As a growing number of products and people are transported throughout the country via rail and on the nation's highways, the United States' infrastructure is in need of improvements to keep up with this rapid growth. During today's OnPoint, Ed Hamberger, chief executive of the Association of American Railroads, makes the case for freight rail as the best option for transporting goods in a clean and efficient manner. Hamberger responds to accusations that the rail industry has been charging customers unreasonably high rates and defends his organization's support of coal-to-liquids technology. Hamberger also explains what his industry needs from lawmakers in order to expand rail's capacity.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Ed Hamberger, CEO of the Association of American Railroads. Ed, thanks for coming on the show.
Ed Hamberger: Monica, my pleasure. Thank you.
Monica Trauzzi: Ed, your organization recently launched an ad campaign touting freight rail as a solution to goods movement in an environmentally conscious world. Why is transport by rail a better option than say transport by truck?
Ed Hamberger: Well, glad to know that you've seen our ads.
Monica Trauzzi: It's hard to miss them.
Ed Hamberger: It would be one of our target audience and what we're trying to do is raise the level of consciousness about the importance of freight in general, but freight by rail specifically. We can get 436 miles to the gallon. That is to say, we move, on average, 1 ton of freight 436 miles on 1 gallon of fuel. Because of that, we emit fewer CO2 emissions. We emit fewer particulates, fewer NOX emissions. And so we think, at a time when people are trying to figure out how to deal with $140 barrel of oil, how to fight global warming, they should be aware of the option of moving freight by rail.
Monica Trauzzi: So, what is this big push for rail use and seemingly against other modes of transport, like trucking, mean for the trucking industry? Do you see a world where we can use both rail, trucks, other modes of transport to move our goods around the country?
Ed Hamberger: Absolutely, absolutely. In fact, the fact is growing segment of the freight rail business is something called intermodal and that is where the trailer part of a tractor trailer, or what's known as a box that comes in, about 5000 of them or more come in on one merchant ship to be unloaded at a port. We double stack them, two to a rail car, and we can move 280 to 300 truck load capacity on one train. And so we do that in cooperation and in partnership with the trucking companies, JB Hunt, Schneider. Our single largest customer is UPS. What I like to say is what Brown does for you; we do for Brown every day. Last year, $750 million is what UPS spent to send their containers by freight rail. So it's a partnership and what we're trying to do with our ad campaign, again, is just raise the level of consciousness of policymakers who are very familiar with the benefits of moving people by rail and make them understand that moving freight by rail as benefits as well.
Monica Trauzzi: In a recent hearing you testified that you support cold liquids technology. That's pretty controversial though in terms of emissions. So, how can you on the one hand be saying, listen, freight rail, it's going to help us reduce emissions in a carbon constrained world. And then on the other hand, you're supporting this technology that a lot of people are saying could double emissions?
Ed Hamberger: Well, I'm confident that that technology will continue to evolve and it's the same as creating electricity by burning coal. This country has 300 years worth of coal reserves and we happen to haul a lot of that. That's our second-largest customer segment, is coal. About 50 percent of America's electricity comes from coal. We move about two thirds of that. I don't see how we can continue to have a thriving economy without some use of coal for electricity. Similarly, again, at $140 a barrel of oil it seems to me we need to be taking a look at how to take advantage of a technology that's proven it can be done. What needs to be worked on is how to do it in a more environmentally friendly way and that's what I would like to see the emphasis on.
Monica Trauzzi: All right and what are some of the technological advancements that the rail industry is making to make transport of goods cleaner and faster in the future?
Ed Hamberger: Well, a lot of that is driven by safety. We have a whole suite of technologies that we are putting alongside the rail bed as the train goes by that uses laser beams, that uses acoustical detectors and radio transmission to try to take a look out what is the quality of the air hose for the brake, of the wheel, using the laser detector to see if there's a hidden crack in the axle. To try to detect all of that before an accident can happen and we call it preventive maintenance and try to let the railroad pull that car out before it causes an accident. Obviously, if you do that the whole network becomes that much more fluid and goods get from origin to destination on time and that's good for the customer and also good for the environment.
Monica Trauzzi: All right, let's talk infrastructure for a moment because it's a top concern for your industry and it's also something that's getting a lot of play on the Hill these days with talk about safety delivery authorization. What does your industry needs from Congress, going forward, in order to meet expanding needs for rail?
Ed Hamberger: What we would like Congress to do, I think, is maybe two or three quick points. One is to recognize that the movement of freight is an important part of what keeps this economy going and keeps this country competitive in the world markets; two, within that overall context of freight movement, the advantages of moving freight by rail. And that is, again, 436 miles to the gallon, three times fewer emissions in terms of particulates and NOx and CO2 going into the atmosphere. And three, a recognition that the same inherent benefits of moving freight by rail because of, as we like to call it, the steel wheel on the steel rail has similar benefits to moving people by rail. And so we need to have enough capacity, enough investment in new track and new stations and new yards, to be able to move as much freight and as many people as we can by rail. Not in competition against each other, not one in lieu of the other, but we need to be working together to figure out how to take advantage of the inherent advantages that railroads have to offer.
Monica Trauzzi: But your industry is also reporting record profits. Do you really need additional financial help from government? Are those profits being put toward infrastructure improvements?
Ed Hamberger: A great question and the answer is yes, the short answer is yes, they are. And just two or three things in your question there. Number one, yes, record profits, but in the context of the Fortune 500 and we're very pleased that the industry is beginning to get close to earning its cost of capital. 2006, 2007 best two years on modern history, we're still beneath the median return on equity for the Fortune 500 companies. But we are taking the money that we are earning and plowing it back into the infrastructure. On average $0.40 of every dollar is reinvested into replacing, expanding, or maintaining the infrastructure that we have. That's $0.40 of every dollar going right back into the infrastructure. Even so, a recent study done by Cambridge Systematics, we actually commissioned the study, but it was an independent study and was part of the National Transportation Commission report. It says that the industry needs to spend about $145 billion between now and the year 2035 in capacity expansion, not to maintain or replace what we have, but new capacity. They project that at current levels we'll get to about 95 billion, leaving about a $40 billion shortfall. We believe that it would be sound public policy for an investment tax credit to incent the railroads to spend even more than they already are spending and to explore public/private partnerships where the public would pay for the public benefits that it receives from moving freight by rail. The private sector, the railroads would pay for the private benefits. This is not a bailout, this is not a subsidy, this is a partnership where the public recognizes that congestion mitigation, clean air, energy independence are public benefits and, therefore, is willing to put some money in a partnership with the railroads, put some money into new capacity.
Monica Trauzzi: OK, at the same time that you have record high profits, there are also claims that the rail industry is charging unreasonably high rates. Is your recent PR push behind freight rail to sort of detract from this really negative attention that the rail industry is getting?
Ed Hamberger: No, our recent education effort, advertising effort, is really meant to have people understand the role do we play in the nation's economy. A couple of facts about high rates. Since 1980, when the industry was partially deregulated, the GAL has found that rates have gone down over 50 percent in inflation-adjusted terms, across the board. In real terms, they have gone down almost 10 percent. So that ten cents you spent for a Coke back in 1980 would cost you nine cents today in real terms. So we've become a much more efficient industry. We've passed those efficiencies on to our customers and I believe that there are a number of customers who share our view and the view of many members of Congress and the Department of Transportation, that the real challenge is how to get enough money back into the infrastructure. And that requires, as the congressional budget office itself recently found, that it's the profits of the railroads that provide both the incentive and/or the means for more investment in infrastructure. And so we need to make sure that the industry could continue to earn its cost of capital.
Monica Trauzzi: Yet there are many claims that there are these double-digit rate increases and they're not followed up by more reliable service, there's less reliable service in fact.
Ed Hamberger: Well, I guess I disagree with the overall statement that service is less reliable. We are actually growing market share and I think that indicates that our customer base is pleased with the service they're getting and, of course, there is an agency, as you know, called the Surface Transportation Board, which is the successor agency to the Interstate Commerce Commission, which is there to make sure that unreasonable rates are not charged. And, in fact, they've just recently come out with a couple of findings in favor of a small shipper, DuPont, and ordered a rate reduction in some of the rates that one of the railroads was charging them.
Monica Trauzzi: OK. Let's talk about antitrust, because railroads are exempt from U.S. antitrust laws and there's a push to include rail under those laws now. Is there a lack of competition among freight railroad providers?
Ed Hamberger: Definitely not. There's plenty of competition, not only between and among the railroads, but also with the other modes of transportation. But at the risk of being confrontational, I need to go back and just correct something.
Monica Trauzzi: Yes, please.
Ed Hamberger: And that is railroads are not exempt from antitrust laws. Railroads are covered by the basic antitrust laws which govern price. We cannot get together and determine price. We cannot allocate markets. In fact, there are a number of antitrust lawsuits pending right now against the industry. The Department of Justice has investigated, in the past, certain alleged mispractices and has found that there are no violations. So, the legislation that is kicking around Capitol Hill really overstates what it's trying to do and the issues that it's trying to address are already covered by the Surface Transportation Board. So we don't believe that the legislation is necessary.
Monica Trauzzi: OK. We're going to end it right there on that note. Thanks for coming on the show.
Ed Hamberger: My pleasure, thank you very much.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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