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WASHINGTON – Individuals choose bank savings accounts based on the interest rate offered, assuming the investment is secure because no depositor has ever lost their principal on a Federal Deposit Insurance Corp. (FDIC) backed account.

By contrast, corporate investors must consider risk of their principal along with an anticipated rate of return on their investment. Investors are more likely to invest in and/or lend to a firm displaying long-term financial sustainability.

For railroads, long-term financial sustainability is measured by revenue adequacy – earnings that cover the cost of paying investors competitive returns as well as covering the cost of efficient railroad operation.

Congress has instructed the U.S. Surface Transportation Board (STB) to make annual determinations of railroad revenue adequacy. For 2009 (the most recent STB determination of revenue adequacy), the STB determined that no major railroad was revenue adequate. A 2010 determination will be made soon.

To determine revenue adequacy, the STB annually measures a railroad’s profitability against its cost of holding and attracting investors.

The STB calculation estimates the average rate of return needed to persuade investors to provide a railroad with capital for new equipment; to maintain existing track, bridges, signal systems and other capital assets; and to fund capacity expansion. That profit must also allow the railroad to pay investors a competitive return.

Thus, only when the railroad’s rate of return on investment equals or exceeds its cost of capital is the railroad considered revenue adequate. The profits of large corporations may look immense in terms of total dollars, but investors and economists measure profit based upon return on investment. For example, a $5,000 interest payment by a bank on a savings account may seem huge, but if the $5,000 is paid on a $500,000 savings account, the return to the investor is but 1 percent and may cause the investor to shift banks in search of a better return.

This week, the STB determined that the 2010 cost of capital for railroads was 11.03 percent, up almost 6 percent (or sixth-tenths of one percentage point) from the 2009 cost-of-capital when no railroad was determined to be revenue adequate.

It will be November before the STB uses the higher cost-of-capital benchmark to determine if any railroad achieved revenue adequacy in 2010. To achieve revenue adequacy, a railroad’s profit for 2010 will have to have met or exceeded 11.03 percent. In 2009, for example, one of the most profitable railroads — Union Pacific — posted a return on investment almost two percentage points below the threshold for revenue adequacy.

Meanwhile, major railroad stocks are well off their 52-week highs, suggesting investor concern over the ability of railroads to sustain their recent levels of profitability.

The price of CSX common stock is down 30 percent from its 52-week high; Kansas City Southern is down 18 percent from its 52-week high; Norfolk Southern is down 21 percent from its 52-week high; and Union Pacific is down 23 percent from its 52-week high. BNSF is now held privately and its stock is not traded.

WASHINGTON – The UTU has won a victory on behalf of 12 train and engine employees represented by the UTU and employed by Manufacturers Railway, a 124-year-old subsidiary of brewer Anheuser-Busch for which Manufacturers performs switching services in St. Louis.

In March, the carrier sought permission from the U.S. Surface Transportation Board (STB) to discontinue operations, and asked the agency not to impose so-called labor protection (actually income protection) for workers who would be put in unemployment lines as a result of the discontinuance.

The railroad’s case rested on a long-standing policy of the board and its predecessor, the Interstate Commerce Commission, not to impose labor protection when an entire system is abandoned.

The UTU Law Department intervened, telling the STB that Manufacturers had provided the agency with “misleading information” with regard to the intended cessation of operations.

Rather than abandon its system, the UTU told the STB that Manufacturers, in its own press release, had said it intended, in fact, to transfer those rail operations to a third party that would operate over the railway’s tracks and yard, which would remain under Manufacturers Railway and Anheuser-Busch ownership.

“It is clear,” said the UTU, that Anheuser-Busch intends the transaction as “a means to get around the labor protection which should rightly be imposed,” and that Anheuser-Busch “stands to benefit financially from this transaction by contracting out the rail switching operations and reducing its labor expense.”

The STB agreed, and ruled that so-called Oregon Short Line labor protection be granted as a condition of the discontinuance of operations by Manufacturers Railway.

The protection provides for six years of income protection – as opposed to a guarantee of employment — for all adversely affected employees of Manufacturers Railway. 

Elliott

NEW YORK – Former UTU Associate General Counsel Dan Elliott, now chairman of the U.S. Surface Transportation Board — the federal agency regulating rail mergers, line sales, abandonments and labor protection — returned to his roots July 4, speaking to more than 500 UTU officers and members attending the union’s eastern regional meeting here.

Terming train and engine workers “the unsung heroes” of the freight railroad industry’s renaissance, Elliott said, “None [of the resurgence] would have been possible without the people in this room. Labor was a major contributor to the rebirth of the rail industry as productivity shot through the roof [since Congress partially deregulated railroads through the Staggers Rail Act of 1980]. This is all thanks to your working harder, smarter and better,” he said.

Elliott recalled that prior to partial deregulation afforded by the Staggers Act, railroad bankruptcies were increasing, track often was in such poor repair that there were standing derailments, service quality had deteriorated and job security was problematic.

The Staggers Act, said Elliott, set loose market forces, giving railroads “greater flexibility to make decisions, develop better ideas and operate more efficiently. There are fewer trucks on the highway and the United States has some of the lowest freight rates in the world. It has all been done with private investment.” He said his job and the job of the STB is to “make sure the industry stays healthy.”

As for his elevation to the STB – which required a nomination by President Obama and confirmation by the Senate — Elliott said, joking, it was something he had long sought. Reflecting on an early-career appearance before the STB’s predecessor agency, the Interstate Commerce Commission, Elliott recalled having to make a difficult argument seeking labor protection.

“I was told to say my piece and sit down. So I went to Washington to the ICC Building. There were scores of railroad attorneys, a press table and spectators. I said my piece. And the chairman asked me to explain why UTU members should have lifetime income protection when nobody else in the room had it. I knew right then and there that I wanted to be the one asking the questions and not answering them,” Elliott said.

WASHINGTON — A former John McCain aide, Ann Begeman, has been confirmed by the Senate as the one Republican on the three-member U.S. Surface Transportation Board.

Two other presidential nominees — Walt Barrows to become the labor member on the Railroad Retirement Board, succeeding Butch Speakman; and Republican Thomas Beck to the National Mediation Board, succeeding Elizabeth Doutherty — are awaiting hearings before the Senate Labor Committee. If the committee recommends confirmation, the nominations will move to the Senate floor for a vote.

Begeman succeeds Republican Chip Notthingham, who departed the STB following expiration of his term. Begeman’s term expires in December 2015. She joins Democratic Chairman Dan Elliott and Democrat Frank Mulvey.

Most recently, Begeman was Republican staff director for the Senate Commerce Committee, which recommended her nomination. From 2004-2009, Begeman was McCain’s legislative director and served as a McCain spokesperson during McCain’s unsuccessful run for the White House against President Obama. Earlier, she was a legislative aide to Sen. Larry Pressler (R-S.D.), who made an unsuccessful run in 1980 for the White House.

Begeman earned a degree in business from the University of South Dakota.

The three-person STB has regulatory authority over railroad mergers and labor protection for rail employees adversely affected by mergers, line sales and leases, and line abandonments. The STB also regulates railroad freight rates and freight-railroad dispatching of intercity Amtrak passenger trains.

WASHINGTON — President Obama has renominated two Republicans to key transportation posts after the Senate failed to take action on the nominations last year.

Nominated to the three-person National Mediation Board, for a term expiring July 1, 2013, is Republican Thomas M. Beck.

Nominated to the three-person Surface Transportation Board, for a term expiring Dec. 31, 2015, is Republican Ann D. Begeman.

Both must be confirmed by the Senate before taking office.

Both agencies have Democratic majorities and will continue under Democratic control so long as a Democrat is in the White House.

Beck was nominated to succeed Republican Elizabeth Dougherty on the NMB. Dougherty’s term expired July 1, but under NMB rules she may continue serving indefinitely until a successor is confirmed.

Since Oct. 2, Beck has been serving as a Senate-confirmed member of the Federal Labor Relations Authority (FLRA). The FLRA administers labor-management relations for non-Postal Service federal employees.

Previously, Beck was a partner in the law firm of Jones Day, practicing labor and employment law. He is a 1992 graduate of the University of Virginia Law School. Beck also is a part-time professor at George Mason University in Fairfax, Va., where he teaches courses on legislation and public policy.

The other two members of the NMB are Democrats — Chairman Harry Hoglander, who is serving his third term, and Linda Puchala, who was confirmed to her first term in May 2009.

Begeman was nominated to succeed Republican Chip Nottingham on the STB. Nottingham’s term expired Dec. 31, but under STB rules he may continue serving until a successor is confirmed, but no later than Dec. 31, 2011.

She currently is Republican staff director for the Senate Commerce Committee, but has been a long-time aide to Sen. John McCain (R-Ariz.), and served as a spokesperson for his unsuccessful run for president. Earlier, she was a legislative aide to Sen. Larry Pressler (R-S.D.).

Begeman earned a degree in business from the University of South Dakota.

The other two members of the STB are Democrats — Chairman Dan Elliott, who is serving his first term; and Frank Mulvey, who is serving his second term.

The STB has regulatory authority over railroad mergers and labor protection for rail employees adversely affected by mergers, line sales and leases, and line abandonments. The agency also regulates railroad freight rates.

WASHINGTON — Two Obama administration nominations of Republicans to key transportation regulatory positions — one to the National Mediation Board; the other to the Surface Transportation Board — were returned to the White House by the Senate this week without confirmation action and will have to be resubmitted to the Senate in the new Congress.

Republican Thomas M. Beck had been nominated by the president to the three-member NMB, for a term expiring Dec. 31, 2013; and Republican Ann D. Begeman had been nominated to the three-member Surface Transportation Board for a term expiring Dec. 31, 2015. Both agencies have Democratic majorities.

Under rules of the Senate, nominations not confirmed during the session during which they are made must be returned to the White House. The president may nominate them again in 2011, or choose new nominees. There is no indication Beck or Begeman will not be renominated or that the Senate would not confirm they if renominated.

Owing to a busy Senate calendar and the late timing of both nominations, neither was afforded a hearing before a Senate committee — Beck before the Health, Education & Labor Committee; Begeman before the Commerce Committee — an interim step prior to a Senate floor vote on confirmation.

Beck was nominated to succeed Republican Elizabeth Dougherty on the NMB. Dougherty’s term expired June 30, but under NMB rules she may continue serving indefinitely until a successor is confirmed. Since Oct. 2, Beck has been serving as a Senate-confirmed member of the Federal Labor Relations Authority (FLRA). The FLRA administers labor-management relations for non-Postal Service federal employees.

Previously, Beck was a partner in the law firm of Jones Day, practicing labor and employment law. He is a 1992 graduate of the University of Virginia Law School. Beck also is a part-time professor at George Mason University in Fairfax, Va., where he teaches courses on legislation and public policy.

The other two members of the NMB are Democrats — Chairman Harry Hoglander, who is serving his third term, and Linda Puchala, who was confirmed to her first term in May 2009

Begeman was nominated to succeed Republican Chip Nottingham on the STB. Nottingham’s term expires Dec. 31, but under STB rules he may continue serving until a successor is confirmed, but no later than Dec. 31, 2011. Begeman is a long-time aide to Sen. John McCain (R-Ariz.), and most recently has been an aide to the Senate Commerce Committee.

The other two members of the STB are Democrats — Chairman Dan Elliott, who is serving his first term; and Frank Mulvey, who is serving his second term.

The STB has regulatory authority over railroad mergers and labor protection for rail employees adversely affected by mergers, line sales and leases, and line abandonments. The agency also regulates railroad freight rates.

Almost 10,000 train and engine workers returned to work on Class I railroads through the first 11 months of 2010, with T&E jobs up almost 10 percent compared with November 2009, says the Surface Transportation Board, which tracks the data.

The STB says 61,819 train & engine workers are now on the job with Class I railroads.

The increase in train and engine workers during 2010 was more than double the increase in other crafts, said the STB.

WASHINGTON – The U.S. Surface Transportation Board says it will hold a hearing Dec. 9 to review certain exemptions from economic regulation afforded railroads – specifically, commodity exemptions, boxcar exemptions and intermodal trailer and container exemptions.

The exemptions from STB rate and service oversight were first imposed in 1976, and modified in 1980 following substantial deregulation of the rail industry by the Staggers Rail Act.

Creating those exemptions, said the STB, “fundamentally changed the economic regulation of the railroad industry. Prior to 1976, [the STB’s predecessor, the Interstate Commerce Commission] heavily regulated the industry. The ICC focused its regulation on ensuring equal treatment of shippers, which in some instances, led to railroad pricing decisions based on factors other than market considerations.

“These agency exemption decisions were instrumental in the U.S. rail system’s transition from a heavily regulated, financially weak component of the economy into a mature, relatively healthy industry that operates with only minimal oversight,” said the STB in announcing the hearing.

“The transition, however, was not without challenges, sometimes because an exemption … excuses carriers from virtually all aspects of regulation, even though the STB’s continuing jurisdiction over exempted movements also extinguishes any common law cause of action regarding common carrier duties,” said the STB.

“In recent years, the STB has received informal inquiries questioning the relevance and/or necessity of some of the existing commodity exemptions, given the changes in the competitive landscape and the railroad industry that have occurred over the past few decades,” said the STB.

“The STB will, therefore, hold a hearing to explore the continuing utility of and the issues surrounding the categorical exemptions.”

The Journal of Commerce reported Oct. 21 that the decision to hold the hearing followed a September promise to the Senate Commerce Committee by STB Chairman Dan Elliott that the STB would begin an examination of past regulatory practices.

Train and engine employment continues to climb back toward pre-recession levels, with Class I railroads continuing to call back furloughed train crews.

The Surface Transportation Board posted data for September, showing train and engine employment on Class I railroads grew almost 9 percent in September, versus September 2009; and was almost 2 percent higher than in August 2010.

Train and engine service employment stood at 61,444 in September, while total Class I railroad employment was at 154,094.

WASHINGTON – U.S. Surface Transportation Board member Charles “Chip” Nottingham said he will not seek reappointment when his term expires Dec. 31.

Under federal law, STB members may continue serving for up to 12 months after expiration of their term, or until a successor is nominated by the White House and confirmed by the Senate.

President Obama has not announced a nominee to succeed Nottingham, the lone Republican on the three-person STB.

The agency’s rail regulatory functions include approving mergers, line sales, line leases, line abandonments and imposition of labor protective conditions.

The other two members of the STB are Chairman Dan Elliott and Vice Chairman Frank Mulvey, both Democrats. Elliott was appointed chairman to succeed Nottingham in that post following Obama’s becoming president.