Railway Age, September 1992

Making the Most of the Elkins Act

Last May, the Interstate Commerce Commission gave the railroads a new weapon in their fight to entice rail traffic to their lines. But many short line managers wonder whether it will work to their advantage, or only to the advantage of Class I lines with deep pockets.

In its decision, the ICC exempts freight railroads from the provisions of the Elkins Act, which prohibits railroads from discounting off tariff rates previously filed with the ICC. Passed in an era when a shipper's only real was the railroad, the Elkins Act placed railroads at a competitive disadvantage with regard to truckers. The recent ICC decision allows railroads to provide shipper incentives for "pre-movement, non-transportation activities" without running afoul of the law. In other words, railroads can now use financial incentives, such as a contribution to the cost of building a siding, as a marketing tool to bring new industry on line.

Whether or not the recent ICC decision is good news or bad news--or any news at all--depends on who you're talking to. Both feeder line and Class I managers seem to agree that the contract provisions made possible by Staggers cover most instances. So, is business under Elkins repeal a case of business as usual?

Conrail doesn't seem to think so. According to Conrail sources, the line sees the exemption as granting "new-found freedoms" and a positive development in ways it can support feeder line partners. Conrail's most widely-used mechanism to recover up-front contributions is likely to be rate contracts. Yet "Conrail would certainly want to hear from feeder line partners who need help in site development," says Kel MacKavanagh, Director-Short Line Marketing. And over at CSX, Aden Adams, VP merchandise sales and marketing, tells me "the feeder line manager's most important tasks are car management and industrial development." And, of the two, the latter has the most long-reaching effect on the viability of the railroad.

Feeder line managers, on the other hand, are wary of the way their larger Class I partners will use this new-found freedom. Morristown & Erie's Ben Friedland gets right to the point: "Sometimes it's a matter of who can afford to give the most up front. We certainly don't have Conrail's resources, so we have to find other ways to level the playing field."

Loving hands vs. deep pockets
Friedland's comment makes an important point for short line managers to keep in mind: just because the Class I may be able to pour megabucks into industrial incentives up front doesn't necessarily put the short line at a total disadvantage. Very often the efficiencies of customized service over the long pull can offset one-shot savings.

Take one example from the Aberdeen Carolina & Western, a 140-mile line in south central North Carolina. They've shown new shippers save six figures up front by making a 20-car siding do the work of a 50-car siding, and cut the customer's car leasing costs by cycling the cars faster. Because they can offer two switches a day (or three for a fee) compared to the Class I's one, the shipper saves on siding costs and increases leased car efficiency. The point here is that short line service advantages can be used to offset one-shot incentives.

Having a knowledgeable and aggressive land developer on your side helps, too. One short line runs right through the middle of a site which could be home to any number of rail users. The Elkins Act forbade incentives for non-shippers such as developers; exempting the railroads makes an extended partnership possible. But this short line and developer team have put together an aggressive joint marketing package.

Local economic development councils readily see the link between healthy, service-oriented freight railroads and bringing in new business. Pete McDevitt, a commercial realtor who sits on the Highlands County (Florida) Economic Development Board, says that an active dialog with the railroad is vital. Why? Because it gives him an edge over other counties who either don't have rail or don't talk to their railroads. Railroad exemption from the Elkins Act brings economic development council, developer, and rail line together as a team with a growing number of options.

According to Jim Howe of the Norfolk Southern legal staff, the exemption was "primarily designed to cover incentives to developers and political entities to induce new industry to locate on their sites, the inducement being an indirect benefit to new shippers."

Short lines also can sometimes call on state funds for the track improvements that mean service improvements. As North Carolina DOT's Mark Sullivan say, "Without feeder lines, key lines would cease to exist, lines which are part of our planned inter- city rail passenger corridors." The short line's business development success, in other words, indirectly impacts state rail plans. When there's aid to give, the short line with the integrated program benefits the state (and itself) the best.

Whether the Elkins Act exemption is boon or bane for the short line will vary from case to case, depending on shipper needs. When the shipper needs a carrier with deep pockets for up-front investment, it will work to the Class I's advantage. On the other hand, the short line's flexibility in meeting customer needs with specific service design packages will continue to be more attrac- tive to many shippers.

In any case, the new freedom to bargain helps both short line and Class I to put together proposals that address the real transportation needs of potential shippers. And that's good business any way you look at it.

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Created July 31, 1995. Send comments to lblanchard@aol.com