Institutional Challenges and Opportunities for Competitive Contracting in Intercity Passenger Rail A presentation before the 2014 meeting of the Standing Committee on Rail Transportation Denver, CO

John D. Heffner Strasburger & Price, LLP Washington, D.C.

In the beginning . . . . .

all passenger service was privately operated by the nation’s railroads starting with the original Baltimore & Ohio Railroad service between Baltimore and Ellicott City, MD. 2

And that business model of privately operated passenger train service provided by America’s freight railroads continued until April 30, 1971. That next day, May 1, 1971, marked the birth of the National Railroad Passenger Corporation, better known as Amtrak. Starting with frequent service in the Northeast and a skeletal network of long and short distance service radiating out of Chicago and up and down the East and West Coasts, Amtrak had a legislatively-granted monopoly on intercity (as opposed to commuter) passenger service. That monopoly was the result of a statutory bargain whereby the private railroads that were still providing passenger service just before Amtrak’s creation were relieved of their common carrier obligation to operate those trains in exchange for a contractual commitment to handle Amtrak service on an incremental cost reimbursement basis. In 1997 Congress repealed Amtrak’s monopoly.

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But a lot has changed since 1971 and 1997.

• Amtrak ridership growth: 13 million in 1971 to 30+ million today.

• Ridership growing faster than competing modes. • Covers up to 89% of its operating costs.

• Significant part of growth due to the expansion of state-supported routes and services.

• Vast changes in freight rail industry.

• Congested highways and less attractive air service.

• Changes in life styles and travel habits for Americans.

• Growing acceptance of public transportation.

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The Opportunities

Obvious opportunities: Some railroads, particularly short line railroads, may have opportunities right under their noses: • Urban congestion: A metropolitan area • Colleges and universities: The “knowledge corridor” in central Massachusetts • An older and possibly “car less” population: East Coast of Florida • A tourist magnet: Cape Cod, southwest Florida, the Berkshires • Decent and upgradeable track: probably a former Class I railroad line • An underutilized asset: Most short lines do not have congestion issues • Availability of state or local government capital funding • Availability of private or government funding due to “transit oriented development” 5

PRIIA: The Passenger Rail Investment and Improvement Act of 2008

• Sections 209 and 217 Section 209 required Amtrak and the 19 states that currently fund Amtrak short haul and regional services outside the Northeast Corridor to agree on a single, nationwide standardized methodology for establishing and allocating operating and capital costs and for those states to begin paying Amtrak for those costs. While all of the affected states have signed an agreement with Amtrak to continue the existing services, many are unhappy with the current state of affairs and may be looking at other options for the future.

The companion section 217 envisions that a state or other agency could engage an operator other than Amtrak and allow the funding entity to obtain access to Amtrak facilities, equipment, and services and, if necessary, to initiate proceedings before the Surface Transportation Board (“STB”) to set terms and conditions for the use of such equipment and services. 6

PRIIA: The Passenger Rail Investment and Improvement Act of 2008 (cont’d)

Suppose a state that is currently paying Amtrak to operate its trains has just received an exorbitant quote from Amtrak to continue providing that service. There is no reason why a short line railroad or a contractor can’t make a proposal to the State to assume the service. The new operator may even be able to provide more service or a more imaginative service for the same cost. A new entity might even take over the marketing and equipping of the service but still employ Amtrak to provide some services such as the furnishing of crews. The implications of section 217 are untested although Indiana has selected another operator and several other states could do the same in the future. As we will discuss later, the one “fly in that ointment” is that the “host” railroad may be comfortable with Amtrak but might not be with an independent operator and the host railroad could veto the service. But where the host railroad owns the right of way, it could easily assume the operation of the state-supported train over its own lines.

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PRIIA: The Passenger Rail Investment and Improvement Act of 2008 (cont’d)

• Section 214 This provision requires the Federal Railroad Administration to develop a pilot program for the host rail carriers [such as UP or BNSF] over whose tracks Amtrak operates trains to takeover and operate a current Amtrak service and presumably receive a federal operating subsidy. The FRA issued a notice of rulemaking and received comments several years ago but has never issued a formal rule as yet. No one has stepped forward to operate a service under this provision. How would the FRA react to a proposal by a carrier to provide service over a route that Amtrak doesn’t operate such as Jacksonville to New Orleans or Chicago to Florida?

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PRIIA: The Passenger Rail Investment and Improvement Act of 2008 (cont’d)

• Section 216

Section 216 encourages Amtrak to operate special trains funded by or in partnership with private sector operators and can use its access rights to use the tracks and facilities of the host railroad to provide that service. While Amtrak does operate several such services, they are few and far between. 9

The Airline Model

For those of you who haven’t flown recently, that is known as a commuter airplane. If you are travelling from a major city like New York or Washington to say, Muskogee, OK, the final leg of your trip might be completed on a plane that says United or Delta or American on the fuselage but it isn’t one of those major carriers. More likely, that plane is operated by Air Wisconsin, Mesa, Colgan, Comair, or Republic Airlines with its own equipment and crews. So if the United States is really going to have a truly national railroad passenger network, it must have service to many secondary markets off Amtrak’s mainlines and that’s a potential role for short line carriers and independent passenger railroad operators.

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The Challenges

Now that I’ve identified some opportunities, let’s discuss some of the many challenges facing “independent operators.” 1.

Access to rail lines and terminals Amtrak enjoys a statutory right to compel access to the host railroad freight network that no other entity has. Under current law neither a State nor a non-Amtrak provider can compel access to the nation’s freight network. PRIIA provides for non-binding mediation of disputes between commuter rail agencies and “host” railroads but that doesn’t help us with “intercity service” and mediation is not the same as binding arbitration. Whether a public agency can “acquire” Amtrak’s rights to host railroad access under its section 217 PRIIA right to obtain the use of Amtrak facilities, equipment, and services is an untested question. Similarly, we don’t know if Amtrak could legally convey its access rights through to a state agency or independent operator.

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The Challenges (cont’d)

Access is a matter of negotiation with the owning “host” railroad at whatever terms and conditions the parties can reach. Compensation is the sticking point with many “host” railroads. For Class I’s, Amtrak is “the devil they know” and are comfortable with. It’s Amtrak or no service at all for some Class I “host” railroads.

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The Challenges (cont’d)

2. Track capacity and operating conditions The status of the “host” railroad’s infrastructure and operating conditions is the initial aspect of access. What sort of railroad is out there? Is it a single track line maintained for 10 mph branch line local service without any form of signaling and traffic control that sees service only a few times a week? Is it a double track signaled line that sees multiple freight trains moving at speeds of 40-60 mph? Is it reverse signaled for use in 13

The Challenges (cont’d)

either direction allowing faster trains to overtake slower ones? Are there numerous grade crossings? Does the “host” railroad have freight trains waiting on the mainline to enter a yard? No discussion will go very far until the agency or the operator that wants service can address these questions to the satisfaction of the “host” railroad. In all likelihood, it will need to undertake an analysis of the line’s capacity and be prepared to fund the improvements needed for freight and passenger to coexist. At the proverbial “end of the day” the “host” railroad will be looking to make sure that the passenger service and the required infrastructure improvements “do no harm” to its freight service.

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The Challenges (cont’d)

3. Through service Another omission in the law pertaining to passenger service is the lack of provisions comparable to 49 U.S.C §§10705 and 10742 of the ICC Termination Act (“the ICCTA”) which require freight carriers to establish through routes and rates and to interchange equipment. Suppose that an “independent operator” assumes a portion of a service previously operated by Amtrak and the rest of the service remains an Amtrak operation. What result if one carrier or the other does not want to cooperate with the other on providing a “seamless service?” 15

The Challenges (cont’d)

4. Inadequate facilities This is a picture of Amtrak’s two track station in Cleveland, OH. The sad fact is that many cities served by Amtrak (or passenger rail) lack the facilities to turn, switch, store, or clean passenger trains. It may surprise many of you to know that in such major cities as Buffalo, Atlanta, Dallas, and Cincinnati the passenger station has but one or two platform tracks and no adjacent yard trackage. How can you provide any sort of multi-frequency service absent such facilities?

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The Challenges (cont’d)

5. Liability Allocation Liability allocation between freight and passenger rail is a major problem for many start up passenger services. State laws may limit the ability of an injured party to sue a state agency. The normal rule for freight is liability allocation for parties with equal bargaining power: “My people, my freight, my equipment, my problem….your people, your freight, your equipment, your problem.” 17

The Challenges (cont’d)

But passenger service is different because passengers (unlike steel beams or lumps of coal) sue for damages that can bankrupt the “host” railroad. Thus the liability allocation theory for parties with unequal bargaining power is what is commonly called “but for liability:” The passenger carrier or agency is responsible for any accident or injury regardless of cause and must indemnify the “host” regardless absent “host” railroad gross negligence.

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The Challenges (cont’d)

6. Insurance Public agencies and rail carriers must carry insurance. Currently $200 million is the minimum level of coverage required by Class I “host” railroads if you want to even have a discussion about access. By comparison, a well-known domestic airline carries $1.1 billion dollars per incident with unlimited coverage.

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The Challenges (cont’d)

7. Regulatory Alphabet Soup Agencies STB FRA, NTSB NMB RRB Laws ICCTA FRSA RLA RRA, RUIA Other laws or issues PTC FDA (food service) ADA 20

The Challenges (cont’d)

8. (“To STB or Not to STB is the Question”) Is your proposed service is subject to the jurisdiction of the ICCTA and the STB? To what extent do entities proposing to provide passenger service require some sort of regulatory authority? It depends upon the specific circumstances. 21

The Challenges (cont’d)

No specific STB authority required Host railroad passenger service STB authority required New passenger construction “Mass transit” 49 USC 10501(c) Interstate service Wholly intrastate service “Dark territory”: no case law or guidance A railroad providing a feeder service to Amtrak under the “airline model” Intrastate service part of national network Service to Canada or Mexico Interstate charter service 22

The Challenges (cont’d)

Being subject to the STB’s jurisdiction is both a blessing and a curse. Or perhaps a curse and a blessing. Aside from compliance with any requirements mandated by the STB and the ICCTA, a regulated passenger rail carrier is subject to the same railroad benefits and unemployment compensation, personal injury, and railroad labor laws that apply to interstate freight railroads. However, being subject to the ICCTA has its advantages. For example, an interstate passenger carrier could claim preemption from burdensome, inconsistent, or contradictory state or local laws under federal preemption. It may be able to force another railroad to let it cross that carrier’s tracks subject to compensation set by the STB.

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The Telephone Analogy

In conclusion, there is an analogy between the prospects for passenger service today and what happened to telephone service in 1984. Back then, all telephone service was provided by a monopoly: either one of the companies comprising the AT&T-owned Bell System or a series of “independent” phone companies. There was no competition and little in the way of innovation. Today, people can choose to have phone service through a “land line” company, either a former Bell operating company like Verizon or an “independent” telephone company. Or they can have service through their cable company or cell phone provider. There’s competition and innovation. The growth in service has been explosive. Any caller can reach any other subscriber anywhere in the country (or the world)! And so it should be the same with passenger rail service. There should be a seamless network that provides service to all parts of the country, whether it be Columbus, OH, Des Moines, IA, or Las Vegas, NV. Not just the 500 cities that have Amtrak today.

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