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One of the best ways to decrease harbor congestion and air pollution is to use trains rather than trucks to move cargo. That is why we support the Burlington Northern and Santa Fe Railway (BNSF) proposal to build a rail terminal a short hop from the ports of Long Beach and Los Angeles.
- Long Beach Press-Telegram editorial
May 10, 2007
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Town Hall Los Angeles Keynote Address
September 14, 2006
Matthew K. Rose
Chairman, President and CEO, Burlington Northern Santa Fe Corp.
“Will Southern California Have Adequate Freight Transportation Capacity In the Future?"
Good morning, and thank you Dr. Goodman.
It is a distinct honor for me to have this opportunity to be here talking about one of my favorite topics – the shortage of rail capacity, and how it impacts Southern California and our nation’s ability to move goods to meet the increasing appetites of consumers and industry -- and how a strong railroad network can provide particular value to a region in regard to air quality, and efficient movement of goods and people.
I am also very pleased that Los Angeles Harbor Commission President Freeman, Dr. Jon Haveman and Jack Kyser will be leading a panel later this morning on making the Port of Los Angeles, secure, green and efficient. You will see that I am an enthusiastic supporter of all three attributes, not only for our proposed Southern California International Gateway (SCIG) project here, but for all intermodal facilities in Southern California and other densely populated areas.
To put this capacity shortage into perspective, I’ll cite a couple reports from the rail industry’s largest competitor, the highway. In 2002, the American Association of State Highway and Transportation Officials, AASHTO, said freight transportation demand is expected to more than double by 2025. And given that it takes a tremendous amount of time and significant amounts of private capital and federal and state dollars to build capacity, I quite frankly think America, and Southern California in particular, are at the Tipping Point of a key policy consideration.
Last October 25, we celebrated the 25th anniversary of the Staggers Act, for those of you who aren’t familiar, reduced the amount of economic regulation on the railroad industry. At that time, there were more than 40 Class I railroads and many of the were in a state of disrepair. Two were receiving billions of dollars. Bankruptcies and bail outs during the 1970s led to the passage of Staggers.
Staggers allowed the industry to find its natural equilibrium. With Staggers, the railroad industry has transformed itself from an industry facing bankruptcy to an industry which will become the “poster child” for efficient growth, capable of handling sharply higher volumes, while reducing prices as the industry worked off excess capacity.
Staggers also helped Southern Californians improve their quality of life as many of the raw materials and finished goods needed by the burgeoning population growth over the past 25 years were brought into the region by rail. And the ports are benefiting from rail, because for the long haul, rail makes sense – it’s the safest, most environmentally friendly, most efficient form of surface freight transportation
As Harbor Commission President Freeman said earlier this year (Traffic World, 2/10/06) and I quote, “It’s real simple – efficient rail service is critical to the future of this port…Moving cargo by rail instead of by truck cuts down on air pollution.”
Today, our industry is poised to shoulder an even larger share of the transportation pie, as long as we can consistently realize the returns that justify new investments and we continue to be sensitive to local needs from an environmental standpoint. And if the nation and the Ports want to be able to count on the rail industry even more, we must continue to embrace the policies introduced with the Staggers Act that gave railroads greater freedom to operate in the marketplace without artificial economic constraints.
This sentiment has been supported recently by a number of people in positions here to make a difference. Geraldine Knatz, executive director of the Port of Los Angeles, was quoted in February (Traffic World, 2/10/06) saying, “We’re moving in the right direction…Our customers are doing a fantastic job of making rail usage a priority, as the numbers clearly show.”
And Los Angeles City Councilwoman Janice Hahn, who also is vice chair of the Alameda Corridor Authority, said: “The Alameda Corridor’s performance proves that we can move goods, accommodate growth and still continue to improve air quality.”
And some two years ago, Julie Masters of the National Resources Defense Council, said: “Environmentalists and some local residents say the ports and corridor authority should halt road-building plans and instead find ways to entice shipping companies to use trains…I cannot understand how they can be turning to building additional highways until they have filled this excess capacity.” We certainly agree with that.
And in Monday’s Los Angeles Business Journal, an article pointed out that “In the Los Angeles area, by 2025, shifting 25 percent of freight from trucks to freight trains would decrease drivers’ commutes by 39 hours…save each commuter $795 in annual congestion costs…along with saving 73 gallons of fuel…and decreasing air pollutant emissions by as much as 49,983 tons.”
On a national level, rail shippers said they want more capacity. Here are excerpts from two shipper testimonies that came from the Staggers Act 25th Anniversary hearing last October: the first is from the National Industrial Transportation League (NITL), it’s really a collection of big rail shippers – largely industrial commodities companies and a growing number of consumer goods shippers, like UPS.
NITL said “ …the country does not need railroad capacity to grow at the same pace as the growth of the economy or transportation generally: it needs to grow faster…than that, the railroads’ share of intercity freight traffic has to grow faster.”
And the second is from UPS: “UPS recognizes the capital intensive nature of the rail industry and have witnessed the equity markets’ punishment of the railroads that aggressively invest in their infrastructure…in other words, putting in capacity before its time. Public policy initiatives addressing infrastructure improvements, adding capacity, improving rail service, and enhancing technology should be promoted.”
Well maybe the California citizens have heard that in terms of the current bonding proposal that’s before the voters. We know that rail transportation will continue to grow for a lot of factors: first, long-haul truck driver shortages are at the highest they’ve ever been; second, agricultural trade growth is just really taking off in this country; highway congestion; high fuel costs are actually a railroad’s best friend, and then finally the most important one, and that’s the transpacific growth – that’s really the economic engine of the ports of L.A. and Long Beach and the other California ports as well. The ports, speaking of which, provide almost than one million jobs and account for, listen to this, almost half of one percent of the entire GDP of our country. What the port means to this region of California influences businesses and consumers across the nation, and is linked to the economies of China, Korea, Taiwan and Japan, among the Asian-Pacific countries.
As the sixth largest economy in the entire world, Southern California requires a tremendous volume of goods to meet local consumption – y’all buy a lot of stuff here. That’s the bottom line. Goods coming through these ports of Los Angeles and Long Beach and goods coming from rail from other regions of the United States.
Before I focus on just the Intermodal growth, I want to cite one more recent report that cites some of the concern that has been raised about freight capacity and who will fund it. In January of this last year, the CBO, the Congressional Budget Office report issued a paper called, “Freight Rail Transportation – Long-Term Issues.” Here’s a couple of excerpts from this CBO report: First, “some transportation experts have expressed concern that the railroads are not investing enough to meet rising demand for their services. If they can’t keep pace, the result could be higher costs not only for shippers and consumers but for taxpayers, because…”- Now just think of this logically… “demand that the railroads cannot satisfy is most likely to go to where, to the highway system, to the trucks and thus require more spending on the construction and maintenance of highways.”
The second point: “Building new track is very costly, and because track is fixed in a specific location, investing in it subjects the railroads to a high risk that demand will shift to other locations and that the investment will no longer yield an adequate returns. The other major domestic freight transportation industries, specifically trucking or the highway and water, in terms of the river system, they don’t face that kind of risk; instead, the government build and maintain the infrastructure for those two industries – and it is the taxpayer, us – everybody in this room – who is ultimately bearing that risk.”
Finally: “Taxpayer policies appear to tilt the overall playing field in favor of the trucking industry and water carriers …In contrast, the railroads pay for their entire rights-of-way and infrastructure and often must pay local taxes on top of that as well as on those investments. Those costs translate into lower private costs for truckers and water carriers and enable them to attract some freight shipments that could be handled by the railroads at a lower total cost of transportation. That encourages greater spending on the highway and water construction than would be justified if we were just competing on economic grounds which leads ultimately to an inefficient use of the nation’s resources.”
With all of those who call for more capacity in mind, let me give you a sense of what has happened to the Class 1 railroads over the last 10 years, from 1996 through 2005, to illustrate the volume and the impact in terms of what we’re seeing of this Intermodal, both for BNSF and the industry in general. And then I’m going to talk a little bit about SCIG and how it fits into the long term plan for Southern California. Finally, I’ll propose some various alternatives on how we get more rail capacity into our nation, national rail network.
From 1996 through 2005, the rail industry, and we measure that in terms of unit growth – freight cars, trailers and containers – grew at a compounded annual growth of about two percent. For the same period, our growth at BNSF volume is double that, or about four percent.
Our units have grown in 1996 from 7 million units to last year hauling about 10 million units. So you can imagine, right there if we weren’t able to handle that growth. What does that mean? Three million units would automatically be put to the highway. Our largest growth came from, no surprise, intermodal, that’s from both container shipments as well as trailers operating on our railroad. About 80 percent of this 3 million growth came from intermodal shipments, specifically driven by Transpacific trade, which you all are very, very familiar with. And what we’ve seen is as our economy moves from a manufacturing economy to a consumption economy, more and more of this traffic wants to move in containers. In 2005, we moved more than five million intermodal shipments on our railroad instead of the nation’s congested highways.
Think about this number: We lift an intermodal container or trailer every six seconds of every day. Every day of every year. So, while I’m up here chatting, we’re going to lift about a hundred intermodal lifts in just the first couple of minutes.
In 2005, BNSF was able to handle about 50 percent of the of entire industry growth, of one million additional units. Looking at 2006, business has even been better. We continue to grow, and our growth from Intermodal is not impeding just the other freight that we also haul as well. Our business model calls for BNSF to be able to move traffic for any market that can support our return on invested capital.
At the end of the day, there is a huge correlation between the returns that the railroads make and the amount of capital they’re able to put back into the business. Higher returns allow us to make investments required to improve velocity and efficiency and meet our customers’ service, and eventually expand our capacity.
At BNSF, our Return on Investment Capital, or ROIC, as we call it, kept falling from 1996 through 2003, dropping about from 9.5 percent to 6.6 percent. Then in 2003, we started growing our volumes, our ROIC started improving, where it reached about 10 percent last year, and you’ll find it no coincidence at all that in the year 2006 we announced record capital spending in terms of expansion on our overall railroad.
Well that takes me to our SCIG project. Imports from Asia keep growing at a faster pace than industry analysts predict. If I recall, the forecast of this year was for 8-to-10 percent, voila, we’re seeing about 12 percent overall growth. High volume growth will continue, and we need a long-term, pro-active plan to be able to handle it, that will also improve the quality of life for the people who live in this region.
BNSF has been able to meet the growth so far because of investments that we’ve made in the past double-tracking our route from the ports here in Los Angeles all the way to Chicago, and by using more on-dock rail here and by expanding intermodal facilities at these various end points. We’ve also kept pace with Intermodal’s growth by making our trains longer and running more trains. For example, in 2004, we were operating more than 40 intermodal trains from the Southern California ports. That grew to 50 trains per week in 2005, and that will grow to about 70 trains at its peak during this year. 70 trains per week moving from Southern California to various parts of this country. Next year, we would expect that to move to about 80 trains per week.
There are really three ways that we get and receive our freight. The first one is most efficient, and that’s what we call on-dock rail. We have increased our usage every year. In July, we handled more on-dock rail units than we handled from our inland terminals, and that’s the first time that’s ever happened. While we will strive to keep growing this aspect of on-dock rail, port terminal space for rail, it is limited. Some terminals have no on-dock rail loading capability. Further, some terminals don’t have sufficient destination volume to build an efficient train.
The second most efficient way to handle intermodal is what we call near-dock. Shipping lines can only do so much because of this limited capacity of on-dock rail loading, and that’s why the construction of SCIG is so essential. It makes a lot of sense, too, because if you think about it, what we’re going to do, we’re going to shift millions of truck miles away from the crowded 710 freeway.
The third approach is to move to our inland intermodal facilities, in this case, what we call our Hobart yard. It is 20 miles away from the ports and handles, this year, about 1.4 million containers and trailers. You can imagine if we could shift that volume near-dock or on-dock the impact that we could just have in terms of reducing congestion and improving air quality. Hobart is the largest inland intermodal facility in the world, and we look forward to being able to continue that as well.
We’re also very, very committed to make SCIG environmentally friendly. Our plan is to use the greenest locomotives and fuel available, as well as electric cranes for lifting and storing containers. We also support Harbor Commission President Freeman’s quest to set a new standard for drayage trucks serving near-dock yards. We also will require that all trucks calling at SCIG burn the mandated ultra-low-sulphur diesel fuel.
We want to work in partnership with the Port of Los Angeles, which controls the SCIG property, and the State of California, if it also wants to participate, to set the standard for clean trucks serving this facility.
As an editorial about SCIG in the Long Beach Press- Telegram noted last October, “What could be better than a neighborhood train terminal that reduces traffic on the 710 Freeway by a million truck miles a year? One that doesn’t put part of the burden on the neighborhood.”
SCIG will represent an investment of about $200 million by BNSF and provide capacity to handle another one-million lifts plus. It’s critical that it gets through the environmental process on time and that we are able to make it operational in 2009 to meet the current demand.
When I think about SCIG, I think about the Alameda Corridor investment. For years, the Corridor was subject to debates about its impact on the environment, neighborhoods, commerce and the ports. Most people don’t realize this, but the first Alameda Corridor, and Art, you can probably correct me, the first Alameda Corridor meeting was actually in 1986. It’s amazing that it took that long.
Looking back, I think the vast majority of the people would agree that the only mistake that was really made was that it wasn’t built 10 years earlier. The bottom line is that California will continue to grow. The consumption requirement of this region will continue to facilitate that growth. Politicians and the Ports either can pro-actively plan their future or just allow the business growth to occur.
I believe it’s time to move forward in a very pro-active way, striking a blow for the environment, commerce and the local communities.
Finally, in regard to the question of: How do we get more rail capacity in to this country? There’s really three different choices. The first is directed government investment – Such non-market driven investments by government will cause, could cause disinvestment by the rail industry. You’ve all heard of specific earmarks, that’s what I’m talking about, if we went to a system where there were unique earmarks into our network it could actually cause disinvestment. The second one is – just no change to the current model – Under that scenario, railroads would continue to invest where it would make economic sense for them to do, where their returns on invested capital exceeded their cost of capital. Unfortunately, in this system, there’s going to be some markets that aren’t going to be served equally as the system develops. The third option is to supplement the current model with an economic stimulus – we believe that we can design such a stimulus that it’s not enough to cause a bad investment to occur, but also it will be enough to make an investment that won’t be made until future to occur sooner.
We believe that the right stimulus is to increase the expansion capital that the rail industry currently spends from around $2 billion a year doubling that to about $4 billion a year. This would also have a tremendous impact on providing rail capacity that is needed.
In line with this a stimulus option, on July 26, 2006, was introduced by Senator Lott and Senator Conrad, calling it The Freight Infrastructure Capacity Expansion Act. We expect for the House to introduce similar legislation later this year.
The proposal is an example of how public policy will incent continued investments for capital expansion by our industry, by providing an environmental review mechanism that allows good projects to come on line in time to meet capacity demands. It’s also good public policy because it should shifts millions of truck miles to the rail, reducing highway congestion and air pollution, without negatively impacting drivers and jobs.
The Senate bill is known as S.3742, provides a 25 percent capacity expansion tax credit to any taxpayer making expenditures for new freight rail infrastructure where property didn’t previously exist. So a couple of examples – you might find a new intermodal facility somebody wants to build. That would qualify for something like this. Again, President Freeman has discussed with putting some sort of lift carrying, a maglev to move containers from the ports to inland facilities. That kind of expansion would exist for something like this. So, there’s a number of opportunities where we see rail infrastructure to be expanded that this type of tax credit could be helpful. It will help the Ports, the shippers, short lines and others as it covers new track to existing rights-of-ways; adding new sidings; constructing new intermodal or transload facilities; technology-based expansion, as well as signal expansion, in terms of creating new signal technology. There are some other positive provisions, but in the interest of time, let me wrap up some comments.
There is no doubt that we have a shortage of rail capacity today to meet current needs, let alone future capacity. All transportation planners are voicing this concern, as well as stating that there’s insufficient capacity to handle forecasted growth and the rail industry cannot do it alone.
I’ve had the opportunity to be appointed to a Federal Transportation Commission that is studying the entire country, and we’re going around the United States holding field hearings, meeting with the Secretary of Transportation, meeting with Port Directors, meeting with shippers, meeting with consumers, and it’s just across the board, there is a looming crisis that we need in terms of expanding the infrastructure in this country.
Without a stimulus to create more rail capacity, the U.S. economy and the consumers will be adversely affected and that’s why we’re pushing this stimulus.
Think about the alternative, especially here in Southern California: on-going capacity constraints; highway congestion; probably slower regional process towards “green.” One other point: When we talk about this stimulus, we’re not tying that to the construction of our SCIG facility. But it would help, of course.
By adding more rail capacity in California and by adopting reasonable policy approaches around the environment and air quality, total truck miles will be reduced, congestion will be lessened, air quality will improve. What a great combination. Again, truck miles will be reduced, congestion would be lessened and air quality will be improved. That’s a compelling vision and I hope that you will work with us to make it happen.
On the other hand, if the state and others impose costly regulations to further reduce emissions from locomotives, the smallest contributor of all the transportation modes, then you will see an enormous increase in trucks, especially from the Mexican border moving north. And if the state changes federally preempted operating practices of the railroads, this, too, will have a negative impact on the efficiency of the rail network and you will see more and more trucks traveling along the highways.
Finally, if the ports adopt “no-growth” strategies, then railroads will be unable to expand and congestion will continue to increase. That’s why SCIG is so powerful – it provides jobs; reduces emissions; uses greener trucks, electric cranes and sets, quite frankly, a new standard for the construction of all new facilities. And it also, quite frankly, begins to address the current facilities out there.
In summary, freight rail demand keeps growing because rail is cleaner, safer and more efficient. I will assure you that the volume at the ports of L.A. and Long Beach will keep growing at very healthy rates. Highway construction is limited and extremely costly, and it keeps increasing and the trucking industry struggles to hire drivers. By comparison, the railroad industry is hiring about tens of thousands of employees every year to meet growth, attrition and the new volume that’s coming.
This really is good news for America, and for Southern California, but the good news story will abruptly end when rail capacity no longer is able to handle this new demand.
With your help, together we can avoid a transportation rail service crisis.
Thank you.
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