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Corridor and Long Distance Operations: a Transitional Plan

December 3rd, 2000

URPA’s POSITION ON:

Corridor Operations, Long Distance Operations, and a Transitional Plan to move from current practice to future methods of operation.

By Dr. Adrian Herzog
VP Research URPA

URPA is well known as the chief advocate of the commercial viability of long distance rail passenger operation. This has lead to erroneous perception that URPA opposes corridor operations or high speed rail development. Nothing could be further from the truth. Our fundamental aim is to insure that all forms of public transportation, including commuter corridors and high speed rail, be fully integrated into the national transportation infrastructure in a way that makes good economic sense. Our main point has been, and always will be, that corridors, either existing, or planned high speed corridors, will always have fully allocated costs that exceed any potential revenue stream due to the high cost of ownership of the infrastructure.

The NEC is a classic example of that phenomena. It produces the highest passenger train density in the nation, but can never recover its infrastructure investment costs and pay for train operations from the fare box. This results in the NEC being a black hole for revenue and public subsidies today and into the foreseeable future, just as it has been in the past. This drain of revenue from the rest of the system into the NEC forced the bankruptcy of the Pennsylvania Railroad and the bankruptcy of the merged Penn-Central. Only AFTER DIVESTING PENN-CENTRAL OF THE NEC to AMTRAK and forming CONRAIL did the northeast rail operations recover. The successful privatization of CONRAIL and its eventual merger into CSX and NS were accomplished because of the divestiture of the NEC infrastructure onto AMTRAK. With the NEC black hole now firmly in Amtrak’s hands, the financial results of the NRPC went into sharp decline and have had to be carried on the back of the national treasury for the last 25 years. The only way to “save Amtrak” as it is presently constituted is to divest it of the NEC in the same way as CONRAIL was divested of the NEC over a quarter of a century ago.

This is the basis of URPA’s argument that, in order to survive, AMTRAK must either get rid of the NEC entirely, or failing that it must at least spin the infrastructure of the NEC off onto an infrastructure authority. Recent developments at the Amtrak Reform Council (ARC) clearly show that the majority of the ARC is coming to the same conclusion. Both the ARC and URPA recognize the fact that politically, it is the corridor operation that must be preserved since it is the one delivering the socially useful high density passenger service needed in our ever more crowded urban environments. Unfortunately, the politically popular services are precisely the ones that contribute to the negative cash flows at AMTRAK.

By contrast, AMTRAK’s interregional long distance train services are all net producers of cash. Attempts to improve Amtrak’s position by reducing number of the marginally profitable long distance operations have ALWAYS LEAD TO AN INCREASE IN THE NEGATIVE CASH FLOW. This is a clear indication that past and current Amtrak management with its corridor/transit orientation does not understand the economics of the situation and that both the ARC and URPA have the correct perception of the economics of rail passenger operations. The culprit is not the trains. All rational passenger trains can be operated on a marginally profitable level. The culprit it is the huge infrastructure cost of corridors. In the case of Amtrak, the only really significant corridor operation is the NEC and so it is the NEC infrastructure cost that must be addressed at this time. However, the “emerging corridors” concept while politically popular is precisely the concept guaranteed to increase the size of the corridor black hole by building more NEC like corridors in the rest of the nation. The problem thus boils down to the following:

How can we cover the infrastructure cost of the NEC and build new infrastructure intense high speed lines while at the same time bringing above the rail train operations into a profitable environment?

This turns out to be an oxymoron because it can not be accomplished within the structure of a single operation such as AMTRAK. The infrastructure cost associated with corridors and or high speed rail are simply too vast to be covered by any conceivable traffic flow in this or any other country. When Japan, France or Germany speak of profitable train operations they mean MARGINALLY PROFITABLE, not FULLY ALLOCATED. The task of the ARC is therefore actually quite straight forward: it must convert AMTRAK into a system THAT IS NOT RESPONSIBLE FOR ANY FORM OF INFRASTRUCTURE COSTS. The fully allocated costs of such a “reformed” system are very close to the marginal costs since the bulk of the infrastructure overhead has been spun off into another agency. URPA therefore recommends the following plan of action:

  1. DURING 2001 FORM A NATIONAL INFRASTRUCTURE AUTHORITY TO BE KNOW AS THE STEEL INTERSTATE AUTHORITY (SIA). The SIA will be the caretaker of all exclusively or predominantly passenger train infrastructure throughout the nation. In the case of the NEC, SIA will be the direct owner. In the case of other infrastructure SIA may be the investor acting in partnership with freight railroads. SIA is emphatically NOT intended to “nationalize” any freight railroad infrastructure, or to facilitate any “open access” other than the exercise of AMTRAK’s trackage rights under the Rail Passenger Services Act of 1970. Subject to these restrictions, SIA may:
    • OWN RIGHTS OF WAY.
    • OWN MAINTENANCE FACILITIES
    • INVEST IN RIGHTS OF WAY OWNED BY PRIVATE RAILROADS.
  2. CONGRESS SHOULD PASS LEGISLATION TO ALLOW SIA TO ISSUE BONDS UP TO $ 20 BILLION OVER THE NEXT TEN YEARS TO INVEST IN CORRIDORS ACROSS THE US. SIA must have adequate financial backing to be able to invest in the NEC and in EMERGENT CORRIDORS on a national basis. In order to construct infrastructure, SIA may:
    • FORM COMPACTS WITH STATES, SUBDIVISIONS WITHIN STATES, OR REGIONAL MULTI-STATE COMPACTS.
    • FORM PARTNERSHIPS WITH PRIVATE REAL ESTATE DEVELOPERS FOR THE DEVELOPMENT OF HIGH SPEED RAIL FACILITIES IN CONJUNCTION WITH URBAN AND SUBURBAN REAL ESTATE DEVELOPMENTS.
    • APPLY FOR FTA FUNDS FOR INTERCITY CORRIDORS THAT ALSO AID LOCAL COMMUTER AND REGIONAL RAIL OPERATIONS.
  3. TRANSFER ALL AMTRAK AND NON-AMTRAK NEC INFRASTRUCTURE ASSETS TO SIA DURING 2002. This will improve both the operational balance sheets of Amtrak in general and in some cases agencies like METRO NORTH and NJDOT. New federal, state and local funding mechanisms must be worked out in order to keep the NEC in its current condition and to improve it in the future. This transfer should also include AMTRAK’s track maintenance and engineering assets and staff.
  4. TRANSFER ALL NON NEC AMTRAK INFRASTRUCTURE WITH THE EXCEPTION OF SOME KEY REAL ESTATE SUCH AS CHICAGO UNION STATION TO SIA DURING 2002. This will remove high overhead cost sources such as Beech Grove and other maintenance facilities from AMTRAK’s accounting system. SIA may:
    • ELECT TO KEEP SUCH FACILITIES
    • TRANSFER THEM TO LOCAL TRANSIT OPERATIONS
    • TRANSFER THEM TO PRIVATE INDUSTRY
    • SELL THE REAL ESTATE FOR OTHER PURPOSES.
  5. TRANSFER ALL TRAIN OPERATIONS CURRENTLY OPERATED BY AMTRAK INTO A RESTRUCTURED AMTRAK DURING 2002. An AMTRAK reduced to an Operating Authority instead of both an Operating and Infrastructure Authority will be able to operate the current fleet of trains on a nearly “profitable fully allocated basis”. The one remaining problem is that in general the administrative overhead is still to large to allow for a fully allocated profit. The only way to address this remaining problems is by increasing methodically train operations in all parts of the country.
  6. RE-ORGANIZE AMTRAK INTO KEY BUSINESS UNITS THAT ARE ACTIVITY BASED, NOT NECESSARILY ON A REGIONAL BASIS DURING 2003. An operations only AMTRAK will still have structural problems during 2003. The main problem is that there are several completely different businesses within the remaining system. By organizing business units to specifically address these semi-independent business, it will be possible to DECENTRALIZE and STREAMLINE the AMTRAK beaurocracy and eventually even to privatize them as tax paying independent operators. These units are:
    • ACELA OPERATIONS IN THE NORTHEAST.
    • CHICAGO HUB CORRIDORS.
    • SURFLINERS
    • CAPITOLS AND SAN JOAQUINS
    • PACIFIC NORTHWEST (TALGO) SERVICES
    • OHIO CORRIDORS (FUTURE)
    • TEXAS CORRIDORS (FUTURE)
    • FLORIDA CORRIDORS (FUTURE)
    • GULF COAST CORRIDORS (FUTURE)
    • NATIONAL SYSTEM LONG DISTANCE INTERREGIONAL TRAINS.
    • FREIGHT AND EXPRESS
  7. METHODICALLY EXPAND PASSENGER OPERATIONS IN ALL BUSINESS SECTORS. This last step is the key to eventually reaching fully allocated profitability by the business units. Current operations are two small to cover the administrative overhead of the remaining AMTRAK operations. Only by streamlining the business sectors into small, lean, independent, competitive, for-profit operations and simultaneously rapidly expanding the amount of business in each sector can profitability be achieved. In corridors such as the NEC profitability for the operating authority requires the integration of all levels of service into a single ACELA train so that both premium business travel and leisure travel can be accommodated on the same train. This reduces the number of train operations necessary in the NEC slightly while increasing the total seat mile availability dramatically. URPA calls for the doubling of the ACELA order and increasing each train set by at least four to six cars. By introducing some higher seat density “economy coaches” on ACELA and doubling the number of train sets, URPA would produce almost 4 times the seat miles that the current ACELA system is capable of providing. It is interesting to note that URPA has had this position and presented it to the Amtrak Board through Andrew Selden during his CEO interview as long ago as 1998, Similar expansions will be needed on all other existing corridors and traffic levels of these sorts of densities will be needed on all future corridors. URPA’s policy of expanding output (revenue passenger miles) in the national system by a factor of about 10 is well known and will not be restated in this paper.

CONCLUSION

The full URPA plan calls for a restructuring of Amtrak by removing infrastructure costs from its current accounting system and moving them into a new financing mechanism for such corridors. This mechanism is the SIA. Since there is no way that the SIA can be profitable, it must remain an independent federal agency and be funded jointly by an alliance of the federal government, the states, regional compacts and local municipalities. Train operations are initially kept totally within what remains of Amtrak after divestiture of its high cost infrastructure. The next step is to form business units that will specifically operate and expand operations in key corridors and over the national system. Operations must be expanded for the simple reason that current operations are too small to cover the administrative costs. Only by growing the passenger trains’ services in all markets including the NEC can true profitability for the operating authorities be achieved. Such operating authorities could be privatized at some future date after 2010.

Copyright © URPA December 2000


APPENDIX URPA DOCUMENT

Why the British Privatization Schemes are not directly Applicable to the Amtrak Issue.

By Dr. Adrian Herzog
VP Research URPA

Revised December 2000

The United Kingdom has recently re-organized and privatized its entire rail system. Many proponents of Amtrak reform have suggested that the UK model is something that could be directly applied to the American environment. There are several reasons why the UK solution, while working reasonably well in Britain, will not be applicable to Amtrak. These include the nature of the system being reformed, its infrastructure and market potentials. None of these is the same in the American environment outside the NEC.

The Nature of the pre-reform systems.

In the United States, outside the NEC, the current non-reformed system is based on the operation of passenger trains on PRIVATE FREIGHT RAILROADS. The main purpose of these railroads is the transport of freight over long distances at moderate speeds and at minimal costs. This means that the private railways in the US will always attempt to maximize the revenue ton miles that can be moved over the most minimal infrastructure system possible. Such economic considerations do not lend themselves to the construction and private financing of multi-track grade separated high speed rail routes. In the UK, the pre-reform system was a COMPLETELY NATIONALIZED PASSENGER ORIENTED and tax supported system. The problem in the US is therefore one of track access and improvement in the national system. The problem in the UK was not the inability to construct modern grade separated multi-track main lines. The problem was the unionized work force and its allies in Labor Governments which lead BR into becoming an overstaffed social organization instead of a for-profit railway system. The privatization has allowed the operation of more services with far fewer staff and has allowed the salary savings to go into infrastructure investment in the form of enhanced track and signaling systems, and new rolling stock and station amenities.

The Nature of the Networks in the US and UK.

In the US, the rail passenger system consists of several widely separated and non-integrated regional corridors such as the NEC, the Chicago Hub, the California Corridors and the Pacific Northwest Corridor and a long-distance and interregional network sometimes known as the “national system”. The regional corridors are essentially independent operations THAT COULD BE EASILY SPLIT FROM AMTRAK and operated by independent operators.

The NEC most closely resembles either the British East Coast Main Line or the West Coast Main Line. These two main lines have been privatized successfully on the British Plan. Only on the NEC would the British model have any bearing in the US. The two British corridors and the NEC represent simple point-to-point railroads that were or still are essentially fully nationalized and primarily serve passenger transportation. The problem on such high density electrified high speed lines is that while the marginal cost of operating trains is often much lower than the revenue generated, the fully allocated costs are much higher than any potential revenue steam. This means that the operation cannot be successfully privatized because it is not capable under any set of circumstances of earning a profit measured by ordinary business criteria. Therefore, the high overhead costs of owning and operating a multi-track high speed passenger railroad must be folded into a national or at least regional publicly subsidized infrastructure authority. In the UK, this is RAILTRACK. On the NEC it could well be a multi-state compact that would own the infrastructure under some sort of NEC-RAILTRACK such as the STEEL INTERSTATE AUTHORITY (SIA). Since this is a purely local corridor, its associated costs would need to be locally financed with some aid from FTA. Only under such a model could ACELA be privatized successfully on the British Model

In the rest of the United States, the UK model has no direct application since we are operating a broad network of interregional passenger trains pursuant to statutory trackage rights (rights of access) ON ALREADY PRIVATIZED RAILROADS that can not be “re-privatized”. The issue here is providing financial incentives to the private railroads for allowing access by a third party sponsor of passenger trains. This is handily accomplished in the US by the provision of TAX CREDITS for the private railways, not some sort of infrastructure authority. The US already has the equivalent of an infrastructure authority in the form of its private rail system, we only need to establish federal financial support for the expansion of the minimalist freight system into a multi-track higher speed national network necessary for the operation of a limited, but integrated, network of interregional passenger and express services. Some incidental benefits from such investments will accrue to the host freight railroads.

Because all existing national system trains currently generate a positive cash flow (apart from infrastructure charges), it follows that with access assured and investments forthcoming that will allow reliable, reasonable-speed service over the national system, it is possible to operate a self financed national system on a genuine for profit basis, provided the network achieves a critical mass flow density to amortize its own necessary fixed costs.

The other regional corridors (e.g. the Chicago Hub, or the California Corridors) could be privatized, provided that the states contribute additional funding for establishing speeds and capacity above the levels provided by FEDERAL TAX CREDITS. Since these corridors are widely separated and do not directly connect, the franchises for these corridors can be distributed among independent operators as in Great Britain, provided that the national system is not separated into more than one operating entity. This might lead to as many as ABOUT SEVEN POTENTIAL INDEPENDENT FRANCHISES that would both operate and in some instances compete for the US rail passenger market.

POTENTIAL FRANCHISES

  • ACELA (NEC)
  • Southern California, Arizona and Las Vegas Regional Corridors
  • Northern California and Reno Regional Corridors
  • Chicago Hub Regional Corridors
  • Ohio Corridors
  • Pacific Northwest Regional Corridors
  • Gulf Coast, Texas and Florida Regional Corridors
  • NATIONAL SYSTEM LONG DISTANCE TRUNK LINES

Benefits of Privatization in the UK and potentially in the US.

Contrary to many news reports out of the UK, the privatization is leading to a re-birth of rail passenger transportation. For the first time in decades substantial new investment from private sector capital markets is going into new passenger train fleets, the first of which will be entering service this year. It is true that for the first few years of privatized service, the operators had to make do with old British Rail equipment, while awaiting delivery of new state of the art train sets. Nevertheless, the private operators managed to re-paint and modernize the old equipment and make it more presentable and attractive to the consumer. The deplorable condition of many stations, covered in over a century of smoke, grime and even W.W.II damage, has been dramatically changed in just a few short years. The great London terminals have been cleaned and returned to their mid 19th Century Victorian splendor and have acquired modern privately operated food courts and even restored station hotels. These above the rail investments, the first significant ones in the last 20 years and the largest since the end of W.W.II, are primarily privately financed with Government providing aid in the form of urban renewal grants for station improvements. With the tracks and signals transferred to the public RAILTRACK, government now has the same relationship to the railroads in the UK as it does for the highways. It is responsible for infrastructure investment in the right of way. These track improvements will begin to show positive operational results starting early this decade. These improvements combined with the arrival of new train sets specifically will cause dramatic improvements in the British Rail Passenger System over the next five years.

The one drawback of privatization in the UK is the large number of competing companies operating into London itself. Several commuter and INTERCITY franchises serve the Capital. This balkanization of service has resulted in a lack of coordination among competing operators. This is not much of a problem for daily commuters, since they use only one operator. It is however a major problem for long distance travelers who change between systems in London. For them connectivity has been curtailed and has lead to the largest level of complaint against the privatized system. In the US this should not be a major problem as long as only one operator is chosen to operate each regional corridor network since the regional corridors do not connect. The only connection problem in the US will be between the National System Franchise and the regional operators in major urban areas where both the National System and regional carrier will operate. Adequate legislation to mandate easy transfer and connectivity at interchange locations will need to be part of the authorizing legislation for reorganization of AMTRAK in the US.

In the UK the operating franchises are only for a limited number of years (5 to 7). Some of these franchises are already being re-negotiated in 2000. One trend is that Virgin, the operator of the West Coast Main Line and several inter-regional rural services, is petitioning to take over the East Coast Main Line from its chief rival. If successful, Virgin has announced plans to develop the East Coast Main Line in concert with RAILTRACK into a true high speed line and to introduce TGV style trains between Scotland and Kings Cross Station in London AND THEN CONTINUING via the now being constructed Kings Cross to Chunnel Access Line to Brussels, and Cologne in Germany. Similar train sets could operate from Milan to London via, the currently longest Alpine rail tunnel, the Simplon Tunnel (1912) and the world’s longest under construction Alpine tunnel, the Loetschberg Base Tunnel (completion in 2007). The long term future in the UK is for continued heavy private investment in rail and the consolidation of the current large number of franchises into a much smaller number. The indications are that the original operating franchises where individually too small, financially, to be viable stand alone businesses. The action of Virgin (also a potential US operator) shows that integrated Rail-Air (Virgin Atlantic Airways) are not just a possibility, but a reality in Britain. The fact that Virgin want to control both the East and West Coast Main Lines and eventually expand into first France, Belgium and Germany and later into Switzerland and Italy by taking advantage of GOVERNMENT SUBSIDIZED INFRASTRUCTURE, shows that this is the wave of the future in not only GB, but in the European Community as well. The fact that Virgin as a rail operator, but still mainly a long haul airline, is looking at the long distance market as the prime profit source in transportation is no surprise, since all airlines are well aware of the economies of long distance transportation.

Since Virgin has proven that it is possible to be a private and profitable above the rail operator, the same concept applies to the US. Companies like Virgin can make noticeable profits by investing in rail fleets designed to meet the needs of the American market, provided that just as in Europe, other agencies provide the route infrastructure. The divergence between the European Model and the American Model is that in the US the bulk of the rail passenger system is operated on private freight railroads. These freight railroads, provided that they are provided TAX CREDITS for necessary investments of benefit to the public, can take the role of the publicly-owned European Infrastructure Authority. The American Model in fact has many advantages over the European Model since unlike Europe, the US still has a continent spanning integrated long distance rail passenger network.

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