STRATEGIC CONSULTING SERVICES Update of the Freight Rail Bottom Line Report: Continuing Study of Freight Rail Supply Meeting Demand Briefing for SCORT Fort Worth, Texas September 10, 2015

1 | Revisit Premises of 2002 Freight Rail Bottom Line Report, Examine New Issues SCORT Premises 1.Private railroads are not responsible for solving national capacity issues. Railroads respond to market forces, which may not necessarily provide an incentive to add capacity at a pace to meet demand. 2.Rationing of capacity will impact some shippers worse than others 3.Public private partnerships are valuable capacity enhancing tools 4.State DOT’s can further develop and implement performance measures to ensure effective PPP’s 5.Conclusions of the 2002 Freight Rail Bottom Line Report are basically true, namely that relatively small additional investments in the freight rail system can be levered to provide relatively large public benefits

2 | Study Tasks Work Item #1: Proposed changes to the Scope of Work Work Item #2: Review of the 2002 Freight Rail Bottom Line Report –The railroad industry now and then –The economy now and then Work Item #3: Railroad Share of Freight Movement –Charting over the past 25 years and causes of shifts –Implications for the future

3 | Study Tasks, Continued Work Item #4: Impacts of railroad market share –Proposed metrics used to assess impacts –Impacts from increasing rail modal share/disbenefits from decreasing rail modal share –Projected impact of forecast changes in rail modal share, impacts of increases 1%, 3%, 5% over forecast Work Item #5: Which industries most likely impacted by rail capacity constraints

4 | Study Tasks, Continued Work Item #6: Railroad public private partnerships for capacity projects –Overview of types of capacity improvements –Assessing the economic need for a capacity project –Benefit calculation techniques –Capacity models –Performance measures –P3 case studies Work Item #7 and #8: Draft and Final Report

5 | SCORT Study Tasks and Status Work Item 1: Critique of SCORT Study Proposal Work Item 2: Review of the 2002 Freight Rail Bottom Line Report Work Item 3: Analysis of Railroad Share of Freight Movement Work Item 4: Impacts of Expected Railroad Share of Transport Market Work Item 5: Industries most impacted by Rail Capacity Work Item 6: Parameters for State- Railroad PPPs for Capacity Projects Work Items 7 and 8: Draft and Final Report Are Here Began June 2015 End June 2016

6 | Themes from Work Item 2: Railroad Industry then and Now Rail traffic –Tons, carloads below pre-recession levels, but ton-miles at an all-time high –Coal, lumber, and automotive down, but intermodal, crude, ethanol, sand up Improved financial performance of Class I railroads –Operating ratio decreased from 88 to 70 percent –Revenue per ton-mile up by 35 percent in real terms –Railroads found to be revenue adequate per STB –Capital investments nearly doubled between 2000 and 2014 –Strong financial performance with the backdrop of a recession

7 | Themes from Work Item 2: Railroad Industry Then and Now, Continued Short lines –Lower carloads per mile –Slight increase in revenue per mile, but uncertain whether revenue increased faster than costs Performance –No improvement in train speeds –More efficient use of inputs, but higher input costs Intermodal developments –Experiments with hub and spoke system, made possible by wide span gantry cranes –Less reliance on trans continental traffic

8 | Themes from Work Item 3: Railroad Modal Share Flat modal share since 1995 in tons Increase in modal share by ton-miles, mostly at the expense of pipeline, water Modal share influenced by changes in commodity flows –Shift to PRB coal favored rail modal share –Greater use of grain for domestic consumption reduced rail modal share –Reduced share in ethanol because new ethanol plants are closer to consumption areas

9 | Themes from Work Item 3: Railroad Modal Share, Continued Faster growth in intermodal, unit train, slower growth in commodities served by manifest Evidence that in certain markets, investments have made a difference Railroads have been effective at exploiting new opportunities Slow growth of bulk commodities could drag down rail market share somewhat, but no major shifts

10 | Next Task Work Item 1: Critique of SCORT Study Proposal Work Item 2: Review of the 2002 Freight Rail Bottom Line Report Work Item 3: Analysis of Railroad Share of Freight Movement Work Item 4: Impacts of Expected Railroad Share of Transport Market Work Item 5: Industries most impacted by Rail Capacity Work Item 6: Parameters for State- Railroad PPPs for Capacity Projects Work Items 7 and 8: Draft and Final Report Up Next

11 | Questions? Comments?