(The following story by Ed Marcum appeared on the Knoxville News website on December 7.)
KNOXVILLE, Tenn. — It’s just one detail in the federal government’s $700 billion financial bailout, but a tax credit extension included in that recent legislation should be a boon to short line railroads and the companies they serve, including an active short line extending from Knoxville’s center city industrial area to East Knox County’s industrial parks.
At least that’s how Pete V. “Doc” Claussen, vice president of asset management for the Knoxville & Holston River Railroad, sees it.
The tax credit, approved as part of the Emergency Economic Stabilization Act of 2008, will help the railroad forge ahead on a project with PSC Metals Inc. to consolidate all that company’s scrap metal shredding operations in Forks of the River Industrial Park and provide direct rail service from there to the Gerdau Ameristeel steel mill in Lonsdale.
The project has been on hold until the legislation passed, Claussen said.
“We have been sort of keeping our powder dry because we know we would have to build a runaround out there,” he said.
The way the track is now configured, the engine of a train serving the PSC site at Forks of the River would have to back its cars into the site and would be facing the wrong way to serve other Knoxville & Holston River customers in the industrial park. The turnaround would allow the engine to turn to get into position to make its other stops.
The railroad estimates it will cost about $200,000 to build the turnaround. At this cost, Claussen said the project probably would have been done eventually, but the tax credit allowed the railroad to move it atop its list of projects. The legislation gives railroad companies a tax break equal to 50 percent of their gross expenditures on track maintenance during the course of a year. These expenses can include track maintenance, roadbeds, bridges and other structures.
So, Knoxville & Holston River Railroad will have to fund the $200,000 project but will recoup $100,000 of that in tax savings.
And, while the tax credit is unrelated to the PSC Metals project, it is indirectly helping that company as well. Don Holt, PSC general manager, said the company would have built its facility at Forks of the River whether the railroad built its turnaround or not, but the turnaround will make it easier and more efficient to get scrap metal from PSC to the Gerdau Ameristeel steel mill on Tennessee Avenue.
Gerdau Ameristeel is the biggest single customer for both PSC Metals and the Knoxville & Holston River Railroad, and with a smelting capacity of 500,000 tons per year, the mill has a healthy appetite for scrap metal.
PSC Metals, which has metal shredding operations on Central Street in Knoxville and in Rockwood, plans to replace both of those operations with a facility it will build on 25 acres in Forks of the River Industrial Park, using more modern equipment, Holt said. The 6,000-horsepower shredder it plans to use there will more than replace the output of the older shredding operations.
“Our shredders in Rockwood and Knoxville together do about 10,000 tons a month, and the new shredder will do about 16,000 tons a month,” he said.
The PSC Metals locations on Central and in Rockwood will remain in operation but will only receive aluminum and other nonferrous metals, Holt said.
Anne Duke, spokeswoman for the American Short Line and Regional Railroad Association, said projects around the country similar to the Knoxville & Holston River Railroad’s are getting a boost from the tax credit. Richard F. Timmons, ASLRRA president, said the projects are helping local economies as the short line railroads form a link carrying goods between local businesses and major railroads like CSX and Norfolk Southern.
“This is a phenomenon that has grown as a niche business and has expanded to 553 small railroads across the country in 49 states, operating on over 50,000 miles of railroad,” Timmons said.
Short lines were an unanticipated result of an attempt by Congress to remedy an ailing railroad industry in the 1980s, Timmons said.
Hamstrung by regulations that forced them to keep operating unprofitable rail routes at a time they were facing increasing competition from air and truck freight service, the railroads were at the point of collapse in the 1960s and 1970s, Timmons said.
After several minor initiatives failed, Congress passed the Staggers Act in 1980 that, among other things, allowed the railroads to divest themselves of unprofitable routes. This sparked a huge consolidation of railroad companies and an unexpected, though welcome, development as a host of entrepreneurs sprang up to buy the unprofitable stretches of rail 20-30 miles in length that the railroads found too short to bother with, Timmons said.
One of those entrepreneurs was Pete Claussen, Doc Claussen’s father. A longtime railroad buff, Pete Claussen was a TVA division director and Knoxville lawyer before founding Gulf & Ohio Railways Inc. in 1985. The Knoxville & Holston River Railroad is one of eight short line railroads the company operates in Tennessee, North Carolina and Alabama.
Gulf & Ohio Railways employs 80 workers, owns 250 miles of track, has 231 rail cars and operates 51 locomotives, including the vintage Three Rivers Rambler steam excursion train.
One issue Claussen and others faced from the start was the need to invest huge amounts of capital into the rail lines they bought.
“Since these little branch lines have been marginal for a long time, the class I’s (major railroads) have deferred maintenance on them for a substantial period of time,” Doc Claussen said.
Track is very expensive, he said. As just one example, the Knoxville & Holston River Railroad decided to use three sections of track at its Knoxville Locomotive Works train yard off Central Street to store ethanol tank cars. This property had been part of the old Southern Railway’s Coster Shop facility, and the track sections had been designed for holding unloaded freight cars of about 60,000 pounds, not tank cars rated to hold 196,800 pounds.
The Knoxville & Holston had to spend $85,000 to add extra cross ties to the tracks so they would support the weight, and the tax credit will help with that expense, Doc Claussen said.
During the 1980s and 1990s, the ASLRRA lobbied to get some form of federal relief for the short line railroads. Finally, in December 2004, Congress passed the initial version of the tax credit legislation, effective from Jan. 1, 2005, to Dec. 31, 2007. The result was 275-300 companies nationwide taking advantage of the credit to make $800 million in railroad improvements, “and that meant jobs all over the country as you had this ripple effect,” Timmons said.
The short line trade organization lobbied to get the tax credit extended, and it was not certain that would happen until Congress approved it as part of the “bailout” bill that is effective through the end of 2009. With more companies aware of the tax credit now, Timmons expects more use of it will be made. This will help grow an industry that already employs 20,000 people across the country, serving 14,000 companies, hauling 14 million carloads annually and taking 33 million trucks off the nation’s highways, Timmons said.
He had no figures for the economic impact of short line railroads on communities but said they are vital in keeping local economies moving and that without them, delivery of goods would shift to trucks with higher freight costs.
“When you sat down for your Thanksgiving meal this year, everything on your table, from the Cool Whip, cranberries, turkey, mashed potatoes – just name it, and a short line railroad touched it in some way,” he said.