R AILROADING : F IFTY Y EARS OF C HANGE Presented to: The 50th Transportation Law Institute By: By: John K. Fiorilla, Esq. Equity Shareholder and Chair, Transportation Group Capehart & Scatchard, P.A. (856) 914-2054 jfiorilla@capehart.com November 10, 2017 This presentation provides a description of the federal legislation which changed the railroad industry in the last 50 years.
The 50th Transportation Law Institute November 10, 2017 By: John K. Fiorilla, Esq. Equity Shareholder and Chair, Transportation Group Capehart & Scatchard, P.A. (856) 914-2054 jfiorilla@capehart.com R AILROADING : F IFTY Y EARS OF C HANGE “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, …” -- Charles Dickens, A Tale of Two Cities Dickens’ words certainly describe the last fifty years in American Railroading. I began my love affair with railroads at age 14 (that was in 1964). I commuted to high school from my hometown of Paterson, N.J. to Seton Hall Prep in South Orange by commuter train and bus. To this day I remember my first day commuting, standing on the platform at South Paterson Station awaiting the Newark Branch Local on the Erie-Lackawanna Railroad. The relatively small RS3 Alco diesel locomotive pulling a string of historic Stillwell coaches seemed gigantic and powerful to me. I’ve been hooked on railroads ever since. By 1967, fifty years ago, things began to happen which would begin changes so earth shaking in the railroad business that no one at the time would predict that the end of an era was upon us. On March 22, 1967 The Central Railroad Company of New Jersey, a/k/a Jersey Central or CNJ, which served the Statute of Liberty for both freight and passengers and whose corporate emblem was a silhouette of the Statute of Liberty from the rear (that’s how us Jersey folks see the statute) declared bankruptcy. CNJ, originally owned by robber baron Jay Gould, had been bankrupt before, so many - 2 -
times in fact that when describing the bankruptcy you were required to use the name of the Trustee. This would be the Timpany Bankruptcy not to be confused with the Gardner Bankruptcy, the Shoemaker Bankruptcy or the Knox and Kean Bankruptcy. I know this history because in 1975, I was the last attorney ever hired by CNJ. The collapse of Eastern Railroading would follow precipitously in the next few years with Penn Central, Lehigh Valley, Reading, Lehigh & Hudson River, Ann Arbor, Erie-Lackawanna and their subsidiaries following suit. The cause of the problem was over regulation of rates, routes and services and the growth of the interstate highway system. So, Congress had to get busy and it wrote several pieces of legislation. In 1970 the Rail Passenger Service Act created the National Railroad Passenger Corporation (known today as Amtrak) and relieved the rail carriers of the responsibility for intercity and interstate passenger services. Passenger service had become a terrible financial burden and was completely regulated by the Interstate Commerce Commission and at the time state public utility commissions. The railroads could not change routes, rates or, in some cases, even equipment without the permission of the ICC and/or state PUC’s. Railroads gave Amtrak the rights to operate on their tracks, sold them their ancient equipment and initially lent them their employees. For this the railroads would be relieved of all intercity/ interstate passenger obligations. Amtrak, a corporation of the District of Columbia, is not publicly traded and the majority of its stock is held by the federal government. Its board consists of the President of Amtrak, the Secretary of Transportation and eight other individuals appointed by the President of the United States and confirmed by the Senate. In 1973 The Regional Rail Reorganization Act completely reorganized all the eastern bankrupt railroads and their bankrupt and non bankrupt subsidiaries. The 3R Act, as it would be called, formed the Consolidated Rail Corporation (Conrail). The Act created the United States Railway Association (USRA) a federal corporation which oversaw the breakup of the eastern lines and providing to the bankrupt railroads net liquidation value for all of their properties which were “used or useful” in rail transportation. As a 25 year old attorney I represented CNJ at USRA, helping to decide which real properties, administrative properties and railroad cars and locomotives would be conveyed to Conrail. The Final System Plan which USRA issued would determine this. In order to make official the reforms and policies that Congress wanted to implement, the Congress in 1976 enacted Railroad Revitalization and Regulatory Reform Act (RRRRA) or 4R Act. It was signed on February 5, 1976 by President Ford. It was the law which would codify the final system plan of the USRA. The 4R Act would provide the means to rehabilitate and maintain the physical facilities, improve the operations and structure, restore the financial stability of the railway system of the United States, and promoted the revitalization of such railway system, so that this mode of transportation will remain viable in the private sector of the economy and will be able to provide energy-efficient, ecologically compatible transportation services with greater efficiency, effectiveness, and economy, through - (1) Ratemaking and regulatory reform; (2) The encouragement of efforts to restructure the system on a more economically justified basis, including planning authority in the Secretary of Transportation, an expedited - 3 -
procedure for determining whether merger and consolidation applications are in the public interest, and continuing reorganization authority; (3) Financing mechanisms that will assure adequate rehabilitation and improvement of facilities and equipment, implementation of the final system plan, and implementation of the Northeast Corridor project; (4) Transitional continuation of service on light-density rail lines that are necessary to continued employment and community well-being throughout the United States; (5) Auditing, accounting, reporting, and other requirements to protect Federal funds and to assure repayment of loans and financial responsibility; and (6) Necessary studies. The 4R Act made the following policy statements: It is declared to be the policy of the Congress in this Act to - (1) Balance the needs of carriers, shippers, and the public; (2) Foster competition among all carriers by railroad and other modes of transportation, to promote more adequate and efficient transportation services, and to increase the attractiveness of investing in railroads and rail-service-related enterprises; (3) Permit railroads greater freedom to raise or lower rates for rail services in competitive markets; (4) Promote the establishment of railroad rate structures which are more sensitive to changes in the level of seasonal, regional, and shipper demand; (5) Promote separate pricing of distinct rail and rail-related services; (6) Formulate standards and guidelines for determining adequate revenue levels for railroads; and (7) Modernize and clarify the functions of railroad rate bureaus. Conveyance day was put off several times until on April 1, 1976 all the properties were conveyed by court order to Conrail. In Newark, at CNJ an era had ended, a party (really a wake) was held for the railroad on the evening of March 31, 1976 by its employees. There was a lot of reminiscing and crying. Some of us had determined to ride into Conrail on its first passenger train which would leave Roselle Park Station at 12:01 AM on April 1. However, the torrential rains and hail that night cancelled that trip. It was an ominous beginning for Conrail. In 1980, the Congress deregulated the business of railroad when it passed the Staggers Rail Act of 1980. The most important features of the Staggers Act were the granting of greater pricing freedom, streamlining merger timetables, expediting the line abandonment process, allowing multi-modal ownership, and permitting confidential contracts with shippers. - 4 -
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