Saturday, September 10, 2011

This Week at Amtrak

Amtrak Acela Express train, led by locomotive ...Image via Wikipedia

From the United Rail Passenger Alliance.

This Week at Amtrak, Vol. 8 No. 14
Volume 8, Number 14

From the Editors…

In this issue, the conclusion of our two-part series where we look at the modern-day history and contemplate the future of the NEC.

Amtrak’s Northeast Corridor

“It will remain for the future to show how that institution can be preserved, and the way provided for its continued progress in usefulness and effectiveness for the public, for its employees, and for its owners.” - Martin W. Clement, President of the Pennsylvania Railroad Company, forward to Centennial History of the Pennsylvania Railroad Company 1846-1946

The first six years of Amtrak operations on the NEC could be described as “business as usual.” From coast to coast, Amtrak was taking responsibility for all remaining passenger services, thus the NEC was just another piece of railroad. Operating crews, conductors and engineers, were still provided by the host railroads. Federal monies were made available to prop up the failing railroad infrastructure of the Northeast, including the NEC, until a permanent fix could be agreed upon. For more than five years between May 1, 1971 and sometime in 1976 Amtrak, itself, governed all of its local and long distance trains in the NEC as a tenant of Penn Central. (This is still the case almost everywhere else in the U.S. on other host railroad properties.) PC was still responsible for the dispatching of their freight trains and the many, many commuter trains that PC continued to operate over the NEC facility. It was during this brief but bright moment that the 1973 oil embargo hit the country, and suddenly the population began to take notice that there were still passenger trains running.

The Railroad Revitalization and Regulatory Reform Act (4R Act),signed into law on February 5, 1976, would forever change the NEC and domestic passenger railroading. In the fire sale that was the end of Penn Central, the NEC south of New Rochelle, New York and between New Haven, Connecticut and the Rhode Island/Massachusetts state line was ceded from the newly-formed ConRail to Amtrak as per the 4R Act on April 1, 1976; the remainder went to State agencies. Transfer of ownership of the NEC to Amtrak in 1976 was orchestrated by the United States Railway Association not because of the magic of Amtrak owning its own railroad, but in order to get the financial albatross of NEC ownership off the back of the brand-new ConRail, and onto Amtrak's books, where the presumed continuing flow of free public money to sustain it would be more appropriate. Also, with the 4R Act came the Northeast Corridor Improvement Project (NECIP) and $1.75 billion in Federal funds, with the goals of achieving New York-Washington running times of two hours forty minutes, and Boston-New York running times of three hours forty minutes. The pitfalls and temptations of government money were all too soon apparent:

“A highlight of the first year of the NECIP was a three-inch-thick Environmental Impact Statement, which came to the startling conclusion that there would be no environmental damage from continuing to run trains where trains had been running for over a hundred years.” - Tom Nelligan and Scott Hartley, Trains of the Northeast Corridor, Quadrant Press, Inc, 1982

At one point, the FBI was summoned to investigate a $16 million discrepancy between material purchased and material on hand. By 1979 Congress knew what to do: Increase the NECIP budget to $2.4 billion and extend the deadline for completion from 1981 to 1985. In 1981, the Reagan Administration cut $600 million from the NECIP, and the plan to extend electrification to Boston would have to wait.

The wait ended January 31, 2000 when regular electrified service commenced to Boston’s South Station. The four-year $2.4 billion project had its own drama, with FBI raids of contractors' offices. But the biggest fraud would be the Acela Express trainsets; an untested, one-of-a-kind fleet of heavy energy users, dubiously procured and never to be repeated.

Today, the maintenance needs of the NEC are about a half billion dollars per year. Yet, due to its nature, the bulk of patronage was not, nor would ever be, Amtrak ticket-paying customers. Even so, prior to direct State assumption of commuter rail services in 1983, Amtrak would be called upon to subsidize those local needs. New amendments to Amtrak’s governing laws in the early 1980s assured that the “formulas” contained therein would never allow Amtrak to recover the huge costs of subsidizing massive commuter rail operations. Unfortunately, that situation still has not changed:

“We are paying a lot of money not needed to operate rail passenger service. We are also cross-subsidizing some of the commuter operations in the Northeast Corridor. That’s a matter of policy, and we are not urging that be changed. But the fact is, it’s not an operating cost of intercity rail passenger travel service. [Cross subsidization] is about $47 million a year.” - Interview with Graham Claytor, Trains Magazine, June 1991

Asking those states which utilize the corridor to ante up would bring Amtrak closer to solvency. Doing so, however, would mean ceding some degree of control to those states. Repeal of the commuter subsidy “formulas” was attempted in the original version of what became the 1997 Amtrak reform law, but the political clout of the NEC states on both sides of the aisle proved too strong. As of this writing, ceding any jurisdiction of the NEC to anyone other than itself is anathema to Amtrak. Emboldened by shear ownership, the NEC has taken on a life of itself; it is no longer a part of the Amtrak network but rather the core of Amtrak, to which all other lines of service must cede.

Amtrak is a political animal, and as such, political expediency will always come before business acumen. Amtrak currently touts its “market share” in the Northeast as 52% between Boston and New York, and 65% between New York and Washington. These numbers, however, are strictly a modal split, as between Amtrak and the air shuttle carriers. Using U.S. DOT Bureau of Transportation Statistics data for intercity travel (non-commuter trips over 100 miles), you get a true “market share” value for rail of somewhere under 2%, and Amtrak itself reports its own paltry load factors. Mobility in the Northeast is just as important as anywhere else in the country, but are these results of a thus-far $30 billion investment worth it?

Breaking the cycle of [Federal] dependency

Whereas the 2008 economic downturn was characterized as a failure of business, the 2011 economic malaise has been defined as a failure of government. The populous will spend the rest of the decade, if not longer, asking and answering some very deep and basic questions regarding who pays for what and how much.

To this end, U.S. Representative John L. Mica of Florida, Chairman of the House Transportation and Infrastructure Committee, and U.S. Representative Bill Shuster of Pennsylvania, Chairman of the Railroads, Pipelines and Hazardous Materials Subcommittee, presented a new initiative called the “Competition for Intercity Passenger Rail in America Act.” The press release of June 15, 2011 reads in part:

“After 40 years of costly and wasteful Soviet-style operations under Amtrak, this proposal encourages private sector competition, investment and operations in U.S. passenger rail service,” Mica said. “Competition in high-speed and intercity passenger rail will cut taxpayer subsidies, improve service, and bring our nation into the 21st century of passenger rail transportation.”

“Amtrak has repeatedly bungled development and operations in the Northeast Corridor, and their new long-term, expensive plan to try to improve the corridor is simply unacceptable,” Mica continued. “The nation cannot afford to continue throwing money away on this highly subsidized, ineffective disaster.

“It is time for a new direction. Around the world, other nations and the private sector have successfully competed to develop high-speed and passenger rail service,” Mica said. “There is no reason we cannot do the same in our most densely populated and congested region. By giving the private sector the opportunity to bring its resources and expertise to the table, we can lower costs, increase efficiency, and improve high-speed and intercity passenger rail service across the country.”

The intent is to transfer title of the NEC from Amtrak to the U.S. DOT or some other organization to allow for more flexibility in operations and investment. It should be noted that relieving Amtrak of the NEC property (and its attendant endless capital needs) is something that has been recommended by members of the United Rail Passenger Alliance for over a quarter century:

“But Amtrak need not own the NEC. It can be sold and its costs of ownership eliminated without adverse effect on train operations…

“Shared ownership is not unprecedented. It simply treats the NEC as a large terminal district; many hotly competitive railroads jointly and profitably own feeder lines, terminal districts, and union stations…

“Structuring the buyer of the NEC as a limited partnership (the customary means of syndicating large real estate projects) would enable Amtrak to be the general partner, retaining needed day-to-day operational control. The limited partners would be allocated the tax and other financial benefits of ownership.” - Andrew C. Selden (URPA Vice President Law and Policy), How to get Amtrak out of the woods, Trains Magazine, January 1986

On the international railroad scene, this is already a reality. In Great Britain, the national network of track is owned by Network Rail, a government-created "not for dividend" company. Network Rail's customers are separate and for the most part private-sector “train operating companies” (passenger) and “freight operating companies” who operate under periodically-renewed franchise contracts. An interesting exception to the private-sector passenger operations is the East Coast Main Line: London-York-Edinburgh. The through trains are currently being operated by another government-created company, Directly Operated Railways, because the last for-profit franchise holder, National Express, bailed out in dramatic fashion after discovering it was losing its shirt running trains even over subsidized tracks. Numerous companies, fast passenger and slower freight, operate over Network Rail and have learned how to play well together over somebody else’s infrastructure. The British experience did not come without its fair share of unpleasantries, but in the end the nationalized British Railways were successfully weaned off the public dole, and succeeded by multiple entities; private where profitable, public where warranted. This was not just to keep the trains running, but to grow and continuously improve national rail transportation. Its progeny now have a chance to learn from this experience.

The Mica-Shuster initiative was immediately castigated as total “privatization” and declared dead-on-arrival by those who may be on the losing end of this potential transaction. One amusing erudition emanating from this fracas involves invoking the final phrase of the Fifth Amendment, “nor shall private property be taken for public use, without just compensation.” The NEC was “private property” which was ceded by Penn Central to public ownership upon its exodus from the transportation business. Amtrak, a “quasi-public corporation," does have preferred and common stockholders. All of the preferred stock is held by the U.S. DOT. The common stock is held by the successors of the original Amtrak-participating railroads who accepted stock in lieu of tax credits that would not aid their fiscal malaise. Today this class includes a financial group and three class-one railroads. The Amtrak Reform and Accountability Act of 1997 “required Amtrak to redeem at fair market value the shares of common stock outstanding as of December 2, 1997, by the end of fiscal year 2002.” Despite this being law, it has not come to pass. If, indeed, the NEC is property of Amtrak and therefore property of the stockholders, then that stock may be worth more than wallpaper, after all.

The other side of the “taking” coin, however, is that Amtrak received the NEC in 1976 subject to a 999-year balloon mortgage, held by U.S. DOT, who holds the mortgage on the NEC property as security on billions of dollars of debt owed back to U.S. DOT by Amtrak; which they cannot repay. All of this is laid out in Amtrak’s annual report. Thus, it is not a question of a “taking,” but one of foreclosure on a lien that has existed for 35 years, is in default, and is callable whenever U.S. DOT chooses. That is a matter of political and commercial will, not constitutional rights. Extinguishing the mortgage in return for a title transfer to U.S. DOT could also eliminate the constitutional objection. Moreover, current law [49 U.S.C. 24907(c)] already immunizes and indemnifies Amtrak and its board of directors from liability regarding any transaction “related to” the mortgage.

Also, a foreclosure would not necessarily directly impact Amtrak’s operating rights, except to the extent that U.S. DOT or its successor might choose to price access to the infrastructure at levels closer to actual cost recovery. Even that would not change anything, except to make the actual accounting losses of the NEC (especially Acela) a lot more visible.

Separating the NEC from Amtrak with all its legal gyrations will take a few years. Even then it is highly unlikely the property will be in the hands of one or more private companies. More likely is a compact of those Northeast states that will hold and become responsible for the whole corridor. (Congress pre-approved such interstate compacts for passenger rail service in the 1997 Amtrak reform law.) Today there are five state commuter agencies operating under the wire of the NEC. Add to this Amtrak and limited freight operations. Yet, once upon a time this was all under the banner of one railroad. Will we ever make it back to one operator?

The Baltimore & Ohio’s overreach of the late 19th Century bears out a pertinent object lesson for us today. The B&O concentrated its resources on a short-haul piece of railroad due to its location in what was believed to be the most valuable stretch of real estate in the country. As a result of neglecting their long-haul routes to the west, however, the railroad would become an “also ran.” The B&O would be controlled at various times by various railroads including the PRR. Ultimately the B&O found security as a lesser partner of the Chesapeake & Ohio. Today there are no major railroads headquartered in Baltimore. This is the purposeful outcome of the free market.

Today Amtrak, self-described as “America’s Railroad,” pours the lion’s share of its meager resources into the NEC to the detriment of the national network. Unfortunately, as a public entity, the laws of the free market are not allowed to be applied. Amtrak points to sheer passenger counts, opposed to passenger-miles, as justification for this aberration. With government deficits growing and public patience waning, this dichotomy cannot continue indefinitely. The longer the decision is forestalled, the fewer resources will be left available to enact said decision. Inaction is an expensive option which is no longer plausible.
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