Why Hasn't DM&E Expansion Been Derailed Yet?

The proposed $2.3 billion loan is an absurd taxpayer subsidy, but keeping the railroad on track as a regional shipper should be a priority.

by Leigh Pomeroy

The fact that the $2.3 billion proposed loan to the Dakota, Minnesota & Eastern Railroad is still seriously under consideration defies logic. Not that government has ever been accused of being logical — witness the Iraq war, for example.

This project has been under consideration for nearly a decade, and opposition to it has only grown. In an effort to save it, the DM&E managed to wheedle special legislation that by any system of accounting is no more than taxpayer-subsidized support for this railroad over two other railroads in a competitive market. One would think that Congress or perhaps the executive branch might have the guts to say, "Enough!"

The DM&E's original plan was relatively simple: It saw an opportunity to expand into Wyoming's coal-rich Powder River Basin. It figured that it could run a more direct route than the two routes already in existence, and because it could operate more cheaply than the existing haulers, the Union Pacific and Burlington Northern Santa Fe, it could compete profitably. And it was planning to do this with privately raised capital.

Yet even though the DM&E's basic plan hasn't changed in 10 years, the economic realities surrounding it have, making it essentially obsolete. Only through the blessings of government — an unsecured $2.3 billion low-interest loan — would it continue to be economically viable. And even then with the debt-to-equity and debt-to-revenue ratios that are being predicted, that viability would be tenuous at best with the real possibility of American taxpayers losing their entire investment while DM&E management and its owners profit handsomely.

The DM&E has been successful in linking its continued service to agricultural producers to the Powder River Basin expansion. DM&E CEO Kevin Schieffer has told agricultural interests repeatedly that the railroad's existence is contingent upon it gaining access to the Powder River Basin. In other words, no coal shipping, no railroad. And agriculture has swallowed this message hook, line and sinker.

But what if it weren't true? What if the railroad were viable as is? After all, it has survived and made a modest profit since its inception in 1986. It has even expanded, acquiring the Colony Line from Union Pacific in 1996 and the Iowa, Chicago & Eastern (the old I&M Rail Link) in 2002. If the Federal Railroad Administration turns down the DM&E's request for the loan, will the railroad cease operations?

What is most intriguing about opposition to the proposed $2.3 billion loan is that it has come from such a broad range of players. When you see ranchers, neighborhood groups, environmentalists, taxpayer advocates, cities, counties, chambers of commerce and the largest employer along the route all coming together in opposition, that's a formidable array. And that should give politicians a strong clue.

South Dakota and Minnesota need the DM&E. There is no argument against that. For many communities its lines provide the sole railroad access. What we need to do is divorce the Powder River Basin coal issue from the DM&E's most important function, which is to serve these rural markets.

If the DM&E were asking for a modest, collateralized loan for upgrading its infrastructure, improving its safety record and bringing its employees' wages and benefits up to the level of its competitors, few parties would object. In fact, the railroad might discover hidden support from many current opponents.

If in fact the DM&E withdrew its $2.3 billion loan request and its Wyoming expansion plans, and resubmitted a more reasonable plan that would concentrate on improving its current operations, an amicable settlement would be possible. Let's hope the powers-that-be move toward a compromise in this direction. By doing so, all players in this controversy would come out winners.