What does the railroad have to do with our households, our businesses, rural California, and issues like homelessness and the environment?
Our host, Paul A. Smith, talks with Francisco Castillo of Union Pacific Railroad about the importance of the railroad and it's interconnectivity with our daily lives. Listen in to hear how we depend on rail for things we sometimes take for granted. Learn about the future of railroads, how the industry has been impacted by the pandemic, the intersection of railroads with local jurisdictions, and how policies in individual states impact the entire rail network.
What does the railroad have to do with our households, our businesses, rural California, and issues like homelessness and the environment?
Our host, Paul A. Smith, talks with Francisco Castillo of Union Pacific Railroad about the importance of the railroad and it's interconnectivity with our daily lives. Listen in to hear how we depend on rail for things we sometimes take for granted. Learn about the future of railroads, how the industry has been impacted by the pandemic, the intersection of railroads with local jurisdictions, and how policies in individual states impact the entire rail network.
INTRO: [00:00:00]
Welcome to Hometown California, a production of the Rural County Representatives of California advocating for California's rural counties for nearly 50 years. Hometown California tells the rural story through the eyes of those who live, work and play in the rural communities of the Golden State.
PAUL A. SMITH, RCRC: [00:00:26]
This is Hometown California. I'm your host, Paul A. Smith. Joining me today is Francisco Castillo, the Senior Director of Public Affairs for the Union Pacific Railroad. Welcome, Francisco.
FRANCISCO CASTILLO, UNION PACIFIC RAILROAD [00:00:36]
Thanks, Paul.
PAUL: [00:00:37]
So folks who have been listening to the podcast now are probably familiar- last episode we talked about the trucking industry and today we're going talk about railroads who have an incredible historic role in California. So we've invited Francisco to join us and talk a little bit about railroads in California and the issues that the railroad faces. Railroads, not just Union Pacific, but across the spectrum and how they intersect with rural California and public policymakers in rural California.
PAUL: [00:01:03]
So to get started, Francisco why don't you tell our listeners a little bit about Union Pacific, its history in California, and its operations across the state, but more importantly, in rural areas.
FRANCISCO: [00:01:14]
Sure. Thanks for having me again. Obviously important to discuss the freight industry as an important economic driver for not only the US, but in California. So we're happy to be on the show to share with the listeners a little bit about what we're all about.
So at Union Pacific, we operate in 23 states west of the Mississippi and run through more than about 7,000 communities across those 23 states. Particularly in California, we have about 3,300 miles of track, about 3,800 employees, a our operations originate really in California from two central hubs. The Northern California Service Unit, which is based in Roseville, and the Los Angeles Service Unit, which are at the heart of a freight operation. And they serve as a vital link connecting north and south transportation services, and the east and west corridors with international commerce.
As it relates to the agricultural Central Valley, our I-5/Highway 99 corridor, which parallels Highway 99 and I-5, that's the most efficient route serving the rich agricultural Central Valley and the Ports of L.A., Long Beach, and Oakland. So again, you might not think of US Railroad as an international company, but 30 to 40 percent of our freight originates or terminates outside of the US. And I can talk a little bit more down the line about, you know, what are some of those key important seaports and regions for Union Pacific. But we are the largest freight railroad in the U.S. And in California, our partner is BNSF. And those are the two freight class one railroads that are here based in California.
PAUL: [00:02:47]
So you're doing a lot of work, I understand, hauling freight out of California and out of the U.S. as well as moving freight that's coming in internationally. Maybe talk about those port operations and what are the challenges of moving that freight out of a seaport and then onto ultimate destinations.
FRANCISCO: [00:03:05]
Yeah, absolutely. So, you know, we link to every major West and Gulf Coast port. Coast ports were critical of the last couple years with increases in grain exports and also the changing diets in Asia. And the larger ports in California include, as I mentioned, L.A., East Oakland, and Stockton. And Union Pacific is unique because we have access to about 28 West Coast and 3 Gulf Coast ports. No other railroad has that type of access. And particularly, I'd like to, you know, focus on the port of L.A. because it's one of the world's busiest seaports and it's also a leading gateway for international trade in North America, right?
So just the ports of L.A. and Long Beach on their own, they're known as the San Pedro Bay complex. They handle about 25 percent of all U.S. exports and nearly 40 percent of containerized import. So that's a significant number in terms of products and commodities that we move in and out of California to other parts of the world and other parts of the US. We also have other big facilities in the state, particularly in Colton. That's our biggest facility in Southern California. In Roseville, we have the Roseville classification yard, which is the largest West Coast classification yard here in California. And the Colton one deals with more trains. There's no intermodal aspect of it. It's a key classification yard where our trains kind of go through. And that's a key location for that. And then we have the intermodal container transfer facility in California. And that's primarily a facility that supports our ports in Long Beach and L.A., which are significant for our import and export.
PAUL: [00:04:39]
So what kind of commodities are you hauling? I understand coal is a big commodity out of Wyoming. I assume autos?
FRANCISCO: [00:04:45] Absolutely. And coal, and you know, the hot topics, right, the hot commodities, as you mentioned, one of them is coal and the other one is crude oil, right? Obviously, those commodities throughout the years have decreased in terms of how much we move into and out of California because of the changing markets, green energy, that business has decreased.
Think about it this way. Think about it for a minute. I think listeners, when we talk about this, really understand how the railroad relates to everyday life. When you woke up this morning and turned on the lights, electricity that you used probably came from coal or wind turbine that moved on one of our trains. Before someone turned on their computer or television to get the news this morning, that probably moved on one of our trains. And same with automobiles, right. If you drive an automobile to work, it probably rode on a Union Pacific train before we ever laid eyes on it. And even the food that we eat on an everyday basis most likely was on a train before it was on the table. And so one I'd like to mention to though, since we're talking about rural California and the railroad's importance to rural America is we have a big economic development interest in rural America. And it shows based on a percentage of our overall ag business, particularly in California overall.
[00:05:57]
So Union Pacific, has four business groups: agriculture, energy, industrial, and premium. And ag plays a major role. And obviously, rural California is a big part of that. And we want to continue investing in the capacity and the projects that improve our operations. And for a long time, you know, our relationship with farmers, for example, in rural- in many rural areas, extends back nearly 200 years to when railroads became the critical link between rural farms and emerging urban centers in the industrialized country. And so we're proud of that history. We're proud of the various commodities that we move throughout the state and we'll continue to do that moving forward.
PAUL: [00:06:36]
So also maybe speak about what's underneath those railroad tracks. My understanding is you're also operating a lot of pipeline underneath those tracks, moving a lot of either natural gas, or oil, or what have you. How vital is that to the railroad as well? And how vital is that to hooking up all of the US's needs, whether again, it's a vital fluid commodity or otherwise?
FRANCISCO: [00:06:57]
Those are relationships that we have with utilities and oil companies that have gone back for many, many, many years. A lot of our railroads in many parts of our right of way, have utilities, for example, which help produce electricity for, you know, individual households. Many of them come from or cross railroad tracks. In some cases, there's crude oil, for example, or oil that helps produce, obviously, the gas that we use on a daily basis. And so it really depends on the different parts of our network that those exist. But we have a great relationship with our utility partners, but also with our chemical and oil partners as well, which help provide essential services and essential needs for Californians to be able to live their everyday life, whether it's gasoline or electricity.
PAUL: [00:07:46]
All right. So what do you think are the biggest issues Union Pacific faces, maybe large railroads in general? What are those issues that they face in California?
FRANCISCO: [00:07:56]
Yeah, you know, rigorously maintaining quality rail infrastructure is obviously the foundation of our ability to safely operate. Union Pacific spent a lot of capital in maintaining our rail infrastructure, not only throughout our system but in the state of California. Just to put in perspective, the Union Pacific Capital Program totalled about 3.2 billion dollars this past year in 2019. And in a five year period, about 1.4 billion dollars of investments went to California to improve track, capacity, and service. And many individuals, you know, don't recognize the fact that we are a private entity. Railroads are a private entity, and we don't receive funding from Federal or State to help improve or maintain infrastructure. And so that upkeep is really important for us.
FRANCISCO: [00:08:43]
In addition, you know, homelessness is a major concern right now. It is our number one community issue in that State. And despite our efforts, there's unlawful encampments that are set up on the right of way, along with dumping, graffiti, and other illegal activities by third parties. And it's a growing social problem that state and local governments are struggling to get their arms around. We try to work very closely with them. And this affects rural America too, Paul. I mean, when we've dealt with farmers in Monterey County, for example, where they're concerned that transient encampments are literally setting up camp next to farms, which they're concerned about the contamination that may occur as a result. And so we work with local jurisdictions to help mitigate that concern as much as possible and partner with them in a way where we can address those issues working together.
And the other, number three, is really our ever increasing environmental regulations in the State. As you know, California is all about environmental justice. And we, as a railroad, support, obviously, the environment. And we've done and taken measures to help improve the locomotives to initiatives that are efficient to help the environment. And so we're constant working on those issues as well.
PAUL: [00:09:58]
Yeah, I think, on the environment, you've probably got two challenges:
A) what you haul- i.e. coal, and
B) obviously, you burn a lot of diesel fuel.
FRANCISCO: [00:10:06]
Rail is the most environmentally sound way to move freight over land. And on average, trains are four times more fuel efficient than trucks. That means that trains can move one kind of freight 473 miles on a single gallon of diesel. They also reduce highway gridlock, your greenhouse gas emissions, and reduce pollution. We're proud of that record as it relates to being environmentally friendly. And it's a friendly competition with our truckers, right? I mean, we're not competing against them when it comes to our environment, but we like to tout our record when it comes to helping to show communities across California and our network that we are environmentally friendly and are taking the initiative to protect the environment for Californians and for the 22 other states we operate in.
PAUL: [00:10:56]
Have there been a lot of calls to try to electrify your line and is that viable in certain corridors? I would think going over the Feather River Canyon, or going through the Sierras, or even the Cajon Pass that would be a major, major challenge.
FRANCISCO: [00:11:11]
That's a huge challenge. There have been discussions about electrification and there's just not the technology, we believe at this time, to use a locomotive on electrified track lines with the amount of weight, and the length of these trains. They are massive. And we don't believe that the technology is there yet as it relates to electrifying our line. And so, you know, as I mentioned, we are the most environmentally friendly, and we are moving in the most environmentally sound way and taking those measures to mitigate those concerns of Californians across the State and the twenty-three states. But electrification has been a discussion we've had with policymakers and, even internal, the technology is just not there yet.
PAUL: [00:12:02]
You're based out of Omaha and I assume your fleets go all the way into Chicago to the east and probably down to the Gulf Coast, to the south? Is that correct?
FRANCISCO: [00:12:12]
That's correct.
PAUL: [00:12:13]
So you would probably have to electrify every segment, whether it's all the way from the Port of L.A. to Chicago or what, and that's going to get very expensive.
FRANCISCO: [00:12:22]
It's also the interconnectivity too. I mean, like you said, I think that comes when there are state and entities that want to set a specific regulation on the railroad. It's really, what we look at, we have the whole picture. We have 23 states that we have to operate in. One segment of our network is California, which is a major segment and we recognize that. But we can have different, you know, regulations, for example, when it comes to the California versus other states because of the interconnectivity, right? And so, what we do in California affects our entire rail network. What we do in Idaho, Washington, and Nevada, in those individual states, it affects our entire network. So, we look at the big picture when it comes to any regulatory efforts at the state level and work closely with those county and state authorities and kind of make them understand and provide a bit of knowledge about what the national rail network looks like and how it would be impacted by some of the policies that are being discussed.
PAUL: [00:13:26]
So it looks like you're kind of making the case for why the railroads have federal preemption. I know a lot of RCRC member counties get a little frustrated about the inability to either regulate or have some amount of influence on Union Pacific and others.
Can you speak a little bit more about why federal preemption is so important?
FRANCISCO: [00:13:45]
Absolutely. And, you know, I want to say- I want to start by saying that we have a positive working relationship with counties throughout California and even with the State of California. I mean, the State of California is our biggest partner on many projects, right? Whether it's passenger freight, passenger rail, public projects. We appreciate and want to continue being in the mix as part of a public engagement effort, right?
But UP is a common freight railroad and that's subject to regulations by the Surface Transportation Board. And that's under the Interstate Commerce Commission Termination Act of 1995, which is what we refer to as ICC. And ICC provides for the STB to have exclusive jurisdiction over all matters relating the construction, acquisition, operation, abandonment, discontinuance of railroad infrastructure and our facilities.
And this federal preemption of local authority doesn't mean that UP intends to construct a facility that is not protective of human health or safety or local government, because regardless of that exclusive jurisdiction of the STB over UP's railroad facilities, we still want to be a good partner and we still are prepared to discuss with local jurisdictions and counties details related to any UP project and any concern that they have, with staff to ensure that the project goes smoothly, right? And so we don't pull that a lot because, like I said, we have a great relationship with many local jurisdictions that many times we go through the permitting process. We go to commission meetings, and we don't bypass that when it comes to working with local jurisdictions on many of the projects that we have going on in California.
PAUL: [00:15:34]
So switching gears-- no pun intended there-- How has the pandemic and this coronavirus been to your railroad, and to the railroad industry as a whole?
FRANCISCO: [00:15:44]
Sure, you know, the year started off on an optimistic note for U.S. ports and railroads and businesses that are an improvement in international trade. And that's thanks to the signing of the Phase One trade deal with China- I know that's probably too much info-- but we were optimistic about about that.
And then COVID-19, happened. And China's annual factory shutdown for the new year lasted longer than normal and that caused a drop in supply. And, you know, although overseas factories are coming back online and the tides are turning, we believe that the recovery period for US demand is really unclear.
PAUL: [00:16:19]
Francisco, on the China front, is that a conversation that you have less freight to move coming into the ports of manufactured goods in China? Or is it more about, maybe, energy exports or raw commodities that you're hauling that are destined for China?
FRANCISCO: [00:16:33]
I think it's equal balance when it comes to that, right? And just to put it in perspective, our quarterly results were significantly impacted by COVID-19, which we expected, right? The second quarter volumes were down across all commodities. And that was an overall about 20 percent decrease compared to 2019. So since bottoming early in that quarter, volumes continue to slowly now trend upward. And as the economy picks up, new business that captures the pre-pandemic is finally really starting to show up in our car loading.
And so, you know, one of the things that we enacted internally was our CEO took the lead and we enacted several cost saving measures like every other company. I mean local jurisdiction's were doing this, the private sector, the public sector. And those cost saving measures included UP furloughs, for example, for May, June and July. Executives and the board members saw a 25 percent reduction in pay over that same time period. So there's certain measures that we put in place early on that really helped get UP back on good footing. And, you know, to the executives credit we ended of the furloughs a month early, right? So we ended them in July versus August. And so, we are starting to see an increase in volume. We're cautiously optimistic and we're not calling an end to COVID-19 volume rates, obviously. But you know, we have a lot of bright spots on the horizon. And one of them is, as it relates to the ag is export feed grain is up year over year and we're anticipating strong export volumes in the second half of the year with increased demand from China, because we're talking about China as well. So, you know, it's finally kind of trending upwards. We're cautiously optimistic and continuing to monitor that closely.
PAUL: [00:18:25]
Are you seeing that across the specter of railroads that your partners, either at BNSF or CSX or what have you, they're experiencing that same dynamic? Or is this something unique to Union Pacific because it's so close to what goes on in East Asia?
FRANCISCO: [00:18:40]
No, you know, I think it's across the board. I think, you know, I don't have earning percentages of the railroads, our railroad partners, but it is clear that they also experienced volume decreases. And so every railroad was trying to figure out ways to reduce our cost, make our railroad more efficient, more effective, whether that was furloughs or reducing our operating. And so that's, you know, on every level, I think it impacted the freight industry in the U.S. as a whole. And you know that that was a significant impact that- We deal with a lot on the railroad. And we've experienced quite a bit after being around for over 100 years. This was something that we weren't prepared for, but took swift action to address it. And now we're seeing carloads starting to come up. So we're cautiously optimistic and we'll see how the economy plays out.
PAUL: [00:19:44]
So, kind of the ancillary issues to running a railroad- some would say your fuel prices must have gone down. You're consuming a lot of diesel and oil prices have been artificially low for the last four months. Has that helped?
[00:19:56]
And then kind of a second question is buying locomotives from the major manufacturers- I believe General Motors still is in the big locomotive business- are things there, have those taken a pause and so there's a ripple economy negative on the supply side, but yet maybe the railroad's doing a little bit better because fuel prices are low?
FRANCISCO: [00:20:15]
Yeah, you know, and it was not just fuel prices, right? I think fuel prices definitely helped, but it was the measures that we took as a railroad to help cut operational cost, help you know, implement those efficiencies across the railroad, the furloughs. I think it was a combination of things that certainly helped for us.
[00:20:36]
And, you know, as production plants and cities were being shut down temporarily, we had to store many locomotives which weren't being used, which resulted in using less diesel. And so that obviously was a cost savings for us too. I don't think it was by choice, but it was certainly part of the operational cost savings that we experienced during the shutdown in March, April, and May, and even June. So, you know, there was a lot of stored locomotives and as a result, less fuel being used. And certainly the prices of diesel were down, right? That helped but we still have to run a railroad 24/7. We're still a part of a critical infrastructure and essential services industry where these allowed us to kind of continue to operate, you know, and meet the needs for the operation to continue during this time. And so a lot of cost saving measures that were implemented or took place that I think added to our efforts to reduce costs.
PAUL: [00:21:42]
So Francisco, in the remaining time that we have, let's talk a little bit about the future of the railroads, particularly in the West. A couple questions here for you. First, the status of building a large port, a western port in Mexico, with vital rail links. There'd been talk maybe a dozen years ago that that was the wave of the future. What's what's going on with that?
FRANCISCO: [00:22:06]
To be honest with you, Paul, I don't have much information about that specific port. But one of the things in terms of what does the future look like, right, you asked what does the future look like. And what we know is that by 2045, the U.S. freight shipments will increase by about 40 percent and America's population will grow by 70 million. And that's according to the US Federal Highway Administration. And so we have capacity in California and throughout our 23 states to safely and reliably move those additional goods, without creating crowd congestion on the nation's already crowded highways and interstates.
And we will continue to identify a way to- or identify locations and ways to invest as part of our economic development growth within California. Because, like I said, we have that capacity to do so. And so, we are going through some rough times now. Not only us, the railroad industry as a whole across the country is going through a rough time. But that doesn't mean we don't have the capacity on our right of way and on properties that we own across the state of California to help increase our work in the state. And so we're looking forward to that.
PAUL: [00:23:21]
It sounds like regardless of what happens in Mexico, regardless of what happens with enlarging the Panama Canal and getting more freight out of the Gulf Coast, it sounds like California ports will continue to be a vital link for Union Pacific Railroad, as well as other freight based railroads shipping commodities around the world.
FRANCISCO: [00:23:36]
And the beauty about Union Pacific and the freight industry is that we have a balanced diversity from our business group that gives our company some strength, right, and along with service to Mexico markets we have a diversified mix, which includes both industrial, and premium which I mentioned in the beginning. And those business groups were consolidated, by the way, from four to three back in January, which was part of a revamp that we did to kind of focus strength on these four different industries. So, you know, it gives us- the product mix that we have gives us the stability between the ebbs and flows of various markets to work out of that business mix. And we hope then in the future, I think, to improve. We constantly look at capacity and expansion, if it makes sense, with not just the state of California, but different parts of our network.
PAUL: [00:24:33]
So lastly, the role of passenger rail. You obviously don't run passenger service and that hasn't done for about 50 years. But your right of ways are very important in the conversation about passenger rail. Maybe, can you speak to that- maybe the high speed rail line in the Central Valley and elsewhere- where all that fits.
FRANCISCO: [00:24:51]
And so, you know, UP's core business, as you mentioned, is it's freight rail. And protecting and growing our freight franchise is going to be our top priority. And so, our right of away is our physical plant, right, unlike many other companies across the country. However, I'd say that UP has several historical passenger agreements in place throughout California that we're proud of, and the West Coast, that's part of our national network. And in fact we're working with various agencies across the state who are seeking to grow their service or footprint. For example ATX, LOSSAN, CCJPA which services the Bay Area, Caltrans, even high speed rail. And some of these agency partners with Amtrak and others have their own operators, which we closely work with as well.
And so, you know, we adhere to our established commuter passenger principles in reviewing any proposed commuter passenger service that seeks to access our property or network. So as long as there's a proposal in place that they present to us, we're going to give it a fair review to see if it makes sense for us, particularly on the capacity side. And also, you know, whether it makes sense for us on the passenger side, who we'd be providing those services. And commuter and passenger rail- and I don't think many people know that commuter and passenger rail agencies get priority service because of the schedules and on-time performance measures. And since freight doesn't, we don't run on a schedule, sometimes the two can conflict, right, and so we don't want to set up a system where freight or passenger on our network creates a standing conflict. So it's an ongoing process that we are proud to work with many of our passenger partners in the state. We have a great relationship with many of them. And we're going to do that and figure out ways to increase passenger service where it makes sense.
PAUL: [00:26:46]
Francisco Castillo of Union Pacific Railroad, thank you for your time today. Very enlightening. I hope our listeners enjoyed it. I know I did. So thank you for your time, Francisco, and really appreciate talkin' choo choos with ya.
FRANCISCO: [00:26:58]
No problem, thank you.
OUTRO: [00:27:00]
You've been listening to Hometown California, a production of the Rural County Representatives of California. Subscribe now so you don't miss an episode. And be sure to write and review this podcast. I'm your host, Paul Smith. And thanks for listening.