Rail Line Abandonments

I I E REPORT TO THE GOVERNOR

FROM

GOVERNOR'S TASK FORCE ON RAIL LINE ABANDONMENTS

Prepared by:

D. J. Astle C. L. Howells Rail/Air Program Public Utility Commissioner of Oregon

1986

-I TABLE OF CONTENTS

Page

FOREWORD 1

INTRODUCTION AND SUMMARY 5

DEFINING THE PROBLEM 10 Overview and Background 13 Transportion Trends 16 Shift from Manufacturing to Service Economy 16 High Interest Rates and Bad Times 17 Product Competition Here and Abroad 18 Transporation "Third Parties" 19 Public Policy and Deregulation 20 Public Policy and Modal Competition 22 Factors Causing Abandonments 25 Railroad Policies (Management and Labor) 25 Branch Line Industries 32 Equipment Costs 33 Deferred Maintenance 34 Shipper and Community Neglect 35 OREGON'S RESPONSE TO ABANDONMENTS 37

THE FUTURE OF OREGON'S RAIL SYSTEM 40 Short Lines 42 The Intermodal Alternative 44

RECOMMENDATIONS 49 General Recommendations 50 Recommendations to State Government 52 Recommendations to Local Governments 54 Recommendations to Rail Users 55 Recommendations to the Railroads 55 A Recommendation Considered and Not Made 56 Subjects Recommended for Future Study 56

APPENDICES A Glossary of Terms B Governor's Executive Order C Summary of Task Force Speakers D Selected Branch Line Case Studies E Oregon Rail Map F Railroad Statistics G "Branch Line Status Memo" H "Railroad Branch Line Abandonments" I. Letter from Jeff Asay, Union Pacific "Advantages and disadvantages of Class I Carrier and short line ownership."

BIBLIOGRAPHY FOREWORD

On April 10, 1985, Governor Victor Atiyeh created a Governor's

Task Force on Rail Line Abandonments, by Executive Order

No. EO - 85 - 6. The task force was formed in response to notification by the Class I railroads serving Oregon that many branch lines were potentially subject to abandonment. Many of the low-density lines still had active shippers; Many of the lines also served economically depressed rural areas of the state. In the Order, the Governor stated:

"Withdrawals of rail service of this mag- nitude are likely to have a substantially negative impact on Oregon's natural resource-based economy. It is therefore essential that this problem be addressed in a manner that will provide a stable basis for future economic growth and development."

The governor directed that the task force be placed under the direction of the Public Utility Commissioner's Office, the state agency which, by law, has the legal obligation to represent customers of railroads (Appendix B). To be included

in the task force were representatives from the Department of

Transportation and the Economic Development Department, as well as railroad companies, motor carriers, labor unions, rail users, the state legislature and local government.

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The Governor directed the task force to:

1. Examine methods of reversing the trend toward abandonment of railroad lines;

2. Develop methods of reducing the negative short term and long term economic impacts of rail line abandonments, including the development of transportation alternatives;

3. Review changes needed in state and federal law.

In July of 1985, the Governor appointed the following people to

the task force:

Chair Vice Chair Gene Maudlin David Astle, Assistant Commissioner Oregon Public Utility Commissioner Oregon P U C

Paul Norris Mike Beyerle, Assistant State Forester Department of Transportation Forestry Department

Henry Markus John Kratochvil Economic Development Department Department of Agriculture

Dick Townsend Bill Penhollow League of Oregon Cities Association of Oregon Counties

Robert H McKellar, Ted Bugas Executive Director Port of Astoria Oregon Forest Products Transportation Association

George Scholibo, Julian Woolford Assistant Vice President District Manager, Governmental Affairs Intermodal Operations Southern Pacific Transp Co Burlington Northern Inc

Jeff Asay, Attorney Cecil Brennan, Executive Vice President Union Pacific Railroad Company GRATRON

John Ficker David Root, President Transportation Consultant Michael Root Gen Mgr Willamette Valley Railroad Co

2 G. W. Mitchener, Carol Roofe Manager, Western Div Transp Tree Source Georgia-Pacific Corp

Del Mobley Don Andrews, Sales Mgr Roseburg Forest Products Co Frank Lumber Co

Ken Pratt, Bill Price State Legislative Director Retired, UTU United Transportation Union

Rep Bob Brogoitti Senator Mae Yih District 58 District 19

The Public Utility Commissioner designated Claudia Howells

(Branch Line Specialist) as task force manager.

A number of people also participated in the meetings on a

regular basis, and contributed to the work of the task force.

They were as follows:

Ed Immel Tom Kopriva State Rail Planner LP & N Short Line

Bob Bauer Rod Stephens Port of Portland Peninsula Terminal Railroad

Pete Williamson Dave Fuller Port of St. Helens Publishers Paper

Everett Cutter Oregon Railroad Association

Special thanks must be given to the entire staff of the PUC

Rail Program who willingly offered their assistance and exper-

tise to the task force. Particular recognition goes to Fred

3 Stewart, Rail Program cost analyst, who provided background on railroad regulation and statistical information on railroad operation.

The work of the task force was accomplished in three phases. During the first four months, beginning in September of 1985, the task force met as a single group once a month. The first phase was designed to provide an overview of the problem and to bring all members to an equal level of understanding.

The task force heard presentations on: intermodalism and new rail technology; short line operations; reload operations; and highway cost responsibility. (Appendix C).

In January, the task force began the second phase by breaking into subcommittees. The subcommittees studied the following issue areas:

Intermodal and reload as transportation alternatives;

Retaining rail service and improving rail efficiency and productivity;

Easing the transition from direct rail service and defining government's role in branch line abandonments.

The subcommittees met through March, when recommendations were formulated. The third phase involved the drafting of the report by staff, and the review and approval of the report and recommendations by task force members.

4 INTRODUCTION AND SUMMARY

The report of the Governor's Task Force on Rail Line Abandon- ment describes the problem of rail abandonment in Oregon, reviews the history of state involvement in line abandonments, looks at factors contributing to line abandonments, reviews the major trends in transportation, discusses alternatives to big railroad ownership, and sets forth recommendations.

This report has been designed to minimize duplication of other agency reports related to railroads. The Oregon Public Utility Commissioner's "Branch Line Status Memo," and "Railroad Branch Line Abandonments," (Appendix G, H), as well as the Department of Transportation's "Oregon Rail Plan" should be considered companion documents of this report. Neither the report nor the work of the task force addresses anything related to rail passenger service, but focuses entirely on railroad freight service.

The Governor's Task Force on Rail Abandonment studied the general problem posed by withdrawal of direct rail service and developed recommendations which the task force believes should be used in formulating future public and private decisions related to rail service and rail line abandonment. The task force did not assess the viability of individual lines, since such decisions should be made by the owning railroad, affected shippers and communities, with the involvement of appropriate state agencies.

The approach of the task force was pragmatic. At the outset, members determined that the recommendations would have to be realistic and positive in direction. Dismissed out of hand were ideas that would either punish the railroads or cost the public an extraordinary amount of money. The members also concluded that "magic solutions," such as a repeal or a major

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change in the Staggers Rail Act would not be forthcoming. Therefore, possible changes to the Staggers Act were not explored in any depth.

In April of 1985, when this task force was created by the Governor's Executive Order, the best minds in the transportation industry assumed the trend toward the abandonment of branch lines would continue, the Santa Fe and Southern Pacific Railroads would merge, and few changes would be made at the federal level regarding railroads. The task force worked from those assumptions.

Now, based on recent discussions with representatives of the three Class I Carriers, Southern Pacific, Burlington-Northern and Union Pacific, there is reason to be cautiously optimistic about the near future of rural rail service. It appears that the railroads serving Oregon will follow the fast-growing national trend by attempting to sell off money-losing or marginal branches to short line or regional railroads, before filing an application to abandon lines.

That is not to say that we in Oregon can relax. The growing potential for short line operations will not protect all rural areas from loss of rail service. For that reason, the recommendations of the task force are extremely important in a-changing transportation environment.

Since the first draft, in May 1986, of this report another event has occurred which will have lasting effect on much of Oregon's rail system and will certainly affect both abandonments and the creation of new short lines. On July 24, 1986, the Interstate Commerce Commission denied the merger of the Santa Fe and Southern Pacific Railroads, which came as a surprise even to rail experts. So certain of the merger were SP and SF, their locomotives had been painted in new colors.

6 The future of the Southern Pacific rail system is uncertain and will probably be so for several years as the railroads, shippers and states go through the process of negotiations and appeals. Ultimately, the ICC may approve some form of merger, or the Southern Pacific may be dismantled and sold to other carriers. Not even the best minds in the industry know for certain.

A year ago, very little was happening at the federal level regarding line abandonment or railroads in general. Now, with the growing number of short line operations and the totally unforeseen denial of the Santa Fe-Southern Pacific merger by the Interstate Commerce Commission, Congressional interest in railroads is growing rapidly.

The task force has not had an opportunity to study the effects of the merger denial or of proposed federal legislation. But the recommendations still are valid since the task force members understood from the beginning that the rail industry is experiencing, and will continue to experience, monumental changes.

Based on the assumptions that the transportation industry is no longer the predictable, stable industry it was under regulation, and that change will continue for some time, the task force concluded the following:

* Rail service is important to Oregon because of the products Oregon produces and the distance of Oregon producers from their markets. * Branch line service should be preserved, but only if the line can be operated without continuing public subsidy and, in the case of privately owned lines, at a reasonable profit. * Long term preservation can only be accomplished by maintaining adequate traffic levels and by decreasing operating costs (specifically labor costs).

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* Ownership of lines by a Class I carrier is preferable, though a financially viable short line ownership ranks a close second. * Public ownership of lines should be discouraged. * Government's primary role should be one of educating the public on the importance of local rail service and of helping rail users and local governments determine their future rail needs. (This is in addition to the present role of the OPUC in representing rail users before federal agencies, and in addition to ODOT's role in administering the Local Rail Service Assistance funds)..

Based on those findings and conclusions, the task force formulated specific recommendations. In what may be the most significant recommendations, the task force strongly recommends that, through the cooperative efforts of state and local governments, rail users, railroads and economic development agencies, branch lines should be targeted for industrial V development with the purpose of increasing and diversifying traffic on lines.

Targeting branch lines for industrial development can be done at a minimum of government expense, with the key to success being better communication among all parties, and an awareness by local communities that increasing rail traffic is the only viable method of preserving local rail service. "Magic solutions" simply do not exist.

Certainly, efforts to add industries along branch lines, particularly very low-density lines, will not always be successful, and there is no doubt that some lines in Oregon will be abandoned. When the traffic is gone, when no realistic potential exists, then the task force believes that the line should be abandoned.

The long term preservation of local rail service in the State,,/ of Oregon will depend on the diligent efforts of rail users,

8 local governments, railroad management and railroad labor to encourage the use of rail. State government will be effective in assuring continued rail service by encouraging communication and helping rail users and local communities make realistic decisions regarding their rail lines.

The transition of the railroads from a highly regulated utility to a semi-deregulated private industry is, and will continue to be, difficult for all concerned. Railroads are learning to compete; rail users are learning to accept more responsibility; and local communities are learning that rail service cannot be taken for granted. Some believe that railroads are obsolete, but if one thing is certain in the midst of the transportation turmoil, railroads can survive and flourish. It just won't be as easy.

Sadly, much of what is in this report and many of the recommendations have been said before and have gone unheeded.

In 1975, a very thorough study of the rail abandonment problem was done by the Council of State Governments. The conclusions were remarkably similar to those of this task force, even though the study predated the 1980 passage of the Staggers Act. Had the recommendations been implemented, we might not be where we are today.

The hope of this task force is that the recommendations herein will be considered seriously, and that further studies will be made on those subjects identified at the end of the report. Rail service is an important part of the state's transportation system, and once a rail line is gone, it is gone for good. It is the intent of all who worked to develop this report that the recommendations and conclusions will contribute to the preservation and improvement of rail services in the State of Oregon.

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DEFINING THE PROBLEM

The passage of the Staggers Rail Act in 1980 has made the procedure for abandoning lines relatively simple, and considerably easier for the railroads. A railroad need only demonstrate that the line is not profitable. If the abandonment is uncontested, the Interstate Commerce Commission must certify the line for abandonment within 75 days. If the application is contested, the process must take no longer than 255 days. Though an appeals process is provided, it is rarely used by contestants.

The State of Oregon cannot stop abandonments. The Interstate Commerce Commission makes the decision. Under Oregon Revised Statutes 760.630, passed in 1985, the Oregon Public Utility Commissioner is required to participate before the ICC in all contested railroad line abandonment proceedings. This was done historically under the general powers of the Commis- sioner. ORS 756.040 gives the commissioner the responsibility of representing the customers of the railroad. The Rail/Air Program of the PUC assists shippers in drafting their protests and also submits protests and verified statements on behalf of the State of Oregon in abandonment proceedings before the Interstate Commerce Commission.

The railroads began actively abandoning lines throughout the country fifteen years ago. The major abandonment activity began in the East where lines were generally overbuilt. The combination of mergers and bankruptcies forced the railroads to abandon many of their branch lines. As more of the big railroads experienced financial difficulties, more lines were abandoned. Oregon had a minimum of abandonment activity until recently.

Things changed dramatically when, in late 1984, Southern Pacific Transportation Company, the railroad with the most low-density lines in the state, informed the state that the

10 company intended to abandon four major branch lines within two years. Two other lines were advertised for sale. PUC Assistant Commissioner for Rail, Dave Astle, determined at that point that it was necessary to analyze all of the lines in the state and he prepared the "Branch Line Status Memo" (Appendix G.). The memo, which is brought current on an almost monthly basis, describes the traffic levels, track and way conditions and abandonment status of each line. In 1985, the state anticipated that all or part of 26 branch lines had traffic levels low enough to be considered endangered.

Between January, 1984, and September, 1986, Southern Pacific filed eight applications for abandonment, four of which can be considered major abandonments. Of those four, one has been approved, one withdrawn, one line was purchased by a county and one is continuing to operate under a lease agreement. Both Lake County and the Port of Tillamook Bay have received financial assistance through the Site Specific Infrastructure Program administered by the Oregon Economic Development Department (See Case Studies, Appendix D).

Southern Pacific operates 17 lines in the state, as of January 1, 1986. Only six, and a portion of another, can be considered secure. The remainder can be considered in jeopardy.

Burlington-Northern has abandoned a small portion of the Astoria Line, south of Astoria, and all of the Athena line, in northeastern Oregon. Burlington-Northern has very few branch lines in the state and there are no major changes expected in the next few years.

Union Pacific Railroad operates eight branch lines, four of which are "under study" by the railroad and one which the PUC considers to be in questionable status. (Union Pacific has filed no formal notice of abandonment.) One of the four "under study" is also under water due to the flooding in Harney County and has been embargoed (out of service) west of Vale, Oregon.

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None of UP's lines are in either Category 1 (intent to abandon within three years) or Category 3 (abandonment application pending), and no abandonments are expected in 1986. UP has indicated that it will solicit short line buyers before abandoning a line.

Oregon also has 15 common carrier short lines, including 3 terminal operators (no line haul activity). Two are owned by municipalities (City of Prineville and Lake County). Several short lines have marginal traffic bases and can be considered endangered. Many of these short lines are even more vulnerable to a decrease in rail traffic than a branch line owned by a Class I carrier, since short lines often have less financial capability.

The possibility of abandonments has caused considerable public concern throughout the state. The reaction from shippers, local communities and state legislators has been one of anger and surprise. This was the primary reason for the creation of the Governor's task force.

The factors contributing to the abandonment of low-density lines can be divided into two categories. First are the general trends in the transportation industry which have affected railroads, but are often beyond their control. Second are the factors directly related to railroads and to branch lines, in particular.

Transportation trends, as described in this report, can be assumed to be beyond the reach of this task force and, in many cases, beyond the reach of government. They also tend to be beyond the control of the railroads. On the other hand, there are factors specific to railroads and to branch lines which can be affected by action from either the railroads, the shippers, the communities, or state and local governments. This report explains both, though the task force recommendations are aimed at solving the latter.

12 OVERVIEW AND BACKGROUND

To begin, it is necessary to provide some historical context to the rail abandonment problem, which is directly related to the decline of the railroads. Except during World War II, evidence of the railroads' decline as the prime mover of the nation's freight has accumulated steadily since the 1930's. This decline accelerated greatly during the late 1950's, coinciding with completion of large taxpayer-funded waterway projects and major segments of the interstate highway system. The latter was built to design specifications for large, heavy trucks. In recent years, interstate trucking deregulation, an influx of owner-operators and liberalized truck size and weight standards in many states have further contributed to the railroads' loss of market share. Railroads, which are both labor* and capital intensive, simply have not been able to compete effectively.

As early as the 1960's eminent transportation economists suggested that railroads would have a better chance of sur- viving if they shed the less profitable portions of their plants, namely low-density railroad branch lines. Foremost transportation economists, Ann F. Friedlaender and Richard H. Spady, in Freight Transport Regulation, analyzed the costs of maintaining low-density lines, and concluded that railroads could be self-supporting if low traffic volume lines were abandoned. Not only do branch lines generate less revenue, but track maintenance is more costly. (Friedlaender and Spady, Freight Transport Regulation, Chapter 4).

*Theoretically, railroads should be the least labor- intensive of all forms of overland transportation. Modern technology which would permit this is readily available. However, due to many traditional practices and requirements-- essentially holdovers from the early days of railroading-- the major railroads, so far, have not been able to take full advantage of opportunities to reduce labor input.

13 Friedlaender and Spady go on to say "...the real policy choice is whether society wants financially viable railroads that perform services that meet the standards of private market profitability, or whether it wants railroads to perform public service activities that require subsidy." The validity of this statement is questionable, since railroads were viewed in isolation, without acknowledging the public subsidization of other transportation modes. However, the views of Friedlaender and Spady were taken very seriously.

The then prevailing economic theory further suggested that railroads should concentrate on providing "wholesale transportation service," with trucks providing the "retail service." In pure theory, the idea is attractive to many since it suggests an orderly, efficient and competitive system, where each mode of transportation performs the job it does best. It is also a theory that may be flawed, since it assumes that the modes are on equal footing. Given present public policies regarding motor carriers and highways, and the problems created by both railroad labor and management, motor carriers will continue to be major competitors for long haul traffic, despite the obvious efficiencies of long haul train movements.

Despite the flaws in the reasoning behind the popular economic theories, they certainly influenced the major changes that Congress made in 1980 in railroad regulation. One major pro- vision of the Staggers Act allowed branch lines to be abandoned with comparative ease. (Lemly, Shippers' Associations, p. 16) Though there are still several stages in the abandonment process, the intent of the law was to make it easier for the railroads to rid themselves of money-losing lines.

Some have argued that the Staggers Act has given tremendous advantages to the large railroads. Closer to the truth, Congress was attempting to avoid what appeared to be an inevitable slide toward the nationalization of the rail system, without coming to grips with other factors controlling

14 the railroads' problems. The one significant message in the Staggers Act was that the bankruptcy of the Penn Central, which resulted in government ownership of the Conrail System, would not become commonplace. For better or worse, Congress had made the policy choice Friedlaender and Spady described.

While steps toward rail deregulation may have helped the financial condition of the railroads, another act of Congress exacerbated the economic problems of the railroads. The Motor Carrier Act of 1981 went a long way toward deregulating interstate truck traffic. The number of trucks doubled, weights and sizes increased and interstate rate regulation all but disappeared. Long haul truckers found it easier to attract traffic that had traditionally belonged to railroads. The only products that have remained essentially within the railroads' domain are the high volume, long haul bulk movements of such products as coal and grain, often moved in unit trains. Rail also continues to be the mode of choice for many hazardous chemicals.

The traffic on branch lines, here in Oregon and elsewhere, simply drained away as shippers opted for the cheaper and often more convenient motor carrier service. Railroads, still locked into heavy capital and labor costs, and burdened with the remnants of tariff regulation, have not adjusted quickly enough to compete effectively.

The entire economic environment has changed as well. Changes in shipping behavior, the increase in transportation "third parties" and growing source competition for Oregon's primary commodities of agriculture and timber has had dramatic effects on Oregon's branch lines.

The railroads have begun to respond with more competitive energy. But the future the railroads see for themselves, and the future many economists believe is the only one open to them, does not include the operation of low-density branch

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lines, or even providing "retail" service on main lines. In this scenario the railroads will provide the "wholesale," long haul transportation service and the motor carriers will provide the "retail," door-to-door service.

Whether or not this is the future of the transportation system remains in question. It is much more likely that the transportation system will continue to be a mixture of branch lines, short lines and intermodal alternatives, as railroads attempt to find a lucrative and stable market niche in the transportation industry.

The biggest factor resulting in the decline of direct rail service is the first of the general transportation trends discussed in this document. This can be described as the forces of a free market. . TRANSPORTATION TRENDS

Transportation trends, as described here, are either a result of a free market economy or of long-term government policies. The most significant include the following:

*Shift from manufacturing to service-oriented economy; *High interest rates and bad times; *Product competition here and abroad; *Transportation "Third Parties"; *Public policy and deregulation; *Public policy and modal competition.

Shift from Manufacturing to Service Economy

America is becoming less of an industrial country. Finished products are imported rather than manufactured in the U.S. The shift to a service economy has directly affected railroads which once moved huge quantities of raw materials to the point of manufacture.

16 Many of the industries that made railroads economic successes have declined. An excellent example is the steel industry which has all but disappeared from this country. The industries that have replaced the "smoke-stack" industries rely less on rail. The railroads have been left with low revenue commodities, with the result being major bankruptcies, particularly in the East and Midwest.

Abandonments of low-density branch lines are also a natural result of the overall decline of railroad revenue and traffic, as railroads have worked to cut costs. The railroads' attempt to recapture high-revenue commodities by emphasizing intermodal transportation, as opposed to direct rail service, has also worked against the branch lines.

Though Oregon's economy is resource-based, a similar shift from the timber and wood products industry to a mixture of high technology, tourism, and service industry is occuring. As that happens, the transportation requirements of this state, like the rest of the country, will change. (Emerging Trends. p. 14.)

High Interest Rates and Bad Times

The increase in interest rates and the recession that hit the economy in the early eighties forced a dramatic change in shipping behavior. Warehousing, a common practice of the past, suddenly became too costly for many retailers and wholesalers.

The transportation industry responded with "just in time" delivery to meet the demands of customers who wanted smaller shipments delivered quickly. The traditional box car load was too large and rail service was too slow. Trucks met the need.

Though the economy is improving and interest rates have declined, the "just-in-time" trend in shipping will continue.

17 Customers like the convenience and the price of the smaller, faster shipments. Railroads are having difficulty luring the rail users back to the traditional manner of shipping.

Product Competition Here and Abroad

It is generally accepted that one reason for the decline in the rail industry nationally is the decline of American heavy industry. The railroads have echoed the change in the American economy from a heavy industrial economy to a service economy.

Oregon's situation is somewhat different, since Oregon has never been a heavy industry state. But Oregon's leading industries are suffering from both cheaper foreign competition and domestic competition from areas located closer to the major markets.

In the not too distant past, Oregon timber dominated the lumber market. The recession and resultant decline in housing starts struck a hard blow, but the Oregon timber industry has also been hurt by serious competition from both the Southeastern United States and Canada.

Processed food,, another major Oregon export product, is experiencing increased domestic competition. As other parts of the country once again produce and process more food products, the cost of transportation becomes more critical in keeping Oregon food producers competitive in domestic markets.

Domestic competition has forced Oregon producers to look to the Pacific Rim and South America for new markets. Products such as lumber, grain and grass seed, which once moved east by rail, now often move west by ship and barge. As Oregon seeks more foreign markets, the trend toward sea transportation and away from land transportation will grow.

18 Transporation "Third Parties"

More and more, producers and customers are relying on "third parties" to handle transportation. They are called many things: transportation brokers, shipper's agents, freight forwarders, and reload operators. While there are legal distinctions -- some are regulated and some aren't -- they have one feature in common. They act as intermediaries between producers and customers for the purpose of arranging transportation.

Brokers and agents are not new, but as one broker, a task force guest speaker, said, the number has "mushroomed" in the last six years. The increase in their ranks is a direct outgrowth of deregulation. In simple terms, third parties match the needs of a customer with the product of a producer. In some cases, the third party may take title to the shipment, but that is happening less often. Generally, the role of the third party is to identify the producer and then decide on the cheapest and fastest form of transportation. Many lumber mills claim that as much as a half of their output is now controlled by third parties.

Railroads created the first third parties and many railroads have willingly turned over responsibility to them. To a limited extent the railroads have control over the involvement of third parties,, but in recent years, the railroads and the rest of the transportation industry have become more controlled by the third parties. The greater control by third parties is a direct result of federal transportation deregulation.

For consumers, the increase in third party activity can be a plus since the shipper's agent or broker can take full advantage of inter- and intramodal competition. For shippers the advantages are not so clear. They may benefit from lower transportation costs, but they also lose the personal relationships with carriers.

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The relationship between a shipper and a carrier can be important since such a relationship can build an allegiance to a particular railroad or trucking firm. Third parties may have a multitude of allegiances.

While many big railroads are welcoming the increase in third parties and are even handing over responsibility for much of their marketing and selling to third parties, others are more cautious. Harry Bruce, Chairman and Chief Executive of the Illinois Central Railroad, expressed his concern recently.

"Let's stop being so eager to let helpful competitors 'relieve' us of certain onerous duties we railroaders might better perform with our own resources. Third parties who assume the burden of marketing, selling and coordinating an intermodal move, and steamship companies bearing double-stack cars, are gift horses that deserve a good look in the mouth. Their 'help' may be coming at a price too high for the railroad industry to bear. That price is loss of control of our own operations and, in particular, the abandonment of the most profitable part of the enterprise." (Bruce, "Intermodal's Bad Boy?", Intermodal Age, Jul/Aug 86, pp.37-38).

Bruce is still in the minority among the big railroad execu- tives, but one thing is certain. The trend has done particular damage to branch lines. The job of the third party is to find the cheapest form of transportation, not to increase traffic on a low-density branch line.

Public Policy and Deregulation

The trend toward the deregulation of the transportation industry began in earnest in the mid-1970's. It was part of a larger trend toward the deregulation of many industries, including banking and telecommunications. Deregulation is a

20 trend away from the extreme regulation of many industries, particularly the transportation industy, that existed from the turn of the century.

The first indication that Congress was moving away from strict regulation of the transportation industry came in 1976, with the passage of the Railroad Revitalization and Regulatory Reform Act (4R Act). In 1978, the Air Transport Regulatory Act & Airline Deregulation Act was passed, followed in 1980 by the Staggers Rail Act, in 1980 by the Motor Carrier Act, and in 1982 by the Bus Regulatory Act.

The Staggers Rail Act and the Motor Carrier Act accomplished partial economic deregulation of both industries. The concept of transportation as a utility was losing credence.

The motivation to deregulate transportation was partially philosophical and partially practical. As modes of transportation became more competitive with each other those aspects of regulation designed to protect customers against monopolistic behavior was viewed by some to be unnecessary. As railroads went bankrupt, the choice appeared to be between deregulation and nationalization of the rail system. The enormous price tag for nationalization decided the issue - deregulation, at least in part, became a reality.

The requirement that state laws conform to federal law was also an important element of the Staggers Act. In Oregon, much of the economic regulatory power over rates and services has been substantially reduced, as has that of the ICC. The Public Utility Commissioner, which began in 1907 as the Railroad Commission of Oregon, now has certification from the federal government, but the powers over the economic activities of the railroads are very limited.

The Staggers Act made the abandonment of lines considerably easier. Rail carriers need only demonstrate that a line is

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unprofitable. The burden of proof falls on the protestants. The decision is made by the Interstate Commerce Commission. Remnants of regulation remain. A legal procedure, which allows for considerable public comment, still must be followed if a railroad wishes to abandon a line and to cease providing service. Unlike most big industries, the railroads must still obtain permission to close their "plants" and until that time must continue to meet their common carrier obligations.

"Deregulation," in some form or another is probably here to stay, though there is increasing pressure for Congress to re-regulate certain aspects of the rail industry, among them the abandonment of branch lines. It is unlikely that there will be any major swing toward regulation any time soon, but there may be some changes made to the Staggers Act by future Congresses which would provide minimal protection to rail users faced with an abandonment.

Public Policy and Modal Competition

Modal competition is supposed to make deregulation work, and public policies related to the regulation of railroads, particularly federal policies, encourage such competition. Competition is healthy, assuming competitors are on equal ground, but competition among transportation modes is not equal and railroads are generally placed at a competitive disadvantage because of other public policies related to highways and waterways.

The competitive advantages of motor carriers and of inland waterway haulers are neither accidental nor intrinsic, in most situations, to either mode. Vast public monies are spent on both highway construction and inland waterway construction. User fees do not adequately support the cost of construction or maintenance, meaning that both commercial waterway and highway users are, at least in part, subsidized by the public.

22 1) Motor Carriers

The development of the Interstate Highway System and the deregulation of interstate motor carriers have allowed trucks to take most of the high revenue commodities from the railroads. Discounted back haul rates and superior service capabilities have also made trucks successful competitors. Trucks are not capital intensive and their labor costs are considerably lower, in comparison to railroads, which are both capital and labor intensive.

As R. Kent Weaver points out in The Politics of Industrial Change, (Chap. 2), highway carriers have benefited from public highways. Though highways are supported by user fees, the users are not directly responsible for the construction and maintenance of their way. Railroads must build and maintain their tracks and then must pay property tax on the land and improvements.

Oregon, more than most states, has a history of supporting the cost responsibility of motor vehicles. From the public's standpoint trucks pay close to their fair share. However, the important distinction between motor carriers and railroads is that motor carriers do not have to earn a return on investment in their right-of-way and railroads, as for-profit businesses, must. Motor carriers could not compete as effectively as they do if motor carriers had to build and maintain the roads and highways they use.

Decisions to build a major interstate highway system and decisions to keep railroads within the private sector have been public policy decisions, made primarily at the federal level. Those decisions have contributed to the decline of traffic on railroads.

In 1980, there were 94,080 interstate trucks hauling in Oregon. Today, the PUC Motor Carrier Program estimates there

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are 149,623. Interstate trucks can pick up almost anything, anywhere and at any price. When times are tough shippers will go with the lowest priced carrier.

Railroads have responded to motor carrier competition by encouraging intermodal transportation, rather than changing or improving direct rail service. The result is that piggyback services and reload operations (truck to mainline rail) are diverting traffic from the branch lines.

2) Waterways

Not unlike highways, waterways have been developed and supported by public funds. Only recently have user fees been instituted and they remain minimal. The public support of waterways has placed the railroads at a competitive disadvantage.

Barges compete for bulk commodities that, were it not for the waterways, would be moved by rail. Such commodities include wood chips, lumber, grain and petroleum. Columbia River barges are moving much of the grain grown in the Columbia Basin west for storage or export. This has affected many of the rail lines serving Oregon wheat growers.

The issue of public transportation policies and how one mode affects the others is gaining attention. Modal policies have been made in isolation, with little regard for the other modes. This has not only done damage to some modes, railroads in particular, but is also no longer realistic in a multi-modal society. A strong transportation system means that each mode must be strong.

A trucker who talked to the task force about the trucking industry said it best: "If abandoning a line forces an industry or mill to close, we lose our business, too."

24 FACTORS CAUSING ABANDONMENTS

In addition to the national trends affecting local rail service on light density lines, there are several factors which have contributed to the demise of many branch lines. They are as follows:

* The attitude of railroads; * High labor costs due to obsolete work rules and excessive crew sizes; * Equipment costs (cars, locomotives);

* Loss or slow down of branch line industries; * Deferred maintenance on line; and * Shipper and community neglect.

The railroad's lack of motivation to encourage branch line use, coupled with the high costs of operation and the decrease in traffic (revenue), has seriously damaged the economic viability of many lines. Added to that is the lack of interest from shippers and communities in their rail lines - until abandonment is imminent.

The major factors contributing to the abandonment of Oregon branch lines, in addition to the national transportation trends, are as follows:

Railroad Policies

1) Management

Three distinct factors appear to contribute to the way most railroads run their business. The first is the belief that railroads can only survive if low-density lines are abandoned; the second, is a lack of entrepreneurial energy; and third is the reality that in the present economic environment more money can be made by investing in something other than in running a railroad.

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Some branch line shippers, and even some main line shippers, relate that the railroads seem to work harder at discouraging traffic than encouraging it. Railroads, given the current economic wisdom, would rather not serve low-density lines. They will often discourage small shippers on main lines, as well. The railroads place surcharges on low-density lines, give preferential rates to piggyback shipments from branch line shippers, and sometimes give poor service. Branch line shippers have been known to beg a railroad sales representative for a car. It is hard to believe that the intent is other than to discourage traffic on the line.

Economic regulation contributed to the lack of energy in the railroad industry. While regulation may have protected shippers, it also isolated rail management from realities of a competitive business environment. The railroads have only recently been forced to compete in anything like a free market system.

The Staggers Act left remnants of regulation, but it took a big step toward shaking the railroads out of decades of lethargy. The adjustment has not been easy, and only a few of the big railroads have shown much business creativity.

Sales and marketing, as understood in other service industries, is very new to the railroads. The most aggressive sales people in the railroad industry tend to be the people promoting intermodal (piggyback, reload, stack trains, etc.) transportation.

Tremendous effort is being made to capture traffic from competing carriers, while their own branch line shippers, confronted with abandonment proceedings, may not have seen a sales representative in a decade.

The freight statistics, which are printed frequently in transportation periodicals, appear to indicate that the railroads have not recovered much traffic from trucks. Though that, in

26 part, is because of the general trend in transportation, it is also because most of the railroads, particularly in Oregon, are spending more energy competing with each other, or in just reducing operating costs, than on competing with their real competition - the motor carrier industry.*

Branch line shippers, particularly the small shippers, are often ignored by the railroad which serves them. Not sur- prisingly, these same shippers receive considerable attention from other rail carriers, which give good, competitive rates to shippers who reload or piggyback on their lines.

The big railroads are also focusing on technological innova- tions, such as double-stack container trains, Roadrailers and high-speed unit trains with marketing names like "Expeditor." This is a positive step, but they have tended to leave traditional railroading behind and that attracts shippers away from branch lines. Box cars sit idle while railroad sales people promote use of the new intermodal equipment. Lg Some railroads have also begun to distance themselves from their customers. This is particularly apparent with the transfer of intermodal marketing and selling responsibilities to third parties and steamship companies. Many of the big s, railroads have closed most of their local freight agencies. le One railroad, Union Pacific, will be forming a single customer r- service center in St. Louis.

What may be gained in efficiency could well be lost when the personal touch is gone.

*This is not to say that reducing operating costs is not a competitive strategy. Rather, railroads have failed to market their services in a manner designed to recapture traffic from motor carriers.

[ 27 Sir:: - I - ;_ - -0 'r

A traffic manager for a major national food processing company may have explained best what is so troubling about the way railroads are beginning to do business:

"This may not sound so sophisticated, but while rates certainly affect how we make the decision on which railroad we ship or which trucking company we use, personality means almost as much. If the person on the other end of the phone is rude or doesn't care about my business, why should I give them my money?" Traffic Manager, Gourmet Foods

By contrast, and to prove that traffic can be recaptured, some of the new short line operations, which make efforts to sell direct rail service to shippers, have added traffic to the line. The personal attention has paid off. Those limited successes may serve as testimony to the damage done by the lack of attention to low-density branch lines by the Class I Carrier. It may even say something about problems in the whole industry.

In a recent article in "Railway Age," John Hall, assistant vice president/marketing and planning for Burlington-Northern Railroad said the following:

"Because price is so volatile we find it harder and harder to stay in touch with our smaller shippers and to respond fast enough to their needs to stay competitive with trucks. Short lines do certain things better than we do, especially in being flexible in service." (Malone, "Here Come the Short Lines," Railway Age, June 87, p. 35)

28 The railroad system has been hurt by the railroad holding companies draining the capital resources from the railroads. Money that could have been put in maintenance and rehabili- tation has been diverted into more lucrative non-rail investments. Branch lines, in particular, have suffered.

There are some reasons to be optimistic. Railroads are beginning to adjust to the demands of deregulation. Compared to management and sales methods of a decade ago, they have shown vast improvement. Compared to successful entrepreneurial companies, the railroads still have a long way to go.

The growing trend of the large railroads to sell branch lines to short line operators is also encouraging since it appears to demonstrate that railroads understand that line abandonment may reduce costs, but does little to enhance revenue or attract shippers away from motor carriers.

2) Labor

A significant cost in the operation and maintenance of a branch line is the cost of labor. A four person crew is typical on a branch line. Southern Pacific still operates five branch lines with firemen, even though the function of the fireman, which is to regulate the boiler in a steam engine, is no longer needed. It is no secret that one function of a line abandonment, and one function of short line spin-offs, is to cut labor costs.

Technology, including diesel engines, computers, and sophisticated maintenance equipment, is in conflict with many hard-won, and probably deserved, labor concessions. That, coupled with government regulation, spawned during the Industrial Revolution, has made many low-density branch lines impossible to maintain and operate at anything close to economically. (Weaver, Industrial Change)

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In 1978, the Rail Division of the Public Utility Commissioner's Office released a study entitled "Analysis of Railroad 'Train Crew' Labor Costs in Oregon and Estimated Potential Savings." (Astle, Coram & Valness, Analysis of Railroad "Train Crew" Labor Costs). In summary, the study determined that railroad operating costs could be reduced significantly without impair- ing employee safety or customer service. Unfortunately, the study is still accurate today.

Improved technology and automation of train-control and clerical operations have reduced the personnel requirements of the rail industry. Management has attempted to improve productivity while the unions, understandably, have fought to save members' jobs. (Weaver, Industrial Change).

The operating crew on a train serving a branch line typically includes four to five people: two brakemen, a conductor, an engineer, and, often, a fireman. The typical low-density branch line crew handles relatively few cars during a day's work. By comparison, short line operations in Oregon will accomplish the same work with two or three personnel, usually at significantly lower wages. In addition, when a short line crew has finished running the train, the personnel often work on the maintenance of the way--something unheard of in the big railroads, where craft lines are well-protected.

For branch lines, the problem is obvious. While revenues on branch lines declined, labor costs have tended to increase. Independent truckers, on the other hand, will charge what they think they can afford. It doesn't take a detailed analysis to conclude that railroad labor costs make it difficult for railroads to lower rates--to a point competitive with independent interstate truckers--except on high-volume shipments moving over long distances.

30 To further complicate the labor problem, government policies protect archaic railroad work rules. Laws affecting management-labor relationships and management-labor negotiating processes have been difficult to change at b6th the state and federal levels. It often appears that labor protection has a higher priority in Congress than preserving rail service. A recent example is Congressional action to require Guilford Transportation to settle its labor dispute with maintenance- of-way union.

In fairness to the unions, railroading can be a dangerous business. Improvements in railroad working conditions have been hard fought and hard won. Railroads have a history of labor-management stress. Labor has not forgotten the early days of the industry and the relationship today between labor and management is often one of distrust and stubbornness on both sides.

Unions also know that in these days where "productivity" is determined by the ratio between revenue and the number of employees, job protection is not something to be taken lightly. Railroads, like other American heavy industry, are priding themselves on reducing their labor force. In Oregon, since 1979, the railroads have reduced the number of employees from 7,566 to 5,355. (Oregon Industrial Outlook, State of Oregon Employment Division, 1986, p. 401).

Labor cost is the critical variable cost on a branch line, which is why short line operators can often make a small profit from a line that was losing money under Class I carrier ownership. This is despite some reduction in operating efficiencies afforded by the ownership of the large carrier.

There are signs that rail labor is becoming more willing to negotiate smaller crew consists, but the smaller crews, negotiated to date, are mainly on the new intermodal trains,

31 I M--: -9f; r i I

such as the "Sprint" trains, and not on regular main and branch line freight assignments. The new style trains are usually high speed expedited trains designed to lure business from trucks. The unions have been willing to allow these trains to operate with as few as two person crews. Rail management and labor have been and are continuing to discuss crew size.

The problems between labor and management are so great and the level of government involvement is so high that it may be years before there is a real turnaround in the way railroads do business. In the meantime, while labor and management continue to squabble, trucks--in the words of railroad vice-president and task force member George Scholibo of SP--will continue to "eat the railroads' lunch."

Recent statistics support the statement:

Ton-Miles Handled Freight Revenue Rail Truck Rail Truck 1929 74.9% 3.3% 72% ? 1975 23.9% 22% 23.9% 71.1% 1984 37.5% 24% 18.2% 71.1% 1985 37.2% 24.9% 17% 72%

"Productivity Alternatives." Modern Railroads. Sept. '86. p. 35.

Branch Line Industries

On the majority of branch lines in Oregon, one shipper provides most of the traffic on the line. In the Willamette Valley, the key shipper is generally a lumber mill. On branch lines off the Columbia Gorge, the key shipper is usually a grain elevator or a lumber mill. Food processors and grass seed growers have opted, in large part, for truck or piggy-back service, and now contribute very little to branch line traffic bases.

32 The lines serving lumber mills have become particularly vulnerable. The recession caused many of the small mills to reduce their output or to close. Orders from customers are smaller, interstate trucks tend to be cheaper and more available, third parties are gaining greater control of the mills' transportation and other railroads are offering better rates at reload and intermodal centers.

The granger lines--those serving agricultural areas--have lost traffic because much of the grain market has shifted to the Pacific Rim. Most grain now moves by barge, at less cost, to points west. In addition to the shift in grain markets, at present, there is a huge surplus of wheat, so little grain is moving at all. The railroads have also established incentives for shippers to ship in volume car units. Smaller elevators on branch lines often truck grain to large loading facilities to allow them to tak