The R&D Tax Credit Aspects of the Freight Rail Industry
Freight-Rail-Industry
The freight rail industry in America is
extensive and innovative. Demand for freight rail
services has been outpacing infrastructure capacity year over
year for the past decade. Each person in the U.S.
requires the movement of approximately 40 tons of freight
every year. In order to meet the needs of
the growing urban population countrywide, engineers are
developing innovative ways of transporting more goods, faster,
safer, and cheaper than previous generations.
This has resulted in the most efficient freight rail industry
in the world. Innovative sensors allow engineers to
analyze a large amount of data that ultimately translates into
smarter logistics which means reduced delivery
time. Positive train control sends up-to-date
visual and audible information to train crew members about
areas where the train needs to be stopped or slowed down which
means safer trains. Equipment upgrades reduce fuel consumption
and ultimately translate into cost reductions for railroad
companies.
Companies developing these and similar
railroad technologies should be aware of federal and state
R&D tax credits which are available to help stimulate
innovation in the freight rail industry.
The Research &
Development Tax Credit
Enacted in 1981, the Federal Research and
Development (R&D) Tax Credit allows a credit of up to 13
percent of eligible spending for new and improved products and
processes. Qualified research must meet the following four
criteria:
- New or improved products,
processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include employee wages, cost of supplies, cost
of testing, contract research expenses, and costs associated
with developing a patent. On December 19, 2014, President
Obama signed the bill extending the R&D Tax Credit for the
2014 tax year.
The Freight Rail
Industry
The freight rail infrastructure in the U.S.
is extensive. It consists of 28,000 locomotives, more
than 1.4 million rail cars and over 140,000 miles of
track. This infrastructure supports a $60 billion
freight industry that is the largest in the world. In
2011, the American freight rail system transported 1,680
billion ton-miles of freight, about 25.4 percent of total
global volume.
Compared with other freight moving industries within the U.S.,
freight by rail is the largest. The rail network
accounts for approximately 40 percent of all freight movement
in the country, as demonstrated in the chart
below. However, such an extensive network
requires enormous investments to maintain. Compared with
other major industries, railroad companies invest one of the
highest percentages of revenues to maintain their
system. Managed as for-profit companies, freight rail
movers routinely invest 15-20 percent of revenues back into
their business. This has resulted in one of the most
efficient freight rail systems in the world.
What’s more is that the amount of freight being moved
throughout the country is still growing at a rapid pace.
Since 2009, Union Pacific, the largest freight mover in the
country increased weekly car loadings from 133,000 to
180,000. This uptick in operations is not unique to
Union Pacific. The Federal Railroad Administration
projects that the tonnage of freight shipped by the U.S. rail
system will increase 22% industry wide by 2035.
This recent boom in the freight rail industry is leading
industry players with extra cash to invest significantly in
R&D. Railroads rely on advanced technologies to
monitor the health of the country’s rail infrastructure.
From ground-penetrating radar used to detect problems beneath
tracks, to a vast network of wayside detectors used to
identify equipment in need of repair, railroads are at the
forefront of developing advanced technologies to further
improve the freight rail equipment and infrastructure.
Some recent technological developments are discussed below.
Safer Tanker Cars
The biggest growth area for the freight
rail industry is in the transportation of oil and energy
products. The recent glut of energy production in the
country has created a huge demand for transportation of the
product. Liquid transportation companies like BNSF have
benefitted greatly. BNSF moves about 600,000 barrels of
oil per day, up from 54,000 barrels per day in 2010.
This type of drastic increase in services is typical in the
energy transportation industry.
In
2009, more than 10,000 tank cars transported crude oil. In
2013, that number increased to nearly
500,000. However, the tank cars that were
safe enough for the relatively light duty work demanded of
them in 2010, simply cannot accommodate the exponential growth
that the industry has recently experienced. To meet the demand
for crude oil transportation, tank car manufacturers are
stretching their capacity to keep pace. Tom Jackson, Vice
President of Marketing for Greenbrier, one of America’s top
train car manufacturers had this to say about tank car
production “Tank Cars are taking precedent over
everything. The box car is not a priority.” There
were more than 52,000 orders for tank cars at the end of the
first quarter this year, compared to just 4,363 orders for box
cars.
The most common tankers in the industry are referred to as
DOT-111 cars. The National Transportation Safety
Board (NTSB) has identified a number of vulnerabilities in
their design. Generally, these vulnerabilities are in respect
to tank heads, shells, and fittings. These
vulnerabilities create risk that flammable liquids such as
crude oil and ethanol, could ignite and cause catastrophic
damage during an accident. Incidents such as that have
happened a number of times recently, causing catastrophic
damage to property and resulting in a number of deaths and
serious injuries.
The main challenge is that the DOT-111 shell is so thin that
it is prone to puncture during an accident. If the shell
is punctured, flammable cargo can spill, catch fire, and
potentially explode. The response has been new
recommendations from the NTSB that existing rail cars be
retrofitted with new technology to prevent such
catastrophes. These proposed improvements to the DOT-111
model are illustrated in the following link,
http://www.post-gazette.com/image/2015/02/18/tankerbig-png.
Besides the upgrades to the tank cars, there are countless
other innovations in the railroad industry. It would take a
large novel to merely scratch the surface when discussing
them. A few of them however, are discussed below along with
some industry leaders in development. It is important to note
that research and development is done by companies of all
sizes from small mom and pop start-ups to large enterprises
like Union Pacific and CSX.
Union Pacific
Union Pacific is one of America’s most
recognized railroad companies. It links 23 states in the
western two-thirds of the country by rail, providing a
critical link in the global supply chain. From
2007-2012, Union Pacific invested $18 billion in its network
and operations to support America's transportation
infrastructure, including a record $3.7 billion in 2012.
The company is constantly discovering ways to improve
technology used to move trains and run operations. Some
of their most recent innovations are described below:
Emissions Reducing Technologies
Since 2000, Union Pacific has spent about $7.5 billion to
purchase more than 4,100 fuel-efficient locomotives.
They also invest significantly in Research and Development to
discover other innovative ways of reducing their environmental
footprint. Exploring new technologies is a hallmark that
Union Pacific has pursued for decades. This focus on research
and development serves as a catalyst for greater reductions in
emissions.
Engineers at the company are currently testing the following
three emissions-reducing technologies:
- Exhaust gas recirculation (EGR)
- Diesel oxidation catalysts (DOC)
- Diesel particulate filters (DPF)
The company is using 25 locomotives to test various
combinations of the above technologies. The locomotives
are all UP9900 models. This signature unit is ideal for
testing because it has a reduced engine size that creates the
space needed to install all three technologies simultaneously.
Union Pacific is also working with the EPA, California Air
Resources Board, and other local, state, and federal agencies
to test and evaluate new emissions-reducing technologies which
are described below:
- Advanced Locomotive Emissions
Control System: reduces emissions by collecting
exhaust gas from the smoke stack of locomotives and then
treating the emissions rather than releasing them into the
air.
- Hybrid Electric Technology:
for locomotives hopes to achieve emissions reductions and
fuel-efficiency improvements similar to those of hybrid
electric cars without hindering normal yard operations.
The eco-friendly ‘Green Goat’ locomotives, for example,
use a conventional engine to charge a bank of batteries,
which in turn power the train. However, the battery
technology, safety, and performance limitations of
currently prevents the Green Goat from achieving the
anticipated and desired results. Still, lessons learned
during these experiments helped guide the development of
other new technologies. It is processes like these
that drive the R&D tax credit.
- Diesel Particulate Filter:
acts as filtration by utilizing high-temperature silicon
carbide blocks to trap particulate matter in the exhaust.
As the gases containing the particles accumulate, the
device periodically heats the carbon, causing it to ignite
and burn off as water and carbon dioxide.
- Intermediate Line-Haul
Locomotive: significantly reduces nitrogen oxide
emissions by routing exhaust fumes through a selective
catalytic reduction unit (SCR). This technology was not
ideal for Union Pacific’s route structure, however, the
company expects it to serve as a stepping stone for other
innovative ways to reduce fuel usage and emissions.
Norfolk Southern
Corporation
Norfolk Southern operates of one of the
most extensive rail networks in the East. The Pennsylvania
based company recently launched a $53 million energy
conversion project at its Juniata Locomotive Shop that will
substantially reduce carbon emissions and water usage at the
70-acre facility. "This project showcases Norfolk
Southern's commitment to sustainability and innovation," said
CEO Wick Moorman. "The Juniata Locomotive Shop has a 125-year
legacy of leading the rail industry in locomotive technology,
and with our energy conversion project, this shop and its
employees will remain an industry frontrunner in the 21st
century."
U.S. Rep. Bill Shuster, chairman of the House Transportation
and Infrastructure Committee praised the initiative, "I
applaud Norfolk Southern's commitment to innovation and growth
for the rail industry in Blair County and across the
country,", "The Juniata Locomotive Shop has been operating for
over 100 years in Central Pennsylvania, and this latest
investment helps solidify its continued role in growing this
nation through our railroads." The project will
replace the shop’s coal boilers with natural gas heaters and
install a 1.2-megawatt capacity combined heat and power
generator that will produce enough electricity to sustain the
entire 16-building complex. When completed in late 2017,
Norfolk Southern expects the improvements to save about $4
million in electricity costs, reduce water usage by 49.4
million gallons from steam-water recovery, and eliminate more
than 29,000 tons of carbon emissions in Pennsylvania on an
annual basis. This initiative will boost Norfolk
Southern’s efficiency and help support further rail
innovations.
CSX Corporation
CSX Corporation is one of the nation’s
leading transport suppliers. The Jacksonville, Florida
based company’s network encompasses about 21,000 route miles
of track in 23 states, the District of Columbia and Ontario
and Quebec. Engineers at CSX are developing a broad
range of technologies. Many which involve the
development of technology to improve fuel efficiency and
reduce greenhouse gas emissions. CSX has invested $1.5
billion over the last decade to improve its locomotive fuel
efficiency and reduce corresponding emissions. One
particular initiative involves real-time, energy management
technology which uses GPS, track grade, and curvature data
along with train information to identify the most fuel
efficient throttle settings for each trip as the train moves
across the railroad. In addition, various methods of rail
lubrication are being explored to reduce rail-to-wheel
friction and increase fuel efficiency.
BNSF Railway Company
BNSF Railway, the second-largest freight
railroad network in North America, covers most of the Midwest
and Western regions of the country. BNSF is committed to
growth and innovation. In 2014, the company spent a
record $5.5 billion dollars to expand their railroad
network. The company also spent $200 million last year
on positive train control alone. Additional technologies
BNSF utilizes to enhance safety include:
- Wayside Detectors – use
laser, infrared and acoustic force technology.
- Rail Detection – uses
ultrasonic shear waves to inspect rails.
- Automatic Grades – feature
biometric driver identification, license plate
recognition, tire inspection portals, and digital
technology.
Like the other major freight delivery companies in the U.S.,
BNSF also invests significantly in the development of fuel
efficiency technology and environmental footprint
reduction. Some of these technologies are discussed
below:
- Idle Control: installed on
locomotives reduce air emissions and fuel consumption by
automatically shutting down locomotives that aren't being
used. BNSF has equipped more than 70% of their 6,600
locomotives with idle control technology. Similarly,
all new locomotives they purchase are equipped with this
technology.
- Genset Locomotives: a low
emissions, EPA-certified diesel switch locomotive. Unlike
conventional single engine locomotives, the Genset has
three low horsepower engines that only operate when
needed. This approach saves significant fuel and
substantially reduces air emissions. BNSF operates 74
Genset locomotives in Texas and California.
- New Hybrid Technology:
involves innovative ways to capture energy generated
during braking and reuse it as needed for propulsion.
- Wide-Span Electric Cranes:
BNSF was the first U.S. rail carrier to install wide-span
cranes. These cranes produce zero emissions on site while
generating power each time they lower a load. The wide
stance design of these new cranes eliminates as many as
six diesel trucks for shuttling containers within the
intermodal facility.
General Electric
GE Transportation is a global technology
leader and supplier to the railroad industry. For more
than a century, GE has been building locomotives at their
massive Erie, PA facility. The company has served as a
pioneer in both passenger and freight locomotives. GE
has also invested significantly in fuel efficiency technology
and some of these technologies are discussed below:
- Trip Optimizer: an
intelligent cruise control technology. Trains
pulling long lines of cars up and down hills are somewhat
like slinky toys, on the way up the cars pull apart; on
the way down they crunch together. The trip optimizer is
aware of those tendencies and uses them to control fuel
usage. The computer actually scans the slope of oncoming
hills, the length and weight of the train, its contents
and its braking ability. It then automatically regulates
the train’s speed to maximize its efficiency with the
slinky tendencies in mind in order to consume the least
amount of fuel.
- Getting the Railcar on the
Train Quicker: GE is also piloting new
technology that will help rail yard managers get the right
railcar on the right train more quickly. Currently
railcars sit idle in a rail yard about 40% of the time.
When railcars come into loading yards they are often piled
up in an unorganized manner. Having a computer that
is smart enough to arrange cars so that they are loaded in
an optimal order saves train usage time, employee salaries
and fuel which all add up to substantial operating cost
savings.
Google Maps U.S. Rail
Crossings
Accidents at U.S. rail crossings have
attracted widespread industry and media attention across the
Northeast recently. So much so that Google Maps and the
U.S. Federal Railroad Administration have agreed to use the
agency’s data along with Google’s app to notify drivers about
upcoming railroad crossings on Google Maps. The
initiative will pinpoint every rail crossing in the country
and send visual and audio alerts to a vast array of drivers
who use the turn by turn navigation feature. Drivers are
increasingly relying on this and similar technology when they
drive. Most rail crossing accidents are caused by driver
inattention and error. With the new app, a driver who is
focused on navigation instead of the road will now have an
increased awareness of the railroad crossings.
Conclusion
The freight rail industry in America is
extensive and innovative. In order to meet the needs of
the growing urban population countrywide, companies are
developing innovative ways of transporting more people and
goods, faster, safer, and cheaper than previous
generations. Federal and state R&D tax credits are
available to support these innovative freight rail efforts.