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Oregon DOT Willamette Valley Intermodal Proposals Background and Summary Comparison

1/9/19

Background

ODOT received two proposals in response to the grant program for a Willamette Valley rail

intermodal terminal and service that would provide Oregon shippers with efficient service to and

from the Ports of Seattle and Tacoma.

The Linn Economic Development Group (LEDG) proposal envisions a Mid-Willamette

Valley Intermodal Center (MVIC) at Millersburg, with service over Union Pacific (UP)

managed by Northwest Container Services (NWCS).

The Oregon Port of Willamette (OPW) proposal envisions an intermodal terminal at

Brooks, served by the Portland & Western (P&W) railroad linked to either BNSF or UP

at Portland.

The Tioga Group was asked to evaluate and compare these two proposals. Choosing between

them was neither easy nor obvious.

Both proposals incorporate innovative approaches to rail intermodal container service

linking the Willamette Valley with the Ports of Seattle and Tacoma.

Both proposals appear technically and operationally feasible, if the required agreements

can be reached with the railroads.

Project sponsors and entrepreneurs are optimistic by nature, and although they take

different analytic approaches, both proposals include overly optimistic economic and

volume projections.

Both projects are aligned with grant program goals. Both projects would, if successful,

provide transportation and economic benefits to Willamette Valley importers and

exporters, even if the benefits were somewhat less than projected.

Neither project is likely to be commercially viable unless some participant or group –

most likely the ocean carriers – is willing to cross-subsidize the operation and absorb

some of the cost.

The challenges to the MVIC and OPW proposals are thus more institutional than technical. With

the right institutional relationships and on-going financial support, either project could succeed.

Without operational cross-subsidy, neither project would be able to compete with existing truck

or rail options.

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Context

The Millersburg and Brooks intermodal terminal proposals share an unusual Oregon

transportation context that affects their ability to compete with alternatives and attract significant

cargo volumes.

Intermodal vs. Truck Breakeven Distance

Under ordinary circumstances rail intermodal services begin to be competitive with motor

carriers at trip lengths between 400 and 750 miles. This conventional wisdom is supported by

analysis provided in the MVIC project proposal, illustrated in Figure 9 of that report and

repeated below as Exhibit 1.

Exhibit 1: Conventional Intermodal Breakeven Distance Illustrated

A very few examples exist of ongoing rail intermodal operations under 400 miles. In each case,

however, there are special circumstances that creates a viable combination of service and price

features. In most cases, the operations are effectively subsidized by states, public ports, or

economic development agencies. The distance from the Willamette Valley to Seattle/Tacoma is

about half the normal intermodal breakeven distance, so some source of economic subsidy is a

likely prerequisite for success of either proposed intermodal service. Neither can be competitive

with trucks or other operations while recovering their full costs.

Critically, any estimate of rail costs or price will be superseded by actual negotiations. In

the end, what the railroads seek in negotiations matters more than any outside estimate. Both

project proposals include rail and drayage service cost estimates. The estimates are not

adequately documented, and Tioga does not consider either estimate valid based on information

reviewed to date. Tioga provided independent estimates in the proposal reviews, but although we

believe those estimates are more realistic, they are still just outside estimates.

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The commercial viability of either proposal will be dictated by the outcome of negotiations,

and cannot be definitively judged or verified from proposal materials.

Current Options

Shippers, shipper associations, or third parties contract with ocean carriers for international

transportation services. Typically these contracts require the shipper to deliver the cargo to a

marine terminal in a port city. This is most often done by motor carrier, a drayage firm. In some

cases the customer might arrange a combination of motor carrier and rail services to make the

delivery if warranted by economics.

In some cases the ocean carrier will accept the container at an alternate location and arrange

motor carrier and/or rail transport to the marine terminal. Many ocean carriers that call at Seattle

or Tacoma offer to pick up and deliver containers in Portland via the NWCS rail service. These

arrangements enable ocean carriers to serve the Oregon market without calling at Portland.

As a result, Oregon importers and exporters have two main alternatives to move containers to

and from the Ports of Seattle and Tacoma:

Over-the-road trucking (drayage) between customer facilities and port terminals

in Seattle or Tacoma.

Over-the-road trucking between customer facilities and the NWCS terminal at

Portland, combined with NWCS rail service between Portland and the

Seattle/Tacoma port terminals (or the BNSF service at Terminal 6).

Truck Drayage Options

Over-the-road truck drayage is typically performed by specialized motor carriers with either

employee drivers or owner-operators functioning as sub-haulers under contract. Drayage tractors

must meet port emissions requirements and be equipped with RFID tags. Drayage drivers need

familiarity with port terminals and processing, and must have a Transportation Worker

Identification Credential (TWIC) card to enter the terminals. Some shippers operate their own

trucks for drayage.

Most port drayage operations are covered by the Uniform Intermodal Interchange and Facilities

Access Agreement (UIIA), a standard industry contract governing the working relationship

between motor carriers and intermodal equipment providers (IEPs, principally ocean carriers and

chassis pools). Under the terms of the UIIA, an intermodal container movement is ordinarily a

round trip. For imports the motor carrier:

Picks up the loaded import container at the marine terminal, on either a pool

chassis or a carrier-owned chassis.

Moves the container on chassis to the importer’s facility for unloading.

Returns the empty container on chassis to the marine terminal.

It is critical to note that under the UIIA, legal responsibility for the container is transferred

from the ocean carrier to the motor carrier, not to the importer. The motor carrier is

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therefore responsible for returning the empty container to the marine terminal within the

specified free time (usually a few days). Accordingly, drayage rates are ordinarily quoted as a

loaded/empty round trip. Drayage rates posted in the on-line Drayage Directory, for example, are

ordinarily round-trip rates.

The basic drayage rate may be modified by:

A fuel surcharge, typically calculated as a percentage of the base rate.

A chassis fee, passing through any chassis rental charges.

Wait or delay time, for excess time (typically over 2 hours) spent at the marine

terminal.

Accessorial charges for “super chassis” to move heavy containers, power supply

for refrigerated containers, etc.

Export moves are the reverse of import trips: the motor carrier pulls an empty container from the

marine terminal, moves it to the exporter for loading, and then moves the loaded container back

to the marine terminal in time for the outbound voyage.

With ocean carrier permission, motor carriers may source empty containers for exports or return

empty containers from imports at off-port container depots. There are container depots clustered

around the ports in Seattle, Tacoma, and Portland. It is possible, therefore, for a motor carrier to

pick up an empty container in Portland and then deliver the loaded container to a Seattle or

Tacoma port terminal. The motor carrier would ordinarily charge the same rate as if the empty

were sourced at the port. The NWCS terminal at Portland is also a container depot.

Drayage rates are more a function of time than of distance. Because drayage trips are usually

relatively short and drivers spend substantial time waiting at marine terminals or customer

locations, labor is a larger cost component than fuel. Rates are usually set empirically, based on

the motor carrier’s experience with the route, location, and parties involved. Actual drayage rates

quoted and paid over repeated transactions are therefore the best guide to costs. (The rate

examples in the Drayage Directory are spot rate quotes, and may not represent rates in actual

use.)

Drayage rate estimates are inherently unreliable, and the competitive reality will differ. Tioga does not consider the drayage estimates in either proposal to be reliable, for different

reasons in each case. While Tioga provided an independent method for estimating rates, those

results are still outside estimates. A comparison of existing drayage rates with alternatives

must also recognize the likelihood of rate cutting in response to new competition. Motor

carriers can be expected to reduce rates to defend their market share. A conservative approach

would therefore treat existing rates as an upper bound, and as an indication of one competitive

threshold to be met.

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Northwest Container Services (NWCS) Option

The NWCS operation moves containers between Seattle/Tacoma and Portland, a distance well

under the typical intermodal breakeven. It is one of the best known short-haul intermodal

services in North America, having operated since 1986.

The NWCS service permits ocean carriers that do not call at the Port of Portland to compete in

the Portland/Oregon market. Ocean carriers offer a Portland Bill of Lading for ocean shipping

priced higher than a Seattle or Tacoma Bill of Lading, with the additional cost at Portland

covering a portion of the ocean carriers’ cost for the rail movement. In the 2016 Oregon Trade

and Logistics Study, Oregon exporters typically cited a $300-400 difference between a Portland

Bill of Lading and a Seattle or Tacoma Bill of Lading. The cost difference is usually less than it

would cost the shippers to truck containers back and forth, so the NWCS option usually sets the

competitive price standard.

The service is unique in several respects:

Ocean carriers pay NWCS for the transportation service, not importers and

exporters. NWCS service is included in the price of a Portland Bill of Lading for

ocean service.

NWCS owns many of the railcars used in the service.

UP provides locomotives and crews to move NWCS trains between Portland and

Seattle or Tacoma via trackage rights on BNSF.

The ocean carriers charge customers less than the full cost of NWCS service,

effectively subsidizing the operation.

The NWCS terminal at Portland operates as a container depot, allowing motor

carriers to source and return empties there. This service provides an additional

revenue stream for NWCS.

The combination of drayage to Portland and NWCS to Seattle/Tacoma is therefore often

priced below the all-truck alternative, not because it costs less to operate, but because the

ocean carriers offer the service at below-market rates.

The ocean carriers subsidize NWCS operations in multiple ways:

The ocean carriers pay for any empty container moves required to maintain a

balanced depot inventory at Portland, so importers and exporters pay for only the

loaded move.

The ocean carriers absorb the lift and switching fees at the Port of Tacoma, which

are about $101.50 per container each way, or $203.00 round trip.

The ocean carriers also absorb drayage costs between the NWCS terminal at

Seattle and the Seattle marine terminals.

The NWCS operation may face two long term risks:

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While intense competition is the norm in the ocean carrier industry, numerous recent

mergers and intense cost pressure in that industry raise concerns that a Mid-Willamette

(or even Portland) rail service based on discounted rates may not be viable over the life of

the planned terminal investment. This risk is unavoidable in a volatile industry.

UP is currently implementing a comprehensive Precision Scheduled Railroading (PSR)

plan (Unified Plan 2020) to improve its profitability, and all of its current services are

under scrutiny. Unified Plan 2020 is unusually comprehensive and focuses on

elimination of relatively less profitable operations. In 2017, CSX went through a similar

process and eliminated intermodal service to some port cities, notably Mobile and New

Orleans. This UP initiative raises the profitability threshold for new services and for

continuing existing services. If the NWCS operation passes this increased scrutiny, this

particular risk will likely be mitigated for some time.

BNSF Option

BNSF recently started offering intermodal rail service to ocean carriers between Terminal 6 at

the Port of Portland and the Seattle/Tacoma port terminals. The service has been used by at least

two ocean carriers. To the best of Tioga’s knowledge, the BNSF service operates on the same

conceptual basis as the NWCS/UP service.

Container Reuse

The terms “match back” or “load matching’ have been recently applied to the practice of reusing

an empty import container for an export load. This is not a new concept. Motor carriers have

always had an incentive to reuse containers whenever possible. The ability to reuse containers is

limited by several factors:

Container ownership – the import container must be reused for an export load via

the same ocean carrier. Containers are physically interchangeable, but not

commercially interchangeable.

Commodity compatibility – food-grade containers, for example, could not be used

for export hay or scrap metal. Most import container goods arrive in standard-

height containers, but hay exporters prefer high-cube containers for larger loads

and air circulation.

Motor carrier relationships – the exporter must have an interchange agreement in

place with the motor carrier who would reuse the import container. Most reuse

occurs between importer and exporter customers of the same motor carrier.

Timing – the export move must be made within a reasonable time after the import

container is made empty.

Location – to be efficient, the exporter must be located near the importer, or along

an efficient route.

Ocean carrier permission – the ocean carrier must explicitly permit use of the

empty import container for a new export bill of lading, and may need to extend

the free time accordingly.

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Limits on motor carrier interchange – interchange of containers between motor

carriers is rare, as it requires ocean carrier permission and legal interchange.

For all these reasons, reuse of empty import containers for export loads remains uncommon.

Most reuse outside of depots (“street turns”) occurs when a motor carrier knows

that a specific export customer can regularly use containers made empty by a

specific import customer. The motor carrier may routinely hold these empties for

reuse, with ocean carrier permission.

Most actual “reuse” occurs when the import drayage firm returns the empty

container to an off-terminal depot, and a second motor carrier subsequently uses it

for an export move to the port. In this case, there is no connection between the

two trips, but part of the return trip to the port has been avoided.

As noted above, when a motor carrier receives a container from a marine terminal, that motor

carrier is ordinarily obligated to return it.

Container reuse is inherently opportunistic, and cannot be planned as a general practice. The

limited information available suggests that, overall, import containers are reused less than 10%

of the time. The availability of container supply at an inland depot can promote and facilitate

reuse, but cannot guarantee reuse. Neither of the project proposals have offered a convincing

rational that would differentiate them in this regard, and expectations of reuse exceeding 10% are

not a reliable basis for financial projections.

Intermodal Pricing Dilemma

A complete apples-to-apples comparison of short-haul intermodal and truck operations costs

reveals that the intermodal option is more expensive (either round-trip or one-way, since the

costs are the same in both directions). This observation is consistent with every comprehensive

analysis to date, and with Tioga’s analysis of the proposed MVIC and OPW operations.

Depending on the assumptions and circumstances, the estimated “breakeven” distance at which a

rail intermodal service can equal truck costs ranges from 400–750 miles, but Tioga knows of no

comprehensive analysis suggesting that rail intermodal service can equal truck costs at the

distances contemplated in the MVIC and OPW proposals.

The fundamental problem is that intermodal service is by nature a compound trip, with

substantial costs at origin and destination that must be spread over a sufficient length of haul to

bring the overall cost down to a truck-competitive level. This inability to compete at short

lengths of haul is not due to any shortcoming of the Millersburg or Brooks proposals, and there

are no operational steps that either proposal could take to change this fundamental cost

relationship.

It is not usually sufficient for rail intermodal options to meet truck costs. Intermodal service is

usually slower, less convenient, and less flexible than truck service, and is often less reliable, and

must therefore be priced below the truck alternative to be fully competitive.

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The MVIC and Brooks services will not be able to compete with truck drayage or the

NWCS option unless they can be priced below cost. The below cost pricing must be

permanent, not just for an introductory period. Volume growth will reduce but not eliminate the

need for below-cost pricing. The existing NWCS operation can only compete with the drayage

option because the ocean carriers price it below cost, effectively subsidizing it.

Port Costs

The two proposals do not provide details of port costs at Tacoma or Seattle, which can be

substantial.

Port of Tacoma Costs

Intermodal rail service to marine terminals at the Port of Tacoma entails two costs:

Tacoma Rail switching costs for transferring intermodal cars between a UP or

BNSF mainline connection and the on-dock or near-dock rail transfer facilities

serving the port terminals. This cost is specified in Tacoma Rail’s Freight Tariff

TMBL8807-I, effective January 1, 2019, under Item 10100, as $51.00 per

platform for each loaded or empty intermodal rail car. That is the equivalent of

$25.50 per container for two containers on a double-stack platform. Tacoma Rail

also assesses a fuel surcharge per Item 1220, which adds to this fee.

The Northwest Seaport Alliance Terminals Tariff No. 300, effective June 30,

2018, provides for a $76 per container lift fee for the North and South Intermodal

Yards. Leased terminals have their own lift fees, but those fees are not published.

The combined cost for switching and lift at Tacoma is $101.50, plus fuel surcharge in each

direction (inbound or outbound). The cost could be higher at leased terminals.

Port of Seattle Costs

The cost for intermodal service to Port of Seattle marine terminals will depend on the

circumstances:

For service to/from UP’s Argo Yard or BNSF’s Seattle Intermodal Gateway, the

lift cost would be included in the rail rate. There will also be a drayage cost

between Argo and the marine terminals, averaging around $250 roundtrip.

For service to/from the NWCS terminal in Seattle the lift and drayage charges

would be part of the ocean carrier rate.

For service to/from the Terminal 18 on-dock yard there will be a lift fee, which is

not published.

Tioga recommends that ODOT require the sponsors of the selected proposal to revise their

cost estimates to include accurate figures for port costs, and to indicate clearly which party

would be expected to pay those costs.

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Railroad Commitment

There are three railroads that could reasonably be involved in the Millersburg or Brooks projects.

BNSF is a large, Class I railroad that owns the main line railroad north of Portland

serving Seattle and Tacoma.

Union Pacific (UP) is a large, Class I railroad that owns the main line railroad south of

Portland serving the MVIC site at Millersburg site. UP has rights to use the BNSF-owned

railroad north of Portland under a “trackage rights” arrangement.

Portland and Western (P&W) is an Oregon regional railroad and a unit of Genesee &

Wyoming, Inc. (G&W). G&W is a multi-billion dollar, multinational railroad operating

company with extensive rail intermodal experience. In North America the firm operates

115 short line and regional freight railroads in 41 states with more than 13,000 track-

miles.

Strategic rail access to Millersburg and Brooks is complex, with pros and cons for both terminals

as presented in Exhibit 2.

Exhibit 2: Rail Service

Terminal South of Portland North of Portland

Millersburg Union Pacific or P&W Union Pacific

Brooks Portland & Western Union Pacific or BNSF

Tioga views the following factors as most important:

The proposed MVIC terminal has direct access to both UP and P&W, while the proposed

Brooks terminal had direct access to P&W only.

The Brooks proposal asserts that interviews with railroad officials, ODOT, and

stakeholders “confirmed current capacity constraints on the UPRR mainline in the Mid-

Willamette Valley” which, if true, may make UP access south of Portland problematic.

This would be a matter to address in UP negotiations.

While a Brooks service would have access to UP or BNSF service north of Portland, the

proposal clearly anticipates a favorable arrangement with BNSF.

The Millersburg proposal is aligned with UP north of Portland. Its operating plan calls for

integration of its rail service with NWCS’s existing UP operations.

Any situation that involves two railroads will be more difficult to execute than a single

line service.

Both Millersburg and Brooks proposals have letters of interest from UP and P&W. Neither

proposal has any documentation of commitment to service, car supply, or rates.

Initially, Union Pacific wrote nearly identical support letters to both projects. Their only

promise was a willingness “to be part of the discussion moving forward.”

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Millersburg received a second letter that indicated UP viewed the facility design as

“conceptually acceptable” and made no “commitment on any specific commodity type nor

level of service.” The letter asserts a strong interest in continuing conversations.

P&W provided initial support letters for both projects and a very strong follow-up letter

for Brooks. P&W appears to favor the Brooks Proposal.

BNSF has not indicated support for either project.

The UP representative that signed the support letters has since left UP, and project sponsors may

have to re-establish a working relationship.

Tioga believes that the relative merits of rail access for both terminals cannot be properly

evaluated based on proposal information provided to date. A complete evaluation would

require details of signed agreements between the railroads and parties able to control

freight and sign those agreements.

One difficulty is that the two entities behind the proposals are not shippers, and cannot

realistically negotiate with the railroads for rates in return for volume commitments. The parties

that could negotiate with UP, BNSF, or P&W include:

NWCS.

The ocean carriers now using UP (via NWCS) and BNSF (at T-6).

A third party or broker (IMC/3PL) such as Hub Group, CH Robinson, or Alliance

Shippers.

A shippers association such as the Columbia River Shippers Association or the

United Shippers Alliance.

Note that railroads do not ordinarily deal directly with shippers for intermodal service. Virtually

all railroad intermodal service is conducted with ocean carriers, motor carriers, and IMCs/3PLs.

It may be unreasonable to expect non-shipper project backers to obtain railroad service and rate

commitments. It would not, however, be unreasonable to expect project sponsors to bring parties

that can negotiate with the railroads into the project at an early date.

The required railroad commitment has three parts:

A service commitment, notably train frequencies, expected transit times, etc.

A commitment to supply the needed rail cars (unless the operating entity, such as NWCS,

handles car supply).

A commitment to rates for loaded and empty containers, perhaps linked to annual volume

commitments.

Most ocean carriers already have rail contracts, possibly with both UP and BNSF. A contract for

Millersburg or Brooks service could be an extension of an existing contract. This may be

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unlikely, however, as neither terminal would be operated by UP or BNSF, and ocean carriers

would not commonly have existing contracts with P&W.

Union Pacific Unified Plan 2020

The two Willamette Valley projects are being planned during a period of institutional transition

at Union Pacific. On September 17, 2018 the Union Pacific announced its Unified Plan 2020, a

new operating plan that implements Precision Scheduled Railroading (PSR) principles. Unified

Plan 2020 launched on October 1st and will be rolled out in phases across the entire Union

Pacific rail network, beginning in the eastern third of the railroad.

In the railroad industry investors and financial analysts tend to judge railroads by their operating

ratio, the ratio of operating costs to revenue. UP, which historically enjoyed the industry’s best

operating ratio produced a third quarter 2018 (3Q18) operating ratio of 61.7%, the same as in

2017. In comparison, CSX’s 3Q18 operating ratio improved from 68.4% in 2017 to 58.7% in

2018 after implementing PSR. Canadian Pacific and Canadian National, which had previously

implemented PSR, had 3Q18 operating ratios of 58.3% and 59.5%.

These are embarrassing financial results for Union Pacific. The goal of PSR is to help Union

Pacific achieve a 60 percent operating ratio goal by 2020, on the way to eventually achieving a

55 percent operating ratio.

Unified Plan 2020 will likely create “headwinds” for a UP-dependent Willamette Valley

intermodal initiative. Unified Plan 2020 is scheduled to be implemented on the western third of

UP in 2019. Exactly what precision railroading entails can be debated. It generally consists of

improving rail service by the paring of complex and less profitable services in order to simplify

and speed up operations, which permits the railroads to improve service. UP2020 anticipates

massive layoffs, some of which have already occurred and more are planned. The strong

economy and truck driver shortage are facilitating this strategy. Under this system the financial

hurdle on UP for the continuation of any existing business or the addition of any new business

will be much higher than in the past.

Ocean Carrier Commitment

Ocean carrier commitment is the second critical element of success for the two proposals.

The NWCS operation (and presumably the BNSF T-6 operation) works because ocean carriers

absorb a significant portion of the cost to access the Oregon market while avoiding the cost of

calling directly at Portland. Nether the Millersburg nor the Brooks proposal will viable

unless the ocean carriers (or some other party as yet unidentified) are willing to do the

same at those locations.

Because the ocean carriers can already access the Oregon market via NWCS, there is an open

question regarding their motivation to absorb additional costs to extend service to Millersburg or

Brooks. With rare exceptions, the import and export traffic that would be handled at either

facility is already moving to and from the Seattle and Tacoma port terminals via either NWCS or

truck drayage. Any higher rate the ocean carriers charged for a Willamette Valley Bill of Lading

relative to Portland would be offset by the additional operating cost they had to absorb.

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Both Millersburg and Brooks contacted ocean carriers.

Gregory Borossay, consultant to the Brooks team, interviewed executives from COSCO

Shipping Lines (North America) Inc., Hapag-Lloyd, Hyundai Merchant Marine, and

Yang Ming Lines, and provided the firms with the Brooks proposal to consider. The

project proposal reported additional interviews with Mediterranean Shipping Company

and Westwood Shipping Lines. While Mr. Borossay reported a generally favorable

response from these firms, none provided formal support letters Tioga views this as a

neutral response; the project proposal lacks necessary detail such a rates, these firms are

headquartered overseas, and long lead times for decisions are not unusual.

The Brooks proposal suggests that ocean carriers would be less likely to allow empty

return to the Millersburg site because it is beyond the common 200-mile limit from

Seattle/Tacoma. The difference is small, and unlikely to become a deciding factor.

The Millersburg project proposal included a support letter from APL, a unit of the French

marine carrier, CMA CGM. The letter thanked LEDG for engaging APL as its “preferred

shipping line.” If a formal or informal agreement exists, it should be disclosed to ODOT.

Tioga did not find a record of additional Millersburg contacts with other ocean carriers.

Tioga recommends that final funding of the chosen proposal be conditioned on successful

negotiation of a viable commercial relationship with ocean carriers or a workable

equivalent.

Competitive Limits

Regardless of the underlying cost of either Brooks or Millersburg operations, the market price is

limited by the price of the alternatives. The lowest cost alternative is likely to be trucking to

NWCS or BNSF at Portland. Based on Tioga’s outreach findings in the Oregon Trade and

Logistics Study, Oregon shippers use the NWCS option when:

It is less costly than truck drayage; and

It can meet the customer’s scheduling and service needs.

If the Millersburg or Brooks truck-rail combination were priced higher than the NWCS Portland

truck-rail service, there would be little reason for customers to use it.

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Proposal Comparisons

Requirements for Success

To succeed in attracting significant volumes of container traffic and providing Oregon shippers

with new alternatives, either of the proposed intermodal services requires:

Contractual railroad commitment to services and rates, including schedule

frequency, motive power, car supply, and transit times.

A contractual agreement with an intermodal terminal operator, and a service

sponsor/manager capable of negotiating rail contracts (one party may combine the

functions).

Agreements from ocean carriers to offer Millersburg or Brooks Bills of Lading (or

commercial equivalent) as they do for Portland via NWCS.

Willamette Valley Intermodal Rail Options

Both proposals rely on BNSF-owned track in Washington State. UP operates on these tracks via

a trackage rights agreement.

Both proposals are based on successful prototypes and could be operated by experienced,

successful operators.

The Millersburg proposal is essentially an extension of the existing, successful NWCS

operations. The service relies on UP service and existing relationships with steamship

line customers. A key advantage of the MVIC proposal is that it anticipates using a single

railroad, rather than relying on a working relationship between P&W and either BNSF or

UP.

The Brooks proposal is based on the Cordele, GA operation and its management team.

The Cordele operation is a full service, offering drayage, trucking, 3PL, and warehouse

services. The Brooks proposal relies on P&W service and anticipates a successful

negotiation with BNSF. A key advantage of the Brooks proposal is that it would provide

Willamette Valley shippers with a competitive rail intermodal alternative to NWCS

service at Portland.

However, as yet there are no written, contractual agreements between the project sponsors and

the potential operators.

Involvement of P&W in the Brooks proposal is a significant difference. The proposed operation

described in the P&W letter of November 9, 2018 appears feasible, assuming the

characterization of P&W’s relationship with UP and BNSF is correct. (Tioga has no reason to

think otherwise). However, the introduction of a second carrier inevitably introduces risks and

complications. The best efforts and intentions of the parties involved are not a guarantee that

P&W will be able to reach the necessary operational and financial agreements with UP or BNSF.

Page 14 Tioga

The Millersburg proposal anticipates a direct connection to UP, with P&W as an alternative. This

alternative may be important if UP is experiencing significant congestion on the line south of

Portland, as was apparently reported by ODOT. Involvement of the P&W in service to

Millersburg would raise the same issues of multi-railroad involvement.

Tioga emphasizes that these concerns are no reflection on the capabilities or reputation of

Portland and Western, which is regarded as a top-notch short line in every respect. These

concerns are strictly a matter of working with two railroads rather than one.

Location Tradeoff

There is an inherent location tradeoff between market access and intermodal economics.

The Brooks site north of Salem provides a somewhat greater “catchment area” to

the south, but is only about 50 miles from the competing NWCS and T-6

terminals at Portland, and about 185 miles from the Port of Tacoma.

The Millersburg site south of Salem and north of Albany is about 76 miles from

NWCS or T-6 in Portland, and 211 miles from the Port of Tacoma, but would not

access as large a market.

The maps below highlight the location tradeoffs.

Exhibit 3 shows the MVIC market area discussed in the ECONorthwest analysis for the MVIC

proposal. This general market area applies to both proposals, and Exhibit 3 shows the

approximate positions of the two proposed terminals.

Exhibit 3: Mid and Southern Willamette Market Area

BROOKS

MILLERSBURG

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Exhibit 4 shows 30-minute drive time areas around the Brook, Millersburg, and NWCS sites

(access to Terminals 6 for the BNSF service would be similar to NWCS). As the map suggests,

Tigard is roughly 30 minutes from either NWCS or Brooks.

Exhibit 4: 30-Minute Drive Times from Intermodal Sites

Millersburg and Brooks are roughly 26 miles apart, so their 30-minute drivetime zones overlap

along I-5 (Error! Not a valid bookmark self-reference.).

Page 16 Tioga

Exhibit 5: Brooks/Millersburg Drive Time Overlap

The effective market boundary between the Brooks and NWCS/Portland options depends on

their relative costs. For these examples Tioga assumed $1.00 per container mile to be the

marginal cost for rail and $1.70 per mile to be the marginal cost of trucking (see Appendix).

Brooks is 50 miles from NWCS, and one-way rail would cost an additional $50. Truck moves

must be round-trip at $1.70 per mile in each direction. The equilibrium is reached about 32 miles

south of NWCS and 18 miles north of Brooks (Exhibit 6), or roughly the Marion County border.

North of this point the customer would incur less cost by trucking to NWCS, so the Brooks

service would be less competitive closer to NWCS.

Page 17 Tioga

Exhibit 6: Cost-adjusted NWCS/Brooks Market Boundary (black line)

While the actual breakeven point would vary with customer location, drayage rates, highway

congestion, and Brooks/P&W/BNSF rates, it appears that the effective market for Brooks would

include the Salem area and points southi.

Millersburg is about 76 miles from NWCS, and one-way rail would cost $76 more than the

NWCS service at Portland. The equilibrium is reached about 49 miles south of NWCS and 27

miles north of Millersburg (Exhibit 7). The Salem area market, in particular, may not be

accessible to MVIC because it would be less costly, and quicker, to truck containers to NWCS at

Portland.

i This general conclusion is consistent with the MVIC project proposal, which addressed the relative market available to Brooks

and Millersburg and estimated that a Brooks location would enjoy a larger catchment area.

Page 18 Tioga

Exhibit 7: Cost-adjusted NWCS/Millersburg Market Boundary (black line)

While the actual breakeven point would again vary with customer location, drayage rates,

highway congestion, and MVIC/NWCS rates, it appears that the effective market for Millersburg

would be south of Salem.

Participating Business Entities

The two proposals differ in their approach to organizing the business.

The Brooks proposal appears to assume that OPW will own and operate the terminal. While

OPW anticipates providing an extensive menu of logistics services, including drayage, the

proposal does not specifically state that OPW would also contract with P&W and/or BNSF, or

contract with the ocean carriers, or market the service to customers. Moreover, it does not appear

that OPW itself has the necessary technical expertise and experience to operate a rail intermodal

terminal. The Brooks proposal materials appear to anticipate that the same organization that

operates the Cordele, GA terminal would be involved in Brooks operations, but does not specify

roles, relationships, or terms, and there is no signed contract.

The Millersburg proposal anticipates that NWCS would operate the terminal and contract with

the railroads and ocean carriers, while LEDG would own the terminal and collect lease payments

from NWCS. In this respect the proposed Millersburg service would be an extension of existing

NWCS services and relationships with UP and ocean carriers. While NWCS involvement is not a

guarantee of success, it does bring a party familiar with Oregon intermodal operations and

Page 19 Tioga

economics and with existing rail and ocean carrier relationships into the picture. However, there

is no signed contract between LEDG and NWCS, nor is there a comprehensive description of

roles, responsibilities, and terms.

Tioga recommends that final funding of the selected proposal be conditioned on conclusion

of an acceptable contractual agreement between the sponsors and the operating entity or

entities.

Market Shares and Public Benefits

Markets share estimates are inherently imprecise. Tioga regards the market share, volume,

and public benefits estimates of both proposals as overly optimistic, based on underestimates of

cost and inclusion of business volumes that the services may not be able to attract.

NWCS and BNSF already offer below-cost intermodal service between Portland and

Seattle/Tacoma. The Millersburg proposal is an extension of the NWCS service, and can be

expected to handle some of the same shipments that would otherwise have used NWCS at

Portland. The proposed Brooks service may be merged with the BNSF operation at Portland.

At the outset, the two services will probably not be able to offer more frequent, faster, or less

expensive service than the NWCS and BNSF offerings.

A location north of Salem may allow the Brooks operation to access Salem-area traffic that

MVIC could not serve, but the trade-off is that being closer to Portland may increase competition

with the existing NWCS option.

Tioga does not see the market share estimates as a basis for choosing between the two

proposals. Neither proposal estimate is likely to be fulfilled in detail, and in both cases the actual

market share will depend on the rail and ocean carrier arrangements made in negotiations.

Congestion Relief

Reduction of traffic congestion on Oregon highways is one objective of shifting truck moves to

rail intermodal moves. While both projects would, if successful, divert some truck trips from

highway to rail, the impact on congestion would be minimal.

Container trucks will still have to use Oregon highways to access rail intermodal terminals, so

truck trips may be shorter and in different directions, but will not disappear.

The volumes projected by the two proposals, even if attained, are small in comparison to truck

and total vehicle traffic on I-5 in the upper Willamette Valley.

Comparable average annual daily truck trips on I-5 between mileposts 250 and 300,

roughly the affected territory, range from about 6,000-13,000, with those truck

accounting for 5-10% of the total vehicles.

The Millersburg proposal projects an annual volume of about 13,000 containers, the

equivalent of about 52 truck trips each way per weekday. The Millersburg estimate would

Page 20 Tioga

thus reduce daily truck moves on I-5 by about 0.4-0.8%, and total vehicle trips by 0.04-

0.08%.

The Brooks proposal projects an annual volume of 60,000 containers, the equivalent of

about 240 truck trips each way per weekday. The Brooks estimate would reduce daily

truck moves on I-5 by about 1.6-3.2%, and total vehicle trips by 0.16-0.32%.

These reductions would not significantly reduce congestion, and would not be perceptible to the

general public.

Capital and Construction Cost Estimates

The two proposals differ in financial approaches.

The LEDG proposal would spend $10 million to purchase the 190-acre International Paper

brownfield site at Millersburg. The site is a partially developed property with some rail

infrastructure and an existing building that could be used to support transloading. An additional

$11 million would be spent on rail infrastructure improvements, including signaling needed to

extend the facility to the north and connect the terminal to UP’s busy main line railroad. That

commitment would leave very little money for other terminal improvements. As a result the

terminal would be a gravel, “bare bones”, facility. Such terminals are functional, but can be dirty

and generally do not present a good appearance to customers or neighbors. Tioga notes that if

UP south of Portland proves impractical, much of the MVIC rail investment might be saved or

applied differently.

OPW plans to spend $10.4 million to purchase just over 200 acres of land for the rail terminal at

Brooks. Compared to LEDG, OPW would spend more on the Brooks terminal’s features and

finances a significant portion of the land acquisition cost. The profits from the facility’s various

business lines are expected to pay off the debt, but it is not clear how those profits would be

generated. This reliance on profits to retire debt is a financial risk/complexity for Brooks

that is not present in the MVIC proposal.

Because the Brooks terminal is a greenfield development, the terminal as proposed would be

new, neat, and clean. It could present a more professional appearance than MVIC as planned

(with a significant gravel portion and reuse of an existing building), which could be an important

intangible factor to customers. At Brooks, much of the money would be spent preparing and

paving the ground with asphalt. Because the Brooks rail connection is to a short line, much less

new track and signaling is apparently required. All the buildings will be newly constructed.

Return on Investment

Proposal projections of profitability and return on investment are based on volume, rate, and

operating cost estimates that will remain speculative until sponsors are able to negotiate with

terminals operators, railroads, and ocean carriers.

Both carriers anticipate using net revenue from terminal operations, although in different ways.

Page 21 Tioga

The MVIC proposal anticipates $60,000 in annual lease revenue and a fee of $12 per lift

from the terminal operator (e.g. NWCS). The revenue would be used for facility costs

and upkeep.

The OPW proposal would use net revenue from terminal operations to support facility

costs and upkeep, retire land purchase debt, and contribute to local infrastructure

improvement funding.

These expectations may or may not prove realistic once operator, railroad, and ocean carrier

negotiations are complete, and rates are set below comparable truck and truck/NWCS rates. Rail

intermodal facilities are commonly built on railroad-owned land, and are considered cost centers

rather than revenue sources. Railroads usually contract out the actual terminal operation to

specialist firms that expect to operate at a profit. Railroad revenue and profits are derived from

the line-haul service, not from terminal ownership or operation.

Accordingly, Tioga recommends that ODOT require revised financial projection from the

chosen project sponsors once the crucial negotiations are complete and the actual cost and

rate structure is clear.

Environmental and Ownership Issues

A key element of the Millersburg project proposal is the 2015 Phase I environmental site

assessment performed by AECOM. The objective of a Phase I Assessment is to identify

Recognized Environmental Conditions (RECs) that may exist at the site. No RECs were

identified during the Phase I process; a Phase I process is relatively cursory compared to a Phase

II assessment.

The Millersburg project proposal included a $10 million purchase agreement between LEDG and

the land owner (International Paper). That agreement expired Nov 30, 2018. There was an

option to extend for 30 days, but Tioga does not know if that option was exercised. Tioga also

notes that the sale agreement included a provision that permitted the purchaser to perform a more

extensive Phase II Environmental Site Assessment. The results of that assessment have not been

shared with Tioga and should be shared with ODOT and the Commission.

The Brooks team has reportedly signed options to purchase the necessary greenfield land parcels,

but the terms and cost of the purchase are not clear.

While the ownership issues may be minor, as a matter of due diligence the status, terms,

and price of the land purchase agreements should be verified and documented for the chose

proposal.

Page 22 Tioga

Recommendations

Location

The Brooks site is about 50 miles from Portland and about 185 miles from the Port of Tacoma.

The Millersburg site is about 76 miles from Portland and 211 miles from the Port of Tacoma.

The Brooks site could capture a slightly larger Willamette Valley market to the

south.

The Millersburg site is 26 miles farther from the ports, yielding a slight advantage

for intermodal economics.

Ocean carriers may be slightly more likely to allow empty return to a depot at

Brooks rather than at Millersburg because Millersburg is a bit beyond the rule-of-

thumb 200-mile limit.

There is not a clear net advantage to either location, as the differences are small. Moreover, some

of the differences could become more or less significant in contract negotiations with the

railroads and ocean carriers.

Operating Costs

Most aspects of operating cost will be comparable at Brooks and Millersburg. Lift, gate, and

mainline rail operations will not differ in any significant systematic way.

Although the different methodologies yielded different operating cost estimates for the two

proposals, there may be little practical significance to the differences:

Neither operation will be able to recover full rail facility, lift, rail, and port costs

in the current competitive environment.

The operating cost differences between the two proposals will be less significant

than the willingness of railroads to provide service at competitive rates and the

willingness of the ocean carriers to absorb a significant part of the cost.

Neither proposal appears to have accounted for interchange and switching costs at Portland to:

Join Millersburg NWCS trains with Portland NWCS trains.

Join Brooks P&W trains with BNSF Terminal 6 trains.

Interchange P&W cars with BNSF or UP.

Operate a Millersburg UP or Brooks P&W run-through train to Seattle/Tacoma.

One potentially significant cost difference would be in P&W involvement, as railroad-to-railroad

interchange tends to be slower and more costly than switching within the same railroad, and

creates the expectation of two railroad profit margins.

Page 23 Tioga

An offsetting potential downside for the Millersburg proposal is the UP push for lower operating

ratios and thus higher profit margins under their Unified Plan 2010. It is possible that UP will not

be willing to provide the anticipated intermodal service if it does not meet its new, more

stringent profitability goals.

Site Development

The Millersburg site is a formerly industrial “brownfield” with potential environmental issues

that could raise costs, delay development, or both. In that respect the Millersburg site is

inherently more risky than the “greenfield” Brooks site.

Institutional Factors

The Brooks proposal appears to anticipate an “operating port” model with the facility owner also

operating the terminal. Cordele Intermodal Services (CIS) is an experienced operator in Georgia

that acted as a consultant to the OPW team. CIS has apparently expressed an interest in operating

the Brooks service, but no commitment has been made.

The Millersburg proposal appears to follow a “landlord” model, with NWCS leasing and

operating the terminal while a public body retains ownership and collects lease payments.

Of the parties involved in the two proposals, only NWCS has experience in local intermodal

terminal operations; existing operations in Seattle and Tacoma; a working contractual

relationship with UP; working contractual relationships with the ocean carriers; access to

railcars; and detailed knowledge of operating cost factors.

The participation of NWCS does not guarantee success for the Millersburg proposal, nor does

the lack of NWCS participation prevent the Brooks proposal from succeeding. Given the critical

reliance of both proposals on railroad and ocean carrier relationship, however, having a locally

experienced partner gives an edge to the Millersburg proposal.

Recommendations

Tioga’s analysis indicates that participation of NWCS makes the Millersburg proposal the more

likely of the two to succeed institutionally and commercially, and the better choice for ODOT

funding, provided other development issues can be positively resolved.

Neither proposal is ready for land purchase, detailed design, or construction. Lack of railroad and

ocean carrier commitment could make such expenditures useless for either project.

Tioga believes that a prudent approach would be to make a Millersburg grant conditional on 1)

resolution of environmental and land purchase issues identified above; 2) satisfactory agreements

with NWCS, UP (or failing UP, P&W), and the ocean carriers (or an equivalent third party) ; and

3) revised financials reflecting the negotiated costs, terms, and rates.

This step will likely require contractual agreements between UP, the ocean carriers, and NWCS

that are conditioned in turn on successful development of a Millersburg terminal of sufficient

capacity and capabilities. While this process may be complex, it is conceptually no different

Page 24 Tioga

from a pre-development agreement between a railroad and any customer contemplating a

service-dependent and rate-dependent investment.

More detailed recommendations for contingent approval are provided in the MVIC Summary

Report.

There is no guarantee that LEDG will be able to complete the necessary negotiations and other

steps in a reasonable time. ODOT may want to consider the OPW Brooks proposal as a feasible

alternative, to be activated if ODOT believes the LEDG efforts to have reached a dead end.