Record Railroad Reinvestments
Coal's Share of U.S. Electricity Generation 54% 52%
Infrastructure & Equipment Spending* Per Mile
40% Jan Feb Mar
Apr May Jun
Aug Sep Oct Nov Dec
Source: Energy Information Administration
in 2010. Since 1980, America’s freight railroads have spent around $460 billion on their infrastructure and equipment – more than 40 cents out of every revenue dollar. In 2010 and beyond, railroads will be asked to do more and more. How well railroads can do this will depend in part on actions by policymakers in Washington. For example, for years debate has ensued regarding the proper type and scope of railroad economic regulation. Freight railroads contend that the balanced approach ushered in by the Staggers Act of 1980 – under which regulators protect shippers against anti-competitive railroad conduct, but otherwise railroads can largely decide for themselves how to run their operations– is the way to go. Others favor a more interventionist government approach. The fact is,railroads themselves pay nearly all of the costs of their systems’ construction and maintenance. Adequate investments in the rail network can only be made if rail earnings are high enough to attract the capital needed to pay for them. That simply won’t happen if unbalanced and unnecessary regulation gets in the way. Policymakers’ actions in other areas are critical too. Consider safety regulation. Legislation passed in October 2008 requires railroads to install positive train control (PTC) systems by the end of 2015 on tracks that carry passengers or extremely hazardous materials. PTC describes technologies designed to automatically stop or slow a train before certain accidents occur.
*Capital spending + maintenance expenses - depreciation Class I railroads only. Source: AAR
According to the Federal Railroad Administration, railroads will have to spend more than $5 billion to install PTC systems, plus more than $700 million more each year thereafter to maintain them. Total costs to railroads over 20 years will be $10 billion to $14 billion. Meanwhile, the value of PTC-related safety benefits over 20 years will be $440 million to $674 million. In other words, railroads will incur approximately $20 in PTC costs for each $1 of PTC benefits. To put the $5 billion PTC installation costs in perspective, it is roughly equal to what railroads spend in a typical year on all infrastructure-related capital spending, and is about equal to what they’ve spent over the past five years combined on capacity expansion. Expenditures on PTC will necessarily mean reduced expenditures on other projects that would increase rail capacity, improve service, provide environmental benefits, and enhance safety. Looking ahead to 2010, the economy will no doubt be a huge question mark that railroads and every other firm will have to deal with. For their part, railroads are cautiously optimistic that the framework for a sustainable recovery is in place. Railroads also hope that policymakers will recognize that to take full advantage of railroads’ unparalleled potential to lower shipping costs, ease congestion by taking trucks off the highway, save fuel, and reduce harmful emissions, smart public policy is needed. As a nation, we can’t afford to get this wrong. u John Gray is senior vice president – Policy and Economics at AAR (www.aar.org).
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