (FRA) released the “Benefit-Cost Guidelines for Rail Branch Line Continuation Program” in 1980, and the “FRA Simplified Benefit-Cost Methodology” in 1982 and then the “Benefit-Cost Methodology for the Local Rail Freight Assistance Program” in 1990.

More recently, the Transportation Investment Generating Economic Recovery (TIGER) program, which began in 2008, created a new set of USDOT sanctioned values and standards by which to evaluate freight rail projects. The TIGER Program was created following the economic recession of 2008 as a counter-cyclical stimulus to the economy. Since its inception it has been used successfully to help fund a variety of freight rail projects, including the CREATE project in Chicago, Norfolk Southern’s Crescent Corridor, the CSX National Gateway, the Tower 55 Multimodal Improvement Project, and many more. This program awards grants competitively on a yearly basis.

Given the recent importance of the TIGER program in funding freight rail projects, the program’s guidance for evaluating rail projects cannot be ignored. In fact, the substantial thinking that USDOT, private railroads, academics, and consultants have applied to the evaluation of public benefits from rail freight projects under TIGER represents a valuable platform for identifying and developing standard approaches for states to utilize in the future.

The key TIGER public benefit categories, as they are relevant to freight rail, include:

• Safety (reduction of vehicle crashes); • State of good repair (reduction of highway pavement damage); • Sustainability (reduction of harmful pollutants); • Livability (reduction of highway congestion); and • Economic competitiveness (reduction of shipper costs for transportation services)

Safety Rail is a relatively safe mode of transportation, especially when compared with trucking. As can be seen in Table 1 and Table 2 following, trucks are involved in many more accidents each year in total and on a, per ton-mile basis. On average there are 25 times more truck-related accidents than rail accidents. Moreover, trucks are involved in five times more fatal accidents than rail. Except at crossings, freight trains are physically separated from the millions of passenger vehicles operating on the nation’s road network.


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Table 1: Truck Crash and Rail Accident Totals

Type 2011 2012 2013 2014 Average per Year

Total Rail Fatalities 646 643 668 746 676

Total Rail Injury Accidents 8,424 8,432 8,745 8,588 8,547

Total Rail Damage Only Accidents 2,438 1,981 2,233 2,664 2,329

Total Truck Fatality Accidents 3,341 3,464 3,541 -- 3,449

Total Truck Injury Accidents 60,000 73,000 69,000 -- 67,333

Total Truck Damage Only Accidents 210,000 241,000 254,000 -- 235,000 Source: FRA7 and FMCSA 20148 *2014 data for truck was not available at the time of this publication. Truck includes single-unit and combination heavy-duty vehicles. Rail includes switching and short-line operations. Rail has a significantly lower accident rate compared to trucking, as can be seen in Table 2. To transport the same freight the same distance by truck compared to rail, risks of fatal accidents are 3.2 times higher, 4.9 times higher for injury accidents, and 6.2 times higher for property damage only accidents.9 Diverting freight to rail significantly reduces the frequency of accidents.

Table 2: Truck Crash and Rail Accident Rates per 10 Billion Ton-Miles, 2014

Type Rail Truck

Fatal Accidents per Ton-Mile 3.59 11.3 Injury Accidents per Ton-Mile 45.4 221 Damage Only Accidents per Ton-Mile 12.4 771

Source: WSP|PB Analysis, using ton-miles from the National Freight Strategic Plan, USDOT

The federal government has provided guidance to assign a monetary value to fatalities and injuries, which in turn is based on a series of studies completed between 1997 and 2001.10 These studies assess the public’s willingness to pay for safety improvements. The average cost of injuries is weighted by the average severity of truck crash injuries.11 On a scale of one to six with one being a minor injury, two being

7 FRA (2015): One Year Accident/Incident Overview – Combined 2015. Office of Safety Analysis, Federal Railroad Administration, U.S. Department of Transportation. 8 FMCSA (2014): Large Truck and Bus Crash Facts 2013. FMCSA-RRA-14-004. Analysis Division, Federal Motor Carrier Safety Administration, U.S. Department of Transportation. June 2014. 9 Injuries associated with truck and rail transportation are reported differently. Trucking statistics are reported as “crashes,” in which a truck strikes something. In the case of rail, most reported injuries do not involve a train hitting something. Rather, railroads are required to report any on-the-job injury or illness, the majority of which do not involve train equipment striking anything. 10 Memorandum from Office of the Secretary of U.S. Department of Transportation to Modal Administrators, Guidance on Treatment of a Statistical Life (VSL) in U.S. Department of Transportation Analyses – 2015 Adjustment, June 17, 2015. 11 USDOT (2013): Delay and Environmental Costs of Truck Crashes. https://rosap.ntl.bts.gov/view/dot/10074


https://rosap.ntl.bts.gov/view/dot/10074

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moderate, and six being fatal, the weighting assigns an equivalent cost of an injury between one and two. Most accidents with injuries result in relatively minor injuries.

Table 3: Monetized Accident Costs

Type Value (2015 $/accident)

Fatal Accident $9,471,219

Injury Accident $154,805

Damage Accident $ 3,957 Source: USDOT TIGER Guidance

Pavement Maintenance Truck travel causes pavement deterioration more than light-duty vehicles, increasing the cost of roadway maintenance. The most frequently cited national study of pavement damage costs on a national level is a highway cost allocation study conducted by the Federal Highway Administration.12 One of the key implications of this study is that the severity of pavement damage depends mainly on the axle weight of the trucks and type of road being used. As can be seen in Table 4, increasing total vehicle weight from 60,000 lbs. to 80,000 lbs. can more than triple per-mile pavement damage. Also, costs were found to be significantly greater for urban than rural highways.

Although the cost allocation study was published almost 20 years ago, its results are still widely used today (adjusted to current dollars). When it was first published it agreed with other studies at the time.13 It was an update to an earlier 1982 study. This study allocated costs associated ongoing maintenance, as well as reconstruction or capacity enhancing projects. For costs such as pavement maintenance where axle weight is a cost driver, the study allocated costs based on vehicle type and weight. For other costs that vary by vehicle demand, such as capacity enhancements, the study allocated costs based on passenger car equivalents (PCEs). Because they are larger and take more space on roadways, trucks are assigned multiple passenger car equivalents. Several recent domestic and international studies have found that values from the Federal Highway Cost Allocation Study remain plausible. In Louisiana the pavement cost of trucks was estimated to range from $0.017 to $0.21 per mile (in 2008 dollars), depending on the axle loading.14 In Virginia the average pavement cost of trucks was estimated from $0.011 to $0.065 per mile (in 2008 dollars), also depending on their axle loading.15 Internationally, a study by the UK Department of Transport estimated these costs at US$0.26/mile.16

12 FHWA, Addendum to the 1997 Federal Highway Cost Allocation Study, Table 13. https://www.fhwa.dot.gov/policy/hcas/addendum.cfm 13 Hajek, J. J., Tighe, S. L., and Hutchinson, B. G. (1998). Allocation of Pavement Damage Due to Trucks Using a Marginal Cost Method. Transportation Research Record 1613. Washington D.C.: Transportation Research Board, 1998. 14 Saber A., Roberts F. (2008). Monitoring System to Determine the Impact of Sugarcane Truckloads on Non-Interstate Bridges, Louisiana Transportation Research Center, LTRC Project No. 03-2ST. 15 Virginia Transportation Research Council (2008). A Review of the Current Overweight Permit Fee Structure in Virginia (HB 1551). VTRC, Report November 2008. 16 UK Department for Transport (2014). Mode Shift Benefit Values: Refresh


https://www.fhwa.dot.gov/policy/hcas/addendum.cfm

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Table 4: Valuation of Truck Pavement Damage

Type of Pavement Impact Pavement Damage (2015 $)

80,000 lbs. Combination Trucks on Urban Hwys. $0.553/mi


80,000 lbs. Combination Trucks on Rural Hwys. $0.172/mi

60,000 lbs. Combination Trucks on Rural Hwys. $0.045/mi Source: FHWA, WSP|PB 2015

A more up-to-date cost allocation study would be useful in validating these figures.

Pollutant Emissions Rail can move freight with lower environmental impacts compared to trucking. The AAR estimates that the fuel efficiency of rail has improved 103 percent improvement since 1980.17

Table 5 and Table 6 compare the emission rates of trucks and rail. Trucking emissions rates were derived by a simulation using the U.S. Environmental Protection Agency’s (EPA) Motor Vehicle Emission Simulator (MOVES) model, assuming combination trucks hauling long-distances (moves of over 200 miles). This model performs detailed calculations to estimate the emissions of various pollutants by vehicle type, road, location, seasonal condition, and drive cycle. The model also forecasts the impacts of technological improvements and government regulations on emissions rates in the future. NOx emissions are forecasted to improve on average 5.4 percent per year through 2040, while PM emissions are forecasted to improve 9.6 percent per year and VOC emissions 3.6 percent per year. California’s vehicle emissions model18 produces results for heavy-duty combination trucks that are similar to those in Table 5. For example, for NOx the model estimates a miles-weighted emission rate of 7.9 grams/mile in 2015 and 1.3 grams/mile in 2045.

Table 5: Truck Emissions Rates

Type 2015 2020 2030 2040

NOX grams/mile 9.41 6.13 2.85 2.32

PM grams/mile 0.374 0.212 0.055 0.030

VOC grams/mile 0.987 0.712 0.440 0.392 Source: EPA MOVES19

In 2008 the EPA introduced new emissions standards for locomotive.”20 According to a 2009 EPA analysis as shown in Table 6, average emissions of NOx will decrease by 5.9 percent per year, PM by 8.2 percent per year, and VOCs by 6.6 percent per year.

17 Association of American Railroads (2015). The Environmental Benefits of Moving Freight by Rail. 18 CARB EMFAC Model 19 EPA MOVES Model, assumed long-haul Long-Combination Vehicles driving at 55 mph. 20 https://www.epa.gov/regulations-emissions-vehicles-and-engines/final-rule-control-emissions-air-pollution-locomotive.


https://www.epa.gov/regulations-emissions-vehicles-and-engines/final-rule-control-emissions-air-pollution-locomotive

https://www.epa.gov/regulations-emissions-vehicles-and-engines/final-rule-control-emissions-air-pollution-locomotive

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Table 6: Rail Emissions Rates

Type 2015 2020 2030 2040

NOX grams/gallon 129 99 53 28

PM grams/gallon 3.4 2.3 1.0 0.4

VOC grams/gallon 6.0 3.8 2.0 1.1 Source: EPA 200921

Because emission rates for railroads are specified per fuel consumption, it was necessary to obtain information about how the fuel efficiency of the trains is expected to improve over time. Table 7 shows the values used. The baseline was obtained from the Association of American Railroads and a one percent per year improvement was assumed based on the average improvement observed over the past decade.

Table 7: Rail Fuel Efficiency

2015 2020 2030 2040

Tons-miles / gallon 483.0 508.5 561.7 620.4 Source: WSP|PB Analysis of information from AAR

Emission rates of CO2 are a function of fuel consumption. Each gallon of diesel emits 22.4 lbs of CO2.

Table 8: Comparison of Truck and Rail Emission Rates

Type Rail (adjusted for circuity) Truck (adjusted for empty miles)

2015 2030 2040 2015 2030 2040

NOX grams/ton-revenue mile 0.3178 0.1044 0.0475 0.5828 0.1765 0.1437

PM grams/ ton-revenue mile 0.0084 0.0020 0.0007 0.0232 0.0034 0.0019

VOC grams/ ton-revenue mile 0.0148 0.0039 0.0018 0.0611 0.0273 0.0243

CO2 grams/ ton-revenue mile 25.033 20.023 17.253 92.197 80.458 79.232 Source: WSP|PB Analysis

The costs of air pollution emissions were obtained from USDOT guidance for TIGER applications (see Table 9) based on a National Highway Traffic Safety Administration study that calculated the various costs associated with NOx, PM and VOC emissions. These values were inflated to 2015 dollars using a CPI deflator. Rail values are based on typical locomotive fuel consumption per ton-revenue mile. These have been adjusted for the fact that rail routing tends to be more circuitous than truck routing. Truck values have been adjusted by the fact that not all truck vehicle miles traveled are loaded. Sometimes trucks must be repositioned empty to pick up loads.

21 EPA (2009). Emission Factors for Locomotives, Office of Transportation and Air Quality, EPA-420-F-09-025 April 2009. https://nepis.epa.gov/Exe/ZyPDF.cgi/P100500B.PDF?Dockey=P100500B.PDF.


https://nepis.epa.gov/Exe/ZyPDF.cgi/P100500B.PDF?Dockey=P100500B.PDF

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Table 9: Non-CO2 Emission Costs

Type Emission (2015 $/metric ton)

NOX $7,937

PM $363,113

VOC $2,046 Source: USDOT TIGER Guidance

The per-ton costs of carbon were also derived from USDOT guidance. These values were in turn obtained from a Technical Support Document published by the Interagency Working Group on the Social Cost of Carbon.22 For present value calculations, the social cost of carbon was discounted at 3 percent per year, consistent with USDOT’s guidance23, even when all other savings were discounted at 7 percent.

Table 10: Social Cost of Carbon at 3 percent Discounting (2015 $ / metric ton)

2014 2020 2030 2040

Social Cost of Carbon $45.34 $52.39 $63.48 $74.56 Source: USDOT; WSP|PB 2015

Congestion Trucks consume highway space, increasing the volume to capacity ratio of roadways. One freight train can take hundreds of trucks off the roads, improving operations for passenger vehicles and reducing costs. Congestion imposes many costs on society, including increased travel time, increased vehicle operating costs.

Congestion is nonlinear. Highways operate well at high speeds for a wide range of vehicle volumes, and descend into congestion rapidly once a particular threshold is reached. Adding a truck to a road has a negligible impact on other vehicles most of the time, except when the roadway is approaching its saturation threshold.

In the U.S., the most commonly used study of congestion impacts is the FHWA’s Highway Cost Allocation Study24 published in 2000. This study used the FHWA Freeway Simulation (FRESIM) model to estimate the delay impact of adding various vehicle types to the highway network. The analysis took into account the relative impact of additional vehicles during peak/off-peak time periods and whether vehicles were added to urban or rural highways. The impact of various vehicles was based on passenger car equivalents (PCE), so that a truck would have a value of several PCE’s. Table 11 contains the parameters proposed by that publication, updated to 2015 dollars using the BLS’s CPI indicator.

22 https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf. 23 U.S. DOT (2015). Tiger Benefit-Cost Analysis (BCA) Resource Guide, p.7-9. (http://www.dot.gov/sites/dot.gov/files/docs/Tiger_Benefit-Cost_Analysis_%28BCA%29_Resource_Guide_1.pdf) 24 Addendum to the 1997 Federal Highway Cost Allocation Study Final Report, May 2000. See http://www.fhwa.dot.gov/policy/hcas/addendum.cfm.


https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf

https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf

https://www.fhwa.dot.gov/policy/hcas/addendum.cfm

10

Table 11: Valuation of Truck Marginal Congestion Cost, 2015 $

Type of Congestion Impact Marginal Congestion Cost (2015 $)



80,000 lbs. Combination Trucks on Rural Hwys. $0.031/mi

60,000 lbs. Combination Trucks on Rural Hwys. $0.026/mi Source: FHWA, 2015

Shipper Savings For those supply-chains and inventory strategies that permit shipping by rail, rail can offer substantial transportation cost savings. This section provides an approximation of the relative price advantages of rail over trucking, for commodities that can typically utilize either mode of transportation. The analysis therefore excluded bulk commodities transported in large blocks of cars, usually on unit trains; and revenues associated with farm products, coal, crude petroleum, metallic ores, and nonmetallic minerals were excluded. The analysis also included truck drayage to and from rail terminals for intermodal traffic.

Trucking revenues per mile were obtained from a survey of trucking companies by TransCore in 2011 and indexed to 2015 by the Cass Truckload Linehaul IndexTM25. The survey found that average truckload motor carrier revenue per loaded mile was $2.03 in 2011.26 When indexed to 2014, the rate per mile was $2.24. Estimated truck revenue per mile was converted to revenue per ton-mile by dividing the revenue per mile figure by an estimated average truck payload of 20.70 tons. The average payload was developed using average truck payload figures for truck movements over 500 miles as reported in the Quick Response Freight Manual.27 The 20.70 tons was a weighted average, weighing average truck payloads by commodity by the extent that those commodities are also shipped in carload manifest or intermodal rail service. The resulting estimated shipper cost of truck was found to be $0.108 per ton-mile.

Rail revenue per ton-mile was estimated using the Association of American Railroads’ Railroad Ten-Year Trends. The analysis also includes assumed drayage costs for intermodal movements, which were derived from data by the Surface Transportation Board (STB) Uniform Railroad Cost (URCS) model. The resulting average railroad revenue per ton-mile for divertible traffic was $0.70. Average revenue per ton-mile was then adjusted for the additional circuity that trains need to travel to deliver shipments relative to trucking. Analysis by WSP | Parsons Brinckerhoff of the relative truck and rail distances between Freight Analysis Framework (FAF) zones using the FAF-3 suggest that to ship products to or from the same locations using truck or rail, requires 1.19 times the mileage by rail as by truck. This is roughly consistent with other studies, such as by Upper Great Plains Transportation Institute.28 After this adjustment, the ton-miles

25 Carrier Benchmark Survey, TransCore 2011, Cass Information Systems, Inc., Cass Truckload Linehaul Index, December 2015. 26 TransCore, 2011. Carrier Benchmark Survey, DAT Special Report. 27 U.S. Federal Highway Administration, Quick Response Freight Manual II, September 2007, Table 4.20. 28 Denver Tolliver, Pan Lu, Douglas Benson of the Upper Great Plains Transportation Institute, Analysis of Railroad Energy Efficiency in the United States, May 2013.


11

weighted revenue for rail was found to be $0.083/ton-mile. Therefore, when compared to trucking, shifting an average truck shipment to rail saves shippers $0.025/ton-mile.

With an average trucking cost of $0.108 per ton mile for trucking, an average cost of $0.083 per ton mile for rail, and a savings of $0.025 per ton mile for trucking, rail offers a computed savings of 23% versus trucking. However, this analysis does not consider modal differences in other logistics costs beyond transportation costs, such as inventory carrying costs (where applicable), administrative costs, or additional facility or operating costs that might be incurred by the railroad in providing new services.

Growing Rail Mode Share Approach Shifting freight from truck to rail can provide transportation savings and benefit society. This section quantifies the magnitude of these benefits under several mode-shift scenarios. Table 12 summarizes some of the additional assumptions that were needed. The proportion of empty miles was obtained from a survey of the trucking sector conducted by ATRI.29 This survey found that 22 percent of miles driven by truckload trucking companies are empty, which is comparable to the findings of other surveys of the industry.30,31 While the average payload of loaded trucks was found to be 20.7 tons,32 the average payload of all trucks, including empty ones, would be 16.15 tons.

29 Fender, K. J. and Pierce, D. A., 2013. An Analysis of the Operational Costs of Trucking: 2013 Update. American Transportation Research Institute. 30 DAT, 2013. 2013 DAT Carrier Benchmark Survey Q1 2013, DAT Special Report. 31 Alam, M. Rajamanickam, G., 2007. Development of Truck Payload Equivalent Factor, Submitted to FHWA Office of Freight Management and Operations, 2007. 32 U.S. Federal Highway Administration, Quick Response Freight Manual II, September 2007, Table 4.20.


12

Table 12: Calculation Assumptions

Input Value Definition and Source Rail to Truck Circuity (miles of rail/miles of truck)

1.19 This parameter indicates the additional miles of rail that would be required to transport goods relative to trucking, taking into account that travel on the rail network is usually less direct than travel on the highway. This parameter was calculated based on an analysis of the FAF dataset. Its value was also corroborated based on the results of other studies.

Mix of highway travel 10% Urban and 90% Rural

This variable has a large impact on the pavement deterioration costs and congestion externality costs of trucking. It was determined based on the characteristics of a representative truck trip.

Mix of Truck Weight 25% 80 kip trucks and 75% 60 kip trucks

This variable has a large impact on pavement deterioration costs because they are a high power function of axle loading. It was determined based on an analysis of VIUS. This variable considers the travel of empty trucks.

Average truck payload 20.7 tons This value was obtained from represents a weighted average of payloads for long-haul trucking from the FHWA Quick Response Freight Manual.

Proportion of empty truck miles

22% This value was obtained from a survey of truck-load trucking companies conducted by ATRI33.

Three mode-shift scenarios were constructed on top of the ton-miles forecast recently published in the National Freight Strategic Plan. The data for this forecast came from a special tabulation of the Bureau of Transportation Statistics using the Freight Analysis Framework. This base scenario shown below predicts that rail will lose modal share in the future. Rail’s modal share of freight ton-miles will decline from 29 percent in 2015 to 26 percent in 2040. Over this time period rail ton-miles will grow by 16 percent or 0.6 percent per year, while truck ton-miles will grow by 50 percent or 1.6 percent per year. These forecasts are based on forecast growth or shrinkage of the underlying commodities between freight markets. The base forecast does not account for relative performance of or investment in transportation modes. Rail’s loss of mode share in these scenarios relates largely to coal. The Freight Analysis Framework (FAF-4) database estimates that coal accounts for 36 percent of the tonnage carried by rail, and that coal volumes will drop by about a third between 2015 and 2040. Thus, rail tonnage drops by 12 percent due to coal before any changes in other commodities are considered.

33 Fender, K. J. and Pierce, D. A., 2013. An Analysis of the Operational Costs of Trucking: 2013 Update. American Transportation Research Institute.


13

Figure 1: National Freight Plan Modal Forecast

Source: National Freight Plan

In order to assess the benefits of railroad transportation, three scenarios have been generated. They represent a shift to rail of one percent, three percent, and five percent of truck ton-miles to rail. Mode shifts are assumed to occur at a constant rate from the start of 2016 to 2025. One tenth of the shift is assumed to occur each year during the 10-year period. Figure 2 shows the resulting mode-shift scenarios.


14

Figure 2: Mode-Shift Scenarios from Truck to Rail

* Baseline Data from BTS

Impacts of Mode-Shifts The impacts of the mode shift are summarized in Table 13. A one percent mode shift would eliminate 65 billion truck miles off U.S. roads between 2016 and 2045. This would translate to 79,313 fewer property damage only accidents, 17,512 fewer injury accidents, and, 737 fewer accidents resulting fatalities, translating to at least 25 avoided fatalities per year.

A one percent mode shift reduces greenhouse gas emissions by 64.3 million Metric Tons CO2 over the next 30 years, representing on average two million Metric Tons of CO2 per year, as well as substantial reductions of NOX and PM emissions. Mode shifts of three or five percent bring higher proportion benefits.


15

Table 13: Impacts of Mode Shifts over 30 Years

1% Mode-shift 3% Mode-shift 5% Mode-shift

Truck miles (billions) –65 –195 –325 Fatal accidents/crashes (number) –737 –2,211 –3,685

Injury accidents/crashes (number) –17,512 –52,535 –87,559

Property damage only accidents (number) –79,313 –237,938 –396,564

CO2 Emissions (thousand metric tons) –64,300 –192,899 –321,499

NOX emissions (metric tons) –101,369 –304,107 –506,846

PM (metric tons) –2,441 –7,322 –12,203

VOC (metric tons) –26,018 –78,053 –130,089

Source: WSP|PB Analysis, 2015

When the impacts as shown in Table 13 are assigned monetary values and then discounted by seven percent per USDOT guidance, a one percent mode-shift was found to generate $19.3 billion in benefits. Of these, 44 percent accrued to shippers in lower transportation costs and 66 percent to the rest of society in cleaner air, less roadway congestion, and improvements in safety.

Table 14: Social and Private Benefits of Mode Shifts over 30 Years Discounted @ 7% (Millions)

1% Mode-shift (M$ Discounted

@ 7%)


@ 7%)


@ 7%) Shipper Savings $8,573 $25,720 $42,867 Pavement maintenance savings $3,145 $9,435 $15,725 Marginal congestion savings $1,125 $3,375 $5,625 Environmental Savings - CO2 emissions savings $2,496 $7,488 $12,479 - NOX emissions savings $284 $853 $1,422 - PM emissions savings $422 $1,267 $2,112 - VOC emissions savings $19 $57 $94 Subtotal Environmental $3,222 $9,665 $16,109 Safety Savings - Injury crash savings $888 $2,664 $4,439 - Fatality crash savings $2,286 $6,859 $11,432 - Damage crash savings $103 $308 $514

Subtotal Safety $3,277 $9,831 $16,385

Total Discounted Benefits $19,342 $58,026 $96,710

Total Undiscounted Benefits $51,749 $165,870 $276,450

Comparison to 2002 Freight Rail Bottom Line Report This update provides current best practice methodologies that are substantially different from the 2002 Freight Rail Bottom Line Report. The key differences are as follows:


16

• The previous study generated a series of scenarios. Under the Constrained Investment scenario, railroads would be able to expand capacity to accommodate 50 percent of expected volume increases. Under the Aggressive Investment scenario, railroads provide enough investment to not only keep up with expected volume but to also seize market share. By year 20 of the analysis (2020), the annual freight rail ton-miles were estimated to be 48 percent higher under the Aggressive Investment scenario than under the Constrained Investment scenario. By contrast the assumed reallocation of five percent of truck ton-miles to rail in the current update increases rail ton-miles by 12 percent in year 20 (2035). In other words, the amount of diversion to rail in the current update is more conservative.

• The previous Freight Rail Bottom Line Report estimated that rail service was priced in the year 2000 at around $0.024/ton-mile and truck priced at $0.080/ton-mile (in 2000 dollars). In today’s dollars this would represent rail being priced at $0.033/ton-mile and trucking priced at $0.11/ton-mile. The estimate of the price of trucking used in this report was similar to the one used in the previous report, at $0.108/ton-mile. On the other hand, the estimate used for rail was considerably higher at $0.083/ton-mile (adjusting for circuity). This higher cost estimate can be attributed to only considering commodities and rail segments that could reasonably shift to truck. Bulk commodities transported by unit train were not considered. The current update offers a more conservative estimate of per-unit rail benefits, based on current best practice data.

• The sources of data for estimating road impacts of rail differ between the 2002 Freight Rail Bottom Line Report and the current update. The former relied on FHWA Highway Economic Requirements System (HERS) model, while the latter relies on the FHWA Highway Cost Allocation Study. The previous Freight Rail Bottom Line report did not include the quantification of safety and environmental benefits, whereas the current report does. The current analysis includes a 30 year analysis period, whereas the 2002 Freight Rail Bottom Line Report had a 20 year analysis period. Some differences are summarized in Table 15 below.

Table 15: Comparison between 2002 Freight Rail Bottom Line Report and Current Update

2002 Freight Rail Bottom Line Report—

Difference between Constrained

Investment and Aggressive Growth

Scenarios

Current Update Difference between

Base Case and 5 Percent Diversion to

Rail

Change in Year 20 Rail Ton-Miles (Billions) 734 252

Percentage Change in Year 20 Rail Ton-Miles 48% 12%

Change in Year 20 Truck VMT (Billions) –40 –13

Change in Hwy Costs (2015 $Billions) $1,251 $65

Change in Shipper Costs (2015 $Billions) $774 $131

Shipper Savings per Ton-Mile (2015 $s) $0.077 $0.025

Change in Environmental Costs (2015 $Billions) $30

Change in Safety Costs (2015 $Billions) $50


17

Chapter 2: Changes to the Rail Industry since the 2002 Freight-Rail Bottom Line Report Rail Traffic Trends The base year of data presented in the 2002 Report was 2000. The 2002 Report was prepared following a long period of growth in freight rail traffic. For example, rail ton-miles had grown by 45 percent since 1990 and by 66 percent since 1980. To some extent, increases in rail traffic resulted from overall growth in U.S. freight movements, but rail had also increased its market share, particularly at the expense of domestic water transportation.

Figure 3: Ton-Miles of U.S. Freight by Mode (Millions)

Source: U.S. Bureau of Transportation Statistics (Air Freight is excluded because it is a small number)

Since 2000, overall freight traffic has not entirely recovered from the Great Recession, and rail freight growth has been inconsistent. Freight rail traffic grew significantly between 2000 and 2006, but then it plummeting during the Great Recession, began to recover through 2014, and then declined again through 2016. Because average length of haul increased, ton-miles have been positive, whereas carloads have not grown over the past 16 years and tonnage transported by rail has declined.

0

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Figure 4: Cumulative Percent Change in Rail Traffic since 2000

Source: AAR (AAR), Parsons Brinckerhoff Analysis

Tonnage declines to some extent have been driven by coal as shown in Table 16, which was 43 percent of rail tonnage in 2000, but other commodities declined as well. These have been partially counteracted by growth in commodities that were not transported by rail in 2000, such as crude oil and ethanol. Intermodal has also been a source of traffic growth for railroads. In Table 16, most intermodal shipments are listed as “Miscellaneous Mixed Shipments.”

-15%

-10%

-5%

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19

Table 16: Changes in Freight Rail Tonnages 2000–2015

Commodity 2000 2015 Tonnage Change

% Change

Annual %

Change Farm Products 135.7 145.5 9.8 7% 0.5%

Metallic Ores 31.6 59.4 27.8 88% 4.3%

Coal 757.8 638.1 –119.7 –16% –1.1%

Crude Petroleum/Natural Gas 0.0 41.6 41.6 NA NA

Nonmetallic Minerals 125.9 159.8 33.9 27% 1.6%

Food & Kindred Products 93.9 101.0 7.1 8% 0.5%

Lumber & Wood Products 48.9 27.2 –21.7 –44% –3.8%

Pulp, Paper, & Allied Products 36.1 32.7 –3.4 –9% –0.7%

Chemicals & Allied Products 155.0 178.0 23.0 15% 0.9%

Petroleum & Coal Products 42.2 51.5 9.3 22% 1.3%

Stone, Clay & Glass Products 48.3 42.8 –5.5 –11% –0.8%

Primary Metal Products 59.8 44.6 –15.2 –25% –1.9%

Transportation Equipment 41.5 27.0 –14.5 –35% –2.8%

Waste & Scrap Material 40.1 36.7 –3.4 –8% –0.6%

Miscellaneous Mixed Shipments 101.0 120.0 19.0 19% 1.2%

Other 48.9 25.5 –23.4 –48% –4.2%

Total 1,766.7 1,731.4 –35.3 –2% –0.1%

Source: AAR, Parsons Brinckerhoff Analysis

One issue with trend analysis is that trends can appear very different depending on the time-period analyzed. Furthermore, what appears to be a consistent trend could be interrupted at any time. However, freight volume trends have implications for the findings of the 2002 Report in 2018. Because the report was written after a period of steady freight rail growth, capacity was a major concern at the time. Rail freight levels appeared to be increasing relentlessly, and it was thought that major capacity additions would be necessary to accommodate all of the additional rail freight. Rail freight may continue its upward trajectory. Capacity is always an issue, and certain portions of the U.S. rail network have been under capacity in recent years. However, the growth of U.S. rail freight has been negligible over the past 16 years, or negative, depending upon which statistic one chooses to consider. Mainline capacity is important but perhaps not as preeminent a concern as in 2002.

Financial Performance The 2002 Report described the railroad industry as operating under “intense price pressure.” To some extent this reflected the timing of the report, which prepared right around a nadir of railroad revenue per ton-mile. For example, between 1993 and 2000, railroad revenue per ton-mile declined by 21 percent in constant dollars. Since that time, revenue per ton-mile has increased. Measured in constant dollars, railroad revenue per ton-mile has increased by 35 percent between 2000 and 2014.


20

Figure 5: Railroad Revenue per Ton-Mile in Constant 2011 Dollars

Source: AAR

A common measure of railroad profitability is railroad operating ratio, which equals operating expenses divided by operating revenues. This metric is an expression of operating profit margins. As shown in Figure 6, starting in 2004, average railroad operating ratios have improved on a regular basis, declining from 88 percent in 2000 to about 68 percent in 2016.

$0.000

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21

Figure 6: Railroad Operating Ratio

Source: AAR, Parsons Brinckerhoff Analysis

The 2002 Report noted a gap between the railroad industry’s cost of capital and its return on investment. The U.S. Surface Transportation Board (STB) is charged with determining revenue levels that “(A) provide a flow of net income plus depreciation adequate to support prudent capital outlays, assume the repayment of a reasonable level of debt, permit the raising of needed equity capital, and cover the effects of inflation; and (B) attract and retain capital in amounts adequate to provide a sound transportation system in the United States.”34 As of the 2002 Report, the STB had almost never considered railroads to be revenue adequate. As an example, between 1980 and 2005, railroads were found to be revenue inadequate 413 out of 445 determinations (number of railroads times the number of years) or 93 percent of the time.35 The frequency with which railroads have been found to be revenue adequate has increased. In 2013, the STB found that five of seven Class I railroads had achieved a rate of return equal to or greater than the STB’s calculation of the railroad industry cost of capital. Three of seven railroads were determined to be revenue adequate in 2012. Figure 7 below represents a comparison of the STB cost of capital determination and a composite of Class I railroads’ return on investment. As can be seen, the industry was found to be revenue adequate since 2011.

34 49 U.S. Code 10704(a)(2). 35 Determining Revenues Adequate to Maintain and Improve Service and Capacity, presentation by Robert D. Rosenburg of Slover & Loftus, LLP and Timothy J. Strafford of AAR to the Association of Transportation Law Professionals Fall Forum XI, November 10, 2014.

0%

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


22

Figure 7: Comparison of Class I Railroad Industry Rate of Return on Net Investment and STB Cost of Capital

Source: AAR

Revenue adequacy is also determined by which of the STB’s methodology is employed. Methodologies have been evolving over the past decade. By one approach the STB has considered, all of the four largest (BNSF, CSX, NS, UP) Class I railroads would have been found to be revenue adequate in 2010, 2011, and 2012.36

Between 2000 and 2015 railroad stock prices reflected the “railroad renaissance,” far outpacing the broader market. Figure 8 shows rail stock performance measured against the Standard & Poor’s 500 (S&P 500) index.

36 Ibid. The STB uses two models to determine the cost of equity, a multi stage discounted cash flow model and the capital asset planning model. The capital asset planning model yield a lower cost of equity.

0.00%

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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23

Figure 8: Cumulative Percent Change in Railroad Stock Prices and S&P 500 since June 30, 2000

Source: finance.yahoo.com

Capital Expenditures The improved financial condition of the railroad industry has enabled railroads to dramatically increase capital spending. Because investment in infrastructure, freight cars, and locomotives are providing better returns to shareholders, railroads have increased investment in their asset bases. In constant dollars, the level of railroad capital investment has doubled in the short period since 2010.

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S&P 500 UP NS CSX KCS


24

Figure 9: Railroad Capital Expenditure (Millions 2011 Dollars)

Source: AAR

The railroad industry’s financial performance has been particularly impressive, since it occurred with the backdrop of the Great Recession. For example, average annual railroad revenue per ton-mile increased every year, excepted between 2008 and 2009, but this decline was erased within two years, reaching a new high in 2011. Industry capital expenditures also increased each year, except for a seven percent drop between 2008 and 2010. Capital expenditures then reached a new high in 2011.

Short Line Railroad Trends The performance of the short line and regional railroad industry since the 2002 Plan has been mixed. Short line company financial health is often considered to be a function of density. The more freight per miles, the better short line railroads will be able to covered the fixed costs of maintaining their lines. Figure 10 below displays the short line industry average revenue per mile operated (owned or leased), and the average number of annual carloads handled per mile operated. Both statistics improved between 2002 and 2006. But carloads per mile have since declined. On the other hand, revenue per mile has remained high.

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25

Figure 10: Short Line and Regional Railroad Revenue per Mile in Constant 2011 Dollars, Carloads per Mile

Source: American Short Line and Regional Railroad Association, Parsons Brinckerhoff Analysis

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26

Chapter 3: The Impact of Rail Service Issues by Industry This chapter considers how rail service issues impact industries differently and how different industries can benefit from freight rail infrastructure improvement projects. Among other sources, this chapter is informed by the following:

• Interviews with several short line railroads, the U.S. Department of Agriculture, Class I railroad,and several shippers performed for this task;

• A review of twenty shipper interviews conducted for state freight or state rail plans;• A review of 34 presentations given at meetings between 2013 and 2017 of the North American

Rail Shippers Association and its regional associations;• Review of summaries of rail shipper feedback for various state rail plans and rail studies;• Shipper filings for the Surface Transportation Board proceedings in Ex Parte 724, United States

Rail Service Issues;• A review of several studies that assessed rail service, including the Federal Railroad

Administration’s Quality of Service Provided to Rail Shippers37 and Transport Canada’s RailFreight Service Review.

Differing Industry Concerns Regarding Rail Service A number of shipper characteristics drive rail service needs and issues encountered. These shipper characteristics in turn generate differences between industries. Shipper characteristics include:

• The types of rail service used by companies within the industry;• Rail service patterns, including the consistency of demand over time and the consistency of

demand between origin and destination;• Ownership and type of equipment used;• The size of the shipper in terms of total volume shipped and volume shipped per locations;• Location of the shipper on the rail network.• Relative reliance on rail compared to other modes

Types of Rail Service The types of service issues that different industries encounter depends upon the type of rail operations used. As discussed in Work Item 3, the three primary types of rail services are:

• Rail Intermodal—The movement of containers or trailers on flatcars.• Manifest or Carload Service—Shipments that travel within trains of mixed commodities with

mixed origins and destinations. Here, the customer is effectively buying space on a freight train.• Unit Train Service—A trainload of one commodity travels from one origin to one destination.

The customer buys the entire train.

Manifest service tends to be slower with a higher variability in transit times relative to unit train service, while unit train service is in turn is slower and less reliable than intermodal service. Manifest traffic is classified onto different outbound trains at one or more yards during the trip, while intermodal and unit trains bypass intermediate classification yards. Every classification increases the probability that the car will miss a connection and arrive late. Back in 1995 researchers analyzed data from the Association of

37 Federal Railroad Administration, Quality of Service Provided to Rail Shippers, February 15, 2011.


27

American Railroads (AAR) for several representative trip types, including boxcars in general merchandise service, covered hopper grain cars in unit train service, and container cars in double stack intermodal service. They found that average loaded trip times, arrival variability, and total cycle times were higher for manifest service than unit train service than double stack intermodal service.38

Table 17: Loaded Transit Times, Variability, and Total Cycle Times by Rail Service

Boxcar inManifest Service

Covered Hopper in Unit Train Service

Double Stack Train Service

Average Loaded Trip Time (Days) 8.77 5.33 3.21 Percentage of Shipments Arriving within 24 Hour Window

32.42 41.90 89.2

Total Cycle Time (Days) 26.88 15.27 6.14 Source: Transportation Research Record

A more recent analysis estimated average loaded trip times for certain manifest services to average 11.4 days with trip variability of 5 to 37 days, while unit train service averaged 6.9 days with variability of 5–9 days.39

Given these difference, shippers using each service have different concerns:

• Manifest. Because transittimes are longer and morevariable, manifest shippersare more concerned withservice reliability, thevariability of rail service inplacement of railcars forloading, pick up of railcars,and empty, loaded time intransit. Manifest shippersalso rely on facilities whichunit train and intermodalservices do not, such asclassification yards and localswitching services (trains thatcarry individual or blocks of cars between shipperlocations and classification yards). Manifest freight shippers prefer frequent local switching.They look to reliable service so that cars arrive at intermediate classification yards in time tomake cutoffs to be on subsequent trains. Variability can appear not only in the loaded portionof a rail move, but also in receiving empty railcars.

38 Oh Kyoung Kwon, Carl D. Martland, Joseph M. Sussman and Patrick Little, Transportation Research Record 1489, “Origin-to-Destination Trip Times and Reliability of Rail Freight Services in North American Railroads,” 1995. 39 Richard Flynn of NELS, LLC, “Railroad 101 – Managing Rail Assets and Costs,” Frac Sand Insider 2014 Conference and Exhibition, Pittsburgh, PA, November 18, 2014.

Figure 11: Manifest Train

Source: Craig Sanders of the Akron Railroad Club


28

Manifest shippers are more likely to rely on low density rail lines for the first and last segment of their shipments. These could be lines operated by short line railroads or could be branch lines operated by Class I carriers. Gaining reasonable access to the rail network is more frequently a concern of manifest freight shippers.

• Unit Train. Unit train shippers may also be concerned about service reliability, but because transit times are faster and more consistent for unit train service relative to manifest, reliability concerns fall within a tighter time frame. Also, some shippers such as coal shippers may have relatively low storage costs per ton. As long as the shipper is able to maintain an adequate inventory, price is of a higher concern than reliability. On the other hand, given the volume that these shippers deliver, in some cases unit train shippers are more heavily reliant on rail service than some manifest shippers. Carrying the same freight by truck would be prohibitively expensive.

• Intermodal. Intermodal service is almost exclusively provided over high density Class I mainlines. Because intermodal is a premium service that requires faster train speeds than other services, these services are particularly dependent on Class I railroad mainline capacity. Any disruption or congestion can slow these trains below the speed that is required. Intermodal service is also dependent on terminal capacity, both at truck/rail intermodal terminals, and at seaports. Intermodal shippers are not only concerned with the timely arrival of containers at terminals, but also the ability to access those containers within terminals upon arrival, the ability to track containers and anticipate late arrivals, and the repositioning/availability of empty containers.

Different commodities rely on different train services as shown in Table 18. This is based on the portion of carloads shipped on waybills with over 50 carloads per waybill from the 2014 STB Public Use Carload Waybill Sample. As shown, coal and metallic ore carloads are almost entirely shipped in unit trains. Grain and oilseed as well as crude oil also rely heavily on unit train shipments. Around half of non-metallic mineral, ethanol, and transportation equipment40 carloads are shipped in unit trains.

40 Waybill data for Transportation Equipment could not be used to estimate average shipment size, but it is assumed that 80 percent of finished vehicles are shipped in unit trains.

Figure 12: Unit Grain Train

Source: Jeff Schultz


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Table 18: Usage of Unit Train Service by Industry

Percentage of Carloads in Shipment Size Equal to or Greater than 50 Cars

Commodities

Over 90 Percent Coal, Metallic Ores Over 65 Percent Grain and Oilseeds, Crude Oil Over 45 Percent Non-Metallic Minerals, Transportation Equipment,

Ethanol Less than 45 Percent All Other Commodities

Source: 2014 STB Waybill Sample

Less information is available regarding the nature of commodities shipped by intermodal rail. This is because most intermodal shipments are classified as “Freight All Kinds,” or “Miscellaneous Mixed Shipments,” which could include any number of commodities. That said, the containers utilized indicate that the great majority of goods are compatible with dry van shipping, and the importance of retailers in the intermodal market implies that consumer goods are a significant component.

The U.S. Federal Railroad Administration (FRA) identified long-distance shipments of retail goods, consumer durables, and other manufactured products as commodity types where intermodal has a comparative advantage (Table 19). Presumably, these are the types of commodities shipped by intermodal rail. However, intermodal in some cases is also used for shipping bulk commodities, such as grain for export.

Railroads rarely contract directly with the end users of intermodal service, but sell intermodal rail service to transportation providers such as steamship lines, intermodal marketing companies, major truck lines, which then market a door-to-door service to the ultimate customer.

Table 19: Potential Modal Comparative Advantage by Market

Wei

ght

Intercity Distance in Miles 0–250 250–500 500–1,000 1,000–2,000 >2,000

Retail Goods/Light Truck Truck Truck Truck/ Rail Intermodal

Truck/ Rail Intermodal

Consumer Durables and other Manufactured Goods/Moderate

Truck/Rail Truck/Rail/ Rail Intermodal

Truck/Rail/ Rail Intermodal

Truck/Rail /Rail Intermodal

Truck/Rail /Rail Intermodal

Bulk Goods/Heavy Truck/Rail/ Water

Rail/Water/ Truck

Rail/Water Rail/Water Rail/Water

Source: National Rail Plan

Figure 13: Intermodal Train

Source: By BriYYZ from Toronto, Canada (BNSF 5216 West Kingman Canyon AZ) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons


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Some industries may use more than one rail service, and within each industry are a range of subindustries that use differing rail services. But the following rail services are generally used by the industries as shown in Table 20. Other industries also rely on rail, but those shown in Table 20 are some of the more rail-intensive industries.

Table 20: Industry Usage of Rail Services

Industry Rail Service Usage Electric Utility, Coal Mining Unit Train Metallic Ore Mining Unit Train Crude Oil Development Unit Train Grain Producers, Marketers, Processing Industries Unit Train, Manifest, Intermodal

Non-metallic Mineral Manufacturing Unit Train and Manifest Ethanol Manufacturing Unit Train and Manifest Automotive Manufacturing and Distribution Unit train for finished vehicles, Intermodal for

vehicle parts Food Manufacturing Manifest, but also Unit Train for inbound Chemical Manufacturing Manifest Steel Manufacturing Manifest Pulp and Paper Manufacturing Manifest Lumber and Wood Products Manifest Plastic and Rubber Product Manufacturing Manifest Agriculture Excluding Grain Manifest, some Intermodal for export Retail (though steamship lines, intermodal marketing companies) Intermodal

Small Package Delivery/Less-than-Truckload Intermodal

Rail Service Patterns Forecasting and planning are key components of rail service. If railroads know what will be demanded of their systems, then they can plan their resources accordingly. But some commodities lend themselves to more consistent demand patterns than others. Some gradations are as follows:

• Conveyor-Like Commodities. Train services, such as unit train movements of coal between mines and power plants resemble enlarged conveyor belts, where trainsets continuously cycle between origin and destination. For base-load power plants, there may be seasonality to demand, but on a week-by-week basis, demand is relatively consistent.

• Uncorrelated Demand. Other rail shipments may be less consistent, where shippers deliver shipments to different origins and different destinations in different volumes at different times. The sources of supply to a given destination may vary or the customers of a shipper could vary over time. From the railroad’s perspective, providing these services may be more difficult to plan for, although this difficulty may be eased with shipper-supplied forecasts. Furthermore, one shipper’s peak delivery schedule may correspond to a dip in another’s demand. Ideally, these peaks and valleys cancel each other out. For manifest freight, if more traffic than usual shows up, then the railroad will run an “extra” train on this service, perhaps one extra a week to


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handle the overflow traffic. If less traffic than usual shows up, the railroad might “annul” the train on that day.

• Correlated Demand. Certain shippers respond to changes in commodity prices. A rise in commodity prices may prompt multiple shippers to want to sell their product. Unfortunately, from the railroad’s perspective, multiple shippers within a given area may be responding to the same commodity price changes, thus creating a surge in demand. Commodities such as grain or crude oil have the potential to create these types of surges.

As an example of differences in shipment patterns, Table 21 below displays the average absolute percent change in weekly originated carloads from the Western Trunk Line Territory from the 2014 STB Public Waybill Sample. The Western Trunk Line Territory roughly corresponds to the Midwest west of Chicago and the Mississippi River. This analysis includes only those commodities for which over 400,000 carloads were shipped in 2014. Timing of shipments was approximated by dates that waybills were cut. The results suggest that the weekly variation in carloads was highest for crude oil shipments while the lowest variation was for coal and freight all kinds (intermodal).

Table 21: 2014 Average Percent Absolute Change in Carloads Originated by Commodity from Western Trunk Line Territory for Commodities over 400,000 Carloads

Average Percent Absolute Change by Week of Carloads Originated from Western Trunk Line Territory Commodity

17% Crude Petroleum, Natural Gas, or Gasoline

13% Farm Products 13% Metallic Ores 11% Non-metallic Minerals 11% Food or Kindred Products 10% Transportation Equipment 9% Chemicals or Allied Products 8% Freight All Kinds 6% Coal

Source: WSP | Parsons Brinckerhoff Analysis of STB 2014 Public Waybill Sample

In addition to short-term variations as reflected in Table 21, industries differ in their seasonality. For example, intermodal traffic tends to peak in late summer/early fall as retailers prepare for the holiday season; grain shipments peak after fall harvest. Coal shipments typically peak in the summer when electricity demand is highest. Any service issues that may arise due to seasonal peaks will impact all traffic, but those industries that are creating the surge could be impacted more, since they are shipping more of their product during these peak times. Figure 14 displays the percentage change in average weekly carloadings between January 2006 and April 2015 for intermodal and grain traffic. Each October value has been highlighted in red. As shown, both intermodal and grain traffic tend to peak in October. Between 2004 and 2015, the STB asked Class I railroads their plans for handling the fall seasonal peaks in rail traffic due to concern over capacity during peak season. The STB discontinued this practice in 2016.


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Figure 14: Percentage Change in Weekly Average Carloads, Containers, and Trailers Originated by Month by Major U.S. Railroads

Source: Association of American Railroads

Equipment Ownership and Type Service needs vary depending upon whether equipment is owned by the railroad, owned/leased by the shipper, or owned by a third party. In general, concerns are as follows:

• Railroad-Owned or Leased Cars. These shippers tend to be more concerned about rail service reliability. They rely on the railroads to supply the cars that they need when they need them, in good condition. This has the potential to create an additional level of uncertainty which shippers that own their own cars do not experience. Equipment supply issues vary by type of equipment. For example, the fleet of boxcars has been declining in recent years, and users of boxcars have expressed concern over boxcar availability and the types of boxcars available. Some shippers have found equipment to be in poor condition, such as boxcars with leaking ceilings. Reliability is not only important to shippers in obtaining empty railcars to use, but is also important because railroads charge shippers demurrage if they do not load or unload railroad-owned cars within a specified period of time. But if railroads place empty or loaded cars at a

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Figure 15: North American Box Car Fleet (000’s)

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different date or time from when shippers expect them, the shipper may not have the resources to empty or load the cars within the designated time specified by the railroad (free time). Or shippers may need to incur extra cost to make those resources available to load or unload railcars at a time other than what was planned. The specific set of shipper concerns may depend on their contracts and specific agreements with railroads.

• Shipper-Owned or Leased Cars. Shippers that own or lease railcars will also be concerned about reliability, but may place relatively greater emphasis on cycle times. The better the cycle times, the better the usage of shipper investment in railcars. For example, if a shipper has 10 loads a day and a 10 day cycle time, the shipper needs 100 cars the fleet (plus maybe 10 percent extra for maintenance.) If the shipper has 10 loads a day and a 15 day cycle time, the shipper needs 150 cars in the fleet (plus maybe 10 percent extra).The empty component of cycle time can be as important as the loaded component. If the shipper has an equipment imbalance, the company may be just as hampered in serving its customer as a failure to deliver loaded cars. For certain commodities such as hazardous goods, the monitoring of railcars and extent of jostling may be an important consideration.

• Containers Owned by Third Parties. Shipping containers used in international service are typically owned by steamship lines. Domestic containers have a variety of owners, including railroads, and large integrated transportation companies such as truckload and less-than-truckload motor carriers or intermodal marketing companies. The ownership of containers by third parties places additional restriction on how shippers can use intermodal transportation. For example, steamship lines in the TransPacific trade often prefer to reposition containers from North America to Asia as quickly as possible, sometimes limiting container usage for U.S. export commodities.

• Railcars Owned by Third Parties. Nearly all intermodal well and flatcars in service in North America are owned by TTX, a railcar pooling company owned by North American Class I railroads. Intermodal cars never leave railroads’ intermodal networks and are never placed on shipper premises. Because shippers do not have a role in managing these cars, they do not directly impact shipper rail service needs. TTX also owns automotive multilevel flatcars, boxcars and various types of flatcars. From a shipper perspective, using these pooled railcars is somewhat similar to using a railroad-controlled railcar.

Table 22 displays car ownership by car type.


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Table 22: Car Ownership by Car Type, 2013

Car Type Railroad Shipper or Car Company

Box Cars 89% 11% Covered Hoppers 25% 75% Flat Cars* 65% 35% Refrigerator Cars 80% 20% Gondolas** 52% 48% Hoppers 41% 59% Tank Cars 0% 100% Other 27% 73% Total 35% 65%

Source: AAR, Railroad Facts, 2014 Edition

*Most Flat Cars listed as Shipper or Car Company are intermodal cars owned by TTX, while other types of flat cars are more likely to be controlled by railroads **Gondolas used in coal service are more likely to be controlled by shippers, while gondolas used for other functions are more likely to be controlled by railroads Translating car type ownership to shipper industry yields the results as shown in Table 23: Car Ownership by Shipper Industry. Most North American railcars are owned by leasing companies, which lease their cars to both railroads and shippers.


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Table 23: Car Ownership by Shipper Industry

Industry Types of Railcars Used Ownership/Control

Electric Utility, Coal Mining Gondolas, Hoppers Generally Shipper in the West, Railroad in

the East Metallic Ore Mining Gondolas, Hoppers Railroad, Shipper Crude Oil Development Tank Shipper Grain Producers, Marketers, Processing Industries Hoppers Railroad, Shipper

Non-metallic Mineral Manufacturing Gondolas, Hoppers Railroad, Shipper Ethanol Manufacturing Tank Shipper Automotive Manufacturing and Distribution Various Railroad, Shipper,

Third Party

Food Manufacturing Various Railroad, Shipper, Third Party

Chemical Manufacturing Tank, Hoppers Shipper Steel Manufacturing Various Railroad

Pulp and Paper Manufacturing Boxcars, Hoppers and Gondolas Railroad

Lumber and Wood Products Flat Cars, Hoppers and Gondolas Railroad

Plastic and Rubber Product Manufacturing Various Railroad, Shipper Agriculture Excluding Grain Various Railroad, Shipper

Retail Intermodal Third Party (TTX for

railcar, other for container)

Small Package Delivery/Less-than-Truckload Intermodal

Shipper (TTX for railcar, shipper for

container)

Shipper Size and Location Railroads derive most of their revenues from a relatively small number of shippers. As an example, Transport Canada recently sponsored a review of CN and CP service to shippers.41 As part of the project, researchers found that four percent of CN customers and three percent of CP customers accounted for 82 and 76 percent of traffic on each carrier’s network, respectively. While the U.S. rail market is much larger than that of Canada, there is little reason to believe that a similar distribution of customer size does not exist in the United States. The revenues that support Class I rail networks come from a relatively small portion of customers. Most Class I shippers are relatively minor from the perspective of the railroad’s revenue.

41 QGI Consulting for Transport Canada, Rail Freight Service Review: Analysis of Railway Fulfillment of Shipper Demand and Transit Times, March 2010.


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Table 24: Canadian Shippers by Size and Traffic Volume

Shipper Size—Shipments per Year

Number of Shippers Percentage Traffic on Railway CN CP CN CP

Large >5,000 101 (4%) 74 (3%) 82% 76% Medium 1,001–5,000 155 (6%) 127 (5%) 12% 14%

Small 301–1,000 195 (8%) 204 (8%) 4% 6% Very Small <301 2,107 (82%) 2,132 (84%) 2% 4%

Source: QGI Consulting

Small shipper size raises a number of rail service issues:

• Access to Rail Network/Switch Frequency. Rail service may not always be available for small volume shipments. For railroads, particularly Class I railroads, it is costly to pick up and drop off individual or small groups of railcars. When rail service is available, it may be infrequent, since railroads may prefer shippers to consolidate shipment. Availability of equipment may be lower.

• Customer Service. A number of rail shippers have noted customer service as a major concern, finding it difficult to reach Class I railroad personnel. This will tend to be a more significant issue for small shippers. Furthermore, larger shippers have access to information technology resources that allow them to perform transactions, check the status of rail shipments electronically and other functions that improve their interactions with Class I railroads. These resource may be too expensive for small shippers.

• Rates and Charges. Small shippers do not benefit from volume pricing, may face higher fees such as demurrage. They pay spot or tariff rates, and do not benefit from lower priced contracts.

Shipper size can be characterized in multiple ways. One railroad customer may ship a lot of carloads from one or several locations but nationwide not account for a particularly large portion of a railroad’s traffic, whereas another may ship large volumes overall but not ship in large quantities from one of many different locations. By their nature, users of unit train service usually qualify as “large” in terms of volume shipped from a given location. But manifest shippers may also ship and receive reasonably large volumes from their facilities, even if they do not ship in unit train quantities between specific origins and destinations. Table 25: Volume by Location of Typical Shipper below displays typical shipper size by location for industries that often ship by rail.


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Table 25: Volume by Location of Typical Shipper

Industry Volume of Typical Shipper Electric Utility, Coal Mining Large Metallic Ore Mining Large Crude Oil Development Large Grain Producers, Marketers, Processing Industries Varies

Non-metallic Mineral Manufacturing Varies Ethanol Manufacturing Large Automotive Manufacturing and Distribution Large

Food Manufacturing Varies Chemical Manufacturing Varies Steel Manufacturing Large Pulp and Paper Manufacturing Varies Lumber and Wood Products Varies Plastic and Rubber Product Manufacturing Varies Agriculture Excluding Grain Varies Retail (through transportation companies) Large Small Package Delivery/Less-than-Truckload Large

Problems accessing the rail network relate not only to the size of shippers, but also their location. The cost of building and maintaining access to industrial sites tends to increase with the traffic density of rail lines on which industrial sites are located. For high traffic rail lines, railroads want to avoid trains interfering with through traffic as they enter or leave local sidings for both operational and safety reasons. Mainlines are often a single track serving both directions. If a train blocks the mainline to pick up a few cars, it blocks trains going both ways.

Class I railroads often require shippers that desire to locate facilities on mainlines to build the railroad equivalent of interstate highway ramps, which allow trains to exit or enter the mainline at speed. For a low volume shipper, rail service would not justify the millions of dollars required to build this infrastructure. If they are available, short line railroads often offer a relatively low cost option for accessing the rail network, where investment in industrial access is relatively low. Figure 16 below displays an example railroad policy regarding new industrial locations. Requirements for building access to the corridors in purple are more stringent than those in yellow, which are more stringent than those that are green.


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Figure 16: Guidelines for Rail Service to New or Modified Industry Locations on Union Pacific’s Mainline

Source: Union Pacific Railroad Websitep

Customer Relationship with the Railroad Industry In 2014 customers experienced rail service problems as the rail network, particularly in the Upper Midwest became congested. Growing crude oil shipments competed with a large grain harvest and a surge in intermodal traffic. As a result of rail congestion, Minnesota corn, soybean, and wheat growers lost an estimated $99.3 million in revenues from March to May 2014; while North Dakota spring wheat, corn, and soybean growers lost $66.6 million from January to April 2014.42 Furthermore, the USDA estimated that grain and oilseed producers throughout the Upper Midwest incurred an extra $570 million in transport costs (3 percent of cash receipts) in 2014.43 Coal burning utilities were impacted both in 2013 and 2014 by a lack of sufficient peak capacity. In November 2014, for example, utilities across the Midwest and Southwest faced a sudden drawdown of their coal stockpiles due to severe cold weather, but were unable to get the surge deliveries they needed due to rail congestion—this led to the curtailment of power generation at some units.44 Intermodal shippers accelerated container imports through West Coast ports in the early summer of 2014 due to an upcoming labor contract expiration at the ports, leading to a sudden demand for intermodal rail capacity—at the same time that the railroads were still dealing with a record grain harvest backlog.45

42 “Minnesota Basis Analysis, Report for the Minnesota Department of Agriculture,” Edward Usett, University of Minnesota, July 10, 2014; “Effects of 2013/2014 Rail Transportation problems on North Dakota Farm Income,” Frayne Olson, North Dakota State University, Executive Summary to Senator Heidi Heitkamp. 43 “Rail Service Challenges,” op. cit., pp. 36-37. 44 “Running low on coal, utilities ask regulators to prod railroads,” The News & Observer, November 13, 2014; “Power plants worry about winter coal supplies,” Minnesota Star Tribune, November 15, 2014. 45 “Intermodal shippers face rocky peak season,” Journal of Commerce (JOC.com), July 14, 2014.


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In the wake of these service problems, a number of companies and industries felt that in rationing rail capacity, railroads had favored certain industries over others. For example, a filing to the STB on behalf of the Alliance for Rail Competition argued that, “Simply stated, it appears that shuttle train shipments of wheat and unit train shipments of other commodities, at least in the West in recent months, have received a higher priority than shipments of 49 cars or less.”46 Another filing in the same proceeding claimed that, “Even during periods not characterized by the type of severe service disruptions being experienced currently, ag rail users often find that when rail capacity is in tight supply, rail service appears to suffer more for our sector than other sectors that may be viewed as ‘higher-priority’ by railroads, such as coal, energy and intermodal.”47 This leads to question of whether industries differ in their relationship to railroads and whether railroads prioritize certain types of traffic over others. If certain industries routinely receive lower priority, then maybe public-private partnerships that improve capacity help those industries more than others.

As a result of service problems in 2014, the STB instituted a requirement that railroads supply performance data in more detail than had previously been required. Figure 17 below displays average train speeds between the week of October 22, 2014 and January 4, 2017.48 The results indicate that average intermodal train speeds are significantly higher than those of other types of trains. In order to maintain high train speeds for premium intermodal service, it is likely that railroads must prioritize intermodal trains. On the one hand, intermodal shippers benefit, since their trains receive priority. On the other, intermodal shippers will be more sensitive to capacity issues, since these premium services require a fluid network to operate correctly. The average speeds of most other train services appear to be within several miles per hour of one another. The average speed of one train type may be higher than another in one month, but then lower in other months.

46 Opening Comments of the Alliance for Rail Competition et. al., STB Docket Ex Parte 724, United States Rail Service Issues – Performance Data Reporting, March 2, 2015. 47 Oral Statement of the National Grain and Feed Association Presented at Surface Transportation Board Public Hearing on Rail Service Issues, STB Docket Ex Parte 724, United States Rail Service Issues, April 10, 2014. 48 Average train speeds were reported by railroad. For each train type, speeds were averaged across railroads, weighted by the number of 2015 carloads handled by each railroad applicable to that train type.


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Figure 17: Average Train Speed by Train Type—Miles per Hour

Source: STB Ex Parte 724 Spreadsheet

The STB also required railroads to report average dwell time at origin for unit train shipments. This represents the time between a customer releasing an empty or loaded train for pick up and when the railroad begins to move the train toward its destination. The results displayed in Figure 18 below suggest that origin dwell time is typically highest for ethanol trains and grain trains, lowest for coal and crude oil trains, with automotive train origin dwell time split between the lowest and highest of the range.49 These differences primarily relate to the manner in which railcars are loaded or unloaded. For example, coal is carried in open top cars, which can be loaded or unloaded much faster than closed top cars, such as those used to carry grain. Therefore, the railroad’s road crew and locomotives are more likely to remain with a coal train or be close by as it is loaded or unloaded. When loading time is longer, such as for grain trains, a new road crew and locomotives will typically need to be dispatched from another location to pick up a grain train. Regardless of the reason, these trends may create the perception to grain and ethanol shippers that their service is slower than for certain industries such as electric power, or crude oil production.

49 Average origin terminal dwell times were reported by railroad. For each train type, dwell times were averaged across railroads, weighted by the number of 2015 carloads originated by each railroad applicable to that train type.

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Figure 18: Average Dwell Time at Origin for Unit Train Movements—Hours

Source: STB Ex Parte 724 Spreadsheet

A Canadian analysis used detailed proprietary information from CP and CN to assess variations in transit times depending on shipper size, access to rail competition, core versus non-core railway origins, and short lines versus CN/CP origins.50 No major systemic differences in rail service were found across these variables. Applicability of a Canadian study to the United States may be limited, but it provides an example of a study where analysts gained access to requisite data and did not find preferential railroad treatment of one group of shippers over others.

A recent paper on rail line capacity for the National Cooperative Highway Research Program (NCHRP) noted that Class I railroads typically use a tiered system of stated priorities for line haul train movements, whereby passenger trains and intermodal trains receive a priority, while less time-sensitive trains like grain or coal trains receive a lower priority.51 In reality though, beyond a few trains that are assigned the very highest priority, most trains are handled on a first-come first-served basis. Allowing all trains to operate at similar speeds is the most efficient use of available capacity. It is highly inefficient to move trains out of order, stopping some and allowing others to pass. Dispatchers rarely have the flexibility to expedite more than a handful of trains. Large speed differentials consume a lot of capacity. With limited capacity, it is more efficient to maintain similar train speeds to the extent possible.

In summary, there is little evidence to suggest that railroads favor trains of certain industries over others in line haul movements beyond intermodal. Doing so would be operationally inefficient. Railroads do make crews and locomotives available to industries at different rates, but this appears to not represent

50 QGI Consulting for Transport Canada, Rail Freight Service Review: Analysis of Railway Fulfillment of Shipper Demand and Transit Times, March 2010. 51 Justin Fox, Paula Hirsch, Om Kanike, NCHRP Report 773, Capacity Modeling Guidebook for Shared-Use Passenger and Freight Rail Operations, 2014.

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a preferential treatment of certain industries over others, but rather operational differences in the loading and unloading of trains. 52

Relative Reliance on Rail In identifying those industries that will most benefit from resolving rail issues, one consideration will be relative industry reliance on rail and on fast, reliable rail service. Generally, the costs of slow, unreliable rail service are as follows:

• Buying alternative shipping mode; • Relying on railcar to truck transloading; • Product/raw material storage and/or facilities; • Product spoilage; • Railcar storage facilities; • Railcar ownership or demurrage; • Production slowdown/stoppage; • Lost business; • Late delivery penalties; • Additional administrative costs; • Additional working capital.

Is not entirely possible to characterize relative industry reliance on rail nationwide. For example, some coal shippers may be completely dependent upon rail, while others may be located close to coal mines and can use truck or may have access to waterborne transportation options. Some grain shippers may be entirely dependent on rail for export grain shipments, located far from points of export or other reasonable transportation options, while others may have viable lake/barge alternatives. Some industries such as steel or paper compete in international markets, so that while they may use both truck and rail for inbound/outbound shipments, a transportation savings can translate to a delivered cost that is competitive compared to uncompetitive otherwise. Thus, the availability and quality of rail service becomes a key competitive differentiator. For steamship lines and some motor carriers the availability of intermodal service can determine the markets they compete in, but these shippers also provide the containers or trailers and require return of their empty equipment in order for their networks to function.

An assessment of relative reliance on rail would need to be made on a case-by-case basis, but as a general indicator, Table 26: Rail Modal Share for Moves over 500 Miles (Rail Percentage of 2015 Tons Shipped) below displays rail modal share by commodity for non-intermodal moves over 500 miles. The results suggest that coal shippers have the highest reliance on rail for relatively distant moves, followed by grain shippers, chemical shippers, sand shippers, and fertilizer shippers.

52 The Canadian study mentioned above found that different types of shippers were receiving approximately equal service in terms of railroads making railcars available, but no analogous analysis is available in the U.S.


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Table 26: Rail Modal Share for Moves over 500 Miles (Rail Percentage of 2015 Tons Shipped)

Commodity Rail Modal Share Commodity Rail Modal Share Coal 94% Wood prods. 27% Cereal grains 69% Milled grain prods. 25% Basic chemicals 56% Other foodstuffs 24% Natural sands 56% Transport equip. 24% Fertilizers 54% Other ag prods. 23% Metallic ores 49% Logs 20% Gravel 42% Base metals 20% Nonmetallic minerals 34% Waste/scrap 19% Plastics/rubber 33% Nonmetal min.

prods. 18%

Newsprint/paper 33% Motorized vehicles 14% Animal feed 32% Chemical prods. 14% Fuel oils 31% Paper articles 12% Alcoholic beverages 31% Articles-base metal 10% Gasoline 27% Crude petroleum 10%

Source: FHWA Freight Analysis Framework—4.3

Translating Table 26 to a relative reliance on the rail industry for long-distance shipments yields the results as shown in Table 27. Industries that are more heavily reliant on rail will tend to be more sensitive to railroad competition, since fewer multimodal competitive options are available.


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Table 27: Relative Industry Reliance on Rail for Long-Distance Shipments

Industry Relative Reliance on Railroad Industry Electric Utility, Coal Mining High Metallic Ore Mining High Crude Oil Development Medium/Low (Depends on location,

availability of pipeline transportation) Grain Producers, Marketers, Processing Industries

High (Depends on location, availability of barge transportation

Non-metallic Mineral Manufacturing Medium/Low (Depends on availability of local resources)

Ethanol Manufacturing Medium (Depends on location) Automotive Manufacturing and Distribution

High for finished vehicles, low for parts

Food Manufacturing Medium/Low (Depends on commodity and location)

Chemical Manufacturing High/Medium (Depends on commodity and location)

Steel Manufacturing Medium/Low Pulp and Paper Manufacturing Medium Lumber and Wood Products Medium Plastic and Rubber Product Manufacturing Medium (Depends on location) Agriculture Excluding Grain Medium/Low Retail (through transportation companies) Medium/Low Small Package Delivery/Less-than-Truckload Medium/Low

Summary of Factors that Influence Rail Needs Table 28 below summarizes factors that influence relative industry rail needs that have been presented in this chapter. These in turn drive the differing rail needs as shown in Table 29.

In terms of their rail service needs, industries overlap. All industries benefit from lower cycle times and more reliable rail service. But as shown above, the different types of rail services that shippers use create different areas of emphasis in their needs. Table 29 below provides a summary of the relative emphasis of rail issues for different industries. Individual companies and subindustries may differ from those shown in Table 29, but the table is intended to provide a broad picture of industry needs. In some cases, designations are intended to provide an indication of the frequency with which these issues are encountered in the industry.


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Table 28: Summary of Factors that Influence Industry Railroad Needs

Industry Rail Service Usage Volatility of Demand Patterns, Peaking

Ownership/Control of Railcars

Volume of Typical Shipper

Average Train Speed

Unit Train Load/Unload

Time

Rail Mode Share >500

Miles

Electric Utility, Coal Mining Unit Train Low Generally Shipper in the

West, Railroad in the East Large Medium Fast High

Metallic Ore Mining Unit Train Medium/high Railroad, Shipper Large Medium No data High

Crude Oil Development Unit Train High Shipper Large Medium Fast

Medium/Low (Depends on location)

Grain Producers, Marketers, Processing Industries

Unit Train, Manifest, Intermodal High Railroad, Shipper Varies Medium Slow

High (Depends on location, availability of barge transportation

Non-metallic Mineral Production

Unit Train and Manifest Medium Railroad, Shipper Varies Medium No data

Medium/Low (Depends on availability of local resources)

Ethanol Manufacturing

Unit Train and Manifest Medium Shipper Large Medium Slow

Medium (Depends on location)

Automotive Manufacturing and Distribution

Unit train for finished vehicles, Intermodal and Carload/Manifest for vehicle parts

Medium Railroad, Shipper, Third Party (TTX) Large Medium Medium

High for finished vehicles

Food Manufacturing

Manifest, but also Unit Train for inbound Medium Railroad, Shipper, Third Party Varies Medium Slow

Medium/Low (Depends on commodity and location)

Chemical Manufacturing Manifest Medium Shipper Varies Medium NA High/Medium

(Depends on


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Industry Rail Service Usage Volatility of Demand Patterns, Peaking

Ownership/Control of Railcars

Volume of Typical Shipper

Average Train Speed

Unit Train Load/Unload

Time

Rail Mode Share >500

Miles

commodity and location)

Steel Manufacturing Manifest Medium Railroad Large Medium NA Medium/Low

Pulp and Paper Manufacturing

Manifest Medium Railroad Varies Medium NA Medium

Lumber and Wood Products

Manifest Medium Railroad Varies Medium NA Medium

Plastic and Rubber Product Manufacturing

Manifest Medium Railroad, Shipper Varies Medium NA Medium (Depends on location)

Agriculture Excluding Grain

Manifest, some Intermodal for export Medium Railroad, Shipper Varies Medium NA Medium/Low

Retail Intermodal Medium/High Third Party (TTX for railcars, other for containers) Large High NA

Varies depending on origin/ destination

Small Package Delivery/Less-than-Truckload

Intermodal Medium Shipper (TTX for railcars, shipper for containers) Large High NA

Varies depending on origin/ destination


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Table 29: Relative Importance of Rail Needs by Industry

Industry Mainline Capacity

Branch Line or Short Line

Condition, Network Access

Local Rail Service, Classification Yard

Capacity

Intermodal Terminal

Availability, Capacity, Access

Railroad Railcar Availability

Rail to Rail Competition

Electric Utility, Coal Mining Medium Medium Low NA Medium High Metallic Ore Mining Medium Medium Low NA Medium High Crude Oil Development High Low Low NA Low Medium Grain Producers, Marketers, Processing Industries

High High Medium Medium High High

Non-metallic Mineral Manufacturing

Medium High High NA Medium Medium

Ethanol Manufacturing Medium High Medium NA Low Medium Automotive Manufacturing and Distribution

Medium Low Medium High Medium Medium

Food Manufacturing Medium High High Low Medium Medium Chemical Manufacturing Medium High High Low Low High Steel Manufacturing Medium High High Medium High Medium Pulp and Paper Manufacturing Medium High High Low High Medium Lumber and Wood Products Medium High High Medium High Medium Plastic and Rubber Product Manufacturing

Medium High High Medium Medium Medium

Agriculture Excluding Grain Medium High High Medium Medium Medium Retail High Low Low High Low Medium Small Package Delivery/Less-than-Truckload

High Low Low High Low Medium


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Illustrations of How Industries Use Rail To describe industry rail service concerns, it is useful to consider how rail fits into shippers’ supply chains. Below are several illustrations of how rail services are used by different industries.

• Beer. Large breweries receive inbound shipments of unit trains of grain. They receive water from pipelines. The input raw materials are of low value, and the outbound beer is of higher value. With more valuable inventory, it is preferable to use a faster transportation mode. In addition, the major brewers have regional production that shortens lengths of haul, and the destinations (distribution centers and some direct store delivery) are more dispersed, which reduces the amount of freight traveling between specific origins and destinations. Therefore a higher proportion of the outbound flows will be by truck first to get the beer into distribution centers and onto store shelves faster, and second because the transport economics favor it.

• Coal. For coal-fired power plants, the cost of transporting the coal to the power plant is in many cases higher than the cost of the coal purchased at the mine. Storage is relatively inexpensive, since coal is stored in a pile. With a stockpile, on-time delivery is less important as long as the stockpile does not fall below a certain level. Regular supply at the lowest possible cost are key logistics objectives.

• Automotive. Auto plants rely on timely shipments of inbound parts to avoid shutting down the assembly line, which runs on minimal inventory. Unless parts are imported from overseas, they arrive mainly by truck. Outbound shipments of assembled autos are by rail or truck. Truck is used if automobiles are to be shipped to markets in close proximity to the assembly plant or if demand is dispersed and thus there is not enough demand at a given location to justify a trainload of automobiles. Rail is used if automobiles are shipped to relatively distant markets with a high concentration of demand. Once the train arrives at destination, automobiles are distributed locally by truck.

• Oil. Crude oil moves from the well head either by a pipeline gathering network or by truck to a main storage facility, a processing plant, or a shipping point. Oil can be shipped overland to distant refineries by transmission pipelines or rail. Tank railcars used for shipping oil are privately owned. They cannot be reloaded with different commodities and therefore have to be returned empty.

• Grain. Grains for export are shipped by unit train or barge to port terminals. For the bulk grain supply chain (as opposed to containerized), grain is then shipped to global markets on chartered vessels. But train schedules and ship schedules must be coordinated. If grain is not available when the ship is due to be loaded, the buyer or seller could be required to pay demurrage on the ship which is very costly. This also puts pressure on the equipment supply, since the scheduled departure depends on sufficient railcars to fill the train.

Summary of Implications The purpose of this technical chapter is to investigate which industries are sensitive to rail service issues and which industries would benefit the most from the resolution of these issues. This knowledge can help state agencies to target potential public/private partnerships to specific industries, to communicate benefits of projects to industry leaders and public officials, and to coordinate with other states on corridor or network-level needs. The extent to which an industry will benefit from public involvement in a freight project depends upon the type of project. Industries in which most shippers are small and use manifest freight service will tend to benefit from projects that improve their access to the freight rail


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system. These can be improvements to short line/regional railroads, improvements to the Class I branch line network, siding and switch improvements, transload facilities, or projects that consolidate freight demand and allow shippers to share the cost of rail access, such as through industrial parks. These shippers will also benefit from improvements not only to low-density rail lines or improving access to mainlines, but also improvements to classification yards and other infrastructure unique to manifest rail service.

Shippers that use intermodal service benefit from improvements to intermodal access, such as new or expanded terminals and better roadway access to terminals. While nearly all rail shippers are impacted by mainline capacity issues, some are more sensitive than others. Because intermodal is a premium service whereby intermodal trains must maintain speeds faster than other trains, intermodal shippers tend to be impacted by mainline capacity issues sooner than others. Grain shipments are seasonal and have the potential for volatile demand as multiple shippers respond to commodity prices, and so are also more sensitive to mainline capacity. Shippers for which rail has a high modal share will be more susceptible to competition issues, since they lack modal options. These industries will benefit from projects that build access to competing railroads, establish industrial locations served by multiple railroads, or provide improvements to short line/regional railroads that interchange with multiple Class I railroads.


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Chapter 4: Parameters for State-Railroad Public Private Partnerships (P3/PPP) This chapter provides guidance to states on evaluating and entering into public/private partnerships (PPPs). It includes:

1. A discussion of the role of public and private investment, and the areas where joint funding can be appropriate;

2. How railroads evaluate infrastructure investments and how this can influence the identification of projects for PPP;

3. A survey of current methods to assess the public need for projects; 4. Presentation of several PPP case studies and why these projects were appropriate for a PPP.

Role of Public and Private Investment and Areas Where Joint Funding Can Be Appropriate Most investment in freight rail infrastructure in the U.S. is made by the private sector. An analysis of the financial statements of Class I railroads53 and the short line holding company, Genesee & Wyoming, Inc., suggests that these railroads have budgeted about $11.5 billion in capital expenditures in the United States for 2017, which is 17.5 percent of 2016 operating revenues. Over half of budgeted capital spending, $6.6 billion is planned for basic capital maintenance, replacement of track and structures that have reached the ends of their useful lives. Another $1.2 billion is planned to be spent on positive train control (PTC) implementation, and $1.9 billion to be spent on rolling stock and other investments. The remaining $1.8 billion will be spent on expansion, including expansion to enable new business or improve operations.

53 Includes estimates for U.S. operations of Canadian Pacific Railway and Canadian National Railway based on past U.S. capital expenditures and expected distribution of 2017 capital expenditures, system-wide.


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Figure 19: Class I Railroad and Genesee & Wyoming, Inc. Estimated 2017 Capital Expenditure Budgets (Billions)

In comparison, combined federal and state funding for freight rail will probably be less than $250 million,54 or around two percent of total capital expenditure. The importance of public funding varies significantly by type of railroad. For a Class I railroad, public sector funding may be a relatively small source of funds compared to the railroad’s internally funded capital budget. But for a short line or regional railroad, public sector funding may be much more significant. For example, the short line holding company, Genesee & Wyoming, Inc.’s 2016 Annual Report indicates that the company expects that about 24 percent of North American subsidiary railroads’ capital budgets will be publicly funded.

Joint Funding Opportunities A starting point for selecting projects that could be opportunities for joint public and private investment is as shown in Figure 20 where there exists a series of projects in which the public sector would be interested in investing, and a series of projects in which the private sector would be interested in investing. Opportunities for public/private partnerships lie where the two overlap.

54 Based on an estimate of the portion of federal multimodal grant programs used for rail, combined state rail program.

$6.6, 57%$1.9, 17%

$1.8, 16%

$1.2, 10%

Replacement Rolling Stock and Other Expansion PTC


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Figure 20: Venn Diagram of Public/Private Partnerships

In general, the public sector will be able to justify investing in projects that yield public benefits in excess of public sector costs. Similarly, a private sector railroad will need to justify investments by its financial return. One way of considering the role of public and private investment in freight rail projects is through weighting public benefits and private financial returns as in Figure 21.55 Projects that do not yield public benefits in excess of costs or have low private financial returns are not undertaken. Projects that have high private financial returns, but few public benefits are left to the private sector to fund.

Projects in the upper left quadrant of Figure 21 can be attractive to the public sector for funding. These projects provide the private sector with low financial return or significant financial risk. Public funding can ensure financial viability and thereby encourage private participation. For projects in the upper right quadrant (high public benefit/high private returns) public participation may be more difficult to justify. While they have significant public benefits, the projects also have attractive private returns which suggest no need for public participation. There are, however, reasons why the public sector may want to invest in projects in this quadrant:

• Accelerates project completion; • Lowers private sector risk; • Results in higher prioritization within a railroad capital program; • Ensures project completion, thereby “locking down” public benefits;

55 A similar framework was presented in National Cooperative Rail Research Program (NCRRP) 1, Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects, by CPCS et. al., 2015.

What the public sector would

invest in

What the private sector would

invest in

Public/ Private

Partnership

Opportunities


53

• Increases private sector financing capacity; or, • Complements other public sector investments, such as a port.

Figure 21: Framework for Public and Private Funding Freight Rail Infrastructure Projects

Public/Private Partnerships and Private Returns To understand the role of public and private investment, it is useful to examine the gradations of private returns.

Contribution Margin For the private sector to provide rail service at all, revenues should exceed day-to-day costs.56 These costs are referred to as variable costs, and the extent to which revenues exceed variable costs is the contribution margin. Variable costs increase or decrease with the volume of traffic. When revenues do not cover variable costs, the railroad loses money on every ton shipped, unless the service is subsidized.57

56 There are some examples of railroads providing service at below cost, such as when subsidizing other highly profitable services. 57 In discussing railroad financial returns, one often refers to “operating expenses” as well, and the extent to which railroad operations cover operating expenses. These are the costs of running a railroad, but not all operating expenses are variable. Some are incurred whether or not the railroad ships anything at all.

High Public Benefits Low Financial Returns or High Risk

High Public Benefits High Financial Returns

Public sector funding can be a means to support (1) financial viability, (2) reduce risk

Invest

Can be privately funded, but public support can (1) reduce risk, (2) accelerate public benefits, (3) lock-down public benefits

??????

Low Public Benefits Low Financial Returns

Low Public Benefits High Financial Returns

Project not justified, should not move forward

Not Invest

Private sector funding

Not Invest

Private Financial Returns Low Financial Returns

High Financial Returns

Publ

ic Be

nefit

s

Low Public Benefits

High Public Benefits


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Railroads also have significant fixed costs. Infrastructure, locomotives, freight cars, and other assets are in place irrespective of volume. A railroad needs to pay for the investment whether it operates a hundred trains or no trains. While a railroad may be willing to provide service when contribution margins do not fully cover fixed costs, the railroad will not be able to reinvest in its asset base. In the short run, however, as long as the contribution margin of a particular service is greater than zero, that service is worth providing as it helps to defray fixed costs. Table 30 describes actions under different conditions of profitability. The role of private sector profitability and public/private partnerships will be further clarified in this section.

Table 30: Railroad Service Strategies

Contribution Level Negative Contribution Margin

Positive Contribution Margin/Fixed Cost Not

Covered

Positive Contribution Margin/Fixed Cost

Covered Railroad Service Strategy

Exit Existing Service Provide Service Until Asset Replacement is

Required

Expand Service

Contribution margin is relevant to the public funding decision. Historically, public sector funding has focused on projects with insufficient contribution to cover the incremental investment cost. A rail service may produce extensive public benefits. However, if the contribution from that service does not cover the full cost of required new investment, portions of the capital costs may be subsidized by the public in order for the public benefits to be realized. A good example is state funding of the rehabilitation of a short line railroad’s infrastructure. Railroad revenues may cover the cost of operations but not be adequate to cover the cost of improvements. Public investment reduces the investment cost to the railroad.

State agencies can also act to mitigate the impacts of the lag between investment outlays and the materialization of traffic. With private sector funding alone, this lag may render the project financially infeasible even though it could be profitable in the future. This is analogous to the investment that venture capitalists make in new businesses whose revenue takes time to ramp up. Public and private sector roles, depending upon project private sector returns are further detailed in Table 31.


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Table 31: Railroad Service and Investment Strategy

Contribution Level

Negative Contribution Margin

Positive Contribution Margin/Fixed Cost

Not Covered

Positive Contribution Margin/Fixed Cost Covered

Railroad Service Strategy

Exit Existing Service Provide Service Until Asset Replacement is

Required

Expand Service

Railroad Investment Strategy

Disinvest No Investment Invest

Public Role/Impact

Operating Subsidy; Investment Unlikely

Participation Makes the

Investment/Service Feasible

Not Required

Market Risk Another consideration is risk. The long economic life of a rail asset requires a long-term outlook on revenues. A risk is that freight traffic will not materialize as planned. Economic recessions, changes in consumption and production patterns, and business failures occur. Freight revenues may be focused on a narrow customer base with an uncertain future. Railroads also face liability risk for rail/highway crossings and other areas of risk exposure. A railroad factors risk into its development decisions by increasing the required financial return for projects considered to have greater risks. The required higher return can discourage investment. Public sector investment may help to mitigate this risk and thereby reduce the required return. In some cases, the public sector assumes the risk on the railroad’s behalf. Table 32 expands the discussion of public/private sector roles to account for risk.

Table 32: Public Role Depending on Profitability and Risk

Contribution Level

Negative Contribution

Margin

Positive Contribution

Margin/Fixed Cost Not Covered


Margin/Fixed Cost Covered/High Risk


Margin/Fixed Cost Covered/Low Risk

Railroad Service Strategy

Exit Existing Service

Provide Service Until Asset

Replacement is Required

Provide Service Provide Service

Railroad Investment Strategy

Disinvest No Investment Maybe Invest Invest

Public Role/Impact

Operating Subsidy;

Investment Unlikely

Participation Makes the

Investment/Service Feasible

Participation Reduces Risk;

Makes the Investment/Service

Feasible

Not Required


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Table 33 utilizes the categories shown in Table 32 and then applies these to potential rail projects. The intent is to provide examples of how the framework developed could be applied to a range of rail projects. Returning to the Venn diagram Figure 20, the left-hand column represents projects in which railroads would be unwilling to participate. The right-hand column represents projects which the public sector would leave to private funding alone. The two center columns are PPP opportunities.


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Table 33: Sample Projects and Private Sector Profitability



Covered

Positive Contribution Margin/Fixed Cost Covered/High Risk

Positive Contribution Margin/Fixed Cost Covered/Low Risk

Capacity Projects (e.g. double track, new passing siding, crossovers)

Improves capacity on rail line beyond the level that railroad usually needs to serve its customers.

Capacity that will probably be needed for the railroad to maintain service standards given potential freight volumes, but traffic volumes for line is highly uncertain

Much needed capacity on high density mainline. Without project, delays and customer service are very likely decline to intolerable levels, costs would increase.

Track Rehabilitation Projects (new ties, rail replacement, surfacing, ditching, etc.)

Rehabilitation of a low-density rail line with moderate growth prospects

Rehabilitation of medium or high density rail line with potentially major increases in traffic, but traffic volumes are uncertain

New customer(s) will generate major increases in traffic and will provide a profitable stream of income for years to come. Rehabilitation is required to serve customer(s), and cost can be recouped from customer income.

Bypass Projects (new routes around urban areas)

Municipality would like to bypass rail line around downtown, resulting in slower rail transit times and making it difficult for railroad to access customers

Municipality would like to bypass rail line around downtown, which would moderately improve rail operations and would not adversely impact access to customers

Industrial Access Projects (spurs and sidings to access industry)

New access to a small customer on a busy mainline, with inadequate infrastructure that would reduce fluidity of mainline

New access to medium sized customers on busy mainline. Infrastructure is adequate so no impact on mainline fluidity

New access to major new industrial development on mainline with adequate infrastructure, but traffic will be contingent on industrial area’s recruitment efforts which is uncertain

New access to a major new customer, income from which would easily recoup the cost of building access

Intermodal Terminals (container terminals)

New intermodal terminal with little customer base or poor container balance, awkward location in carrier’s network

New intermodal terminal in a market with moderate prospects, serving the terminal would be reasonably easy given carrier’s network

New terminal that could potentially represent a major expansion of carrier’s business, but it also represents a new market with which the carrier has little experience

New replacement intermodal terminal for another that is at capacity. If not for the new terminal, the railroad run out of capacity and turn profitable business away


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Covered

Positive Contribution Margin/Fixed Cost Covered/High Risk

Positive Contribution Margin/Fixed Cost Covered/Low Risk

Natural Disaster Recovery

Natural disaster makes a lightly used rail line impassible. Railroad would never be able to recover the cost of putting the line back into service through revenues earned on the line.

Natural disaster causes extensive damage on a rail line with moderate traffic. Although rail line is probably worth repairing, railroad is concerned about the high cost and whether traffic will recover.

Natural disaster makes a core mainline impassible.


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The role of public funding differs for Class I and Class II/Class III railroads. Over the past several years, Class I railroad returns on invested capital have exceeded the cost of capital. Consequently, most Class I railroads have had sufficient internally generated funds to cover their basic capital investment needs. The role of public sector investment becomes that of offering an incentive, so that public sector monies provide railroads with an inducement to serve new markets, provide new services, or provide better service than they otherwise would have. On the other hand, Class II or Class III railroads, in many cases, do not have the financial resources to cover their basic capital needs. Most short line and regional railroads were created from low density rail lines that were divested by Class I railroads, or remnants of previously liquidated railroads. Because these lines were not investment priorities of their previous owners, they often suffer from significant deferred maintenance. In some cases, the revenue earned by the short line is not enough to “catch up” on the needed maintenance. Ideally, the public sector’s contribution to rehabilitating short line and regional railroads serves as a requisite “push” to allow the carrier to become operationally and financially self-sufficient. However, in some situations, public sector funding serves as no more than a “band aid” that enables the railroad to continue providing service.

Subsequent sections will explore tools that states can use to assess public/private partnerships, how to evaluate potential project public benefits, and how to understand the role and appropriateness of public funding based on the nature of the project and the role of the project to the railroad.

Funding and Financing In considering the role of public/private partnerships, it is important to define the public sector’s participation in a project. Funding refers to monies that are permanently made available for a project. When the public sector “funds” a project, this generally refers to a grant. Financing refers to tools to access money to pay for a project, often when money is needed to pay for an investment before revenues are sufficient to provide these monies. When the public sector “finances” a project, this often refers to a loan. The discussion of public/private partnerships in this analysis focuses on those projects where the public sector provides funding rather than just financing. But many of the considerations presented herein could be relevant to public sector financing of projects as well. Low interest loan programs reduce borrowing costs, similar to a grant program lowering construction costs. However, loan programs require an additional set of considerations, such as assessing the creditworthiness of applicants.

Projects that Must be Funded and Projects that Might be Funded Another dimension to consider when evaluating public funding of rail assets, is whether the project supports a mission-critical capital need, one that from the railroad’s perspective must be funded, or a project that the railroad would perceive as option, one that might be funded or might not. Investment addressing mission-critical needs are those basic investments that the railroad will need to make to continue to function properly, whereas development investments aim to expand the scope of the railroad’s activities beyond what they are today. For Class III railroads, the carrier may not be able to fund all mission-critical capital needs, and public sector investment in both mission-critical and optional projects could be appropriate. For Class I railroads, the carrier should fund mission-critical capital needs itself, and public funding serves as an incentive for optional capital needs.

Whether a project is mission-critical or optional could provide a consideration in considering whether public sector participation in a project is appropriate. For optional projects, public sector support can provide an incentive to enable rail services that would not otherwise be available without public sector


60

support. By contrast, Class I railroads would typically fund mission-critical investments internally, since these are activities necessary for normal operations. Funding for mission critical projects could be appropriate for Class II and Class III railroads, since these carriers cannot always entirely fund these activities through their own revenues. Guidelines for exploring whether projects are optional or mission-critical are detailed in the following section.

PPPs beyond Railroads This chapter focuses on projects jointly funded by railroads and the public sector. But railroads are not the only private sector partners for freight rail infrastructure projects. Shippers can also be PPP partners, where shippers and the public sector jointly invest in improved rail access, loading/unloading facilities. These projects not only enable shippers to access the rail network and improve operations within shipper facilities, but they also can have implications for operations on the wider rail network. For example, improved switches and access points can reduce interference on rail lines. Unit loading facilities can consolidate shipments to fewer trains with fewer stops. To some extent, the evaluation of when PPPs are appropriate with shippers would be similar to that for PPPs with railroads. Questions to ask would be those such as:

• Do public benefits justify public investment? • How mission-critical is the rail infrastructure? Without public sector support, would the

organization not build or improve its rail infrastructure? • Would the shipper likely have the financial resources to build the infrastructure on its own?

But unlike railroads that rely on a specific rail network at a specific location, shippers can often choose among different locations to site their facilities. Adequate public benefits are still required to justify public involvement, but debates over whether the project is highly profitable from the shippers’ perspective or whether it is optional/mission critical may be less relevant within a competitive environment.

Conclusions—Role of PPPs • Public sector funding of freight rail projects is only appropriate if public benefits exceed public

costs.

• One framework to consider PPPs relates the appropriateness off PPPs to private financial returns. A PPP for a project with large public benefits is appropriate if public sector funding fills a financial gap such that the private sector has an incentive to participate where it otherwise would not have. PPPs may also be appropriate for projects with high private financial returns if public sector funding mitigates risk that otherwise would have prohibited private interest or if public sector funding accelerates project completion.

• A second framework is consideration of whether the project is mission-critical or discretionary to the railroad. Class I railroads will generally self-fund mission-critical projects, whereas the public section can provide an incentive to railroads to complete optional projects. In the case of Class II or Class III railroads, public sector participation in both mission critical and optional projects can be appropriate due to limited financial resources.


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How Railroads Evaluate Infrastructure Investments In order to better understand the role of PPPs, it is useful to explore how railroads evaluate infrastructure investments. A good understanding of the railroad point of view will assist in working with railroads to identify PPPs. States can understand how projects funded by PPPs fit into railroad capital budgets. This understanding is also useful to estimate the economic need for public participation in a project, i.e. whether the project would probably have been privately funded anyway without public sector participation.

Railroads go through an annual process to evaluate how to allocate the capital budget for the upcoming year. As discussed above, there are two broad categories of projects.

• Projects that Must Be Funded or Mission-Critical Projects—includes maintenance and plant renewal for infrastructure and rolling stock. This category also includes government mandates, such as positive train control (PTC). It includes scheduled maintenance and unscheduled repairs.

• Projects that Might Be Funded or Optional—includes debottlenecking to reduce delays, extensions to a new customer, new information technology (IT) solutions, public private partnership (PPP) opportunities, and other special projects.

Projects that must be funded consume the majority of the annual capital budgets. Although the railroads have some leeway in deferring or accelerating maintenance projects and rolling stock purchases, or in the timing of federally mandated projects, most of these expenditures are predetermined by state of good repair schedules or government deadlines. These projects require evaluation, but the evaluation is often based more on age, usage, and condition of the infrastructure or equipment, rather than on a financial assessment of the benefits.

Projects that might be funded and are optional, however, do require a more rigorous calculation of internal rate of return (IRR) or other determination of the benefits and risks to identify the projects to be undertaken. It is relatively easy to establish an IRR for projects such as a line extension to a new customer, but much more difficult to establish an IRR for projects that add capacity to reduce delay for dozens of customers.

After a brief discussion of the projects that must be funded, this section describes the process for determining how railroads decide where to apply the remaining capital budget for maximum benefit.


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This section concludes with a discussion of the types of projects railroads prefer to fund internally, and those that are more suitable to PPPs.

Maintenance, Rolling Stock, and Government Mandates U.S. freight railroads reinvest close to 20 percent of operating revenue back into infrastructure, rolling stock, and technology each year, making them one of the most capital intensive industries, as illustrated in Figure 22. As estimated previously in Figure 19 above, $11.5 billion has been budgeted for 2017 capital expenditures by the Class I railroads and Genesee & Wyoming, which is 17.2 percent of their 2016 combined operating revenue.58 The majority of these funds will go toward maintaining and renewing the 175,000 miles of track, 550 million crossties, 28,000 locomotives, and 1.6 million railcars that are necessary to move more than 1.6 trillion ton-miles of freight annually.59 The funding available for expansion and special projects totals $1.8 billion, which on average is a few hundred million for each of the seven Class I railroads and Genesee & Wyoming operating in the U.S.

Figure 22: Capital Expenditure as % of Revenue for Various U.S. Industries, Average 2011–2015

These categories of capital expenditures are further broken down in Figure 23. This list is not exhaustive, but indicates the types of projects that might fall under each category. For example, a new IT system is often funded through the IT Department budget, but if it is a new, large system, it may fall under special projects in the capital budget. The two government mandates listed—PTC and High Hazard Flammable Trains (HHFT)—are current mandates, but these will change over time.

58 Association of American Railroads, “Class I Railroad Statistics,” May 1, 2017, Genesee & Wyoming 2016 Annual Report. 59 Ibid.


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Figure 23: Categories of Capital Expenditure

Scheduled Maintenance Scheduled maintenance is typically known in advance, and is based on age, usage, and condition. Steel rail and wooden and concrete crossties, for example, are replaced as the components reach the end of their design life or after a predetermined amount of tonnage has passed. Crossties have an average life of 35 to 40 years, so railroads tend to replace approximately 3 percent per year. For the 500 million crossties on the Class I rail network, this equals approximately 15 million annual tie replacements.60 Scheduled maintenance includes not only rail and crossties, but ballast, subgrade, catenary wires (for electrified lines), vegetation control, etc.

Replacement based on age or usage is known as rule-based or systematic maintenance. Improvements in automated track inspection and data analytics capabilities are allowing railroads to adopt conditioned-based maintenance and move toward predictive maintenance. Performing maintenance based on the condition of the rail, crossties, ballast and other infrastructure, rather than age or usage, has allowed less money to be spent on maintenance while retaining safe operations, thus freeing capital for other uses. Predictive maintenance, calculating the probability of failure over a planning horizon, has the potential to lead to even further savings.

Scheduled maintenance of existing infrastructure has a high priority and consumes over half of the annual capital budget. Without this maintenance, the railroads could not continue to safely serve their existing customers.

Unscheduled Maintenance Unscheduled maintenance occurs when something fails, or is deteriorating faster than expected. An example might be a switch that is frozen and prevents trains from changing tracks. It can also reflect unexpected natural phenomena, such as a washout. The railroad must determine if this is something that requires immediate attention, or if it is something that can be deferred and scheduled in a future capital budget. Simple, quick fixes are often funded from the operating budget. More expensive fixes that require immediate attention to prevent disruptions in service or to mitigate safety concerns may divert funds from other capital expenditure projects, or may require allocation of additional funds or borrowing approval by Senior Management and/or the Board.

60 Association of American Railroads, “Analysis of Class I Railroads,” 2015.


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Bridges & Large Infrastructure Deteriorating bridges that must be replaced, and other large maintenance expenses, are ideally tracked over time with failure rates established by engineers. This allows expensive replacement and maintenance of this infrastructure to be planned with the scheduled maintenance. Unexpected failures, due to natural or man-caused events, follow the pattern for unscheduled maintenance.

Locomotives Capital Expenditures for locomotives include new purchases and major rehabilitations of existing locomotives. New locomotives include renewals, i.e., locomotives purchased to replace retired locomotives, and locomotives purchased to expand capacity. Standard maintenance, such as greasing or replacing wheels, typically comes from the operating or mechanical budgets rather than capital budgets.

The rate of replacements is generally based on the age and condition of the fleet, or in some cases, to take advantage of new technologies. Much like the crosstie example above, the railroads typically will plan to replace a percentage of locomotives each year. Newer locomotives may be used in long-haul service, but as they age are then moved to shorter hauls, local service, and/or yard service. The lifespan is often 30 to 40 years.

Locomotives purchased for expansion, i.e., traffic growth, will be evaluated using an IRR or other financial assessment. At approximately $3 million per locomotive and a 30+ year lifespan, railroads are cautious about expanding their fleets.

As of 2017 railroads have had low levels of investment in new locomotives over the past several years due to a current surplus. Future investments will depend on the duration of the surplus, which will depend on traffic volumes.

Railcars Like locomotives, railcars are acquired both as replacements and fleet expansion. However, a large difference between locomotives and railcars is that railroads own about 40 percent of the 1.6 million active railcars, while shippers and leasing companies own the other 60 percent. Railroads either purchase, lease, or rehabilitate existing cars as part of their capital programs. Another category of railcar capital expenditure involves retrofitting cars to meet government regulations, as is currently happening with tank cars moving in high-hazardous flammable trains, as discussed under HHFT below.

Railcars have a maximum age of 50 years, at which point the car is sold for scrap and a replacement car is needed. By tracking the age and condition of the railcar fleet, the railroads know how many cars of each railcar type need to be replaced each year to maintain the current car capacity. This will be adjusted based on forecasts, to reduce car types currently in surplus, and to add car types currently in deficit.

Replacement is also triggered by new technologies or car designs. The economic benefits of the larger 286,000 pound gross weight on rail freight car accelerated the retirement of less economic lower capacity cars. Similarly the introduction of double stack car technology led to early replacement of the single stack flat cars.

Expansion opportunities can also lead to purchases of fleets, such as that recently associated with growth in crude-by-rail opportunities spurred by the Bakken region in North Dakota, including not only shipper-owned or leased tank cars, but also cars that could haul frac sand and drilling equipment into


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the Bakken region. Purchases like this will typically be evaluated through calculation of the IRR by the railroad, shipper, or other car owner.

Other Equipment Other equipment includes items like track inspection vehicles and maintenance equipment, such as rail grinders, ballast spreaders or new track construction machines. These also fall into the renewal and expansion categories seen with locomotives and railcars, though newer technologies that can help reduce maintenance costs may increase the benefits, thus accelerating the renewal process.

PTC Unfunded government mandates, of which positive train control (PTC) is a primary example, require capital investment from the railroads. PTC is a technology designed to improve rail safety by preventing train-to-train collisions, derailments due to excessive speed and unauthorized movement of trains onto occupied track sections. Although the U.S. Congress mandated that the Class I railroads install PTC on track meeting specific criteria, railroads are almost solely responsible for covering the estimated $11 billion installation price, along with all of the long-term maintenance costs.61

PTC installation is funded as part of the capital budget, thus reducing the amount available for other projects. The railroads have flexibility in how much to fund each year, provided they are progressing toward installation by the end of 2018, and operational by the end of 2020.

HHFT Another unfunded government mandate involves safety improvements for “high-hazard flammable trains” (“HHFT”) that was first issued in 2015 by the Pipeline Hazardous Material Safety Administration (PHMSA). The ruling applies to all HHFT trains, but the motivation behind PHMSA’s action was public concern over a string of high-profile train accidents involving crude oil tank cars. The PHMSA ruling contains six safety improvement measures, almost all of which are directed at mitigating the severity of an accident. The cost to implement the PHMSA regulations will be expensive to both railroads and tank car owners (primarily shippers and lessors). In the original rule, PHMSA estimated the total cost to be $2.5 billion, with 70 percent of the cost allocated to retrofitting tank cars to the DOT 117 standard.62 One of the safety measures, still under investigation by PHMSA, involves the installation of electronically controlled pneumatic brakes (ECP), which could add another $2.9B to the price tag. While the costs of the PHMSA rule can be spread out over 20 years, most of the costs will be realized over the next few years so the railroad can comply with the HHFT safety improvements. Similar to PTC, the HHFT regulations will reduce the amount of capital available for rail expansion and other projects.

Evaluating Expansion and Other Special Projects Unlike capitalized maintenance and asset replacement, projects that are related to capacity expansion and new business require an assessment of the internal rate of return (IRR) or other tangible measure of financial return to be approved for funding. This is done through an annual process to determine which project should receive capital funding. While the details will vary from railroad to railroad, the basic process is depicted in Figure 24.

61 Association of American Railroads, “Positive Train Control,” March 2017. 62 “20-Year Cost and Benefits by Stand-Alone Regulatory Amendments 2015-2034,” Federal Register, Vol. 80, No. 89, Friday, May 8, 2015, Rules and Regulations, p. 26649, Table 4-20.


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Figure 24: The Railroad Capital Planning Process

Step 1: Identify Potential Projects Railroads initiate an annual capital budgeting process typically in late summer or early fall. All company departments are allowed to enter their requests for capital funding, which is used to form a project list. Most requests come from:

• Marketing Department—will identify new customers, new and expanded customer facilities, and are usually integral in helping develop traffic forecasts.

• Strategic Planning/Network Planning/Simulation Group—responsible for modelling the network to identify areas of congestion and determine strategies to remove bottlenecks, strategic network needs of the railroad.

• Operating Department, Especially Field Operations—identify the locations and problems causing the most “pain” in the network, rolling stock needs. Field staff are especially helpful since they are closest to problems occurring in yards and along the corridors.

• Engineering Department—will have input on maintenance needs, especially larger maintenance projects not fitting the typical renewal process. This might include major bridges that have reached the end of their design life.

The project list is generally not a comprehensive list of every possible project, but rather a list that has been through some vetting. For example, requests from the field generally reflect the top areas of operational problems, not a large wish list. Ideally, the railroads like to “stay ahead of the curve” by looking one to two years out to predict the most likely problem locations so they are known well in advance, although there are times the railroad must invest to address unanticipated growth.


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Projects from prior years that did not receive funding may be carried forward to the new list. Some projects stay on the list for years. These deferred projects often involve future benefits to the railroad, and have been placed on hold due to high project risk, or to the presence of too many projects with larger immediate benefits in prior fiscal years. For example, during the oil boom there was a backlog of projects to add capacity—more than could be funded in a single year. These projects were carried forward, but now many have been dropped as the demand for crude-by-rail has declined.

With regard to PPPs, it is best to start project discussions as early as possible with the railroad. This will allow for early vetting of the project need, and will help to get the project on the list so it can run through the normal capital budgeting process.

Step 2: Evaluate Potential Projects Depending upon the railroad, strategic planning, capital planning or finance or other group is responsible for evaluating and prioritizing the requested projects. Each of the departments submitting projects has usually performed an initial vetting and prioritization of their projects, so the strategic planning group will evaluate and prioritize all the projects into a single list by considering the investments, benefits and risks.

For non-line-of-road projects (e.g., terminals, support facilities for new customers, information technology) it is relatively easy to place dollar value on the benefits and calculate an internal rate of return (IRR). These projects can be evaluated using a standard financial analysis. For line-of-road it is often more difficult to put a dollar value on the financial return since the benefits will need to be divided among all the various trains operating on the line. One method is to use a simulation model to calculate statistics, such as the reduction in delay minutes or crew use, and then estimate a dollar value from those statistics that represents the financial return.

Mostly, the desire to eliminate current operational problems drives the priority of a project. If traffic is projected to increase, and the railroad simulation models show the network cannot accommodate the growth, it will cause problems. If this is a near-term forecast with high certainty, then projects to eliminate this operational problem will receive a high priority.

Risk is also a factor in prioritizing projects. If the traffic growth is not certain, as often happens with longer-term forecasts, then the project moves down the priority list. Projects that impact a high, diverse amount of traffic, such as a mainline into Chicago, tend to have lower risk and an improved chance of receiving funding.

One way to think about the evaluation process is shown in Figure 25, where the impact to the railroad is contained on the x-axis and the timing of the project is contained on the y-axis. Impact includes both operational and financial impact, while the timing of the need includes both the urgency and an element of risk. Projects falling into the upper right-hand quadrant have the highest likelihood of receiving funding for the upcoming fiscal year. Projects in the lower right-hand side may receive funding, but it depends on the length of time before the benefits will be realized and the amount of risk associated with future projections.


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Figure 25: Priority Matrix for Railroad Investments

Projects on the left-hand side of Figure 25 have a lower priority of receiving funding since they will by definition have a lower IRR or financial benefit. Projects in the upper left-hand quadrant may receive funding if there is available capital budget and if the IRR is acceptable. Projects in the lower left-hand quadrant are the least likely to be funded due to the lower, more uncertain financial return.

Step 3: Establish Capital Budget The final list of proposed projects is then organized and a capital budget meeting is held to review the list and make the final prioritization. This meeting is attended with senior staff from strategic planning, transportation, marketing, finance and relevant technical staff. The goal of the meeting is to prepare a final, prioritized project list for presentation to the Board of Directors. In many cases, railroads’ Boards provide preliminary guidance on the size of the capital budget in advance. The Board uses this information, along with the financial performance of the railroad, to establish the capital budget for the next fiscal year. In recent years, the total capital budget has tended to be 15 to 20 percent of the operating revenue from the prior year.

Step 4: Select Projects to Fund Once the capital budget amount is known, the railroad will make the final determination of which projects will receive funding during the upcoming fiscal year, which projects will be deferred to the next year, and which projects will be dropped from the list.

While most of the capital budget is earmarked for maintenance, rolling stock, government mandates, and expansion projects, it is also possible to set aside funding for projects that have not been fully evaluated. This might happen if the full costs and financial returns are not known by the time of the Board meeting, though initial indications are that the project will have a high enough priority that it should start prior to the next annual capital budget cycle. PPPs could fall into this category if the level of public funding and the timing of the project are still being negotiated.

Step 5: Determine if PPP is Appropriate Ideally, potential public private partnerships are known in advance and enter the capital budgeting process during project identification in Step 1 and follow the same steps as the projects initiated within


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the railroad. However, PPPs are listed here as a separate Step 5 since they involve special considerations, including:

• Railroads will consider PPPs for projects that are currently on their capital project list. A project low on the list may be increased in priority since public funding will change the IRR and/or risk profile of the project. This is especially true if it is “now or never” public funding.

• In general, the more geographically constrained the funding, the harder it is for the railroad to identify network problems and justify investments of capital budget.

o The most popular types of PPP programs, from the perspective of the railroads, are programs not geographically constrained. For example, the railroad can canvas their network to identify what projects they want to work with a sponsor to submit to the TIGER Grant program.

o Less popular PPPs are where the money has to be spent in a county or political district. The railroad may have no pressing needs in that region, and therefore does not want to invest capital that is needed elsewhere.

• Other considerations from the railroad perspective on whether or not to enter into a PPP include:

o Project timeline. If the railroad needs to complete the project quickly, they will usually prefer to avoid the public funding process. If it looks like public funding will cause the project to continue for years, the railroad may not be interested.

o Volume requirements. The railroad is careful if they have to guarantee a minimum volume, since they cannot control the shipper or the economy.

o Matching capital. The amount of capital the railroad will be required to match is a consideration, since this impacts the IRR.

o Partnership. Railroads like to work with states and public entities that are good partners, where they can build a good working relationship.

• Large projects like the Crescent Corridor, National Gateway, and Heartland Corridor require more lead time and more vetting of the project than the typical capital project. The railroad has to consider the future potential for the corridor and how the investment impacts the overall network.

• Finally, it should be noted that some railroads, and some CEOs, will decline public money on principal, preferring to retain a culture of independence and self-funding.

Projects Best Suited for Public Private Partnerships Figure 26 recasts Figure 25 from the viewpoint of PPPs. Assuming there are sufficient public benefits to justify public investment, then projects falling into the upper left-hand and lower right-hand quadrants should have the highest priority for pursuing a PPP.


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Figure 26: Project Categories Most Suitable for Public Investments, Where Impact and Need Are Viewed from the Railroad’s Perspective

Immediate Need, Higher Impact—projects addressing an immediate need and having a high impact on elimination of operating bottlenecks or on revenue generation will receive the highest priority for railroad capital funds. Given the mission-critical nature of these projects, railroads will often prefer to fund them internally to maintain control and prevent any possible delays associated with public participation.

Immediate Need, Lower Impact—projects addressing an immediate need but with a lower impact on operations and/or revenue may be funded by the railroad, depending on the availability of capital funds. The railroad may also choose to defer these projects, especially operational improvements, until congestion and delays worsen. Projects falling into this category, if they also have significant public benefits, may be good candidates for PPPs, since a PPP will increase the likelihood the project will be completed.

Future Need, Higher Impact—projects with a high impact on future railroad operations and/or revenue may be funded if there is a high degree of certainty, or may be deferred to address more immediate needs. These projects often are the best candidates for PPPs since public funding reduces the risk to the railroad, accelerating the project so public benefits can be realized sooner.

Future Need, Lower Impact—uncertain, future needs with low impact on railroad operations or revenue are unlikely to be of interest to the railroad, and are not good choices for PPPs even if they have high public benefits. Any railroad investment in these projects would reduce the capital available for the more immediate needs and the higher impact projects.

Assessing Likelihood Project Would Have Been Privately Funded without Public Support The question of whether or not a railroad would likely fund the project without public money is difficult for a public agency to determine. In many cases, it is not even known by the railroad until the capital budget is allocated. However, the public agency should keep Figure 25 in mind and ask the following questions, for each of which a positive answer increases the probability the railroad will fund the project without public money:


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1. Is the investment for a mission-critical need, i.e. an investment that the railroad must make in order to operate properly?

a. Are there reports of increasing service delays that might prompt the railroad to take immediate action?

b. Is this a known bottleneck that has increasingly become more congested?

c. Are there forecasts, over the next one to two years, which indicate large traffic growth along a corridor? An example of this was the oil boom and large investment by the railroads to transport crude-by-rail.

2. Is the project low risk from an investment standpoint?

a. Is the project on a mainline, part of the railroad’s core network, supporting many customers, thus reducing the risks?

b. Will the railroad have sole access to a facility, such as a port or industrial park, or is it served by other railroads?

c. Does a rail line extension into a new facility serve one of the railroad’s preferred customers (e.g., a line into a new auto plant)?

3. Would public funding require a lengthy NEPA or other process, or require commitments to transport a minimum traffic volume?

If an agency would prefer to move beyond considering the indicators listed and attempt to calculate railroads’ financial returns from projects, the primary methods for calculating project returns are:

• Payback Period Analysis—Estimates how long it will take the railroad to earn back the money that was spent on a project;

• Net Present Value (NPV)—Is the difference between the present value of cash inflows and the present value of cash outflows;

• Internal Rate of Return (IRR)—Is the discount rate at which the net present value of all cash flows from an investment would equal zero.

Each of these methodologies relies on an estimate of the project cost and the subsequent project impacts on cash flows. An agency would need to request this information from the railroad. In the case of an NPV calculation, the analyst supplies an expected rate of return and then determines whether net cash flows discounted by that rate are positive or negative. In the case of an IRR calculation, the analyst calculates the IRR and then compares it to the expected rate of return or “hurdle rate.”

Railroads usually require the estimated return on project to be significantly higher than the railroad’s weighted average cost of capital (WACC). Depending upon the risk of the project, as of mid-2017 the expected rate of return will often fall into the 15 to 20 percent range. A project with low to moderate risk and a rate of return significantly in excess of 20 percent may indicate that the project would be profitable from the railroad’s point of view.


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Differences between Class I and Class II/Class III Evaluations of Infrastructure Projects The discussion above primarily focuses on Class I evaluations of infrastructure projects, although many of the same principles would likely hold true for Class II, and Class III carriers. Carriers maintain ongoing capital budgets to address mission-critical needs, similar to Class I carriers. However, some carriers look to the public sector for assistance with mission-critical projects, not just optional investments, such as through state programs that focus on short line rehabilitation projects.

For short line and regional railroads that are owned by holding companies, the parent company often serves a role similar to that of a bank. The subsidiary railroad funds routine mission-critical capital needs through its own retained earnings, but to fund major opportunities, the carrier will seek financing from the parent company. The subsidiary is expected to repay the investment through higher future returns. The holding company could provide the matching funds for a major PPP.

Conclusions: How Railroads Evaluate Infrastructure Projects • Most of railroads’ capital spending is for capital maintenance and replacement, and other

mission-critical needs. These projects can be scheduled or unscheduled. Financial analysis is generally not necessary to justify these expenditures to railroad Boards.

• For projects that support expansion and new business opportunities, railroads evaluate projects through a capital planning process that considers the timing of needs and project financial impacts. Often, whether a project will or will not be funded is unknown until the end of the process. The availability of public funds can affect the decision, lowering risk or increasing the return on projects that may otherwise not have been financially feasible.

• Public funding can be appropriate for projects that have a high level of public benefits and, from the railroad’s point of view, are either expected to represent an immediate need but with low near-term financial return or a more future long-term need with high financial return. Projects with high financial returns and immediate need will be funded by the railroad, and railroads will not be interested in funding projects with low financial impact, serving a future need.

• It is difficult for public agencies to gauge whether railroads will fund projects on their own without public sector participation, but indicators to consider determine whether projects are mission-critical and their relative risk and return.

Assessing the Public Need for a Project As discussed previously, a PPP is only appropriate if the public benefits yielded by a project significantly exceed its costs. Otherwise, the public sector would have little interest in supporting the project regardless of private sector financial return or decision-making. In providing guidance to states on how to assess PPPs, it is useful to review methodologies used to assess the public benefits of projects, advantages and disadvantages of approaches, and issues that states currently face as they make these determinations.

Public Sector Approaches to Evaluating Freight Projects Methodologies used to evaluate freight rail projects differ widely, depending on the size, nature, and funding source of the project. Generally, three broad approaches are used today.


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1. Scoring by Public Agency Staff or Outside Party. Scorers are given a set of criteria by which projects are to be evaluated, typically relating to the agency’s goals and objectives. The scorers are agency staff or other individuals with significant knowledge of rail transportation. Based upon project descriptions, presentations, and other non-quantitative information, the scorers rate the project per each of the given criteria. Each criterion is weighted by its relative importance to the agency. If multiple scorers are evaluating the project, their scores are averaged. The advantage of this approach is that it is relatively simple and inexpensive to implement. It can also account for non-quantifiable information about which the scorers might be aware. The disadvantage is the subjectivity and potential for scoring to be influenced by scorers’ biases. Also, while this approach allows projects to be evaluated against each other, it does not measure benefits, which then can be compared to costs.

2. Performance Measures and Other Considerations. A quantitative measure provides an indicator of the extent that the project will accomplish a goal or objective. For example, projects could be evaluated by the projected change in rail traffic volume, either tons or carloads that result from the project. Other indicators can be in the form of “Yes/No,” such as the examples, “Does the project enable a multimodal connection” or “Does the project eliminate unnecessary grade crossings?” Performance measures have the benefit of being more objective than scoring, but they do not consider non-quantifiable issues. Furthermore, it is only possible to compare similar projects. Projects focused on safety, for example, may not easily be compared to projects intended to improve economic development or transportation efficiency, since the relevant performance measures would be different. Performance measure data may also be costly to collect, or the assumptions used to develop the performance measures could be subjective.

3. Benefit/Cost Analysis. Benefit/cost analysis employs many of the same parameters that could be used as performance measures, but are monetized to permit a comparison with costs. Monetization also places the value of different types of benefits on the same scale. In addition, by using financial discounting, consideration is given to the timing of benefits applying greater value to near-term benefits.

The advantage of benefit/cost analysis is that public benefits are compared to costs, thus providing a measure of social return on the public investment. The benefits represent taxpayers’ incentives to provide public funding and services. Furthermore, because the value of competing projects are expressed as a common unit, monetary value, projects can be more readily compared to each other. The disadvantage of benefit/cost analysis is the time required to collect the information and conduct the analysis. Similar to performance measures, benefit/cost analysis only captures those considerations that can be quantified. While benefit/cost analysis may carry the appearance of objectivity, in fact, the results are only as valid as the input data. The input information may be based number of assumptions, and the development of these assumptions can be subjective.

Due to each approach having advantages and disadvantages, state freight rail investment programs often combine approaches for evaluating projects. Some examples of combinations are:

• The ratio of benefits to costs is used as one of several criteria in evaluating a project, with each criterion assigned a weight for scoring projects;

• Benefit/cost analysis is used as a screening tool with benefits having to exceed costs for a project to be considered for further evaluation using other criteria;


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• Benefit/cost ratio and performance measures are used as quantifiable criteria, while staff scoring is used for non-quantifiable criteria;

• For smaller projects, a combination of scoring and performance measures are used.

For approaches that combine multiple evaluation methodologies, the separate evaluation methodologies are converted to a common basis, so that they can be added to produce a single overall project evaluation. For example, a benefit/cost ratio may provide the basis for an index which is aggregated along with other indexes that capture performance measures, and finally are combined with staff scoring indexes. The component scores are weighted and then summed or averaged to a total project score.

Examples of Evaluation Methodologies

Washington State Washington State Department of Transportation (WSDOT) administers rail grant and loan programs. WSDOT developed a rail project assessment methodology required by legislative directive in 2008. The agency has developed a spreadsheet model to help with this. An abbreviated version of the model is used to analyze smaller projects for the state’s regular programs, while a full version is used to evaluate larger projects. Under the evaluation methodology, a benefit/cost analysis serves as a screening tool. The benefit/cost analysis measures the project’s impact on future road and rail maintenance costs, shipper costs, automobile delays at grade crossings, new and retained jobs, increased tax revenues from industrial development, and safety and the environment comparing these to project costs. If the project has a benefit/cost ratio less than one, the evaluation ends. If a project has a benefit/cost ratio greater than one, the evaluation proceeds to the next step of scoring the project on the likelihood that project will advance six legislative goals and objectives:

1. Economic, safety, or environmental advantages of freight movement by rail compared to alternative models;

2. Self-sustaining economic development that creates family wage jobs; 3. Preservation of transportation corridors that would be otherwise lost; 4. Increased access to efficient and cost-effective transport to market for Washington's agricultural

and industrial products; 5. Better integration and cooperation within the regional, national, and international systems of

freight; 6. Mitigation of impacts of increased rail traffic on communities.

The evaluator then scores the likelihood the project will be completed on schedule without major problems, considering partner funding and project readiness, scope, resources, budget, schedule, and equipment needs. Finally, the evaluator scores the project on who will be receiving the benefits (state, ports, trucking companies, shippers, railroads, communities). The extent to which benefits accrue to the state inform the extent to which state funding is considered appropriate for the project and the extent to which partners should be sharing in the cost. The results are then compiled, and a recommendation is made.

Oregon ConnectOregon is a lottery-backed bond initiative to invest in air, rail, marine, transit, and bicycle/pedestrian infrastructure. Once applications are received, Oregon Department of Transportation


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(ODOT) staff review them for completeness and feasibility (scope, schedule and cost are reasonable, construction impacts are reasonable) and forward those that qualify to modal (for rail, this is the Rail Advisory Committee) and regional committees, and subsequently to a Final Review Committee for review and ranking. These committees are comprised of a range of stakeholders. Projects are then submitted to the Oregon Transportation Commission. An important component of the project review is a calculation of projected economic benefits by applicants including impacts on jobs and unemployment, and estimated project cost. The review committees also score the projects on five statutory considerations:

1. Whether a proposed transportation project reduces transportation costs for Oregon businesses or improves access to jobs and sources of labor;

2. Whether a proposed transportation project results in an economic benefit to the state; 3. Whether a proposed transportation project is a critical link connecting elements of Oregon’s

transportation system that will measurably improve utilization and efficiency of the system; 4. How much of the cost of a proposed transportation project can be borne by the applicant

for the grant or loan from any source other than the Multimodal Transportation Funds; and 5. Whether a proposed transportation project is ready for construction.

Iowa The Iowa Railroad Revolving Loan and Grant (RRLG) Program funds or finances projects in three categories.

1. Targeted Job Creation. These rail projects provide immediate, direct job opportunities. Loans and grants are available.

2. Rail Network Improvement. The rail projects support existing rail lines and service or improve industrial access when no direct job creation is involved. Only loans are available.

3. Rail Port Planning and Development. These are grants up to $100,000 available for studies to investigate the location, design, and funding requirements of rail multimodal facilities.

Targeted job creation projects are evaluated by both qualitative and quantitative scoring. The quantitative assessment scores on the following:

1. Job Leverage Score. The grant will fund a maximum of $12,000 per job created. The job leverage score increases as the grant amount per job created declines to $4,000.

2. Wage Quality Score. Jobs created by the program must be at least 100 percent of average laborshed wage. The wage quality score increases as jobs created by the project increase to 200 percent of average laborshed wage.

3. Capital Investment Score. The capital investment score increases up to $3,000 in private investment generated per $1 of grant money.

4. Loan Leverage Score. Applicants receive a higher score if most of the money requested is for a loan rather than a grant. The loan leverage score increases until the loan is up to 200 percent of the grant amount.

The qualitative assessment considers the transportation, economic, public, and other benefits presented in the application.


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Rail network improvement project evaluations consider the ratio of state financing to private/local financing and the transportation, economic, and public benefits of the project. Rail port planning and development program projects are evaluated considering what is known of the existing site to be included in the study, the goals of the study, and the ability of the sponsoring organization to oversee the study.

Pennsylvania The Pennsylvania Department of Transportation (PennDOT) administers two rail programs, the Rail Freight Assistance Program (RFAP), which is oriented toward smaller projects on short line and regional railroads, and the Capital Budget Transportation Assistance Program (TAP), which is geared toward larger projects. PennDOT uses a model that comprises three components. One module is a benefits estimator that that assesses rail projects on the basis of transportation impacts, including highway maintenance, safety, air emissions, diesel tax implications, and shipper savings. A second module estimates employment impacts of projects, both construction and ongoing jobs, including direct, indirect, and induced employment. A third module provides a qualitative assessment of projects. Outputs of the model are monetized benefits, projected employment, return on investment (project benefit minus cost divided by the project cost), a set of impacts on Pennsylvania including a return on Pennsylvania’s investment (benefits net of shipper savings—Pennsylvania investment divided by Pennsylvania investment), and a qualitative score. Following the application period, each applicant is given the opportunity to present its project(s) to PennDOT staff in Harrisburg and provide additional information to effectively evaluate the proposed project.

Virginia The Virginia Department of Rail and Public Transportation (DRPT) administers 1) Rail Industrial Access Grant program, which provides assistance to connect rail-traffic-generating facilities to the rail network, 2) the Rail Preservation Grants program which supports short line railroads, and 3) The Rail Enhancement Fund, which provides 70/30 matching assistance to a variety of passenger and freight rail projects. DRPT maintains three variations of a benefit/cost model customized to each program. Rail Preservation Program applicants provide carloading and job creation estimates. Staff evaluate according to qualitative and regulatory criteria with a contractor conducting the benefit/cost evaluation. For the Rail Industrial Access Grant Program, DRPT staff score projects on the number of carloads generated, added employment, non-state matching, jurisdictional unemployment rate, contribution to long-term viability of a shortline, and whether the project was included in initiatives by the Virginia Economic Development Partnership or the Virginia Department for Business Assistance. Once projects achieve a minimum score on these criteria, they are forwarded to the Commonwealth Transportation Board for final evaluation. For the Rail Enhancement Fund, DRPT performs a preliminary screening to make sure that projects are in compliance with minimum policy criteria. The project is then subject to a benefit/cost analysis performed by a contractor. For those projects with a benefit/cost ratio above one, the Railroad Advisory Board reviews and recommends projects to the DRPT Director for further review and recommendation. If recommended to by the DRPT Director, the project is forwarded to the Commonwealth Transportation Board for final review and obligation of state funds. In addition to the benefit/cost ratio, DRPT also considers the extent that projects:

• Address needs in state, regional, local plans; • Enhance competitiveness, including joint access to major shippers;


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• Be built quickly, within the six-year program of the state—and limit long-term liability; • Leverage public funds by drawing on sources of private funding; • Ensures the project will be used for stated purpose of proposed life span; • Contribute to the effectiveness of the entire transportation system (intermodalism); • Apply 90 percent of funds to capital improvements (limiting planning and engineering to 10

percent).

North Carolina The North Carolina Strategic Transportation Investments (STI) law of 2013 introduce the Strategic Mobility Formula to allow the North Carolina Department of Transportation (NCDOT) to more efficiently invest transportation dollars using a data-driven process along with local input. Projects are categorized as to whether they represent division needs (associated with one of 14 NCDOT divisions), are regional (associated with one of seven NCDOT regions), or impact statewide mobility. Freight rail projects are evaluated by the following criteria, the weighting of which depends upon whether projects are categorized as statewide, regional or division:

• Cost Effectiveness uses a benefit/cost index and a job creation index; • System Health examines capacity/congestion and accessibility/connectivity; • Safety and Suitability is based on the Rail Division’s Investigative Index, which measures the

crash potential for grade crossings; • Project Support measures the level of outside contributions compared to costs to NCDOT.

For statewide projects, projects are 100 percent evaluated by STI criteria. For regional needs, regional projects, STI criteria are 70 percent of the evaluation and local input makes up the other 30 percent. For division projects, STI criteria are half the evaluation, and local input represents the other half.

Summary of Evaluation Methodologies Table 34 below summarizes the project evaluation methodologies that have been described. Most have a benefit/cost analysis as a component, but not as the sole basis for determining projects to be funded. Generally, additional non-quantitative elements are included as well. All consider the projects’ impacts on future rail volumes, the likely level of modal shifts, and the likely job creation.


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Table 34: Sample of State Project Evaluation Methodologies

Pennsylvania Washington Oregon Virginia North Carolina

Iowa

Benefit/cost analysis?

Yes Yes Yes Yes Yes No

How used? One of several criteria

Screening criteria before

additional analysis

One of several criteria

Screening criteria before

additional analysis

One of several criteria

N/A

Considers incremental rail volume

Yes Yes Yes Yes Yes Yes

Modal shift benefits

Yes Yes Yes Yes Yes Yes

Job creation Yes Yes Yes Yes Yes Yes

Drivers of Public Benefits The calculation of benefits typically includes a small number of performance measures. These are frequently among the same measures that agencies use to evaluate projects when benefits are not monetized.

Change in the Volume of Rail Freight Traffic as a Result of the Project. Nearly all evaluations of freight rail projects use a forecast of changes in freight rail traffic. The volume of freight handled can take the form of number of carloads, car-miles or intermodal unit-miles, or ton-miles.

Factors that can influence a change in traffic attributable to a freight rail investment include:

1. The project supports the continuation of service on a rail line that would otherwise have been embargoed;

2. The project stabilizes service that would otherwise have declined as the infrastructure deteriorated or became obsolete, such as through an inability to accommodate 286,000 pound railcars;

3. The project removes a bottleneck or constraint that otherwise would have limited capacity, thus enabling traffic to grow;

4. The project improves speed, cost, or reliability of rail service, thus drawing customers to use rail; 5. The project provides or improves rail access to a new or existing industrial site, thus expanding

the number of customers with rail service; 6. The project enables a new transportation service, such as through a new transload facility or

new intermodal terminal which draws users from other transportation routings.

Modal Shift Resulting from the Project. The benefits of a freight rail project often include the reduction of truck traffic due to freight shifting from roadway to rail. For the purpose of analysis, the “avoided” truck traffic is measured in either reduced vehicle miles or vehicle ton-miles. The entire change in rail freight volume is not necessarily attributable to the shifting between modes. Expanded production by


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existing shippers and new industrial location encouraged by the improved rail service increase rail traffic.

Traffic Forecasting State rail programs often rely on applicants to provide estimates of the impacts that a proposed project is expected to have on future rail volumes and truck diversions. On the one hand, using projections provided by applicants can introduce biases into the evaluation as applicants tend to be optimistic and are trying to make a strong case for their projects. Sometimes, agencies avoid sharing their decision-making with applicants so that applicants do not tailor their applications too closely to meet evaluation thresholds, etc. Agencies rely on applicants to provide honest and reasonable estimates.

On the other hand, preparing independent market forecasts and diversion estimates can be prohibitively expensive and time-consuming to an agency. Agency staff and/or consultants may also be less familiar with the relevant freight markets than applicants. An agency assuming the cost of developing independent traffic and diversion forecasts may be appropriate for large, more costly projects, but may not be warranted for smaller projects.

The difficulty in producing traffic and diversion estimates stems from the following:

• Number and Uncertainty of Potentially Affected Rail Customers. If only a few customers will be affected, they can be interviewed to determine estimated changes in rail freight traffic. However, if the project is expected to have an impact on a wide range of customers or if the specific markets/customers are unknown, then traffic estimates have a greater uncertainty.

• Extent to Which the Project Is Focused on Attracting New Rail Users. If the project is expected to increase the usage of an existing rail service, the existing traffic can provide a base to estimate incremental traffic related to the project. However, if the project is intended to enable an entirely new transportation service, projected traffic will need to be determined without any historic base, thus introducing uncertainty and requiring more analysis.

Analytical approaches used to estimate the freight rail traffic levels and diversion are:

• Existing and Prospective Shipper Interviews. Railroad applicants may have contacted its shippers or may be sufficiently familiar with shippers on their network, such that they can predict likely behavior in response to freight rail improvements. If numerous shippers may be affected, a survey of representative shippers may provide insight into the overall freight market.

• Benchmarking Other Freight Rail Services. Benchmarking can take a number of forms. Experienced railroad professionals and experts may develop a general sense of how freight markets respond to improvements. In this sense, they are benchmarking a particular situation to their past experience. Benchmarking can also be more data driven with modal shares based on national or regional averages drawn from commercial data sources such as TRANSEARCH. Other approaches rely on statistical techniques that relate rail traffic volumes to population, economic activity, shipping distance, and other factors.63

63 For example, to estimate likely demand at a new intermodal terminal in West Virginia, researchers developed a regression model based on Norfolk Southern intermodal traffic data which predicted intermodal freight volumes as a function of origin population, shipping distance, railroad at origin and destination, whether the origin was a port or gateway between eastern/western railroads.


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• Logistics Cost Models. These models predict freight diversions as a function of changing logistics costs. The models apply a logistics cost function to freight flow data and then predict which freight will divert to use a given service because shippers would save money by doing so. This is analogous to the types of logic that underlie certain modules of statewide Travel Demand Modules. Other models use an “elasticity function” that relates changes to costs and expected modal shifts.

• Capacity. For freight projects that remove an existing or expected capacity constraint, the project allows traffic to grow beyond the capacity constraint. Thus, the traffic impact is established by the capacity model. Rail line capacity is most frequently measured as trains per day. Rail terminal capacity is measured in railcars or container units processed over a given period of time. Unfortunately, there is no analogue to the AASHTO Highway Capacity Manual for rail. This is because rail capacity is subject to more variables than roadway capacity, including signaling systems, the number of tracks, permitted train speeds, power assigned to trains, track geometry and topography, the mix of train types, passing siding length and frequency, railroad policy, peaking patterns, and a host of other considerations. Railroads are often the most knowledgeable about the capacity of their rail lines and terminals. Otherwise, rail capacity models fall into two broad categories: planning models and simulation models. Planning models can be relatively simple to use and do not require detailed proprietary information but have limited application for assessing the capacity implications of specific rail projects. Simulation models provide more credible results but can be costly to use and require detailed information which is proprietary on private rail networks. More information on rail capacity modeling can be found in the Transportation Research Board NCHRP Report 773: Capacity Modeling Guidebook for Shared-Use Passenger and Freight Operations.64

Quantification of Benefits The Federal Railroad Administration (FRA) and the U.S. Department of Transportation (USDOT) have placed increased emphasis on formal benefit/cost analyses. On its website, the FRA writes,

“FRA strongly believes that the systematic process of identifying, quantifying, and comparing expected benefits and costs helps decision-makers organize information about, and evaluate trade-offs among, alternative transportation investments. In addition to serving as a valuable tool for defining and narrowing investment alternatives, BCAs are also increasingly a prerequisite to receive financial assistance under Federal investment programs, including those administered by the U.S. Department of Transportation (DOT).”

Benefit/cost analyses compare the streams of benefits and costs between two scenarios, typically a “build” scenario with the project and a “no-build” scenario in which the project is not undertaken. The comparison is made for a given period of time, which FRA guidance recommends be at least 20 years into the future. The “costs” are the resources needed to make the project happen. The “benefits” are the results of the project, the difference in circumstances between the build and the no-build scenarios. Benefits most often appear as avoided costs.

Public or social benefits are the positive monetized consequences of a project and are derived from the improved transportation performance attributable to the project such as reduced truck miles, reduced

64 Transportation Research Board, NCHRP Report 773: Capacity Modeling Guidebook for Shared-Use Passenger and Freight Operations, 2014. http://www.trb.org/Publications/Blurbs/171662.aspx


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truck ton-miles, and reduced vehicle delay times as examples. These performance measures are then converted to parameters to which monetary values are applied. For the benefits of a rail modal shift from truck to rail that were presented in Work Item #4 of this project, the values were as shown in Table 35.

Table 35: Monetary Values Performance Measures, Translation Parameters, Monetary Values per Unit

Social Benefit Category

Basis of the Social Benefit

Social Benefit Performance Measure

Translation Parameters

Monetary Value per Unit

Safety Rail transportation is safer than truck transportation

Savings from reduced fatalities, injuries, property damage only (PDO) crashes

Reduced truck ton-miles

Average number of fatalities, injuries, and PDO crashes per ton-mile carried by truck and by rail

Cost per fatality, injury, or PDO accident

Increased rail ton-miles

State of Good Repair

Roadway damage is directly related to truck usage

Reduced pavement damage costs

Reduced vehicle miles traveled by truck (VMT)

Distribution of truck VMTs by weight and urban/rural

Pavement damage cost per truck VMT by weight and urban/rural

Environment Rail transportation is less damaging to the environment

Net reduced emissions costs

Reduced vehicle miles traveled by truck (VMT)

Gallons per VMT, Ton-miles per gallon, emissions per gallon;

Cost per ton of emissions

Increased rail ton-miles

Transportation efficiency

Cost of congestion due to trucks

Reduced congestion

Truck VMT Distribution of truck VMTs by weight and urban/rural

Congestion cost per truck VMT by weight and urban/rural

User Economics

Rail transportation is less costly than truck transportation

Reduced transportation costs to shippers

Reduced truck VMT

Average payload per VMT

Shipper cost per truck ton-mile, shipper cost per rail ton-mile Increased rail

ton-miles

Not all benefits are based on modal shifts from truck to rail. Some rail projects result in operating cost savings. Projects can lower fuel costs, or result in faster/more reliable rail service. While these outcomes can encourage diversions of truck traffic to rail, they also benefit existing rail traffic. A project that reduces freight train delays could reduce fuel consumption, provide savings in train crew costs, better locomotive and railcar utilization, and reduce inventory costs to shippers. Estimates of the number of crew, locomotive, car hours saved provide a useful indication of project benefits, however, these rail costs, however, tend to be “lumpy.” For example, a freight project may only reduce crew costs if it reduces the number of shifts. Savings in locomotive capital costs only occur if the usage of locomotive units can be reduced. Applicants can provide this information. Otherwise, relevant operating expense data can be obtained from trade press or data collected by the STB.


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Deficiencies of Benefit/Cost Analysis As mentioned previously benefit/cost analyses are subject to variability. They should therefore not be considered as absolute measures of public benefit and costs. Some examples of variability are below:

• Shipper cost savings often appear as the largest source of benefits in benefit/cost analyses, but shippers face unique supply chain situations that impact the extent to which they benefit from rail. Railroad pricing decisions associated with specific projects can also impact actual shipper savings.

• The only national source for capturing the impact of reducing on pavement and bridge maintenance is over a decade and a half old. Estimated truck impacts on roadways, bridges, and congestion are highly sensitive to assumptions regarding truck size and weight, urban and rural travel.

Public and Private Benefits Potential issues arise in defining a “public benefit”. On the one hand, public benefits could be defined as only those that affect the general public and not private companies. But the FRA on its website lists reductions in logistics costs as a public benefit of freight rail. These savings pass to private companies, but because they impact the general economic competitiveness of a given area, they are classified as public benefits. Frequently, reductions in rail operating costs are assumed to be passed on to shippers and thereby represent public benefits as well, although the railroad could also benefit financially from these savings.

Economic Impacts The USDOT draws a firm distinction between economic impacts and benefits. Benefit/cost analysis measures a project’s benefits and costs, while economic impacts analysis measures the project’s effects on economic activity within a region. Common measures for assessing economic impacts include jobs, income, value added (similar to gross domestic product but applied to a region), and output (includes value added plus the value of inputs used to create goods and services). Economic impacts are not benefits per se. For example, a job created represents both a cost to the employer and a benefit to the employee. As such, it represents a “transfer” rather than a benefit. A job created in one industry can divert labor away from other industries. Furthermore, a job created in one region may decrease employment in another region. For its competitive multimodal grant programs, the USDOT would like to avoid redundant projects that move economic activity around rather than helping to stimulate economic development for the nation as a whole.

In its benefit/cost analysis guidance for funding, the FRA states that economic impact analyses should only be performed as follow-on exercises after conducting a benefit/cost analysis. The benefit/cost analysis should be the “main tool” for assessing rail projects.65

For states, jobs and other economic impacts of projects can be the most important justification of freight rail projects. While additional jobs and economic development might not be considered a “benefit” from a national perspective, they may certainly be desirable from a state agency’s perspective. There currently exists no nationally recognized method for evaluating what jobs or other economic impacts a project would represent an efficient use of agency funds. Boosting economic activity would be

65 Federal Railroad Administration, Benefit-Cost Analysis for Rail Projects, June 2016.


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more valuable in economically distressed areas with high unemployment. The European Union (EU) includes employment impacts in its guidance for benefit/cost analyses for infrastructure projects.66 The EU approach estimates the difference between wages paid by jobs brought about by the project with the opportunity cost of workers being employed elsewhere. The benefit is the difference between wages associated with jobs brought about by the project and opportunities costs of other foregone jobs. The opportunity costs are lower in economically distressed and high unemployment areas, so the benefits are higher. Within an area where employees move from one job to a similar job, benefits are nil.

Most frequently, states evaluate the economic impacts of projects by asking applicants to provide estimated jobs or investment resulting from a project. Analytical tools can also help with economic impact analysis. The most commonly used tools are input/output models. These measure the goods and services produced by each industry and the use of these goods and services by other industries and final users. When the “direct effects” of infrastructure projects are known, such as the resulting jobs and/or investment, input/output models can measure the indirect effects (business-to-business transactions caused by the direct effects) and the induced effects (household-to-business transactions). Economic simulation models take the analysis a step further. While the input/output models are static and assume one relationship between industries and consumers over time, economic simulation models account for future economic and demographic changes. These models can capture the impacts of changes in transportation efficiency.

Project Monitoring Some states not only monitor the progress of project construction, but also monitor whether promised benefits have been achieved post construction. Most often, applicants provide reporting on carloads and/or jobs. If projects significantly fall short of promised job creation and/or carloading, “clawback” provisions may require all or a portion of grant money be returned. Monitoring and reporting is practiced in rail programs in Pennsylvania, Iowa, Ohio, Virginia, and Washington State.

Jobs created is one of the more logical performance measures by which to measure project economic development impacts. Further detail could include the type, location, and wages of jobs created. Induced investment could provide another basis.

Given the likely difficulty in directly monitoring truck traffic avoided (e.g. difference between average annual daily truck volumes and some expected value without the project), rail traffic volume growth is a logical measure to monitor the progress of benefits accruing from truck/rail diversion.

A number of measures could help to evaluate project impacts on rail operations, but complications may arise in isolating impacts applicable to a specific project and/or railroad willingness to collect and share this information. For projects that rehabilitate low density rail lines, measures could include the reduction in the number of slow orders, the reduction in derailments or other train incidents/accidents, improvements to schedules. For high density rail lines, performance measures could relate to speed and reliability but tying these impacts to a project could be difficult.

66 http://ec.europa.eu/regional_policy/sources/docgener/studies/pdf/cba_guide.pdf.


http://ec.europa.eu/regional_policy/sources/docgener/studies/pdf/cba_guide.pdf

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Best Practices in Evaluating the Public Benefits of Projects Reviewing the status of benefits evaluation, several themes become apparent.

• States that follow best practices use quantitative approaches, particularly benefit/cost analysis to evaluate projects, but also recognize that not all project benefits can be quantified. Agencies often combine benefit/cost analyses with qualitative assessments.

• Larger projects are evaluated more rigorously than smaller projects.

• Agencies often rely on applicant data for the performance measures that provide input into benefit/cost models. For the most part, this is a logical source of this information, since applicants are generally the most knowledgeable about relevant freight markets, and it would be prohibitively time-consuming to perform independent assessments. Nevertheless, it is preferable if agency staff can maintain a sense of whether estimates seem reasonable or not. It is also appropriate to perform independent assessments for large projects.

• Although USDOT guidance on evaluating rail projects tends to diminish the importance of long-term job creation that results from freight rail projects, this is usually a significant criterion for state agencies. Unfortunately, there exists relatively little guidance to evaluate the cost effectiveness of projects in job creation. The value of job creation should be higher in areas with high unemployment and low wages. Benefit/cost analysis guidance by the European Union considers the relationship between jobs created by transportation projects and the opportunity costs of that employment per the local labor market.

Case Studies of Public/Private Partnerships In providing guidance to states on how to assess public/private partnerships, it is useful to examine case studies that illustrate the role of PPPs. Among the two most notable in recent years have been Norfolk Southern Railway (NS) Heartland Corridor and Crescent Corridor initiatives.


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Crescent Corridor (2009–ongoing)

About the Project The intermodal network in the eastern U.S. was developed principally to serve traffic between Western railroads and Eastern markets, and between East Coast ports and Midwest customers. The motor carrier network serving north-south traffic—primarily I-95, I-81, and connecting interstate and state highways—is constrained by metropolitan area congestion affecting reliability, and is forecast to experience even greater demand over the next few decades. The NS Crescent Corridor initiative upgrades its north-south corridor to provide new and more efficient rail service options for intermodal customers between the Northeast, Southeast, and (through interchanges with other railroads) the West Coast and Mexico. Studies suggested that a significant amount of freight on the corridor could efficiently be carried by rail. Overall, the Crescent Corridor encompasses 2,500 rail miles affecting 13 states, and currently accommodates 30 service routes.

Economic Need and Partnership Justification The total investment program has a cost of $2.5 billion to improve 64 service routes. To date, approximately $600 to $700 million has been invested. The cost includes:

• New intermodal terminals in Birmingham AL, Memphis TN, Charlotte NC, and Greencastle PA • Improvement of existing intermodal terminals in Bethlehem PA, Harrisburg PA, and Philadelphia

PA • Construction of double track segments and passing tracks to accommodate long intermodal unit

trains • Upgraded signal and control systems to allow faster speeds and higher capacity

Two primary conditions made this project an excellent candidate for public-private partnership.

• Risk to the Railroad. The required up-front investment was extremely high. Increased rail traffic and revenues were expected to cover some of the costs, but it was recognized that growth would only be realized over time, as markets and shipper preferences adapted to allow modal choices to shift from truck to rail. In the long-term, the railroad saw the project as a clear winner, but the uncertainty of the time between near-term investment and materialization of a consistent revenue stream represented a significant business risk. The programmatic nature of the project represented an additional risk, as the success of the initiative depended on

Source: Norfolk Southern


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implementing a complex set of interrelated projects across multiple states, subject to significant modal competition.

• Demonstrable Benefits to the Public. The project is expected to generate strong and clearly demonstrable public benefits to each of the states it serves: avoided truck traffic and its related costs and impacts; lower freight transportation costs for rail users; and job creation. To secure these benefits, many of the Crescent Corridor states agreed to contribute their own funds to corridor projects in their states, through a variety of mechanisms including state grants and sponsorship of federal grant applications. By sharing costs, the states helped mitigate the significant near-term risk to the railroad, allowing the overall project to proceed.

Benefit Estimation The benefits of the Crescent Corridor were rigorously estimated through a formal BCA as part of the application for federal funds under the first round of TIGER discretionary program grants.

• The corridor BCA calculated a set of performance metrics measuring the physical benefits: truck units diverted to rail; VMT avoided; rail ton-mileage created; fuel consumption avoided; and emissions avoided.

• Based on the performance metrics, the corridor BCA calculated a set of monetized measures addressing: state of good repair (avoided pavement damage); economic competitiveness (reduced logistics costs); livability (reduced highway congestion); sustainability (reduced fuel consumption and social costs of emissions); and safety (reduced crashes).

• Job creation benefits were also estimated.

All benefits were calculated not only for the corridor as a whole, but also for each individual state impacted by the Corridor. This required the development of truck routing models (to determine which trucks would be diverted from specific highways on a state-by-state basis) and 13 separate state-level BCA models. The state calculations were not required for the TIGER application, but were deemed essential to prove and quantify the project value to each state. A total of 4.3 million truck trips per year were identified as potential candidates for diversion to rail across the 13 states.

From TIGER I (February 2010), the Crescent Corridor received an award of $105 million dollars for the construction of the new Memphis and Birmingham intermodal facilities. Subsequently, the Corridor received $15 million for Harrisburg (Rutherford) Intermodal Terminal improvements from TIGER 2011.

Performance Measurement Performance reports are provided to USDOT consistent with the requirements of the TIGER program. For NS, the key metrics are intermodal rail units and ton-miles. These are the key drivers of public benefits—the higher the rail units and ton-miles, the higher the avoided truck trips, and the higher the public benefits—and also represent critical business metrics since they drive railroad revenues.

The Crescent Corridor is a long-term strategic initiative whose full benefits will be realized over decades, and its market capture is still in the ramp-up phase. While annual tracking of rail units and ton-miles is useful, it also reflects market fluctuations and other short-term effects. The true benefit and performance of the Corridor will be best assessed over longer multi-year reporting periods.


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Heartland Corridor (2007–ongoing)

About the Project NS serves the Port of Virginia with a rail line through Roanoke and Columbus to Chicago, Detroit, and Cincinnati. Historically, Virginia’s deep-water port facilities at Hampton Roads were largely focused on moving coal and bulk products so that rail line linking the Port of Virginia to the Midwest was physically designed for trains that handle bulk products in freight cars that do not have high vertical clearance requirements. With the development of intermodal service, the Port of Virginia has become one of the largest and most important container ports on the U.S. East Coast. The Heartland Corridor project was designed to modernize the historic rail route, raising clearances to allow double stacked intermodal container trains to operate and providing intermodal terminal connections and capacity.

Economic Need and Partnership Justification The total investment cost was approximately $310 million. The cost included:

• Improved overhead clearance of 29 tunnels to allow double-stack intermodal trains, and then in a later phase double-stack clearance between Columbus and Cincinnati

• Construction of grade separated “last-mile” rail access to marine terminals and elimination of highway/rail grade crossings near the Port of Virginia

• Construction of new sidings and terminal track capacity

• Construction of a new intermodal terminal (opened 2008) at Columbus, OH (Rickenbacker)

• Construction of a new intermodal terminal (opened 2015) at Prichard, WV (Heartland Intermodal Gateway)

The development concept also includes an intermodal terminal near Roanoke (Elliston), which is currently under study.

The project offered significant benefits, including:

• Direct rail connections between the Port of Virginia and Midwestern markets for double stack intermodal; because a single train can carry far more containers, double stack trains are more

Source: Norfolk Southern


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efficient than single stack intermodal trains and can enable services that would be uneconomical under single stack service alone

• Improved speed and reliability for Port of Virginia intermodal rail service, supporting continued growth of the Port and benefiting Port customers in critical Midwest markets

• Improved accessibility to intermodal service for states and regions served by the corridor, including not only fast-growing markets (like Central and Southwestern Ohio) but also including previously underserved markets (like West Virginia)

Historically, intermodal was not a large share of traffic on the Heartland Corridor. Clearing the Corridor for double stack trains posed a business risk for the railroad. To some extent, this risk could be mitigated by the relocation of existing business using intermodal service from other NS routes to the improved Corridor. However, because the relocated business would not be new business, it did not represent additional revenue to NS. To support the capital investment, the project had to generate new business the railroad could not otherwise attract. The investment was made up-front, while the revenues from increased traffic were to be realized over time, and were by no means certain.

It was clear that the Port of Virginia, the states served by the Corridor, and the national freight shipping community as a whole would realize significant benefits from advancing the project. It was especially imperative for the Port to have the clearance projects to grow the services it could offer to Midwest markets, and for Columbus to have the clearance projects to support the rapidly-growing intermodal logistics center around Rickenbacker Airport. West Virginia needed the upgraded Corridor and the new terminal at Prichard to provide improved intermodal service for the state’s industries. The public sector became an investment partner, sharing the risk with the railroad to facilitate the benefits.

To implement the funding, partnerships between the railroad, USDOT, and public agencies in Virginia, West Virginia, and Ohio were established. Funding sources67 included:

• Norfolk Southern • Federal SAFETEA-LU and ARRA funds • Virginia Rail Enhancement Fund, Governor’s Transportation Funds, and Commonwealth Railway • Ohio Rail Development Commission grant • West Virginia Railroad and Intermodal Enhancement Fund • USDOT TIGER III (2011) award

Benefit Estimation The USDOT TIGER discretionary grant program established a consistent set of guidelines for estimating the benefits and costs of public-private partnership investments. However, planning for the Heartland Corridor was initiated prior to the rollout of TIGER, and as a result there was no comprehensive program-level benefit cost analysis. Instead, projects and investments were evaluated based on their individual utility as determined by the partners. For example:

67 https://www.fhwa.dot.gov/ipd/project_profiles/wv_heartland.aspx.


https://www.fhwa.dot.gov/ipd/project_profiles/wv_heartland.aspx

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• West Virginia’s Rahall Institute analyzed the Prichard WV intermodal terminal • NS and the state of Ohio examined Rickenbacker and the Columbus-Cincinnati improvements • NS, the Port of Virginia, and the Commonwealth of Virginia evaluated port-area projects

A USDOT prescribed benefit cost analysis was prepared for the Prichard terminal, in support of the $12 million TIGER 2011 award.

Performance Measurement Performance reports are provided to USDOT consistent with the requirements of the TIGER program. For NS, the key metrics are intermodal containers and ton-miles. These are the key drivers of public benefits—the higher the number of rail units and ton-miles, the greater the avoided truck trips, and the greater the public benefits—and also represent critical business metrics since they generate railroad revenues.

Heartland Co-Op

About the Project The Heartland Co-Op, a farmer-owned cooperative, in Fairfield, Iowa received a $1.45 million loan from the Iowa Department of Transportation (Iowa DOT) in 2014 to build a 125-car unit train loop track at its grain facility. Prior to this project, truck transportation was the primary method of shipping grain for a six-county area. Heartland chose to build a shuttle train load out facility to obtain the price advantage of unit train service and the high capacity shipment capabilities to provide local producers additional markets for their grain. In addition to benefitting shipper by lower transportation cost and faster service, the railroad also benefits from additional revenue, low handling and switching requirements, and improved freight car utilization, thereby a more fluid operation.

Economic Need/Partnership Justification The Rail Revolving Loan and Grant (RRLG) program provides very attractive loan terms of zero percent interest for a period of 10 years for projects that build or enhance rail infrastructure and demonstrate economic and transportation benefits. Applicants must provide a 50 percent private investment match. Collateral for the loans is the rail, ties and other track related material that goes into the project. For this project, the rail infrastructure was part of a much larger multimillion dollar expansion project to expand grain storage which was privately funded. The RRLG program provided 44 percent of the estimated cost for the rail portion of the project.

Figure 27: Heartland Co-Op


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Benefit Estimation The project was financed through the Iowa DOT Railroad Revolving Loan and Grant (RRLG) Program. Eligible projects submit applications to the Iowa DOT, which are reviewed by an Iowa DOT team. Rail Network Improvement projects are scored by team members on the transportation, economic, and public benefits provided by the project. This particular project scored well because the benefits to producers was clear and the diversion of trucks from the highway provided multiple safety, environmental and public savings (in highway maintenance and rebuild costs). The review team also considers the ratio of private and other public capital investment to the RRLG public investment in the rail projects.

Performance Measurement Post-construction monitoring of job creation and or job retention is not a requirement when requesting a loan through RRLG, in contrast to RRLG grants where projects are required to conform to performance standards in terms of job creation and retention. The program manager keeps in contact with project sponsors throughout the course of construction. Once complete, the project manager along with the office engineer and track inspector visit the project to assure it meets the stated objectives and specifications before signing off as complete. Loan repayments begin upon project completion and are reinvested in future projects.

Garden City and Great Bend Transload Facilities

About the Projects Two transload projects in Kansas emerged from a competitive selection process in 2015. The Great Bend transload facility is located just outside of Great Bend, Kansas on the Kansas and Oklahoma (K&O) Railroad. The facility operator is Kansas Transload Services, a subsidiary of Sherwood Companies. The facility has 222,000 square feet of rail and truck-served warehousing and 86 acres of land. The Kansas Department of Transportation (KDOT) contributed $3 million of the $8.5 million cost of the transload facility. The K&O contributed $3.5 million for rail reconstruction and rehabilitation. The City of Great Bend spent $0.5 million on roadway improvements, while Sherwood Companies spent $1.5 million on site development and improvements. Fuller Industries, whose manufacturing plant is on an adjoining property, is also party to the project through provision of land and warehouse space. As of 2017, the facility was devoted to transloading wind turbine components as well as aggregates and cement. Almost half the warehouse space was used to house power assembly units for the wind turbines. The transload project also supports another 1,400-acre industrial site a short distance away.

Figure 28: Great Bend Transload Ribbon Cutting


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The Garden City transload facility is a component of a larger development on 900 acres. The transload facility’s operator is Transportation Partners and Logistics (TP&L), while the serving railroad is BNSF Railway. KDOT contributed $4.5 million to the $14 million Garden City transload project, including $3 million for rail construction and $1.5 million for local roadway improvements. KDOT State Rail Service Improvement funds were used for the rail siding, while economic development funding was used to improve roadway access to the facility. TP&L and an affiliated company contributed $5.6 million in site development and improvement. Garden City spent $2.5 million to purchase 336 of the 900 acres on a site that had formerly been a meat packing plant. Garden City invested another $0.9 million in local roadway improvements. The Garden City facility supports TP&L’s wind turbine supply business, which occupies over 500 acres of the 900-acre site. Other tenants on the 900-acre site include an ethanol plant, a grain storage business, and a manufacturer of carboard boxes. The transload facility could also benefit a nearby dairy nutrition plant and will be used to transport aggregate materials for highway construction projects.

Economic Need/Partnership Justifications The economic need for additional transload facilities in Kansas was identified by the Kansas Freight Advisory Committee (KFAC) in 2014. The KFAC members are professionals with freight experience from public agencies, the Kansas legislature, and private companies. The KFAC mission is to advise, assist, and advocate for multimodal freight infrastructure improvement needs. KFAC members identified a need for additional transload facilities in Kansas beyond what was available through private funding alone. Building additional transload facilities would support economic development and divert freight from Kansas roadways.

Benefit Estimation The two transload facilities were selected by KDOT for funding after an extensive competitive process that assessed the relative benefits and feasibility of numerous proposed facilities. The steps in the process were as follows:

1. Solicited proposals for potential transload sites across Kansas, asking for sites that were the correct size, near rail and near roads (Received proposals for 111 sites)

2. Assessed sites based on readiness for development (Narrowed to 98 sites) 3. Discussed with railroads their ability and interest in serving sites (Narrowed to 71 sites) 4. Further assessed sites for readiness (Narrowed to 41 sites) 5. Performed limited assessment using the following criteria: days of rail service per week, distance

to track of existing rail connection, presence of utilities, anchor commodity/tenant, local trucking partners, proximity to highway access, distance to nearest transload site (Narrowed to seven sites)

6. Performed a more detailed assessment using multiple criteria with site visits and presentations (Narrowed to two finalists)

7. Performed final analysis, due diligence and engineering, set funding contributions and developed agreements

8. Constructed facilities

Performance Measurement KDOT assesses the ongoing performance of the two projects by the following performance measures:


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• Annual inbound and outbound carloads to and from the facility • Annual truckloads to and from the facility • Number of on-site showings of facility to prospective tenants • Number of new tenants signing leases at the facility

As of late 2017, the projects were still recently built and annual reports unavailable, but some performance information was reported. Between opening in June 2017 and November 2017, the Great Bend facility handled slightly less than 1,000 carloads and was estimated to have generated $3.5 million in community economic impacts. The Garden City project was estimated to have generated $3.6 million in community impacts and handled over 1,000 carloads between opening in early 2017 and November 2017.

Colton Crossing

About the Project Colton Crossing is located in San Bernardino County, CA and is one of the busiest rail crossings in the nation, handling most of the rail traffic to and from Southern California. In addition to freight trains, the crossing also carries Amtrak and MetroLink trains. More than 110 trains per day passed through the crossing in 2008. At the time, the crossing was at-grade, so that trains on the approaching UP and BNSF tracks needed to alternate which would pass through the crossing.

The San Bernardino Associated Governments (SANBAG) worked with the railroads, the City of Colton and the California Department of Transportation on the financing and design of a new Colton Crossing. Eventually, parties decided that the most practical solution would be to construct a 1.4-mile concrete flyover to elevate the Union Pacific east-west tracks over the north-south BNSF lines, as shown in Figure 29. The project received a $34 million TIGER grant in 2010, $41 million from the State of California, and $18 million from the railroads. Construction was completed in 2013.

Economic Need/Partnership Justification Before it was grade separated, Colton Crossing created significant delays to the railroads, sometimes requiring trains to wait for hours to clear the intersection. Grade separating the crossing relieved a significant transportation bottleneck. The costs of the delays not only accrued to freight railroads and shippers. Trains also blocked highway/rail crossings further back for significant periods of time as they waited to clear at Colton. Idling trains generated pollution for the surrounding areas. Amtrak and

Figure 29: Colton Crossing


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Metrolink passenger trains were delayed along with UP and BNSF freight trains. The project was appropriate for a PPP because benefits were both public and private.

Benefit Estimation A benefit-cost analysis was performed for the application for the TIGER Discretionary Grant. The project was estimated to create $828 million in estimated public economic benefits, reducing greenhouse gas emissions by 31,000 tons annually. The project was also funded by California’s Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, approved by voters as Proposition 1B which included funding for the Trade Corridors Improvement Fund (TCIF). Projects nominated for the TCIF were evaluated by a series of criteria, including,

• Freight System Factors: o Throughput o Velocity o Reliability

• Transportation System Factors: o Safety o Congestion reduction/mitigation o Key transportation bottleneck relief o Multi-modal strategy o Interregional benefits

• Community Impact Factors o Air Quality Impact o Community Impact Mitigation o Economic/Job Growth

The Colton Crossing project nomination included performance measures to show how the project would further these criteria.

Performance Measurement Under the California TCIF, performance measures are monitored both during and after project completion. Construction was finished on-time and for less money than was originally expected. Performance measures, performance targets, and timing of performance targets post construction are listed in Table 36.


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Table 36: Colton Crossing Performance Measures, Targets, Status as of 2014

Outcome Metric 2006 Baseline

Standard Timing of Standard

Actual 2014

Throughput Train volume: train feet per day excluding commuter trains

683,811 966,154 2019 926,445

Velocity Transit time through corridor (MPH)

10.75 BNSF Mainline: 30.00, UP Mainline: 42.50

2019 BNSF Mainline: 20, UP Mainline: 20

Reliability Variability in Transit time (Avg Annual Delay Hours)

NA (74.852) 2018 (26.710)

Safety Reduction in highway accidents

NA 800 Life of the project

No accidents reported as of project completion

Safety Reduction in accidents, fatalities

NA 3 fatal accidents, 100 injury accidents

Life of the project


Safety Reduction in heavy truck accidents

NA 38 crashes Life of the project


Safety Reduction in delay hours for vehicles

NA 2.9 million Average annual

905.8

Safety Reduction in time-in-queue delay hours for vehicles

NA 2.4 million Average annual

756.8

Congestion reduction

Reduction in emissions from vehicles

NA HC = 2.8 tons; CO = 18.6 tons, NOx = 4.9 tons; PM = 1.0 tons; CO2 = 10,982 tons

Average annual

HC = 0.00087; CO = 0.0056, NOx = 0.0013; PM = 0.0015 tons; CO2 = 3.41 tons

Emissions reduction

Reduction in emissions from locomotives

NA HC = 42.8 tons; CO = 145.1 tons, NOx = 67.4 tons; PM = 5.8 tons; CO2 = 101,583 tons

Average annual

HC = 4.0; CO = 13.7; NOx = 6.3; PM = 0.54; CO2 = 2,194.6

Other Outcomes

Fuel, oil gallons saved NA Gasoline: 907,590; Diesel = 79,060; Oil = 101,583

Average annual

Gasoline = 282; Diesel = 7,424; Oil = 9,539

San Bernardino County staff report that the difference between the performance standards and the actual 2014 benefits is probably explained by lower than expected traffic levels. Benefits generally accrue in proportion to rail traffic. Forecasts were originally developed pre-recession and anticipated higher rail traffic levels than were realized in 2014. San Bernardino staff are confident that benefits will be significantly higher by 2019. The project has resulted in major improvements and made needed rail capacity available.


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Port of Tucson Container Export Rail Facility

About the Project This 2014 Tucson, AZ project extended a siding and installed high-powered switches so UP trains would not need to slow down or stop when arriving at the facility from the UP “Sunset Route” mainline. The project also built a double-loop track so that unit trains could simultaneously be loaded and unloaded. Intermodal trains can be processed at the Port of Tucson in less than 15 hours. The project augments an agreement between the Port of Tucson and UP to establish intermodal service between the Port of Tucson and the Ports of Los Angeles and Long Beach, CA. Before the project, containers between Tucson and the two California ports had to be transported by truck. While intermodal trains to and from the Ports of Los Angeles and Long Beach came through Tucson before the project, no trains stopped. Before the project, there was limited intermodal service between the port and Chicago, but the operational improvements that resulted from the project have enabled UP and the Port of Tucson to expand service to Los Angeles/Long Beach. The $13 million project received a $5 million TIGER grant in 2013. The Port of Tucson funded the other $8 million.

Economic Need/Partnership Justification The project represented a partnership between Pima County, the Port of Tucson, a private company, and the UP railroad. Without public sector involvement, UP and the Port of Tucson would not have been fully incentivized to complete the project. Class I railroads prefer to only invest their own money in large intermodal terminals that are fundamental components of their intermodal networks. The incremental business for UP therefore may have been unlikely to have covered the cost of the improvements. The rail siding extension and high-powered switches included in the project were not located on the Port of Tucson’s property, so the Port of Tucson would have been unlikely to fund these improvements itself.

Benefit Estimation A benefit-cost analysis was performed for the TIGER Discretionary Grant application. The largest source of benefits is expected to be at highway/rail grade crossings. Since trains can move more quickly between the Port of Tucson and the UP mainline, trains are expected to block crossings less. The project is also expected to remove traffic from Interstate 10 and create up to 100 logistics jobs.

Performance Measurement The FRA required performance monitoring of the project. The project has been monitored by two performance measures: improvements in the time required for trains to enter or leave the Port of Tucson, and the number of container lifts at the Port of Tucson. As of 2016, both performance measures

Figure 30: Port of Tucson Ribbon Cutting

Source: Union Pacific Railroad


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reflected improvement. The average time required for trains to enter of leave the Port of Tucson declined from 30 minutes in 2014 before the project was completed, to eight minutes in 2016. The number of container lifts at the Port of Tucson increased from 911 in 2014 to 3,875 in 2016.68

Wrap Up—Assessing PPP Opportunities For the purposes of this study, the definition of a PPP is somewhat different from that associated with transportation projects outside of freight rail. The USDOT describes “A public-private partnership is a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional.”69 Because the U.S. freight network has historically been owned, operated, and funded by the private sector, a PPP within a freight rail context is the opposite. The public sector participation in a PPP is more than what would have been considered “traditional” several decades ago.

Under the framework presented, there exists a potential set of projects that the public sector would fund. These have high public benefits. The private sector would be interested in pursuing another set of freight projects. These projects yield adequate private sector returns. This deliverable provides guidance in identifying those projects that overlap the two sets, projects that both the public sector and private sector would have an interest in supporting.

To determine if a project is appropriate for public sector participation, states must evaluate likely project public benefits. This deliverable investigates current practices in evaluating project benefits, raising relevant issues,

• Should projects be evaluated by quantitative indicators, quantitative data, or some combination of both?

• If quantitative information is included, where should this data come from, and who will be providing the analysis?

• What are the advantages/disadvantages and role of benefit/cost analyses?

• What performance metrics drive public benefits?

• Given that freight rail projects are most often justified through economic development, how should economic development impacts be incorporated into the assessment, and what are some of the issues with assessing whether a project is a “good deal” in terms of economic development?

As states invest in private infrastructure, states are also curious to understand how these project fit within railroad capital budgets, in part to ensure that the public monies enhance rather than displace private investment. This deliverable presents a tutorial regarding railroad capital budgeting in order to explore railroad decision-making and how PPPs fit within the process. This deliverable provides guidance regarding the types of projects that are appropriate for PPPs, considering project impacts on railroad profitability, project timing, and risks, also considering the types of capital investments that railroads

68 Memorandum of Pima County Administrator to Pima County Board of Supervisors, dated January 12, 2017. 69 USDOT, Report to Congress on Public-Private Partnerships, December 2004.


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would be expected to make on their own. Differences between PPPs with Class I and Class II, Class III railroads were explored.

Finally, this deliverable presents case studies of PPPs, including descriptions of how these projects were appropriate for PPPs from both the public sector and railroad perspectives.


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