[Senate Hearing 107-1057]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1057

                      RAIL FREIGHT TRANSPORTATION 
                            IN NORTH DAKOTA

=======================================================================

                             FIELD HEARING

                               before the

           COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 27, 2002

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia 
BILL NELSON, Florida
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
      Jeanne Bumpus, Republican Staff Director and General Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 27, 2002...................................     1
Statement of Senator Dorgan......................................     1

                               Witnesses

Bobb, Jim, Grain Division Manager, Southwest Grain...............    45
Bobb, Stevan B., Group Vice President for Agricultural Products, 
  The 
  Burlington Northern and Santa Fe Railway Company...............     3
    Prepared statement...........................................     5
Clark, Tony, Public Service Commissioner.........................    47
    Prepared statement...........................................    49
Fisher, Craig, North Dakota Wheat Farmer.........................    50
Griffin, Gene, Director, Upper Great Plains Transportation 
  Institute, North Dakota State University.......................    52
    Prepared statement...........................................    55
Johnson, Roger, North Dakota Agriculture Commissioner............    75
Lee, Larry, Vice Chairman, North Dakota Wheat Commission.........    75
    Prepared statement...........................................    76
Strege, Steven D., Alliance to Keep Rural America on Track; 
  Executive Vice President, North Dakota Grain Dealers 
  Association....................................................    20
    Prepared statement...........................................    23

                                Appendix

Christianson, Jim, Executive Vice President, Montana Wheat and 
  Barley Committee, prepared statement...........................    86
Morgan, Linda J., Chairman, Surface Transportation Board, 
  prepared 
  statement......................................................    80
    Response to written questions submitted by Senator Dorgan....    83
North Dakota Farm Bureau, prepared statement.....................    85
North Dakota Grain Dealers Association and Alliance to Keep Rural 
  America on Track, supplemental testimony.......................    84
Response to the Southwest Grain testimony from Stevan B. Bobb....    79

 
                      RAIL FREIGHT TRANSPORTATION 
                            IN NORTH DAKOTA

                              ----------                              


                       WEDNESDAY, MARCH 27, 2002

                               U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                      Bismarck, ND.
    The Committee met, pursuant to notice, at 1:30 p.m., at the 
Brynhild Haugland Room, North Dakota State Capitol, Hon. Byron 
L. Dorgan, presiding.

          OPENING STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. We'll begin the hearing today. My name is 
Byron Dorgan and I'm Chairman of the Subcommittee of the Senate 
Commerce Committee that deals with consumer affairs and related 
issues and we are having a hearing today on the impact inverse 
rail rates are having on the State of North Dakota. I'm joined 
by Emmett O'Keefe who works with me on the Commerce Committee 
and two staffers, Debbie Hersman here on behalf of the Majority 
staff and Mary Phillips on the Minority.
    The transcript of this hearing will be made available, of 
course, to the Full Commerce Committee and the Senate and I 
intend also to make the transcript available to the Surface 
Transportation Board.
    I'll be making a couple of brief comments as we begin and 
then we have six witnesses. We will ask that the witnesses 
condense their comments, their testimony to 5 minutes each and 
we'll give you a signal at the end of 4 minutes. We won't be so 
rigid that if you go over a bit, there's no trap door through 
which you will fall, but we would like you to stay, if you can, 
close to 5 minutes; and following that I will ask a series of 
questions and then we may have some time at the end for others. 
If they wish to make comments, we will recognize them to do so.
    I would make a couple of comments about railroads. First of 
all, we have a representative of Burlington Northern Santa Fe, 
Steve Bobb, we have a representative of Upper Great Plains 
Transportation Institute, Gene Griffin, and they will talk 
about the railroad company itself, about transportation in a 
more general way.
    It is not a secret that I am one of those in the Senate 
that has cosponsored legislation called the Rail Shipper 
Protection Act because I believe that our rail system is 
broken. Deregulation, in my judgment, has led to a rail system 
dominated by what I believe are regional and actually larger 
monopolies today. We have gone from 42 to I believe only a few 
companies with very, precious little competition. A 
consolidation does not happen in a vacuum, it was accommodated 
by the U.S. Congress with specific legislation and then by the 
Surface Transportation Board and the ICC before it, which has 
been relatively unagressive in dealing with that concentration. 
The pro-competitive intent of the law, in my judgment, has not 
been realized by the consumers in this country.
    Now, in 1999 the GAO documented in a study that I was a 
part of how it is nearly impossible for a shipper to get rate 
relief under these circumstances. The GAO found out that it 
takes up to 500 days to decide a rate case, can cost hundreds 
of thousands of dollars, and can take anywhere from 2 to 16 
years to actually get a result in a rate case. So effectively, 
you have a circumstance where we don't have the capability 
under the law and under the circumstances that exist with the 
STB of having complaints on rail rates and other issues 
adjudicated in a circumstance that would be good for consumers.
    Part of the hearing today is a result of a request by 
shippers in North Dakota who have reacted to another initiative 
by the Burlington Northern Railroad dealing with inverse rate 
structure. The inverse rate pricing, which was announced some 
while ago in North Dakota, it is alleged and will be alleged in 
testimony today is causing great problems in our State for 
country elevators, small towns and for shippers, and we want to 
explore what these rates are and what is the justification for 
the rates and what remedy might exist for shippers.
    This chart shows some of the rail prices to the Pacific 
Northwest reported in North Dakota. These are wheat rates, 80 
cents from Breckenridge, 80 cents from Alton, $1.18 from Minot, 
$1.08 from Gladstone. Now, these are shipments to the West 
Coast and one would probably question why would you pay more to 
ship a shorter distance. We know that that kind of system has 
existed in previous circumstances. I've been in hearings where 
they've talked about corn being shipped from Iowa to the West 
Coast being charged a lower rate than corn from North Dakota to 
the West Coast. So this inverse rate pricing or set of inverse 
rates is counterintuitive to someone who thinks that the rates 
ought to relate to distance travelled but we will hear a lot 
about that today.
    The question I want to ask is, Is this divergence in rates 
fair? If one alleges it is fair, the question is, fair to whom? 
What will be the impact on elevators that are not able to offer 
the better rate if farmers are forced to bypass the better 
elevators for only a handful of designated elevators. Even if 
we make the assumption for BN to drag grain westward, is there 
an equal opportunity for all those elevators to offer the same 
rate? If not, what will happen to the elevators that are left 
out, especially when many have already spent millions of 
dollars to upgrade their facilities to the benefit of the 
railroad? Are all of the costs safe and efficiency passed on to 
the producers? What will the impact be on local, State, and 
Federal highway systems as thousands of trucks travel on our 
already overloaded road system because of displacement? These 
and other issues are things that we'll discuss.
    I mentioned that I have worked with a bipartisan Rail 
Shipper Protection Act and it is a more comprehensive piece of 
legislation that would try to make life more fair for captive 
shippers. The legislation that we are trying to deal with is 
legislation that would address a range of issues, not just this 
pricing issue, but that legislation has not yet moved in the 
Congress and is, of course, somewhat controversial. Today we 
will address the narrower issue and I assume some will address, 
in their comments, the broader issues of rail competition.
    With that, let us begin. And I would like to also introduce 
Commissioner Reinbold, Commissioner Wefald, who are in the 
audience, and Commissioner Johnson. Thank you for being here.
    Why don't we begin and ask Mr. Steve Bobb from Burlington 
Northern to proceed.
    Mr. Bobb, thank you for joining us and we will include your 
entire statement as a part of the record. I have read your 
statement and you may summarize.
    Mr. Bobb.

     STATEMENT OF STEVAN B. BOBB, GROUP VICE PRESIDENT FOR 
             AGRICULTURAL PRODUCTS, THE BURLINGTON 
             NORTHERN AND SANTA FE RAILWAY COMPANY

    Mr. Stevan Bobb. Thank you. Good afternoon. Senator Dorgan, 
my company appreciates the opportunity to appear today and 
represent our views.
    My name is Steve Bobb and I'm Group Vice President of 
Agricultural Products for----
    Senator Dorgan. Excuse me, do we know what that sound is?
    Mr. Stevan Bobb [continuing]. Burlington Northern Santa 
Fe--I have no idea what it is--Railway Company. I do want to 
make a few comments to summarize my testimony.
    Senator Dorgan. We need to give you a better start than 
this, Mr. Bobb. Why don't we switch the microphone and see if 
we can avoid that sound.
    Mr. Stevan Bobb. I do want to make a few opening remarks 
and summarize my written testimony which covers these issues in 
great detail.
    My written testimony touches on the efforts we've made this 
past decade to increase both the quality of service and the 
range of service products that we offer all of our customers as 
well as the role of capital investment in maintaining our 
infrastructure.
    I do want to refer to a hearing held here in North Dakota 
in December 1997, in which service issues as well as rates were 
greatly discussed, and we believe these service issues that 
were raised at that hearing have been addressed. They were not 
addressed easily. Beginning in 1995 and through the end of 
2001, our company spent nearly $12.5 billion, that would be 
$5.7 million per day, on infrastructure and that infrastructure 
is now, we believe, providing our constituents in North Dakota 
with the best service they have experienced.
    I do want to describe how our pricing initiatives and 
discounts that we have made that have been the subject of some 
controversy in the last several months have been introduced to 
make North Dakota farmers competitive in export markets. We 
think we have responded to markets by providing farmers with 
rate efficiency discounts and essentially given wheat producers 
the same products that are available to corn and soybean 
producers in other geographic territories.
    I also want to touch on the issue of rate levels. You 
mentioned a GAO study that touched on rates and our revenue per 
ton-mile has declined 32 percent, adjusted for inflation, in 
the agricultural commodities area between 1994 and the first 
quarter of 2001. That has occurred due to competition with 
other railroads and other modes, and we believe we have passed 
these efficiencies on to the customers in the form of lower 
rates.
    I have some charts in my testimony that actually compare 
wheat transportation rates both westbound to export markets and 
eastbound to Minneapolis on 52-car shipments from a period of 
1981 through calendar year 2001 and there are periods in which 
the rates go up and the rates go down, but essentially our 
producers are experiencing the same rate per bushel in both of 
those markets as they did in 1991. For example, to the Pacific 
Northwest. Burlington Northern Santa Fe has literally taken 
over a dollar per bushel of inflated transportation costs out 
of the market.
    I do want to touch on the shuttle network which we believe 
represents the success, not only of infrastructure which means 
something to our customers of BN Santa Fe, but also of success 
in taking a new approach to how we operate that infrastructure. 
The growth over the last 5 years of the shuttle network 
reflects the benefits our customers are reaping. Grain cars in 
shuttle service make almost three times as many trips per month 
as cars in the rest of the grain fleet.
    Three points I do want to make about our shuttle service. 
First, we still continue to offer single-car, 26-car, and 52-
car service--it is not a one-size-fits-all program. We have 
merely broadened. Second, shuttles are not a large customer 
game; over 60 percent of our shuttle facilities are owned by 
local cooperatives and independent grain companies. And third, 
farmers are delivering grain to the shuttle networks because 
they make more money by doing so. The shuttle network shares 
characteristics of our other high efficiency and high service 
network, which is coal and intermodal and the results of 
transportation in those speak for themselves.
    I want to talk about differential or market-based pricing 
and because that does lead to different rates for movements of 
different commodities or movements between areas of the 
country, and it specifically is not distance- or cost-based, it 
is based upon the competitive factors at both origin and 
destination. We seek to maximize the amount of product moving 
over our entire network. We are part of the supply chain that 
brings grain to markets and we respond to the market demands. 
Our so-called inverse rate structure helps supplement and does 
not displace the export markets traditional origination 
territory.
    In summary, from a policy prospective, BN Santa Fe 
continues to urge the need for flexibility and market 
innovation in rail transportation. We believe that is essential 
not only for our company, but certainly for our customers to 
remain competitive in their marketplaces.
    [The prepared statement of Mr. Stevan Bobb follows:]

      Prepared Statement of Stevan B. Bobb, Group Vice President, 
  Agricultural Products, The Burlington Northern and Santa Fe Railway 
                                Company

    My name is Stevan B. Bobb. I am Group Vice President, Agricultural 
Products for The Burlington Northern and Santa Fe Railway Company 
(``BNSF''), 2650 Lou Menk Drive, Fort Worth, Texas. I began my career 
in the railroad industry in 1987 with Burlington Northern and have held 
various positions in information systems, business analysis, and 
planning and yield management. In 1992, I moved to the marketing area 
in our company. I was appointed to my current position of Group Vice 
President, Agricultural Products in June 1999. I am responsible for the 
marketing of rail services on our system for whole grains agricultural, 
products, and fertilizer.
    In response to the request from this Committee, I am appearing and 
offering this testimony for the purpose of providing information about 
BNSF, the role of our railroad in the movement of agricultural 
commodities, and the products and services we offer our customers. My 
testimony describes the efforts we have made over the past decade to 
increase the both the quality of service and the range of service 
products we offer our customers, as well as the role of capital 
investment in maintaining the infrastructure which is critical to 
providing that service.
    I will also specifically describe our shuttle network and the 
efficiencies it provides our customers, as well as address aspects of 
our current pricing initiatives. Like other trends in the rail 
transportation of agricultural products over the last twenty years, the 
shuttle network and concept is another essential step to greater 
efficiency for all of us in this supply chain. Similarly, I will 
describe how the pricing initiatives and discounts we have made that 
have been the subject of concern in the last six months have been 
introduced to make North Dakota farmers more competitive in those 
markets. BNSF has responded to the market by providing rate and 
efficiency discounts and offering wheat customers and producers the 
same economic options for lower cost transportation that have been 
available to corn and soybean shippers, and other users of rail 
transportation. Thus, from a public policy standpoint, I will urge you 
to recognize the need for flexibility and market innovation in rail 
transportation, not increased or stifling regulation, to keep us a 
vibrant part of the agricultural supply chain in domestic and world 
markets. I believe this is essential for BNSF to be able to keep making 
the investments in rail infrastructure necessary to allow us to provide 
the service North Dakota needs.

   AGRICULTURAL COMMODITIES AND PRODUCTS ARE A CRITICAL PART OF OUR 
                                BUSINESS

    The transportation of agricultural commodities and products 
represented approximately 17 percent of BNSF's 2001 total freight 
revenues. Our business unit handles wheat, corn, sugar, high fructose 
corn syrup, soybeans, oil seeds and meals, feeds, barley, oats and rye, 
flour and mill products, milo, oils, specialty grains, malt, ethanol 
and fertilizer. The BNSF network is strategically located to serve the 
grain-producing regions of the Midwest and the Great Plains. In 
addition to serving most grain-producing areas, BNSF Railway serves 
most major domestic terminals, storage, feeding and food-processing 
locations. BNSF also has access to major export markets in the Pacific 
Northwest, the western Great Lakes, Texas Gulf and Mexico. We have 
historically played a key role in moving North Dakota's production to 
markets in the rest of the country and for export through the PNW 
ports.
    Our railroad and our agricultural customers are a part of both a 
North American and a worldwide market. Our revenues from movements of 
agricultural products were approximately 5 percent lower in 2001 than 
2000 primarily due to weaker corn export shipments to the Pacific 
Northwest and Mexico, and decreased shipments of Gulf and Pacific 
Northwest wheat, both caused by worldwide crop competition. We also saw 
decreased shipments of sweeteners due to an oversupply of sugar and 
supplier price competition in the corn syrup market, which resulted in 
less rail traffic of those commodities. We continually look for ways to 
promote the movement of agricultural commodities to and from the 
territories we serve, as I will discuss below.
bnsf has continued to invest in our railroad and strives to improve our 

                         SERVICE AND EFFICIENCY

    The key to our ability to provide our customers with the service 
they demand is our rail infrastructure, including equipment, track and 
associated structures. The BNSF merger in 1995 led to a huge capital 
investment program on our property. By the end of 2001, BNSF had spent 
about $5.7 million per day, or $12.5 billion, to improve our 
infrastructure--rails, ties, ballast, bridges, tunnels and yards; to 
expand our network by reopening the Stampede Pass route in Washington, 
by rebuilding Argentine yard in Kansas City, boosting intermodal lift 
capacity at hubs in Los Angeles, San Bernardino, and by building a new 
Stockton, California, hub, not to mention adding 500 miles of double 
and triple track; and acquiring some 1,700 locomotives and thousands of 
freight cars.
    We have a fleet of almost 29,000 grain covered hopper cars, which 
we either acquired ourselves, by purchase or lease from car leasing 
companies, or lease from shippers. Over the last four years, BNSF added 
5,500 heavy axle, high cubic capacity covered hopper cars. The amount 
of our acquisitions of covered hoppers over the last decade are shown 
in the chart below.

[GRAPHIC] [TIFF OMITTED] T9639.001

    During the decade, BNSF's investment in equipment for transporting 
whole grains and some processed commodities has been greater than any 
other rail carrier.
[GRAPHIC] [TIFF OMITTED] T9639.002

    The point of this capital investment program is that we had to 
spend that money in order to provide better service levels to meet our 
customers' expectations and to support growth, which is part of the 
vision of our Company.
    At the same time we have been making these investments, our 
transportation rates have been declining, and these declining rail 
shipping rates are benefiting both our shippers and consumers. A study 
released last December by the Surface Transportation Board (``Rail 
Rates Continue Multi-Year Decline'') found that the ultimate 
beneficiaries of increases in rail productivity--and decreases in rail 
prices--have been consumers. A key finding of the study was that rail 
rates have fallen 45.3%, adjusted for inflation, since 1984. According 
to the STB, shippers would have paid an additional $31.7 billion for 
rail service in 1999 if revenue per ton-mile had remained equal to the 
1984 level. Another key finding was that ``. . . all types of rail 
customers, and not just those with competitive transportation 
alternatives, have received some portions of the rate reductions.''
    This industry study reflects what has happened at BNSF as well. 
Numerous examples confirm this decline. Two that stand out pertain to 
coal and agricultural commodities, on which I focus. BNSF's 
agricultural commodities average revenue per ton-mile declined by 32%, 
adjusted for inflation, from 1994 through the first quarter of 2001 due 
to competition with both other railroads and other modes. Further, we 
have passed these efficiency gains through to customers in the form of 
lower rates in order to grow our business. The charts below compare our 
rates on transporting wheat to the PNW and to Minneapolis over time and 
the level rates would be at had we simply passed on inflation.

[GRAPHIC] [TIFF OMITTED] T9639.003

[GRAPHIC] [TIFF OMITTED] T9639.004

    These charts reflect the same service product over the 
entire time period for a 52-car shipment. In each case, there 
has been a substantial reduction in the real cost of our 
services. The rates today to the PNW would be over a dollar a 
bushel higher, and 53 cents a bushel higher to Minneapolis, if 
those rates had simply reflected inflation. Additional savings 
have also been introduced into the market place in the form of 
new products, such as shuttle service, which as shown, above 
brings another $150 a car reduction to the customer.
    At the same time that the economic benefits of shipping on 
our network have improved, our service performance has improved 
as well. In the first quarter of this year, BNSF provided our 
agricultural customers with 95% on time performance for unit 
trains compared with 80% in 1997, and 86% in 2001. BNSF is 
continually sharpening its customer focus, including 
development of a number of e-business initiatives to make BNSF 
easier to do business with. We receive ongoing feedback from 
our customers regarding our service and that feedback during 
the last two years reflects both a substantial improvement as 
well as a positive comparison to our competition.
    Infrastructure investment in the grain network has been 
accompanied by operational changes that have improved the 
efficiency and reliability of those networks. That translates 
into more reliable service, with fewer assets, for our grain 
customers. Even with these improvements, however, we understand 
that BNSF service is not as good as it needs to be across all 
commodities and across our entire network. But, it is getting 
better, year after year. The biggest key to further service 
improvements is continuously making the capital investments to 
increase the capacity of our network.
    Because of our continuing investment in infrastructure, we 
have continued to improve our ability to meet customer 
expectations. In addition to infrastructure investment, we have 
also introduced new products that provide new service levels, 
transportation economics and capacity. Our shuttle train 
network, which is outlined on the map below, is a key new 
service offering the agricultural sector. 

[GRAPHIC] [TIFF OMITTED] T9639.005

    The latest addition to our network of shuttle-loading facilities is 
under construction now at Ritzville, Washington. Shuttles improve 
utilization and velocity of grain-car assets. The shuttle network also 
improves utilization of locomotives and crews. Our customers gain the 
service benefit of using a solid train where they are not dependent on 
the actions of other shippers. In the case of Ritzville, we expect to 
grow our participation in the PNW white wheat market by being able to 
compete more vigorously with barges. Shuttles have also helped BNSF 
grow its domestic business. For example, our shuttle network has 
enabled us to move feedstock grain from the upper Midwest to California 
and to Mexico, both markets we were unable to penetrate previously.
    How one views shuttles depends a lot on what one has invested in 
their use. Elevator operators who have not invested in shuttle-loading 
facilities say they do not think shuttles are a very good idea. Their 
claim is that the market does not want shuttle trains. If that were the 
case, one could ask why then have we seen substantial customer 
investment in BNSF's shuttle network as well as other railroad's own 
versions of a shuttle program. In terms of the users of shuttles, most 
North Dakota shuttle loading facilities are owned by producers through 
local or regional co-ops, not by big grain companies. In fact, 
approximately 60 percent of shuttle facilities are owned by 
independents or local cooperatives.
    The shuttle network represents the success not only of 
infrastructure investment by both BNSF and its customers, but also the 
success of taking a new approach to how we operate the infrastructure. 
The growth over the last five years in the shuttle network reflects the 
benefits our customers are reaping from this more efficient way to move 
grain. Grain cars in shuttle service make almost three times as many 
trips per month on average as the rest of the grain-car fleet, 
delivering the value of asset velocity and a new level of service to 
rail customers as well as railroads.
    The grain shuttle network--the part of the grain network that works 
best, in terms of on-time performance and reliability--shares the 
characteristics of other relatively high efficiency parts of our 
system, such as coal and intermodal networks. Two of these 
characteristics are solid trains moving within a defined set of origins 
and destinations and well-defined service standards.
    The intermodal and grain networks certainly did not start out as 
rationalized networks with high service standards. There were several 
hundred piggyback ramps, as we used to call them, handling anywhere 
from hundreds of units a day to just a few units a week. There were 
many more grain elevators years ago, many of them small ones loading 
only a few cars at a time.
    BNSF has promoted the redesign and rationalization of both those 
networks to take out the complexity inherent in trying to provide 
consistent, high-quality service to hundreds of locations. The process 
of rationalization is continuous, and it has not been done without some 
friction with rail shippers, elected officials and other interested 
parties. However, the service and efficiency benefits of rationalized, 
focused networks are apparent for all to see.
    While the grain shuttle network provides both our customers and 
BNSF with the benefits of a rationalized network, BNSF continues to 
offer single-car, 26-car and 52-car service. The service 
characteristics of our grain shuttle network are very different than 
the service characteristics needed by many of our small shippers. While 
there is much rhetoric about the negative impacts of shuttles on small 
shippers there are no facts supporting allegations that shuttles 
negatively impact small shippers. The rate differential between a 
single-car or a 26-car shipper and a shuttle shipper is no greater than 
that between those smaller shipment sizes and a 52-car shipment in 
1995.

        DEMAND OR MARKET BASED PRICING MAKES SENSE ECONOMICALLY 
                         AND BENEFITS SHIPPERS

    Most of the efficiencies we have achieved have been passed through 
to shippers in the form of lower prices, as STB studies have confirmed, 
due to competition and our need to increase volumes. Fortunately, 
because railroad expenses were reduced even more deeply than rates, 
railroads managed to keep some of the difference, which allowed the 
industry to gradually shore-up its finances.
    We do this through ``differential pricing,'' which is the way 
virtually all industries set prices. Differential pricing, also known 
as demand base pricing, is the pricing of goods and services to yield 
various contributions to fixed costs based on the willingness and 
ability of various market sections to make those contributions. Costs, 
competitive factors, and the purchaser's demand elasticity all get 
factored into the price equation. Some rail customers have argued to 
change this approach to pricing, but the changes they suggest would 
severely and immediately constrain our ability to make capital 
investments. Railroads should not be denied the same pricing mechanism 
as other service companies.
    Demand based pricing leads to different rates for movements of 
different commodities, for movements between different areas of the 
country, and on grain commodities moving to different markets. We are 
part of the supply chain that brings grain to markets, and we respond 
to that demand, as does the rest of the supply chain. What we do as a 
rail transportation provider is look at the difference between value of 
the grain at the origin and value of the grain at destination, and try 
to determine the level of charges for transportation with margin for 
the elevators to operate and make money. The fact is that winter wheat 
off the Texas Gulf at the destination has a lower value than hard 
Spring wheat off the Pacific Northwest. One can look at the value of 
grain at those two port destinations, and it is clear Spring wheat has 
a higher value. Therefore, it can stand a higher transportation cost 
and still move in the marketplace.
    It is in our interest to move grain, not to charge rates so high 
that the grain cannot move. Hard Spring wheat is more valuable on a per 
bushel basis than winter wheat. If you look at the disappearance from 
the origin, there is grain disappearing from the State of North Dakota 
that BNSF does not handle--it goes into processors, it goes on the 
Canadian Pacific Railroad and it goes by truck. There are alternative 
markets for that grain to move to than the ones BNSF serves. If our 
rate does not provide a higher delivered value for the customer, the 
customer ships to alternative markets. We also have to compete with 
other sources of that grain, i.e., in the case of Spring wheat out of 
North Dakota, we are competing with Canadian product delivered on the 
West Coast.

        CURRENT DIFFERENTIAL PRICING FOR WEST-BOUND EXPORT WHEAT

    The term that has lately also been used to describe an instance or 
application of market based pricing is so called ``inverse pricing.'' I 
will describe how this applies in connection with our much talked about 
west-bound export wheat program. I believe the marketplace requires 
differentiated rail service. High volume rapid unload elevators at the 
Texas Gulf or Pacific Northwest (PNW) export terminals demand efficient 
high capacity train movements. Domestic flour mills and terminal 
markets like Duluth and Minneapolis do not yet efficiently or 
physically handle the larger shuttle trains. Thus, 110-car shuttle 
stations do not have shuttle rates to the domestic market segments 
which is by far the largest demand sector for eastern North Dakota 
wheat (see affected area shaded on the map of 100 car stations in the 
region below). Single, 26- and 52-car shippers must meet this demand.

[GRAPHIC] [TIFF OMITTED] T9639.006

    BNSF rates enable shuttle shippers to serve some select markets 
where shuttle efficiencies can be captured. These various alternative 
rate structures, like our recent PNW initiative, blend into and become 
a positive market factors facilitating shipments when market supply and 
demand for particular movements dictate. The program at issue provides 
just such a structure. It helps supplement, not displace, the major 
traditional supply sources for the PNW. It is available to take excess 
grain during periods of supply push (harvest) markets when traditional 
terminal and mill markets are full. This program will help relieve 
congestion and add capacity. It continues to increase our capability to 
compete with trucks, and it has not diminished the value or role of our 
single, 26- and 52-car stations.
    Our efforts in this initiative are driven by several factors. 
Montana's spring wheat crop is the lowest in 11 years at 65 million 
bushels, while spring wheat export demand from the PNW will approach 
140 million bushels this year. This difference will have to be 
augmented from other regions. In fact, PNW export companies have 
indicated that the main problem that they have this year is finding 
enough wheat to offer to compete with Canada and Australia into the 
Asian market. I understand we are currently in a demand-rationing mode, 
which is not healthy for the producer in the long term. Lost markets 
are difficult if not impossible to recover. Avoiding loss of market 
share to international competitors is good for Montana and North Dakota 
producers alike.

[GRAPHIC] [TIFF OMITTED] T9639.007


    This initiative has also not had an adverse impact on 
country elevators. First, it is imperative to recognize that 
there is a distinction between a rate change as an absolute and 
the impact to the FOB value of grain at each grain facility. If 
a rate change is made that does not significantly change the 
FOB value between two elevators, there is no relative harm to 
the origin (single, 26 or 52-car) shipper. Our recent PNW 
spread initiative accomplished exactly that. While rates to the 
PNW have changed from North Dakota, the relative value of the 
grain between shippers of different unit sizes is at parity. 
Note the value of wheat between the 52-car market to the east 
and the PNW 110-car shuttle market for origins such as Eldridge 
and Jamestown. A market snapshot on Friday July 26, 2001, shows 
the FOB value quoted from both markets is only 2 cents per 
bushel difference.

[GRAPHIC] [TIFF OMITTED] T9639.008

    From an overall perspective, grain buying is globally competitive. 
For our farmers to participate in this market, pricing has to be linked 
to product quality and demand. Shuttles provide farmers with 
transportation efficiencies for those markets; it does not obviate the 
use of single car, 26 and 52-car rates.
    We have also prepared a comparison of grain prices at comparable 
origins, for like quality, for shuttles to the PNW under our program 
compared with 52-car rates to the Minneapolis market (See Table 1 & 
Chart 1). We are told by grain companies that have bought new crop 
grain since our PNW program was established that the wheat was priced 
based on Minneapolis values and market terms. Merchandisers have 
included terms in their purchases which will allow them to shift or 
redirect the actual execution to the PNW in shuttles, if that is the 
best market when actual shipment takes place. These purchases are 
clearly not market distortive.
    I believe that both for BNSF as a railroad and the consumers of our 
services, the development of regional elevators capable of loading 
large trains and our use of shuttle trains are motivated by the basic 
drive for efficiency as we all compete in world markets. Farmers are 
voting with their feet, or where they send the trucks with their grain, 
to obtain the benefit of these efficiencies by having their grain 
trucked to those regional elevators where they can obtain the best 
prices. Low density branch lines are costly to maintain, and are 
maintained with private dollars, at the same time public policy has 
been designed to improve the mobility of rural America by providing 
better roads so farmers can get their product to market. We and the 
elevator operators have developed a more efficient way to load, handle 
and transport grain using shuttle trains, and are investing in those 
elevators and rail assets on appropriate lines to be able to provide 
that service with an infrastructure that will last a long time. We will 
continue to serve our other elevator customers, but the most efficient 
will receive greater benefits, as is true across all rail systems

    A RAILROAD MUST HAVE THE FLEXIBILITY TO ADAPT TO THE MARKETPLACE

    In the over twenty years since the passage of the Staggers Rail 
Act, which gave railroads more flexibility to meet market conditions, 
we have seen a number of positive trends in the rail transportation of 
agricultural products. In the late 1980s, we introduced the COTS 
program, which offers locked-in rates, guaranteed service, and 
guaranteed car supply as benefits to our customers. In the 1990s, we 
saw more standardization of equipment; and we increased introduction of 
high-capacity cars, with 286,000 lb. gross weight capacity, which are 
consistent, allow ease of loading, and are solely dedicated to grain 
customers. The shuttle network and concept is another essential step to 
greater efficiency for all of us in this supply chain. BNSF has 
responded to the market by providing North Dakota producers rate and 
efficiency discounts and offering wheat customers and producers the 
same economic options for lower cost transportation that have been 
available to corn and soybean shippers, and other users of rail 
transportation.
    From a public policy standpoint, I urge you to recognize the need 
for flexibility and market innovation in rail transportation, not 
increased or stifling regulation, so we are treated on a basis 
consistent with what happens in other industries and can remain a 
vibrant part of the agricultural supply chain in domestic and world 
markets. This is essential for BNSF to be able to keep making the 
investments in rail infrastructure necessary to allow us to provide the 
service North Dakota needs.

    Senator Dorgan. Mr. Bobb, could you add to that testimony 
just another piece telling me the decisionmaking process by 
which you developed an inverse rate pricing schedule?
    Mr. Stevan Bobb. Yes, I can. There are several components 
to the inverse pricing that is approximately demonstrated by 
that board.
    The first decision criterion was, we were approached by our 
export customers on the Pacific Northwest. Montana is a 
traditional source of much of the wheat that is exported out of 
the Pacific Northwest and those exporters, subsequent to the 
poor crop results last year, were concerned with their ability 
to continue selling grain to their customers. And so they came 
to us and asked if there was something we could do to make more 
grain available to the Pacific Northwest, and essentially that 
was--the first criterion was to make more grain available, not 
to displace the existing grain that moved into that destination 
market.
    The second criterion, by way of decision, was to make sure 
that we did not distort the marketplace and we had two concerns 
there: The first was that too much grain would move from the 
Pacific Northwest and drive down rates that our producers 
received in that marketplace, or that we would inappropriately 
distort original values of grain; and so we designed a rate 
structure that essentially pivots off the domestic market.
    While your chart there demonstrates an approximation of the 
transportation rate components, it does not have the other 
three pieces of math that are required for the entire equation. 
The second piece of math is the difference in the value of 
wheat in the Pacific Northwest and the domestic milling 
markets. Essentially our rate structure allows the exporter to 
compete more vigorously against a domestic market. The areas 
east of Sterling typically ship domestic only, and so what this 
does is it provides producers in that territory with a higher 
grain price when the Pacific Northwest wants the grain, because 
the Northwest has to bid up essentially to get the grain.
    The third component of the math that none of us really sees 
is the individual elevator's choices in terms of their bid 
structure and how much money they want to make in handling the 
grain, make less pulling the grain further away. And the fourth 
component is the issue of which particular customers that may 
have elevator infrastructure in North Dakota have made the 
export sales in detail of grain. So all four of those are 
moving parts that we gave consideration to.
    Senator Dorgan. Thank you very much.
    Steve Strege of North Dakota Grain Growers Association.

 STATEMENT OF STEVEN D. STREGE, ALLIANCE TO KEEP RURAL AMERICA 
ON TRACK; EXECUTIVE VICE PRESIDENT, NORTH DAKOTA GRAIN DEALERS 
                          ASSOCIATION

    Mr. Strege. Thank you, Senator. For the record, I'm the 
Executive Vice President of the North Dakota Grain Dealers 
Association and I'm also here on behalf of the Alliance To Keep 
Rural America On Track, which is a new organization that was 
formed last November by a number of major farm organizations 
and commodity promotion groups in the State who are concerned 
about the activities of the Burlington Northern Santa Fe.
    Our primary focus at today's hearing is inverse rates, 
which is the unusual concept that grain elevators and farmers 
who ship grain a shorter distance should pay more than those 
who ship a longer distance. Inverse rates distort historic 
markets and traditional grain flows. BN claims no market 
distortion, but it's hard for us to believe that reversing the 
normal mileage-based rates to create a disadvantage for western 
shippers for westbound movements doesn't distort markets. We 
also have evidence from individual grain elevator operators who 
are in the areas where they are affected by the inverse rates 
having seen the spreads between themselves and the shuttle 
owners who have received the inverse rate widen substantially.
    We are told that the BNSF needs more wheat for the Pacific 
Northwest market. However, there were 79 million bushels of 
spring wheat stored in Montana on the 1st of December and 
millions more bushels are in western North Dakota. Those would 
have been available to that market.
    We believe that there's a different motive in mind also at 
BNSF on inverse rates, and that is artificially promoting the 
building of shuttle train loading facilities in other parts of 
the State and in western Minnesota----
    Senator Dorgan. Steve, can you speak up just a bit?
    Mr. Strege [continuing]. With the eventual goal of closing 
other grain elevators in those areas. And if the railroad can 
give a special rate to a few selected shuttle loaders in 
eastern North Dakota and western Minnesota and prioritize that 
service, that takes volume away from the other elevators, 
jeopardizing their very future. Then when that volume goes 
down, the railroad will say it can no longer operate the branch 
line and it will be abandoned, and some may exist as receiving 
stations for shuttle loaders. Meanwhile, the grain in western 
North Dakota is held hostage to a much higher rate.
    So there are two components that come off of the inverse 
rate plan, both the east to west discrimination as well as the 
discrimination between shuttle loaders in other parts of the 
State and other elevators. We think this is irresponsible for 
BN to be doing this to its present customers. We have a lot of 
26- and 27-car and 52- and 54-car loaders in the State. In 
fact, of the 230 some North Dakota grain elevators served by 
BNSF and its short line affiliate, the Red River Valley and 
Western Railroad, about 60 load 52- and 54-car trains and 
another 50 load 26- and 27-car trains. Only nine load shuttle 
trains. Although the details are kept secret, it is commonly 
understood in the grain trade that only three of these nine 
have the special inverse rate. So what we have is the BNSF 
caters to a couple percent of its grain elevators, to the 
disadvantage of all others.
    Our domestic milling market is primarily for 26 cars or 
less. The statement that the BN will maintain single, 26- and 
52-car rates, they probably will, but if their practices push 
all the grain in the direction of the 110-car shuttle loaders, 
then these other elevators are not going to be able to exist on 
the dribblings. The rates may be there, but there will be no 
grain.
    The BN also claims great efficiency for its shuttle trains 
and says that other trains cycle much more slowly from origin 
to destination and back again. That may be true, but who's 
controlling it? It is the railroad, and when the railroad lets 
the unit trains and other smaller shipments sit loaded for days 
and weeks at the elevator, or in rail yards, while pushing the 
shuttle trains on through, then the shuttle time differences 
are grossly exaggerated. It's all controlled by the railroad.
    We believe that the BNSF could cooperate with its present 
elevator system, and gain shuttle train efficiencies, by 
allowing co-loading of shuttle trains. This means allowing two 
or more elevators to contribute loaded cars to that long train. 
Four of the five railroads operating in North Dakota do co-
loading. Only BNSF does not. The Canadian Pacific and its two 
short line affiliates work with its customers and do co-
loading. The BNSF has allowed the Red River Valley and Western 
short line to co-load for about the past 3 years, but that ends 
on June 30 by order of BNSF. We're told there is co-loading of 
BNSF equipment on the Dakota, Minnesota and Eastern and also on 
the CN-IC, that, too, may be expiring.
    A month ago today we had the Interim Ag Committee hearing 
here in Bismarck at the North Dakota Legislative Committee and 
we were talking about much the same things as we did today. And 
for the record I'm attaching the minutes of that meeting, my 
testimony, and also attaching an article from our association 
magazine in March about that. My friend here, Jim Bobb, Grain 
Division Manager, Southwest Grain, was at the hearing and his 
remarks about wheat shuttle trains and BN shifting the PNW 
market to eastern shuttle loaders who would otherwise not have 
sufficient volume, confirm what I had previously said about the 
unspoken BNSF motive behind inverse rates.
    Not only is BNSF distorting markets here at home, it is 
also jeopardizing our markets overseas. North Dakota Wheat 
Commission Administrator Neal Fisher stated at that Ag 
Committee hearing the Commission's concern that there be no 
quality disruptions. Asian buyers are accustomed to certain 
milling characteristics in wheat from the usual sources of 
supply in western North Dakota and Montana.
    Another discriminatory car supply program being developed 
by BNSF is called ``Scoots.'' These are smaller trains but they 
will be available to only 110-car shuttle loaders. This kind of 
discrimination should be flat out illegal.
    Market forces are not at work in creating the inverse rates 
or the BNSF push for shuttle trains. It is well known in the 
grain trade that BNSF provides facility building incentive to 
some and not others. These are artificial incentives, money 
taken from high rates charged to its present customers.
    Well, what should we do about it? You, Senator Dorgan, have 
been engaged in these issues for a number of years and for that 
we thank you. Senator Conrad and Representative Pomeroy have 
expressed their strong support for our efforts. We've had the 
support of our Governor, PSC, ag commissioner, tax commissioner 
and many State legislators. Unfortunately, BNSF's response so 
far has been to simply tell us we are against change.
    You have introduced the Railroad Competition Act of 2001. 
It provides some needed changes like elimination of the revenue 
adequacy test and putting into law the elimination of product 
and geographic competition in the market dominance test. 
Shippers desperately need an inexpensive and quick way to 
resolve disputes with railroads. The size of the railroads and 
their ample number of attorneys tilts the table in their favor. 
Somehow the interest of shippers and shipper groups must be 
strengthened in dealing with railroads.
    Perhaps there needs to be some restrictions on contracting 
for rail grain movements, or at least greater public disclosure 
of the provisions. I watched the process over the last 20 years 
move from no contracting to contracting with disclosure to 
contracting with hardly any disclosure, and now what little 
disclosure there is comes after the movement is completed. 
There is discussion going on about open access from some 
railroads on to other railroads, that might be a viable option. 
There is discussion here in North Dakota about filing a formal 
rate complaint. Maybe we have to require disclosure of these 
subsidies or rebates that are going into certain facilities.
    The railroads were instrumental in settling the prairies 
and they were compensated for it with generous land grants. Now 
we see the process unraveling in the other direction as 
railroads promote what I call economic undevelopment by 
withdrawing services from many customers. Where effective 
competition exists, then competition should govern. But where 
competition does not hold railroads in check in their dealings 
with captive shippers, additional government oversight and 
relief must be provided.
    Thank you, Senator Dorgan.
    [The prepared statement of Mr. Strege follows:]

Prepared Statement of Steven D. Strege, Alliance to Keep Rural America 
    On Track; Executive Vice President, North Dakota Grain Dealers 
                              Association

    Thank you Senator Dorgan, Chairman Hollings and the entire Senate 
Commerce Committee for holding this hearing on issues so critical to 
not only this state, but also the region and nation as well.
    My name is Steve Strege. I am the Executive Vice President of the 
North Dakota Grain Dealers Association, a 91-year-old voluntary 
membership trade association in which approximately 90% of our state's 
grain elevators hold membership. I've been with the Association since 
1976 and have watched railroad matters with keen interest for more than 
25 years. The Alliance To Keep Rural America On Track is a much newer 
organization. It was formed in November 2001. It includes every major 
farm organization and commodity promotion group in this state, as well 
as other ag-related organizations, and some groups from other states. A 
membership list is attached to this testimony. Members of the Alliance 
recognize the adverse long-term consequences of what the Burlington 
Northern Santa Fe Railway is doing at the present time in this state 
and region. The Alliance was formed to alert the public to these 
dangers, to make a broader appeal to the railroad to change its ways 
for the betterment of its customers, and to bring local, state and 
federal elected officials such as yourself into this situation. If 
prodding the BNSF to change its ways does not work, this group will be 
forced to consider other measures such as federal legislation or a 
formal complaint to the Surface Transportation Board, or the courts.

                             INVERSE RATES

    Our primary focus today is on inverse rates, the unusual concept 
that grain elevators and farmers who ship their grain a shorter 
distance should pay more than those who ship a longer distance. Inverse 
rates distort markets and traditional grain flows, period. They cannot 
be explained away by calling them ``differential pricing.'' The BNSF 
claims no market distortion. It is hard for us to believe that 
reversing the normal mileage-based rates, to create a disadvantage for 
western shippers for westbound movements, doesn't distort markets. It 
is also hard to believe that changing the cross-country freight 
differentials between two elevators from five cents per bushel to 
around 30 cents per bushel over a distance of 40 miles (Edgeley, ND-
Jamestown, ND), or from 15 cents to around 35 cents across a distance 
of 20 miles (Portland, ND-Alton, ND), doesn't distort markets. 
Adversely affected elevators managers can tell you it definitely does.
    The BNSF says these inverse rates from eastern locations are 
necessary to supply needs of the PNW export market. That is simply not 
true. According to the Montana Grain Growers Association, quoting the 
Montana Ag Statistics Service, there were 79 million bushels of spring 
wheat in Montana on December 1, 2001. Millions more bushels are in 
western North Dakota. But yet these areas are the very ones 
disadvantaged by BNSF's inverse rate scheme. If the Pacific Northwest 
market actually needed more bushels, then let it bid up the price to 
get them. This BNSF manipulation of rail rates has a price-depressing 
effect for farmers and elevators normally serving that market.
    We believe there is a more sinister motive at BNSF for its inverse 
rates. That is to artificially promote the building of shuttle train 
loading facilities in other parts of this state and western Minnesota, 
with the eventual goal of closing other grain elevators in those areas 
and abandoning branch lines and short lines. The process goes as 
follows: Give a super special rate to a selected few shuttle train 
loaders in eastern North Dakota and western Minnesota, and prioritize 
their service. This takes grain volume away from existing elevators, 
jeopardizing their very future. Then when the volume from those 
elevators goes down, the railroad will say it can no longer operate the 
branch line, and so it will be abandoned. Some elevators will close, 
some others may exist as receiving stations for the shuttle train 
loader. The end result is less competition out in the country for the 
farmers' grain, longer hauls for everybody, a huge impact on roads and 
the taxpayers who fund them, and further deterioration in rural 
communities. Meanwhile the grain in western North Dakota is held 
hostage to much higher rates.

                 DISHARMONY WITH CUSTOMERS AND MARKETS

    BNSF is being irresponsible to its present customers. BN encouraged 
investments in unit train facilities of 26/27 or 52/54-car capacity. 
The larger ones were the cream of the crop. Now they are second-class 
citizens because BNSF wants to emphasize shuttles. We are not against 
shuttles, or reasonable and consistent rate spreads between shipment 
sizes. What we oppose is the artificial manipulation of incentives and 
rates to benefit a very few at the expense of the very many.
    In round numbers, of the 230-some North Dakota grain elevators 
served by BNSF and its shortline affiliate the Red River Valley and 
Western Railroad, about 60 load 52/54-car trains and another 50 load 
26/27-car trains. Only nine load shuttle trains. Although the details 
are kept secret, it is commonly understood in the grain trade that only 
three of the nine have the special inverse shuttle rate. The BNSF 
caters to a couple percent of its grain elevator customers, to the 
disadvantage of all others.
    Our domestic milling market is primarily for 26-car trains or less. 
It is not for the shuttle trains BNSF is pushing. BNSF has said that it 
will always have single, 26-car and 52-car rates for niche markets. 
(Niche markets don't take 52-car trains.) But if BNSF continues to push 
grain to shuttle train loaders through its discriminatory rates and 
service priorities, these other elevators can't exist on the 
dribblings.
    There is sometimes a misconception that the struggle in our state 
over inverse rates and shuttle train loading is between modern shuttle 
loading facilities and small dilapidated elevators that have had their 
day and are no longer useful. This is not true. Many of the grain 
elevators being jeopardized by BNSF's new schemes are huge modern 
facilities that have kept themselves up to date for not only their own 
efficiency, but also for the railroad's. Millions of farmer dollar 
investments in their local cooperatives will be lost if these are put 
out of business.

                              EFFICIENCIES

    BNSF claims great efficiency for its shuttle trains, and says other 
trains cycle much more slowly from origin to destination and back 
again. Well, whose fault is that? It is the railroad's! When the 
railroad lets unit trains and other smaller shipments sit loaded for 
days or weeks at the elevator or in rail yards, while pushing shuttle 
trains on through, the cycle time differences are grossly exaggerated. 
It is nearly all under railroad control. In fact, according to the 
BNSF's Fleet Performance Report, available on its website, the loader 
and unloader actually have control of a railcar about two days each, 
while the railroad has it the other 22 days of, for instance, a 26 day 
cycle time.

                          DELAYS AND DEMURRAGE

    Another aspect of efficiency is demurrage, a charge to shippers for 
delaying railroad equipment. We agree with the railroads that there 
have to be limits on how long a shipper or receiver can hold a railcar. 
But there should also be responsibility on the railroad to pull the 
cars in a timely manner once they are released. Elevator managers and 
employees are all-too-familiar with loading cars on weekends or 
holidays, sometimes in terrible weather conditions, only to see the 
loaded cars or train sit for five or seven or 10 days before being 
pulled away. The BNSF might say these trains or cars are waiting for 
``matches'' of other trains or cars to go off to destination. If more 
effort was made, and more sophisticated computer technology and 
management time was applied to this situation, we believe it could be 
improved significantly. And, if shippers must pay penalties to the 
railroad for delay, then the opposite should be true also.

                               CO-LOADING

    The BNSF could cooperate with its present elevator system and gain 
shuttle train efficiencies by allowing co-loading of shuttle trains. 
This means allowing two or more elevators to contribute loaded cars to 
that long train. Four of the five railroads operating in North Dakota 
do co-loading. Only BNSF does not. The Canadian Pacific and its two 
short line affiliates work with their customers in co-loading. The BNSF 
has allowed the Red River Valley and Western short line affiliate to 
co-load for about the past three years. But that ends on June 30, by 
order of BNSF. We're told there is co-loading of BNSF equipment on the 
Dakota, Minnesota and Eastern, and the CN-IC. That too may be expiring.

                           RATES AND PROFITS

    Our Association and Alliance favor lower rates. But we think they 
should be spread around so that everyone can benefit. The BNSF's 
current plan for elevator industry concentration will result in 
relatively few farmers, who are close to those remaining facilities, 
maybe getting a better deal for a short time. Others from farther out 
will burn up any advantage in trucking costs, time and road 
maintenance. Then when the other elevator competition is eliminated, 
the BNSF will have no reason to give preferential rates to anyone. Less 
competition among buyers will mean less incentive for them to pass on 
any savings. Farmers and rural America lose out, while BNSF pads its 
already hefty profit margins on our grain.
    Those profit margins are substantial. The revenue to variable cost 
ratios on many North Dakota grain rail movements are far in excess of 
the 160% standard of adequate profitability. This is confirmed by the 
inverse rate scheme. If BNSF can afford to haul farther for less money, 
then its higher rates for the shorter distance shipping are even more 
out of line.

                          INTERIM AG COMMITTEE

    One month ago today the Interim Ag Committee of the North Dakota 
Legislature held a hearing on rail rates and service, much as we are 
doing today. For the record, I am attaching the minutes of that meeting 
to my testimony, and also attaching an article from our Association's 
March Grainmen's Mirror magazine about the hearing. Southwest Grain 
Cooperative Grain Division Manager Jim Bobb's comments at that hearing 
about there being few markets for wheat shuttle trains and that the 
BNSF is shifting the PNW market to eastern shuttle loaders who would 
otherwise not have sufficient volume, confirm what I said previously 
about the unspoken BNSF motives with the inverse rates.
    An exchange between Senator Bill Bowman and Steve Bobb of BNSF at 
that hearing confirms that the railroad will charge whatever the market 
will bear when it has the opportunity.
    Not only is BNSF distorting markets here at home, it is also 
jeopardizing our hard-won markets overseas. North Dakota Wheat 
Commission Administrator Neal Fisher stated at that Ag Committee 
hearing the Commission's concern that there be no quality disruptions. 
Asian buyers are accustomed to certain milling characteristics in wheat 
from usual sources of supply in western North Dakota and Montana. This 
is not to say that our eastern wheat is inferior. It is just different, 
because it is raised under different climate conditions. But buyers 
notice these things.

                                 SCOOTS

    Another discriminatory car supply program being developed by BNSF 
is called Scoots. They've been called the domestic equivalent of the 
110-car shuttle train program. BNSF first indicated these would be 58-
car trains. But they are available to only 110-car shuttle loaders. 
This is a new and higher level of discrimination and manipulation.
    Several of us in this room challenged BNSF on this, questioning why 
52 and 54-car loaders who could accommodate 58 cars would not be 
eligible. The latest from BNSF is that Scoots will be in the 65-68-car 
range, but still available to only 110-car shuttle loaders. This is 
like requiring a person to drive an 18-wheeler to get a week's worth of 
groceries. This kind of discrimination should be flat-out illegal.

                       MARKET FORCES CIRCUMVENTED

    Market forces are not at work in creating the inverse rates or the 
BNSF push for shuttle trains. It is well known in the grain trade that 
BNSF provides facility-building incentive to some but not others. At 
the Ag Committee hearing, Mr. Steve Bobb denied putting any upfront 
capital into new shuttle loading facilities. But that doesn't address 
the upfront commitments to provide rebates later. BNSF says it is not 
driving these changes. But that is contradicted by an article from the 
July 3, 1999 Hillsboro (ND) Banner in regard to the planned 
construction of the Alton Grain Terminal near Hillsboro, ND, quoting 
one of the directors of the Halstad, MN elevator, a significant owner 
in the facility:
    In fact, Lovas said, it was the railroad that was pushing the 
project. ``The railroad is driving this. Without their incentives,'' he 
continued, ``this would not have happened. They're giving us a hell of 
a deal.'' BN-Santa Fe has assured board members that it will 
``protect'' the rates it will give the terminal for a 75-mile stretch 
of track.
    I would also like to submit for the record a copy of the article 
from the February 3 Bismarck Tribune, titled ``Alliance claims railroad 
out to bust rural ND''. The article states that Steve Bobb said BNSF 
has provided incentives to build all ND shuttle loading facilities. I 
don't know if that is true in every case, but it surely tells the 
direction BNSF is headed and willing to push for. This is the same 
article in which Steve Bobb said the elevator in Edgeley is a ``victim 
of its own poor planning'' for upgrading to 52/54-car loading a few 
years ago on the RRVW in order to feed the BNSF more traffic. It could 
have upgraded on a Canadian Pacific short line.

                            THE FEAR FACTOR

    As the railroad has become bigger, more dominant, and more 
demanding, shippers and receivers become less willing to speak out in 
public forums like this one about their problems with railroads. Some 
will say privately that they disagree with the railroad's direction and 
the investment requirements. But for fear of reprisals or being left 
out of the next deal to come along, they decline to speak in public. 
Maybe some of that silence is breaking. Perhaps the formation and 
growth of our Alliance To Keep Rural America On Track has given more 
people a flag to rally around and encouragement to speak out. But many 
shippers remain apprehensive.

                           WHAT IS TO BE DONE

    You, Senator Dorgan, have been engaged on these issues for a number 
of years and for that we thank you. You have been in contact with the 
BNSF on these current problems and arranged for this hearing to shed 
more light on the topic, provide additional encouragement to BNSF to 
mend its ways, and establish a record of abuse to document the need for 
change in regulatory oversight, should the railroad continue to think 
about only itself. Senator Conrad and Representative Pomeroy have 
expressed their strong support for our efforts. Governor Hoeven has met 
with BNSF officials and is forming a coalition of regional Governors to 
address these issues. Our PSC, Ag Commissioner, Tax Commissioner, and 
many state legislators are involved.
    Unfortunately, the BNSF's response so far has been to tell us we 
are simply against change.
    You have introduced the Railroad Competition Act of 2001. It 
provides some needed changes like elimination of the phony revenue 
adequacy test, and putting into law the elimination of product and 
geographic competition in the market dominance test. Shippers 
desperately need an inexpensive and quick way to resolve disputes with 
railroads. The size of the railroads and their ample number of 
attorneys tilts the table in their favor. Somehow the interests of 
shippers and shipper groups must be strengthened when dealing with 
railroads.
    Perhaps there needs to be some restrictions on contracting for rail 
grain movements, or at least greater public disclosure of the 
provisions. I've watched the process move from no contracting to 
contracting with disclosure of terms. Then we went to contracting with 
hardly any disclosure. Now, what little disclosure there is can come 
after the movement is completed.
    The railroads were instrumental in settling the prairies, and they 
were compensated for that with generous land grants. Now we see the 
process unraveling in the other direction as railroads promote what can 
be called economic UNdevelopment by withdrawing services from many 
customers. Where effective competition exists then competition can 
govern. But where competition does not hold railroads in check in their 
dealings with captive shippers, additional government oversight and 
relief must be provided.

                                 ______
                                 
        ALLIANCE TO KEEP RURAL AMERICA ON TRACK MEMBERS 3-25-02

    North Dakota Grain Dealers Association
    North Dakota Farm Bureau
    North Dakota Farmers Union
    North Dakota Wheat Commission
    North Dakota Barley Council
    North Dakota Grain Growers Association
    North Dakota Corn Growers Association
    North Dakota Soybean Growers Association
    Farm Credit Services of North Dakota
    North Dakota Professional Insurance Agents
    North Dakota Association of Telephone Cooperatives
    Oliver-Mercer Electric Cooperative, Inc., Hazen, ND
    Dakota Central Telecommunications, Carrington, ND
    North Central Bean Dealers Association
    North Dakota Association of Rural Electric Cooperatives
    Mayco Export, Minneapolis, MN
    Nebraska Agri-Business Association
    Colorado Grain and Feed Association
    North Dakota Mill

                                 ______
                                 
 NORTH DAKOTA LEGISLATIVE COUNCIL, MINUTES OF THE AGRICULTURE COMMITTEE
     WEDNESDAY, FEBRUARY 27, 2002, ROUGHRIDER ROOM, STATE CAPITOL, 
                         BISMARCK, NORTH DAKOTA

    Senator Terry M. Wanzek, Chairman, called the meeting to order at 
9:00 a.m.
    Members present: Senators Terry M. Wanzek, Bill Bowman, Duane 
Mutch, Ronald Nichols, Harvey Tallackson; Representatives James Boehm, 
Michael Brandenburg, Thomas T. Brusegaard, April Fairfield, Rod 
Froelich, C. B. Haas, Phillip Mueller, Jon O. Nelson, Dennis J. Renner, 
Arlo E. Schmidt, Ray Wikenheiser
    Members absent: Representatives Joyce Kingsbury, Edward H. Lloyd, 
Eugene Nicholas, Earl Rennerfeldt
    Others present: See Appendix A
    It was moved by Senator Bowman, seconded by Representative Nelson, 
and carried on a voice vote that page 1 of the December 14, 2001, 
minutes of the Agriculture Committee be amended to provide that 17 
percent of all gasoline used in this state contains ethanol and that 
Minnesota gets back about $10 for every dollar it invests in the 
ethanol industry.
    It was moved by Senator Bowman, seconded by Representative Nelson, 
and carried on a voice vote that the amended minutes of the previous 
meeting be approved.
    Chairman Wanzek recognized Mr. Stevan Bobb, Group Vice President, 
Agricultural Products Marketing, Burlington Northern Santa Fe (BNSF), 
who presented testimony regarding rail transportation of agricultural 
products. Mr. S. Bobb distributed a document entitled Enabling the 
Future Through Change. A copy of the document is on file in the 
Legislative Council office.
    Mr. S. Bobb said from the BNSF perspective, the issues being 
addressed by the committee represent additional steps in a continuing 
process of change. He said elevators, producers, and multinational 
corporations had originally opposed many of the initiatives introduced 
by BNSF over the last 20 years. However, he said, as the individual 
initiatives played out over time, they proved themselves to add value 
to the marketplace.
    Mr. S. Bobb said the rail industry was deregulated in 1980. He said 
railroads had been regulated much like utilities are today. He said 
railroads are not guaranteed a return on invested capital. He said 
railroads like BNSF make their decisions based on profit motives. He 
said they have stockholders who expect them to continue in that vein.
    Mr. S. Bobb said in the early 1980s, Burlington Northern did a 
study regarding how it was running its grain business. He said there 
was serious consideration given to exiting the grain business. He said 
Burlington Northern was not making money on huge portions of its grain 
business. He said Burlington Northern decided to make some fundamental 
changes by moving from long-term contracts to a public transparent 
pricing environment. He said Burlington Northern stopped using a 
mileage-based-cost-plus approach for transportation rates and 
implemented a market-based approach. He said that caused some 
consternation, especially among the large multinational corporations 
that had been the beneficial holders of those contract rates.
    Mr. S. Bobb said a farmer's cooperative that ships a single car or 
a shuttle train pays the same transportation rate from point A to point 
B as does Cargill. He said large shippers are not given favorable 
positions. He said BNSF gives rate differentials as a function of the 
efficiency of the product that a shipper elects to ship. He said BNSF 
does offer different rates for different efficiency programs. He said a 
single-car shipment is more expensive than a 26-car shipment, which in 
turn is more expensive than a 52-car shipment. He said a 52-car 
shipment is likewise more expensive than a shuttle train of 110 cars.
    Mr. S. Bobb said in the late 1980s the certificate of 
transportation program was put in place. He said the program was 
controversial when introduced. He said the grain industry had sued the 
railroad over the introduction of the program. He said the railroad 
wanted to have the marketplace allocate capacity. He said the program 
provided customers with an opportunity to lock in rates. He said 
customers can still choose to lock in a rate with a certificate of 
transportation. He said it provides guaranteed service and a guaranteed 
car supply. He said despite having sued the company in the late 1980s 
over the program, most grain companies today view the program as being 
very beneficial. He said there would probably be a suit if BNSF stopped 
offering certificates of transportation.
    Mr. S. Bobb said other changes were introduced in the 1990s. He 
said BNSF standardized unit train sizes and started investing in high-
capacity cars. He said high-capacity cars allow for the handling of 10 
percent more product per car. He said BNSF customers have benefited 
from having standard size cars. He said the cars are of higher quality 
and handle more product.
    Mr. S. Bobb said during the last decade BNSF invested $600 million 
in equipment. He said that does not include the $70 million that BNSF 
spent to maintain its fleet of covered grain hoppers.
    Mr. S. Bobb said BNSF believes its customers want BNSF to 
distinguish itself from its competition. He said the customers do 
receive benefits from the actions BNSF takes. In the last 10 years, he 
said, BNSF has made a substantial capital investment in the grain 
industry. He said no other railroad in the last 10 years has matched 
the BNSF investment in covered grain hoppers. He said BNSF is very 
focused on getting a return on its investment. He said BNSF's primary 
competition in North Dakota is the Canadian Pacific Railroad. He said 
investment in the Canadian Pacific Railroad is made by the Canadian 
government.
    Mr. S. Bobb said BNSF has downsized its grain fleet since 1988. In 
1988, he said, Burlington Northern had 35,000 cars in its grain fleet. 
He said the current grain fleet is approximately 29,000 cars. He said 
while taking cars out of the fleet, BNSF has actually increased its 
carrying capacity. He said the new cars carry 10 percent more product. 
He said BNSF has broadened its product offering from having only 
single-car, 26-car, and 52-car opportunities to also offering shuttle 
train capacity. He said this has created efficiencies in the network. 
He said in the fall of 2001 approximately 5,500 of BNSF's 29,000 cars 
were in shuttle service. He said those 5,500 cars were generating 
nearly 40 percent of BNSF's carrying capacity. He said the cars are 
high-capacity hoppers and they turn an average of three times a month 
as opposed to 1.4 times a month for a traditional grain fleet. He said 
the difference is not in transit time. He said the difference is in the 
end points. He said the difference comes from the amount of time it 
takes for customers to load and unload and in the amount of time it 
takes the railroad to put trains together. He said the other reason 
there is a faster turnaround is that shuttle trains are 110 cars long. 
He said for every such train moving throughout the network, more grain 
is being delivered.
    Mr. S. Bobb said overall system performance has improved 
dramatically. He said the major reason is the company's willingness to 
invest capital in its operations. He said BNSF spent $11 billion in 
capital investment over the last six years.
    Mr. S. Bobb said there is a disconnect between what their customers 
say about service and what the recent customer satisfaction survey has 
concluded.
    Mr. S. Bobb said over time BNSF service to the grain shipper has 
improved, especially with respect to providing capacity to the 
marketplace. He said when grain is to be moved, that puts a demand on 
hopper cars. He said it would be impossible for BNSF to buy and 
maintain a fleet large enough to ensure that everyone who wants access 
to a grain hopper can have one during harvest. He said by making the 
investments in capacity and service improvement, BNSF has been able to 
dramatically shorten the number of days late. He said BNSF has also 
managed to narrow the gap between its guaranteed products and its 
tariff products. He said the nature of those two products will never be 
the same. He said a customer who chooses to buy a guaranteed product is 
going to get guaranteed service. He said a customer who chooses to buy 
a tariff product is going to get capacity available service.
    Mr. S. Bobb said the shuttle program is a set of symmetrical 
commitments between BNSF and its shuttle customers. He said BNSF 
dedicates power, a covered hopper fleet, turn times that provide 
efficiency payments, and trip incentives to customers who take risks 
and put on forward freight. He said shuttle customers commit to having 
an appropriately efficient facility. Instead of having to break up 
trains, he said, BNSF can drive in with empty trains and drive out with 
loaded trains. He said shuttle customers commit to loading and 
unloading the trains within 15 hours at both the origin and 
destination. He said shuttle customers also commit to providing BNSF 
with logistical information. He said before BNSF spots a loaded or an 
empty shuttle train, the owner of the certificate of transportation has 
indicated where the empties will go next. He said this customer 
commitment to providing logistical information gives BNSF savings in 
the form of equipment costs and operating costs because shuttle trains 
use locomotives optimally. He said 110 cars, each loaded with about 110 
tons of product, use about three locomotives over most of the BNSF 
network. He said shorter trains result in wasted horsepower. From a 
service perspective, he said, shuttle service has fewer moving parts. 
He said it is an intact train from origin to destination. He said there 
is not as much variability or risk of failure. Under the current 
shuttle network, he said, there are 73 origins and approximately 35 
destinations across North America. He said those include destinations 
in Mexico and both origins and destinations on other railroads--both 
short line and Class I railroads. He said the BNSF shuttle network is 
not an BNSF-only product.
    With 26- or 52-car service, Mr. S. Bobb said, BNSF has to wait 
until it gets a bill of lading from the customer indicating where those 
cars are going. He said the grain desk in Fort Worth, Texas, has to 
piece together the puzzle. He said BNSF does not run 26- or 52-car 
trains on rail lines because the economics are not there to do that. He 
said BNSF instead matches four 26-car trains or two 52-car trains or 
some other combination thereof. He said the time it takes to do that 
can average four to four and one-half days. He said shuttle trains get 
much better cycle time because they are not waiting to be matched up.
    Mr. S. Bobb said BNSF had only one nonterminal elevator capable of 
handling shuttle trains in 1996--South Sioux City. He said in the early 
1990s Burlington Northern tried coloading comprehensively across the 
network. He said under the program, Burlington Northern gave its 
customers incentives for providing information about coloading in 
advance. Upon evaluating the program, he said, it was found that 
customers did not see any service improvement, there was no enhancement 
of capacity for the network, there was no decrease in cycle time, there 
were no cost-savings, and there was a loss of market share to the Union 
Pacific because Union Pacific outperformed Burlington Northern. He said 
BNSF determined the coloading program was not something that ought to 
be continued and in its place developed the shuttle program.
    Mr. S. Bobb said the Canadian rail network has undergone an even 
more dramatic change than the American rail network. During the last 
five years, he said, the Canadians have gone from a wooden car-single 
crib environment to a steel and concrete 112-car environment. He said 
the Canadians load a 112-car train more quickly than Americans load 
110-car trains. He said the Canadians can load a car in 12 minutes. He 
said the grain is cleaned, graded, and ready to go before it hits the 
car.
    Mr. S. Bobb said BNSF has had a shuttle product since 1996. He said 
BNSF still provides single-car service, 26-car service, and 52-car 
service because the marketplace demands differentiated service. He said 
one size does not and will not fit all. In 2001, he said, well over 40 
percent of BNSF shipments were below 52 cars in size. He said about 
five shuttle facilities in North Dakota are presently owned by local 
cooperatives. He said that is the dominant type of shuttle facility 
ownership. He said two are owned by regional cooperatives, two are 
owned by multinationals, and one is a privately owned facility. He said 
over 20 of the 73 shuttle facilities across the BNSF network are owned 
by local cooperatives and 20 are owned by regional cooperatives.
    Mr. S. Bobb said there are a lot of macroeconomic forces affecting 
rural America. He said those forces have been playing out for decades. 
He said BNSF is not driving the change in rural America. He said small 
elevators have a role and they will continue to have a role. He said 
there are markets that are not going to ship shuttle train quantities. 
He said examples are barley, canola, certain varieties of milling 
wheat, and identity-preserved grains. He said the single-car and 26-car 
trains provide transportation for these products. He said the 26-car 
rate is higher than the shuttle rate. He said one would presume that 
the niche markets provide higher value as well.
    Mr. S. Bobb said the shuttle network will take trucks off the 
highway by reducing long-haul trucking on both outbound grains and 
inbound fertilizer. He said the highways are competition for BNSF. If 
it is cheaper to gather grain by truck than by rail, he said, the grain 
will be gathered by truck. He said that is what is happening on many 
branch lines. He said if highway economics are the better option, 
branch lines will disappear.
    Mr. S. Bobb said BNSF is not a regulated utility that is guaranteed 
a return on invested capital. He said BNSF is not earning its cost of 
capital. He said BNSF can earn its cost of capital by one of three 
ways. He said BNSF can increase and has increased the volume of product 
it transports. He said BNSF takes and has taken tremendous cost out of 
the network. He said the shuttle train program is one such way BNSF has 
managed to take cost out of the network. He said the third way BNSF can 
earn its cost of capital is by increasing prices. He said the grain 
transportation business is tariff-based and the transportation rates 
therefore move with the market.
    Mr. S. Bobb said BNSF has not done a good job of increasing grain 
transportation rates. He said the North Dakota car rates going to the 
Pacific Northwest have stayed about the same as they were in 1981. He 
said if BNSF were a utility or a good cost-plus pricer, it would have 
passed on the incurred costs of inflation and the rates would be $1.08 
per bushel higher. He said if BNSF tries to raise its rates above that 
which the market will support, the grain will be trucked rather than 
shipped by rail. He said if BNSF rates are too high, the grain does not 
move into the destination markets. He said BNSF has managed to raise 
rates a bit on grain going west but not on grain moving east to the 
Minneapolis domestic market. Mr. S. Bobb said there are four parts to 
the economics of a shuttle train. He said the rate spread between a 52-
car wheat train and a shuttle train is $100 to $150 per car. He said in 
the world of grain, that is a narrow rate spread. He said in some corn 
markets the rate spread approaches $600 per car. He said the rate 
spread will probably widen in the future. He said the present rate 
spread is too narrow to reflect current economic benefits. He said the 
elevator at the point of origin has the opportunity to earn $100 a car 
for loading the train in 15 hours or less. He said the elevator gains 
or loses that loading incentive on every train. He said the destination 
has an opportunity to earn $100 per car for unloading the train within 
15 hours. He said they can also lose it by doing what many of the 
exporters do with the 26- and 52-car trains, i.e., mix and match them 
on the way.
    Mr. S. Bobb said BNSF offers an additional incentive of $100 per 
car to customers who take a risk position and commit to running a train 
24 consecutive times. He said that way BNSF does not have to take cars 
in and out of storage. He said BNSF has locomotives and crews available 
and it knows how long a commitment it has.
    Mr. S. Bobb said the data does not support claims of a negative 
impact on small shippers. He said in 1995 the rate spread for the 
Pacific Northwest between a single-car and a 26-car train was about 
$300 per car. He said the rate spread between a 26- and 52-car train 
was about $300 per car. He said the current rate spread between a 52-
car train and a shuttle train is about $50 to $100 per car. He said in 
2000 the rate spread between a shuttle train and a single-car shipper 
was less than the rate spread between the 52-car train and the single-
car shipper. He said while claims of impact on single-car shippers 
amount to interesting rhetoric, the claims are not supported by the 
facts.
    Mr. S. Bobb said inverse pricing is another term for differential 
pricing. He said this is practiced in every business. He said when the 
rail industry was deregulated in 1980, it was coded in law as a way of 
allowing the rail industry to go from bankruptcy to potentially earning 
a return on invested capital. He said differential pricing is a way of 
doing business.
    Mr. S. Bobb said in 1995 Burlington Northern had the opportunity to 
capture additional foreign business. He said there are two ways that 
southeast Asian customers can get corn from the United States. He said 
they can get it by transport down the river system to the Gulf or by 
rail to the Pacific Northwest. He said there were changes in ocean 
freight and barge freight. He said when barge rates went up, Burlington 
Northern raised its rail rates. He said when barge rates went down, 
Burlington Northern lowered its rail rates. He said in 1995 barge rates 
were up, ocean freight differentials moved, and Burlington Northern had 
an opportunity to take corn transport away from the barge system. To do 
that, he said, Burlington Northern had to price the corn off the river 
lower than the corn for the West. He said this is a great example of 
inverse pricing. He said some thought that Burlington Northern should 
have lowered all its rates. He said had Burlington Northern lowered all 
its rates and not engaged in differential pricing, it would have cost 
Burlington Northern more money than it would have made pursuing the 
additional traffic.
    Mr. S. Bobb said differential pricing involves pricing to the 
market at every origin and capturing all the business one can. He said 
different customers pay different prices. In the 1995 scenario, he 
said, Burlington Northern realized a net benefit of $32 million by 
getting the additional corn. He said had Burlington Northern lowered 
all its rates to capture the corn market, it would have cost the 
company $42 million.
    Mr. S. Bobb said the genesis of the westbound contract wheat 
program was that Montana had a bad crop and the Pacific Northwest 
export customers were indicating in early 2001 they were worried that 
they would not be able to source enough grain to backfill their wheat 
export plans. He said they were also worried that their customers would 
go to Canada. He said BNSF put in place rates that allowed the Pacific 
Northwest exporters to reach farther east than they traditionally would 
have to obtain the product. He said those rates were put in place in 
March 2001. He said BNSF does not believe that the rates have distorted 
the market.
    Mr. S. Bobb said people said that BNSF flooded the Pacific 
Northwest with wheat, that the low-quality wheat was going to damage 
the Pacific Northwest's reputation, and that the low-quality wheat was 
going to distort the Asian markets. He said this issue is bigger than 
transportation. He said this is all about alternative markets. He said 
the domestic market, signified by Minneapolis, and the export market, 
signified by the Pacific Northwest, tend to move together. He said 
there is a market price relationship between those two market 
destinations and it has to do with the differing demands at those two 
destinations.
    Mr. S. Bobb said during 2001 wheat prices in the Pacific Northwest 
were generally substantially higher than they were in 2000. He said the 
statistics do not bear out the charge that the Pacific Northwest was 
flooded with wheat that drove the prices down. He said the claim that 
there was lower quality wheat going to the Pacific Northwest is 
facetious as well. He said an exporter would not buy lower quality 
wheat and risk its customer relationships. He said wheat from western 
Minnesota and eastern North Dakota has been going to the Pacific 
Northwest for decades. He said the only difference is who is handling 
the wheat. He said if a Pacific Northwest exporter cannot go out and 
get an occasional bit of grain when needed, the exporter would risk 
losing customers because the customers could not be supplied with 
wheat.
    Mr. S. Bobb said if a Pacific Northwest exporter wants to get grain 
away from the domestic market, the exporter would have to bid up the 
price to make it happen. He said bidding up results in more money going 
into the farmer's pocket. He said even at the closest spread point, 
Southwest Grain Cooperative has a three-cent advantage over everybody 
to its east. He said people need to look at more than just 
transportation rates. He said the grain industry is not that simple.
    Mr. S. Bobb said about 4 percent of the wheat shipped out of North 
Dakota during 2001 moved under differential rates. He said 16 percent 
moved in shuttles. He said North Dakota's shipments are predominantly 
to the eastern mills, the western mills, Duluth-Superior, the Pacific 
Northwest, and Gulf-St. Louis. He said the Pacific Northwest and the 
Gulf-St. Louis are really the only shuttle destinations. He said even 
in those wheat shuttle destinations, the predominant shipments of 
choice are 26- and 52-car trains because that is what the market wants.
    Mr. S. Bobb said BNSF has provided rate and efficiency discounts 
and multiple trip incentives. He said North Dakota shippers are given 
the same transportation options as are other shippers in North America. 
He said the shuttle network will continue to expand. He said there are 
probably about 30 origin and destination projects in the hopper. He 
said they should end up with approximately 200 origin and destination 
points on either BNSF or other rail lines.
    Mr. S. Bobb said specialty crops and genetically modified organisms 
will result in more single-car shipments. He said BNSF will continue to 
offer single-car service to support that segment of the market. 
However, he said, single-car rates cannot be the same as the shuttle 
rates because the economics to support that are not available.
    Mr. S. Bobb said until there are genetically modified crops with 
traits that create consumer-perceived value, it is unlikely the 
consumer will pay more for those crops. To date, he said, most genetic 
modification has resulted in value for the producer--disease 
resistance, insect resistance, and herbicide tolerance--through lower 
production costs. He said when the next wave of genetic modification 
hits and consumer-perceived value is added, then the consumer will pay 
more and that higher payment will address the enhanced segregation and 
transportation costs necessary to move the product. He said government 
intervention is always a risk. He said capital flight is a risk. He 
said Wall Street does not get excited when a company spends lots of 
money on investment and does not get an appropriate return on its 
invested capital. He said BNSF will be doing whatever it can to 
increase its return on invested capital.
    Mr. S. Bobb said the macroeconomic forces in rural America have 
been coming for decades and they are going to play themselves out. He 
said rail service in North Dakota is better than it was 20, 10, and 5 
years ago. He said customers can get access to guaranteed service and 
to guaranteed railcar supplies. He said rates have not gone up. He said 
BNSF has absorbed a lot of inflationary costs. He said both railroads 
are getting market share back from trucks. He said the facts are 
evidenced by statistics from the Upper Great Plains Transportation 
Institute.
    Mr. S. Bobb said the biggest risk is not going for change. He said 
capital invested 20 years ago or 10 years ago might not be the right 
capital investment today. He said producers have trucks today. He said 
they have the ability and the opportunity to bypass the elevator 
network and go directly to market or to processors themselves. He said 
while change is uncomfortable, it is necessary for the future.
    In response to a question from Senator Nichols, Mr. S. Bobb said 
the way the rate structure is designed, the Pacific Northwest has to 
bid up the price of grain slightly over the Minneapolis market. He said 
the Pacific Northwest's ability to bid up much higher is a function of 
the world market because of Canadian Wheat Board exports.
    In response to a question from Representative Brandenburg, Mr. S. 
Bobb said BNSF spent a fair amount of time looking at the Edgeley 
situation in terms of the origin free on board value. He said Edgeley 
still has a better free on board value going east than Jamestown has 
going west. He said Edgeley also has elevator facilities on the 
Canadian Pacific and the area farmers therefore have an option to ship 
that way as well. He said BNSF has looked at its rates very carefully 
and it does not believe that its rates have had an impact on the 
Edgeley facility.
    In response to a question from Representative Fairfield, Mr. S. 
Bobb said BNSF experiences a fair amount of competition across its 
network. With the trucks on the highway, he said, BNSF has had a lot of 
competition and has had to respond. He said the rate structure is 
designed to make wheat available to the Pacific Northwest. He said if a 
rate is already moving grain to the Pacific Northwest, a company would 
have no reason to lower the rate. He said the goal is to have a rate 
structure that puts more wheat into the Pacific Northwest, not a rate 
structure that degrades BNSF revenue.
    In response to a question from Senator Krauter, Mr. S. Bobb said 
the bushel decrease mathematics is fairly close. He said the exporters 
did not use the differential rate as much as BNSF had expected them to 
use it. He said with respect to the three-cent differential rate, one 
must take into account not only the transportation rate, but also the 
destination market that French, Minnesota, has in Minneapolis. He said 
French, Minnesota, gets a net-back by selling to the Minneapolis market 
and that amount needs to be factored into an equation as well. He said 
one needs to know how much a Pacific Northwest exporter has to pay in 
order to pull the grain away from the domestic market.
    Mr. S. Bobb said BNSF has very close working relationships with the 
grain exporters but those relationships do not impact the price of 
grain. In general, he said, freight is paid by the origin shipper. He 
said the choices of where to buy the grain and how to transport the 
grain are generally made by the destination. He said the majority of 
BNSF's revenue comes from the shipper, not from the receiver.
    In response to a question from Representative Mueller, Mr. S. Bobb 
said BNSF's experience with coloading is that it does not increase 
capacity or create operational savings or improve service. He said 
economic and operational experience has caused BNSF to determine that 
coloading is not a comprehensive answer for the network. He said the 
reason that BNSF would not want to coload at certain select points 
along its railroad is that it would have an economic impact on those 
people who have made an investment in BNSF efficiency. He said BNSF has 
broadened its product line and given customers more options from which 
to choose. He said those people who have invested in the shuttle 
template have in effect earned a lower rate that is based on shared 
economics.
    In response to a question from Representative Mueller, Mr. S. Bobb 
said there are some branch lines and single-car service issues that are 
the root cause of many of the comments on the Public Service 
Commission's customer satisfaction survey. He said other issues within 
the survey reflect philosophical differences regarding the shuttle 
program and demurrage.
    Mr. S. Bobb said beginning in early 1996 and extending through 
early 1998, BNSF had a team that worked on designing the shuttle train 
program. He said the team was composed of people from various 
disciplines within BNSF and customers. He said people from elevators 
were on the design team.
    Mr. S. Bobb said the issue is about economics. He said BNSF does 
have tremendous pressure from its investors. He said there are also 
customer pressures that are imbedded in the decisions that BNSF makes. 
He said the programs that BNSF puts in place are at the request of 
customers to meet the customers' opportunities. He said there are 
always a few people that believe something BNSF did was to their 
detriment. He said for each person who did not like the decision, there 
are probably 8 to 10 people who profited from the decision. He said 
shuttle trains drive up the origin value of grain.
    Chairman Wanzek recognized Mr. Bob Stevens, Regional Manager, 
Southwest Grain Cooperative, Gladstone, who presented testimony 
regarding grain transportation rates. Mr. Stevens said Southwest Grain 
Cooperative has a shuttle loading facility between Gladstone and 
Taylor. He said Southwest Grain Cooperative is also in the process of 
building another shuttle facility in Lemmon, South Dakota. He said 
Southwest Grain Cooperative is a cooperative representing about 5,000 
people. He said it has facilities in 12 communities.
    Mr. Stevens said BNSF has transferred southwest North Dakota spring 
wheat markets that had been developed over the past 20 years to 
producers in the eastern Dakotas and western Minnesota by using 
inverted rate systems. He said BNSF has displaced millions of bushels 
of spring wheat raised in the western Dakotas. He said even though 
inverted rates have been in effect since last spring, the effects were 
not felt until after the 2001 harvest. He said the facility at Boyle is 
losing about a shuttle train a month to the eastern markets. He said 
the eastern grain does not have the same milling characteristics as 
western North Dakota grain. He said Asian markets will be lost to 
Canadian producers if those types of milling characteristics continue 
to move to the Asian markets.
    Chairman Wanzek recognized Mr. Jim Bobb, Grain Division Manager, 
Southwest Grain Cooperative, who presented testimony regarding grain 
transportation rates. Mr. J. Bobb said the shuttle concept with respect 
to spring wheat is something about which people can get very excited. 
He said the problem arises when facilities are being built and there is 
the realization that there are not enough markets. He said the Pacific 
Northwest is the only real market right now. He said when you start 
looking at the facilities in the Red River Valley, you have to ask 
where they are going to ship the grain. He said there is no competition 
and the grain is held hostage unless the producer decides to move the 
grain first east and then west. He said the volume at Southwest Grain 
Cooperative is down about 20 percent at the current rate. He said 
Southwest Grain Cooperative will be down about 3.5 million to 5 million 
bushels of spring wheat this year. He said BNSF has not lost that 
volume. He said a lot of that volume is being loaded east at a lower 
rate. He said Southwest Grain Cooperative has invested about $6 million 
in the facility to be able to load shuttles. He said a long-term 
inverse rate will place Southwest Grain Cooperative in jeopardy.
    Mr. J. Bobb said he does not understand why he needs to pay 
$120,000 more for a wheat train that has the same specifications for 
loading and unloading into the same marketplace as another product 
train. He said the Pacific Northwest market is 25 cents lower than it 
was a year ago. From the middle of November 2001, he said, the Pacific 
Northwest has lost value against last year. He said the export market 
is sluggish this year. Chairman Wanzek recognized Mr. Craig Fisher, 
farmer-trucker, Richardton, who presented testimony regarding grain 
transportation rates. Mr. Fisher said he normally hauls all his grain 
to the southwest corner of the state. He said this year he is hauling 
70,000 to 80,000 bushels to Jamestown. He said his credibility with the 
local elevator will be hurt this year when he goes to buy fertilizer.
    In response to a question from Senator Wanzek, Mr. Fisher said the 
net price per bushel difference that exists when he trucks his grain to 
Jamestown is 33 cents when contracted. He said that amount gives him a 
dollar a mile to drive.
    In response to a question from Senator Krauter, Mr. Fisher said the 
road from Bismarck east is terrible. He said the truckers are the ones 
who are breaking up the roads. He said the truckers are using fuel and 
wearing out tires. He said he should not have to haul his grain east.
    Chairman Wanzek recognized Mr. Vernon Mayer, farmer, Regent, who 
presented testimony regarding grain shipment rates. He said the 
majority of his wheat goes to the Southwest Grain Cooperative. He said 
Mr. S. Bobb presented a lot of overwhelming data regarding the 
economics of running a railroad. He said the average cost for BNSF to 
haul freight in the United States last year was approximately $18 a ton 
per thousand miles. He said BNSF's break-even costs are $15 to $16 per 
ton per thousand miles. He said that netted BNSF approximately $750 
million in profit. He said to haul his wheat from Gladstone to the 
Pacific Northwest, it costs $26 per ton per thousand miles. He said 
that is $8 per ton more per thousand miles than the average of 
everything else that BNSF hauls in the country. He said if BNSF would 
just haul his wheat the average it costs to haul all other products in 
this country, the Southwest Grain Cooperative could pay 33 cents per 
bushel more for his wheat. He said there is a feeling of frustration 
out there, especially in the southwestern part of North Dakota. He said 
they feel they are being economically discriminated against by the 
railroads.
    In response to a question from Representative Nelson, Mr. J. Bobb 
said the freight spread between a shuttle rate and a 52-car rate will 
vary depending on the barge rate through St. Louis. He said destination 
markets are very small for spring wheat right now. He said the Pacific 
Northwest is the primary market. He said he does not understand why all 
the new facilities are being built if there is no market. He said he is 
not saying there will not eventually be a market. He said right now 
they do not have any destination markets that can accommodate a 
shuttle. He said shuttle service to the Pacific Northwest has been 
profitable for the Southwest Grain Cooperative. He said the cooperative 
has loaded 33 shuttle trains since 1999. He said between the 2001 
harvest and January 2002, the Southwest Grain Cooperative did not ship 
any grain to the Pacific Northwest. He said at that time the best 
market involved smaller trains going to Minneapolis. He said there are 
economic risks with shuttle trains. He said in order to get the 
incentives, everything has to click and that does not always happen.
    In response to a question from Senator Wanzek, Mr. J. Bobb said it 
took everyone awhile to figure out why grain was moving the way it was. 
He said right now there is an unfair shifting of customers. He said 
everything west of the Southwest Grain Cooperative is a mileage rate 
and everything east is an inverse rate.
    In response to a question from Senator Bowman, Mr. J. Bobb said 
BNSF holds a farmer's grain hostage until it is ready to ship it. He 
said BNSF will eventually ship everyone's grain.
    In response to a question from Representative Fairfield, Mr. J. 
Bobb said the Southwest Grain Cooperative was built at Boyle because 
the two branch lines south had been abandoned, as had one branch line 
north. He said in 1999 the Southwest Grain Cooperative completed an 
addition to the facility which expanded it to two million bushels. He 
said the cooperative also completed an addition to its track to allow 
loading of the 110-car shuttle trains. He said the cooperative was told 
that inbound shuttle trains carrying fertilizer would become a reality 
and the cooperative therefore has a fertilizer plant. He said he has 
unloaded one such fertilizer train.
    In response to a question from Representative Schmidt, Mr. J. Bobb 
said the elevator consolidation in southwestern North Dakota happened 
in the late 1980s. He said the Southwest Grain Cooperative also owns 
eight elevator facilities in the country.
    Chairman Wanzek said a representative from the North Dakota Farm 
Bureau was not able to be present today. However, he said, he was given 
written testimony compiled by Mr. Eric Aasmundstad, President, North 
Dakota Farm Bureau. A copy of the testimony is attached as Appendix B.
    Chairman Wanzek recognized Mr. Ron Raushenburger, Governor's 
office, who presented testimony on behalf of Governor Hoeven. He said 
Governor Hoeven has asked the Governors of neighboring states to join 
him in working toward a solution for the unfair grain prices. He said 
BNSF is using its power to offer discounted inverse rates. He said 
Governor Hoeven is asking BNSF to evaluate its rates and commit to 
making them equitable. He said BNSF practices are having impacts on the 
state's roads and the state's smaller elevators.
    Chairman Wanzek recognized Mr. Tony Clark, Public Service 
Commissioner, who presented testimony regarding the role of the Public 
Service Commission in regulating railroads. A copy of his testimony is 
attached as Appendix C. Commissioner Clark said BNSF views North Dakota 
as being resistant to change. He said the problem is that North Dakota 
has a monopolistic imposition of will upon captive producers and 
elevators. He said North Dakota is against creating unfair and 
irrational advantages for a small number of shippers.
    Representative Brandenburg said he wonders why there is a $1.08 
rate in western North Dakota and lower rates farther east. He said it 
appears that the western part of the state has no competition; whereas, 
there is competition in the eastern part of the state and in western 
Minnesota.
    In response to a question from Representative Mueller, Commissioner 
Clark said a rate complaint case would have to be taken before the 
Surface Transportation Board in Washington, DC. Until a few years ago, 
he said, going before the board was not a realistic option. He said in 
order to prevail in such a case, one had to prove the rates are 
unreasonable and the railroad was market dominant. Before the recent 
rules, he said, the railroads were able to stymie anyone who brought a 
rate complaint case. He said a rate complaint case brought in Montana 
was bottled up by the railroads for 17 years, just on the issue of 
whether the railroad was market dominant. He said they never were able 
to get to the issue of whether the rates were above what a competitive 
market would allow. He said in western North Dakota the railroad is 
clearly market dominant. He said the standard rule of thumb is a 180 
percent ratio of revenue to variable cost. He said the Public Service 
Commission has looked at some shipments and determined that the ratios 
were in the 200 to 300 percent range.
    In response to a question from Senator Wanzek, Commissioner Clark 
said federal preemption applies to the rail industry. On the federal 
level, he said, we have seen what has happened to other network 
providers, such as the telephone industry and the electric industry. He 
said the competitive changes have not happened in the rail industry and 
would require federal intervention.
    In response to a question from Senator Krauter, Commissioner Clark 
said the Public Service Commission has intervened in cases before the 
Surface Transportation Board. He said new rules issued by the board are 
much more favorable to states like North Dakota and get beyond the 
initial determination regarding market dominance and move to the issue 
of the rates themselves. However, he said, the rules are now bottled up 
in litigation because the railroads apparently challenged the rules. He 
said during the last legislative session the Public Service Commission 
asked for an appropriation of $100,000 so it could begin to explore 
whether filing a rate case was the appropriate thing to do. He said the 
commission still believes it would be appropriate to pursue such 
research. However, he said, the commission also understands it will 
take a lot more money than $100,000 to prevail in a rate complaint 
case. He said because the new rules are being litigated by the 
railroads, the new rules are not in effect.
    In response to a question from Senator Wanzek, Commissioner Clark 
said the Public Service Commission would be the entity to pursue a rate 
complaint case against BNSF.
    In response to a question from Representative Schmidt, Commissioner 
Clark said before implementation of the Staggers Act in 1980, there 
were difficulties in the rail industry. He said there were a lot of 
bankruptcies. He said the rail industry was a very insolvent industry. 
He said the Act gave the railroads more ratemaking freedom and allowed 
them to streamline their abandonment procedures. He said it may be time 
to review the provisions of the Act and determine if changes are 
merited.
    In response to a question from Senator Wanzek, Commissioner Clark 
said the Public Service Commission has the authority to initiate a rail 
case but without dollars to appropriately staff the effort, it would 
not be effective. He said rail rate cases are highly specialized. He 
said there is not the time to get involved in such an effort, given the 
number of staff employed by the commission and the statutory duties of 
the commission. He said a rail rate case would require specialized 
attorneys and specialized expert witnesses. He said such individuals 
can charge a premium for their services. He said the type of 
information that would have to be used in litigation would be above 
that which the commission is able to provide.
    Chairman Wanzek recognized Agriculture Commissioner Roger Johnson 
who presented testimony regarding grain transportation rates. 
Commissioner Johnson said participants at the national meeting of 
agriculture commissioners passed a resolution urging all railroads to 
charge reasonable rates, offer fair and consistent rate spreads and 
service to all shippers, and treat all shippers equitably. He said the 
resolution also urged all railroads to offer coloading of trains and to 
implement reasonable loading policies that hold both shippers and 
railroads responsible for moving equipment promptly. He said the 
agriculture commissioners believe the federal government should 
increase its oversight over railroad issues, including issues 
pertaining to rates and services in areas where competition is not 
present. He said this is an issue that is beyond North Dakota. He said 
some of the states give their agriculture commissioners regulatory 
authority in this area. He said North Dakota does not do so.
    In response to a question from Representative Froelich, Ms. Marcy 
Dickerson, State Supervisor of Assessments, Tax Department, said only 
the real property of railroads is subject to taxation in this state. 
Ms. Dickerson said the personal property of railroads used to be taxed 
too but the Railroad Revitalization and Regulatory Reform Act precluded 
discrimination in the way states tax railroads. She said because North 
Dakota does not tax the personal property of other businesses, it 
cannot impose a tax on the personal property of railroads.
    In response to a question from Representative Froelich, Ms. 
Dickerson said to determine the taxation of a railroad's real property, 
the state begins by valuing the entire railroad. She said this is done 
via the cost, income, and stock and debt approaches to value. She said 
this is the method used by most states and it is known as unit 
valuation. She said a portion of that unit value is then allocated or 
apportioned to North Dakota. She said allocation factors include gross 
earnings, revenue traffic units, and car and locomotive mileage. She 
said the North Dakota figure is then taken and divided by the system 
figure to arrive at a percentage. She said the percentage of the unit 
value is then allocated to this state. She said the next step is to 
assign a value per mile of track to each rail line. She said all the 
value has to be allocated according to miles of track without regard to 
other factors. She said to arrive at the mile of track value, the Tax 
Commissioner asks the railroads for statistics on their income and 
their various activities on their miles of track. She said this enables 
the Tax Commissioner to determine which are the most valuable lines of 
track, as opposed to those that are less valuable. She said the Tax 
Commissioner calculates the relative value of each track. She said the 
railroads provide the Tax Commissioner with the number of miles in each 
taxing district.
    In response to a question from Representative Brusegaard, Ms. 
Dickerson said when a railroad spur becomes nonoperating or abandoned, 
it becomes subject to local assessment. She said at that point it is 
not subject to the system assessment.
    In response to a question from Representative Brandenburg, Ms. 
Dickerson said the Tax Commissioner does not collect property taxes. 
She said that is done at the local level.
    Representative Brandenburg said elevators pay property taxes, fuel 
taxes, and other taxes that go to support local communities. He said 
when the local elevators close, somebody has to make up that shortfall 
in the local revenue stream.
    Chairman Wanzek recognized Mr. Steven D. Strege, Executive Vice 
President, North Dakota Grain Dealers Association, who presented 
testimony regarding grain transportation rates. Mr. Strege said the 
issue of grain shipment rail rates is attracting national attention. He 
said the association has been accused of being adverse to change. He 
said in fact the association has a record of opposing changes that are 
detrimental to North Dakota. He said the inverse rates are in effect 
secret contract rates that will not be disclosed by BNSF. He said the 
shuttle packages are sold as 6, 12, or 24 packs. He said it is a large 
shipper's game. He said there is a discount for the 24 pack of $100 a 
car. He said the inverse rates go only to large shippers. He said it is 
not an even playing field. He said recently it became known that 52-car 
loaders east of Bismarck could also participate in the inverse rate. He 
said they get less of a rate break and it is only a temporary rate 
lasting through the end of March 2002. He said this move widens the 
discriminatory pricing in effect between the 26- and 52-car loads. He 
said instead of bringing rate levels down across the board, this brings 
a different fracture level to the program.
    Mr. Strege said the shuttle program is claimed to be very 
efficient. However, he said, shuttle trains are given priority while 
other trains are left to sit for 7 to 12 days. He said the trains are 
loaded and ready to go but they are not picked up. He said the 
inefficiencies in the smaller shipments are created by the railroads. 
He said if BNSF would put as much effort into coordinating these 
smaller trains as they do into advancing the shuttle train concept, the 
efficiencies could be enjoyed by all.
    Mr. Strege said BNSF says it had tried coloading and it did not 
work. He said that was tried in Union Pacific territory. He said all 
railroads in North Dakota, except BNSF, provide for the coloading of 
trains. He said BNSF has allowed its Red River Valley and Western 
Shortline to coload until June 30, 2002. He said the question to be 
asked is if the other railroads can make coloading work, why cannot 
BNSF. He said BNSF has made a decision not to coload and to instead 
push the single-loading shuttle station concept and to let other 
customers find their own way or simply go out of business.
    Mr. Strege said in the eastern part of the state and particularly 
in the northern part of the state, the shuttle concept amounts to an 
elevator and branch line abandonment plan. He said if certain elevators 
are given a preferential rate and if those elevators have a circle of 
dominance that can extend out for 50 to 60 miles, the reality is that 
other elevators will close. He said that gives farmers in the area less 
marketing opportunities and it creates difficulties for rural 
communities.
    Mr. Strege said there will probably always be single-, 26-, and 52-
car rates on the books. However, he said, if the volume is pushed into 
the shuttle facilities, the smaller facilities will not be able to 
continue to exist. He said the scoots program is another indication 
that the 52-car loads are destined to be loaded only by the shuttle 
loaders.
    Mr. Strege said Mr. S. Bobb stated that BNSF is not driving the 
change but rather the market is driving the change. He said the North 
Dakota Grain Dealers Association is not against efficiency and lower 
rates. He said the association would simply like to see those lower 
rates and efficiencies made available to everyone in North Dakota.
    Mr. Strege said the eastern part of the state and the western part 
of the state should not get into a war. He said neither should shippers 
of different sizes get into a war. He said the common goal is lower 
rates for everyone. He said the Agriculture Committee could work with 
the National Conference of State Legislatures to bring attention to 
this matter. He said the committee could support remedial federal 
legislation, press BNSF for coloading on its lines, and investigate 
what it would take to file a rate complaint case. He said those efforts 
will put pressure on BNSF to be friendlier to all shippers.
    In response to a question from Representative Brandenburg, Mr. 
Strege said a shuttle loading facility needs to have track on each side 
that can accommodate 110 cars, plus the necessary number of 
locomotives. He said that is two and one-half miles of track. He said, 
in the alternative, a facility could have circle tracks. He said the 
track needs to be able to accommodate 286,000-pound gross weight cars. 
He said the gross weight on hopper cars used to be 263,000 pounds. He 
said in the last 10 years, the hopper cars have increased to 286,000 
pounds gross weight. He said one of the disadvantages of the increase 
was that it did create a problem for short line tracks that were not 
heavy enough to accommodate the heavier cars.
    In response to a question from Senator Wanzek, Mr. Strege said 
there are nine elevators that are shuttle capable. He said some load 
110-car trains but not within the 15 hours or they load for shipment to 
destinations that are not subject to the preferred rates. He said some 
elevators believe if they do not participate in the shuttle program, 
another elevator down the road will get the incentives from the 
railroad. He said it is not accurate to say the railroads are not 
pushing the shuttle facilities. He said the railroads could do more to 
work for the current system by encouraging coloading and by matching 
the 52- and 54-car trains.
    In response to a question from Senator Bowman, Mr. Strege said the 
committee needs to determine whether this discussion is just about the 
efficiency of railroad transportation or whether it is about the 
efficiency of the entire food chain, from the elevator to the end 
consumer. He said the domestic milling market requires mainly 26-car 
trains or less. He said that market does not take 110-car trains. He 
said the railroad is creating a system that does not fit the domestic 
market. He said 52-car trains were serving the export market adequately 
and people had to spend money on the other end to gear up for 110-car 
trains. He said because there is the 15-hour unloading requirement, the 
exporters sometimes have to keep crews on even when they would 
otherwise not do so, simply so the exporters can be ready for the train 
and get it unloaded in the time required. He said the exporters also 
experience logistical problems, especially when they have other trains 
onsite.
    Chairman Wanzek recognized Mr. Neal Fisher, Administrator, North 
Dakota Wheat Commission, who presented testimony regarding grain 
shipment rates. Mr. Fisher said most of the shuttle movement is much 
more applicable or adaptable to commodities other than spring wheat. He 
said the quality traits in the spring wheat markets do vary. He said 
there are different milling and baking attributes and performance 
within the spring wheat production regions. He said Asian customers 
have certain preferences. He said the commission is concerned about 
quality disruptions in key markets and the allocation of resources that 
might in the future dictate where wheat can be produced.
    In response to a question from Representative Brusegaard, Mr. 
Fisher said the rates that do not make sense on a ton-mile basis are 
what is generating the concern about fairness. If the opportunity 
exists to lower rates in an area that requires longer shipping to the 
end market, he said, there must be enough margin to work with and still 
make a profit.
    Chairman Wanzek recognized Mr. Keith Brandt, Manager, Farmers 
Elevator, Enderlin, who presented testimony regarding grain shipping 
rates. Mr. Brandt said BNSF seems to be ignoring branch lines that 
serve entities that have been BNSF customers for many years. He said 
more grain is being trucked on highways. He said North Dakota will 
probably lose $27 million in federal highway funds. He said the 
committee needs to determine who is going to bear the brunt of that. He 
said because BNSF has done a good job of reducing expenses, it should 
have the ability to reduce rates.
    Chairman Wanzek recognized Mr. Todd Vogel, Manager, Marion 
Elevator, and a director of the North Dakota Grain Dealers Association, 
who presented testimony regarding grain shipping rates. Mr. Vogel said 
in the 1980s the railroad went to the 26-unit cars. He said the 
elevator incurred the cost and made the required change. He said in 
1987 Red River Valley and Western Shortline took over the track from 
Burlington Northern but Burlington Northern still had a lot of control 
over the short line. He said in the early 1990s the certificate of 
transportation program came into existence. He said the North Dakota 
Grain Dealers Association opposed introduction of the program. He said 
the association thought it was not a decision that would help North 
Dakota. He said what Mr. S. Bobb did not explain was that under the 
certificate of transportation program, BNSF auctions off cars. He said 
in the auction process, the Marion Elevator had to pay the original 
$2,000 per car tariff rate and then had to go out and buy cars for $300 
to $400 over that rate to get the cars to Marion. He said, as a result, 
the Marion Elevator started using trucks to move grain. He said in the 
past seven years there has been flooding in the Marion area. He said 
track in the area was under water. He said the railroad indicated that 
because the elevator did not ship cars in the past 5 to 10 years, the 
railroad would not fix the tracks in the area. He said the railroad 
blames the elevator for not shipping cars when the reality is that the 
railroads made it too expensive for the Marion Elevator to ship the 
cars. He said in 2001 the area tracks became abandoned. He said 
railcars will never be seen in Marion. He said the farmers in the area 
are shipping their grain by truck and that has a negative impact on 
roads. He said farmers are working land that was once owned by the 
railroads and the railroads therefore have a responsibility to service 
all the communities in North Dakota, and not to just pull out and say 
it is the community's fault or the elevator's fault that rail service 
is not provided or that cars are not loaded to make the rail service 
work. He said the circumstances are something over which the local 
residents have no control.
    Chairman Wanzek recognized Mr. Dana Brandenburg, who presented 
testimony regarding his experience with BNSF. Mr. Brandenburg said all 
he heard today is how the railroad has used people, lied to people, and 
cheated people. He said in 1997 he had a business that involved picking 
up railroad ties from BNSF and reselling them to farmers and other 
entities. He said he had submitted a proposal to the railroad to 
develop a chipping facility in Mandan so he could chip the scrap ties, 
take the chips to the Heskett Plant, mix them with coal, and make 
electricity. He said he was told by the road masters that he would get 
the contract. He said BNSF had in fact given the contract to another 
entity. He said there should be an investigation into what BNSF did to 
him.
    Chairman Wanzek recognized Professor Dwight Bauman, Pittsburgh, 
Pennsylvania, who presented testimony. Professor Bauman said his 
grandfather was involved in setting up the State Mill and Elevator and 
the State Bank. He said his grandfather was concerned that people in 
Minneapolis were trying to run North Dakota. He said that is happening 
now. He said farm people are driven by yearly cycles and city people 
are driven by economic cycles. He said in 1970 he convinced Carnegie 
Mellon University to buy a bankrupt taxi company to study the 
regulatory process. He said those who do not learn from history live to 
repeat it. He said the railroad is the model of the reregulation 
process. He said computer models have determined that 52 cars work and 
51 cars do not work. He said the airlines had the same problem. He said 
the regulatory process does not fit a nice model. He said Oregon and 
Washington formed a process to take over branch line railroads and run 
them. He said the main lines are selling to Amtrak and someone should 
find out how much they will charge to use the track. He said farmers 
could then ship their own grain. He said the State Mill and Elevator 
Act included this possibility.
    In response to a question from Representative Froelich, Mr. S. Bobb 
said in 2000, $390,731,000 of revenue was generated by BNSF in North 
Dakota. He said total taxes paid in North Dakota by BNSF was 
$7,246,602.
    In response to a question from Senator Bowman, Mr. S. Bobb said 
BNSF sets transportation rates by capturing as much grain as it can at 
the various origins and by capturing as many destination opportunities 
as it can. He said in some origins, BNSF can set the rates higher and 
in some origins, it has to set the rates lower. He said the rate levels 
set by BNSF are a function of what the markets will bear. He said the 
question is how else would others suggest that BNSF set the rates. He 
said looking only at BNSF transportation rate impacts will give an 
incomplete equation. He said the elevation margins also need to be 
reviewed as well as export sales. He said during January, February, and 
March 2002, the wheat export market has gotten a lot softer and there 
is really only one entity that has exports. He said the question is 
from whom is that entity choosing to buy wheat and is that decision 
driving some of the other behaviors. He said is Jamestown simply 
needing to fulfill a commitment they made to supply bushels and are 
they therefore bidding flat to negative margins to avoid some sort of 
penalty. He said there is grain being trucked from the Dickinson area 
east and then moved west. He said BNSF will do the mathematics. He said 
if there are enough bushels moving, BNSF will have to do something to 
offset that. He said it would be a bad business decision for wheat to 
go from the Dickinson area east by truck to get on a lower rate moving 
west.
    Mr. S. Bobb said BNSF has to make certain that this is a rate issue 
rather than a customer choosing to manage its elevator margins in this 
way. He said Minnesota producers have eastern domestic markets to which 
they are choosing to ship. He said producer marketing is driven by 
price expectations, tax purposes, and storage situations rather than by 
shipping rates.
    In response to a question from Representative Fairfield, Mr. S. 
Bobb said testimony was offered about the trucking of grain from 
Dickinson to Jamestown. He said if people are trucking their grain 
instead of paying a premium for guaranteed cars, that shows there is 
competition. He said none of today's presenters has refuted the 
economic arguments he has made. He said there are opinions about future 
impacts and philosophical differences about what is right and wrong but 
no one has disagreed with BNSF's economic explanations. He said a 
question that needs to be asked is how many John Deere dealerships and 
Chevrolet dealerships have recently opened in rural North Dakota. He 
said those macroeconomic forces have nothing to do with BNSF but they 
are taking place.
    Senator Bowman said the problem is that there is no profit left to 
the farmers. He said the farmers have been squeezed by everyone.
    Mr. S. Bobb said farms are getting larger and the fact is that 
fewer farmers are therefore buying tractors. He said that is why there 
are fewer dealerships. He said farm income is derived from crop 
production and crop prices are very low. He said the railroads have not 
been able to get rail rate increases in part due to the fact that the 
destination market cannot pay more and still be competitive.
    In response to a question from Representative Fairfield, Mr. S. 
Bobb said BNSF is charting its way through the macroeconomic forces. He 
said there is a perception that BNSF is causing consolidation in rural 
America. He said the reality is that BNSF is responding to the changes 
that are causing consolidation.
    In response to a question from Representative Fairfield, Mr. S. 
Bobb said reprisals and punitive actions would not be acceptable in 
BNSF's corporate culture. He said if someone has a difference of 
opinion with what BNSF is doing, that person should express his or her 
opinion. He said some people have assumed that if the rates are lowered 
in western North Dakota, the rates will have to be raised in eastern 
North Dakota. He said the marketplace does not work like that. He said 
rates are set where the market allows them to be set. He said rates are 
not set as a result of reprisals.
    In response to a question from Representative Renner, Mr. S. Bobb 
said BNSF is not a cost plus pricer. He said the rate per thousand 
miles is going to vary across commodity markets and across geographic 
origins as a function of each commodity's competitive environment. He 
said he does not know how BNSF agricultural rates compare to BNSF coal 
rates. He said BNSF agricultural business is 90 percent tariff-based. 
He said the agricultural rates are published on the web; whereas, coal 
rates are highly contractual.
    In response to a question from Representative Brandenburg, Mr. S. 
Bobb said BNSF's shuttle program is both international and domestic. He 
said the largest growth in the shuttle program has been in Mexico and 
in domestic destinations. He said the scoots program was designed to 
fit the unique needs of some processors. He said the scoots program has 
been run primarily out of shuttle locations because they are capable of 
handling 58-car trains without any additional capital investment. He 
said because the nature of the domestic marketplace requires BNSF to 
partner with eastern railroads in offering the scoots program, it has 
taken a long time to achieve the appropriate design parameters for the 
program. He said the program started out at 58 cars and it is now at 
about 65 to 68 cars because that is what the eastern railroads want to 
run. He said the scoots program is in the developmental stages. He said 
today there are no wheat scoots running out of North Dakota. He said it 
looks like the scoots program's loading origination will not be 
confined only to shuttle elevators but it will be confined to the 286 
network.
    In response to a question from Representative Mueller, Mr. S. Bobb 
said he has been responsible for BNSF's agricultural products area for 
only four years so he does not know who said what to whom or who 
implied what prior to that time. He said he does not believe anyone 
could say that the 26-car or the 52-car arrangement is the only way to 
go. He said over 50 percent of the grain that left North Dakota in 2001 
was shipped in 26-car shipments or less. He said in 1980 unit trains 
were introduced. He said in some markets, a shuttle is the best 
shipping method. He said shuttle economics is the way to get North 
Dakota grain to Mexico. He said the same is probably true of the 
Pacific Northwest. He said those customers who invested in 52-car 
facilities made that investment because it had an inherent set of 
capacity-creating and efficiency-creating service opportunities. He 
said the investment gave them a rate structure different from the 
single- and 26-car shippers. He said BNSF does not believe it would be 
fair to allow 26-car shippers to coload on the 52-car rate. He said 
given the investment made by facilities that have gone to 110-car 
facilities, it would not be fair to allow the same 110-car rate for 52- 
or 26-car shippers. He said not too many years ago no one would have 
been able to predict the kind of locomotive traction and horsepower 
characteristics in the marketplace today. He said a big new locomotive 
weighs 435,000 pounds and will literally squash a non-286 line when it 
rolls onto it. He said BNSF's coal fleet involves 315,000-pound cars. 
He said the coal trains are 117 to 135 cars. He said coal moves over a 
very dense network called the central corridor. He said there is less 
coal moving through North Dakota because the siting infrastructure is 
not in place to handle the trains. He said the grain network is never 
going to have the same density. He said if BNSF goes to a 315,000-pound 
railcar, six inches will be added to every railcar. He said that means 
that a train hauling grain in 315,000-pound cars with a locomotive 
consist would be longer than the typical siting infrastructure. He said 
BNSF therefore chooses to maintain a 286,000-pound grain car.
    In response to a question from Senator Wanzek, Mr. S. Bobb said if 
one local elevator is already a 110-car facility and a second local 
elevator made the commitment to upgrade to a 110-car facility, BNSF 
would not discriminate against the second facility. He said both 
facilities would be offered the same rate. He said a single area might 
not, however, be able to support both shuttle facilities.
    No further business appearing, Chairman Wanzek adjourned the 
meeting at 3:45 p.m.
                                 ______
                                 

 [From ND Grain Dealers Association Grainmen's Mirror magazine, March 
                                 2002]

              Legislative Committee Hears from Steve Bobb

    Tensions were high as the North Dakota Interim Legislative 
Agriculture Committee met on February 27 at the State Capitol in 
Bismarck. Sole item on the agenda was the committee's study into 
railroad rates and practices. Leadoff witness was BNSF Ag Products Vice 
President Steve Bobb. His presentation promoted shuttle trains and 
attempted to show there were no adverse effects from BNSF's inverse 
rates on wheat to the West Coast.
    A very revealing point of the hearing came when Richardton area 
farmer Craig Fisher told of how those inverse rates caused him to truck 
his wheat 170 miles east to Jamestown for loading on a shuttle train to 
go back west past his normal delivery point of the Southwest Grain 
Terminal near Gladstone. Fisher said he didn't want to do that, what 
with time and wear and tear on his equipment involved, and bypassing 
his local business, but it gave him the best price on his wheat. Steve 
Bobb said he would have to look into the matter because he didn't want 
to be hauling wheat for less from Jamestown than he could haul those 
same bushels from Gladstone.
    Committee member Senator Bill Bowman of Bowman, ND has been an 
outspoken critic of the inverse rate, which means farmers and elevators 
in his west end of the state pay more to ship grain to the West Coast 
than is charged for grain from eastern North Dakota and western 
Minnesota. He says this has robbed western North Dakota farmers of 
markets they have developed and traditionally served, and has had a 
significant depressing effect on wheat prices.
    Southwest Grain Cooperative Grain Merchandiser Jim Bobb, a cousin 
of Steve Bobb, confirmed the market distortion by saying his 
cooperative's grain volume is down 20% from a similar period a year 
ago, which he blames on the inverse rate.
    Senator Bowman questioned Steve Bobb pointedly about rate-setting 
by railroads. Bobb said they had to meet the competition. Well, asked 
Bowman, what about where there is no competition, like western North 
Dakota. Bobb basically admitted they charge what the traffic will bear.
    Steve Bobb had actually set the stage for a high tension hearing 
when, in his opening remarks, he said North Dakota is simply against 
change. He said North Dakotans opposed unit train rates 20 years ago, 
the COT program, and now shuttle trains. Public Service Commissioner 
Tony Clark rebutted the accusations by stating that a definite pattern 
was showing, but that it wasn't of resistance to change; instead it is 
a monopolistic railroad trying to impose its programs on captive 
producers and elevators.
    Grain Dealers Executive Vice President Steve Strege pointed out 
that on a Fargo area radio talk show the previous Friday, Mr. Bobb had 
singled out the ND Grain Dealers as opposing change, opposing any 
innovative concept the railroad had come up with. Strege thanked Mr. 
Bobb for the recognition of the key role the Grain Dealers Association 
had played in resisting changes like wholesale abandonment of 
branchlines and the car auction program that pits one shipper against 
another while the railroad controls the car supply faucet. He said the 
BN had more money and more lawyers to outlast the grain industry, 
including the National Grain and Feed Association and some large grain 
companies in the COT case, and that after seven years the grain 
industry just quit.
    At one point during the hearing, Bobb said ``macroeconomic forces'' 
were driving the conversion to shuttle trains. He denied BNSF had 
anything to do with it, or that it was putting in any ``upfront 
capital''. Committee members seemed unconvinced. Representative April 
Fairfield of Jamestown asked Bobb if he was ``a pawn or a predator'' 
within the ``macroeconomic forces.'' Strege read to the committee from 
a July 1999 North Dakota newspaper report in which an official with a 
company building a shuttle facility had stated: ``The railroad is 
driving this. Without their incentives this would not have happened. 
They're giving us a hell of a deal.''
    Steve Bobb said that BN had decided back in the 1980's to get away 
from secret contracts and go to transparent rate-making. His intentions 
were questioned later in the hearing when someone asked why these 
inverse rates are in secret contract.
    Steve Bobb might have been surprised at the level of discontent 
these rates have generated. Upper management, half the Board, and a 
number of other patrons from Southwest Grain were at the hearing. Grain 
Dealers was there in force with five people. The Governor's office, 
Public Service Commission, Ag Commissioner, Wheat Commission and others 
testified in opposition to what BNSF is doing. Public Service 
Commissioner Tony Clark's testimony is printed elsewhere in this issue.
    Southwest Grain Cooperative General Manager Bob Stevens, with a 
shuttle facility near Gladstone, ND and another going up at Lemmon, SD, 
said the railroad is transferring markets developed by western North 
Dakota and Montana, to the east. He said there is a difference in the 
quality and milling characteristics of the production from these areas 
and that (by trying to fill markets with something different) we risk 
losing market share to Canada.
    Jim Bobb said the shuttle train concept for spring wheat is a 
little baby. He warned easterners that there are few destination 
markets that take shuttle trains of spring wheat. He said the BNSF has 
used the PNW market to keep the eastern shuttle loaders going, robbing 
western shippers of their usual markets. If people are building shuttle 
facilities for spring wheat, they better take a look at destination 
markets, he said, there are no mill markets in the U.S. that take 
shuttle trains. He also said that competing non-shuttle elevators in 
the east are vulnerable to this use of the shuttle concept.
    Jim Bobb also brought up the significant but unexplained difference 
in rates between different crops. Why, he asked, does it cost him 
$120,000 more to ship a wheat train west than it would for corn or 
barley. He said the wheat rates are high enough to allow for the 
inverse rates.
    From Governor Hoeven's office, Policy Advisor Ron Rauschenberger 
said Hoeven has been in contact with other Governors around the region 
and that a joint letter of concern to the BNSF is being circulated for 
signatures.
    Ag Commissioner Roger Johnson stated that the National Association 
of State Departments of Agriculture had addressed rail issues at its 
meeting the previous weekend and had adopted a resolution calling for 
equitable treatment of all shippers.
    Wheat Commission Administrator Neal Fisher reported some Asian 
market complaints about the milling characteristics of wheat they have 
been receiving off the PNW Coast. It is not yet confirmed, but Fisher 
thinks this could be related to eastern North Dakota and western 
Minnesota wheat moving into those markets, instead of the traditional 
supply from western North Dakota and Montana. Fisher emphasized that he 
wasn't saying the eastern wheat was of lower quality, but it is a 
different quality, and mills differently because of the differences in 
climates under which the two are raised.
    Steve Bobb claimed that the PNW wanted more wheat than was 
available in Montana or western North Dakota, and so he had to put in 
lower rates from the east in order to fill the demand. He did not 
mention the Montana Ag Statistics report showing 79 million bushels of 
spring wheat stored in Montana in December 2001, or the millions of 
bushels stored in western North Dakota. State Senator Ron Nichols of 
Palermo asked if PNW buyers wouldn't have had to bid up to get more 
grain had the inverse rates not been put in. Bobb said the business 
would have gone to Canada.
    State Representative Mike Brandenburg of Edgeley said he is 
concerned about BN's new tactics wiping out elevators, jobs and the tax 
base. He cited a widening spread in the rate between his local 
elevator, of which he is a director, and a shuttle loader 40 miles 
away. Bobb said the FOB values are the same and so there had been no 
impact. Brandenburg cited volume figures that showed otherwise. His 
elevator invested heavily in its station on the Red River Valley and 
Western Railroad, that feeds the BNSF. Edgeley could have made these 
improvements at one of two stations they have on the Dakota, Missouri 
Valley & Western. Now, said Brandenburg, the BNSF takes grain away from 
them with discriminatory rates. (Steve Bobb had said in a recent 
newspaper article that Edgeley was a victim of its own poor planning.)
    State Senate Minority Leader Aaron Krauter of Regent accused BNSF 
of taking over the marketing process and being the exporter and the 
handler. Bobb said the majority of their revenue comes from the shipper 
and it is not BNSF's place to get in between the shipper and the 
exporter.
    At one point during the meeting, Steve Bobb said, ``We have not 
been very good at raising rates.'' This probably didn't score many 
points with Committee members. Bobb said they had cut costs. This 
prompted Grain Dealers Association President Keith Brandt to ask why 
all rates hadn't been going down. Brandt also made reference to the 
many times Steve Bobb talks about taking care of Wall Street and 
stockholders. Brandt quoted the new CEO of Ford Motor Co as saying a 
company should take care of its customers first and then the stock will 
take care of itself. Grain Dealers Director Todd Vogel said his 
elevator at Marion had spent money to upgrade for unit loading on BNSF, 
later becoming an RRVW line, but then couldn't remain competitive with 
high priced COTs. Lack of volume and serious roadbed problems have 
since led to the line being abandoned.
    Mr. Bobb told the Committee that BNSF was hauling 40% of its grain 
volume in the 5,500 cars dedicated to shuttle train service. The other 
20,000 cars picked up the rest. Strege said that much of this 
efficiency difference is explained by the railroad's concentration on 
shuttle service, while leaving other trains and cars sit at the 
elevators or on sidings or in rail yards so that shuttle trains can be 
pushed on through. It is the railroad that controls the efficiency. He 
said if BNSF would spend as much time and effort on working with its 
current customers, for example co-loading of shuttle trains, as it does 
on pushing the shuttle concept into areas where it doesn't make sense, 
by manipulative rate schemes, the railroad could gain efficiencies and 
much of the current elevator system could be maintained to service 
farmers.
    Bobb said they had tried an extensive program of co-loading in the 
mid 1990's, but lost market share to the Union Pacific. It was later 
pointed out that the closest Union Pacific tracks are some distance 
south of North Dakota and so the comparison is invalid. All other 
railroads in North Dakota, except BNSF, do co-loading.
    The state's authority over railroads doing business in interstate 
commerce is limited. The Public Service Commission is the designated 
agency to represent the state in railroad matters such as at the 
federal Surface Transportation Board. That does not preclude other 
state officials such as the Governor or Ag Commissioner or Attorney 
General from becoming involved.
    Public Service Commissioner Tony Clark stated in his testimony that 
in the 2001 legislative session a PSC request for $100,000 to look into 
bringing a rail rate complaint to the STB was turned down. The 
railroads had lobbied against it. Sentiment at the Interim Ag Committee 
seemed to be that the rejection of that funding had been a mistake, and 
that getting something going like that should be taken up again.
    State Representative Rod Froelich of Selfridge asked a number of 
questions about the amount of property taxes BNSF pays in North Dakota. 
A representative of the Tax Department was called to the hearing to 
explain the formulas for assessment.
    State Representative Phil Mueller of Wimbledon said the BNSF is 
certainly not talking fairness when it put programs in place that 
bypass its own 52-car loaders. He also brought up co-loading. Steve 
Bobb said he doesn't know what was said by whom about the duration of 
52 car trains being ``top dog''.
    Strege urged continued joint action with other states through 
Governors, Public Service or Utility Commissions, Ag Commissioners, and 
the Conference of State Legislatures. Support of federal legislation to 
provide more oversight on the railroads is likely necessary, and should 
be supported by state government and the Congressional delegation he 
said.
    The Committee plans to meet again in April regarding the railroad 
issues. It is scheduled to meet again in March to take up one of its 
other studies, on genetically modified crops.
                                 ______
                                 

             [From the Bismarck Tribune, February 3, 2002]

            Alliance Claims Railroad Out to Bust Rural N.D.

                          (By Lauren Donovan)

    Farmers and the railroad are like a couple locked in a bad 
marriage.
    They can't break up and they can't get along either.
    The relationship never has been easy. But it has now reached the 
point where an agriculture coalition in North Dakota is spending big 
advertising bucks to tell the world how far things have deteriorated.
    In thousands of dollars worth of newspaper and radio ads, the 
Alliance to Keep Rural America on Track claims Burlington Northern 
Santa Fe is behind a system of super shuttle elevators on its line, 
giving some of those shuttles better rates than others and ultimately 
driving smaller elevators right off the map.
    Among casualties, the alliance says, will be more small towns, more 
jobs and more roads and highways beat up bald because they're used like 
branch lines to fewer elevators.
    The alliance says BNSF looks, smells and acts like a monopoly and 
it can do whatever it wants because it doesn't have any significant 
competition here, pushing rail rates higher in North Dakota than any 
other state. They estimate the railroad's gross revenue in the state 
approaches $340 million.
    The railroad answers that the alliance puts emotion ahead of fact.
    BNSF says the 110-car super grain shuttles so disliked by the 
alliance accounted for 16 percent of its grain freight in North Dakota 
last year and have helped keep rates fairly steady over the last 20 
years.
    And besides, the market, not the railroad, will decide how many 
elevator shipping points are viable in the future, BNSF says.
    As to charges of monopolistic behavior, the railroad says it isn't 
regulated like one and the presence of the Canadian Pacific railroad, 
plus any number of semi trucks in North Dakota, provide a competitive 
rate atmosphere. Rates are highest here because distance to the market 
is longest, it says.
    BNSF owns or controls 70 percent of all the railroad track in North 
Dakota and correspondingly has a 70 percent share of all grain moved by 
rail, according to a study by the Upper Great Plains Transportation 
Institute at North Dakota State University.
    The alliance has the attention of state officials.
    An interim Agriculture Committee will investigate BNSF's rates, and 
railroad representatives were called into Gov. John Hoeven's office 
Thursday. At that meeting, BNSF agreed to open its books so a third-
party analyst can look at the railroad's rates and its economic 
justification for other shipping practices in dispute.
    The North Dakota alliance, arm-in-arm with a national Alliance for 
Rail Competition, is pushing federal legislation. The proposal, while 
still a long way from regulating the railroads like they were before 
the deregulation of the 1980s, would give shippers and producers better 
avenues for rate complaints and access to rate arbitration.
    Jon Mielke, who oversees elevator issues for the state Public 
Service Commission, agrees with the alliance's position that the future 
looks very worrisome for many of the state's 420 elevators.
    Farmers and elevators on one side and BNSF on the other were 
rubbing along in their usual fractious way until last summer.
    Then, because BNSF wanted to pull grain from eastern North Dakota 
away from Minneapolis and into the Pacific Northwest markets, the 
railroad implemented a new inverse rate system that suppressed freight 
rates for only a few 110-car shuttle elevators east of Bismarck. The 
further east of the usual market dividing line at Bismarck, the lower 
the rate.
    Mielke said BNSF should give all farmers an equal shot at lower 
rates.
    Because the railroad not only gives better rates to shuttles and 
then picks and chooses among shuttle elevators which ones get favorable 
inverse rates, ``It's thereby dictating who will live and who will 
die,'' Mielke said.
    Terry Whiteside of Billings, Mont., heads up the National Alliance 
for Rail Competition.
    He said BNSF's inverse rates in North Dakota were a tactical 
blunder that could cost the company in the ongoing battle.
    ``This is not a nice company. This is a war,'' Whiteside said.
    To illustrate, he holds up Monopoly cards that let the players 
charge eight times the rate when they own all four railroads on the 
game board.
    ``The inverse rates were classic market abuse, creating winners and 
losers,'' Whiteside said.
    Stevan Bobb, a Richardton native, is head of agricultural products 
for BNSF at Fort Worth, Texas.
    He said the railroad had to pull more grain to export markets in 
the Pacific Northwest this summer, and if it hadn't, both the railroad 
and North Dakota grain producers would have left money on the table to 
be snatched up by the Canadian Wheat Board.
    ``Should we do what the alliance says and let the Canadian Wheat 
Board make the sale?'' Bobb said. He said the inverse rate only pulled 
4 percent more wheat onto shuttles.
    Steve Strege, head of the North Dakota Grain Dealers Association, 
says it isn't that simple. He said rates were lowered to less than $1 
per bushel at some shuttle elevators, primarily because of competition 
from Canadian Pacific. But out at Southwest Grain Cooperative, the 
shuttle elevator in Gladstone, the rate stayed at $1.08 because BNSF is 
the only game in town, he said.
    Today, there are nine elevators that can load the super shuttle 
trains on BNSF's lines. Bobb said in every case, the railroad provided 
incentives to encourage the elevator boards and managers to build to 
that capacity.
    Shuttles are the best rates around. They're lower than for unit 
trains of 52 or 26 cars, pushed by BNSF in the 1980s and 1990s, and far 
lower than single car shipments.
    Strege said shuttles do, for now, offer farmers a better rate.
    ``But for who and for how long? Once they get rid of the other 
elevators, the rates will go back up and no one will get a break,'' 
Strege said.
    As a case in point, he nods to the Edgeley elevator, which two 
years ago invested $1.5 million to ratchet up to 52-car capacity.
    Then, when BNSF lowered the shuttle rates at Jamestown, 40 miles 
north on the main line, producers were attracted to a 30-cent rate 
spread. As a consequence, Edgeley saw about 1 million bushels that it 
normally handles go right up on the highway.
    Bobb said Edgeley is victim of its own poor planning.
    ``If they went to a 52-car system in the last five years, they 
probably made a bad business decision,'' Bobb said. ``They're welcome 
to build to shuttle size.''
    Same thing for elevators that invested in track and equipment to 
load 26-car unit trains.
    ``They face nothing (from the shuttles) that they haven't already 
faced from the 52-car guy. The small shipper, I don't get their 
story,'' Bobb said.
    Bobb said BNSF invested heavily in the high cubic volume shuttle 
cars, adding 5,500 of them to its fleet of 29,000 cars to cut 
operational costs.
    The shuttle trains--a mile long, pulled by three locomotives and as 
big as grain trains get--are a response to changes in the market place. 
They're most profitable on the long-haul runs to the Pacific Northwest 
export market. BNSF gives shippers incentives to load and unload them 
in 15 hours, so they can be quickly turned around used again.
    ``Where else in industry do you have 20 years before a change in 
technology comes along? Most of them (26- and 52-car unit facilities) 
were built in the 1980s,'' Bobb said.
    With nine shuttle elevators already in operation and six in various 
stages of development in eastern North Dakota, it's clear that more and 
more grain and oil seed in North Dakota will move on shuttles and less 
and less on single and unit car trains.
    It's also a tactic that could increasingly pull grain away from 
BNSF's competition in eastern North Dakota.
    That part of the state has a high concentration of Canadian Pacific 
rail lines, which doesn't have any shuttle elevators, and semi-trucks 
can compete in a short-haul to the Minneapolis market.
    The summer's experiment with inverse rates proved that BNSF can 
pull wheat from eastern North Dakota--traditionally bound to 
Minneapolis and out--into the Pacific Northwest export market.
    Since that has been a western North Dakota wheat market until now, 
some say the availability of even more product will only further 
depress the price.
    Bobb said BNSF did not crash the Pacific Northwest market with 
inverse rates this summer.
    ``A delivered market is a delivered market,'' he said.
    Research by the Upper Great Plains Transportation Institute shows 
that the shuttle elevators--only 2 percent of all elevators in the 
state--can already handle one-third of all grain freight in the state 
and will have to, in order to show a profitable return.
    That kind of concentration into so few locations has implications 
for roads, towns and elevators.
    The institute estimates that another 100 elevators will close 
within the decade, meaning farmers will have to drive further to get to 
those that remain. The number of farmers who own semi-trucks increased 
200 percent since 1995.
    ``We're fighting for more than a town here and there, an elevator 
here and there and a bunch of beat-up roads in between,'' Strege said.
    Whiteside, the chairman of the national Alliance for Rail 
Competition, said there's talk in the industry that shuttle elevators 
and consequently BNSF are having difficulty filling the super grain 
trains. They're too big to provide the kind of product consistency and 
grading required by the end users, he said.
    ``The jury is still out on whether the shuttle train is going to 
work or not,'' Whiteside said.
    Some also fear that the shuttles--huge trains hauling nearly a half 
million bushels at a crack--will limit economic development in small 
niche markets for identity preserved grain and specialty crops.
    Ward Uggerud of Otter Tail Power helped organize the national 
Alliance for Rail Competition.
    He's worried about the future of the 250 or so towns it serves that 
have fewer than 300 people in them.
    Uggerud said in the drive to encourage shuttle trains that drive 
out small elevators, BNSF may be working adverse to its own best future 
interests in niche markets.
    ``I think they've lost a certain amount of business acumen,'' 
Uggerud said. ``They've lost the wisdom that would have allowed them to 
be more profitable in some of these niche markets.''
    But Bobb says if the market demands small niche grain shipments, 
the shipper elevators will be there to respond.
    He said there was a 2 to 5 percent increase in single car shipments 
in the 2001 crop year compared to the year before. However, those were 
confined to commodities like dry edible beans, because no one out there 
is willing to pay a premium for wheat.
    He said BNSF does and will continue to service small elevators, but 
to expect them to get the same favorable rates as the super shuttles is 
out of line.
    One thing BNSF doesn't dispute is that it has 1,000 less track 
miles in North Dakota than it did 20 years ago--more than Interstate 
94, both directions.
    It also doesn't deny that in some instances, it provides incentives 
for small elevators to use trucks instead of branch lines to move grain 
to the main line.
    It will abandon another 4,000 miles of track through its entire 
system over the next four years.
    Mielke said some of those miles will likely be in places like Zahl 
and Grenora where BNSF will be able to claim the line isn't being used 
because it's paying incentives for it not to be.
    Bobb said cutting down track maintenance is one way BNSF takes 
costs out of the equation and keeps rates stable.
    ``We would raise rates if we could,'' Bobb said. ``It's not like 
we're nice guys.''
    Whiteside said North Dakota and regional farmers and shippers who 
are locked inland are engaged in a critical struggle against BNSF's 
practices.
    ``It's a struggle we can't afford to lose,'' Whiteside said, ``or 
we'll never be able to pull ourselves up by our bootstraps.''

    Senator Dorgan. Mr. Strege, thank you very much.
    Next we'll hear from Jim Bobb, Grain Division Manager, 
Southwest Grain. And we have two Bobbs on the panel, can you 
describe the origin of the two Bobbs?

 STATEMENT OF JIM BOBB, GRAIN DIVISION MANAGER, SOUTHWEST GRAIN

    Mr. Jim Bobb. Yes. First of all, thank you, Senator Dorgan, 
I appreciate the opportunity to testify today. Steve and I are 
cousins and I don't know why we're not sitting next to each 
other, but then I notice their names are the same, so I 
thought, maybe you guys are related, too (Steve Bobb and Steve 
Strege). I have to apologize, I do have a handout, but I don't 
know where they're at and I can put it on PowerPoint, but I see 
you're direct in line with the screen so I don't know if that's 
viable.
    Senator Dorgan. It's your choice. I'd be happy to move if 
that's easier for you, if that would allow the people in the 
galleries to see. I'll just move to this side of the table. Why 
don't you proceed.
    Mr. Jim Bobb. I apologize for the delay. Are my 5 minutes 
up?
    I'm going to begin and we can look at the handout as I go 
through it.
    I'm Jim Bobb, Grain Division Manager for Southwest Grain, 
Regional Division of Cenex Harvest States. Our headquarters are 
northeast of Gladstone, North Dakota, about 80 miles straight 
west of Bismarck.
    I provided a handout stating our concerns and reasons we 
feel we need your help. Why would I come here today when 
freight is not a cost for a company, but fully passed on to the 
producer? It's very simple. I would like to be the voice for 
those producers. I feel it's an appropriate time to testify 
before this Subcommittee asking for a simplified rate relief 
mechanism.
    In southwest North Dakota, there's only one railroad and 
trucks are not a viable competitor with the volume of wheat 
that needs long haul transportation. Producers have been 
assessed high rates when compared to product competition and 
now this past year with the inverse rates, a compelling case 
can be made that at our shuttle location, the rate on wheat is 
31 percent too high, or $.29 a bushel. In southwest North 
Dakota, the 2001 spring wheat production was 36 bushels an 
acre, 5 percent higher than the year before. With a reasonable 
rate structure, producers would have realized $10.47 an acre 
decrease in their transportation expense. A typical producer 
that raises 1,500 acres of wheat would have seen a $15,000 
savings. Over his 30 years of farming this would be $450,000. 
This would increase land values. To give you an example of what 
the savings would have been to these producers, this past year 
we shipped 15 shuttles to the PNW from Boyle alone; that would 
have been a savings of $1.8 billion.
    My presentation will also address Southwest Grain's 
decreased handle, financial impact, and it is a direct result 
of the BNSF-initiated inverse pricing structure.
    This slide that's currently up is something we're having a 
hard time understanding when the corn/barley rate for a shuttle 
that operates under the exact same loading, unloading, and 
shipping conditions at Boyle is $1,101 more. So if you farmers 
could figure out some way to bring your grain in so that we 
could buy it as corn, we'd be doing all right. As you can see, 
that is a substantial savings.
    Senator Dorgan. This is the West Coast?
    Mr. Jim Bobb. That's just to the West Coast.
    This slide, and I'm not going to go through this, but what 
we did is we took the revenue per ton per thousand miles at 
each of these locations along the interstate and showed what 
that revenue was in the blue graph. The yellow line is a 
revenue that BN received in the year 2001 on all commodities 
hauled at $18.05, and the red line is their operating expense. 
The space in between there would be $731 million they reported 
as their profits in 2001. As you can see, we feel, probably 
justifiably, that rates are quite above that out West.
    This slide compares a flat price track value 14 protein 
spring wheat, delivered to the PNW, for the past 2 years. With 
increased procurement, from the inverse pricing scheme, comes a 
direct correlation to the lower prices.
    This slide shows mileage and rates charged per bushel for 
wheat shuttle at various locations both to the PNW and 
Minneapolis, and there are farmers in this room that wouldn't 
mind if the BN could pull those cars to Minnesota and back if 
they just need mileage, you know. If that's all you're looking 
for, they can pull them cars around awhile after they're 
loaded.
    The inverse pricing scheme has affected our operation as 
much or more than any elevator in North Dakota for a couple 
reasons. First, access to Interstate 94. Interstate 94 provides 
availability for back hauling of corn, feed stuffs, and 
fertilizer. Second, the quality and quantity of spring wheat 
grown in our immediate area.
    I want to share with you these three areas that I believe 
have directly impacted Southwest Grain's bushel handled, rail 
cars loaded and spring wheat margins.
    This next slide shows the seven counties within a 50 mile 
radius of our terminal. Production in 2000 and 2001, as I 
stated before, up 5 percent. If you look at those seven 
counties, according to the information that was given before 
here in North Dakota, 50 percent of North Dakota's production 
was within 50 miles of our elevator but where is this 
production going right now?
    This next slide shows our handle since September through 
February, we're down 14 percent, about 800,000 bushels just at 
our own facility.
    This next slide shows cars loaded in each of those months. 
This will be just wheat cars loaded out of Boyle, 2000 versus 
2001, down 21 percent.
    This next slide is what really hurts us, this represents 
our margin retention per bushel compared to the 6 months a year 
ago. Loss of margins is directly related to local procurement 
against the inverse rate.
    As you have been able to see, business is not as usual. 
Relationships with our producers are stressed. If this trend 
continues our co-op is in jeopardy as bushels move east and 
margins are lost.
    In conclusion, I would like to ask that the BN stop this 
destructive practice of using an inverse rate pricing scheme in 
North Dakota. Second, that we'd have an affordable, timely, and 
simplified rate relief process that all shippers of 
commodities, in captive markets, can access. In simple terms, a 
rate relief mechanism without long litigation.
    On behalf of patrons and management of Southwest Grain, I 
would like to thank you personally, Senator Dorgan, and the 
rest of the Committee on Commerce, Science, and Transportation, 
for the opportunity to testify in your presence today.
    Senator Dorgan. Mr. Bobb, thank you very much.
    Next we will hear from Tony Clark from the Public Service 
Commission.
    Tony.

      STATEMENT OF TONY CLARK, PUBLIC SERVICE COMMISSIONER

    Mr. Clark. Thank you, Senator Dorgan, for having me here 
today on behalf of the Public Service Commission. As you 
mentioned earlier, I am in attendance with my fellow 
commissioners, Susan Wefald and Leo Reinbold.
    The Public Service Commission is the State agency charged 
with both regulating grain elevators and representing the 
State's rail interests. Since this hearing involves 
transportation of grain out of North Dakota, I believe the 
Commission is especially well qualified to testify and on 
behalf of the Commission, I thank you for this opportunity.
    Burlington Northern Santa Fe's inverse rates on wheat 
shipped from North Dakota to the Pacific Northwest make a great 
deal of sense from the railroad's perspective, they allow BNSF 
to maximize profits and shift part of its costs to the public 
sector. Now, if this were a competitive market, we likely 
wouldn't be here today. But in a noncompetitive market, this 
policy raises great concern, as these are essential services 
that are being provided to North Dakota farmers.
    The BNSF has been able to carry out its plan because 
shippers in almost all of western North Dakota are captive to 
BNSF. If there was effective competition in the market, BNSF 
could not implement this particular rate structure. Because 
unlike so many other regions of the country, we simply have no 
other alternatives. BN is the only rail carrier west of the 
Missouri River in North Dakota, it's the dominant carrier 
throughout all of North Dakota. We do not have any direct 
access to water transportation, and trucks are just simply 
inadequate when it comes to moving bulk commodities in 
distance.
    The extent of North Dakota's captivity is exemplified by 
the rates that we pay. North Dakota's rail rates are among the 
highest and most profitable anywhere. While the Staggers Rail 
Act sets 180 as a reasonable and profitable revenue-to-
variable-cost ratio, many of North Dakota's rates generate 
ratios of 300 or more. If there was effective competition in 
the local transportation marketplace, the railroads would not 
be able to achieve the high ratios of this magnitude. We 
estimate that these excessively high rates cost North Dakota 
farmers and shippers between 50 and 100 million dollars each 
year.
    BNSF's inverse rates were implemented about a year ago. At 
the present time, the 110-car shuttle train rate from 
southwestern North Dakota to the PNW is about 28 cents per 
bushel higher than the rate paid by shippers in eastern North 
Dakota, even though the shippers in western North Dakota are 
over 250 miles closer to the market.
    These preferential rates are available only to a very small 
number of eastern shuttle train loaders. They put western North 
Dakota shuttle and non-shuttle shippers at a disadvantage 
relative to their eastern counterparts, but they have an even 
greater impact on non-shuttle loaders in eastern North Dakota.
    Prior to the implementation of these inverse rates, eastern 
shuttle loaders had a 15 cent per bushel rate advantage over 
nearby 52-car loaders. The advantage increased to as much as 38 
cents with the implementation of inverse rates.
    Grain elevators cannot compete when they are faced with 
rate disadvantages of this magnitude. In the long run, we 
believe these unfair rate advantages will result in the closure 
of many grain elevators, a loss of local competition and 
farmers being forced to truck their grain to more distant 
markets. Farm operating costs will increase and branch lines 
will be abandoned. The railroad's costs will be shifted to 
public roadways and State taxpayers. These changes will be 
forced in ways that a competitive market would not allow.
    Existing Federal law unfortunately leaves shippers with few 
workable solutions when they are faced with harmful railroad 
practices. Railroads are exempt from Federal antitrust laws and 
other forms of regulatory relief are costly, slow, and largely 
unworkable. The rail industry truly has done a masterful job of 
stacking the deck in its favor.
    In closing, I would like to address the BNSF's assertion 
that North Dakota is simply being resistant to change and 
macroeconomic forces out there, because frankly, nothing could 
be farther from the truth.
    The truth is, this is something that was said repetitively 
and this is the Commission standpoint, we are not against 
shuttles per se. What we are against is using market dominance 
to create unfair and irrational advantages for a small number 
of shippers. BNSF offered millions of dollars in incentives to 
select shippers to encourage them to build shuttle train 
facilities. Then the railroad implemented inverse rates, which 
doubled the size of the rate advantage that some of these 
shippers were initially given. It appears that the BNSF is 
attempting to forcibly restructure the State's grain industry 
rather than responding to its needs. That is what we are 
opposed to.
    North Dakota needs transportation and its shippers have 
very few transportation options. This captivity makes us very 
dependent on the railroad. The company needs to be profitable, 
but we also need to be treated fairly here in North Dakota.
    I thank you for this opportunity for the Commission to 
express its views. I would be happy to entertain any questions 
at this time.
    [The prepared statement of Mr. Clark follows:]

     Prepared Statement of Tony Clark, Public Service Commissioner

    Good afternoon. My name is Tony Clark. I am a member of the North 
Dakota Public Service Commission. Also in attendance this afternoon are 
my fellow commissioners, Susan Wefald and Leo Reinbold.
    The PSC is the state agency charged with both regulating grain 
elevators and representing the state's rail interests. Since this 
hearing involves the transportation of grain out of North Dakota, I 
believe that the Commission is especially well qualified to testify. On 
behalf of the Commission, thank you for the opportunity.
    Burlington Northern Santa Fe's inverse rates on wheat shipped from 
North Dakota to the Pacific Northwest (PNW) make a great deal of sense 
from the railroad's perspective--they allow BNSF to maximize profits 
and shift its costs to the public sector. If this were a competitive 
market, we likely wouldn't be here today. But in a non-competitive 
market, this policy raises great concern, as these are essential 
services that are being provided.
    The BNSF has been able to carry out its plan because shippers in 
almost all of western North Dakota are captive to BNSF. If there was 
effective competition in this market, BNSF could not implement this 
rate structure. Unlike so many other regions of the country, we simply 
have no alternatives. BNSF is the only rail carrier west of the 
Missouri River, and is the dominant carrier throughout all of North 
Dakota. We do not have any direct access to water transportation and 
trucks are inadequate when it comes to moving bulk commodities 
distances of 300 to 1000 miles.
    The extent of North Dakota's captivity is exemplified by the rates 
that we pay. North Dakota's rail rates are among the highest and most 
profitable anywhere. While the Stagger's Rail Act sets 180 as a 
reasonable and profitable revenue-to-variable-cost ratio, many of North 
Dakota's rates generate ratios of 300 or more. If there was effective 
competition in the local transportation marketplace, the railroads 
would not be able to achieve ratios of this magnitude. We estimate that 
these excessively high rates cost North Dakota farmers and shippers 
between $50 and $100 million annually.
    BNSF's inverse rates were implemented about a year ago. At the 
present time, the 110-car shuttle train rate from southwestern North 
Dakota to the PNW is about 28 cents per bushel higher than the rate 
paid by shippers in eastern North Dakota, even though the shippers in 
western North Dakota are over 250 miles closer to the market.
    These preferential rates are available to only a very small number 
of eastern shuttle train loaders. They put western North Dakota shuttle 
and non-shuttle shippers at a disadvantage relative to their eastern 
counterparts, but they have an even greater impact on non-shuttle 
loaders in eastern North Dakota.
    Prior to the implementation of these inverse rates, eastern shuttle 
loaders had a 15-cent per bushel rate advantage over nearby 52 car 
loaders. This advantage increased to as much as 38 cents with the 
implementation of inverse rates.
    Grain elevators cannot compete when they are faced with rate 
disadvantages of this magnitude. In the long run, we believe these 
unfair rate advantages will result in the closure of many grain 
elevators, a loss of local competition and farmers being forced to 
truck their grain to more distant markets. Farm operating costs will 
increase and branch lines will be abandoned. The railroad's costs will 
be shifted to public roadways and state taxpayers. These changes will 
be forced in ways a competitive market would not allow.
    Existing federal law leaves shippers with few workable solutions 
when they are faced with harmful railroad practices. Railroads are 
exempt from federal anti-trust laws and other forms of regulatory 
relief are costly, slow, and largely unworkable. The rail industry has 
done a masterful job of stacking the deck in its favor.
    In closing, I would like to address the BNSF's assertion that North 
Dakota is simply being resistant to change and macroeconomic forces. 
Nothing could be further from the truth.
    The truth is, as we have said repetitively, we are not against 
shuttles per se. We are against using market dominance to create unfair 
and irrational advantages for a small number of shippers. BNSF offered 
millions of dollars in incentives to select shippers to encourage them 
to build shuttle train facilities. Then the railroad implemented 
inverse rates, which doubled the size of the rate advantage that some 
of these shippers were initially given. It appears that BNSF is 
attempting to forcibly restructure the state's grain industry rather 
than responding to its needs. That is what we are opposed to.
    North Dakota needs transportation and its shippers have very few 
transportation options. This captivity makes us very dependent on the 
railroad. The company needs to be profitable but we also need to be 
treated fairly.
    Thank you for this opportunity for the Commission to express it 
views. I would be happy to respond to any questions that you may have.

    Senator Dorgan. Mr. Clark, thank you very much.
    Next, we'll hear from Craig Fisher who's a wheat farmer in 
western North Dakota.
    Craig.

      STATEMENT OF CRAIG FISHER, NORTH DAKOTA WHEAT FARMER

    Mr. Fisher. My name is Craig Fisher. I'm a small grains 
farmer from Stark County in southwest North Dakota. Not only am 
I a small grains farmer, I am a small farmer--so I need to 
concentrate a little bit more heavily on the market.
    This year one of the opportunities, if you would call it 
that, was the inverse freight rate from western to eastern 
North Dakota. I'm 20 miles from the Gladstone terminal (that is 
where my farm is). I had to make a choice to haul my grain to 
Jamestown which is 160 miles to the east. There was a 34 cent 
price difference on January 28 when I made the contract. It was 
a 50,000 bushel contract which gave me an income of about 
$17,000, based on 14 protein over my local elevator (which I 
would have much rather gone to). It takes 2 months to deliver 
instead of 2 weeks, but in this case the difference in the 
income is about $340 a load before expenses. That's on a 1,000 
bushel load. Some of our trucks haul 1,200 bushels if you pull 
double trailers and some are going to haul 800 with single 
trailers, but for an estimate we're looking at 1,000 bushels a 
load. That gave me $2.12 a loaded mile or $1.06 a running mile. 
The expenses incurred by this are approximately $76.80 a load 
for fuel, a driver income allowance of 25 percent would be 
$85.00 a load. I put in a depreciation on the truck, which was 
quite liberal, of 10 cents a mile. The trucks are already 
depreciated considerably but I put it in there. This would have 
been about $32 a load. After fuel, oil, and tire wear and tear, 
I still realized a 14.1 cent per bushel advantage after all 
expenses.
    The trucking that I plug into this scenario goes back to 
me, because I do 90 percent of my own driving or my family 
members do, but driver allowance was put in for math's sake as 
well. A few other things that we have to keep in mind is time 
lost. I should have been home working on machinery. I've got a 
lot of equipment that should be maintained that hasn't been 
yet, family time that I have lost, rest that I have lost, 
informational meetings that we need to go to in the winter to 
be more productive. We've missed out on a lot of those things 
in order to be trucking this grain.
    We made the trade and we did realize somewhat of a profit 
although it's not really a--it's not a net profit and it's 
profit that we're basically recovering. We should have gotten 
the same price in Gladstone that we got in Jamestown and there 
would have been very little expense, we had to go and get that 
profit back minus your expense.
    I've got in my testimony--I, in the past, have had no beef 
with the BNSF or with the eastern elevators. I think up until 
now they've been doing what's best for their companies. Changes 
need to be made however, and I hope we can work that out here.
    Most of all, I think we need to keep in mind there's a lot 
of farmers in my area that don't have the options I have. I've 
got the trucks and the time where I can do this, but for every 
one of me, there's probably 30 or 40 farmers that don't have 
this option, and they're the ones that took that 30 cent 
beating--the entire beating, not just part of it. Now when you 
look at a 100,000 bushel grain contract at 34 cents, that's a 
considerable income loss. Also with the loss of our LDP's this 
year, our input costs being higher due to the fact that we had 
higher fuel costs, we had fertilizer prices that were 
considerably higher. On top of that, we've had inverse freight 
rates, it is putting these boys right up against the wall. 
There's going to be a lot of people who won't pay debt down 
this year. Along with our local co-ops losing money--there will 
be no dividends from them--there has also been a stress between 
your local elevators and your producers that are shipping east. 
There are big problems from this. I guess that's all I have to 
say right now.
    Senator Dorgan. Before I call on Gene Griffin, I want to 
understand your story just for a moment.
    You live 20 miles from the Gladstone facility?
    Mr. Fisher. Right.
    Senator Dorgan. But instead of taking your grain to the 
Gladstone facility and having it moved to the West Coast, you 
trucked it 160 miles east and got a pricing differential by--
how many loads of grain did you truck?
    Mr. Fisher. Fifty loads approximately.
    Senator Dorgan. You made 50 trips, 160 miles east and then 
had it taken to the West Coast?
    Mr. Fisher. Shipped right back through my yard. I've got 
land on both sides of the railroad and it's going right back. 
It is counterproductive for the grain industry as a whole. For 
me, I recovered some lost income, but it's almost embarrassing 
actually that that's what we had to do to recover some of our 
monies lost.
    Senator Dorgan. All right. I'll come back to you, but I 
think I understand. You took 50 trips from Stark County to 
Stutsman County and received a price advantage and then had the 
grain come back through your yard to the West Coast shipped at 
a lower rate?
    Mr. Fisher. That's correct.
    Senator Dorgan. Mr. Griffin, you're an expert in 
transportation; can you respond to that? I won't ask you to 
respond to that. Gene Griffin, of course, runs the Upper Great 
Plains Transportation Institute, and, Gene, why don't you 
proceed. I may ask you to respond after you're done; we'll see.

    STATEMENT OF GENE GRIFFIN, DIRECTOR, UPPER GREAT PLAINS 
    TRANSPORTATION INSTITUTE, NORTH DAKOTA STATE UNIVERSITY

    Mr. Griffin. Thank you, Senator. Good afternoon. For the 
record, my name is Gene Griffin, I'm the Director of the Upper 
Great Plains Transportation Institute.
    I would like to preface my statement by pointing out that 
the United States production agriculture industry is critically 
dependent on an efficient and effective transportation and 
distribution logistical system. Recent research suggests that 
it is the distribution system which makes the U.S. grain 
producing industry competitive in the global economy. It is 
also important to recognize that some of those efficiencies 
must be passed on through the supply chain to have an impact on 
the delivered price of grain and processed commodities. 
Regardless of how exactly the distribution of efficiency gains 
eventually takes place, it should be emphasized that an 
efficient, reliable, and equitable transportation system is 
critical to the viability of agriculture in the United States, 
one of the major industrial sectors of the U.S. economy.
    The 110-car shuttle train program introduces a new level of 
efficiency for the BNSF in transporting wheat to export and 
domestic markets. This is a trend that began over a hundred 
years ago and was introduced into North Dakota grain marketing 
around 1980. The traditional effects of increased concentration 
in the country elevator industry and increased truck traffic in 
select locations are predictable. Presumably, it has a positive 
impact on farm prices as well. The impacts of increased rail 
shipment size are not significantly different from the effects 
of other changes such as farm production technology, larger 
farm equipment, truck technology, and highway quality and 
capacity.
    As in all change, there are winners and losers resulting 
from the transformation taking place in the rail grain system. 
It is intuitive how each will react to such changes. However, 
there are fundamental questions that need to be addressed. Does 
the State's grain producing sector need continued advances in 
the grain handling and transportation system to remain 
economically viable in a highly competitive global market 
system? Are cost efficiencies gained by railroads reflected, at 
least to some degree, in rail rates? What are the impacts on 
traffic patterns of both local and long haul trucking and what 
are the corresponding impacts on local, State, and Federal road 
and highway systems?
    Although this is not a complete set of questions of all of 
the important issues, a final question is the method of 
implementation of these systems. Do they provide an equal 
opportunity for all shippers to compete for fewer viable number 
of country grain stations? This seems to be an issue with the 
implementation of the 110-car shuttle train program.
    The issue seems to be that this method of promoting the 
movement of 110-car system has not been widely available to all 
or even a majority of shippers. This would appear to conflict 
with basic human nature, although it may be warranted from a 
business prospective. Recent experimental economic research 
indicates that as human beings, we have an inherent bias toward 
fairness within groups. However, it should be noted that it 
would be unreasonable to expect that a large number of the 
existing country elevators would be able to participate in this 
program without an extensive amount of excess storage and 
throughout capacity being developed. Excess capacity that would 
be paid for, in the most part, by producers, especially if the 
facilities are dominated by farmer-owned cooperative 
facilities. It does seem that there might have been a mechanism 
to limit the development of such facilities consistent with the 
demand while still being seemingly fairer in the eyes of 
country grain elevator interests.
    The inverse rate poses another whole issue and has been 
discussed widely already, so I think I will just say that 
inherently it seems, or intuitively it seems unfair to look at 
a rate system that is demonstrated on the chart.
    However, it should be pointed out that it is not the first 
instance in which there has been inverse rates to the PNW. 
Railroads published inverse rates on wheat to the PNW from 
North Dakota in the 1960s and 1970s in an effort to promote 
wheat sales to the Pacific Rim countries off the PNW. This 
program, although successful, was eliminated and replaced with 
distance-based rates sometime in the 1980s, due in part to 
criticism from producers. I might add to extreme--everybody 
remembers Herman Schmitz from Williston, you know what I mean.
    A major issue with such rates is if they displace wheat 
from more traditional market territory in western North Dakota, 
if it does, such rates may be in violation of regulations 
governing rail rates. Also, the question of its effect on farm 
prices is another issue, albeit a difficult one to answer.
    Another question--which has already been addressed and will 
probably be addressed by others--is the impact of filling 
traditional markets with wheat of different characteristics 
from different producing areas of the region. The North Dakota 
Wheat Commission and other agriculture interests in this State, 
the Department of Agriculture and others, have spent a great 
deal of effort in developing a market for wheat with certain 
characteristics, and it would appear that there is certainly a 
question that that could damage that market development 
activity that's taken place over the last 30 and 40 years.
    Finally, I'd like to focus--or briefly focus--on the rail-
to-revenue cost ratios. We conducted two types of analysis at 
the Institute to make an assessment of the reasonableness of 
rail rates to North Dakota wheat shippers. One was an analysis 
of the waybill sample and the second was an analysis of 
specific BNSF stations. The 2000 waybill analysis of revenue-
to-variable cost ratios and the analysis of current revenue-to-
variable cost ratios for BNSF wheat movements to Portland and 
Minneapolis paint a similar picture. Both analyses suggest that 
North Dakota wheat shipments to Portland and Minneapolis are 
highly profitable for the BNSF. For all service levels in 
either analysis, the average revenue-to-variable cost ratio to 
either market is at or above 1.85. Moreover, for all service 
levels of 26 cars or more to either market, the average revenue 
variable-to-cost ratio exceeds 2.43. For all service levels of 
52-cars or more to either market, the average revenue-to-
variable cost ratios exceed 2.7. The trend obviously is, the 
larger the shipment size, the higher the revenue cost in 
relation to variable revenue cost ratios.
    As was pointed out, although a revenue-to-variable cost 
ratio of 180 percent is often used as a baseline for 
comparison, rail rates above the 100 percent--180 percent of 
variable costs are not necessarily unreasonable. The 180 
percent of variable cost figure comes from a congressional 
determination that rates exceeding this level can be examined 
for market dominance. That is, if rail rates exceeds 180 
percent of variable costs, then the shipper can try to 
establish market dominance by examining the extent of 
intramodal and intermodal competition. If a rate above 180 
percent is shown, and it is shown that intramodal and 
intermodal competition do not serve to effectively discipline 
rates, then market dominance is established. And subsequently, 
the Surface Transportation Board examines other measures in 
making an assessment of whether or not rates are reasonable.
    In evaluating some of those measures, without getting into 
a lot of technical jargon, what we did find was the revenue 
shortfall allocation method of determining what their rates 
were, compared to North Dakota rates, would seem to put North 
Dakota in terms of a very unfavorable light in terms of the 
rates that--the net profitability that the Burlington Northern 
Santa Fe earns on those rates.
    Also, we did look specifically at 84 stations in North 
Dakota and just found some averages, and we found that, for 
instance, into Portland that on the 110-car rate, the average 
revenue-to-variable cost ratio was 3.23 and ranged from 2.94 to 
3.68. Further, looking at rates into Minneapolis we found that 
on the 52-car shipment the average revenue-to-variable cost 
ratio varied from 3.14 to 6.64, significant, a very high 
revenue-cost ratio.
    I would conclude by--one more thing is we did look at the 
road impacts and we did not come up with what we thought were 
conclusive numbers. I think it's fair to say that there was 
probably not sufficient time to conduct an adequate analysis of 
the road impacts; thus the confidence in the analysis is not 
what we would want it to be if the time and resources were 
available to develop more accurate models. I think it is fair 
to say that road impacts on a statewide basis are indeterminate 
at that time. However, based on past experience we can say with 
confidence there will be some significant localized impacts on 
the road system and how those will be paid for is certainly a 
subjective question at this time.
    I would like to close with the recent controversy 
surrounding the 110-car shuttle train program and inverse rates 
raises a larger question concerning the adequacy of rail 
regulation, and, additionally, how should railroads be 
regulated, if at all. There seems to be a popular perception 
among certain groups, such as the country grain marketing 
industry, that the Surface Transportation Board has been less 
than effective in interpreting and applying rail regulating 
laws. Further, there is a perception that the STB has a 
positive bias toward the rail industry. This leads to the 
question of why hasn't anyone used the simplified rate 
guidelines procedure to challenge the rate? In view of these 
perceptions, should current railroad regulation be changed in 
some way to strengthen the interests of the shipper? A more 
fundamental question arises regarding treating railroads like 
other industries. Should railroads be totally deregulated and 
subject to oversight by the Federal Trade Commission and 
Department of Justice, governed by antitrust law, and stripped 
of their antitrust immunity? Would shippers and railroads both 
be better off under such a scenario?
    These are merely questions which raise issues of a 
subjective nature. Economics, political science and other 
disciplines can provide valuable insights into such questions, 
but the answers still remain largely subjective. Thus, it is 
highly appropriate that these issues be debated before and 
decided by the U.S. Congress.
    Thank you.
    [The prepared statement of Mr. Griffin follows:]

   Prepared Statement of Gene Griffin, Director, Upper Great Plains 
        Transportation Institute, North Dakota State University

    Good afternoon. For the record my name is Gene Griffin, Director of 
the Upper Great Plains Transportation Institute, North Dakota State 
University. A number of Institute Research Fellows were collectively 
responsible for developing the testimony forwarded to the Committee: 
Denver Tolliver, Senior Research Fellow; John Bitzan, Advanced Research 
Fellow; and Mark Berwick, Associate Research Fellow.
    I would like to preface my statement by pointing out that the 
United States production agriculture industry is critically dependent 
on an efficient and effective transportation and distribution 
logistical system. Recent research suggests that it is the distribution 
system which makes the U.S. grain producing industry competitive in the 
global economy. It is also important to recognize that some of those 
efficiencies must be passed on through the supply chain to have an 
impact on the delivered price of grain and processed commodities. 
Regardless of exactly how the distribution of efficiency gains 
eventually takes place, it should be emphasized that an efficient, 
reliable, and equitable transportation system is critical to the 
viability of agriculture in the United States, one of the major 
industrial sectors of the U.S. economy.
    There appears to be three fundamental issues that are causing a 
great deal of consternation among grain producers and shippers, as well 
as those public sector entities responsible for transportation. They 
are: (1) the 110 car shuttle train program being developed by the BNSF; 
(2) the manner in which this program is being implemented; and (3) the 
so-called inverse rate structure. There is a great deal of anecdotal 
evidence regarding all three of these issues as well as much second-
hand information. There is little hard reliable data to evaluate these 
from a research perspective, thus my remarks will be largely conceptual 
in nature and somewhat speculative. However, I will present more 
conclusive findings on rail cost and rate relationships as well as an 
estimate of the road impacts that could result from the 110 car system. 
Finally, I will conclude with a general statement about my perceptions 
of the adequacy of the regulatory system as it applies to rail pricing 
and service.

                     110 CAR SHUTTLE TRAIN PROGRAM

    The 110 car shuttle train program introduces a new level of 
efficiency for the BNSF in transporting wheat to export and domestic 
markets. This is a trend that began over a hundred years ago and was 
introduced into North Dakota grain marketing around 1980. The 
traditional effects of increased concentration in the country elevator 
industry and increased truck traffic into select locations is 
predictable. Presumably, it has a positive impact on farm prices as 
well. The impacts of increased rail shipment size are not significantly 
different from the effects of other changes such as in farm production 
technology, larger farm equipment, truck technology, and highway 
quality and capacity.
    As in all change, there are winners and losers resulting from the 
transformation taking place in the rail grain system. It is intuitive 
how each will react to such changes. However, there are fundamental 
questions that need to be addressed. Does the states' grain producing 
sector need continued advances in the grain handling and transportation 
system to remain economically viable in a highly competitive global 
market system? Are cost efficiencies gained by railroads reflected, to 
some degree, in rail rates? What are the impacts on traffic patterns of 
both local and long haul trucking and what are the corresponding 
impacts on the local, state, and federal road and highway system? 
Although this is not a complete set of questions of all the important 
issues, a final question is the method of implementation of these 
systems. Do they provide an equal opportunity for all shippers to 
compete for fewer viable number of country grain stations. This seems 
to be an issue with the implementation of the 110 car shuttle train 
program.

          IMPLEMENTATION OF THE 110 CAR SHUTTLE TRAIN PROGRAM

    There is no documentable evidence or data available to address this 
issue because of the private and proprietary nature of contracts, thus 
it is speculative in nature. However, there are allegations that 
special contract rate agreements have been developed with certain 
shippers giving them an advantage over others in developing a 110 car 
facility. These contracts most likely take the form of rebates on 
shipments of grain conforming to certain loading, unloading, origin, 
and consignment size standards.
    The issue seems to be that this method of promoting the movement of 
a 110 car system has not been widely available to all or even a 
majority of shippers. This would appear to conflict with basic human 
nature, although it may be warranted from a business perspective. 
Recent experimental economic research indicates that as human beings, 
we have an inherent bias towards fairness within groups.\1\ However, it 
should be noted that it would be unreasonable to expect that a large 
number of the existing country elevators would be able to participate 
in this program without an extensive amount of excess storage and 
throughput capacity being developed. Excess capacity that would be paid 
for, in the most part, by producers, especially if the facilities are 
dominated by farmer-owned cooperative facilities. It does seem that 
there might have been a mechanism to limit the development of such 
facilities consistent with the demand, while still being seemingly 
fairer in the eyes of country grain elevator interests.
---------------------------------------------------------------------------
    \1\ Karl Sigmund, Ernst Fehr, and Martin Nowak, The Economics of 
Fair Play, Scientific American, January, 2002.
---------------------------------------------------------------------------
    The most controversial of the three issues mentioned in the 
beginning of this statement appears to be the so-called inverse rate.

          INVERSE RATE ON WHEAT TO THE PACIFIC NORTHWEST (PNW)

    There is hearsay that BNSF has instituted contract rates for wheat 
originating at shuttle facilities to the Pacific Northwest market that 
are inversely proportional to distance. In other words, they charge a 
lower rate for a longer haul. Thus, rates to the PNW from western North 
Dakota are higher than similar rates from eastern North Dakota. Since 
these are contract rates they are proprietary in nature and are not 
published. However, if they do exist, it intuitively seems to be 
unfair. That does not mean there is not a sound business reason for the 
implementation.
    It should be pointed out that this is not the first instance in 
which there has been inverse rates to the PNW. Railroads published 
inverse rates on wheat to the PNW from North Dakota in the 1960s and 
1970s in an effort to promote wheat sales to the Pacific Rim countries 
off the PNW. This program, although successful, was eliminated and 
replaced with distance-based rates sometime in the 1980s, due in part 
to criticism from producers.
    A major issue with such rates is if they displace wheat from more 
traditional market territory in western North Dakota? If it does, such 
rates may be in violation of regulations governing rail rates. Also, 
the question of its effect on farm prices is another issue, albeit, a 
difficult one to answer.
    Another question is the impact on filling traditional markets with 
wheat of different characteristics from different producing areas of 
the region. The markets in Asia are extremely conscious of specific 
milling and baking characteristics and have come to depend on quality 
and end-use performance traits associated with the hard red spring 
wheats produced in the drier, less disease-prone areas of western North 
Dakota and eastern Montana. However, under the current inverse rate 
structure, spring wheats produced in the eastern part of the region are 
now more likely to move to PNW terminals for eventual shipment to Asian 
destinations, rather than traditional domestic or gulf export 
positions.
    These wheats, which under normal conditions are not tributary to 
PNW markets, are typically lower in protein content and often have 
lower gluten strength. Challenges in functionality and performance are 
also more likely to arise due to negative impacts resulting from 
disease pressures more often associated with eastern production 
areas.\2\
---------------------------------------------------------------------------
    \2\ Personal Communications, Neal Fisher, Administrator, North 
Dakota State Wheat Commission, Bismarck, ND, March 21, 2002.
---------------------------------------------------------------------------
    Increased incidence of processor concerns has been noted by US 
Wheat Associates personnel in regional offices in Asia and is thought 
to be related to the inverse rate structure. This could harm the 
overall market development efforts that have been so successful over 
the past four decades.
    As stated earlier, much of what has been addressed is speculative 
and conceptual in nature. There are two issues that can be addressed in 
a more definitive and researchable manner, rail revenue/cost ratios and 
the impact on roads.

                        RAIL REVENUE/COST RATIOS

    Two types of analysis were performed to make an assessment of the 
reasonableness of rail rates to North Dakota wheat shippers: (1) an 
analysis of BNSF revenue-to-variable cost ratios for wheat originating 
in North Dakota from the 2000 annual railroad waybill sample, and (2) 
an analysis of BNSF revenue-to-variable cost ratios for wheat 
originating in North Dakota and terminating in Minneapolis or Portland 
using the current rate structure and an operationally specific costing 
methodology.
    The 2000 waybill analysis of revenue-to-variable cost ratios and 
the analysis of current revenue-to-variable cost ratios for BNSF wheat 
movements to Portland and Minneapolis paint a similar picture. Both 
analyses suggest that North Dakota wheat shipments to Portland and 
Minneapolis are highly profitable for the BNSF. For all service levels 
in either analysis, the average revenue-to-variable cost ratio to 
either market is at or above 1.85. Moreover, for all service levels of 
26 cars or more to either market, the average revenue-to-variable cost 
ratios exceed 2.43. For all service levels of 52 cars or more to either 
market, the average revenue-to-variable cost ratios exceed 2.7.
    While all of these revenue-to-variable cost ratios seem high, one 
must put them in the context of rate reasonableness guidelines to 
determine if they are unreasonably high. These guidelines provide 
insight into equity considerations and revenue adequacy considerations 
that should be taken into account when making an assessment of the 
magnitude of a particular rail rate.
    Although a revenue-to-variable cost ratio of 180 percent is often 
used as a baseline for comparison, rail rates above the 180 percent of 
variable costs are not necessarily unreasonable. The 180 percent of 
variable cost figure comes from a Congressional determination that 
rates exceeding this level can be examined for market dominance. That 
is, if a rail rate exceeds 180 percent of variable costs, then the 
shipper can try to establish market dominance by examining the extent 
of intramodal and intermodal competition. If a rate above 180 percent 
is shown, and it is shown that intramodal and intermodal competition do 
not serve to effectively discipline rates, then market dominance is 
established. Subsequently, the Surface Transportation Board examines 
other measures in making an assessment of whether or not rates are 
reasonable.
    In its simplified rail rate guidelines, the Surface Transportation 
Board uses three measures to establish the reasonableness of a rail 
rate. These measures consider the equity of similarly situated 
shippers, the revenue adequacy needs of the railroad, and the 
reasonableness of the carrier's revenue requirements borne by a shipper 
or group of shippers. The three measures include: the revenue shortfall 
allocation method (RSAM), the average revenue-to-variable cost 
percentage for all shipments with revenue-to-variable cost percentages 
above 180 (RVC>180), and the average revenue-to-variable 
cost ratio on comparable shipments (RVCCOMP).
    As recognized by the Surface Transportation Board, none of these 
measures can be used alone to make an assessment of whether a rate is 
reasonable, but in combination they provide a good baseline for 
examining the level of various rates. RSAM measures the uniform markup 
above variable cost that would be needed from every shipper of 
potentially captive traffic (traffic with revenue-to-variable cost 
ratios above 180 percent) in order for the carrier to recover all of 
its costs. The RSAM recognizes the need for differential pricing by the 
railroad, and the railroad's need for revenue adequacy.
    RVC>180 measures the average markup for all of the 
railroad's traffic that moves at rates exceeding variable costs by 180 
percent or more. The idea behind the RVC>180 measure is that 
a particular shipper should not be bearing an unreasonable share of the 
carrier's revenue requirements relative to other potentially captive 
traffic. Moreover, an interesting comparison between the RVC>180 
and the RSAM can be made. An RVC>180 that exceeds the RSAM 
suggests that the railroad is meeting its revenue adequacy 
requirements. Such a finding may be further justification for a rate 
reduction.
    RVCCOMP measures the average markup on traffic of 
similar commodities moving under similar transportation conditions. It 
is designed to serve as a comparison with traffic that has a similar 
elasticity of demand. The idea is that a shipper should not be 
penalized for being on a railroad that has higher revenue needs from 
its potentially captive traffic. Because of the short time frame for 
performing the analysis, revenue-to-variable cost ratios for comparable 
traffic were not developed.
    STB estimates of the RSAM for BNSF indicate that it is below the 
average revenue-to-variable cost ratios for North Dakota wheat to many 
markets. Moreover, the number of revenue-to-variable cost ratios that 
exceed the RSAM increases when such an efficiency adjustment is made. 
Similarly, many North Dakota wheat shipments show revenue-to-variable 
cost ratios that exceed the average charged by BNSF to potentially 
captive shippers. Finally, a comparison between the RSAM and the 
average revenue-to-variable cost ratio charged to potentially captive 
shippers by the BNSF shows that in the most recent year, the average 
revenue-to-variable cost ratio charged to potentially captive shippers 
exceeds the RSAM with or without the efficiency adjustment. This 
suggests that BNSF is charging an average rate to its captive shippers 
that exceeds the average rate necessary for the railroad to cover all 
of its costs, including a return on investment. This would seem to 
indicate that the BNSF's rates to many North Dakota shippers may exceed 
reasonable limits.
    While rates on the BNSF for North Dakota wheat shipments appear to 
be high relative to costs, it is important to note that the overall 
rate levels associated with larger shipment sizes are lower for North 
Dakota shippers. Thus, these larger service level options provide a 
benefit to North Dakota shippers.
    The waybill analysis further provides a comprehensive picture of 
revenue-cost ratios for North Dakota shipments to major markets. This 
section focuses on current rates to Portland. It also includes an 
analysis of shuttle trains and 110-car co-loading service levels. 
Shipment costs are computed using the 2000 Uniform Railroad Costing 
System (URCS) and BNSF cost factors. Rates are derived from Item 43538 
of the BNSF's current rate book, which is effective as of March 2, 
2002. These rates are applicable to wheat movements in 286,000-pound 
rail cars, which appear to offer the greatest mainline efficiency and 
profit potential for the BNSF. The following service levels are 
analyzed for movements from North Dakota to Portland:

        1. 1-car
        2. 26-car
        3. 52-car
        4. 110-car multiple-origin (55 cars per station)
        5. 110-car single-origin train

    Only a few stations in North Dakota currently originate 110-car 
shipments. However, rates are analyzed for all stations in order to 
present a meaningful comparison of the relative efficiencies of BNSF 
service levels. Because few stations currently originate 110-car 
shipments, the summary statistics presented in Table 1 are not weighted 
by shipment volumes--i.e., they represent simple averages or means.

  Table 1--Average Revenue-Cost Ratios for BNSF Wheat Shipments From North Dakota to Portland By Service Level
----------------------------------------------------------------------------------------------------------------
                                           Average Revenue   Minimum Revenue   Maximum Revenue      Standard
              Service Level                 Variable Cost     Variable Cost     Variable Cost   Deviation of RVC
                                                Ratio             Ratio             Ratio             Ratio
----------------------------------------------------------------------------------------------------------------
1-Car...................................              1.85              1.72              2.11              0.09
26-Car..................................              2.44              2.24              2.85              0.14
52-Car..................................              2.71              2.49              3.09              0.15
55-Car..................................              3.07              2.80              3.55              0.18
110-Car.................................              3.11              2.83              3.54              0.18
----------------------------------------------------------------------------------------------------------------

    The statistics shown in Table 1 reflect 84 individual stations. 
These stations are a subset of the 92 stations listed in the latest 
revision of Item 43538.
    The revenue-cost ratios for wheat from selected origins to 
Minneapolis are shown in Table 2. Because of the shorter trip distances 
to Minneapolis, fewer adjustments are needed to URCS. Way and through 
train miles are based on BNSF division points. Intertrain and 
intratrain switches are assigned by URCS, using a 200-mile distance 
interval. The origin-destination and train size adjustments developed 
for 52-car movements to Portland are also implemented for 52-car 
shipments to Minneapolis. However, no adjustments are made for 26-car 
or single-car shipments. According to the waybill sample, over 50 
percent of wheat shipments from North Dakota to Minnesota and Wisconsin 
are single-car shipments or multi-car blocks of less than 25 cars. 
Given this movement pattern, BNSF's system-average through train 
characteristics are probably reflective of the mix of car block sizes 
and commodities that move in eastbound trains.

 Table 2--Average Revenue-Cost Ratios for BNSF Wheat Shipments From North Dakota to Minneapolis By Service Level
----------------------------------------------------------------------------------------------------------------
                                           Average Revenue   Minimum Revenue   Maximum Revenue      Standard
              Service Level                 Variable Cost     Variable Cost     Variable Cost   Deviation of RVC
                                                Ratio             Ratio             Ratio             Ratio
----------------------------------------------------------------------------------------------------------------
1-Car...................................              2.26              1.81              3.30              0.25
26-Car..................................              3.15              2.48              4.86              0.36
52-Car..................................              4.04              3.14              6.64              0.50
----------------------------------------------------------------------------------------------------------------

    An important economic question is: What are the relative efficiency 
gains of 110-car unit train movements to the Pacific Northwest? 
Appendix A presents detailed comparisons for 84 stations in North 
Dakota. One of these stations, Hillsboro, is used to illustrate the 
magnitude of the potential efficiency gains.
    Hillsboro is located 40 miles south of Grand Forks and 1,553 miles 
from Portland. An existing shuttle-train facility is located in the 
vicinity of Hillsboro. In the BNSF tariff, single-car, 26-car, 52-car, 
and 110-car rates are published for Hillsboro. In addition, a 110-car 
co-loading rate is published for Hillsboro. Table 3 shows the estimated 
variable cost for shipping wheat from Hillsboro to Portland in 286,000-
pound rail cars. The costing methods and data used in these 
calculations are documented in the appendix.
    As Table 3 shows, the estimated variable cost for the 110-car 
single-origin shipment is 47 percent lower than the estimated variable 
cost of a single-car shipment from the same origin. Moreover, the 
estimated 110-car cost is 25 percent lower than the estimated variable 
cost of a 26-car shipment. Although an individual 52-car shipment is 
often referred to as a ``unit train,'' it does not offer the same 
efficiencies as a 110-car train. Typically, a 52-car shipment must be 
matched with one of similar size or with several smaller multi-car 
blocks before a large grain train can be assembled. On average, the 
single origin 110-car shipment results in a 15 percent savings in 
comparison to the 52-car shipment.

      Table 3--Illustration of the Relative Efficiencies of 110-Car
                              Consignments
------------------------------------------------------------------------
                                                           Variable Cost
                      Service Level                           Per Car
------------------------------------------------------------------------
1-Car...................................................          $2,732
26-Car..................................................           1,974
52-Car..................................................           1,710
110-Car Two-Origin......................................           1,498
110-Car Single-Origin...................................           1,454
------------------------------------------------------------------------

    This comparison probably understates the efficiency gains from 
shuttle trains because there are certain operational and car 
utilization effects that cannot be captured with a costing formula. 
Nevertheless, the illustration suggests that 110-car trains offer the 
potential for large efficiency gains, greatly reducing the cost of 
long-distance movements to the Pacific Northwest.

                              ROAD IMPACTS

    One reason the 110-car shuttle program and the so-called inverse 
rate structure mentioned previously are controversial is because of the 
potential road impacts resulting from each. The UGPTI examined case 
studies of Jamestown, Berthold, and Milton in order to make an 
assessment of some of the potential road impacts resulting from these 
programs.
    The Jamestown case study showed an average incremental distance 
hauled as a result of the shuttle facility of 5.3 miles for every 
bushel. For Berthold, the extra distance from the shuttle program was 
estimated at 1.8 miles. For Milton, the extra distance from the shuttle 
program was estimated at 4.5 miles per bushel. It is important to note 
that these estimates are based on simulated case studies, and some 
movements may be much farther than the estimated incremental miles. 
Moreover, it is fair to say that there was not sufficient time to 
conduct an adequate analysis of the road impacts. A more detailed study 
is needed before definitive conclusions about highway impacts can be 
drawn.
    In summary, producer marketing decisions are based on board prices, 
elevator and community loyalty, and other variables. Because of the 
rate incentives at only some elevator facilities, provided by the 
railroad, board prices may be higher resulting in longer truck 
movements. It is difficult to quantify the longer movements, and truck 
costs would be a determinant of those movements. There may be cases in 
the future where facilities are located where the highway 
infrastructure is not adequate to handle the truck traffic. In these 
specific cases, large infrastructure investments may need to be made.

                      ADEQUACY OF RAIL REGULATION

    The recent controversy surrounding the 110-car shuttle train 
program and inverse rates raises a larger question concerning the 
adequacy of rail regulation and, additionally, how should railroads be 
regulated, if at all. There seems to be a popular perception among 
certain groups, such as the country grain marketing industry, that the 
Surface Transportation Board (STB) has been less than effective in 
interpreting and applying rail regulatory laws. Further, there is a 
perception that the STB has a positive bias towards the rail industry. 
This leads to the question of ``Why hasn't anyone used the simplified 
rate guidelines procedure to challenge a rate?'' In view of these 
perceptions, should current railroad regulation be changed in someway 
to strengthen the interests of the shipper? A more fundamental question 
arises regarding treating railroads like other industries. Should 
railroads be totally deregulated and subject to oversight by the 
Federal Trade Commission and the Department of Justice, governed by 
antitrust law, and stripped of their antitrust immunity? Would shippers 
and railroads both be better off under such a scenario?
    These are merely questions which raise issues of a subjective 
nature. Economics, political science and other disciplines can provide 
valuable insights into such questions, but the answers still remain 
largely subjective. Thus, it is highly appropriate that these issues be 
debated before and decided by the United States Congress.

    Senator Dorgan. Mr. Griffin, thank you very much.
    Let me begin with Mr. Fisher's example and then I have a 
series of questions for most of the panelists.
    Mr. Fisher, I was just doing a quick calculation, it 
appears to me that you drove your truck--18-wheel truck, is 
that correct--you drove your truck 16,000 miles on our roads in 
North Dakota to truck your grain 160 miles east so that it 
could be put on a railroad and then come back past your farm to 
go to the West Coast?
    Mr. Fisher. Right.
    Senator Dorgan. That sounds just preposterous to me.
    You described to us the economic incentive for you to do 
that.
    Mr. Fisher. Right.
    Senator Dorgan. But it sounds just preposterous that that 
economic incentive should exist. What part of the economic 
incentive was represented by the inverse rates, inverse rail 
rates? You said that there was roughly a 40-cents-per-bushel 
advantage?
    Mr. Fisher. Thirty-four cent.
    Senator Dorgan. Thirty-four cent bushel advantage. I'm 
sorry. What part of the 34 cents was represented by the inverse 
rates?
    Mr. Fisher. I'm not sure. I went and got my bid in 
Gladstone and I got my bid in Jamestown elevator and that's--
that was the difference, the 34 cents. I'm not sure how much of 
it was actually freight, how much of it was--one elevator with 
a marketing advantage. Maybe they wanted to pull some better 
grain from the west. I've heard that argument; they wanted to 
pull a higher quality grain or higher proteins from the west. I 
don't know what all it was with freight or not but it was a 34 
cents difference.
    Senator Dorgan. This chart would show 17 cents difference 
with respect to the inverse rate structure so that's about 50 
percent of the change in price but--go ahead.
    Mr. Fisher. Right. And with the margins that I've seen, 
some of these elevators are working on--something's missing, 
there's something missing in this because we've got a very 
small margin and a very big difference in price there.
    Senator Dorgan. Mr. Bobb, let me come to you. This is an 
interesting discussion because the incentives Mr. Fisher had as 
a farmer was to put his grain on a truck and haul it 16,000 
miles so that it could be--put the grain on the truck, haul it 
16,000 miles to be put on your railroad in order to come back 
through his farm later on and go to the West Coast. Why would 
that seem plausible to anyone and does it seem plausible to you 
to have that happen?
    Mr. Stevan Bobb. I think it--I have two reactions to it. 
The first is, I think it does underscore the trucking economics 
that are out in the marketplace. It is not the first time that 
we have experienced wheat trucking east out of western North 
Dakota. It has, I mean, there is a competitive factor that we 
have faced in the past and continue to face.
    Senator Dorgan. Except that his was all free labor.
    Mr. Stevan Bobb. I understand.
    Senator Dorgan. He did that on his own time, doesn't charge 
anything for labor, so that's not the competitive trucking, I 
believe. But I mean, how does it strike you that we've got a 
guy from Dickinson essentially having to drive to Jamestown to 
put it on your railroad to come back through Dickinson?
    Mr. Stevan Bobb. And I think the second reaction would be 
it is not a desired outcome to see wheat that we could 
allegedly handle for 1.08 westbound being handled for 91 cents 
westbound, that's not in our best interest either.
    Senator Dorgan. So if Mr. Fisher's driving his truck 50 
times between Dickinson and Jamestown is not a desired outcome, 
and at least half of the incentive for him to have done that 
was inverse rates?
    Mr. Stevan Bobb. Our perspective would be that the inverse 
rate structure that's suggested by your board there would not 
compensate him for doing that. I'm questioning as well where 
the other 17 cents came from.
    Senator Dorgan. But 50 percent of it would come from 
inverse rates and I think in your testimony you were saying 
what we're trying to do is pull that grain from western North 
Dakota, right, rather pull the grain from eastern North Dakota 
to move it to the West Coast. In fact, you hauled grain from 
western North Dakota in order to haul it back to western North 
Dakota and through western North Dakota. My problem is, isn't 
that a Byzantine result? And if you agree that it's a Byzantine 
result, doesn't it suggest the inverse pricing here is a 
failure from the standpoint of the consumer?
    Mr. Stevan Bobb. I would characterize it as an unintended 
result, but I'm not sure I would characterize it as a failure 
of the rate structure. He has testified to 50,000 bushels 
having moved. Relative to the amount of grain that has moved 
out of North Dakota, it is a very small amount. And second, 
when we look at Gladstone's shipping experience, crop year to 
date this year versus last year, we actually see their 
shipments up nearly 6 percent. So our view of their shipments 
is dramatically different then what has been testified here. So 
I do not see it as a failure of the rate structure.
    Senator Dorgan. Mr. Fisher, you're an unintended result.
    I want to ask a question of Jim Bobb and also Steve Bobb; 
when the railroad imposed this pricing structure was there 
consultation with the shippers and if so, can we describe that 
consultation?
    Mr. Bobb.
    Mr. Stevan Bobb. Our consultation would have been primarily 
with, in this instance, Cenex Harvest States and Inver Grove 
Heights.
    Senator Dorgan. Mr. Bobb.
    Mr. Jim Bobb. Last fall--especially when we start seeing 
bushels as Craig Fisher was talking about--who I expect, and 
myself, made calls to BNSF asking about five times comparable 
rate reduction of all bushels and we were flatly told no. We 
were never once given the opportunity.
    Senator Dorgan. Tell me from the standpoint of the railroad 
company why you wouldn't answer the Southwest Grain's request?
    Mr. Stevan Bobb. Well, again, from a factual perspective we 
have not seen a reduction in their grain volumes, and so when 
we do the math, we did not and still do not see the negative 
impact. If you look at the elevators in western North Dakota, 
on a crop year basis, and that would be very consistent with 
how the grain industry looks at it, July of 2001 through 
February of 2002, Boyle's shipments are up nearly 6 percent; 
Dickinson, which is west of Boyle and a 52-car shipper, I 
believe their shipments are up nearly 18 percent; Beach up 42 
percent; Scranton up 9 percent, they also are a shuttle 
shipper. So we do not see reduced shipments occurring in 
western North Dakota.
    Senator Dorgan. So you're saying it's really not bad for 
them. I'm not sure you're saying it's good for them, you're not 
saying it's bad for them.
    Mr. Stevan Bobb. Correct.
    Senator Dorgan. Mr. Bobb, he's saying that your numbers are 
wrong. Tell me about his math assessment of what's happening at 
Southwest Grain.
    Mr. Jim Bobb. We're looking at two different timeframes and 
one of them is gut slot of harvest, July, August, September, as 
I stated before, production was up 5 percent out there. During 
the peak of harvest producers do not have time to run across 
the State. So I didn't bring those volumes along. We probably 
were compatible to the year before, or maybe up that 5 percent 
at harvest time. What's been a problem since the grain's been 
put in a bin when the producers have time to move that grain 
and look at other marketing positions. There's no doubt we 
haven't fudged them a bit.
    So I think it's looking at different time periods. You 
could say both of us are trying to make a point. I know it's 
taking place since September, when we started a new fiscal 
year, so the ones we have here today, that's factual.
    Senator Dorgan. And Steve Bobb, if Jim Bobb from Southwest 
Grain is correct with respect to the numbers in your fiscal 
year, would that give us evidence that the inverse rates are 
hurting companies like Southwest Grain?
    Mr. Stevan Bobb. Well, that's one of the--I mean, we are 
trying, based upon the testimony by Mr. Fisher earlier this 
month, that there was trucking occurring and he was making 
money by doing it, we've been trying to dig a lot deeper and 
make sure that there is not a lot of grain going east to go 
west because that would not be what we wanted to have happen. 
And there again, as we mentioned earlier, there are several 
moving parts to this rate structure. We're trying to 
understand, for instance, what the elevator in Jamestown may be 
doing with its bid structure that is impacting this rate 
structure in an unexpected way. Are they narrowing their 
margins so dramatically as to draw more grain than they 
normally would?
    The other thing we're trying to peel out of this is if you 
look at the period really October, November, December, there 
was really one dominant exporter on the West Coast and it--how 
much of it was a fact that they had the export program on and 
had made the sales determined where the grain went, because 
they chose to run it through their affiliated elevators, I 
don't know.
    Senator Dorgan. Mr. Strege, how many elevators in North 
Dakota are taking advantage of the inverse rate structure at 
this point?
    Mr. Strege. Right now as far as we know there are the three 
shuttle loaders that you have listed there, Alton, Jamestown, 
Sterling. Although I'm told Sterling doesn't get into it very 
much. Just about the 1st of February the BN did offer an 
inverse rate structure to 52-car loaders also, but it wasn't 
nearly as good a deal, I understand it did not include an 
origin efficiency payment and it expires, as far as I know, the 
end of this month. So it was put in just on a short-term basis. 
I think it was put in to quiet down the complaint from the 52-
car loaders against the few selected 110-car loaders.
    Senator Dorgan. Now, you represent the North Dakota Grain 
Dealers Association, can you tell me what kind of consultation 
existed with respect to inverse rates?
    Mr. Strege. None at all. The BN did not talk to us about 
this. It was put into effect and I found out about it after the 
matter was decided on; and I don't know whether they were in 
affect or not but apparently they were coming along, and the 
railroad was quite surprised that the news had gotten out. That 
these few selected shuttle loaders that were to get that kind 
of relief.
    Senator Dorgan. And what did you do when you learned of the 
inverse rates?
    Mr. Strege. Well, we discussed it at a board of directors' 
meeting early July and we decided we had to try to stop this, 
try to change their mind. I talked to Mr. Bobb at some point 
around that time, he also was at a Public Service Commission 
meeting, I think that was the 17th of July, and we visited with 
him about it.
    At that time the first reaction of the BNSF was to deny 
that there was anything out there or to say that there were 
allegations or rumored rates, and now I think it's become more 
public that these things do actually exist.
    Senator Dorgan. Mr. Griffin, let me ask about one of the 
graphs that was used by Mr. Bobb talking about wheat and corn 
rates because you had, in your testimony, talked about the 
issue of the rates being charged for wheat, you couched it--I 
used to teach economics in college briefly, so I was able to 
follow you and you couched it in very careful terms. But I 
think if I read between the lines, I think you were saying a 
pretty good case can be made for our paying a much higher rate 
than most and for wheat bearing a much bigger burden than most 
and that there's a basis for thinking that is unjustifiably--
but maybe I'm putting words in your mouth.
    Let me ask you to take a look at this chart that was passed 
out, it talks about the wheat rate versus corn/barley rate. 
Now, that goes a bit afield from the issue of the inverse 
rates, but I'm wondering because you testified in your written 
testimony substantially about rates generally with respect to 
wheat, can you tell me why this exists in your judgment, and is 
there justification for it with respect to wheat?
    Mr. Griffin. The reason it exists is because they're 
setting rates in response to market conditions and the 
competition, you know, in different markets, I think that there 
may not be total agreement on this, but I think North Dakota 
wheat is generally considered a residual market. In other 
words, we're sitting in a market where the grain generally 
speaking is going to be here for some time. There are reported 
instances which you may have observed where corn, for instance, 
would move from the Iowa, southern Minnesota producing region 
through North Dakota to the Pacific Northwest while corn from 
North Dakota was not moving. That's because that's subject to 
competition down the river, the Mississippi, and if that corn 
isn't moved at that time when the market is there, the Pacific 
Northwest, it's going to go to the Gulf, and then the railroads 
can come back to move North Dakota corn at a later date because 
it's not going to move to the river or PNW at that time without 
the available equipment.
    So I think we're fairly captive in that context and wheat 
does pay a considerably higher rate, there is no appreciable 
difference in the cost of moving wheat versus corn with the 
same equipment at the same service level. And the reason would 
be that the market conditions permit them to charge a higher 
rate.
    Senator Dorgan. But let me ask about those market 
conditions because it relates to inverse rates as well. Market 
conditions would suggest that there is a ``market'' when in 
fact the railroads, Mr. Bobb and those who run the Burlington 
Northern Railroad, simply, I assume, sit in an office somewhere 
and decide here are the rates we're going to charge. There's 
really no consultation as has been stated. There's an 
opportunity to do it because they don't have competition.
    Mr. Bobb will say--and I'll give him a chance in a minute--
he'll say, ``Well, but the competition would be trucking.'' But 
the fact is, we're now down to very few railroads in our 
country and they set prices the way they want to set prices and 
set service patterns the way they want to set service patterns. 
So, in fact, you don't have normal market condition 
circumstances to try to keep a company somewhere within 
boundaries, do you? What would prevent Mr. Bobb from announcing 
tomorrow that they have increased their inverse rates, the 
differentials, by another 25 percent effective tomorrow 
morning? What would prevent that from happening?
    Mr. Griffin. Senator, I don't believe there's anything that 
prevents them from doing that other than certain market 
conditions, but certainly there's no competitive factor that 
would prevent them from doing that.
    Senator Dorgan. Mr. Clark, what is the role of the Public 
Service Commission? I assume the floor Act and other Federal 
legislation prevents you from doing anything effectively with 
respect to these rates; is that correct?
    Mr. Clark. Right. On the Federal level, before the Staggers 
Act, Commission authority was always limited to intrastate 
shipments but since then even those things have been preempted 
by Federal law.
    The Public Service Commission gets involved in a few 
different ways. One is, State law charges us with the 
responsibility of representing State interests before the 
courts, Surface Transportation Board, and Congress so we get 
involved in a few different ways. For example, there has been 
some exploration about whether the Commission should bring--in 
some form or another, explore the possibility of bringing a 
rate case before the Surface Transportation Board. There have 
been some recent hopeful changes in some of the STB rules that 
might make a case more viable now than it was prior to those 
changes and so we continue to explore that.
    We get involved in other Surface Transportation Board 
proceedings. We're currently an intervenor in a proceeding that 
deals with rail arbitration and would like to see more workable 
rules for small shippers to kind of fast track some of this so 
they can get more redress in a timely way, because it's not 
effective right now.
    Senator Dorgan. What is the official view within the Public 
Service Commission with respect to inverse rate?
    Mr. Clark. The official view, we're opposed to the current 
rate structure that they have, as my testimony indicated. We 
believe that they're having a number of harmful effects on 
North Dakota shippers and on the current transportation 
industry in North Dakota. So the current structure gives us 
great concern.
    Senator Dorgan. And how have you communicated that to the 
Surface Transportation Board?
    Mr. Clark. That specific concern, frankly, hasn't come up 
in a STB proceeding--we've been working more with rail 
competition and things like that. But certainly if a proceeding 
came up, it would be something that we could include. 
Potentially these inverse rates, if a rate case does come up, 
the nature of them may make a rate case more--the opportunities 
more available for a successful rate case to be brought. And 
we'll continue to look at that, contingent of course on 
available funds for the Commission to do it.
    Senator Dorgan. Under current Federal law is there anything 
that prevents a State commission such as the Public Service 
Commission from initiating a complaint with the Surface 
Transportation Board on behalf of, for example, grain elevators 
and farmers?
    Mr. Clark. I don't believe that there is and that's one of 
the reasons that the Commission has been--well, we asked for 
appropriation to do it last legislation session, we didn't get 
the appropriation to----
    Senator Dorgan. What size appropriation did you ask for?
    Mr. Clark. It was $100,000 to begin a feasibility study for 
a rate case and we will again go back to the legislature and 
ask for that. I anticipate that we will be doing that again. So 
I don't know the exact mechanics of how it would work, whether 
it would be the Commission bringing it in on behalf of a class 
of shippers or if you go out and find kind of poster child for 
an elevator that's been harmed and then bring it for that 
specific elevator on their behalf, or if it's just a matter of 
gathering information so that that entity can bring forth a 
successful case on its own.
    Senator Dorgan. I'm skipping around some, but I'll come 
back to you, Mr. Bobb.
    But, Mr. Strege, what will be the consequences, in your 
judgment, to the array of grain elevators in North Dakota if 
nothing changes? The inverse rates exist, they will continue to 
exist, we will continue to move toward the larger shuttle 
trains; and tell me what you see as a future for the country 
grain elevator.
    Mr. Strege. I think it doesn't look too bright and for 
people in the western part of the State who built up these 
western markets and can't get access to them, it looks bad from 
that respect. In other parts of the State, where the shuttle 
loading facilities are going in and being given advantages over 
everybody else, eventually that is going to wear these other 
people down; and, I mean, you can't blame a farmer for hauling 
to an elevator where they can get a better price. But if he's 
bypassing the local elevator, in the end, he's doing a 
disservice to himself and to his community for a short run 
benefit; and I think Mr. Fisher's testimony over here is an 
example of that and he stated that. But in the short term the 
farmer wants to go to those places that offer the better price, 
that have the lower rate.
    What we're in favor of is spreading those rate reductions 
around and if you look at those revenue of variable cost ratios 
that Gene Griffin just laid out in front of us, that's why 
they're quite eye-popping. You had mentioned or had talked 
about whether we had a market and that rates should be set in 
response to market conditions. A market assumes that there are 
a number of willing buyers and sellers. That's not what we have 
here. I'd like to make a reference to one of the items in Mr. 
Bobb's testimony here, and it's on page 10 and it says,

          ``What we do as a rail transportation provider is look at the 
        difference between value of the grain at the origin and value 
        of the grain at the destination and try to determine the level 
        of charges for transportation with margin for the elevators to 
        operate on enough money.''

    I guess that could be interpreted as saying they're going 
to take as much out of the middle as they possibly can and 
leave just enough for the elevator to continue to exist; and 
that is simply what is monopolistic, being able to do that 
rather than pricing their services on what they cost. It's 
based on what they can extract from the origin and the 
destination.
    And I think somebody touched on the market, what has 
happened to the grain market as a result of these inverse 
rates. If that PNW market needed more grain then let it bid up 
that way. We're not letting the market work if we put in a 
system like this, because it gives more reason for them to keep 
the price lower.
    Senator Dorgan. Mr. Bobb, let me ask you a series of 
questions. You're Group Vice President for Agriculture 
Products; is that correct?
    Mr. Stevan Bobb. Yes.
    Senator Dorgan. How long have you been with the company?
    Mr. Stevan Bobb. Fifteen years.
    Senator Dorgan. This is not unfamiliar territory for you to 
go testify someplace and have to defend rates and so on. And 
yet you hear the testimony today of people who think that your 
company has imposed rates that are unfair.
    First question I guess is, Mr. Strege and Mr. Bobb say that 
they effectively are customers of yours, I assume big customers 
in the aggregate, good customers, customers for many, many 
years, and yet when your company decided to create a new rate 
system, you didn't call them to talk to them about it or 
consult with them. Why would a company do that? Why would your 
company sit in a room and decide here are our new rates and we 
don't intend to talk to our customers about them?
    Mr. Stevan Bobb. Well, it has--I would say it goes to the 
definition of a customer. We spent a lot of time talking to the 
export customers for which our westbound programs are primarily 
designed; and, second, we spent a lot of time talking to the 
individuals that various grain companies have indicated they 
want us to talk to.
    Our commercial relationship with Boyle is primarily--or 
Gladstone on that map--is primarily through Cenex Harvest 
States and Inver Grove Heights based upon Cenex States' 
direction. The Gladstone facility is essentially owned by Cenex 
Harvest States and they prefer us not to talk to their 
elevators independently. So that's their choice, it's their 
company. We have our interaction in a manner that they prefer.
    Senator Dorgan. So who did you talk to at Harvest States?
    Mr. Stevan Bobb. We would have talked to their vice 
president of transportation as well as the individuals 
responsible for their various line facilities throughout the 
Upper Midwest.
    Senator Dorgan. And when would you have done that?
    Mr. Stevan Bobb. In the first quarter and second quarter of 
last year.
    Senator Dorgan. How did they react to this? They obviously 
didn't share it with Jim Bobb, but how did they react when you 
said we're going to create a new inverse pricing system?
    Mr. Stevan Bobb. I think in general they were concerned 
about the ability to get grain to the West Coast and they saw 
the value of it. It was testified here earlier about a 79 
million bushel reserve in Montana, that sounds like a really 
big number, but when you put that in the context of historical 
stocks-to-use ratio in Montana, that would essentially draw 
Montana inventory to a level to which they've never been down 
and the current low flat rate price they've produced today, 
those stocks aren't going to magically come out. So we think 
that there was a supply problem.
    And I think the second reaction is there were some 
individuals that had a philosophical disconnect. They said, 
``Well, rates should be distance-based,'' and there was some 
discussion with some individuals at Cenex Harvest States that, 
you know, that they had philosophical--they said, ``Your rates 
should be distance-based as opposed to inversely rated 
distance.''
    Senator Dorgan. So let me understand, you talked to the 
Harvest States executives, perhaps in Minneapolis/St. Paul, 
they didn't want you to talk to the folks out here, and in any 
event they perhaps disagreed with you?
    Mr. Stevan Bobb. Some of them disagreed, some of them 
agreed. We also got concurrence from the other grain companies 
with which we have relations.
    Senator Dorgan. Now, let me also ask the question about the 
market. Mr. Strege I think raised a point that I have 
questioned, if you have a market for grain and the West Coast 
is having trouble getting the grain it needs, letting the 
market system work would mean that you would bid a higher price 
for that grain to access that grain to the West Coast. If a 
railroad comes in and creates an inverse pricing, what you've 
done is you've been a conduit for an exporter to create 
circumstances to lower the price for the farmer, saying the 
grain is less valuable because we won't let the market system 
work for you. How would your company justify that?
    Mr. Stevan Bobb. Well, that would occur--you asked the 
question earlier what stops BN Santa Fe from lowering the 
inverse rate an additional 25 percent. What stops us is our own 
financial self interest, because essentially that rate would be 
unnecessary to get more grain tributary to the west.
    In the terms of why not let the market work, in general, 
the West Coast market has an upside that is capped by what the 
Wheat Board delivers wheat for on the West Coast, and the 
exporters essentially didn't have a lot of head room in terms 
of ability to bid that grain up. The way this structure is 
designed, the intention is that wheat prices actually have to 
bid up somewhat relative to eastern North Dakota's traditional 
net packet they get from the actual market. So in that effect 
it actually facilitates the market by allowing more market 
negotiators to work on eastern North Dakota grain.
    Senator Dorgan. Mr. Griffin, you're an economist, aren't 
you?
    Mr. Griffin. Should I admit to that? Yes.
    Senator Dorgan. Did you understand that and agree with it? 
Again, having both studied and taught economics, it seems to me 
the logical answer is, if the West Coast is unable to access 
the grain it needs, the way you get access to that grain is to 
have the market system increase the value of that grain through 
market pricing and they will access as much grain as they need. 
The development of inverse rates short-circuits that. Would you 
agree with that?
    Mr. Griffin. I think----
    Senator Dorgan. If you don't, I'll ask somebody else.
    Mr. Griffin. I think the answer is yes to both of you.
    Senator Dorgan. No, you can't do that.
    Mr. Griffin. OK. But I think what Steve Bobb was saying was 
that the Canadians capped the price in the West Coast because 
of the similar wheats and we've got the Canadian Wheat Board 
which is a single seller, a monopoly seller basically.
    Senator Dorgan. That's a different source of shame that we 
are burdened with, we have a monopoly that would be illegal in 
this country playing those kinds of games. But aside from that.
    Mr. Griffin. But if I may, I think it makes the point that 
if, in fact, those prices are capped on the Canadian Wheat 
Board, then lower rates in North Dakota overall should be very 
beneficial to North Dakota producers because the market out 
there is capped at a level.
    Senator Dorgan. Let's explore this just a bit because this 
is central to the question to what Burlington Northern is 
doing. You're saying and Burlington Northern is saying the 
Canadian Wheat Board sets a top price for wheat on the West 
Coast; is that correct?
    Mr. Griffin. I think that's what he's suggesting.
    Senator Dorgan. But you also said that. Do you disagree 
with what he said?
    Mr. Griffin. I tend to probably agree with that, but I'm 
not an expert. I'm no--off a limb here.
    Senator Dorgan. It is fascinating that we start with an 
assumption that fundamentally illegal trade by the Canadian 
Wheat Board capping our price on the West Coast is the basis on 
which we should judge the behavior and actions of a railroad in 
the States, I guess I just don't accept that. But that's a 
fascinating premise from which to start.
    Mr. Bobb, you said that because they're capped by the Wheat 
Board on the West Coast, you then can come in and draw grain 
from eastern North Dakota that wouldn't have otherwise gone to 
the West Coast by creating inverse rates; is that essentially 
correct? My feeling is that what you have done is interrupted 
the marketplace in a way that is detrimental to producers, and 
you're saying not, because the Canadians will injure those 
producers anyway. Is that a fair representation of what you 
said?
    Mr. Stevan Bobb. Yes. There's a value for wheat on the West 
Coast and if it's not the Canadians, it's the Australians or 
the Argentinians. There's a value at which our specialty 
exporters need to deliver wheat to the West Coast.
    Senator Dorgan. How do you know that?
    Mr. Stevan Bobb. In conversation with them.
    Senator Dorgan. All right. Let me ask a couple other 
questions. I'll come back to this. What consultation did you 
have with those elevators that benefited from your inverse rate 
schedules in North Dakota? There are several of them that 
benefited substantially, did you have consultation with them 
before you announced the rates or were they totally surprised, 
pleasantly surprised by what you did?
    Mr. Stevan Bobb. I would imagine that some of them were 
pleasantly surprised. To the extent that some of them are 
independent grain companies, like Alton for instance, we may 
have had a conversation with them directly. Jamestown is owned 
by another company, we would have had a conversation with their 
corporate headquarters, as we would with Gladstone and 
Sterling. So who we talk to is a function of who has financial 
ownership of those facilities.
    Senator Dorgan. So, Mr. Bobb, what you're hearing is that 
your headquarters apparently had conversations with Burlington 
Northern, but didn't want you to know. The companies who 
benefit from the actions of the railroad apparently had 
consultations with the railroad. Tell me how you react to all 
of that.
    Jim Bobb.
    Mr. Jim Bobb. How do I?
    Senator Dorgan. Yes.
    Mr. Jim Bobb. Well, I knew it was going on and like I 
stated before, as of last fall, we could not access those rates 
by, it seems like, any means. It's a hard pill to swallow.
    Senator Dorgan. And what happens to you? I mean, you come 
from a part of the country where I grew up, you invested a 
substantial amount of money, in fact, you did that, I believe, 
because of the way the railroad described its intent to serve 
our State, and the result is I got to work helping try to find 
some money for paving certain roads and doing various things, 
and we had trucks moving in and they move into one central 
location to a facility that was built, really, because of what 
the railroad was saying to you. And now we have a change in the 
approach by the railroad. What happens to you, I mean, will you 
tell us what has happened since the start of your fiscal year, 
what happens the rest of this year, do you think?
    Mr. Jim Bobb. I don't know. We're so reliant--I mean, on my 
grain margins, I'm totally reliant on what the programs are. 
It's been obvious since last summer that they're not willing to 
look at some other rate structure across the State that would 
have been fair as we see it, or equitable. That's our 
differential, what we see as equitable, as agriculture 
elevators to our producers, and how the railroad sees it.
    Senator Dorgan. Steve Bobb, you know that Jim is 
representing a number of country elevators here today, he's 
testifying on behalf of his elevator, but he and Steve Strege 
represent a good number of country elevators. Tell me why the 
Burlington Northern Railroad Company will not provide the 
Southwest Grain Cooperative the same rates that you're offering 
to eastern North Dakota for shipments west. Why will you not do 
that, he's requested that?
    Mr. Stevan Bobb. Well, we get a lot of requests for 
something that isn't always necessarily in our best financial 
interest. But again, the quandary here with Gladstone is the 
economic facts, as we have looked at them time and time again 
in talking to various participants in the marketplace, is that 
volumes of grain should not be able to flow east to places like 
Sterling or Jamestown to access the lower rates. That's not--
the math doesn't add up.
    Now, we are continuing to have conversations with Southwest 
Grain. As a matter of fact, I believe since the last set of 
conversations we had up here a month ago with the legislative 
testimony, we have had a couple more interactions where we're 
trying to better understand their grain handled in the months 
of September, October, November, December and really 
understand. If there's something going awry here, we need to 
fix it, but we're not going to fix it without facts.
    Senator Dorgan. Have you ever heard of Craig Fisher before 
today?
    Mr. Stevan Bobb. Yes.
    Senator Dorgan. Oh, really. How?
    Mr. Stevan Bobb. I grew up in Richardton, North Dakota.
    Senator Dorgan. Oh, so you know Craig?
    Mr. Stevan Bobb. I don't know him very well personally, but 
I recognize the name.
    Senator Dorgan. Well, there's a start. Let me ask, I assume 
that you didn't know that Craig Fisher drove 16,000 miles to 
Jamestown with his 50,000 bushels of wheat, did you?
    Mr. Stevan Bobb. The first I heard that was approximately 
one month ago and at that point in time he indicated he had 
handled between 60,000 and 70,000 bushels of grain to Jamestown 
and that begun our more extensive research in terms of what 
some of the unintended effects might be.
    Senator Dorgan. And in that research in the past month what 
have you concluded, if anything?
    Mr. Stevan Bobb. Interestingly enough, to this point 
Jamestown has denied buying any grain from people in Stark 
County. This is an onion that needs to be peeled.
    Senator Dorgan. I guess it's your position that you're not 
sure Craig Fisher ever drove to Jamestown, that's what you're 
suggesting; is that correct?
    Mr. Stevan Bobb. I'm sure he did.
    Senator Dorgan. Well, you're saying that the folks in 
Jamestown are telling you that probably no one delivered grain 
over there from western North Dakota.
    Mr. Stevan Bobb. Senator, we're trying to decide if it was 
50,000 bushels or 500,000 bushels and that's really what the 
economic question boils down to.
    Senator Dorgan. Fifty-thousand bushels may not seem much to 
you, but it's a whole lot to Craig Fisher, it's a whole lot to 
people in my home county, and I bet 50,000 bushel is a pretty 
good chunk to Jim Bobb. So I'm trying to ask a question, I 
think the implication of your answer was that yes, you heard 
that a month ago, that story, but you're not sure it exists?
    Mr. Stevan Bobb. We're sure it exists for 50,000 bushels.
    Senator Dorgan. I thought you just said the folks in 
Jamestown deny receiving it?
    Mr. Stevan Bobb. That's what I said but, see, we're trying 
to get a sense from Jamestown how much grain is trucking into 
Jamestown.
    Senator Dorgan. But you don't deny that, you think there's 
some being trucked in?
    Mr. Stevan Bobb. Well, there's always been grains, that is 
a factor.
    Senator Dorgan. Do you think more has been trucked east 
because of your inverse rates?
    Mr. Stevan Bobb. That's what we're trying to understand.
    Senator Dorgan. If that's the case, then what will the 
company do about it?
    Mr. Stevan Bobb. We may need to adjust some spread 
relationships.
    Senator Dorgan. Now, I asked you why you wouldn't adjust 
your rates so that the Southwest Grain company could receive 
the same rates and you said you talked about what is in your 
financial interest. When there's a tension between good public 
policy and the financial interest of your railroad, how is that 
tension resolved? It seems to me that in a railroad where you 
really don't have much competition, if any, you always resolve 
that in your favor; would that be correct?
    Mr. Stevan Bobb. That would not be correct.
    Senator Dorgan. Could you tell me instances in which you 
resolved rates in favor of the consumer and against the 
interest of your company?
    Mr. Stevan Bobb. There are probably a number of occasions 
where we have not been as aggressive on rate increases as the 
market opportunities may have allowed because of our position. 
Because there is a natural tension in our company between all 
of our constituents, those constituents include not only our 
owners, which is where the financial rewards flow, but our 
employees, the communities we serve and our customers. So in my 
4 years being responsible for our grain business I have not had 
an occasion, up until this exact case, where the issue has been 
this unclear in terms of the economics of the action. I can 
tell you in terms of making infrastructure investments where 
there were branch lines, we have upgraded branch lines where it 
was not in our financial best interest to spend money to 
continue.
    Senator Dorgan. Mr. Strege, you heard my question. Do you 
see circumstances where the railroad essentially pulls a punch 
and says, ``Well, let's do this in the interest of consumers, 
we're not so interested in our well being''?
    Mr. Strege. I guess I can't recall any of those things at 
this point. Mr. Bobb just mentioned that--the upgrading of some 
branch lines and that did happen. Twenty years ago when the BN 
was going to announce or announced a series of abandonment 
possibilities, probabilities, and the State sort of rose up in 
defiance and there were some branch lines fixed up. Many of 
those are still in existence, running maybe as a short line.
    One of the questions that I wonder about is if somehow the 
BN can take care of the problem with Southwest Grain, is that 
where you stop? Or do we try to fix the inequities in other 
places and between other elevators not only in southwestern 
North Dakota but in other places?
    Senator Dorgan. Well, my question wasn't designed simply to 
say, ``Why don't you do something for Southwest Grain?'' The 
reason I was asking the question is what about the fairness of 
rates for all country elevators in North Dakota?
    Mr. Strege. Senator, if I may, I've got the BN's latest 
annual report here for the year 2001 and I think part of the 
problem is where the focus is, at the company, and right inside 
the front cover the first thing we see is a focus on customers. 
There's also a focus on employees, owners, and communities. 
Then later on there's a tribute here to Rob Krebs who was 
stepping down as chairman--and I don't want this to sound like 
an attack on Mr. Krebs, because certainly it is not--but there 
are some quotes in here from people saying nice things about 
Mr. Krebs. There are four economic analysts, one locomotive 
engineer, one professor, one who was described as a journalist 
and rail industry observer, and absolutely no customers. And I 
think that says something about where the focus is at, it's on 
Wall Street, not Main Street, and we need to get it back on 
Main Street.
    Senator Dorgan. I had intended to ask a question earlier, 
Mr. Bobb, you mentioned that the rail rates for grain and wheat 
especially have fallen, generally, your testimony describes 
those circumstances and timeframes, and I think you referenced 
a GAO study for that, did you not? An STB study and a GAO 
study. My understanding is, though, that the studies 
demonstrate that while you might be talking about trends 
nationally, that there are regional trends that are starkly 
different from that, is that not the case?
    Mr. Stevan Bobb. There may very well be, but my testimony 
specifically points out that rates for agricultural commodities 
for the BN Santa Fe, declined on a revenue per ton-mile basis; 
and it goes on to point out just the point that you make, that 
there are some areas where rates may not have gone down 
dramatically in nominal terms and I have examples there of 52-
car shipments, they certainly haven't gone up, and when 
adjusting for inflation they are down dramatically.
    So, you know, North Dakota is a great example of what ails 
the rail industry. We are unable to get rate increases because 
we compete against a public infrastructure, the highway and 
barge system, and in attempting to get rates up, I can 
personally tell you I've seen convoy lines of trucks form out 
of elevator facilities like Southwest Grain and we end up 
having to retract our attempt to raise rates. So there are 
parts of the rail network that rates are down dramatically, 
there are parts of the network that they are stable.
    Senator Dorgan. But I think it is the case you charge what 
you can and for example, putting a carload of wheat on a track 
here in Bismarck, trucking it to Minneapolis which is just over 
400 miles, close to 450, I guess, you charge more than twice as 
much then would be charged for the same carload of wheat from 
Minneapolis to Chicago. So we pay more than double the price 
because you can charge that price; is that not correct?
    Mr. Stevan Bobb. Well, that's an interesting example, the 
reality is that the rate between Minneapolis and Chicago is an 
additive rate. Not a lot of grain ships between Minneapolis and 
Chicago. The rate is structured to allow customers to deliver 
grain to Minneapolis or continue that shipment through to 
Chicago and it is designed that essentially once you have rail 
car originated and moving, it's just as efficient to keep it 
ongoing to Chicago as opposed to stopping short in Minneapolis, 
it does not move grain from Minneapolis to Chicago.
    Senator Dorgan. How many carriers are you able to use 
between Minneapolis and Chicago?
    Mr. Stevan Bobb. Between Minneapolis and Chicago?
    Senator Dorgan. Yes.
    Mr. Stevan Bobb. I would imagine there are three or four 
railroads that move through that corridor. Again, the question 
is, how much grain originates from Minneapolis and moves to 
Chicago.
    Senator Dorgan. Right, but I'm talking about rates, not 
quantity, and how many railroads exist between that would carry 
grain from Bismarck or Jamestown to Minneapolis?
    Mr. Stevan Bobb. We would carry grain from Jamestown 
specifically. However, CP stations compete for Jamestown as 
well.
    Senator Dorgan. Bismarck?
    Mr. Stevan Bobb. Yes.
    Senator Dorgan. My point is, it's like pulling teeth here, 
my point is, you got one carrier to charge what they want, 
another route you got three carriers and there's price 
competition and voila, the prices decrease by more than half 
and I think it describes almost everything that's wrong with 
what's happening with the railroads today, in increasing 
concentration and higher prices.
    Having said all that, let me do this, Mr. Bobb, you 
represent your company, you represent your company well. You've 
heard that the State regulatory body has no regulatory teeth, 
it's kind of a gummer body when it comes to railroads, but then 
that's the case--I don't mean that in terms of age--but that's 
the case with every State regulatory body because the Federal 
legislation has preempted them. But you heard testimony from 
the State regulatory body here that they think your rates are 
unfair and unwarranted. You hear from your customers that they 
are unfair. My own view is that these rates are not fair, 
should be changed and we need to find ways to force that 
change.
    Now, I well recognize that we don't have the capability to 
do that unilaterally on our Committee, for example, and I'm 
going to re-authorize the Federal Trade Commission as Chairman 
of this Subcommittee at some point later this year and see if I 
can put a provision in that re-authorization to give the FDA a 
crack at your pricing. They don't now have the opportunity, but 
I want to give them that opportunity. We've got a fair number 
of lawyers at the FDC that I hope that we could turn loose on 
pricing by railroads. I'd like to see us pass a couple pieces 
of legislation that have been introduced about this pricing 
strategy, but I feel very strongly about this, and I hope that 
you will consider this and go back and do what you can about 
pricing.
    I think your pricing choices have a profound impact on 
rural communities, on country elevators, and on family farmers, 
and just because you can impose these rates, does not mean you 
should. Just because you have the opportunity to do it, does 
not mean they're fair. And I think that when you take a look at 
this, I would not have had a problem if you say that you want 
to move grain to the West Coast and create incentives to do 
that, if you provide the same incentives to all of our State 
shippers. But you've not done that; you decided to pick and 
chose; and I think you create very serious problems with that.
    I'll be happy to let you have the last word as we proceed 
in just a moment, but there are some others in the room, we 
only have about 10 minutes left, I promised that I'd have the 
room for 2 hours. There are some others in the room that may 
wish to make comments. And I would like to ask you to do so 
briefly and identify yourself and make comments if you would 
like to make comments.

                  STATEMENT OF ROGER JOHNSON, 
             NORTH DAKOTA AGRICULTURE COMMISSIONER

    Mr. Johnson. Senator Dorgan, thank you for holding this 
hearing. For the record, my name is Roger Johnson, I'm the Ag 
Commissioner.
    I think the case has been clearly made that there aren't a 
whole lot of people who think what's happening here is the way 
it ought to be happening. A month ago all of the ag 
commissioners of NASDA, Nationally Association of State 
Departments of Agriculture, I brought to that meeting a 
resolution dealing with this issue and I would like to read 
just the policy recommendation part of that for you, it is 
three sentences in length.

          ``NASDA urges all railroads to charge reasonable rates and 
        consistent rates to all shippers and treat all shippers 
        equitably. NASDA also encourages railroads to offer co-loading 
        of trains and to have reasonable loading policies that hold 
        both shippers and railroads promptly--NASDA believes the 
        Congress and Federal Government should substantially increase 
        oversight of railroads including rates and services where 
        competition is not present.''

    And I think that is the heart of what this hearing is about 
through the testimony that's been given.
    For the record, I would like it also known that there was 
some concern about, I mean, this is essentially saying it's 
time to re-regulate railroads where competition doesn't exist 
and there was some concern that this language may be too strong 
when it got to the floor, and all of the ag commissioners were 
there debating it. It was passed without a single dissenting 
vote, and the only debate was critical of me for not making it 
even stronger. And so, I mean, I think that speaks volumes 
about the feeling across this country in agriculture as to how 
they are being treated by railroads all across America.
    If you have any questions, I'd be pleased to respond.
    Senator Dorgan. We will be willing to take written 
testimony from anyone who wishes to submit any written 
testimony following this hearing, and that would be from anyone 
who feels any way on any side of this issue. We'll take one 
more piece of testimony, then we'll adjourn.

            STATEMENT OF LARRY LEE, VICE CHAIRMAN, 
                 NORTH DAKOTA WHEAT COMMISSION

    Mr. Lee. Senator Dorgan, on behalf of North Dakota's 20,000 
wheat producers we thank you for holding these meetings, 
extremely important to us. I am Larry Lee, I'm a wheat producer 
from Bell, North Dakota, Vice Chairman of North Dakota Wheat 
Commission and chair the Transportation Portfolio. I'm going to 
make this as brief as possible.
    First of all, I think one assumption comes out of here is 
that these rate structures are discriminatory. Discriminatory 
rates applied by BN have little to do with change, efficiency, 
or pro-market forces. BN tells the rest of the world to adapt, 
improve efficiency, but it appears that this efficiency is a 
cost that is borne by the rest of the farm-to-fork chain of 
supply. I think BNSF is behaving badly, it is a rail monopoly 
and maybe we are going to have to look at some type of 
regulation.
    With that, any questions?
    [The prepared statement of Mr. Lee follows:]

            Prepared Statement of Larry Lee, Vice Chairman, 
                     North Dakota Wheat Commission

    Senator Dorgan, on behalf of the state's nearly 20,000 wheat 
producers, I thank you for holding this hearing to look into an issue 
that is extremely important to all of North Dakota.
    I am Larry Lee, a wheat producer from Velva, N.D. I serve as vice-
chairman of the North Dakota Wheat Commission and I'm one of two 
commissioners who carry the transportation portfolio for the 
Commission.
    Before I get into specific implications of BNSF's inverse rate 
scheme, I think it's important to put this issue into context. No 
matter how many coats of whitewash Burlington Northern Santa Fe applies 
to its discriminatory rate structure, the situation producers are 
facing has little to do with ``change,'' ``efficiency,'' or the 
``forces of a free market,'' and more to do with BNSF flexing its 
market dominant muscle.
    Approximately 70 percent of the grain sold in North Dakota each 
year moves to market by rail. Burlington Northern Santa Fe directly and 
indirectly (through its short line affiliate) controls about 75 percent 
of the so-called rail ``service'' in North Dakota.
    We are captive shippers, and as such North Dakota and Montana 
farmers pay the highest per mile rail rates of farmers anywhere. The 
North Dakota Public Service Commission and Upper Great Plains 
Transportation Institute (at NDSU) estimate that the state's farmers 
pay $50 million to $100 million annually in excessive freight rates. In 
other words, farmers would net about $.17 to $.33 per bushel more from 
sales of wheat if rail rates were at a reasonable level, which is 180 
percent of variable costs, according to the Surface Transportation 
Board.
    High rail freight rates mean lower grain prices and lower farm 
income, so you'll seldom find the North Dakota Wheat Commission in 
opposition to the lowering of rail rates. However, rates need to be 
equitable. Rates should be lowered for all shippers and all farmers.
    At a hearing held recently before North Dakota's legislative 
interim agriculture committee, BNSF executive Steve Bobb testified that 
BNSF put the inverse rate into place at the request of exporters in the 
Pacific Northwest to giive them access to more wheat from a larger draw 
area. This scheme is allowing BNSF, not the market, to dictate who and 
where the grain merchandisers will be.
    BNSF's secretive, lower contract rate to a few shuttle loaders, and 
now perhaps a few unit train loaders, in eastern North Dakota and 
western Minnesota has distorted local producer prices and shifted 
typical wheat movement. Producers west of BNSF's ``Great Divide'' are 
being deprived of traditional and hard-earned sales to West Coast 
markets, with no reciprocal access to markets in the east. We are 
receiving lower prices for our wheat as a result.
    In addition, BNSF's rate is distorting the source of hard red 
spring wheat being shipped to key customers in the Asian region. It is 
not that the spring wheat produced in eastern North Dakota and 
Minnesota is of lower quality; it is a different quality. Because of 
the varieties grown and for environmental reasons, a 14 protein spring 
wheat from the eastern growing region will typically be more mellow in 
its protein quality and gluten strength than a wheat with 14 percent 
protein content from the western region. Our customers don't like 
surprises and the North Dakota Wheat Commission has recently been 
catching some heat from customers in Japan and other important Asian 
markets.
    At the request of U.S. Wheat Associates and the Wheat Commission, 
the North Dakota State University Cereal Science Department is 
currently testing samples obtained from customers in Asia to determine 
their varietal make-up. The number of samples is relatively small at 
this point, but varieties like Forge (SD), Russ and 2375 are showing up 
in greater numbers. These are weaker mixing, lower absorption 
varieties. Although they are also grown in western North Dakota as well 
these days, they are grown in larger percentages farther east.
    Testing of cargo samples on export shipments is also revealing 
weaker dough mixing characteristics than would be traditionally found 
in wheat shipped from the PNW. The drop-off appears to have happened 
since mid-2001 to the present, which seems to coincide with BNSF's 
inverse rate. It is too soon to say for sure, but we speculate that the 
change in wheat origins might be playing a role in the concerns we are 
hearing from Asian customers.
    A recent analysis of farm expenses and income showed that 
southwestern North Dakota is the best place--the most profitable place, 
if there is any--to grow wheat. This area has been favored by good 
weather and a relatively disease-free growing environment in recent 
years. These producers are sitting on some of the highest quality wheat 
stocks in the state. BNSF must not be allowed to dictate who can grow 
wheat and where they can grow it, but if the monopoly railroad is not 
stopped, the inverse rate structure has the potential to seriously 
damage the viability of wheat production in many sectors of the state 
due to its unfair and inequitable nature.
    BNSF tells the rest of the world to ``adapt'' to improve 
efficiency. But it seems to me that we're improving BNSF's efficiency 
at a cost to other sectors in the farm-to-fork supply chain. I thought 
rail transportation was supposed to be a service industry. What 
happened to the concept of customer service?
    BNSF is behaving badly. The rail monopoly's abuse of the freedoms 
it was given under deregulation make a sound argument for increased 
government oversight. Without the discipline of competition or 
effective regulations, North Dakota agriculture is at risk of being 
completely derailed. Senator Dorgan, we appreciate your attention and 
encourage you pursue solutions to the problem of excessive and 
inequitable rail rates.

    Senator Dorgan. Mr. Lee, thank you very much.
    I think because of the time we will have to ask for people 
to submit--you have submitted a statement, we will make that 
entire statement a part of the record. We will keep the record 
open for 2 weeks, if that is satisfactory, and if you submit 
testimony for the record within 2 weeks, it will be, by 
consent, made a part of the record of this hearing.
    Mr. Bobb, thank you for coming on behalf of the railroad, 
in support, rather, of the railroad company, and explaining the 
policies.
    I thank the rest of the witnesses for being here to 
describe your view of things and this, of course, is a 
discussion that will continue and go on for some while.
    My hope is that in the final analysis we will have 
circumstances that exist that all of us would feel represent 
fair rail rates for our customers and North Dakota farmers, 
shippers, country elevators and others.
    First of all, I would say this, we need a railroad in our 
State. If Burlington Northern woke up tomorrow and said, ``By 
the way, we won't run any trains in North Dakota'', we would be 
severely disadvantaged. So we need rail service in North 
Dakota. It must be good rail service, reliable rail service, 
affordable rail service with fair rates; and because we've had 
so much concentration in recent years and we have had prior to 
that substantial deregulation, it is perfectly reasonable for 
us to be talking about what kind of thoughtful regulation is 
necessary in this new era. That's a discussion for a later day 
and will provoke enormous--spark controversy in the full 
Congress. I'm convinced that, we've said it before and we'll 
say it again, it is time--high past time--for us to discuss all 
of these issues.
    So we thank the witnesses for coming and this hearing is 
adjourned.
    [Whereupon, at 3:30 p.m., the hearing was concluded.]

                            A P P E N D I X

               Burlington Northern Santa Fe, April 10, 2002
Senator Byron Dorgan, Chairman,
Subcommittee on Consumer Affairs, Foreign Commerce and Tourism
Senate Committee on Commerce, Science and Transportation,
Washington, D.C. 20510
    Dear Senator Dorgan: Pursuant to your offer to accept submissions 
for the record following the March 27th Commerce Committee hearing in 
Bismarck, North Dakota, I am providing on behalf of Burlington Northern 
Santa Fe Railway the following information. The intent of this 
submission is to clarify several points made in the testimony of 
Southwest Grain, which we believe will provide for a more complete 
hearing record.
    Thank you for this opportunity to submit this information.
            Sincerely,
                                                Steve Bobb,
                                               Group Vice President
                                              Agricultural Products
                                 ______
                                 
   RESPONSE TO SOUTHWEST GRAIN TESTIMONY BEFORE THE SENATE COMMERCE 
    COMMITTEE HEARING ON RAIL TRANSPORTATION PRICING, MARCH 27, 2002

Response to page 3:
    The flat price graph for delivered grain bid prices presented in SW 
Grain's testimony (page 3) is not the relevant measure of grain value 
year over year. Commercial grain transactions are conducted in a hedged 
environment, which is not reflected in SW Grain's graph. Instead, the 
graph (at right) more accurately reflects the Minneapolis basis (bid 
price) and PNW basis (bid price) year over year, which indicates that 
during the differential pricing program, delivery prices at major 
markets remained at a premium to year earlier levels. This is evidence 
that BNSF transportation pricing did not depress delivered grain bid 
prices. These bid prices determine FOB Boyle grain values.

[GRAPHIC] [TIFF OMITTED] T9639.009



Response to page 7:
    The wheat volumes reflected in the graph on page 7 do not appear to 
include harvest movement (Jul, Aug & Sept). When all volumes are 
included, the harvest movement for the Boyle, ND facility in 2002, 
under the present pricing program, is 149% of 2001's harvest movement.

[GRAPHIC] [TIFF OMITTED] T9639.010

Response to page 8:
    With the inclusion of harvest volume (Jul, Aug & Sept Shipments), 
while the differential pricing program was in place, Boyle's volume was 
not adversely affected. A comparison of year over year volume by major 
competing shippers in Southwest North Dakota, both shuttles and non-
shuttles, show year over year growth occurred at ALL of the facilities 
in this region. Southwest North Dakota elevators benefited from greater 
production in the 2001-2002 wheat crop year. Increases in carload 
volumes from all of these stations indicate that significant volumes of 
grain did not leak away from Southwest Grain, as suggested.

[GRAPHIC] [TIFF OMITTED] T9639.011


Response to page 10:
    Lower wheat margins are likely due to increased competition from 
both shuttle and non-shuttle stations in southwest North Dakota as 
demonstrated in Chart 3 above. In fact, two nearby facilities shown in 
the chart achieved shuttle status in early 2001.

                               __________
           Prepared Statement of Linda J. Morgan, Chairman, 
                      Surface Transportation Board

    My name is Linda J. Morgan, Chairman of the Surface Transportation 
Board (STB or the Board). I am testifying at the request of the 
Committee to discuss the Board's jurisdiction over railroad rates. I 
have appeared before this Committee many times over the past several 
years and have discussed at some length matters before the Board, 
including issues relating to railroad rates.
    Rate Regulation in General. Although the Board is charged with 
regulating railroad rates and routings, see 49 U.S.C. 10701(d)(1), 
10704(b), 10707(b), its responsibilities are limited by the statute. 
Historically, customers often directed railroad routings, railroads 
were generally required to charge the same rate regardless of the 
routings a particular shipment used, and the rate regulation of the 
Interstate Commerce Commission (ICC) was pervasive. Through the 
Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act) and 
the Staggers Rail Act of 1980 (Staggers Act), however, Congress ended 
the requirement that railroads provide service and rates over all 
possible routes, and instead gave carriers the discretion to choose the 
routes over which they will provide service, intending to free them to 
maximize their use of efficient routes and to eliminate less efficient 
ones. The 4-R and Staggers Acts also gave railroads more pricing 
freedom and curtailed regulatory rate review. The current statute 
reflects this changed approach and provides for the review of 
complaints about unreasonably high rates under certain 
circumstances.\1\ The current law also prohibits unreasonable 
discrimination (49 U.S.C. 10741), but the prohibition does not apply to 
the cancellation of joint rates, rail rates applicable to different 
routes, or different rates that result from different services.\2\ 
Shippers have not made substantial use of the anti-discrimination 
provision in litigation before the Board.
---------------------------------------------------------------------------
    \1\ Complaining shippers bring cases under the procedures outlined 
below. Shippers are required to pay a filing fee (effective April 8, 
2002, $61,400 for ``large'' rate cases and $6,000 for ``small'' cases), 
which has been a matter of concern to various parties. The Board (and 
the ICC before it), however, has been required for some time by statute 
to cover some of its expenses through filing fee assessments that 
reflect the costs to the Board of handling the various matters brought 
to it.
    \2\ The current law does provide a discrimination-type remedy for 
shippers of agricultural commodities by permitting them to protest an 
agricultural contract given to another shipper on one of two grounds: 
that the protesting shipper has been denied the same terms for 
contemporaneous movements of the same commodity provided under similar 
transportation conditions (in which case the protesting shipper will be 
entitled to receive matching terms), or that the contract with the 
other shipper constitutes a destructive competitive practice. See 49 
U.S.C. 10709(g); 49 CFR 1313.
---------------------------------------------------------------------------
    Market Dominance. The Board may review a rail rate only where the 
railroad has market dominance (that is, where there is an absence of 
effective competition for the transportation to which the rate 
applies), 49 U.S.C. 10701(d)(1), 10707. There are two components to a 
market dominance inquiry. One is, in effect, a quantitative test. The 
statute establishes a conclusive presumption that a railroad does not 
have market dominance over transportation if the rate that it charges 
produces revenues below 180% of the ``variable costs'' of providing the 
service. 49 U.S.C. 10707(d)(1). This 180 revenue-to-variable cost (r/
vc) percentage is thus the floor for regulatory scrutiny.
    For situations in which the 180% threshold is met, the second 
component of a market dominance inquiry involves a qualitative analysis 
in which the STB must determine whether there are any feasible 
transportation alternatives that could be used for the traffic 
involved. 49 U.S.C. 10707(a). Currently, in its market dominance 
determination, the STB considers actual or potential direct 
competition, that is, competition either from other railroads 
(intramodal competition) or from other modes of transportation such as 
trucks, pipelines, or barges (intermodal competition) for the same 
traffic moving between the same points. For many years, the ICC (and 
later the Board) also considered two other types of indirect 
competitive alternatives: geographic competition (the ability to use 
other railroads or modes to ship from or to other locations) and 
product competition (the ability to use other railroads or modes to 
ship substitute products). The STB no longer considers these forms of 
indirect competition because it found that they are unduly complicated 
for the Board to assess, that they prolonged the handling by the Board 
of rail rate cases, and that they discouraged shippers from pursuing 
legitimate rate complaints.\3\
---------------------------------------------------------------------------
    \3\ Market Dominance Determinations--Product and Geographic 
Competition, STB Ex Parte No. 627 (STB served Dec. 21, 1998), pet. for 
reconsideration denied (STB served July 2, 1999), remanded, Association 
of Am. Railroads v. STB, 237 F.3d 676, 679 (D.C. Cir. 2001) (``AAR v. 
STB''), decision on remand, Market Dominance Determinations--Product 
and Geographic Competition, Ex Parte No. 627 (STB served Apr. 6, 2001) 
for judicial review pending sub nom. Association of Am. Railroads v. 
STB, No. 01-1213 (D.C. Cir. filed May 15, 2001).
---------------------------------------------------------------------------
    Large Rate Cases. In cases where market dominance has been found, 
the determination of what is a reasonable rate is not an easy task. It 
would seem that the relatively straightforward way to adjudicate 
reasonableness would be through reference to the cost of service. But 
the full costs of serving each individual shipper cannot be measured 
directly, due to the high degree of shared costs (e.g., overhead costs) 
and sunk costs (e.g., costs for tunnels, bridges, etc.) in the rail 
industry that cannot be attributed to individual traffic. Additionally, 
railroads are not able to price their services based on preset cost 
allocations because they serve a mix of captive and competitive 
traffic, and the competitive traffic would not pay a pro rata share of 
costs assigned by a formula if the resulting rate is any greater than 
the rate for using competitive transportation alternatives. Thus, a 
preset allocation formula would drive away those shippers with less 
costly competitive options, and the remaining captive shippers would 
then have to pay even higher cost-based rates once the departed 
shippers would no longer be contributing to shared costs.
    Accordingly, to limit the rates on captive rail traffic to 
reasonable levels while affording railroads the opportunity to cover 
all of their costs and earn a reasonable profit, the STB uses demand-
based differential pricing principles as contemplated by the statutory 
scheme. In other words, the statute anticipates that the railroads will 
apply differing markups (amounts by which rates exceed variable costs) 
based on the price sensitivity (degree of captivity) of the traffic. 
Shippers with more choices are offered lower markups in order to keep 
their traffic in the rail network and thus minimize the overall 
contributions to the railroads' shared costs needed from those shippers 
with few, if any, choices.
    These pricing principles, which apply in many industries in 
addition to railroads, make determining the reasonableness of an 
individual rate a complex task. Neither attributable costs nor degree 
of captivity (demand elasticity)--the bases for demand-based pricing--
can be measured directly. Therefore, to assess whether market dominant 
rates are reasonable, the Board uses a well-established concept known 
as ``constrained market pricing'' (CMP) whenever possible.\4\ CMP 
principles recognize that, in order to earn adequate revenues, 
railroads need the flexibility to price their services differentially 
by charging higher mark-ups on captive traffic, but the CMP guidelines 
impose constraints on a railroad's ability to price differentially.
---------------------------------------------------------------------------
    \4\ See Coal Rate Guidelines, Nationwide, 1 I.C.C.2d 520 (1985), 
aff'd sub nom. Consolidated Rail Corp. v. United States, 812 F.2d 1444 
(3d Cir. 1987).
---------------------------------------------------------------------------
    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 what a hypothetical new, optimally efficient carrier would 
need to charge the complaining shipper if such a carrier were to 
design, build and operate--with no legal or financial barriers to entry 
into or exit from the industry--a system to serve only that shipper and 
whatever group of traffic is selected by the complaining shipper to be 
included in the traffic base. The ultimate objective of SAC in 
particular, and CMP in general, is to eliminate cross-subsidies from 
one shipper to another and to have optimal efficiency reflected in the 
rate base used to evaluate the reasonableness of rates paid by captive 
shippers. Thus, the SAC test allows railroads to price differentially, 
but it limits rates through the hypothetical efficient new railroad 
model by assuring that a captive shipper not be required to 
unreasonably subsidize a carrier's competitive traffic by being forced 
to bear the costs of any facilities or services from which it derives 
no benefit.
    The Board has used this test to resolve five rate complaints since 
the agency was established at the beginning of 1996 (cases brought by 
West Texas Utilities Company, Arizona Public Service Company, McCarty 
Farms, Inc., FMC Corporation, and Wisconsin Power and Light Company), 
and the test is being used to evaluate the reasonableness of rates in 
several ongoing cases. The Board has also established procedures for 
expediting these cases. While presenting a SAC case is not inexpensive, 
large rail shippers have used it to obtain substantial rate relief. One 
shipper, for example, was awarded over $10 million in reparations for 
past shipments, and obtained a rate prescription that lowered its rate 
for future shipments by 30%.\5\ Another shipper was awarded over $20 
million in reparations and obtained a 40% rate reduction.\6\ The 
parties have reached voluntary settlements in various other large rate 
cases,\7\ while the railroad has prevailed in some cases.\8\
---------------------------------------------------------------------------
    \5\ West Texas Util. Co. v. Burlington N. R.R., No. 41191 (STB 
served May 3, 1996), aff'd sub nom. Burlington N.R.R. v. Surface 
Transp. Bd., 114 F.3d 206 (D.C. Cir. 1997); reparations calculated, No. 
41191 (STB served Oct. 24, 1997).
    \6\ Arizona Pub. Serv. Co. et al. v. Atchison, T.&S.F.R.R., No. 
41185 (STB served July 29, 1997), modified (STB served Apr. 17, 1998). 
More recently, shippers obtained substantial rate relief in FMC Wyoming 
Corp. and FMC Corp. v. Union Pacific Railroad Company, STB Docket No. 
42022 (STB served May 12, 2000) and Wisconsin Power and Light Company 
v. Union Pacific Railroad Company, STB Docket No. 42051 (STB served 
Sept. 13, 2001) (petitions for reconsideration pending).
    \7\ E.g., Potomac Elec. Power Co. v. CSX Transp., Inc., STB Docket 
No. 41989 (STB served June 18, 1998); Sierra Pac. Power Co. v. Union 
Pac. R.R., STB Docket No. 42012 (STB served July 15, 1998); 
Pennsylvania Power & Light Co. v. Consolidated Rail Corp., et al., No. 
41295 (STB served May 13, 1999); PSI Energy, Inc. v. CSX Transp., Inc., 
et al., STB Docket No. 42034 (STB served May 13, 1999); Northern 
Indiana Public Service Company v. Consolidated Rail Corporation, STB 
Docket No. 42027 (STB served Nov. 28, 2001).
    \8\ E.g., McCarty Farms, Inc. v. Burlington N., Inc., Nos. 37809 et 
al. (STB served Aug. 20, 1997), modified (STB served May 11, 1998), 
aff'd sub nom. McCarty Farms, Inc. v. STB, 158 F.3d 1294 (D.C. Cir. 
1998); Bituminous Coal--Hiawatha, UT to Moapa, NV, 10 I.C.C.2d 259 
(1994).
---------------------------------------------------------------------------
    Small Rate Case Simplified Guidelines. Although the CMP guidelines 
provide the most economically authoritative procedures for evaluating 
the reasonableness of rail rates, CMP can be impractical to use where 
the amount of money at issue is not great enough to justify the expense 
of such an evidentiary presentation. In the ICC Termination Act of 
1995, Congress directed the Board to develop a simplified, alternative 
procedure to CMP. 49 U.S.C. 10704(d). Accordingly, in December 1996, 
the Board adopted simplified guidelines that employ three revenue-to-
variable cost benchmarks as starting points for a case-by-case rate 
reasonableness analysis. Subsequently, the Board adopted procedures for 
expediting those cases. Although the evidence needed to use these 
benchmarks is available and inexpensive to obtain, no complaint cases 
have been filed by shippers seeking application of these guidelines, 
and the one case already pending to which these guidelines would have 
been applicable was settled by the parties. The customer community 
remains concerned that this process is still too burdensome.\9\
---------------------------------------------------------------------------
    \9\ To address this continuing concern, the Board recently issued a 
decision seeking comment on the idea of legislation mandating the use 
of arbitration to resolve these small rate cases. Arbitration--Various 
Matters Relating To Its Use As An Effective Means of Resolving Disputes 
That Are Subject To The Board's Jurisdiction, Ex Parte No. 586 (STB 
served September 20, 2001).
---------------------------------------------------------------------------
    Summary. The statute that the Board administers assumes that the 
railroads will price differentially, that is, price depending on market 
sensitivity. At the same time, the law is intended to ensure that, 
while customers may pay different rates, no customer will pay a rate 
that includes an unreasonably high share of the railroad's overall 
costs.

                               __________
    Response to Written Questions Submitted by Hon. Byron L. Dorgan 
                           to Linda J. Morgan

    Question 1. The March 27 hearing focused to a large extent on the 
inverse export wheat rates of BSNF; that is, rates to the west coast 
which are lower from certain points in eastern North Dakota or western 
Minnesota than from points in western North Dakota or Montana, even 
though the rail line that carries the cheaper eastern wheat passes 
through the communities, or over main lines just a short distance from 
the communities, where there is wheat that could have been shipped to 
the west coast but for the inverse rate structure.
    Your testimony points out that ``current law . . . prohibits 
unreasonable discrimination (49 U.S.C. 10741), but the prohibition does 
not apply to the cancellation of joint rates, rail rates applicable to 
different routes, or different rates that result from different 
services,'' and you observe: ``Shippers have not made substantial use 
of the anti-discrimination prohibition in litigation before the 
Board.''
    A. Do you think that the anti-discrimination provision was or is 
available to wheat shippers who believe they were injured by the BNSF 
inverse rates in North Dakota?
    B. Would the inapplicability of that remedy to ``different routes'' 
be likely to defeat a discrimination claim?
    C. If you think the answer to the latter question is affirmative, 
then, where all of the rates and routes involved are under the control 
of the same carrier, would you see any substantial harm in changing 
section 10741 so that it would be inapplicable to different carriers, 
rather than different routes, bearing in mind that the defendant 
carrier could still defend by arguing that the rate disparity was due 
either to different services provided under the different rates, or for 
performing services that are not ``like and contemporaneous'' or 
applicable under ``substantially similar circumstances''?
    Answer. I am not in a position to attempt a definitive answer to 
the first two parts of your question, as it could prejudge an issue 
that could come before the Board in a formal proceeding. However, it is 
virtually certain that, if such a complaint were brought, the railroad 
would raise as a defense the argument that the anti-discrimination 
remedy is expressly precluded by the statute because the services at 
issue involve different routes. That, I suspect, is why a formal 
complaint has not been brought before the agency by North Dakota wheat 
shippers.
    Changing the statute by repealing the categorical exclusion of a 
discrimination remedy for services over different routes, as you 
suggest in the third part of your question, would not completely 
foreclose a carrier from defending itself in a discrimination case: a 
carrier could still prevail by showing that the services or 
circumstances at issue are not similar, and thus that the different 
rate treatment is not unlawful. Whether or not such a statutory change 
would be harmful depends upon the interest that is being considered. 
The existing statutory scheme reflects a delicate balance of competing 
interests. Certain statutory changes could upset that balance, and 
could restrict the ability of rail carriers to respond to market 
forces. This, in the long run, might reduce the revenues flowing into 
the rail network to cover capital needs and have a negative effect on 
the service to be provided overall.
    Question 2. Your testimony also reviews the methods available for 
challenging unreasonably high rail rates. You observe that there is a 
``simplified, alternative procedure'' but that it has not been used and 
that rail customers remain concerned that even the simplified procedure 
is still too burdensome. You note that, to ``address this continuing 
concern, the Board recently issued a decision seeking comments on the 
idea of legislation mandating the use of arbitration to resolve these 
small rate cases.''
    As you know, one of the criticisms leveled at the ``simplified'' 
procedure is that the three ``benchmarks'' it relies upon appear 
destined to produce a maximum reasonable rate well in excess of 200% of 
variable cost--some say in the vicinity of 240% of variable cost--while 
the stand-alone methodology, utilized in large volume cases, is capable 
of achieving a maximum rate as low as 180% of variable cost.
    A. Do you agree that the simplified methodology is likely to result 
in a maximum rate that is higher than 200% of variable costs or, in 
general, higher than the lowest maximum reasonable rate obtainable 
under the stand-alone methodology? If so, why should one of the Board's 
recognized rate case methodologies be more likely to produce a higher 
maximum reasonable rate than the other methodology?
    B. If an arbitration system either relies on or allows the use of 
existing maximum rate case methodologies, won't arbitration virtually 
compel shippers in cases suitable for arbitration to engage in the 
costly proofs required under the Board's litigation methodologies or 
run the risk of being overwhelmed by railroad arbitration presentations 
that rely on approved methodologies?
    Answer. A. The simplified maximum rail rate procedure, like the 
stand-alone cost (SAC) methodology, was designed to give effect to all 
of the considerations that the statute directs the agency to consider 
in rail rate cases. As we do not have much experience in applying the 
simplified guidelines, I cannot project the range of results that the 
methodology would likely produce. But even if the simplified 
methodology did produce ratios above 180%, comparing a small rail rate 
case to a case involving high-density rail movements of a commodity 
such as coal does not seem to me to be a valid exercise. The stand-
alone methodology is designed to determine the lowest cost at which a 
hypothetical, efficient railroad could provide the transportation 
service needed by the complaining shipper. High-density coal movements, 
which have been the subject of most of the SAC cases handled by the 
agency, tend to produce efficiencies of scale that in many cases would 
not likely be generated by the traffic associated with a small rate 
case. Thus, under the economic principles underlying the statute that 
the Board administers, it would not be surprising or inappropriate if 
the rates set in a coal case were lower than those that would be set if 
the SAC methodology were applied to the traffic involved in a small 
rate complaint.
    B. Although we do not believe that the small rail rate case process 
need be particularly burdensome, it is true that an arbitration system 
based on SAC could involve elaborate presentations comparable to those 
currently made before the Board. With this concern in mind, if Congress 
decided to adopt an arbitration remedy, it could prescribe a standard 
other than those currently used by the Board. If it proceeds along 
those lines, however, whatever standard or approach is adopted should 
recognize that most railroad traffic is competitive, and that if rates 
on captive traffic are held down too far, carriers will not be able to 
meet their capital needs or make appropriate investments in their 
facilities.

                               __________
 Supplemental Testimony of North Dakota Grain Dealers Association and 
                Alliance to Keep Rural America on Track

    Assertions by BNSF Railway that it is trying to keep North Dakota 
farmers more competitive are directly contradicted by the extremely 
high revenue to variable cost ratios on wheat movements from this state 
documented in the testimony of the Upper Great Plains Transportation 
Institute. These ratios also undercut the relevancy of BNSF's claim 
that rail rates have declined. Shippers have provided investments to 
make themselves and the railroad more efficient. Railroads have trimmed 
their labor force, abandoned unprofitable track and spun off other 
pieces of track to short lines. This has further reduced their costs. 
When comparing costs, we learn that rates should have declined more, to 
below their current levels.
    BNSF's claimed on-time performance percentages do not fit with 
customer reports. The measurement of what is ``on-time'' is not 
disclosed in the BNSF testimony. At times in the past it has been plus 
or minus one business day for some kinds of service, and more for other 
kinds of service. Accurate prenotification of car deliveries and timely 
pick-up of loads remain unpredictable.
    Comments from Mr. Steve Bobb of BNSF that are now on the record 
document that BNSF consults with very few of its customers before 
making huge changes in rate structures that dramatically affect volume 
handled by many elevators on its system. This is manipulative and 
designed to favor a few at the expense of the many.
    Some of the numbers BNSF uses are not representative of what is 
going on most of the time. Here is a description from an elevator 
manager regarding Table I on page 12 of Mr. Steve Bobb's testimony:
    An example is given comparing 52 car shipments of wheat from 
Eldridge to Minneapolis and 110 car trains of wheat from Jamestown to 
the PNW. The comparison is how the two types of shipments would relate 
on a FOB basis. The example picked July 26, 2001 for comparison 
purposes.
    Two things are very notable in this comparison. First, July 26, 
2001 was definitely a date hand-picked in an attempt to show the least 
differential. The basis to Minneapolis and the PNW on this date were 
the narrowest they had been for some time. Both prior to that date and 
also after that date the basis was wider, favoring the PNW.
    Second, these comparisons are using tariff rates and it is well 
known that Jamestown has an inverse rate for 110 car shuttles of wheat 
to the PNW. On July 26,using Jamestown's inverse rate, they would have 
a 13 cent advantage on a FOB basis instead of the 2 cents that is shown 
in Steve Bobb's testimony. This advantage of Jamestown over Eldridge 
was 19 cents on July 5 and quickly widened back to 19 cents by 
September 4 and 21 cents by October 1.
    No allowance is factored in for the origin and destination 
efficiency payments that the BNSF offers for participation in their 
shuttle train programs. These payments can be as much as $300/car, 
another 8 cents per bushel. None of these car credits are available to 
less than shuttle train loading elevators.
    Mr. Steve Bobb states that railroads must have flexibility to meet 
market conditions. This is code language for changing rates and service 
policies on very short notice for the railroad's benefit, with little 
concern for how it affects their shipping customer and the investments 
those customers have made on or adjacent to railroad property in order 
to give the railroad more business.

                               __________
             Prepared Statement of North Dakota Farm Bureau

    Thank you Senator Dorgan, Chairman Hollings and the entire Senate 
Commerce Committee for the opportunity to present our views on railroad 
shipping rates. North Dakota Farm Bureau is a member of the Alliance to 
Keep North Dakota on Track, and as such we are very disturbed and 
concerned about the pricing practices of the Burlington Northern-Santa 
Fe Railroad.
    North Dakota farmers produce some of the best quality small grains 
and row crops in the nation. However, we do not receive premium prices 
for our products in part due to the tremendous costs we incur in 
shipping our goods to market. We are at a competitive disadvantage 
because of our distance from the markets. That is a fact of life that 
we must accept. We are also disadvantaged because there is no 
competition for delivery of our goods. We are a captive supplier, held 
hostage to the pricing policies and railcar distribution practices of 
railroad companies. It is those policies and practices that we cannot 
accept.
    An inverse pricing structure that provides eastern North Dakota and 
western Minnesota elevators cheaper rail rates to the west coast 
markets than comparable elevators in western North Dakota is blatantly 
unfair. As we see it, there are two reasons for BNSF to employ this 
practice. First, there is competition for the business in those eastern 
locales. The western elevators have only one choice. The second reason, 
we believe, is that BNSF is positioning grain facilities that are most 
efficient for the railroad. By selectively choosing which elevators 
they want to survive and then providing incentives to those elevators 
and their customers, BNSF can dictate where commodities will be 
delivered.
    Currently, some producers are benefiting from BNSF's practices. If 
you happen to be lucky and are located close to one of the ``chosen'' 
elevators, you will probably receive more for your product than farmers 
at more distant locations. Also, those distant farmers have the added 
expense of hauling their product to the elevator. As stated, there may 
be some price advantage to the producers right now. But what happens 
after local elevators close and your only option is to haul great 
distances to market your product? Incentives will no longer be needed 
to insure product delivery and shipping costs will rise. Nearby 
producers will no longer receive a premium, and the distant farmers 
will still have the hauling costs.
    What impact will this scenario have on the North Dakota road 
infrastructure as more grain is hauled more miles on highways and 
secondary roads? They will require more maintenance and more tax 
dollars. At the Senate Budget Field Hearing conducted by Senator Conrad 
on February 20, 2002, there was talk of increased taxes being needed to 
offset fewer Federal highway funds. We can see this being compounded by 
the decisions of the railroad company. It won't be just the farmers 
that are negatively impacted. It will be every taxpayer in the state.
    Public awareness of the inequities in freight rates and the 
detrimental effects they have on our economy is vital in getting 
changes made. We believe it is prudent that this committee contact 
other states regarding freight rates and incentive programs to find out 
what the situation is and what potential solutions there may be. We 
encourage you to continue researching this issue.
    Thank you for your consideration of our concerns.

                               __________
   Prepared Statement of Jim Christianson, Executive Vice President, 
                   Montana Wheat and Barley Committee

    Senator Dorgan, the grain producers in Montana ask your indulgence 
to permit our intrusion into a hearing that we know was intended for 
the citizens of North Dakota. But, the rail transportation problems 
that North Dakota faces are identical to those confronted by your 
state's neighbors to the west, most certainly including Montana.
    The United States railroad industry has become more and more 
concentrated throughout the last 20 years. Large areas of our states, 
and the United States as a whole, have industries that are captive to a 
single railroad. Industries such as grain, coal, chemicals, forest/
paper products, and manufacturing, are suffering as they try to compete 
in a world market, but with a major component of their cost structure 
being dictated by the rail transportation industry.
    States' economies are integrally tied to the need for competitive 
transportation service. In order for our industries to prosper, it is 
essential that efficient, capable and competitive rail transportation 
be available in order to move products to a position that will create 
wealth for all.
    The Burlington Northern Santa-Fe (BNSF) has recently instituted 
inverse rate structures on wheat moving from western Minnesota and 
eastern North Dakota to the Pacific Northwest. The BNSF is charging 
higher rates for shorter distance transportation services to export 
destinations than longer distance services over the same routes. A 
point 1600 miles from Portland has the same freight rate as a point 
eight hundred miles from Portland. This practice provides preference to 
the eastern rail customers that have competition over those in the west 
who do not, destroying traditional marketing patterns. Inverse rate 
structures are glaring examples of how railroads are unfairly able to 
discriminate in their captive rail customers' areas.
    Inverse rate structures and the injustice created through 
discriminative practices are grounded in the lack of competition within 
the U.S. railroad system. The effect of the inverse rate structures has 
been documented throughout western grain markets. Cash prices paid to 
farmers at those elevators impacted by inverse rates immediately 
dropped the moment inverse rates were announced. Our states cannot be 
put at a disadvantage due to transportation monopolies that contribute 
to making the United States a residual supplier of goods and services 
to the world.
    After a multitude of rail mergers since 1980, today over 95 percent 
of the U.S. rail industry's gross ton miles are controlled and 
dominated by only four railroads. This nation's output industries have 
a growing concern about monopolistic railroad behavior in both pricing 
and service. They, and we, face deterioration in service performance, a 
decrease in rail transportation choices among major industries and 
inadequate regulatory protection from monopolistic behaviors. Value-
added economic development efforts by State and local governments are 
virtually not possible with these railroad monopolies pricing inbound 
and outbound commodities.
    All farmers, regardless of geographic location, need the U.S. rail 
industry to provide competitive rail service, and inverse freight rates 
are a symptom of the railroad industry's arrogance, not to mention a 
disservice to us all. If the rail industry is not capable of providing 
competitive transportation services at equitable rates, then, together, 
we must ask the Congress to intervene on our behalf.
    Senator Dorgan, on behalf of Montana farmers, thank you for your 
proven concern and attention to this important issue.
  

                                  
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