Statement of
Tyler D. Duvall
Assistant Secretary for Transportation Policy
U.S. Department of Transportation
Submitted for the Record
Committee on Transportation and Infrastructure
U.S. House of Representatives
September 25, 2007
Rail Competition and Service
The U.S. Department of Transportation appreciates the opportunity to submit this statement for the record for the House Committee on Transportation and Infrastructure’s hearing on Rail Competition and Service.
In April of this year, Under Secretary for Policy Jeffrey Shane testified before the Surface Transportation Board that congestion and capacity limitations continued to be a problem on the Nation’s railroad network, despite record levels of investment in new capacity. The miles-of-road owned by the Nation’s railroads have fallen by almost 20 percent since 1990, primarily because of the high cost of maintaining track at a time that traffic demand did not appear to warrant such a large network. Similarly, railroad employment levels were static. Nevertheless, significant increases in productivity (measured in freight revenue ton mile per employee hour) allowed the railroads to realize record traffic gains – from 1985 to 2005, rail productivity grew nearly 240 percent, while traffic, measured in ton miles, grew by 93 percent.
However, the cushion provided by these productivity increases has been exhausted, and traffic continues to increase, partly because high fuel costs and a shortage of truck drivers has increased costs for truckers and made rail freight a more attractive option for shippers. At the same time, crew shortages have also limited capacity; only in the last few years have railroads begun to boost employment. As a consequence, the system is significantly constrained. Average train speeds have fallen by nearly 22 percent, to 18.6 train-miles per train-hour in 2006, the lowest level in 16 years, accompanied by network congestion and deterioration in service reliability.
This has happened despite record levels of investment in rail capacity. Capital investment by Class I railroads rose from roughly $3.5 - $4 billion annually during the early 1990s to $6 - $7 billion in the late 1990s to over $8 billion last year. Railroads operate in a competitive capital marketplace. They must be able to promise a competitive rate of return on the debt they incur and the equity investments their stockholders make in order to raise capital resources. If railroads are to make further investments in rail capacity and improved service, the regulatory framework within which they operate must permit them to earn competitive rates of return.
The Surface Transportation Board has worked hard within the existing statutory framework to balance the needs of the railroads for adequate revenues to support investment in new capacity with the needs of shippers to be protected from the high rates that lack of rail competition might bring. Changes to the existing statutory framework may weaken the ability of railroads to raise the capital they need in a competitive capital marketplace. As long as we expect the railroad industry to finance its own capital investment and to innovate, we must give the industry the pricing flexibility it needs to serve as many customers as possible and to generate the revenues that will provide for competitive returns on its capital investment.
The railroad industry has enormous fixed costs relative to most other industries. Railroads invest 17.8 percent of their revenues in capital projects, compared with 3.7 percent for the average manufacturing firm. Railroads must charge more than their variable costs in order to cover these enormous costs of capital. In some rail service markets, where rail service is closely competitive with truck or barge service, railroads can only charge rates that barely cover their variable costs, and make little contribution to their capital costs. Railroads must charge higher rates on “captive” traffic, where they face less competition, in order to cover their high capital costs. If railroads could not charge higher rates on traffic where they face less competition, they would have to reduce the size of their networks even more, reducing the range of customers they could serve, thus increasing their costs for each customer served and probably increasing the rates that they would have to charge in the long run.
The statutory framework that has been in place since the Staggers Act was enacted in 1980 has worked exceptionally well to rationalize the nation’s rail networks - while also meeting the needs of shippers. The flexibility permitted by the Staggers Act has allowed railroads to increase their productivity by nearly 48 percent between 1987 and 1999 (based on the Bureau of Labor Statistics multifactor productivity measure), which in turn has allowed a real, inflation-adjusted reduction in rail rates of 1.3 percent per year between 1990 and 2003, allowing more shippers to enjoy the benefits of low-cost rail service. This has resulted in huge amounts of truck traffic being carried by rail, reducing the wear and tear on our Nation’s highways and bridges, and generating significant environmental benefits.
Moreover, as the U.S. Government Accountability Office pointed out in a report last year, the percentage of rail traffic that moves at rates in excess of 180 percent of variable cost (and hence, by statutory standards, potentially captive) has declined since 1985 from 41 percent of all traffic to 29 percent in 2004. While there may be isolated instances of shippers paying excessive rates, we believe those instances are rare. The GAO report found that only 6 percent of all rail tonnage was moved at rates in excess of 300 percent of variable costs. Changes in the rate structure to benefit a relatively small number of shippers could have unintended consequences for the overall rate structure, undermining the railroads’ ability to earn reasonable returns on their investment, and threatening the improvements in rail capacity and efficiency that we have experienced since the Staggers Act.
The railroad industry has undergone and continues to undergo substantial changes. Economic de-regulation has been a tremendous success story. It provided the foundation for substantial efficiency improvements in the sector, and it is no coincidence that the U.S. freight rail system is by far the most productive in the world. For these and other reasons, we believe that economic re-regulation of the railroad industry is unwarranted at this time. We appreciate this opportunity to share our views with the Committee.