Hard Stop

Hard Stop

A look inside the railroad industry's struggles to move Minnesota's commerce.

The sound of a train in the distance is evocative—a reassuring touchstone that the nation is at work. Railroads built America, and America has always loved trains, or at least the idea of them.

But in recent months railroads have come to symbolize just another facet of American life that is breaking down under some unidentifiable strain. Xcel Energy’s Sherco power plants in Becker almost ran out of coal last year when BNSF railway fell deeply behind in deliveries. Grain piled up across Canada and the Midwest as railroads could not provide cars or crews to move the harvest. And the identified villain—huge trains of tank cars of oil pumped out of central Canada and North Dakota—keeps derailing and bursting into flames across the continent.

 

Further complicating the industry’s image, Twin Cities & Western successfully fought the political might of the Twin Cities, refusing to accept a reroute to accommodate the Southwest light rail line planned for Minneapolis, while BNSF wants to run oil trains through Wirth Park in Minneapolis as part of a congestion-relief arrangement.

Railroads may make a convenient bogeyman for the media, but peel back the layers and a more complex picture emerges—of an industry that has struggled for nearly a century to find economic equilibrium, reliant on volatile trades for its well-being, at the mercy of an impractical public that wants the goods the rails carry, but none of the impacts they bring with them.

Railroads are investing nearly half a billion dollars in Minnesota this year to address capacity constraints. The question is whether it’s enough—whether the rail industry is ready to take a flyer on the fickle shippers it relies on and invest in the kind of capacity that would restore its role as the preeminent mover of commerce in the U.S.

The Perfect Storm

Around the rail industry in the Upper Midwest, 2014 prompts grimaces. Railroaders called it “the perfect storm,” because they were hit from all directions, much of the damage inflicted by prosperity.

“They didn’t see it coming,” says railroad historian and author Steve Glischinski, “so they had inadequate crews [and] locomotives, and were unprepared for the severe winter.”

The year was so memorable, explains Dave Christianson, MnDOT’s senior freight and rail planner, “because it was the first time the railroads ran out of capacity since World War II.”

And few states were hit as hard as ours. “It is undeniable,” says Glischinski, now in his fifth decade of monitoring railroads in the region, “that rail congestion is worse in Minnesota than [in] most other states.”

Culprit No. 1 is oil. Despite railroads’ protestations to the contrary, regulators, state officials, and shippers affected by delays insist that oil trains out of Canada and North Dakota have wreaked havoc with freight traffic.

“To have an industry go from a handful to half a million carloads overnight is virtually unprecedented,” explains longtime industry analyst Anthony Hatch. “This industry is not like an airline that can move fixed assets around to respond to demand.”

And unlike grain or coal, which can sit around indefinitely, there’s nowhere to put the oil, so it has to move. “Crude [oil] trains have two advantages,” says Christianson. “You have to take the oil or production stops. Wells aren’t easily turned off. Also, the railroads were being paid more to move crude.”

BNSF spokesman Amy McBeth did not respond directly to Christianson’s pricing allegation, but noted the railroad does not favor one commodity over another and strives to move all the goods it can.

And oil trains are not the industry’s most lucrative business anyway. “There’s nothing more profitable,” says Hatch, “than a grain shuttle train.”

No railroad was criticized more for delays moving grain than Canadian Pacific. “CP did not favor the movement of any one commodity over any other,” says spokesman Andy Cummings. “CP successfully implemented a new grain-car ordering system. The implementation of the program was highly successful in bringing focus to our customers’ needs while driving efficiency and velocity in grain movements.”

Crude oil accounts for 1.6 percent of total carloads moved by rail, according to the American Association of Railroads; still, six to seven oil trains per day move through Minnesota.

Why is so much oil moving by train? Because no pipeline capacity exists to keep up with the growth of northern-tier oil pumping, and may never do so, given the opposition many pipeline plans face from communities and land owners. Pipeline capacity would have to grow 150 percent to accommodate the oil moving by rail.

Last year, oil (and the fracking sand required to drill for it, mostly shipped across Minnesota from Wisconsin to North Dakota) was only a piece of the puzzle. Strong grain harvests, and the tendency of agricultural interests to hold grain as they wait for an optimal price before shipping, meant gluts beyond the usual seasonal demand. “Last year,” says Christianson, “the railroads couldn’t move half the grain waiting to go to market.”

But strong harvests only tell half the story. “Genetics and farm management have caused big jumps in output per acre,” Christianson explains. And the Upper Midwest’s commodity of choice has changed as well.

“I drove U.S. Highway 14 west from Watertown [Minnesota],” recalls Mark Wegner, president of the Twin Cities & Western Railroad. “In 1999 it was wheat all the way to Pierre. Today it’s all corn.” Corn produces four times the output per acre as soybeans or wheat.

Wegner also identifies coal, much of it shipped to Asia from eastern U.S. mines, as a little-discussed part of the national freight glut. Christianson adds iron ore and oceangoing container traffic (mostly imports) as added factors in the state.

The winter of their discontent

Then winter hit.

Once temperatures reach a designated benchmark of cold (usually –10 degrees), freight trains must be halved in length to maintain the reliability of their air brakes. This happened repeatedly during the 2013-14 polar vortex winter, so double the crews were required to move the same amount of goods; imagine being asked to double staffing at your business overnight.

Even in normal weather, traffic gluts slow trains, and the domino effect is substantial. A drop of 1 mph in average train speeds, says Christianson, equates to a 3 to 4 percent loss of utility of physical plant.

The railroads are even seeing new business from competitor modes. “Trucking companies are in bad shape,” wrote longtime financial industry/railroad analyst Fred Frailey this winter in the trade magazine Trains. “They have an ongoing driver shortage, and new hours-of-service rules will restrict how far drivers take their rigs during a workday.”

The impact: “Over the long run, more and more traffic that went by truck is going to rail,” says Christianson. “Trucks are increasingly restricting hauls to under 250 miles because they don’t have crews.”

Only the perennially troubled rail industry could find such struggle in largesse, but that goes to its unique history. “We have the situation today because this industry,” says TC&W’s Wegner, “has spent most of the last century cutting infrastructure to cut costs.”

A century of decline

The Chicago World’s Fair of 1933, dubbed “A Century of Progress,” was dominated by rail exhibits and themes, befitting the nation’s great rail hub. Had it looked out a century, it might not have dubbed the forward-looking fair as it did.

TC&W’s Wegner traces the start of the rail industry’s slide, intriguingly, to before the Depression, “when the road network began being built out in earnest,” he says. “The last line built in Minnesota was the Luce Line in the 1920s, and the fundamentals of the industry were already in decline.”

Still, empire builders were laying rail until Minnesota’s rail mileage peaked in the 1930s, at approximately 9,500 miles. There was an especially dense network of lines across southern Minnesota to carry grain to the Twin Cities for milling. Rails across the state’s north, mostly built by James J. Hill’s lines (Northern Pacific, Great Northern), were parts of a network to develop the hinterlands to the west.

The Panama Canal represented the first hit to the transcontinental railroads, then the Depression hit the entire industry, pushing most railroads into bankruptcy. World War II provided an illusory prosperity brought on by temporary industrial and passenger demand. That was followed by free-fall.

Widespread postwar ownership of cars hit passenger trains first, but the 1960s interstate highway system continues to serve as an enduring subsidy to trucking. “Trucks were more flexible,” says Wegner. “You didn’t need a rail coming into your business. If I’m a creamery in Woodstock, Minnesota, it’s much easier to fill a truck than a freight car.”

Wegner says truck rates, service and operating rules were less restrictive than railroads’, whose pricing and operations were controlled by a federal agency, the Interstate Commerce Commission (ICC), until 1980.

In the 1960s and ’70s, railroads sought to abandon the many lines that couldn’t compete with cars and trucks. Stymied by state and federal regulators, they gave up maintenance, which depressed acceptable speeds, which sunk traffic further, eventually facilitating a de facto abandonment.

It took the industry two decades following 1980s deregulation to right its ship. High fuel prices and increasing regulation of trucking are major factors finally bringing shippers back to rail.

Yet some of the industry’s unpreparedness for prosperity is puzzling. Only today, faced with government mandates, says Christianson, and nearly a century after technology allowed it, is Canadian Pacific signaling its ex-Soo Line main line from the Twin Cities to the North Dakota border. It is the longest “dark” stretch of mainline rail in the U.S., meaning trains traveling across it do so only with verbal permissions separating trains.

 

Fixes come at a price

As 2015 plays out, the storm has mitigated. This past winter was not as cold, with fewer days when railroads had to operate with halved trains. The plummeting price of oil and declining global industrial demand has reduced fuel commodity shipments to more manageable levels. Though fewer Bakken wells are operating, oil output is yet little changed. The harvest remains a question mark, but corn will have less competition.

Glischinski says the Twin Cities are regarded second only to Chicago as a choke point for rail traffic in the nation’s midsection. The media and government officials have spotlighted the region’s bottlenecks (see “5 Bottlenecks,” page 3). The industry is being urged to invest in infrastructure and is responding.

“It takes a long time to train people to run trains and to buy equipment to operate them,” says Glischinski. “The railroads failed to invest early enough; there wasn’t enough forward thinking.”

One railroad that did think ahead was Union Pacific (UP), a small player in Minnesota, which learned from operational problems following mergers with neighbor railroads two decades earlier. UP had crews on furlough and 600 locomotives in storage that could be called in on short notice during the 2014 crisis, says MnDOT’s Christianson. “BNSF, CP and Canadian National had no slack.”

Analyst Hatch says the railroads have seen the light, but expectations need to be kept in check. “I’m not saying they are blameless, but demand planning is extraordinarily difficult,” he says. “It’s hard to create personnel surge capacity in a place like North Dakota when the oil industry is paying the wages they do. But it’s clear the next generation of railroad management will have to get comfortable with some excess labor capacity.”

BNSF has not followed UP’s model, but says it has done substantial hiring for its “Northern transcon” line and is investing $6 billion nationally and $326 million in Minnesota alone this year, plus millions more in Wisconsin and North Dakota to improve capacity and ease bottlenecks. Double-tracking of one of its main lines between Minneapolis and St. Paul will more than double its capacity. It’s also investing in locomotives and labor to better meet demand surges, says the railroad.

Rail capacity improvements often require land or reactivating now-quiet rights of way, and some of the efforts are creating controversy.

Too much traffic and a lack of yard capacity in north Minneapolis led CP and BNSF to pursue a connection from CP’s main line (for St. Paul-bound trains) to a BNSF branch at Crystal. The connection would have sent oil trains through Theodore Wirth Park and increased rail traffic through parts of the metro that usually see very little. Community opposition was quick to form, causing Hennepin County to move to buy the land before BNSF could build on it.

Said Hennepin County Commissioner Mike Opat in the Star Tribune: “We’re going to put the full weight of the county behind ensuring” the railroads can’t acquire the land for the connector.

Trains’ Frailey reported in January that even though railroads plow 20 percent of each dollar of revenue into capital spending, only 14 percent of it went to capacity expansion last year—less than 3 percent of total revenue (see “Hey, Big Spender,” above).

It’s the legacy of a century of retrenchment for a business whose basic model was obsolete at its peak of preeminence. Rail’s reliance on volatile commodities beset by price spikes and quick collapses has left it gun-shy. “Trying to forecast ROI five years out,” says TC&W’s Wegner, “is simply a moving target.”

Then there is the massive cost of infrastructure. The standard metric is $1 million a mile to build, and roughly $13,000 a year to maintain each mile of track.

Hatch notes that the railroads earned an ROI of 4 percent through much of the 1970s and ’80s while needing to return 15 percent of earnings just to keep their physical plant in good order. “You can’t build too much,” he notes, “because your investors won’t put up with it. The issue is matching cap ex with a 30- to 50-year life and demand planning. If most of your business is ag and oil, the two most volatile commodities out there—good luck.”

It also comes down to a bigger question: Whether the railroads are ready to take the opportunity the nation is offering—to reassert their role as the primary conveyer of commerce.

“Railroads must decide whether they want to have a growth industry or just muddle along, advancing by inches,” says Frailey. If the answer is “ ‘Yes, we want to be a growth industry,’ then it’s going to require a lot more investment, a big degree of risk and creative thinking.”

“The railroads are definitely entering a renaissance,” says Hatch. “The opportunities are immense. But they are being asked to build the church for Easter Sunday.” TCB

60%

Single tracking of double tracked main lines reduces capacity by roughly 60 percent, meaning many of the remaining lines in the state carry well below the capacity they once did.

Missing Rail Delays Commuters

>>> Northstar commuter rail’s chronic underperformance is a consequence of the 1980’s single-tracking of eight miles of BNSF main-line track west of Big Lake. Northstar’s route is frequently so congested with delayed freight trains that commuter runs are stuck behind or waiting for them to clear the line.

>>> Had a thinly used Burlington Northern branch line not been pulled out to facilitate the construction of Highway 169 in 1984, the Twin Cities & Western would have had a viable alternate route off the sensitive Kenilworth Corridor Southwest LRT route.

50 Years of Retrenchment

1. The Milwaukee Road, now part of the Soo Line/Canadian Pacific system, tore out one of its tracks between Minneapolis and Aberdeen, S.D., after World War II. In 1989 it single-tracked its main line through Winona and LaCrosse to Milwaukee.
2. The Great Northern (part of BNSF) had two separate lines from the Twin Cities to Fargo, but abandoned one in the 1980s. It single-tracked its main line through the North Dakota oil regions in the 1970s and 1980s. Its Midway subdivision in the metro area was reduced from four tracks to one.
3. The Northern Pacific (part of BNSF) single-tracked a portion of its main line from the Twin Cities to Fargo in the 1980s and tore out its line to Duluth in 1976.
4. The Chicago & North Western (C&NW, now part of Union Pacific) abandoned one of its two tracks from MSP to Madison, Wis., via Eau Claire in the 1960s. Its line to Duluth was abandoned in 1980.
5. The main lines of the Chicago Great Western and Minneapolis & St. Louis were abandoned in the 1980s by purchaser C&NW.
6. The Soo Line (part of Canadian Pacific) abandoned its line from the Twin Cities to Duluth in the 1980s.

The 5 Biggest Rail Bottlenecks

A. BNSF Big Lake to Becker
This stretch from the Twin Cities to St. Cloud was shared by the Northern Pacific and Great Northern for decades. Their successor, the Burlington Northern, reduced it from two to one track in the 1980s as the industry merged and consolidated. Heavy with oil traffic, the eight-mile gap in double-track rail is a choke point on BNSF’s main line to the Pacific. BNSF has begun a project to restore the eight miles of double track.
B. BNSF in Northeast Minneapolis
The south end of BNSF’s Northtown Yard is a choke point for rail entering the Twin Cities. Canadian Pacific trains bound from Canada to St. Paul and Chicago plus BNSF traffic to Minneapolis pass through here. There’s simply too many trains (many carrying oil) and not enough yard capacity, say local experts. One solution—to divert CP trains to a BNSF line through Wirth Park—stirred up a hornet’s nest of public and government opposition.
C. Hoffman Avenue
All rail traffic entering or leaving the Twin Cities from the south and east passes through this choke point east of St. Paul Union Depot. Insufficient yard capacity and nearby wetlands mitigate against an easy solution.
D. BNSF Midway Sub
This line carries much of the traffic passing through the Twin Cities. Reduced during the downsizing era from four tracks to one (two in places), BNSF is investing this year in restoring two through-tracks.
E. Canadian National’s Superior Slog
This bottleneck where Superior and Duluth meet slows down CN’s entire Chicago to Canada main line. CN has embarked on a multi-year project to double-track the line and smooth curves that slow trains.

Adam Platt is TCB’s executive editor.