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Rail chiefs urge Congress to reject regulation

WASHINGTON, D.C. -- Chief executives of major U.S. freight railroads urged Congress Wednesday (May 9) to reject any attempt to re-regulate the industry and to embrace calls for public funding to help build rail infrastructure as the industry faces an uncertain future.

"The financial picture for railroads has not improved enough, and now we are seeing signs that it is slipping," Matthew Rose, president and chief executive of Burlington Northern Santa Fe Corp. , said in testimony at a Senate hearing.

"Weak earnings recently reported by the railroads, combined with the soft economic outlook for the quarters ahead, make it unlikely that (capital) investment levels will increase in the short term," he said. The company said that industry investment levels peaked at $7.4 billion in 1998 and are expected to decline to about $5 billion this year. "This trend bears watching closely," Rose said.

James Valentine, a managing director at Wall Street firm Morgan Stanley, said in his testimony that freight railroads are "not on their last leg" but said structural changes are necessary.

"In my opinion, equity markets are slowly losing patience with railroads as an investment as they continue to wait for the promised land of adequate returns, and may eventually turn their backs on the industry, leaving the government to bail it out similar to what we saw with the creation of Amtrak in 1970," Valentine said.

Amtrak, the federally subsidized passenger railroad, is struggling to reverse huge losses and meet a congressional mandate to become operationally self-sufficient.

Valentine said freight railroads have spent more than $50 billion in capital expenses over the last 10 years and generated only $30 billion of net operating income. Richard Davidson, chairman and chief executive of Union Pacific Corp., said the industry plows 20 percent of revenues back into the system. "The closest industry to us in that regard is the paper industry, and they only reinvest 5.5 percent of their revenue," he said.

Davidson acknowledged the freight rail industry "cannot continue to operate" with a negative return rate, but warned lawmakers that the biggest threat was the specter of regulation. He said "Powerful shippers" want to regulate freight rail by "forcing us to give our competitors access to our facilities." He also said they want price controls to limit what rail companies can charge for that access.

Davidson said those price controls, if imposed, would "trigger a 40 percent loss in operating income that would virtually wipe out profits." "We strongly urge you to reject their attempts at regulation," Davidson said.

Rose said deregulation in 1980 "breathed new life" into the industry which is not recommending the government take over "our rights of way." But he said access to capital for infrastructure is emerging as one of the biggest challenges."

He said the amount of public money spent on projects like new grade crossings and big track relocation that have clear public benefits is "minuscule." "We need to see many more such projects, with more community, state and federal funding support," Rose said. He cited examples of "excellent" private/public partnerships that could be a model for future financing. "I urge you to find ways to increase the amount of funding available for rail projects that have associated public benefits," Rose said.

Valentine suggested subsidies could help put railroads on a level playing field with the long-haul trucking and barge industries, which he said receive "substantial" federal help. He also said the government could create incentives for railroads to expand in places where highways are too congested.