Trends-2008

As the U.S. transportation industry looks for better ways to ease congestion on the nation’s highways, improve infrastructure, and accommodate surging inbound container volumes from Asia, rationalizing freight movements between truck and rail modes presents a viable solution.

But, at the moment, some shippers and carriers aren’t looking at the problem in the same light. Captive rail freight users are calling for government control over the market, railroads and intermodal shippers are looking for tax incentives to free up capital and stimulate needed infrastructure development, and Congress is clogging up the legislative pipeline with proposals for reform.

In 2006, Trent Lott (R-Miss.) and Kent Conrad’s (D-ND) introduction of the Freight Rail and Infrastructure Capacity and Expansion Act was widely applauded by the railroad industry as a much-needed fix for the future of U.S. freight movement.

The legislation proposes offering a 25-percent tax credit for any business—shippers included—that invests in new rail equipment, tracks, intermodal facilities, or any other project that improves infrastructure.

Support for the bill has been widespread among major global shippers such as Hewlett Packard, Michael Stores, Nike, Owens Corning, and Target. Port authorities, ocean carriers, and numerous shipper and carrier coalitions also back the bill.

So in 2007, when Jim Oberstar (D-Minn.) presented the Railroad Competition and Service Improvement Act (H.R. 2125) to Congress, a “pro-shipper” initiative directed at limiting the railroads’ control over the market and increasing competition, a pitched battle ensued between captive rail shippers and the railroad industry at large.

This current Congressional conundrum reflects a much deeper drama between two groups of rail freight users set against the backdrop of an industry headed in a new direction.

On one end, captive shippers long dependent on the railroads for moving product to market, are fighting for more government control over pricing and access to shared rail networks.

One supporter of Oberstar’s plan is Consumers United for Rail Equity (CURE), a group of rail customers including public utilities; farmers; chemical, ethanol, agriculture, cement and other manufacturers; and forest and paper companies.

These types of shippers invariably transport bulk commodities that, due to size or characteristics, cannot be moved over the road—making them captive to existing rail services.

The Washington, D.C.-based lobby sees lack of competition in an increasingly capacity-constrained rail system resulting in rising costs and deteriorating service for its members. This railroad monopoly, in their opinion further exacerbated by the U.S. Surface and Transportation Board’s reluctance to embrace reform since the Staggers Act, continues to impede U.S. trade competitiveness domestically and abroad.

“While the major railroad companies log record profits and stock prices on Wall Street, delays in coal deliveries have caused higher electricity prices on Main Street. Skyrocketing transportation costs are forcing chemical and paper companies to consider moving American jobs overseas.

“Already a handful of utilities are importing coal from Columbia and Indonesia in order to meet consumer demand because the railroads are not delivering adequate supplies of U.S. coal,” according to the coalition’s position statement.

Currently, CURE is working to address two changes in legislation.

First, the coalition supports initiatives that will improve the Surface Transportation Board, which it believes is failing in its mission to ensure competition and protect shippers from railroad monopolies.

Second, CURE supports legislation that removes current railroad exemptions from the nation’s antitrust laws—Oberstar’s proposed H.R. 2125 bill included.

On the other side of the argument, railroad constituents led by the Association of American Railroads (AAR) are vehemently opposed to any lobbying for what they perceive as “re-regulation”—efforts they contend will take the railroad industry back in time and stifle ongoing efforts to increase capacity and create a broader footprint for domestic freight transportation.

The AAR’s cause has also attracted the attention of “global rail shippers,” specifically those that are using intermodal to create capacity, reduce costs, and speed inventory turns in and around congested U.S. chokepoints.

In an open letter to Oberstar this past spring, Ezra Finkin, director of government affairs for the Waterfront Coalition, an organization that represents retailers, suppliers, manufacturers, and agricultural producers moving product through U.S. ports, addressed some of these concerns.

“As users of the freight rail network, we are concerned that H.R. 2125 may needlessly and unfairly set rates and mandate service for only one segment of freight rail users at the expense of other customers. In order to meet the needs of all freight rail customers, we instead encourage your committee to consider policies to promote freight rail expansion that serve the interests of all users,” writes Finkin.

He further argues that many intermodal shippers are already experiencing rising freight rates and declining service as a result of congestion and cargo delays.

Instead, further tax incentives are needed for the industry to continue investing in railroad improvements—beyond the $9.4 billion that Class I’s outlaid for such initiatives in 2007.

Herein lies a major sticking and sore point between U.S. bulk rail shippers and global intermodal users.

Captive rail shippers have long lamented the U.S. railroad industry’s lack of attention and the fact it has dumped dividends in Wall Street and done little to reinvest in infrastructure, equipment, and services beyond status quo requirements—a railroad that these shippers helped build.

From their perspective, the industry’s current predicament is one born of its own greed and inaction. While carriers are enjoying record profits, these rail customers are paying more and getting less.

Now the railroads want more funding from government to invest in infrastructure largely benefiting intermodal shippers and not them—an inconvenient truth if there ever was one.

Despite this reality, railroads are changing. The challenges of the marketplace are driving railroads to enhance their service offerings and capabilities beyond what they have previously offered to core customers.

Growing pressure for more intermodal options has necessarily forced sweeping change within the industry as carriers evolve their service and technology capabilities to compete with the trucking industry for capacity.

As the United States becomes more consumer-oriented and less industrially based, the railroads’ captive audience is changing—traditional rail shippers, confined by mode, are now competing against intermodal shippers liberated by mode—and they are both vying for rail infrastructure investments.

As a result of these capacity and cost constraints, new rail/intermodal shippers are testing the tracks and the railroad industry is evolving to meet their demands.

There seems to be little room for compromise between these separate interests. But in reality there is, and CURE has laid down a challenge to Congress and the railroads.

When the Freight Rail and Infrastructure Capacity and Expansion Act (ITC) was introduced to Congress, CURE encouraged its members to support such a bill—.with one caveat: “Please contact your senators and urge them to support the ITC legislation only if provisions are added that address rail customer concerns.”

All interests should supprt providing tax credits to railroads and rail shippers as long as credits are mandated to ensure that freed capital is then proportionally specified for both intermodal and railroad improvements. If such amendments are made, regulation is unnecessary; if not, some shippers might feel Oberstar’s proposal bears consideration.

Even Oberstar, who has proposed this new legislation and lobbied heavily in favor of captive rail shippers such as the U.S. lumber industry, recognizes that the demands of the U.S. economy require a new, intermodal approach to ensuring future growth.

In an Oct. 21, 2007, op-ed in the Duluth News Tribune, he painted a bucolic picture of how Americans might see this intermodal future:

“Pulling out of the station, they will pass a busy sea port where goods are being loaded on ships bound for destinations all over the world. The train will roll past a great freeway carrying goods and people all the way to Texas. They will be using a transportation system that reflects the greatness of America’s innovative spirit,” he wrote.

For the time being, however, America’s innovative spirit is mired in a dogfight on Capitol Hill—.and its outcome will likely rest on whether or not the railroad industry can work together.

The railroads do not want to damage their relationships with shippers that have largely funded operations and infrastructure over the past 100 years—and investment in intermodal over the past 35 years.

And captive shippers recognize the challenges that smart railroad managers face, and are loathe to limit investment or push for re-regulation as long as their needs are fairly met.

Alternatively, if both sides cannot find a suitable compromise, government might be forced to turn back the clock as it addresses the railroads’ future.

Where do you stand on theses two pieces of rail legislation currently circulating in Congress? Is re-regulation necessary? Email: [email protected]

Part 2. H.R. 1: Smoke and Mirrors or Smoking Gun?

When President Bush signed into law the Implementing the 9/11 Commission Recommendations Act of 2007 (H.R.1) this past summer, it expanded provisions set forth in the 2006 SAFE Port Act by requiring “100 percent” scanning of all foreign cargo containers shipped to the United States by July 1, 2012. It also provoked its share of skepticism.

Some U.S. industry voices have questioned whether this five-year plan is realistic or merely a symbolic response from Congress. Other foreign governments, ports, and business interests readily expressed concerns about how they will bankroll security infrastructure projects and why standards and protocol are only being legislated abroad and not in the United States.

As a result of these reactions, the feasibility of ensuring that world ports are compliant with the H.R. 1 specifications still remains uncertain.

To be sure, U.S. businesses sourcing from and selling to global markets have a considerable stake in ensuring the safe and efficient flow of goods. But many stateside consignees and shippers are wary about making any significant investment in GPS tracking technologies, scanning equipment, and electronic security devices that have yet to be standardized.

Also, U.S. government attempts to roll out security measures at U.S. ports—such as the Transportation Worker Identification Credential (TWIC) program—have been slow at best.

Consequently, businesses have little incentive to begin subsidizing security projects at ports abroad. Any progression from the status quo will likely take some time, and conceivably, additional prodding from public interests.

Until government can convince the private sector that such investments are not only good for securing global transportation, but good for business as well, acceptance and adoption will remain sluggish.

Still, for all the scuttlebutt and debate, recent rumblings suggest some companies and government authorities are beginning to take stock of the situation and make progress toward, at the very least, testing container equipment and scanning technology that have global potential.

At the same time, these enterprises are making a business case for companies towing the ROI line.

Schenker AG, for example, recently completed a pilot phase for monitoring visibility of its Schenker smartbox containers between Hamburg and Hong Kong.

Using special sensors to complement RFID technology, the Essen, Germany-based integrated logistics service provider can monitor current GPS coordinates, temperature levels, and security parameters of containers in transit.

RFID status notifications communicate the most important points where liability changes hands, as well as the time when containers arrive at a terminal. This gives a clear view of when and where the load is being transshipped.

This application of cargo security technology also drives shipment visibility and creates actionable information that can streamline transportation processes as well as rationalize costs.

With Schenker’s new containers, shippers can continuously monitor the temperature of sensitive goods, which could prove less expensive than transporting them in refrigerated containers in the long term.

Elsewhere on the global radar, a recent partnership between QinetiQ North America (QNA) and VeriTainer Corporation aims to bring greater transparency to global ports via new radiation scanning capabilities.

The VeriSpreader solution, a crane-mounted device that scans containers for dangerous radiation in real time as they are being loaded and unloaded from container ships, facilitates higher security levels and efficient container movement.

Complementing VeriTainer’s solution, QNA’s systems engineering and data analysis capability helps deliver leading-edge scanning technology.

Their collaborative effort offers one of the first actionable solutions to address the significant challenges presented by integrating scanning into transshipment and on-dock rail operations.

VeriTainer’s crane-based solution eliminates the long dwell time between entry and scanning at many U.S. ports. The company has demonstrated the efficiency of this technology with its own pilot projects, including “The Oakland Test Program,” which successfully scanned more than 20,000 containers as they entered the Port of Oakland—without disruption to operations.

“VeriTainer has proven that its crane-based detection system works. We believe it accomplishes primary scanning in the most accurate and efficient way because the lift period offers a long dwell time for the sensors to read the cargo container,” says Rob Topping, QNA president and COO.

“Combining VeriTainer’s technology with our ability to deliver solutions to port and Homeland Security customers is an important part of our strategy to employ innovative, best-in-class technologies, both from inside QinetiQ and from our partners,” he adds.

While the technology and equipment have only been tested stateside, both parties expect to expand their reach to global ports.

Finally, as private sector interests around the world begin making progress toward developing next-generation cargo security technologies, the U.S. government is testing the feasibility of the SAFE Port Act’s “100 percent scanning” provision at ports in the United Kingdom, Pakistan, and Honduras with its Secure Freight Initiative.

Southampton Container Terminals in Britain, Port Qasim in Pakistan., and Puerto Cortez in Honduras are working in collaboration with the Department of Homeland Security and the Department of Energy’s National Nuclear Security Administration to install scanning systems and a communications infrastructure to transmit scanning data back to U.S. Customs and Border Protection’s national targeting center for analysis.

Moving forward, the U.S. government intends to include other ports in Southeast Asia in the pilot phase, as well as boost diplomatic outreach to assuage foreign government concerns about the initiative.

Arguably though, government should be paying equal attention to stateside interests—gathering their input and providing them with more incentive to consider investments in cargo security technology and strategy.

Inevitably, U.S. businesses will be paying for it one way or the other—for better or for worse.