We are going to be hearing increasingly this year about the Highway Funding Crisis. Much of that discussion will be directed toward exploiting the political leverage that our car addiction gives to the Highway Lobby.

But there is the other side of the Highway Funding Crisis, which is freight transport. Our freight transport system has been as deliberately addicted to road funding as our passenger transport system, and in the process is quite heavily addicted to diesel fuel.

Now, the Sunday Train has frequently tackled this issue from the side of the physical unsustainability of our dependence on petroleum based fuels for a majority of our transport. However, its also the case that the system of public finance upon which we built our road transport system is becoming more and more financially unsustainable.

Last week's Sunday Train started laying out the problem, while it is in this week that I look at one overlooked part of the solution. This is not a free-standing essay this week, so if you have not read Part 1 last week, go ahead and do that before moving on to this week's Part 2.

 
Freight Transport and the Highway Funding Crisis (continued)

3. Achieving A Big Enough Mode Shift to Electric Rail To Make A Difference.

If a mode shift from truck freight to freight rail offers these potential benefits, why aren't we already pursuing it? Turning to the policy proposals contained in the 2013 NREL study on road to rail mode shift [7] reveals a set of policies that are incapable of achieving a mode shift of sufficient scale to make substantial progress on the problems of energy waste, greenhouse gas emissions, or unfunded road maintenance associated with truck freight.

The 2013 NREL study identifies seven possible Federal policies that could affect the share of different transport modes (p. 50). Expanded reliance on direct-user fees and investment in rail corridors have moderate potential to drive shifts from truck to rail. Increasing the federal fuel tax, regulating or pricing greenhouse gas emissions, or modifying commercial vehicle hours of service regulations would all have low potential to drive shifts from truck to rail. And two policies, increasing truck size and weight limits and re-regulating freight rail rates not only have low mode shift potential but would likely shift freight from rail to truck.

The problem is the characteristics of rail freight make it an unattractive choice for a large number of specific freight shipments. This becomes is reflected in what called the “cross-price elasticity” of truck to rail shift. That is what percent of shift from truck to rail results from a 1% increase in the price of truck freight relative to rail freight. For a wide range of types of freight, these cross-price elasticities range from about 0 (no response at all), to about +1 (p. 30), indicating that customers for most types of freight shipping are relatively unresponsive to relative price changes. As the NREL 2013 study notes:

Regardless of distance, service, or rail technology, there are certain types of commodities for which the railroads are not competitive. Certain automakers, for example, insist on trucking because of special handling requirements; shippers of time-sensitive freight require the flexibility that trucking provides; and bulk commodities may need to move in smaller quantities than can be handled efficiently by rail or to places not served by rail.

In addition, infrastructure improvements might be necessary to make rail more competitive with truck movements along some corridors. Many rail lines have significant speed restrictions and without improvements will not be capable of competing with trucks for short- or medium-haul traffic. One of the largest challenges is removing height clearance obstructions that prevent double-stack intermodal service. (p. 34)

A useful in-depth examination of the potential for investment in rail infrastructure to divert long-haul freight from truck to rail was undertaken by the Virginia Department of Transport in a technical appendix to its Environmental Impact Study of projects for adding lanes to I-81 through Virginia. [9] In the technical report, a no-build bases case is compared to three levels of infrastructure investment in the Piedmont corridor:

• In the no-build, case, the effective transit speed is 22.5mph, the transit time reliability index is 0.45 (the index measures variability, so the lower, the better), rail load/unload times are 34mins on average and congestion on I-81 is expected to drive a 1.5% shift of long-haul truck traffic – truck traffic over 500 miles – onto rail.
• With a $111m infrastructure investment, the effective transit speed is 24.8mph, transit time reliability improves slightly to 0.44, and with no change in rail load/unload times there is an expected 2% shift of long-haul truck freight.
• With a $267m infrastructure investment and $229m in rolling stock, the effective transit speed is 28.1mph, transit time reliability improves to 0.43, and rail load/unload times improving to 9mins, there is an expected 8.2% shift of long-haul truck freight.
• With an additional $13m in infrastructure investment to make $280m in infrastructure investment and $229m in rolling stock, the effective transit speed can rise to 33mph and transit reliability improve to 0.42, with an expected 10.1% shift of long-haul truck freight.

However, the most substantial improvements are offered by a fourth investment alternative, the “Steel Interstate” alternative along the Shenandoah corridor proposed by a citizen's advocacy group. This involves substantial dual tracking and grade separation, so came with an estimated infrastructure cost of $3.2b, and $300m investment in rolling stock. This investment is similar in size to the roadway alternatives of expanding I-81 to a uniform 6 lanes, at $4.9b, or adding 1 lane throughout, at $5.1b. The capital cost would be fully recovered by user-fees, as compared to the majority of the ongoing maintenance cost of an interstate highway expansion project being covered by tax-subsidy or unfunded road wear.

This investment was projected to deliver an average freight transit speed of 40mph, a transit time index of 0.38, more than 10% better than the base case, and an average 9min load/unload time. The impact of the improved rail freight performance was projected to be a 16.6% diversion of long haul truck freight to rail. However, while the original “Steel Interstate” proposal was for a multi-state rail corridor, the Virginia study was limited to investments in the state of Virginia, and this was a critical limitation:

Based on the findings of the previous studies and using information obtained from Norfolk Southern, DRPT, and Reebie Associates, this report concludes that there may not be sufficient rail capacity on the Norflok Southern Piedmont rail line to service future base load rail traffic. While the scope of this study is primarily based on the future needs of I-81, some assumption of rail capacity was necessary to determine whether and at what point freight diversion to rail would not be possible. It is a distinct possibility that future diversions of truck freight on I-81 to rail mode could be restricted unless additional public investments are made to the rail infrastructure both inside and outside the Commonwealth of Virginia. (p. ES-4)

So investment in rail infrastructure, financed by public authorities and funded by user fees, is capable of attracting a substantial shift from rail freight to truck freight. Based on the study of potential rail diversion by the Virginia DOT, the key factors driving this shift are increases in average rail freight transit speed, improvements in rail freight transit time reliability, and reductions in rail freight load/unload times. However, since it is long-haul truck shipments of 500 miles and longer that are most readily shifted from truck to rail, the full benefit of these investments will only be available if the investment is directed to a rail corridor of suitable length.

 
4. Public Institutions to Harvest the Benefits of a Truck to Electric Rail Mode Shift.

The institutions that we have to both fund and finance freight transport infrastructure are specialized to the freight transportation system that we presently have. Under our current system, payments to cover a large part of the cost of building and maintaining road infrastructure for freight are funded in roughly equal amounts by tax-subsidies from general income and sales taxes and by user fees. At the federal level, there is a cross-subsidy from user fees collected from passenger cars and light trucks to cover part of the costs imposed by heavy trucks.
Competing means of hauling freight operate on a user-pays basis, specializing on segments of the freight market where their specialized advantages outweighs the tax-subsidies to truck freight. Much infrastructure for water-born freight relies on federal and state public works funded by user fees, and so is, in effect, financed at the lower interest rates available for public debt. Most infrastructure for rail freight is privately owned infrastructure and so is financed at the higher interest rates that must be paid by very capital intensive private going concerns.

So the United States has the market shares for various means of freight transport that we would expect given the public funding and finance of road freight infrastructure, private funding and public finance of water born freight, and private finance and finance of rail freight infrastructure. We subsidize the least energy efficient means of hauling freight, and as a result have an energy inefficient system that exposes our economy to serious risk in the face of oil price shocks. We subsidize the means of hauling freight that emits the most greenhouse gases per ton-mile, and as a result freight transport is responsible for tens of billions of dollars of damage from greenhouse gases annually. We subsidize the means of hauling freight that is most expensive to maintain per ton-mile, and as a result we have a funding crisis where even after substantial tax-subsidy, highway maintenance spending falls behind highway maintenance needs.

The United States can have a freight transport system that delivers more benefit at lower cost to freight customers, to public authorities funding road infrastructure, and to the general public in terms of both out of pocket costs for goods and services and unfunded environmental costs. One part of doing so will be to establish institutions to support investments that will enable a mode shift of long haul truck freight to electric rail, contracted to make use of recently established carbon neutral electrical power sources.

Given the substantially lower maintenance costs of rail freight per ton-mile, it will be possible to get started on this process by offering public finance for privately funded infrastructure. To get an idea of the advantage offered by public finance, consider that in the cost of capital to BNSF has been found to be 11.25%, while as of May 1, 2014, yield of municipal bonds from the state of Washington range between 1% and 6%, and Federal 10-year Treasury bonds have a yield of under 3%. A $3.2b project, such as studied by the Virginia Department of Transport, financed over a period of 30 years at 11.25% requires annual funding of $380m. The same project financed at 6% requires $230m annually, and financed at 3% requires $160m annually. So public finance at 6% can reduce the annual funding cost by 38%, and public finance at 3% can reduce the annual funding cost by 56%.

Note that providing public finance will offer a substantial private benefit to the railways or railways that have this publicly-owned infrastructure built on their privately owned right of way. For this reason, the investment should be undertaken by a public authority with the capacity to oversee the project, in addition to raising the required funds. This requires a multi-state regional development bank, with the authority to raise funds for infrastructure investment on both publicly and privately owned right of way, with funding provided by user fees and investment on privately owned right of way guaranteed by commitments from the right of way owners to make use of the infrastructure. When this is established, it is vital to set down ground rules that ensure that the development bank pursues the full public interest. This includes ensuring that publicly provided finance will be refunded from user fees, and also includes the public interest in establishing carbon-free transport options.

This development bank system can be used in two ways to reduce both the unfunded maintenance liability and unfunded environmental costs of our highway system. First, it will allow the establishment of electric freight rail on substantial mainline transcontinental rail corridors, allowing freight to be shipped on the using corridors with renewable electric power. Electrifying an entire transcontinental corridor ensures that the commercial benefit of electric freight rail is available to the long-haul shipments that are the primary target for shifting from truck to rail. It also directly expands the capacity of the rail corridor to cope with new traffic, as an electrified rail corridor enjoys an increase in capacity of over 15%.

Once the corridor is electrified, then the development bank will be in a position to invest in new rail capacity to support rapid freight rail shipping. The study of rail investment alternatives by the Virginia Department of Transport established that increasing freight transit speeds from 22mph to 40mph would result in a substantial shift of long haul freight from truck to rail. It is feasible to design single stack freight railcars to carry freight long distances at 90 mph, which implies freight transits of over 80mph for long-haul freight.

A substantial commercial obstacle to rapid freight rail on the current mainline rail system are increased maintenance costs. Operating freight at speeds above 80mph, up to 110mph, requires that the track be maintained to Class 6 standard, which is substantially more demanding than the Class 4 standard that allows a 60mph freight speed limit or the Class 5 standard that allows an 80mph freight speed limit. The cost of maintaining track to Class 6 standard escalates for track that experiences substantial heavy bulk and double-stack container traffic.
Given public finance, new Class 6 track can be built next to existing Class 4 and Class 5 track. This track can be used for freight in three ways. First, it can be used to provide freight rail paths with freight speed limits of up to 90mph for single stack rapid freight rail trains. Second, it can be used as the return path for trains consisting of empty bulk freight and/or empty containers, which have much lower weight per axle and therefore do not escalate the cost of maintaining Class 6 track. Third, sections of the high track can be switched to the neighboring track to use as a passing siding. These would either be sections where curves impose a lower speed limit on the rapid freight rail in any event, so may be maintained as Class 4 track in any event, or else the heavy freight would be limited to low speed siding operations that avoids imposing undue additional maintenance cost.

The cost of building and maintaining this public rapid freight rail throughway, or “Steel Interstate”, would be recouped through access fees to operate on this track. We will therefore gain the public benefits from the investment in this Steel Interstate by virtue of providing public finance for the infrastructure investment, but without requiring substantial public tax-subsidy of the infrastructure. The development bank will not proceed with the project unless it is projected to attract sufficient use to refund the borrowing – and will likely require some guarantee of use of the Steel Interstate by the railway receiving the Steel Interstate investment in its right of way. Since the largest untapped markets for freight rail are markets dominated by truck freight, we can be confident that the private interests using Steel Interstate projects will be pursuing a shift of freight from truck to rail. The primary moral hazard in setting up these development banks is therefore the risk that they invest in entrenching our reliance on unsustainable energy sources for transport.

Thus, to guarantee the broadest possible public benefits from these investments, the development bank should be limited to financing transport projects that will be entirely sustainably powered, or that share of the project that represents a reduction in unsustainable energy required. Therefore, 100% funding a project by the development bank will only be possible for investment in transport infrastructure that eliminates the requirement for unsustainable power. By contrast a project that reduces the requirement for unsustainable power by 10% will only be eligible for 10% funding from the development bank.

 
Sources

[1] American Society of Civil Engineers. “Report Card for America's Infrastructure”. March, 2013: http://www.infrastructurereportcard.org/a/browser-options/downloads/2013-Report-Card.pdf

[2] Victoria Transport Policy Institute. “5.6: Roadway Facility Costs.” In Transportation Cost and Benefit Analysis II – Roadway Costs. 28 August, 2013. pp. 5.6-6. http://www.vtpi.org/tca/tca0506.pdf

[3] Kevin DeGood. “Understanding the Highway Trust Fund and the Perils of Inaction”. Center for American Progress, February 20, 2014: http://www.americanprogress.org/wp-content/uploads/2014/02/HTF_factsheet2.pdf

[4] Federal Highway Administration. “1997 Federal Highway Cost Allocation Study –
Summary Report: V – Highway Cost Responsibility.” 1997: https://www.fhwa.dot.gov/policy/hcas/final/five.htm

[5] Oregon Department of Administrative Services, Office of Economic Analysis. “Highway Cost Allocation Study 2013-2015 Biennium.” January 2013: http://www.oregon.gov/DAS/OEA/docs/highwaycost/2013report.pdf

[6] Federal Highway Administration, U.S. Dept. of Transportation. “FHWA Freight Management and Operations – Chapter 5: Capacity and Performance Analysis.” August 10, 2011: http://faf.ornl.gov/fafweb/Data/Freight_Traffic_Analysis/chap5.htm#table54

[7] Office of Energy Efficiency and Renewable Energy, US Dept. of Energy. “Freight Transportation Modal Shares: Scenarios for a Low-Carbon Future.” March, 2013: http://www.nrel.gov/docs/fy13osti/55636.pdf

[8] Inter-agency Working Group on Social Cost of Carbon, United States Government. “Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866.” May 2013: http://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf.

[9] Virginia Department of Transport. “I-81 Corridor Improvement Study: Freight Diversion and Forecast Technical Report.” March, 2007: http://www.virginiadot.org/projects/resources/freight.pdf.

 
Conclusions & Conversations

The Sunday Train does not end at the end of the essay ... not even the end of an essay that took two weeks to arrive at. Rather, the end of the essay is just the beginning of the conversation.

And, as always, any topic in sustainable transport is on-topic in the Sunday Train. So feel free to talk about CO2 emissions reduction, energy independence, suburban retrofit and reversing the cancer of sprawl over our diverse ecosystems, or the latest iPhone or Android app to map you bike ride. Whatever.

On this particular topic, what are your thoughts on how to address the problem that the road network that our freight transport is so heavily dependent upon is both ecologically and financially unsustainable?