Did Cap Metro Try to Put Its Freight Rail Operator Out of Business?
Is Austin in danger of losing its freight rail service? Longhorn Railroad, which has provided service to Austin-area shippers and quarries since 1996, is in precarious financial condition, but there are vastly differing opinions of how the company ended up in dire straits. Longhorn, which operates on a rail line owned by the Capital Metro Transportation Authority, contends that the reason the company is failing is because of the transit agency's reluctance to spend money upgrading its own rail line. Longhorn's allies in this contentious battle include two former Cap Metro employees and three former board members, who say they believe that the transit authority has purposely tried to ruin Longhorn. Cap Metro officials deny the charges and point out that the agency has spent millions of dollars to keep Longhorn operating.
Whichever side is correct, there's a possibility that Longhorn will fail and Austin would be left without freight rail service, a situation that would not only raise prices for Austin consumers, but worsen the city's traffic problems by putting more trucks on the road.
Cap Metro's problems with Longhorn are coming just as the agency is hoping to convince voters that Austin needs a 14-mile-long light rail system costing $700 million that will extend from McNeil in North Austin to downtown. Part of the light rail system will run on tracks now used exclusively by Longhorn. The allegations about Cap Metro's dealings with Longhorn raise questions about the management of the city's transportation agency, which is funded by a one cent city sales tax. They also raise questions about the agency's commitment toward freight rail service, a service it is required to provide under federal law.
Cap Metro's own consultants have repeatedly told the agency that it should work with Longhorn. The consultants have also warned that if Longhorn goes out of business, the agency may not be able to find another railroad to take over the freight rail operations.
Cap Metro General Manager Karen Rae and board Chair Lee Walker stress their commitment to keep freight rail services intact. In March, the Cap Metro board even passed a resolution to that effect, saying that Cap Metro is "fully committed to cooperating and assisting" Longhorn. Walker says that providing freight service is not only Cap Metro's "legal obligation, it's our civic responsibility. And I think it's a crying shame that we haven't been able to establish a working relationship with our contractor."
Walker went on to say that the agency's relationship with Longhorn is "unstable and unacceptable. We ought to have a stable, harmonious relationship. We don't have that and I do regret it. I'm as frustrated as I can be but I don't know what to do."
Despite the poor relations, Rae says that Austin is not in danger of losing freight rail service. "I would do everything in my power to make sure that doesn't happen," Rae says. "I've always been told this would be a dual use facility -- with both light rail and freight rail -- and that's what makes the most sense." Rae adds that if Longhorn does go out of business, Cap Metro will seek another operator right away. But Rae acknowledges that the agency might have to agree to subsidize another rail freight provider if Longhorn is unable to continue operations.
As for Longhorn, which is owned by Austin businessman Donald Cheatham, the company has been in an ongoing battle with Cap Metro for over a year, about a variety of issues, including repayment of maintenance costs and infrastructure improvements. Cap Metro officials contend that they have been overly lenient with Longhorn and that the company hasn't provided sufficient financial information to the agency. For instance, they point out, a recent audit of the railroad by Cap Metro officials found that Longhorn owes tens of thousands of dollars in back taxes and has $2.6 million in accounts payable. The company's revenues for 1999 will total about $1.5 million, down from $2.5 million in 1998.
Longhorn, which signed a 20-year contract with Cap Metro in 1996 to provide freight rail service on the Llano to Giddings line, is still reeling from problems caused by the Union Pacific service disruptions in 1997 and 1998. Union Pacific, America's largest railroad, has a near monopoly on the Texas rail market and its service problems cost Longhorn hundreds of thousands of dollars in lost revenue. Earlier this year, the Cap Metro board, recognizing Longhorn's predicament, reimbursed the company $1.5 million for capital expenses even though the payment was not required by the contract between the two entities. This summer, Longhorn asked the agency for an additional $2.5 million to help cover operating losses and capital investments in the rail line. Cap Met refused.
Adding further fuel to the Longhorn controversy is a claim being made by Capital Metro's former rail manager, Robert Bolduc, who says he was blacklisted at the agency after he raised questions about the viability and costs of the light rail proposal. "I started to get unpopular when I took Cheatham's side on a few things and then I got on the enemies list when I started asking questions about light rail," Bolduc told the Chronicle during a Nov. 18 interview.
Fanning the Flames
Told of Bolduc's allegations, Cap Metro general manager Karen Rae responded, "That's a flat-out lie. That sounds like a quote from Don Cheatham." And she added that Bolduc's allegations came out of "disgruntled employee 101" and that "everything I've heard or seen said by him is not true."
The most serious charges being made against Cap Metro are coming from Bolduc and former railroad right-of-way manager Joe Ramirez. The two men contend the agency has been slow to act on projects that might help Longhorn Railway stay in business. Their most serious charges are that Cap Metro delayed spending on safety-related projects that may have caused the derailment of two of Longhorn's trains.
Rae and Walker vehemently deny the charges and insist that the two former employees are disgruntled and that both of them were too friendly with Longhorn Railway owner Donald Cheatham. They point out that Ramirez lives with and rents a room from Cheatham.
Although Walker told the Chronicle that he wants a more harmonious relationship with Cheatham, their relationship appears fatally poisoned. The quarrel over the contract has degenerated into a bitter personal feud between Cheatham on one side and Rae and Walker on the other. Adding further intrigue is a lawsuit that Cheatham filed in July against Cap Metro board member and City Council Member Daryl Slusher. The lawsuit, which also names the city of Austin as a defendant, seeks $1 million in exemplary damages from each of the defendants and $15 million in actual damages from the defendants as a whole. It claims that Slusher and the city have interfered with Longhorn's rail business and worked "to injure the Plaintiff's business operations, revenues, and business reputation."
Other complicating factors are two filings Cheatham has made with the Surface Transportation Board, one of the federal agencies that regulates railroads. On Oct. 11, Cheatham asked the agency to determine that Cap Metro has prevented Longhorn from providing freight rail service and that in doing so, it has violated federal law. On Nov. 9, he sent a six-inch-thick sworn statement with 128 exhibits to the Surface Transportation Board, claiming that Longhorn has been "unjustifiably and unlawfully thwarted in achieving consistent profitability by the active interference of third parties," including the city of Austin and Cap Metro.
Perhaps Bolduc and Ramirez are disgruntled and are simply trying to salvage their reputations. But what about the former board members? Are they trying to get back at Cap Metro, which has decided not to build transportation infrastructure that could help alleviate traffic problems in their municipalities? Perhaps. All three former board members -- Sam Billings, Heywood Ware, and George Denny -- are from towns northwest of Austin that would be helped if Cap Metro agreed to provide transportation infrastructure that would carry local residents into Austin. Maybe they too became too friendly with Cheatham and decided to take some easy shots at Cap Metro.
Whatever the critics' motivation, their charges are serious, and the business community is concerned. Bruce Byron, the executive director of the Capital Area Transportation Coalition, a nonprofit membership organization of major Austin employers who are concerned about mobility issues, says Austinites need to understand how important freight rail is to the city. "The average citizen doesn't realize how much the incremental cost of living rises if you don't have freight rail. Even if you take Cap Metro's side of this story, it's still their responsibility to make sure the rail freight operator is successful for the benefit of the community. We have so many other problems in Austin, it'd be the height of folly to lose rail freight service in Austin," Byron says.
Of all the allegations rolling down the tracks, perhaps the most serious are being made by Ramirez, who claims that Cap Metro's failure to fix a crossing in Northeast Austin led to the derailment of two of Longhorn's trains. On Sept. 7 and again on Oct. 5, Longhorn trains rolled off the tracks in the middle of the Cherrywood Road crossing in northeast Austin. In both cases, Cheatham blamed the derailments on outdated crossing equipment that Cap Metro has failed to replace. In one instance, the damage was so bad that a rail car loaded with lime had to be tipped over in order to repair the rail line.
The Derailment Debacle
Cheatham claims that the two derailments cost Longhorn more than $100,000 in wages, expenses, and lost revenue. The crossing has since been replaced. "The derailments at Cherrywood were caused by the need for major rehabilitation of the crossing. The rehabilitation should have been done by Cap Metro. It was in the budget and it wasn't done. The derailments had nothing to do with the rail equipment or the rail operator. That's an example of the agency not doing what it was scheduled to do and it compromises the economic viability of the entire rail operation," Ramirez says.
"During the last 12 months of my time at Cap Metro, there was a strong underlying current to drive the rail freight operator out of business," claims Ramirez, who worked at Cap Metro for 13 years. He says he gave Cap Metro his two weeks' notice on Nov. 9. Three days later, he was terminated by Rae for "poor judgment and unacceptable conduct."
Walker, who has been on the Cap Metro board since September 1997, and Rae, who took over as general manager in October 1998, both grit their teeth when Ramirez's name is mentioned. Rae contends that, like Bolduc, Ramirez had ties to Cheatham that were too close. On the fact that Ramirez rents a room in Cheatham's house, Rae observes: "He left because he was living with, and renting for a low fee, a room from the concern he was supposed to be managing," she said. "It's the most blatant ethics violation I've ever seen."
Ramirez, who says he has had numerous health problems and needed a place to stay that was close to Seton Hospital, claims he told the agency he was renting a room from Cheatham. He denies that renting the room violates Cap Metro's ethics policy, and both he and Cheatham deny that Cheatham gave Ramirez a price break on the rental; Cheatham says he charges Ramirez $300 per month for the room, which is around the going rate for a room in the Central Austin neighborhood where Cheatham lives.
Walker, however, insists that anything Ramirez says must be discounted. "He took favors. It was not disclosed. It's a pattern of behavior of the past Capitol Metro culture that we are trying to eradicate," Walker said.
Bolduc has made similar allegations, claiming that Cap Metro didn't replace the crossings, or take other measures to help Longhorn, because the agency wanted to save money. "Getting rid of Longhorn could save Cap Metro $20 million in light rail construction costs and $50 million in maintenance upgrades on the Llano to Giddings line," Bolduc claims.
Bolduc says that between the time he was hired in August and Nov. 16, when he resigned his $92,000-a-year job, it became clear that his superiors were hoping Longhorn would fail so that all or part of the rail line could be abandoned. He contends that if freight rail continues to operate, Cap Metro will have to spend heavily to keep freight rolling while it builds light rail on a section of the line. In addition, he says, the Llano to Giddings line is in poor condition and needs a huge amount of maintenance. If Longhorn goes out of business, Bolduc believes Cap Metro may try to abandon large segments of the rail line to avoid spending millions of dollars maintaining it. (Walker says there has been no discussion by Cap Metro board members regarding abandonment of the railroad.)
Former board members Sam Billings and Heywood Ware agree with Bolduc and Ramirez. "It looks to me like there's an absolute conspiracy to destroy the freight railroad, which will cost all of us a lot of money in the long run," says Jonestown mayor Billings, who resigned from Cap Metro's board on Nov. 23. Cap Metro officials, says Billings, "don't want a freight railroad going through town." Ware, who left the board in May of 1998 after he decided not to run for re-election as mayor of Pflugerville, offers similar comments, saying Cap Metro has been "trying to put Longhorn out of business for the last year and a half."
George Denny, the mayor of Cedar Park, who left the Cap Metro board this spring after Cedar Park dropped out of Cap Metro, also agrees. He says that the criticisms being made by Bolduc and Ramirez are "right on target."
Walker and Rae both say that Bolduc left Cap Metro because he didn't perform up to standards. Rae said that Bolduc quit because "he was being pressured on work product." She said Bolduc was turning in reports that were incomplete and that she had criticized him for it. She provided three memos addressed to Bolduc to bolster her point. One, dated Nov. 1, chastised Bolduc for "poor research" and for being "very late" in responding to one of Rae's assignments. In addition, she charges that Bolduc was too friendly with Cheatham, and that he decided to leave the agency shortly after "he was asked for meal receipts for his meals with Cheatham."
While Rae and Walker and the former employees exchange allegations, business owners who want to ship freight on the agency's rail line say they are suffering because of the sniping between Capital Metro and Longhorn. "It looks like Cap Metro has heartburn for Longhorn," says a lawyer who represents one shipper. The lawyer, who asked to remain anonymous, said the problem "is hurting my client's ability to have an efficient rail system."
Even if Longhorn goes out of business, Cap Metro will likely still have to figure out a way to provide rail freight service on the Llano to Giddings line. Under federal law, Cap Metro is required to provide freight service to any of the shippers who have property along the rail line. Known as the common carrier obligation, the law says that the owners of a rail line may not deny service to any of the shippers who want it.
Tied to the Tracks
Over the past two years, Cap Metro's consultants have reminded them of their duties under the common carrier obligation, and they have encouraged the agency to retain Longhorn and help the rail company as much as it can. In a Nov. 3, 1998, memo to Capital Metro general counsel Sally Crosby, Al Krachman -- a lawyer with Bracewell & Patterson, the law firm Cap Metro hired to help it analyze freight railroad issues -- predicted that Longhorn would be hurt by infrastructure problems on the rail line. He noted that Longhorn's predecessor operator on the line, the Austin and Northwestern Railway, "aggressively deferred infrastructure maintenance, having the predictable effect of temporarily increasing net operating income, followed by a collapse in the capacity of the line to service demand."
Krachman added that service disruptions caused by Union Pacific in 1997 and 1998 "had a similar effect by constraining the ability of the operator to provide service in a reliable manner." The Union Pacific service disruption came about after the railroad merged with the Southern Pacific. The company's inability to smoothly merge the two operations wreaked havoc on Longhorn's business and drastically reduced the number of rail cars Longhorn was able to move. The disruption also hurt shippers in other regions. In late 1997, the Texas Railroad Commission estimated that Union Pacific's service problems were costing Texas shippers $100 million per month. But despite the problems with Union Pacific, Krachman notes that in its first year of operation, Longhorn moved 60% more cars than its predecessor. He concluded that Capital Metro "should seek to retain Longhorn as operator. Adjusting for the impact of the U.P. crisis, Longhorn has a very favorable cost structure. It is unlikely that an alternative operator could meaningfully improve upon it."
In a Jan. 20 report to Cap Metro, Zeta-Tech Associates, a New Jersey-based consulting firm, said that changing rail freight operators "appears less than desirable" as long as Longhorn can provide service. "Also, Longhorn's losses over the past three years will almost certainly cause other potential operators to demand revenue guarantees or some other financial measures to ensure financial stability," the report says.
Longhorn's main business involves hauling aggregate and stone products for area quarries, as well as beer, waste paper, and lumber. Longhorn's contract with Cap Metro requires it to pay 15% of its gross revenues into an escrow account, which can then be used by the agency to maintain the railroad right-of-way.
Cap Metro took over operation of the rail line from the city of Austin in 1991. The city had purchased the line from the Southern Pacific Railroad in 1985 for $9.3 million, with the idea that part of the line would eventually be used for some type of mass transit.
But buying a railroad can be cheap compared to maintaining it. Bracewell & Patterson estimated that short haul rail lines often spend between $8,000 and $10,000 per track mile per year on maintenance. That would come to about $1.5 million for the 162-mile line, but that may be just a fraction of what's really needed. Bolduc claims that even before Rae hired him, he warned her that Cap Metro would have to spend heavily to return rail line to good operating order. In a June 1999 letter to Rae that Bolduc provided to the Chronicle, he warned that the 100-year-old rail line needed lots of work and that "the five-year plan might be $50 million" in capital improvements. Bolduc went on to say that Cap Metro's choices were clear: "Either put Longhorn out of business and abandon 100 of the 160 miles, or work with the operator to increase his revenue and decrease your costs."
Cap Metro has already spent millions to maintain the rail line. According to Rae, the agency allocated $6.9 million last year for rail safety improvements, but spent just $1.7 million. The rest of that money, she said, will be spent over the coming months.
But Cheatham and others believe Cap Metro has withheld several million dollars in other maintenance items, and that it has been acting too slowly on critical infrastructure improvements. The most important project is the rail interchange with the Burlington Northern-Santa Fe Railroad near McNeil in North Austin. At present, Longhorn has to rely heavily on Union Pacific. If Cheatham wants to exchange cars with the BNSF, he has to send his locomotives all the way to Elgin, a 60-mile round trip.
In mid-1998, Longhorn and Cap Metro asked the Surface Transportation Board -- which rarely assents to such requests -- to approve an interchange with the BNSF. Union Pacific opposed the request. Despite their opposition, the Surface Transportation Board approved Cap Metro's request last December. According to Bolduc, construction of the interchange should have taken about three months, or six months at the most. But the interchange still hasn't been completed.
If Longhorn could interchange with the BNSF at McNeil, it would save thousands of dollars in operating costs from not having to pull its trains all the way to Elgin and back. In addition, if Longhorn could interchange with both the BNSF and U.P. at McNeil, the small railroad could play the two larger railroads against each other and bring competition into the Austin market. "Longhorn was counting on having the McNeil interchange to use as leverage against Union Pacific. That would have allowed competition for shippers on the line and improved the rate structure and increased the number of cars he could move, thereby increasing Cheatham's revenues," says Ramirez. "That would have started an upward trend toward profitability and made him less reliant on subsidies."
Walker says he doesn't know why the McNeil interchange hasn't been built, but Rae says that Cap Metro has been working on approving funding for the interchange, and that it should be completed in the next few months. "The interchange at McNeil is moving ahead," she says. "We knew it should be built. But I can't just hand over $500,000. We have to show it is a fair and reasonable use of taxpayer dollars. It's nothing different from what we do with our other contractors."
It is no doubt good news that Rae and Walker are concerned about Cap Metro's expenditures. But perhaps they don't understand how important the interchange is to Longhorn. "If I'd had the BNSF interchange, I would have doubled the number of cars I've moved this year," says Cheatham.
Rae and other Capital Metro officials deny the charges being leveled by Cheatham and the others. They suggest that Cheatham is making a lot of noise in order to force Cap Metro to pay him a large sum of money to go away and leave the railroad business altogether. There may be some truth to that. Indeed, Longhorn's high debt levels and falling revenue could force it out of business in the near future. A recent audit by Cap Metro found that Longhorn is in a precarious financial position. The company owes more than $12,000 in overdue taxes to Travis County, and has accounts payable of some $2.6 million. Moreover, the audit found that Longhorn's lack of reliable financial statements makes it "impossible to know the full extent" of the company's liabilities.
The End of the Line?
For Cap Metro board member Slusher, the issue all boils down to money. He says that the freight operator "wants a taxpayer subsidy for his business. The old Capital Metro probably would have done that. This Cap Metro won't do that." Slusher says the agency's disagreements with Longhorn should be mediated as required by their contract with the freight operator.
Rae offers a similar point, saying that she could find no examples in the U.S. where a railroad's "operating losses are paid for by a public entity." Rae adds that Cap Metro's contract with Longhorn does not allow it to pay an operating subsidy. "We were told in March that if we did the $1.5 million reimbursement for capital expenditures that everything was fine," she said. Now that Cheatham has come back and asked for more money, Rae says the board has had enough. "The majority of the board feels we've been too lenient with this contractor," she says. Nevertheless, she says, Cap Metro is "committed to do what we need to do to fulfill our common carrier obligations."
Walker says the situation can be summed up easily. Cheatham's "problem is that he has a massive cash shortfall. He needs a lot of money and he needs it yesterday. And I haven't got a clue how to help him."
Cheatham, a voluble lawyer, says he knows how Walker can help him. And he has a list: "I want Cap Metro to help develop this railroad for the citizens of Central Texas. I want them to go to the Union Pacific with me so I can get good rates for my customers. I want them to quit horsing around and do the safety improvements," he says. "I want them to assist me with getting new shippers. I want them to help me market the railroad and to spend the money needed to put the thing into a working order." Cheatham says he doesn't want to get into a legal fight with Cap Metro, he just wants to run his railroad.
While Cheatham and Walker analyze their problems, the charges being made by Bolduc and the others are sure to linger. And the fight will likely move to the courthouse as Cheatham's lawsuits against the city and Slusher go forward. But the contentious relationship between the agency and the railroad may be a significant stumbling block for Cap Metro over the next few months. Critics like former board member Ware, for instance, question the agency's ability to handle larger projects. "If Cap Metro can't cooperate and help run a small freight rail operation with $2 or $3 million in annual revenues, I can't see how they will manage a light rail operation costing nearly a billion dollars," he says.
Asked about Ware's comment, Walker replies that it's "not a fair question," and that Cap Metro's lousy relationship with Longhorn shouldn't be compared to the light rail project. Perhaps he's right. Freight rail service is different from light rail service. But even so, it's clear that Cap Metro has a serious problem. Bolduc and the others claim that the agency intentionally hurt Longhorn. That may be true. It's also possible that Cap Metro simply doesn't understand how important the rail freight operation is and that through indifference and bureaucracy, it has accidentally maimed the railroad, pushing it to the edge of financial ruin. The other possibility is that Cap Metro has done nothing wrong, and that Longhorn is failing because of its own shortcomings. Whatever the reason for the current imbroglio, Cap Metro has a mess on its hands. And resolving it won't be cheap.