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Introduction and Opening

Good afternoon!

It is an honor for me to be able to participate at this important conference Eurail Liberalization: Analysis and Changeover. I am pleased to be able to speak to you about railroad issues and challenges in the United States.

Most of today’s presentations have described the transitions a number of European railroads are working towards, through commercialization, privatization or restructuring. As you know, such change is complex and there are many challenges that need to be addressed in one form or another.

I believe the best way to highlight the current railroad challenges we are facing in the United States, is for me to describe the evolution of our railroad system over the past 170 years. Rest assured, I will not offer you a year-by-year summary.

A Brief History of Railroading in the United States

As many of you know, one of the fundamental differences between the U.S. and European railroad systems is that our system, including rail infrastructure and rolling stock, is privately owned and operated. This ownership and operation came about in part because mid-nineteenth century Americans did not believe in a strong, central federal government. Instead, governmental policies encouraged franchises for regional railroads. After the civil war in 1860, the federal government and in some cases State and/or local governments, offered rail entrepreneurs land grants alongside or near planned rail routes in many of our western states.

This enticement attracted private investors, as well as the fledgling Wall Street bankers and brokerage houses. The investments that resulted helped give birth to new cities and industries along or near rail lines. Cities like Kansas City, Denver and Salt Lake City, to name just a few, evolved much more quickly than they otherwise would have because rail service hastened population settlement and related economic development. The impact of railroads on commerce and industrialization is most evident when examining a map of the U.S. Railroad mileage in the U.S. reached its peak in the 1920's.

The explosive growth of railroads, manufacturing, resource extraction, and organized finance gave rise to a number of questionable business practices. In a populist backlash against these developments, the U.S. government created the Interstate Commerce Commission in 1887. The ICC as it came to be known, was the first regulatory agency in the U.S. government. Over several decades, and well into the middle 1970's, the ICC issued regulations covering virtually every aspect of railroading, including finances and operations. In the early twentieth century, such regulations were not a competitive drain on railroads. But all that changed dramatically after World War II!

After the war, American automobile and truck manufacturers applied their considerable excess industrial capacity to meet the vehicular demands of a booming post-war economy. The national economy grew and post-war industries were established in a number of new geographic areas, not the traditional manufacturing centers of New York City or Chicago. To further encourage and stimulate the national economy and to provide for the movement of military equipment and personnel, President Eisenhower and the U.S. Congress launched a major program to construct a network of modern, efficient superhighways called Interstates. Much like the Autostradas here in Italy or the Autobahn system in Germany, the Interstate system connected cities to one another as never before.

Motor carriers made the most of this national network of roads, built to national standards with national regulations on sizes and weights. Coupled with 20th century investments in inland waterways, there now serious competitors to railroads. America’s railroads, which had been the dominant force in transportation for well over one hundred years, found themselves at a considerable competitive disadvantage!

By the 1950's, the railroad industry was so hobbled by regulations governing every aspect of their business, the industry was unable to react quickly enough to rapidly changing economic forces affecting supply and demand. For instance, obtaining rate changes from the ICC would take 2-3 years. By the time approval was granted, the market had changed so much that new rates would no longer benefit the railroad or its customers.

Furthermore, the ICC rarely allowed railroads to shed non-productive rail capacity through abandoning particular rail lines. To make matters worse, the railroad was required to maintain the existing level of service and rate structure during the time the ICC deliberated and rendered a final decision.

In contrast, the newly emerging trucking industry was regulated in a different way. Unlike the rail industry, truckers were free to offer flexible service and contracting. In addition, the trucking industry is a pay-as-you-go industry, with the government recouping highway construction costs through registration fees and gas taxes, whereas the rail industry was and continues to fund capital and system maintenance itself. In most states, market entry was easier for new trucking firms.

De-Regulation: The Staggers Act and Rail Freight Transportation

In the early 1970's, there was increasing recognition of this inequity within the transportation system, by Government and otherwise, but not before much of the rail system in the United States was threatened by bankruptcy. In fact, large portions of the system along the Eastern Seaboard did go bankrupt and required significant restructuring. Finally, in 1980, the Staggers Act was passed by Congress and the rail freight industry emerged from bankruptcy. The decades since these events has brought about a turnaround in the railroad industry, which is now by and large a profitable enterprise.

Some of you might ask how this change of events came about? A central feature of the Staggers Act was wide-ranging de-regulation of the rail sector. As a result of the legislation, railroads and customers were allowed to negotiate rates of service. In other words, the Staggers Act had, for all intents and purposes, leveled the playing field. To ensure continuity and fairness, a much smaller Federal entity called the U.S. Surface Transportation Board or STB, replaced the ICC. Congress terminated or “sunset-ed” the ICC in 1997, transferring its remaining economic and financial regulation powers to the STB.

In a de-regulated environment, railroads have been able and willing to invest funds previously used to pay for the upkeep and operation of their unprofitable lines, into rolling stock, infrastructure and other technology improvements. Productivity, calculated on a revenue ton-mile basis increased dramatically. And, perhaps most important to shippers, tariff rates dropped 46% over a twenty year period.

This turnaround attracted both Wall Street investors, and customers that had abandoned railroads. In general, trucks are currently preferred as a means of moving cargo in the U.S. for distances less than 700 kilometers. In contrast, the large U.S. railroads, with an operating revenue in excess of 268 million Euros a year, are the preferred means of interstate transportation over distances of 700 kilometers or more. Surprisingly, the trucking industry is one of the largest customers of the railroad industry. Railroads carry thousands of trucks on behalf of companies like JB Hunt and Schneider for long distance shipments.

I don’t want to suggest that railroads have abandoned distances less than 700 kilometers. With the passage of the Staggers Act, the large railroads were able to spin-off (discard) unprofitable lines by selling them to smaller railroads. Today, there are nearly 600 smaller railroads, commonly referred to as Shortlines. In general most shortline railroads interchange with or transfer traffic to the large railroads. In sum, deregulation is viewed as beneficial to shippers and railroads, big and small.

Lessons Learned - Rail Freight Traffic

While I hope this historical context has been interesting, there are some valuable lessons we’ve learned the hard way, lessons you may want to consider as you plan the future of railroading in Europe.

The Staggers Act of 1980 removed much of an outmoded rail economic regulatory structure, retaining regulations only where intermodal and intramodal competition is not sufficient to protect shippers from abuse. Over the years, the STB has developed guidelines for maximum rates for captive shippers that create a balance between the needs of the railroad for an adequate rate of return and the need for shippers for fair tariffs.

And although there remain today some tensions between the STB and captive shippers on tariff rates, the overall economic experiment of de-regulation has been a great success. The Staggers Act helped rescue the rail freight industry in the United States from almost certain bankruptcy, and it provided a significant opportunity for the national economy to grow as well. The ability for the customer to negotiate directly with the railroad, in turn, has forced its management to truly act as a service provider, not merely to run trains. This change to a customer-oriented business entity has had a positive financial effect. Over the past twenty years, the average rate of return on shareholders’ equity for the major carriers, the so-called Class I railroads, has hovered at nine percent. The bottom line is that we in the U.S. believe very strongly in a de-regulated rail freight industry and we continue to recommend this economic model virtually everywhere in the world.

Rail Passenger Service in the U.S.

But now I would now like to shift my remarks from the rail freight sector to rail passenger service in the United States. I know this subject probably will be of greater interest to you here today, since rail passenger service is so critical in Europe. Interestingly enough, although rail passenger traffic in the U.S. is considerable less than it is in Europe, I believe some of the issues and challenges we in the United States face are not that different from the issues and challenges you in the newly formed European Union are addressing.

As you may know, Amtrak, the interstate rail passenger entity in the United States, is a for-profit quasi-government corporation, with ownership papers held by the U.S. government. Since its birth as an outgrowth of the rail bankruptcies I mentioned earlier, Amtrak has received considerable Federal subsidies. In fact, some 20 billion Euros have been pumped into this system over the past 32 years! President Bush and his Administration, of which I am proud to be a part, believes significant structural reform of how we manage intercity rail passenger traffic is required. Furthermore, we believe if significant structural reform is not undertaken, this form of transportation will slowly wither away.

Simple statistics bear this out. Intercity rail passenger traffic volumes have remained essentially constant over the past 25 years, while airline volume has increased to 250 percent of its mid-1970s levels, and traffic volumes for both commuter rail and intercity automobile traffic have more than doubled.

An issue that troubles us is that currently, intercity passenger rail planning is primarily the responsibility of only Amtrak. Its exercise of that duty is marked more by a defense of the route system it inherited in 1971, rather than providing the opportunity to meet head-on changing demographics and travel patterns. In contrast, highway and transit programs require comprehensive statewide and metropolitan area planning, which is performed by the departments of transportation in the States, as well as metropolitan planning organizations. Of course, it is these entities that are most in tune with changing regional and local mobility needs. In most European countries, rail planning has been a cooperative process between national governments and national rail carriers.

Planning also includes our addressing the issue of a “national system.” Must such a system involve a single carrier, national in scope? We do not believe so.

Indeed, before the creation of Amtrak, there was no national carrier of rail passengers. The U.S. system of intercity passenger rail service actually was composed of regional services provided by multiple carriers. We advocate and envision a modern view of a national system that has attributes of the past. This would include a coordinated system of passenger transportation that takes advantage of the strengths of all forms of passenger transportation, a system where connections to rail, air, highway and personal transportation come together in intermodal terminals. This concept is, of course, not a new one, certainly not here in Europe. In fact, in that regard, we can learn much from your planning and implementation of the concept of passenger intermodalism.

However, the rail passenger situation in the United States actually is not as bleak a picture as I may have painted just now. Certainly the picture is not bleak across the entire spectrum of passenger rail services. Most importantly, rail passenger service does have broad support from the American public, as well as from local communities and States, often in the form of capital investment and operating assistance. Furthermore, President Bush, Secretary of Transportation Mineta and I continue to believe that there is a vital role for intercity passenger rail service as part of the United States’ system of passenger transportation.

For a long time, we have achieved flexibility and excellent degree of planning and investment through joint State and Federal planning in other modes of transportation. Let me give you an example: The Federal government cannot do satisfactory highway investment without partnering with States on where those highways should go. Also, we cannot do satisfactory work on maintaining and growing our aviation and maritime infrastructure without State or local partners making some very key decisions. Therefore, the government’s current proposal on the future of rail passenger service in the U.S. is built on a strong and stable Federal-State relationship.

And States already are taking this initiative. More than 130 million Euros in passenger rail investments were made by States just in fiscal year 2003 alone. Not coincidentally, those investments are being made in places where demand for passenger rail is high, where State and local commitments are strongest, and where service has the greatest chance of success. Also, it is significant to note that States are making those investments largely unsupported by the Federal government.

High-Speed Passenger Service in the U.S.

Another issue this Administration currently is addressing is intercity versus high-speed passenger service. Some in the U.S. believe that high-speed passenger service requires a Federal policy completely distinct from other forms of intercity passenger rail. We don’t see it that way. We see intercity passenger rail as one form of transportation that encompasses a wide range of speeds, reflecting the mobility needs of the transportation market that is being served. We stress that high-speed rail service should be viewed not as a distinct and separate goal, but a possible end state of current investment in passenger rail service.

Our goal is to transform the existing program of “high speed” corridor planning into a program that supports State planning for conventional, as well as high-speed rail service. This type of planning program would help States make informed decisions on the where, what and how intercity passenger rail service cam play an appropriate role in enhancing passenger mobility. We propose to establish a program that would provide capital grants, including full funding grant agreements, to implement State-based intercity passenger rail initiatives that are the product of sound State planning.

The Question of Money

As you well know, particularly as you analyze railroading in Europe and plan for the future, funding issues and options virtually always come into the center of the spotlight - and very quickly so, I might add. We are vigorously addressing this issue and are in consultation and deliberation with the U.S. Congress.

Many of the reforms under discussion right now will help reduce the size of the government’s subsidy requirements for specific routes and services. We recognize that some amount of operating assistance will be required for almost all of these routes and services for the foreseeable future. We propose that such subsidies should be the responsibility of the State or States that believe these services are important enough to warrant their financial support. To assist in this process, an extended phase-in period will provide time for States and other regional and local authorities to identify sources for financial support. Furthermore, this period will provide opportunities and incentives to improve financial performance.

We firmly believe that this approach will provide encouragement to the States to consider the merits of all forms of passenger transportation in their planning and to prioritize their investments based upon how the different forms of transportation can work together to provide effective passenger mobility.

Safety is Good Business Practice

Let me close out my remarks by briefly addressing an issue that crosses the boundaries of both freight railroading and providing for passenger services, and that is rail safety. I am confident that this is an issue you, as members of the European Union, have or will be addressing as borders and frontiers disappear, and more and more restructured and possibly even merged railroads start to move seamlessly throughout Europe.

In the U.S., in addition to operating in a de-regulated environment that has resulted in a healthier rail environment, some of the financial success can be attributed to a very safe mode of transportation. Currently, we take an approach that someone other than the privately owned and operated railroads needs to also monitor the entire system and enforce those safety regulations that affect the traveling public.

In a privatized rail environment such as we have in the United States, safety has evolved into a partnership between us, the Federal Railroad Administration, and the railroads. The government sets the baseline standards and enforces rail safety regulations. In turn, the railroads complement this regimen by establishing and enforcing stricter safety regulations that apply to their own respective railroad environment.

I just said FRA establishes the “baseline standards.” But we do not do this in a vacuum!

Instead, we work very closely with the railroads, manufacturers and suppliers, labor and the public. Workshops and other venues allow all the stakeholders to participate in the process of establishing regulations to advance rail safety. I can say with confidence that since this approach was introduced, FRA has been successful in implementing better, more effective regulations than had been the case when we, the bureaucracy, would unilaterally promulgate and then enforce safety regulations.

This new way of developing safety regulations has resulted in a win-win situation for everyone. First and foremost, the public is confident that travel and shipments by rail move safely and that its government aggressively monitors and enforces regulations. And, equally as important, in the case of rail freight for instance, shippers are assured that the cargo they have entrusted the railroad company with, will arrive in a timely, safe and secure manner.

Rail safety is about more than regulation, it’s about effectively diagnosing and managing safety problems. As FRA Administrator, I have been working with railroads to resolve serious safety issues through something we call “responsibility based enforcement.” We jointly identify the nature of the problem, agree on metrics to define how we’ll know when the problem should be solved, and then assist the rail companies as they take steps to bring about lasting solutions to these safety issues.

We’re confident that these problems will be resolved, because rail safety is good business. Failure to provide on-time service due to a derailment or an accident ultimately will drive the customer back to other modes of transportation, such as trucks. The U.S. railroads have learned this lesson the hard way over the years and as a result have instituted excellent safety programs.

I might add, the realization that there is a direct linkage between safe delivery of the cargo and the financial bottom line has made our Federal job of safety enforcement easier. The approximately 425 FRA safety inspectors, assisted by an additional 160 State safety inspectors trained by FRA and often working alongside our inspectors, can tailor safety inspections to specific areas of concern.

The United States annually transports over 2.4 billion ton/kilometers of freight, more than any other country. Working with an excellent safety enforcement program has resulted in rail accidents and incidents continuing to decline as you can see on this slide. The example I have chosen to show reflects the decline of accidents and fatalities at grade-crossings, while at the same time, the volume of traffic dramatically increasing as shown by the red line.

Summary

In conclusion, I would like to thank you for the opportunity to share some of the rail experiences, issues and challenges we in the United States deal with.

I hope I have highlighted for you some of rail-related issues you as a newly formed political and economic union are deliberating. From my perspective, many of these issues are similar to those we in the United States either already have experienced and dealt with, or currently are grappling with.

As a result of my travels and in my meetings with heads of foreign rail entities, such as Chairman Matsuda of JR East, I no longer am surprised that rail issues essentially are similar around the world. There are nuances, of course, but not enough to where we cannot learn from each other.

As you might gather from these remarks, I am optimistic about the future of railroading. I hope and trust you are as well!

I look forward to following the progress of your efforts to bring competitive forces into such an advanced rail system .Thank you for the invitation to join you and thank you for the gift of your attention.