[Senate Hearing 107-1049]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1049
OVERSIGHT HEARING ON THE SURFACE TRANSPORTATION BOARD
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 21, 2001
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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WASHINGTON : 2003
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois RON WYDEN, Oregon
JOHN ENSIGN, Nevada MAX CLELAND, Georgia
GEORGE ALLEN, Virginia BARBARA BOXER, California
JOHN EDWARDS, North Carolina
JEAN CARNAHAN, Missouri
Mark Buse, Republican Staff Director
Ann Choiniere, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
----------
SUBCOMMITTEE ON SURFACE TRANSPORTATION
AND MERCHANT MARINE
GORDON SMITH, Oregon, Chairman
TED STEVENS, Alaska DANIEL K. INOUYE, Hawaii
CONRAD BURNS, Montana JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virgina
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
SAM BROWNBACK, Kansas BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois RON WYDEN, Oregon
JOHN ENSIGN, Nevada MAX CLELAND, Georgia
BARBARA BOXER, California
JEAN CARNAHAN, Missouri
C O N T E N T S
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Page
Hearing held on March 21, 2001................................... 1
Statement of Senator Brownback................................... 22
Statement of Senator Smith....................................... 1
Witnesses
Morgan, Linda J., Chairman, Surface Transportation Board......... 2
Prepared statement........................................... 4
Appendix
Rockefeller IV, John D., U.S. Senator from West Virginia,
prepared statement............................................. 27
OVERSIGHT HEARING ON THE SURFACE TRANSPORTATION BOARD
----------
WEDNESDAY, MARCH 21, 2001
U.S. Senate,
Subcommittee on Surface Transportation and Merchant
Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:35 a.m., in
room SR-253, Russell Senate Office Building, Hon. Gordon Smith,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. GORDON SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Good morning, ladies and gentlemen. I am
pleased to call to order the first Surface Transportation and
Merchant Marine Subcommittee hearing of the 107th Congress. I
am very honored to be chairing this Subcommittee, and I fully
intend for us to have an active and productive agenda.
This Subcommittee has enjoyed a long history of bipartisan
cooperation, and I assure my colleagues, who I am sure will
soon arrive, that I will work to continue that bipartisanship.
As the new Subcommittee Chairman, I am most eager to begin
addressing the many challenges and important issues under the
jurisdiction of this Subcommittee. In addition to holding
hearings on matters of importance to the Members, we will be
working to assist the Full Committee Chairman and Ranking
Member in developing and moving legislation to reauthorize a
number of important Federal agencies and programs that have
expired.
These reauthorizations include the Surface Transportation
Board, the rail safety program, the hazardous materials
transportation program, the Federal Maritime Commission, and
the U.S. Maritime Administration. I will note the Committee is
already off to a good start with the successful passage of
pipeline safety improvement legislation, which passed the
Senate in February. Last week, Chairman McCain and I announced
the Subcommittee would begin holding a series of hearings on
rail transportation, starting with today's oversight hearing on
the Surface Transportation Board.
I wanted our Subcommittee's first hearing to address rail
issues, because rail transportation is such a critical element
of our nation's rail transportation system. Rail freight issues
are complicated whether considering rail service or capacity or
competition. Moreover, given the Committee has a number of new
Members, including myself, I believe it would be helpful to all
of us if we held a series of hearings to explore the many
complex issues involving rail transportation.
In addition to today's hearing, future hearings will focus
on the rail industry, including its financial condition,
capacity, and long-term capital infrastructure needs. We will
also have another hearing which will focus on rail shipper
concerns, including reliability, rates, and competition.
Let me say up front I am conducting this series of hearings
from an information-gathering approach. Most of us already know
there is a line drawn in the sand on certain issues when it
comes to rail shippers and the industries, but I am approaching
these hearings and topics with an open mind and look forward to
hearing the many differing points of view of the interested
parties. My goal is to try and find common goal on some of the
problems and collectively develop reasonable solutions to those
problems, whether through a meeting of the minds or perhaps
through legislation.
I know that Chairman McCain shares my strong view that the
only way such legislation is going to be advanced is if it is a
consensus product, one that can be supported at least in part
by both shippers and industry. If I have learned one thing in
my public life, it is hard to pass legislation and it is easy
to kill legislation, and that is why what I hope to do is
foster this consensus-building so we can make progress on
critical issues.
I am pleased to kick off this series of hearings with an
overview from the Surface Transportation Board chairman, Linda
Morgan. Established just over 5 years ago, the Board has issued
several thousand decisions affecting our nation's surface
transportation system and its users. While the Board's decision
may not please all the people all of the time, I think we can
all agree that it has demonstrated well what a small agency
with limited resources can accomplish with dedicated Board
members and a capable staff, and that, Linda, I think is very
much a tribute to you.
Let me note that the Board is in the process of rewriting
its rules on major consolidations. The Board's proceeding,
initiated March 17, 2000, is of great interest to this
Subcommittee. I understand, under Senator Hutchison's
leadership, a hearing was held last March, just after the
Board's merger moratorium announcement. Since that time, the
Board has issued its notice of proposed rulemaking and has
scheduled an oral argument for early next month.
In light of the attention our Committee has been paying to
the issue of aviation mergers in recent weeks, we will all be
interested in hearing first-hand the direction the Board is
taking with respect to major consolidation transactions under
its jurisdiction and, should other members join us soon, and we
do expect several of them, we will ask them for their opening
statements should they have them, but Chairman Morgan, we
welcome you, and thank you for taking time to be with us to
prepare for this hearing. We are anxious to hear what you have
to tell us. The mike is yours.
STATEMENT OF HON. LINDA J. MORGAN, CHAIRMAN,
SURFACE TRANSPORTATION BOARD
Ms. Morgan. Thank you, Mr. Chairman. I am appearing here
today at the request of the Committee to discuss the Board and
its achievements. I have some oral remarks, which I will make
brief. I also have submitted written testimony, which I would
ask be included in its entirety in the record.
Senator Smith. Without objection, it will be included.
Ms. Morgan. My written testimony reviews the Board's
accomplishments, particularly in the rail area, since its
establishment in 1996, as well as the Board's budget and its
ongoing proceeding to examine its major rail merger policy and
rules.
My written testimony, I believe, demonstrates that the
Board has acted responsibly but aggressively when necessary,
and that we have been a positive force in addressing the
concerns brought to our attention.
I believe that the Board has been a model of common sense
Government, looking for creative solutions to the serious
regulatory issues entrusted to it, promoting private sector
initiative and resolution where appropriate, and undertaking
vigilant governmental oversight and action in accordance with
the law where necessary. And I believe that the Board has been
a model of efficient and effective Government, doing more with
less, tackling hard issues, and resolving cases fairly and
expeditiously, and being upheld in court over 90 percent of the
time.
My testimony highlights how the Board has handled its
responsibilities in this regard. It discusses the service
crisis in the West, the 1998 access and competition proceedings
that the Board conducted at the request of this Committee, rate
and service issues, formal and informal dispute resolution,
mergers, and employee matters.
A key focus of the law that the Board implements is to
permit the freight rail industry to operate in the marketplace
without regulatory interference unless regulatory oversight is
necessary to address marketplace imperfections for which the
law provides relief.
An important part of the Board's regulatory oversight
involves the ability of captive shippers to have real access to
a process for challenging unreasonably high rail rates. I know
that concerns remain about the burden and the complexity of
this process. The Board has responded to these concerns within
the context of the law.
We have set deadlines, established procedures, and
developed a rate review methodology that works, and under which
large shippers that have brought complaints have been
successful. We have changed the market dominance rules for rate
complaints to make the process simpler, less burdensome, and
more accessible for all shippers, and although the court, upon
challenge of the railroads, has ordered us to take another look
at that case, we will continue to make all of our processes
workable and accessible whenever we can.
I know that concerns remain about the ability of the
smallest shippers to bring rate challenges. As I pointed out in
my letter to this Committee in 1998, I believe that we have
done what we can under the statute in this regard. I would be
happy to work with the Congress further on this issue.
Another matter that has concerned all of us has been the
service problems experienced throughout the rail sector in
connection with the recent round of mergers. Although I have
not always been satisfied with where the industry service
record has been, I believe that the Board has been a positive
force in helping on both a formal and an informal basis to fix
problems that have arisen while averting new ones, and not
taking actions that would help some and hurt others.
And I feel that our recent action, which was affirmed in
court, imposing a 15-month moratorium while we revisit the
Board's merger policy was an important step to ensure that the
then-existing service problems were not further aggravated.
By June, we will have held our oral argument and completed
our reexamination of our merger policy and rules. I cannot be
too specific yet, but given the current configuration of the
industry at the Board we are looking to raise the bar for
approval so that applicants will bear a substantially heavier
burden in demonstrating that a merger proposal is truly in the
public interest.
We are looking at requiring merger applicants to
affirmatively show that the transaction will enhance
competition and improve service. We are looking at requiring
more accountability for benefits that are claimed, and a
showing that such benefits could not be realized by means other
than a merger. We are looking at requiring more details up
front regarding service that would be provided, as well as
contingency planning and problem resolution in the event of
service failures. And we are looking at dealing with a
collective bargaining agreement issue that has concerned rail
labor in the past.
I know that, regardless of how much we have done at the
Board, and how much we can do in the future at the Board, there
are those who will say that we have done nothing of substance
unless we somehow provide for a regulatory scheme that
guarantees every shipper the opportunity to be served by at
least two carriers, the so called ``open access'' approach to
regulation.
I hope that the Members of the Committee can appreciate
that the Board has acted responsibly to address in a manner
consistent with the statute the concerns that have been raised
about the rail sector, and to drive change and to otherwise
carry out its responsibilities in a way that has moved the
industry in a positive direction. I also hope that as we move
forward we take the long view and act so as to ensure that the
steps that we take will produce the type of rail network we
want into the future.
I would be happy to answer any questions that you might
have.
[The prepared statement of Ms. Morgan follows:]
Prepared Statement of Linda J. Morgan, Chairman,
Surface Transportation Board
INTRODUCTION
My name is Linda J. Morgan, and I am Chairman of the Surface
Transportation Board (Board). I am appearing today at the
Subcommittee's request to provide an overview of the Board's activities
since its inception, with a particular focus on actions taken by the
Board on various rail transportation issues. The Subcommittee also has
asked for information regarding the Board's budget, as well as the
Board's proceeding to reexamine its major rail merger policy and rules.
I have testified numerous times before Congress since the creation
of the Board. My testimony here attempts to capture the essence of the
prior testimony and provide an update on Board activities since my
Congressional appearances last year.
OVERVIEW OF THE BOARD
The Board came into being on January 1, 1996, in accordance with
the ICC Termination Act of 1995 (ICCTA). Consistent with the trend at
that time toward less economic regulation of the surface transportation
industry, the ICCTA eliminated the Interstate Commerce Commission (ICC)
and, with it, certain regulatory functions that it had administered.
The ICCTA transferred to the Board core rail adjudicative functions and
certain non-rail adjudicative functions previously performed by the
ICC. Motor carrier licensing and certain other motor functions were
transferred to the Federal Highway Administration within the Department
of Transportation (DOT). And Congress provided the Board with more
limited resources.
The Board is a three-member, bipartisan, decisionally independent
adjudicatory body organizationally housed within DOT. The rail
oversight conducted by the Board encompasses, among other things,
maximum rate reasonableness, car service and interchange, mergers and
line acquisitions, line constructions and abandonments, and labor
protection and arbitration matters. The jurisdiction of the Board also
includes limited oversight of the intercity bus industry and pipeline
carriers; rate regulation involving noncontiguous domestic water
transportation, household goods carriers, and collectively determined
motor rates; and the disposition of motor carrier undercharge claims.
The substantial deregulation effected in the Staggers Rail Act of 1980
(Staggers Act) and the laws governing motor carriers of property and
passengers was continued under the ICCTA. The ICCTA empowers the Board,
through its exemption authority, to promote deregulation through
administrative action.
The period after the passage of the ICCTA presented many logistical
challenges. Fewer than half of the personnel who had worked for the ICC
were retained by the Board. Yet, the case load remained heavy, and
indeed increased in complexity and degree of challenge, particularly
with the significant restructuring taking place in the rail industry
and the focus of parties on testing the law in certain areas. The Board
had to find ways to do more with less.
We hit the ground running, and quickly became what I believe to be
a model Federal agency. We were given many rulemaking deadlines in the
ICCTA, and we met each and every one of them. We revamped the old ICC
regulations to reflect the new law; we streamlined the regulations that
remained relevant to make them work better; and we issued new
regulations so that we could move cases to resolution more quickly. We
have continued to meet our deadlines and to look for ways to handle
matters more efficiently. And we have moved cases faster, and as a
result have made great strides in clearing up the older docket.
Many of the cases that we have tackled at the Board--some of which
had been pending at the ICC for many years, and some of which have been
new--have been extremely difficult and controversial. But a principal
focus of the Board's work is the belief that parties who bring disputes
to the Board want and should have the certainty of resolution and that
the Board is here to make decisions in hard cases. Not everyone will
like every decision we issue, but our job is to take the controversies
that come our way, review the records carefully, and then put out
decisions as expeditiously as possible that implement the law to the
best of our ability. The competence of our staff and the integrity of
our decisionmaking process are reflected in our record of success in
court: since I became Chairman (at that time of the ICC) on March 24,
1995, several hundred ICC and Board cases have been decided, about 170
cases have been challenged in court, and well over 90% of those cases
have been upheld. Fair and expeditious case resolution and the
certainty and stability that come from success on appeal should be key
objectives for an adjudicative body such as the Board.
THE BOARD'S RESOURCES
When the Board was created, it was authorized for 3 years, through
September 30, 1998. Because of the controversy surrounding the law that
the Board implements, the agency has not been reauthorized. However, it
continues to be funded on an annual basis, operating at essentially the
same resource level since its establishment in 1996.
Current Fiscal Year. The Board's current appropriation for fiscal
year (FY) 2001 provides $17.916 million for 143 staff-years. (This
resource level is the result of an across-the-board rescission of
$38,000 from the amount originally enacted.). The appropriation
provides that up to $900,000 in user fee collections may be credited to
the $17.916 million appropriation, thereby allowing the Board's
resources to be derived from both funding sources. This credit
provision also means, in essence, that our funding this year is
guaranteed regardless of the level of user fees actually collected.
The Budget for the Next Fiscal Year. In the Board's FY 2002 budget,
we requested $18.889 million and 145 staff-years. The President's
budget provides for $18.457 million and 143 staff-years, which is only
a slight decrease from our request and essentially represents a status
quo budget allowing for relatively constant staffing and funding
levels. The FY 2002 budget also includes $950,000 in user fee
collections offsetting the $18.457 million request under the same
appropriation crediting provisions contained in the FY 2001
Transportation Appropriations Act. This provision means in essence that
our funding would also be guaranteed in FY 2002.
User Fees. Congress continues to expect that some of the Board's
funds will come from user fees. Significantly, however, the FY 2002
budget is the first one in which the Administration has not requested
full funding by user fees for the Board. And recently Congress through
the user fee credit provision has guaranteed the Board's funding level
up front.
In this regard, particular concern has been raised about the level
of user fees associated with the filing of rail rate complaints. In
light of this continuing concern, the Board has held down the user fee
levels for these cases for the last 2 years to 20% of the full cost of
processing one of them, even though a DOT Inspector General report
urged the Board to assess fees that more closely adhere to full costs.
The Board regularly revisits its user fee schedule. Further, we
have fee waiver procedures in place to ensure that parties seeking
adjudication of matters under our jurisdiction are not precluded access
to the Board because of the level of user fees.
Workload. The Board continues to accomplish much with limited
resources. Although there have been some shifts among workload
categories, the Board projects a relatively level overall workload
through FY 2002. For example, while we have resolved all of the cases
in the motor carrier undercharge docket, there has been a significant
increase in rail rate case filings, as well as rail restructuring
activity in FY 2001. We project that this trend will continue through
FY 2002.
Future Needs. In connection with future Board resource needs, I
should note two issues. First, the Board must continue to focus on
hiring new employees in sufficient time to be prepared to replace the
many experienced employees that will be retiring in the next few years.
Second, the Board must have the resources necessary to accommodate any
legislative changes that Congress might approve.
THE BOARD'S OVERALL APPROACH TO ITS RESPONSIBILITIES
I believe that the Board has been a model of ``common sense
government,'' looking ``outside of the box'' for creative solutions to
the serious regulatory issues entrusted to it, and promoting private-
sector initiative and resolution where appropriate while undertaking
vigilant government oversight and action in accordance with the law
where necessary to address imperfections in the marketplace. In many
circumstances, private-sector initiative can provide for better
solutions because it can be tailored to the needs of the individual
parties, can go beyond what government is able to do under the law and
with its resources, and can create a dynamic in which all the parties
to the initiative have been involved in its development and thus are
invested in its success. And government can use its presence and its
processes to encourage such results and bring parties together in new
and constructive ways. At the same time, there are circumstances in
which more direct government action is necessary, and in such
situations, the Board has used its authority appropriately, creatively,
and to the fullest extent in accordance with the law.
The work of the Board has exemplified the balance of private-sector
and government action. This balance, for example, was demonstrated in
the Board's handling of the rail crisis in the West. In that matter,
under the umbrella of an unprecedented 9-month emergency service order,
the Board required significant operational reporting, engaged in
substantial service monitoring, and redirected operations in a focused
and constructive way. The Board was successful in working on an
informal basis with affected shippers to resolve service problems, and
it was careful not to take actions that might have helped some shippers
or regions but inadvertently hurt others. And the Board proceeded in
such a way as not to undermine, but rather to encourage, important
private-sector initiatives that facilitated and were integral to
service recovery, such as the unprecedented creation of the joint
dispatching center near Houston, TX, and the significant upgrading of
infrastructure.
In addition, responding to the concerns of Members of this
Committee, and in particular Chairman McCain and Senator Hutchison, we
held extensive hearings on access and competition in the railroad
industry, which resulted in a broad mix of private-sector and
government initiatives, summarized in my attached letter to Senators
McCain and Hutchison dated December 21, 1998 (December 21 letter).
Those initiatives included the revision of the ``market dominance''
rules to eliminate ``product and geographic competition'' as
considerations in rate cases and the adoption of formal rules providing
for shipper access to a new carrier during periods of poor service.
They also included the formal railroad/shipper customer service
``outreach'' forums, which produced the public dissemination for the
first time ever of carrier-specific operational performance data by the
major railroads, based on the data collection that the Board had
initiated during its handling of the service crisis in the West and
continued in its monitoring of the acquisition of Conrail by CSX and
Norfolk Southern (NS). And the initiatives included the unprecedented
formal agreement between large and small railroads addressing certain
access issues of concern to the smaller carriers and to various members
of the shipping public, the implementation of which the Board continues
to closely monitor.
My letter to Congress also highlighted areas in which the Board
believed legislation would be required if Congress wanted to fully
address certain concerns that had been raised. These areas included
small shipper rate relief, certain labor matters, and more open access
that, unlike the current law, would not require a threshold showing
that the serving carrier acted in an anticompetitive way. Regarding
open access, the Board did direct interested parties as part of this
rail access and competition proceeding to meet to see if common ground
could be found. Those discussions were not successful.
The balance of private-sector and government action is also
exemplified by the Board's informal dispute resolution process that it
used during the service crisis in the West and more recently in
addressing service problems that have arisen from the implementation of
the Conrail acquisition. And this process has now been formalized
through the establishment of the Rail Consumer Assistance Program,
discussed later on, and enhanced through monitoring by the Board of the
various customer service programs at the various Class I railroads.
Also, the Board has been active in focusing the Class I railroads on
improving the operations of the Chicago terminal, a major gateway
between the East and the West.
At the same time, the Board has promoted purely private-sector
dispute resolution. It imposed as a condition to its approval of the
Conrail acquisition the establishment of a privately agreed-to Conrail
Transaction Council made up of shipper and carrier representatives for
the purpose of discussing implementation problems. With the
encouragement of the Board, the National Grain and Feed Association and
the Association of American Railroads (AAR) and the National Mining
Association and the AAR reached groundbreaking agreements on issues of
concern to their respective memberships that provide dispute resolution
procedures that are more tailored to the interests of the individual
parties. These agreements will hopefully provide a model for other such
carrier/customer agreements. Furthermore, the Board has attempted to
move in the direction of private negotiation rather than government
fiat as the way of resolving employee matters, a trend which I discuss
later in my testimony.
In individual cases brought to it, the Board has used its authority
fully and creatively. For example, in a case in which Amtrak sought to
carry certain types of non-passenger traffic, we interpreted the
statute in such a way as to bring about a private agreement between
Amtrak and individual freight railroads on the matter after the Board's
decision was rendered. In railroad consolidation and construction
proceedings, our process has encouraged private-sector solutions with
respect to environmental and other issues, but where the private
parties have been unable to reach resolution, the Board has imposed
conditions to remedy the concerns expressed in a way that preserves the
benefits of the transaction under consideration. And with respect to
the ``bottleneck'' rate complaint cases (involving rates for a segment
of a through movement that is served by a single carrier), while
shipper parties argued that the Board should have gone farther in its
rate review, the Board's decisions do provide for rate relief where
there is a contract for the non-bottleneck segment, based on a
pragmatic reading of the statute that was affirmed in court upon
challenge by both the railroads and the shippers.
The Board has tackled many difficult issues effectively by
balancing private-sector resolution and governmental action. This
approach has ensured that, in the spirit of the ICCTA, available
resources are put to the best use and government does not interfere
inappropriately.
RAIL RATE AND SERVICE ISSUES
Since I became Chairman of the ICC and then of the Board, the
agency has tackled several important rail rate and service matters, and
in this regard I believe that we have been responsive to shipper and
other concerns in accordance with the law. In particular, we have been
committed to resolving formal and informal shipper complaints
expeditiously, clarifying applicable standards for resolution of formal
complaints, and leveling the playing field to ensure that the formal
process is not used simply to delay final resolution and that it
encourages private-sector resolution where possible. I believe that our
record reflects those objectives.
Rail Rate Matters. The Board has jurisdiction to adjudicate
complaints challenging the reasonableness of a railroad's common
carriage rates only if the railroad has market dominance over the
traffic involved. Market dominance refers to ``an absence of effective
competition from other rail carriers or modes of transportation for the
transportation to which a rate applies.'' Under the law, the Board
cannot find that a carrier has market dominance over a movement if the
rate charged results in a revenue-to-variable cost percentage that is
less than 180%. If this ratio is over 180%, then the Board determines
whether there is effective competition (historically, by considering
whether there was effective intramodal, intermodal, geographic or
product competition, but more recently, since the Board eliminated
product and geographic competition as considerations in market
dominance cases, by considering only intramodal or intermodal
competition). If there is no effective competition, then there is
market dominance. Thus, in considering any rate reasonableness
challenge, the first finding that the Board makes is whether the
carrier has market dominance over the traffic involved.
To assess whether rates are reasonable, the Board uses a concept
known as ``constrained market pricing'' (CMP) whenever possible. CMP
principles limit a carrier's rates to levels necessary for an efficient
carrier to make a reasonable profit. CMP principles recognize that, in
order to earn adequate revenues, railroads need the flexibility to
price their services differentially by charging rates that reflect
higher mark-ups over variable costs on captive traffic, but the CMP
guidelines impose constraints on a railroad's ability to price
differentially.
The most commonly used CMP constraint is the ``stand-alone cost''
(SAC) test. Under the SAC test, a railroad may not charge a shipper
more than it would cost to build and operate efficiently a hypothetical
new railroad, tailored to serve a selected traffic group that includes
the complainant's traffic. The Board typically uses this test to
resolve the large rail rate complaints that are presented to it.
With respect to rate cases, the Board has established deadlines and
procedures to expedite the decisional process, and decisions resolving
large rail rate complaints have refined the standards for developing
the record in these cases. We have resolved the old cases (such as the
``McCarty Farms'' case that was pending at the ICC for some years)
and--although we have recently been flooded with new rate cases that
could tax our resources--we have kept up with our statutory deadlines
in putting out decisions in the newer cases that have been filed. We
have sought to improve the rate review process by, for example,
eliminating the product and geographic competition elements from the
market dominance rules and by establishing evidentiary procedures
(including a decision issued just recently) to allow us to process
large rate cases more efficiently. The reviewing court has told us to
take another look at the product and geographic competition case after
it was challenged by the railroads, but in that case and in other
respects, we will continue to try to find ways to make the process work
better.
From a substantive perspective, the CMP procedure for determining
whether a rate is reasonable or not is now a well accepted way of
measuring rate reasonableness for larger rate cases, and of the 4 large
rail rate cases that have been decided by the Board, the shippers have
won in 3, while the defendant railroad won 1. Our ``bottleneck''
decisions, which construed the statute as permitting challenges to
bottleneck rates (rates for a segment of a through movement that is
served by a single carrier) when the shipper has a contract over the
non-bottleneck segment, were, as noted, affirmed by two courts after
they were challenged by both shippers and railroads. A number of
shippers have taken advantage of the opportunity afforded by the
bottleneck decisions and have filed ``bottleneck'' rate complaints with
the agency. Consistent with the Board's philosophy favoring private
sector resolution, several rate cases have been settled before the
agency reached a decision.
The Board at the end of 1996 adopted simplified rules for small
rail rate cases. However, no such cases have been brought to date under
those rules. Concerns remain that those rules are still too complex. In
my December 21 letter, I explained that the Board's rules reflect the
statute and the standards that must be balanced, but I also recommended
that Congress consider adopting a single benchmark test or some other
simplified procedure for small rate cases to address those process
concerns. I am prepared to continue to work with Congress on this
matter.
Service Issues. Over the past few years, we have used our general
oversight and specific legal authority, as well as reporting and
specific merger-related monitoring, to promote service improvements and
resolve service problems. As I discussed previously, the Board applied
its formal emergency service order and informal powers judiciously in
dealing with the rail service crisis in the West. In addition, we
adopted rules that permit a shipper to obtain the services of an
alternative railroad when service is poor. Those rules require prior
consultation among all of the involved parties to ascertain whether the
problem can be readily fixed by the ``incumbent'' carrier, and, if not,
to make sure that the proposed service will solve the problem without
creating new problems. Board representatives are continually in
communication with carrier management about general service issues, and
they work on an ongoing basis with carriers and shippers to address
individual service problems on an informal basis.
More recently, in connection with the Conrail acquisition in the
East, we have engaged in extensive pre- and post-implementation
monitoring, including the review of significant operational metrics and
plans, and have continued to work constructively with carriers and with
shippers to resolve service problems. And the Board in November of last
year formalized its informal dispute resolution process by establishing
a Rail Consumer Assistance Program through which individuals with rail-
related problems can contact the Board's Office of Compliance and
Enforcement by way of a toll-free number, an e-mail address, or a web
site page. I believe that the Board has effectively addressed and can
continue to address service issues.
RAIL MERGERS AND COMPETITION
Background on Past Rail Mergers. One of the areas in which the
Board has issued some high-profile decisions involves major rail
mergers. Although mergers and other changes in corporate structure have
been going on in the rail industry for many years, there has been
substantial rail merger activity since the Staggers Act was passed,
reflecting what has been occurring throughout the Nation's economy.
On the basis of the governing statute, under my Chairmanship of the
ICC and the Board, four Class I rail mergers have been approved, with
substantial Board-imposed competitive and other conditions. During this
period, the Board evolved in a creative and constructive way in
applying its conditioning authority, also incorporating private-sector
agreements into the process. The conditions in a variety of ways
provided for significant post-merger oversight and monitoring that have
permitted us to stay on top of both competitive and operational issues
that might arise. They provided for the protection of employees and the
mitigation of environmental impacts, and our recent decisions employed
a ``safety integration plan'' that draws on the resources of the Board,
the Federal Railroad Administration, and the involved carriers and
employees. And all of our decisions have assured that no shipper's
service options were reduced to one-carrier service as a result of a
merger.
In varying degrees, these mergers have had the support of segments
of the shipping public, as well as employees and various localities,
and were considered by a number of interested parties to be in the
public interest. A variety of shippers actively supported the
Burlington Northern/Santa Fe (BN/SF) merger, the inherently
procompetitive Conrail acquisition, and the Canadian National/Illinois
Central (CN/IC) merger. The Union Pacific/Southern Pacific (UP/SP)
merger was opposed by some segments of the shipping community, although
it was supported by others. However, the Board believed it was
necessary, not only to aid the failing SP, but also to permit the
development of a second rail system in the West with enough presence to
compete with the newly merged BN/SF.
Some have said that rail mergers are inherently anticompetitive,
that they cause service problems, and that we should be discouraging
them. In approving these mergers, the Board (and the ICC before that)
considered the statutory criteria and concluded that, with all the
conditions imposed, they would not diminish competition and in fact
could enhance competition; would produce significant transportation
benefits; and were otherwise in the public interest. The Board will
continue to exercise its oversight authority in accordance with these
objectives.
In this regard, in connection with the UP/SP merger, the Board has
issued four general oversight decisions and one related to service in
Houston (in addition to its actions with regard to the service crisis
in the West); it has issued one oversight decision concerning the CN/IC
merger; and in connection with the Conrail acquisition proceeding, it
has issued one general oversight decision and two decisions regarding
Buffalo, one on rates and the other on infrastructure, in addition to
the ongoing operational monitoring of the Conrail acquisition.
New Major Rail Merger Policy and Rules. These recent mergers have
changed the way the rail system now looks. In 1976, there were, by our
calculations, 30 independent ``Class I'' (larger railroad) systems;
nine of those systems have since then dropped down to Class II or III
(smaller railroad) status because the revenue thresholds for Class I
status were raised substantially some years ago; two large carriers
went into bankruptcy; and the remaining 19 systems have been reduced to
6 large independent North American systems in the past 23 years (Kansas
City Southern remains a smaller independent Class I system). In the
United States, these include two competitively balanced systems in the
West and two competitively balanced systems in the East.
Given the changes in the make-up of the rail system in the past
several years and developments associated with the most recent round of
mergers, when the BNSF and CN rail systems announced their intention to
merge in late 1999, the Board, after four days of hearings, issued a
15-month ``moratorium'' directing large railroads not to pursue further
merger activities until the Board has adopted new rules governing large
rail merger proceedings. The Board noted that recent merger
implementation had not typically gone smoothly, and that the railroad
industry and the shipping public had not fully recovered from the
service disruptions associated with the previous round of mergers when
the BNSF/CN announcement was made. Additionally, the testimony at the
hearing confirmed the Board's perception that a BNSF/CN combination
would more than likely instigate, in the very near future, responsive
mergers involving each of the other four large systems. Therefore, the
Board, like numerous parties that testified before it during its
hearing, concluded that it needed to revisit its merger rules for large
rail mergers in light of the current transportation environment and the
prospect of a North American transportation system composed of as few
as two transcontinental railroads. I appeared before this Committee a
year ago to discuss the moratorium and the merger policy rulemaking.
In instituting its rulemaking to revise the rules for considering
large rail mergers, the Board noted the increased concentration in the
rail industry, along with the only limited opportunities remaining for
significant merger-related efficiency gains. It concluded that the time
has come to consider whether the rail merger policy should be revised,
as many have suggested, with an eye towards more affirmatively
enhancing, rather than simply preserving, competition and ensuring that
the benefits of a future merger proposal truly outweigh any potential
harm. More specifically, the Board is reexamining its approach to
competitive issues; ``downstream'' effects; the important role of
smaller railroads in the rail network; service performance issues; how
benefits should be examined and accounted for; how alternatives to
merger, such as alliances, should be viewed; employee issues such as
the override of collective bargaining agreements (CBAs); and
international trade and foreign control issues that would be raised by
any proposal of a Canadian railroad to combine with any large U.S.
railroad.
The Board issued an Advance Notice of Proposed Rulemaking (ANPR) in
March 2000 instituting its rulemaking to revise its rules for large
rail mergers. Following the receipt of public comments on the ANPR and
replies to the comments, the Board issued a Notice of Proposed
Rulemaking (NPR) in October 2000, proposing new rules for major rail
mergers. Over 100 parties are involved in the proceeding, and the Board
has given the public the opportunity to file three rounds of comments
(initial comments, replies, and rebuttals) on the proposed rules. In
addition, the Board has scheduled an oral argument for April 5, 2001,
and will hear from over 30 parties. The Board intends to issue its
final rules by June 11, 2001, at which time the moratorium is scheduled
to expire.
In its NPR, the Board has proposed a new policy statement and rules
for future major rail mergers that raise the bar for approval. I have
attached a copy of the press release describing the proposed policy and
rules. The proposed new rules would require applicants to bear a
substantially heavier burden in demonstrating that a merger proposal is
in the public interest. Key provisions in the proposed rules would
require applicants to affirmatively show that the transaction would
enhance competition and improve service. They would require more
accountability for benefits that are claimed and a showing that such
benefits could not be realized by means other than a merger. And they
would require more details up front regarding the service that would be
provided, as well as contingency planning and problem resolution in the
event of service failures.
RAIL EMPLOYEE ISSUES
Background. Under the law, the Board becomes involved in rail
employee issues as a result of its approval of various types of rail
transactions. Certain significant employee issues are raised by Class I
consolidations. When larger railroads consolidate, the individual CBAs
and protective arrangements into which the merging railroads earlier
entered are not always compatible.
The law that the Board administers provides for imposition of the
so-called New York Dock conditions upon such transactions. The New York
Dock conditions have their origins in the negotiated Washington Job
Protection Agreement of 1936 (WJPA), which sets up the framework within
which consolidations are to be carried out. New York Dock provides (1)
substantive benefits for adversely affected employees (including moving
and retraining allowances, and up to 6 years of wage protections for
employees dismissed or displaced as a result of the consolidation), and
(2) procedures under which carriers and employees are to bargain to
effectuate changes to their CBAs if necessary to carry out the
transaction, with resort to arbitration and, as a last resort, limited
Board review if bargaining is not successful.
When the parties go to arbitration, the arbitrator must make a
determination in all areas of disagreement, including the extent, if
any, to which it is necessary to override a particular CBA where a
change in a CBA is being proposed. In 1991, the Supreme Court confirmed
that the law provides that agency approval of a consolidation overrides
all other laws, including the carrier's obligations under a CBA, to the
extent necessary to permit implementation of the approved transaction.
Employee interests have argued that the override of CBAs is purely
an administrative remedy that the Board could administratively reverse,
and that the Board in its consideration of appeals from arbitral
decisions has too broadly construed when a CBA may be overridden. The
override of a CBA, however, cannot be viewed as simply an
administrative remedy that the Board could administratively reverse.
The 1991 Supreme Court decision (often referred to as the
``Dispatchers'' case, rendered before I arrived at the ICC) and other
court decisions have made that clear. The Supreme Court found that,
once the consolidation is approved and the labor protection
requirements are met, the law ensures that obligations imposed by
contracts such as CBAs, or by other laws such as the Railway Labor Act,
``will not prevent the efficiencies of consolidation from being
achieved.''
In short, given its view of the statutory scheme, the Supreme Court
did not simply hold that the ICC had the ``discretion'' to decide
whether to find that CBAs could ever be overridden, but rather stated
that CBAs are to be overridden, when necessary to do so, because that
is what the law and Congressional intent require. Case law since then
has clarified the conditions under which CBAs can be overridden. Thus,
short of an agreement between labor and management, a change in the law
would be required to alter this overall approach and to prevent any
override of a CBA. Accordingly, in my December 21 letter, I suggested
that Congress consider addressing these issues through legislation if
it is concerned about CBA overrides.
Agency Approach. The Board over the last few years has attempted to
make the playing field more level in this entire area to promote more
private-sector resolution. The Board has worked to move away from
taking affirmative actions to break CBAs, has taken action to limit
overrides in the decisions that it has rendered, and has encouraged
private negotiation as a preferred way of resolving related issues. The
Board's specific emphasis on negotiation as the preferred way of
resolving labor implementation matters has led to an increased number
of negotiated agreements in BN/SF, UP/SP, CSX/NS/Conrail, and CN/IC.
More specifically, in its landmark 1998 Carmen III decision, the
Board held that the authority of arbitrators to override CBAs is
limited to that which was exercised by arbitrators giving effect to the
WJPA and ICC labor conditions derived from that agreement during the
years 1940-1980, a period marked by labor-management peace regarding
rail merger implementation. The Carmen III decision was not appealed
and is now binding on all arbitrators in addressing CBA override
issues.
As to review of labor arbitration awards in general, the Board has
strictly interpreted its authority to review these awards consistent
with the law, has generally deferred to the expertise of arbitrators,
and has declined to review and overturn arbitral awards to the extent
possible, regardless of whether the arbitral award favored management
or labor. It has, however, where appropriate, used the appeal process
to encourage private-sector resolution, sometimes through its decision
on appeal or other times by staying arbitration awards to provide time
for the parties to negotiate further. Disputes impacted by those stays
have been ultimately settled by the parties.
The Board is considering the matter of CBA overrides as part of its
reexamination of its major merger rules. Along these lines, the United
Transportation Union, the Nation's largest rail union, has negotiated
its own agreement with the U.S. rail systems to resolve the CBA
override issue. The Board has urged that similar agreements involving
other employee groups be negotiated.
OTHER RAIL MATTERS
I will now mention briefly a few other rail matters that may be of
interest to Members of the Committee.
1. Mergers. The application of Canadian National Railway to merge
with Wisconsin Central Railroad system is anticipated.
2. Construction Cases. Pending are the application of the Dakota,
Minnesota and Eastern Railroad to extend coal-hauling capability by
that carrier into the Powder River Basin, and several other rail
construction cases geared to produce new competition where the market
will support it.
3. Amtrak. Amtrak has asked the Board to become further involved in
the proceeding in which the agency acted earlier to facilitate
restoration of passenger service between Boston, MA, and Portland, ME.
NON-RAIL MATTERS
Certain issues involving modes other than rail also fall within the
Board's jurisdiction. I will briefly describe the Board's jurisdiction
and some of the significant pending cases involving other modes.
1. Motor Freight Carriers. Apart from the Board's jurisdiction over
motor carrier undercharge matters (a docket that the Board recently
closed out), the Board's principal involvement with respect to trucking
companies relates to rate bureaus. Under the law, interstate motor
carriers may enter into agreements under which competitors may discuss
certain matters related to rate setting, and if these ``rate bureau''
agreements are approved by the Board, then activities conducted
pursuant to them are immunized from the antitrust laws. The Board is
reviewing the records compiled to determine the conditions under which
the various motor carrier rate bureau agreements could be approved.
2. Intercity Bus Industry. Intercity bus carriers require Board
approval for mergers and similar consolidations, and for pooling
arrangements between carriers. In recent years, the Board has seen a
rise in the number of consolidations within the bus industry. We are
watching the bus industry closely in light of the issues that have
surfaced in recent months regarding the financial condition of
Greyhound and its parent, Laidlaw.
3. Noncontiguous Domestic Trade. Before the ICCTA, the ICC
regulated inland water carriage, while regulation of the noncontiguous
domestic trade (service between mainland points and points in Alaska,
Hawaii, or the U.S. territories and possessions such as Puerto Rico or
Guam) was bifurcated: the ICC regulated joint water-motor or water-rail
rates, while the Federal Maritime Commission regulated ``port to port''
transportation. The ICCTA transferred all jurisdiction over
noncontiguous domestic trade to the Board, requiring carriers to file
tariffs, and giving the Board jurisdiction over the reasonableness of
rates for service in the noncontiguous domestic trade. A variety of
noncontiguous domestic trade cases are pending at the Board, including
a formal rate complaint involving the water carriers serving Guam.
4. Pipeline Rate Regulation. The Board regulates the rates charged
for interstate pipeline transportation of commodities other than water,
gas, and oil. In October 1996, in a decision responding to a complaint
filed against Chevron Pipe Line Company, the Board found that, at
certain volume levels, the tariff rates filed by Chevron for the
transportation of phosphate slurry from Vernal, Utah, to Rock Springs,
Wyoming, were unreasonably high and had to be reduced. In response to a
complaint filed against Koch Pipeline Company, the Board recently found
that the rates charged for pipeline movements of anhydrous ammonia from
production facilities in southern Louisiana to several Midwestern
States were unreasonably high, and it awarded several million dollars
in reparations. The Board's decision has been challenged in court.
CONCLUSION
Since its inception, I believe that the Board has been proactive
and constructive in its approach to the matters that have come before
it, and has tried to affect in a positive way those issues over which
it has direct jurisdictional control. Taken overall, the Board has
produced a significant body of decisions, handled its caseload
expeditiously, and resolved complex matters before it in an effective
and responsible manner in accordance with the ICCTA. The Board has
approached its work with fairness, balancing the many varied and often
conflicting interests under the statute in reaching its decisions on
the record.
I recognize that there are those who believe that the Board has not
done enough in certain areas, particularly in the matters of small
shipper remedies, labor matters, bottleneck relief, and open access. As
I have outlined in my testimony today, and as I stated in my December
12, 1998 letter to this Committee, I believe that the Board has done
what it can under its current statutory authority and has moved issues
in new and positive directions. Until the law is changed, the Board
will continue to implement current law as we believe Congress intended,
using its existing authority fully and fairly, in accordance with the
goals of common sense government that I have outlined. I look forward
to continuing to work with this Committee, other Members of Congress,
and all other interested parties as we tackle the many important
transportation issues that continue to confront us.
______
ATTACHMENT 1.--LETTER FROM THE SURFACE TRANSPORTATION BOARD
Surface Transportation Board,
Washington, DC, December 21, 1998.
Hon. John McCain, Chairman,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC
Hon. Kay Bailey Hutchison, Chairman,
Subcommittee on Surface Transportation and Merchant Marine,
United States Senate,
Washington, DC
Dear Chairman McCain and Chairman Hutchison: In our letter of June
30, 1998, Vice Chairman Owen and I reported to you on the Board's
recent informational hearings to examine issues of rail access and
competition in today's railroad industry. After summarizing the
testimony, the Board responses to the testimony (including the Board's
April 17 decision, copy attached hereto as Addendum A*), and further
actions that might be taken by Congress, our letter reported on certain
ongoing private-sector initiatives. The purpose of this follow-up
letter is to inform you of the outcome of the Board's proceedings and
the private-sector initiatives undertaken as a result of the hearings;
and to suggest possible ways in which related issues that are still
outstanding might be addressed.
1. Board Proceedings. As we pointed out in our prior letter, the
Board initiated rulemaking proceedings addressing market dominance and
service inadequacies. The Board has completed those proceedings. In
Market Dominance Determinations--Product and Geographic Competition,
STB Ex Parte No. 627 (STB served Dec. 21, 1998), the Board repealed the
product and geographic competition tests of the market dominance rules.
This change applies to both large and small rail rate cases. In Relief
for Service Inadequacies, STB Ex Parte No. 628 (STB served Dec. 21,
1998), the Board issued rules giving shippers and smaller railroads
opportunities to obtain service from alternate carriers during periods
of poor service, using either the emergency service or the access
provisions of the law. Copies of these decisions are attached as
Addenda B* and C.*
2. Railroad Industry Discussions. One of the issues that arose at
the Board's hearings was the desire of smaller railroads to eliminate
industry restrictions on their ability to compete. The Board directed
the railroads to address this issue through private-sector discussions.
As our earlier letter noted, the large and small railroads separately
indicated that they were having some difficulties in reaching
agreement, but the Board encouraged them to continue their dialogue,
and indicated that it would take action, as appropriate, if they did
not reach agreement. We are pleased to report that in September, an
agreement was reached, portions of which were formally approved by the
Board. A copy of the Board's press release announcing the agreement is
attached as Addendum D.*
3. AAR/NGFA Agreement. In our June 30 letter, we advised you that,
consistent with the Board's preference that private parties seek non-
litigative dispute resolution mechanisms, the railroads were meeting
with the National Grain and Feed Association (NGFA) in an effort to
arrive at an agreement on a mandatory arbitration program to resolve
certain disputes. The Association of American Railroads (AAR) and the
NGFA recently announced such an agreement. A copy of the AAR/NGFA press
release describing the agreement is attached as Addendum E.*
4. Formalized Dialogue Among Railroads and Shippers. Another issue
that arose at the Board's hearings involved the concern of some
shippers that railroads had not been adequately communicating with
them. To address this concern, the Board directed railroads to
establish formalized dialogue with their shippers and their employees,
particularly about service issues in general, small shipper issues, and
any other relevant matters. The railroads have organized and conducted
discrete and formalized meetings with various shippers and shipper
groups throughout the Nation. The meetings, which have been attended by
Chairman Morgan, were held in Chicago, IL; Houston, TX; Atlanta, GA;
Newark, NJ; and Portland, OR. AAR's letter to the Board describing the
meetings and the follow-up actions to be taken--including, among other
things, issuance of performance reports by each of the large railroads,
development of a plan for facilitating interline movements, and
continuation of the outreach meetings is attached as Addendum F.* The
Board, which supports the continued dialogue that the AAR letter
promises, will be closely monitoring all of these follow-up steps. In
addition to the AAR letter, a letter from various shippers regarding
those meetings, and Chairman Morgan's response to that letter, are
attached as Addenda G* and H.*
5. Additional Railroad/Shipper Discussions. Other shipper concerns
that were raised at the Board's hearings involved railroad ``revenue
adequacy'' and the Board's competitive access rules in general.
Concluding that each of these issues could be better addressed
initially in a private-sector rather than governmental forum, the Board
directed railroads to meet with shipper groups to address the issues
under the auspices of an Administrative Law Judge. Although extensive
meetings were conducted, the parties could not reach agreement on these
issues. Attached as Addendum I* are copies of the reports that the
parties submitted to the Board on their recommendations as to these
issues.
Revenue Adequacy. Although the concept of revenue adequacy has thus
far had minimal real-world impact, the existing judicially approved
revenue adequacy measurement, which focuses on a railroad's return on
investment, has been a source of controversy. Based on suggestions from
railroad and shipper representatives at the Ex Parte No. 575 hearing,
the Board directed railroads to meet with shippers with a view toward
selecting a panel of three disinterested experts to make
recommendations as to an appropriate revenue adequacy standard, and to
name a panel and report back to the Board by May 15, 1998. The panel
was then to report back with final recommendations on July 15, 1998.
Shippers opposed this approach, contending that it would be
expensive and inefficient for them to pay part of the costs of the
expert panel, while also paying for litigation associated with the
conduct of the proceeding before the panel and the Board (and,
presumably, if either side wanted to litigate further, the courts).
Ultimately, most of the participating shippers recommended that the
Board itself initiate a new rulemaking looking to adoption of a revenue
adequacy approach that would permit the Board to consider a variety of
financial indicators in determining whether railroads are revenue
adequate.\1\ By contrast, contending that the multiple indicator
approach advanced by the shippers would not provide enough certainty or
predictability, the railroads supported the expert neutral panel
approach.
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\1\ The shippers indicated that, given the Board's own resources
and their own priorities, they would not object if the Board deferred
this rulemaking until a later date.
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Competitive Access. The Board directed railroads and shippers to
attempt to find common ground, and to meet, negotiate, and report back
to the Board by August 3, 1998. After extensive meetings, the parties
reached an impasse. The principal areas of concern involved the
definition of terminal areas; the scope of reciprocal switching;
appropriate compensation to an incumbent carrier; and, perhaps most
fundamentally, whether access to other carriers ought to be required
only when an incumbent carrier has acted in some sort of an
anticompetitive way, or whether it ought to be provided whenever
additional competition is determined to be in the public interest.
6. Possible Resolutions of Revenue Adequacy, Competitive Access,
and Small Rate Case Issues. The Board appreciates the opportunity to
assist Congress in addressing the transportation issues that face the
Nation during these important times and believes that it has
appropriately addressed matters of concern within the scope of the
authority given to it by Congress. Nevertheless, it is likely that
certain legislative proposals will be discussed in Congress during the
next session. Following are some thoughts on some of the issues as to
which legislative proposals are likely.
Revenue Adequacy. The revenue adequacy issue, in our view, has
unnecessarily polarized the transportation community. The underlying
policy objective that the Board's regulatory approach among other goals
permit railroads to earn adequate revenues is a laudable one that
should be retained. As we see it, however, and as we have testified
before, the revenue adequacy status of any particular railroad has
little practical effect. Revenue adequacy is not a factor in maximum
rate cases prosecuted under the ``stand-alone cost'' (SAC) methodology.
It is not a factor in construction, merger, or abandonment proceedings.
Revenue adequacy does play a small role in rate cases brought under the
``small case'' guidelines, but to date, no such cases have been
brought. Therefore, Congress may wish to consider legislatively
abolishing the requirement that the Board determine on a regular basis
which railroads are revenue adequate.
That is not to say that Congress should abandon the concept of
revenue adequacy. As we have testified before, in order to oversee the
industry, the Board needs to have some indication of how the industry
is faring financially. Moreover, revenue adequacy is one of the non-SAC
constraints in the Board's ``constrained market pricing'' (CAMP)
methodology for handling larger maximum rate cases. Although, thus far,
all railroad rate cases brought under CAMP have been handled under SAC
procedures, if a ``revenue adequacy'' case were brought, the Board
would need a basis on which to address it.
For those reasons, and because Congress may not wish to abolish the
revenue adequacy requirement immediately, the questions that have been
raised about the Board's current revenue adequacy methodology cannot be
ignored. With its credibility on the issue under challenge by several
shippers, however, the Board, with its limited resources, does not plan
to undertake the shippers' proposed rulemaking at this time. Rather,
given the benefits, the Board continues to support the expert panel
approach that was suggested by both shipper and railroad interests
during the Board's Ex Parte No. 575 hearings. The shippers are correct
that someone would need to provide funding for the expert panel; that
costs rise as layers of litigation are added to the regulatory process;
and that it is the Board, and not a private expert panel, that is
charged with establishing regulatory procedures. Nevertheless, the
Board is willing to make a commitment to give great deference to the
expert panel, which would be a competent body that would be perceived
as neutral if selected after agreement among the private parties. If
the private parties were also to give the expert panel deference,
rather than to litigate should they disagree with its (and the Board's)
conclusions, then not only would the parties' confidence in the
objectivity of the process likely be enhanced, but the overall costs
also would likely be contained.
Competitive Access. In its Ex Parte No. 575 decision served April
17, 1998, the Board addressed in some detail the implications of the
competitive access debate. The differences between the railroads and
the shippers on the Board's competitive access rules are fundamental,
and they raise basic policy issues--concerning the appropriate role of
competition, differential pricing, and how railroads earn revenues and
structure their services--that are more appropriately resolved by
Congress than by an administrative agency. Moreover, the so-called
``bottleneck cases,'' which involve issues related to competitive
access, are still being reviewed in court. For those reasons, although
the Board has moved aggressively to adopt the new rules described above
to open up access during times of poor service, the Board does not plan
to initiate administrative action to otherwise revisit the competitive
access rules at this time.\2\
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\2\ Should Congress choose to review the issue, we would note, as
we did in our April 17 decision, that the shape and condition of the
rail system that open access would produce is a significant but
unresolved issue. Certain shippers assume that the replacement of
differential pricing by purely competitive pricing would reduce the
rates paid by shippers, and that added competition would result in
increased infrastructure investment. The railroads, by contrast, argue
that, because their traffic base would shrink, the rates paid by those
shippers that would continue to receive service would actually
increase, even as overall revenues received by railroads would decline,
because the overall traffic base from which costs could be recovered
would be reduced. Additionally, as the Board noted in the April 17
decision, carriers could be expected to seek to maintain an adequate
rate of return by cutting their costs, which could include shedding
unprofitable lines and reducing new investment in infrastructure. Thus,
while certain shipper representatives believe that an open access
system would ensure better service, concern has been raised that,
unless smaller railroads were able to fill in service gaps that could
be created, open access could produce a smaller rail system that would
serve fewer shippers, and a different mix of customers, that are served
today, with different types and levels of, and perhaps more selectively
provided, service.
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Small Rate Cases. As you know, the Board has adopted small rate
case guidelines, which apply in cases in which CAMP cannot be
practicably used. Under these small case guidelines, the Board reviews
the profits that the carrier obtains from the challenged rate from
three perspectives: it compares them with the profits that railroads in
general earn from comparable traffic; it compares them with the level
of profits that the carrier would need to obtain from all of its
potentially captive traffic in order to become ``revenue adequate'';
and it compares them with the profits that the defendant carrier earns
on all of its potentially captive traffic. Taken together, these three
comparisons are designed to permit carriers to price ``differentially''
as provided under the law, in a way that will promote their financial
health, while still protecting individual shippers from bearing an
unfair share of a particular carrier's revenue needs. Although the
procedures may sound complex, in fact the information needed to make
this sort of a case is readily available at reasonable cost. Moreover,
the Board concluded, after reviewing many years of debate, that these
guidelines are the only procedures that have been identified that
readily address each of the concerns that the Board must consider under
the statute.
Nevertheless, we are aware that certain shippers are concerned
that, for small cases, anything other than a single benchmark test
could unreasonably impede access to the regulatory process. If Congress
agrees, it could adopt specific small rate case standards. As an
example, it could provide that, for certain types of cases, all rates
above a specified revenue-to-variable cost ratio, or series of ratios,
would be considered unreasonable. If this approach were to follow the
tenets of the existing statute, the specifics of such an approach--for
example, the cases to which it would apply, and the level or levels at
which rates might be capped--would have to balance issues such as
differential pricing and railroad revenue need against the fairness in
requiring captive shippers to pay substantially higher prices than
competitive shippers.
7. The Override of Railroad Collective Bargaining Agreements.
Another matter that may be presented to Congress next year is the
question of limiting the authority of arbitrators under the standard
labor conditions imposed by the Interstate Commerce Commission (ICC) or
the Board to modify existing collective bargaining agreements (CABS) in
the process of implementing approved rail consolidations. This process
has become extremely controversial since a decision of the Supreme
Court in 1991. That decision, Norfolk & Western Ry. v. American Train
Dispatchers Ass'n, 499 U.S. 117 (1991) (N&W), held that the exemption
from all other laws to carry out approved rail consolidations provided
by former 49 U.S.C. 11341(a) and carried forward as 49 U.S.C. 11321(a)
extends to existing CABS and operates automatically to permit the
override of CBA provisions as necessary for implementation of an
approved rail consolidation.
Present practice for implementing Board-approved rail
consolidations is for the unions and the railroads involved to
negotiate agreements to enable implementation of the Board-approved
transaction. If they are unable to agree, the matter is submitted to an
arbitrator selected by the parties or the National Mediation Board if
the parties cannot agree on the choice of an arbitrator. Because the
arbitrator is acting under section 11321(a), he or she has the
authority and the obligation to modify existing CABS as necessary to
carry out the transaction.
In the recent Conrail Acquisition\3\ decision, at the request of
the various labor organizations, the Board specifically declined to
make a finding in its decision approving the transaction that
overriding provisions in Conrail CABS was necessary to carry out the
transaction. Rather, the Board specifically left the determination of
necessity to the process of negotiation and, if necessary, arbitration.
Even more recently, in the Carmen\4\ decision, the Board elaborated on
the limitations on arbitrators' authority to modify CABS as permitted
by the Supreme Court's N&W decision. In Carmen the Board held that
overrides of CABS by arbitrators are limited, among other things, to
the override authority exercised by arbitrators during the period 1940-
1980, an era marked by labor/management peace regarding the
implementation of rail consolidations. A copy of the Carmen decision is
attached as Addendum J.*
---------------------------------------------------------------------------
\3\ CSX Corporation and CSX Transportation, Inc., Norfolk Southern
Corporation and Norfolk Southern Railway Company--Control and Operating
Leases/Agreements--Conrail Inc. and Consolidated Rail Corporation, STB
Finance Docket No. 33388, Decision No. 89 (STB served July 23, 1998).
\4\ CSX Corporation--Control--Chessie System, Inc. and Seaboard
Coast Line Industries, Inc. (Arbitration Review), Finance Docket No.
28905 (Sub-No. 22), and Norfolk Southern Corporation--Control--Norfolk
and Western Railway Company and Southern Railway Company (Arbitration
Review), Finance Docket No. 29430 (Sub-No. 20) (STB served Sept. 25,
1998). This decision was not appealed by any party.
---------------------------------------------------------------------------
Nonetheless, the Board is aware that labor representatives oppose,
and are understandably dissatisfied with, any provision or action that
permits overriding any existing CBA provisions. If Congress were to
agree with their position, given the Supreme Court decision in N&W,
some modification of section 11321(a) so as to exclude CABS, or some
other legislative expression, could address labor's concerns in this
area.
8. Conclusion. Again, we appreciate the confidence that Congress
has shown by allowing us to play a role in this important process, and
we remain committed to providing a forum for constructive dialogue and
appropriate regulatory relief. If we can be of further assistance in
this or any other matter, please do not hesitate to contact us.
---------------------------------------------------------------------------
* The addenda referred to have been retained in the Committee
files.
---------------------------------------------------------------------------
Sincerely,
Linda J. Morgan.
______
ATTACHMENT 2.--NEWS RELEASE
Surface Transportation Board Issues Notice of Proposed Rulemaking on
New Rules for Major Railroad Mergers
Surface Transportation Board (Board) Chairman Linda J. Morgan
announced today that the Board has issued a Notice of Proposed
Rulemaking (NPR) proposing new rules for major railroad mergers and
consolidations (those involving two or more ``Class I'' railroads, that
is, railroads each with annual revenues of at least $250 million). The
new rules would significantly increase the burden on applicants to
demonstrate that a proposed merger transaction is in the public
interest, reflecting what Chairman Morgan notes as an awareness of the
great risk of failure and the competitive, service, and financial
concerns raised in connection with what could be the final round of
consolidation in the rail industry. In particular, the new rules would
require applicants to show that the transaction would enhance
competition, and they would require much more accountability with
respect to claimed merger benefits and service. At the same time, in
proposing these new rules, the Board indicated that it does not intend
to prevent transactions genuinely in the public interest and would
continue to look with favor upon private-sector initiatives in the
public interest.
Overall Approach. A key element of the Board's proposal is a new
policy statement that, together with the proposed rules, represents a
major shift in basis from the pro-merger approach that has guided
agency merger decisions for the last 20 years. The Board noted that
there is no longer the pressing need that the Nation's largest
railroads once had to consolidate their operations to reduce excess
capacity because that rationalization has largely been accomplished.
Moreover, the Board emphasized that recent consolidations have brought
significant transitional service problems that have harmed rail
customers and delayed full realization of the merger benefits that were
anticipated from those transactions. Accordingly, the Board found it
appropriate to propose new rules requiring applicants to bear a
substantially heavier burden in demonstrating that a merger proposal is
in the public interest.
Enhancement of Competition. The Board recognized that any further
consolidations in the rail industry are likely to result in some
competitive harms, such as the loss of geographic competition, that are
difficult to remedy directly. Because of this problem, and because of
the likelihood based on past experience of harms from service
disruption during the integration period, the Board proposed that it
would require merger applicants in the first instance to include
provisions for enhanced competition as an essential aspect of their
proposals. The Board would give substantial weight to this enhanced
competition in making its public interest determination.
At a minimum, the Board would require applicants to propose
specific remedies to keep open major existing gateways, retain build-
out and build-in options, and preserve the opportunity of shippers in
the so-called bottleneck situation to obtain a contract rate for one
segment of a movement in order to separately challenge a rate for the
remainder of the movement. The Board also would look for other
competition-enhancing proposals, such as those related to paper
barriers, emphasizing that it encourages innovative ways of enhancing
competition throughout the network. The Board noted that, given the
import of future consolidation, it was no longer appropriate to limit
the focus of its conditioning power to preserving competition and
essential services, and that it would impose conditions as necessary to
mitigate or offset all types of harm to the public interest, including
conditions that would enhance competition. In this regard, it would
look carefully at the proposals made by the applicants to enhance
competition.
Assessment of Benefits. The new rules recognize that there can be
economic efficiencies associated with consolidations. However, because
claimed benefits in recent mergers have often been delayed or
frustrated by transitional service problems, the Board would carefully
scrutinize future claims of merger benefits and associated timeframes
to ensure that they are well-documented and reasonable projections. The
Board would expect applicants to propose additional measures that the
Board could take if the anticipated public benefits should fail to
materialize in a timely manner. Additionally, the Board would view
proposals to enhance competition as public benefits, and the Board
would consider whether the benefits of the particular consolidation
claimed by the applicants could be realized by means short of a merger
through private-sector initiatives, such as joint marketing agreements
and interline partnerships.
Downstream Effects. The Board also noted that, with only a handful
of major railroads remaining, any further merger proposals could
trigger other applications that the Board would have to consider. The
Board recognized that a transaction involving two Class I rail carriers
will affect the entire transportation system, including regional and
shortline railroads, highways, waterways, ports, and airports. The
Board cautioned that ``we must be confident that at the end of the day
a balanced and sustainable rail transportation system is in place.''
Thus, the Board would assess the likely outcome of any major proposal
on the future structure of the industry through an examination of its
downstream effects.
Service and Oversight. Applicants would be required to submit up
front detailed service assurance plans, including contingency plans, to
permit the Board's staff to assess proposed consolidated operations
prior to approval. As part of this process, the Board would expect a
discussion of specific service levels to be attained from the proposed
transaction. The Board would expand its post-approval monitoring of the
implementation of mergers to help ensure that adequate service is
provided during the crucial transitional period and beyond.
Additionally, applicants would have to establish problem resolution
teams and specific problem resolution procedures to ensure that post-
merger service problems are promptly and appropriately addressed. The
Board would anticipate the establishment of a Service Council
consisting of shippers, railroads and other interested persons in each
merger proceeding to provide an ongoing forum for the discussion of
implementation issues for that transaction. And the Board's proposal
would formalize the role of oversight in the merger approval process,
with successful applicants required to submit reports on no less than
an annual basis, subject to comment by the public, for a period of at
least 5 years.
Employee Concerns. The Board emphasized that it strongly supports
early notice and consultation between the railroads and their
employees, and that it prefers negotiated solutions to merger
implementation problems. The Board also said that it ``respects the
sanctity of collective bargaining agreements'' and that these should
not be changed ``except to the very limited extent necessary'' to
implement a particular transaction. In this regard, the Board urged the
railroads and the various rail unions, building upon prior efforts, to
negotiate systemwide agreements concerning these issues, and to report
back to the Board as soon as possible.
Transnational Issues. The proposed rules also reflect additional
attention to international issues related to applications involving
Canadian and Mexican railroads. The Board would require applicants to
cooperate with the Federal Railroad Administration concerning safe
implementation of those transactions, and would require applicants to
show that any applications approved by the Board are consistent with
the North American Free Trade Agreement and would not undermine the
Nation's defense needs.
The NPR was issued today in the case entitled Major Rail
Consolidation Procedures, in STB Ex Parte No. 582 (Sub-No. 1). Vice
Chairman Burkes and Commissioner Clyburn commented with separate
expressions. The NPR follows the Board's March 31, 2000 Advance Notice
of Proposed Rulemaking (ANPR) in that docket. In the ANPR, the agency
instituted a rulemaking and sought public comment on modifications to
its regulations governing proposals for major railroad consolidations.
The ANPR followed March 7-10, 2000 public hearings held by the Board in
the case entitled Public Views on Major Rail Consolidations, in STB Ex
Parte No. 582.
Comments in response to the NPR are due on November 17, 2000,
replies are due on December 18, 2000, and rebuttal comments are due on
January 11, 2001. The Board will issue its final rules by June 11,
2001.
Printed copies of the NPR are available for a fee by contacting Da-
To-Da Office Solutions, Room 405, 1925 K Street, N.W., Washington, DC
20006, telephone(202) 466-5530. The NPR also is available for viewing
and downloading via the Board's website at www.stb.dot.gov.
Senator Smith. Thank you, Chairman Morgan. First, so I
understand your agency a little more, you have 143, roughly,
employees, and is the issue of authorization affecting your
ability to keep current with staffing and workload?
Ms. Morgan. Well, despite the fact that we have not been
reauthorized, we have been funded on an annual basis,
essentially a level funding.
Senator Smith. So that is not an impediment to your
continuing?
Ms. Morgan. It is not an impediment unless people decide to
stop funding us because there is no authorization.
Senator Smith. And I think you indicated in your testimony
you win 90 percent of the decisions that are taken to court.
Ms. Morgan. Over 90 percent, that is correct.
Senator Smith. Which ones didn't you win?
[Laughter.]
Ms. Morgan. Well, I referenced, of course, the market
dominance decision, which we won in part, but it has been
remanded to us for further review. We have lost a couple of
cases in the trails use area. If you abandon a line, then that
particular line can go for trails use. There is a conflict
between landowners who do not want trails and those who want
trails, and some of those cases we have not managed to win on
appeal, but the big cases we have won on appeal.
Senator Smith. I know, given how few railroad companies
remain, that shippers are certainly looking to you for your
intervention and help, I assume. Do you feel that pressure all
the time?
Ms. Morgan. All the time.
Senator Smith. I figured you would.
Ms. Morgan. I feel pressure from many quarters all the
time.
[Laughter.]
Senator Smith. You know, I cannot remember a time with more
intensity of complaint from the northwest. When the UP and the
Southern Pacific merged and there was a serious deterioration
of service, there was literally mills and plants that were
laying off people just simply because they could not move
inventory.
Is there--I mean, I do not know how many more rail mergers
there could possibly be, there are so few railroads left, but
in the event that there were, is there a way to better mitigate
those kinds of impacts that are just felt very keenly and
personally by folks, and they certainly ring our phones off the
hook. Can you speak to that particular instance, and I do not
think it is a stretch to say that other mergers have had
similar problems. Is that accurate?
Ms. Morgan. Well, certainly with this last round of mergers
we have experienced service problems. Obviously, some have been
more associated with particular mergers than with others, but
as a whole this last round has been difficult, and I certainly
understand what the customers in your communities have gone
through.
One of the reasons that we are reexamining our rail merger
policy and rules is to try to reflect the lessons that we have
learned in this last round, and obviously one of the lessons
learned has been the difficulty in operational integration when
you have a melding of systems that creates integration
problems, whether it be with computers or personnel or
whatever. The other lesson learned has been the impact of
inadequate infrastructure on service, and that was part of what
you experienced in your area of the country.
So the proposed rules that we put out in October, on which
we will be having an oral argument in April, focus very
specifically on getting more details about the service that
would be provided in a proposed merger. We want that up front.
We want the details up front. We are also looking for more
accountability. What is put forth up front, the applicants
would be held accountable for it. We also are looking up front
for contingency planning and problem-solving in the event that
there are service problems.
Senator Smith. And absent those things, those mitigating
factors, you would not allow a merger to go forward?
Ms. Morgan. We would be looking for the applicants to bring
to us very specific details on service, and if those details
are not there, then the application would not be able to go
forward.
Senator Smith. Since the Board's creation, how many rail
mergers have there been?
Ms. Morgan. Four. I have overseen four.
Senator Smith. Suffice it to say you have learned from
those four some things that could be very helpful should there
be further mergers.
Ms. Morgan. Yes, and as a matter of fact, when we had the
service situation in the West we learned from that, and we
carried our lessons into how we established our monitoring for
the Eastern merger, and how we have handled that since then.
And of course many times I have been asked, have you learned
from what has gone on, and I am proud to say that yes, we have,
and any agency that does not learn is not doing its job.
Senator Smith. Are there any mergers on the table right
now, and which ones are likely to be anticipated by your
agency?
Ms. Morgan. Well, in terms of major rail mergers, I do not
know of any out there being discussed. I certainly would not
know what is being discussed in rooms that I am not in at the
moment, and I really would not want to prejudge whether we will
see any, and what I would do with those.
I would say, though, that I am asked this a lot--will there
be more mergers, and I think a lot will depend upon the
economy, how our rules are viewed, what the customer view of
more mergers is, and finally, what the investor community feels
about more consolidation. So I think all those things will come
together to answer that question.
Senator Smith. Linda, I remember from my own business
experience when I was selling a big volume of peas to
Campbell's Soup in Camden, New Jersey, I could get a pretty
good rail price for that volume going across the country, and
if I had to, I could take it to Burlington Northern on a
different spur.
I also know that when I wanted to ship to Boise, Idaho, for
a few pallets it was pretty expensive, but I am wondering how
you evaluate those kinds of volume differences, and how you
assuage the feelings, if you attempt to at all, of captive
shippers, people unlike in my experience, where we are on a UP
line, if we had to we could truck to a Burlington line. What do
you say to a captive shipper that just does not have any
option, and he is paying a lot more to go to Boise than he
would to go to Camden, New Jersey?
Ms. Morgan. Well, the law that the Board implements is
based on the assumption that there, first of all, are customers
out there who are only served by one rail carrier, which has
been the case for a while, and secondly, that prices will
differ between various customers, and that for competitive
customers, customers where there is more competition, more
competitors, those prices might be lower than captive customer
rates, which is called differential pricing. Those are the
assumptions made in the law that we implement.
So as to what we do in terms of our responsibilities vis-a-
vis captive shippers, the law says that where there is no
effective competition, the Board is to step in and regulate. As
I said in my oral comments, an important part of that is our
regulation of rail rates and allowing for a process for captive
customers to challenge rates based on the argument that they
are reasonably high.
Senator Smith. And are those challenged on an ongoing
basis? Is that one of your biggest workloads?
Ms. Morgan. Well, in recent years the Board has handled
about four of those cases, and recently we have had several
filed, so we now have up to 7, I believe, rail rate cases
pending.
Senator Smith. How do they normally come out? What factors
would say, this is injurious here and it would not work?
Ms. Morgan. Under the law there is a certain threshold
below which we do not look at a rate and above which we do, and
in this regard, we look at the revenue-to-cost ratio, variable
cost ratio, and whether there is market dominance or not. Once
you get beyond those thresholds, then we evaluate whether the
rate is unreasonable based upon what we call the stand-alone
cost methodology, which is, create the most efficient railroad
and figure out what its costs would be and its revenue flow
would be, and then from that you determine whether this
particular rate that is at issue is too high or not.
Senator Smith. And do the railroads understand those
formulas pretty well that you follow?
Ms. Morgan. I think everyone understands the stand-alone
cost methodology well. It has evolved, and during the Board's
tenure we have refined the standard so that people know what
these cases should look like going forward, and we are
continuing to do that with each case, so for large shippers the
stand-alone cost methodology is well-known and understood.
Senator Smith. And observed?
Ms. Morgan. And observed.
Senator Smith. That then brings me to--I wish he were here.
Senator Dorgan has a bill that shifts some of this
responsibility to the Department of Justice, as I understand. I
do not know all the details of the bill, but I am wondering, in
light of what you just told me, how do you factor in the
prospect of his bill and what it would do?
Ms. Morgan. Well, as I understand his bill, it would
involve the Justice Department more in the merger process, the
rail merger review process. It would also remove any antitrust
immunity that would attach once a rail merger is approved,
which is the case today. It also would remove immunity for
certain other railroad activity. That obviously is a change
from where we are today.
This has been a discussion that we have had in the past,
should we have the Justice Department more involved in the
review of rail mergers, and what I have said on that is that
the Justice Department is a party in our processes. They have
filed in all of the mergers that they have cared to file in. We
have disagreed on one merger, and that was the Union Pacific-
Southern Pacific merger. Yes, we disagreed on that. The Board
felt strongly that the SP would not survive without a merger
with the Union Pacific. So I guess I question what of the
current process is broken in that regard.
I think with respect to eliminating antitrust immunity
otherwise the question for this Committee would be whether that
somehow creates a duplicative agency involvement that perhaps
is not necessary. That would be how I would analyze that.
Senator Smith. I am very pleased to be joined by the
Senator from Kansas, Senator Brownback. Do you have a statement
or a question?
STATEMENT OF HON. SAM BROWNBACK,
U.S. SENATOR FROM KANSAS
Senator Brownback. Thank you, Senator Smith. Linda, welcome
to the Committee. You have been here a number of times before.
I have worked with you on a number of issues, and I appreciate
your willingness to work with a number of us. If you have
already covered this, I apologize, and you may need to cover it
again, but I want to go to the rail merger issue and discuss
that a little bit with you if I could.
I noted in your testimony, in 1999 the Surface
Transportation Board stepped in on the BNSF merger with
Canadian National and put a 15-month moratorium in place at
that time before proposing some new rules and regs on that. I
wonder what do you see now in the offing, of large railroad
mergers, or what are you anticipating coming down or toward the
Surface Transportation Board on some of these larger railroad
mergers?
Ms. Morgan. Well, as I indicated before you came in,
certainly I do not want to prejudge what might come to me and
how to handle that, but in terms of whether there will be more
mergers, as I indicated to Chairman Smith a minute ago, a lot
of it will depend upon how our rules are viewed, our final
rules once they come out in June, how the economy is, how
customers view more mergers, how investors view more mergers.
Whether there are discussions going on about more mergers right
now, obviously I do not know that one way or the other.
What I did not say to Chairman Smith, but I will say to
you, is that I certainly hope that we will have a period here
where we focus on operations, focus on day-to-day business,
focus on running the rail network, and providing better service
with the system we have today. And of course one of the reasons
for the moratorium was to create some stability in the industry
while we reviewed our rail merger policy and rules.
Senator Brownback. Do you feel like the rules you have in
place now are sufficient to handle another round of potential
large mergers if they were to come down the road in a year or
two?
Ms. Morgan. Well, the rules that we now have in place we
determined are not sufficient, and that is why we have a
moratorium in place and are reexamining our policy and rules.
Obviously, we hope that the final rules that we issue in June
of this year will be appropriate for whatever may come to us in
terms of a final round of mergers.
And as I discussed earlier, the proposed rules we put out
in October raised the bar, and put a burden, a substantially
heavier burden, on the applicants as it relates to competition
and service and accountability for benefits.
Senator Brownback. I am sorry you are having to cover
terrain over a second time.
Ms. Morgan. That is OK. Maybe I said it better the second
time. It gives me a second bite at the apple.
Senator Brownback. I am sure you said it great both times,
and I apologize for that, but that has been a big issue in my
State, is to watch that, and watch what takes place.
I think a number of people were very happy with the
moratorium put in place last time, just let us put a pause
here, we are not exactly sure what all of this is going to lead
toward, and I thought pause was the right way to put it, not
say no, we are not going to do this, and we are going to
prevent these, but more of a pause, and taking some time.
One other narrower, State-specific issue for me is that we
are trying to get some of these short-line railroads to expand
into the State instead of track being abandoned, and there is
an ongoing effort in the States to try to put together public
financing to help upgrade some of the short line railroads. We
have got a big one in central Kansas. Are you familiar with
this issue?
Ms. Morgan. Yes.
Senator Brownback. There is a substantial mileage of track
with heavy agriculture and a fair amount of manufacturing, so
that it sits well within a rail service, and it needs rail
service, but the financing on it has been tough to come up with
for a short-line operator to come in and upgrade the track
sufficiently to run it on an economically competitive basis.
I just want to make sure you are aware of it, and that we
are going to try to do what we can to get the help to be able
to upgrade these facilities to be able to maintain that
trackage. Any suggestions you have, ways that this can be done,
or that it can be handled better or more likely to be
successful would obviously be appreciated.
Ms. Morgan. Well, the Board staff has been working with
some of the customers in Kansas on this whole issue of
abandonments in Kansas, and so that is why I am intimately
familiar with some of what you have been experiencing in the
State, and I know there was a discussion of a moratorium on
abandonments in the State, and we will continue to work with
you on that.
Many times when we get into these issues we are able to
bring parties together on an informal basis, get the right
people together to make the right thing happen, which does not
necessarily require regulation on our part, but is more of an
informal process and an intervention in the private sector way
to move the issue.
Senator Brownback. It has been my perspective over time
that one of the best things Government can do is create the
right atmospherics, create the right atmosphere for this to
move forward and to try to encourage it so that the private
sector looks at it and says, well, we do not think we are going
to have impediments from Government because they are trying to
encourage and facilitate this, and whereas if it is more
standoffish from Government a lot of times they might say,
well, this is going to take us more time, it is going to take
us more effort, more resources to do this because we do not
have that encouragement, that atmosphere that is encouraging,
and so I appreciate your helping us out with that. We could
sure use that line.
We are glad to see you still on the task, and focused on
keeping our railroads running.
Ms. Morgan. Thank you.
Senator Brownback. Thank you, Mr. Chairman.
Senator Smith. Thank you, Sam.
Linda, just a couple more things. We have talked around the
open access issue, something that shipper groups often
advocate. I wonder if you can speak to how differential pricing
could be carried out in an open access environment. Does that
work?
Ms. Morgan. Well, as I indicated before, the basis for the
law that is in place now is that there would be differential
pricing so that some rates would be higher than others,
depending upon the marketplace.
If legislation were to pass to provide for open access, a
guarantee of two rail carriers for every shipper, then the net
effect of that presumably would be to bring rates down, which
of course I know customers want, and in the short term that
would happen, but then as I have indicated before, that would
have an impact on the revenues coming into the system and you
would not have the differential pricing impact that you have
today, because all the rates would come down. Then you would
create a revenue shortfall problem, which over the long term
could result in a smaller network than what we have today, with
less investment going into the infrastructure.
Senator Smith. I would like to focus on that last point you
are making, because I think it is really somewhat unique to the
rail industry. The amount in investment and infrastructure, I
mean, is absolutely enormous. If you went to a system like
that, or a statutory requirement, what does that likely mean to
the willingness of a railroad to invest in its infrastructure
for the future?
Ms. Morgan. Well, I think as I said there would be two
issues. One would be, of course, the amount of money that is
available to do whatever is necessary, and that, of course, was
the genesis of the Staggers Act originally, that we had an
industry that was not financially sound, and we needed to
create a system in which it could get sounder through a revenue
flow that made more sense in terms of needs.
But the second issue is one of incentive, I think, and that
is what you are also getting to, and that is, if someone is
brought onto the tracks of a particular carrier, you would
obviously have the issue of price, how much should that access
be worth to the carrier onto whose track someone has entered to
ensure reinvestment. You also have issues of private property,
and someone else using private property, and so that creates
possibly a disincentive for investment. And I think what we
have seen in Britain, where you have a split between operations
and the infrastructure, is that the incentive to invest in the
infrastructure is not there the way it would be if the
operations and the infrastructure were together in the same
operation.
Senator Smith. What kind of shape is the rail
infrastructure in?
Ms. Morgan. Here in the United States today?
Senator Smith. Yes.
Ms. Morgan. Well, the industry has put a lot of money over
the last several years into infrastructure in general, and also
in the context of the mergers that have been approved. We are
now seeing a slowing in that, and that, of course, has to do
with the economy, and it has to do with the view on Wall Street
investors that perhaps the investment to date have not produced
the kind of returns that it should have.
In any event, we are seeing a slowing in the investment,
and we need to always be concerned about a slowing in the
investment, because in order to ensure that you have good
service into the future and the potential for improved service
into the future, you need to make sure that investment in the
infrastructure can continue.
Senator Smith. So any effort to go statutorily to an open
access concept would have to allow a user fee, or some sharing
of infrastructure burden, and that is a given, is it not?
Ms. Morgan. Well, you would have to make sure that both the
marginal cost and the fixed cost of the network are covered,
and that is the challenge, really, in the rail industry. And
then, of course, otherwise I guess you could go to a system of
federally funding the infrastructure, but again I am not sure
that that is necessarily something that anybody is embracing
today.
Senator Smith. I have not heard anybody propose it around
here.
[Laughter.]
Senator Smith. Linda, you have been very, very helpful, and
I would note that you are joined by two members of your Board,
and I would like to introduce them. They are Wayne Burkes--
Wayne, if you would stand--and William Clyburn as well. We
welcome you both, and thank you for your service, and Linda, we
thank you for the job you are doing. You are always in the
cross-hairs, and it is not easy, but it is necessary, and you
handle it very, very capably.
We thank you for that, and we thank all of you for
attending this morning. It has been helpful. It is a good
start, and there are many more hearings to come of the
competing interest in this issue, so thank you all, and with
that, we are adjourned.
[Whereupon, at 10:15 a.m., the Subcommittee adjourned.]
A P P E N D I X
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
Thank you Mr. Chairman. Welcome to the Committee and to the Surface
Transportation Subcommittee. I look forward to working with you on
issues of importance to my constituents, and to the entire nation, that
will come before this subcommittee. I commend you for beginning to
address the state of our country's railroad system so early in your
chairmanship, and I applaud you for committing to three hearings on the
various issues involved.
Good morning, Chairman Morgan, and welcome back.
As Ms. Morgan knows, and as I suspect Chairman Smith has heard, in
the past I have been primarily interested in the workings of the STB,
and its predecessor the Interstate Commerce Commission, with regard to
these agencies' oversight of the freight rail industry, and in
particular, the efforts both agencies have taken to ensure that
railroads and rail shippers, not to mention the frequently forgotten
end-use consumers, each enjoy the benefits of the competitive rail
market that Congress believed it was setting up with the passage of the
Staggers Act more than twenty years ago.
I have had the opportunity to discuss this issue with and before
Ms. Morgan on a number of occasions. Given that history, I am quite
sure she will be happy to hear that after a brief description of the
Board's responsibilities regarding rail competition and the current
merger moratorium and rulemaking, I intend to refrain from belaboring
the point, at least for today.
Mr. Chairman, it is important for all of our Members, especially
our new Colleagues, to understand what the STB is called upon to do.
When the 104th Congress terminated the ICC, we were careful to not
leave the rail freight industry operating in a vacuum. We entrusted the
STB with the authority to regulate the nation's freight rail carriers,
including authority over rail mergers and responsibility for protecting
the rights of rail labor. Many people who have followed this issue
during the past few Congresses know that I have not always been
convinced that the STB has acted with the broadest possible
understanding of the power I believe Congress intended it to have.
Two relatively recent actions by the Board that I believe may
demonstrate the appropriate level of concern for rail competition are
the moratorium and subsequent rulemaking regarding rail mergers. As the
industry has moved rapidly toward corporate consolidations that may
further reduce the competitive nature of the rail freight hauling, the
STB took action that may result in the Board giving a more searching
and appropriate inquiry to railroads seeking approval of their mergers.
With the rulemaking proceeding set to conclude later this year, I
expect to give the Board's recommendations a searching inquiry of my
own, and I look forward to discussing the matter further with Ms.
Morgan.
Once again, I want to express my thanks to Chairman Smith for
devoting his time and intellect to these important issues. I know that
in the months to come, as the Subcommittee considers oversight and
reauthorization of the STB, we will continue to look to you for
leadership on the issues that will come before us.