Railroad Industry Overview Series - Information Systems and Industry Operating Procedures - October 2007
LMSB Control Number: LMSB-04-1007-072
Affected IRM: X.XX.X
This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited or relied upon as such.
Major railroads maintain extensive computer systems to conduct every aspect of their business. These include many operating systems relative to train locations, logistics, car hire, marketing management, etc.
In addition to routine accounting records maintained by all LMSB taxpayers, systems integral to efficient and effective IRS tax examinations include the following:
- Asset Tracking Files,
- Track Work Project Files,
- Mechanical Department Project Files,
- Locomotive Maintenance History Files, and
- Capital Accounting Project Cost Detail Files.
Industry Operating Procedures
The following information was obtained primarily from internet sites maintained by the U.S. Department of Transportation’s Bureau of Transportation, and the American Association of Railroads (AAR).
A. In General
Railroads are wholesalers of transportation services. They concentrate on hauling bulk commodities and large quantity shipments over long distances. Based on volume, they transport 12.7 percent of the nation’s goods. In addition, they are the long-distance link in providing intermodal freight services.
B. Track Ownership, Usage
Each railroad owns the track over which it operates. In some cases, they operate joint services with or operate over the tracks of another railroad. Where voluntary access agreements are reached through commercial negotiations, the parties file trackage rights agreements with the Surface Transportation Board (STB) for review and approval. Where the parties cannot agree, the STB can set compensation levels. The STB also can require that carriers grant access over their tracks. This normally occurs when the regulatory agency seeks to preserve competition when approving merger applications.
C. Industry Composition and Metrics
Railroads in the United States are classified by the Surface Transportation Board as either Class Is, IIs or III, depending on their gross operating revenues.
U.S. Class I railroads are line haul freight railroads with operating revenue in excess of $319 million. In 2007, the seven U.S. Class I railroads were: BNSF Railway, CSX Transportation, Grand Trunk Corporation (owned by Canadian National Railroad), Kansas City Southern Railway, Norfolk Southern Railroad, Soo Line Railroad (owned by Canadian Pacific Railroad), and Union Pacific Railroad. The Class I railroads account for about 71 percent of industry road miles operated and 93 percent of the total rail freight revenues.
The remainder of the industry is composed of Class II railroads, with revenues between $23.6 million and $319 million, and Class III railroads, with revenue below $23.6 million. There are over 400 of these railroads, also referred to as regional or short-line railroads. They often act as feeder services to the Class Is. Many of them were created as the Class Is downsized in the 1970s and 1980s and spun off their unprofitable and light density lines. Because of lower operating costs, these smaller carriers have been able to create profitable, more customer oriented operations not possible under a Class Is cost structure and expansive route system. They are divided into two categories—line haul and switching/terminal.
Local line haul or short-line railroads operate like Class Is but only on a much smaller scale. Switching and terminal railroads operate in specific urban areas. Their function is to facilitate the interchange of rail shipments among the railroads in their area, normally Class I carriers, as well as to serve the needs of the rail customers within their territories. It is not unusual for one or more than one Class I railroad to own this type of carrier. Regional railroads, accounting for less than 6 percent of the industry, are substantially smaller than their Class I counterparts but operate almost as much total mileage as the local short-lines. Because they are smaller than Class I railroads, regional carriers can offer cost effective, customer oriented services like short-lines. Since they are larger than short line railroads, they have larger territories in which to build a customer base like Class Is.
In 2004, Class I railroads in the United States transported the highest originating tonnage ever, 1.8 billion tons (AAR 2005a). This record level tonnage reflects steady growth in rail traffic for six straight years, since 1998. Coal accounted for 43 percent of the rail tonnage in 2004, followed by chemicals and related products with 9 percent, and farm products and non-metallic products with 8 percent each. By revenue, coal accounted for 20 percent ($8.4 billion) of the Class I rail industry-wide gross revenues ($41.6 billion), followed by miscellaneous mixed shipments (mostly intermodal) with 15 percent, and chemicals and related products with 12 percent (AAR 2005a).
U. S. freight trains are carrying more loads and traveling farther than in 1980. The average freight train carried over 3,100 tons of freight in 2004, also a record high for the rail industry. By comparison, the average train load in 1980 was about 2,200 tons. While the average load per train rose, the average cargo weight per rail car dropped from 67 tons in 1980 to 61 tons in 2004, reflecting the higher growth rate of lighter freight that is typical of intermodal shipments. During this same period, the freight trains traveled more miles on average. The average length of haul was 902 miles per ton in 2004, up from 616 miles per ton in 1980. Since 1980, the length of haul has grown at an average annual rate of about 1.6 percent per year. Railroads improved on their operational efficiency as they carried more loads farther. Net ton-miles per train-hour, one measure of industry efficiency, increased 49 percent from 40,400 in 1980 to 60,300 in 2003 (AAR 2005b).This is a measure of the number of tons hauled and the miles traveled during an average hour of freight train's operation. The peak for net ton-miles per train-hour was in 1991 when the industry averaged about 66,300 ton-miles every train hour (AAR 2004).
U.S. freight railroads serve almost every economic sector in the nation that handles goods, including manufacturing, mining, wholesale, and retail trade. They move not only bulk commodities but also time-sensitive goods. According to the composite estimates, rail as a single mode carried about 3 percent of nation’s freight shipments, measured by value, and 10 percent of the weight, hauling over long distances everything from coal to vegetables, lumber to orange juice, and finished automobiles and parts to grain. Rail accounted for 31 percent of the estimated total ton-miles, despite having a more spatially concentrated network than the highway system and in spite of declines in miles of rail roadway operated due to rail abandonment and industry consolidation. Miles of rail roadway have been declining for decades. In 2004, Class I railroads operated about 99,000 miles of rail roadways, down from about 160,000 miles in 1980.
Rail’s shares of overall shipment value and weight primarily reflect the fact that low value-per-ton primary raw materials like metallic ores (e.g., bauxite), logs and wood products, and grains account for the bulk of rail shipments. Coal and chemicals alone accounted for over half (52 percent) of the rail tonnage in 2004 (AAR 2005a). Rail’s share of ton-miles reflects the high weight and the longer length of haul of the products moved by rail. For example, in 2002, coal was shipped an average of 671 miles per ton, cereal grain averaged 841 miles per ton, and fertilizers about 747 miles per ton.
Some of the largest rail freight flows by tonnage are coal shipments originating in the Powder River Basin in Wyoming and from West Virginia, Illinois, Kentucky, and Pennsylvania. These are vital economic flows because the vast majority of coal shipments are to coal-fired power plants for generating electricity. In 2003, these five states accounted for more than three-quarters (79 percent) of the total tonnage of coal originations. In 2003, the leading states for total rail tons originated included Wyoming, Illinois, West Virginia, Pennsylvania, and Kentucky. The leading states by tons terminated included Texas, Illinois, Florida, Ohio, and California.
D. Railroads and Their Transportation Partners
Railroads’ relationships with the other modes range from virtually no interaction (air freight) to a sometimes-uneasy customer/competitor dichotomy (trucking). There is little interaction with air carriers because of differing products and service needs. Airfreight carriers handle high value, light weight shipments which must be moved within very sensitive time frames, often as little as 24 hours. Railroads handle low value, high volume loads that very rarely require completed service within 24 hours or less. In short, the two modes each handle distinct and separate segments of the freight industry.
- Maritime Carriers
Railroads and ocean-going international or maritime carriers, by and large, have very cooperative relations. They regularly partner to provide seamless transportation services for their bulk and intermodal customers. It was the cooperative efforts of railroads and U.S.-flag maritime ship operators that created the double stack train service that spurred the intermodal revolution. Double stack service is when one shipping container is placed on a rail car and another container is placed on top of it. This allows almost twice the freight volume to be handled with the equipment needed to operate a single train.
- Trucking & Barge Operators
Railroads face competition primarily from two sources — trucks and barges. Trucks provide competition on higher value shipments such as intermodal and finished vehicle transport. Barges compete on the more traditional low value goods such as coal and grains. Barge competition is essentially limited to commodities moving in the central portions of the U.S. where there are navigable waterways, such as the Mississippi, Ohio, and Missouri Rivers.
- Unique Relationship: Trucking, Railroads, and Intermodal Transportation
The relationship between railroads and truck lines is probably the most complicated of the modes because trucks have the ability to both generate freight for the railroads and take it away from them. Railroads and trucks are business partners in providing intermodal services. Trucks provide the short haul connections between the firm sending the freight and the railroad as well between the railroad and the customer receiving the freight. Trains provide the long haul service between origin and destination.
When trucks and trains compete, they compete for types of traffic — mostly the goods that give the railroads their higher profit margins — intermodal, transportation equipment (automobiles — finished products as well as assembly supplies), chemicals, and good products. Intermodal freight is subject to competition from long distance trucking companies. As a result, even when there is a rail/truck business relationship with one motor carrier for an intermodal move, there is a competitive tension with other long distance truckers seeking to capture the same business.
In developing a profile of intermodal freight, distance is a factor. Because the inter-change of freight equipment between carriers is costly, intermodal service is chosen only in those instances where the economies of scale for changing modes outweighs the expense of doing so. These interchanges, on average, account for 15 - 20 percent of the cost to the shipper and, can run as high as 25 percent. For general freight, which usually ranges between 10,000 and 40,000+ pounds, the minimum distance for cost-effective rail/truck interchanges is about 700-750 miles. The economies of scale are more pronounced at distances of 1,000 miles and 1,500 or more miles.
Intermodal is a popular choice in moving international traffic across the U.S. About 70 percent of intermodal tonnages are these international shipments. A fierce competitor on other types of shipments, intermodal is one area where trucking and rail carriers work together to create a seamless service for these customers.
As noted earlier, double stack train service was crucial in developing the international freight flows for this segment of the freight industry. These flows basically are west/east and east/west moves. West/east traffic primarily moves Pacific Rim goods through the major gateway ports of Los Angeles/Long Beach and Seattle/Tacoma. This traffic is destined for delivery in the Midwest and East Coast, with some goods moving in land bridge service to Europe. East/west shipments come from Europe and Central/South America primarily through the gateway port areas of New York/New Jersey, Hampton Roads, VA, and Charleston, SC. Freight is sent to Midwest and West Coast locations, with some traffic moving in land bridge service. As the Pacific Rim’s new manufacturing centers move west into India and other countries, some shipments are being routed through the Suez Canal across the Atlantic to the U.S. due to shorter transit times.
Since railroads are privately owned and have regional infrastructure, it is necessary for intermodal shipments to be switched between carriers for delivery to destination.
Chicago is the major interchange point, with Kansas City and St, Louis, Missouri as second and third choices respectively. This railroad-to-railroad interchange normally occurs by either a switching railroad moving the goods between carrier yards or trucks transporting containers and trailers from one carrier’s intermodal yard to its connection’s intermodal facility.
- Railroads and the Government
The railroad’s relationship with government is a long-standing one. The Federal government’s first independent regulatory agency, the Interstate Commerce Commission, was created in 1886 to ensure fair play among railroads and act as a referee between the rail industry and its customers, especially its “captive” customers — entities whose cargoes depend on rail transportation because they cannot readily be transported by other modes, and who have service from only one railroad.
- ICC / STB
From 1886 through the early 1970s, railroads were subject to increasing levels of government control over the pricing of their services and safety of their operations. In 1980, Congress ended economic controls over a sizeable portion of rail operations by enactment of the Staggers Act. It limited Federal oversight to those matters where there were concerns about a lack of competition. In 1995, Congress further eased these economic controls. The Surface Transportation Board is the Federal entity now administering the remaining regulatory functions. The STB is an independent unit with the Department of Transportation.
Since its creation in 1967, the DOT’s Federal Railroad Administration has administered Federal rail safety regulations and the programs they generate. Unlike economic regulatory controls, Congress has increased these safety requirements over the last 20 years.