[Senate Hearing 107-1112]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 107-1112
 
                       RAILROAD SHIPPER CONCERNS

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

                                HEARING

                               before the

       SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE

                                 of THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 31, 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
                                 ------                                

       Subcommittee on Surface Transportation and Merchant Marine

                  JOHN B. BREAUX, Louisiana, Chairman
DANIEL K. INOUYE, Hawaii             GORDON SMITH, Oregon
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
RON WYDEN, Oregon                    OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia                 SAM BROWNBACK, Kansas
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JEAN CARNAHAN, Missouri              JOHN ENSIGN, Nevada
JOHN EDWARDS, North Carolina
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held July 31, 2002.......................................     1
Statement of Senator Allen.......................................     7
Statement of Senator Breaux......................................     1
    Prepared statement...........................................     2
Statement of Senator Dorgan......................................     5
Statement of Senator Rockefeller.................................     3
Statement of Senator Smith.......................................    16
    Prepared statement...........................................    16

                               Witnesses

Huval, Terry, Director, Lafayette Utilities System...............    72
    Prepared statement...........................................    74
Morgan, Hon. Linda J., Chairman, Surface Transportation Board....     9
    Prepared statement...........................................    11
Platz, Charles E., President, Basell North America Inc...........    57
    Prepared statement...........................................    59
Schwirtz, Mark W., Senior Vice President and Chief Operating 
  Officer, 
  Arizona Electric Power Cooperative, Inc........................    28
    Prepared statement...........................................    30
Snow, John W., Chairman and CEO, CSX Corporation.................    79
    Prepared statement...........................................    82
Strege, Steve, Executive Vice President, North Dakota Grain 
  Dealers 
  Association....................................................    45
    Prepared statement...........................................    47
Williams, Dennis, Manager of Transportation Services, Roseburg 
  Forest 
  Products.......................................................    32
    Prepared statement...........................................    34

                                Appendix

Borne, Dan S., President, Louisiana Chemical Association, 
  prepared statement.............................................    98
Burns, Hon. Conrad, U.S. Senator from Montana, prepared statement    93
Carolina Power and Light Company, prepared statement.............   100
Duff, Diane C., Executive Director, Alliance for Rail 
  Competition, Inc., prepared statement..........................    93
Entergy Services, Inc., prepared statement.......................   104
Letter dated July 30, 2002, submitted by Gerard J. Donnelly, 
  Global Director, Logistics, to Hon. John B. Breaux.............   103
Louisiana Energy and Power Authority prepared statement..........   111
Minnesota Power prepared statement...............................   112
Western Coal Traffic League, prepared statement..................   113


















                       RAILROAD SHIPPER CONCERNS

                              ----------                              


                        WEDNESDAY, JULY 31, 2002

                                       U.S. Senate,
Subcommittee on Surface Transportation and Merchant Marine,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:45 a.m. in 
room SR-253, Russell Senate Office Building, Hon. John B. 
Breaux, Chairman of the Subcommittee, presiding.

           OPENING STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. All right. We will now take off the 
maritime hat and begin our hearing on the railroad shipping 
interests. I will have a brief opening statement, and then we 
will proceed with our witnesses.
    The Committee is here today to complete a series of three 
hearings. This is the third of a series on the state of the 
railroad industry. Today's hearing will explore whether the 
current regulatory process is adequate to ensure that the 
railroads do not act in an anticompetitive manner, to the 
detriment of railroad shippers.
    These concerns are not new. Railroad regulation dates back 
to the enactment of the original Interstate Commerce Act back 
in 1887, which created the Interstate Commerce Commission to 
regulate the practices of railroads operating in interstate 
commerce. Though much has changed in the industry since then, 
the primary interests at stake have not.
    The issues here are complex. As I see it, we have two 
objectives that we need to achieve. On one hand, the Government 
needs to ensure the stability and growth of the Nation's 
economy through maintaining a healthy freight railroad 
industry. For instance, as early as the mid-1900's, in order to 
populate the West and harvest the resources of the western and 
Great Plains States, the Federal Government and the State 
governments provided land grants and subsidies to railroads to 
help them build the infrastructures. These actions reflect the 
importance of railroads to the Nation's economic development, 
and also recognize the importance of the Federal Government 
that we place on freight railroads.
    On the other hand, these same policies that help stimulate 
development of the railroad system in our modern economy also 
resulted in the railroads becoming the dominant mode of freight 
transportation in certain areas of the Nation. Because of the 
efficiencies they are able to realize, some railroads 
essentially are monopolies in the transportation of bulk 
commoditiee with no competition from other modes of 
transportation that provided efficient and effective 
alternatives such as barges or pipelines.
    Just as with any monopoly, the Government has a legitimate 
role to step in to regulate to ensure that market power is not 
abused in such cases. The same tensions and battles that 
existed over 100 years ago still exist today, and from time to 
time we need to evaluate the effectiveness of our methods for 
balancing these two objectives, whether through regulation or 
through private sector dispute resolution, or some method 
combining the two.
    In 1980 we deregulated an admittedly financially unhealthy 
railroad system, and provided the railroads with greater 
flexibility in the provision of service and price. At that 
time, there were 40 Class I railroads operating in the United 
States. Today, there are eight Class I railroads.
    I doubt any of our witnesses will contest that it is in our 
Nation's interests to have a healthy and viable system of 
freight railroads. I am a strong believer in competition, but 
in order to have competition, you have to have competitors.
    We are here today to hear from rail shippers in particular 
to determine whether our current policies about railroad 
regulation are effective. I believe in marketplace competition, 
but in the absence of effective marketplace competition the 
Government has a legitimate role in seeing that everyone is 
treated fairly. With that, I would recognize our distinguished 
Chairman.
    Mr. Chairman, this is our third hearing on the question of 
railroad rates.
    [The prepared statement of Senator Breaux follows:]

 Prepared Statement of Hon. John B. Breaux, U.S. Senator from Louisiana
    Good morning. Today's hearing will complete a series of three 
hearings that this Committee has held on the state of the railroad 
industry. The purpose of today's hearing is to explore whether the 
current regulatory process is adequate to ensure that railroads do not 
abuse their market powers to the detriment of railroads shippers, and 
ultimately to our economy. While we are here today to primarily hear 
from the customers of the railroad, we must also keep in mind, that it 
is in the best interests of all concerned that this nation have a 
healthy railroad system.
    This is not a new issue. In fact, the same regulatory issues the 
Committee will explore today date all the way back to the enactment of 
the original Interstate Commerce Act in 1887 which created the 
Interstate Commerce Commission to regulate the practices of railroads 
engaging in interstate commerce. An action that was approved by this 
Committee, I might add. Through time, railroads and their shippers have 
sat through hundreds of hearings, if not thousands of hearings, all 
pleading their cases for; a fair process, a fair way of regulating 
against abuse of power, for the proper degree and provision of service, 
or for proper returns on investment. So, our witnesses here today 
follow a long tradition of concerned carriers and shippers, and all 
manner of experts in the field of transportation. Essentially, the 
times and the equipment used in rail transportation have changed, while 
the issues have not markedly changed since the 1800's when the federal 
government first grappled with the same issues we will consider today.
    This is a difficult issue because we have two principal objectives 
to balance. First, the government, rightly, wants to stimulate the 
growth and expansion of the railroad industry to spur economic growth 
and expansion throughout the entire country. For instance, in the mid 
1800's, in order to populate the west and harvest the resources of the 
western and great plain states, the federal and state governments 
provided land grants and subsidies to construct railroad lines. The 
construction of these railroad lines was crucial to the development of 
our nation and to emergence as an international economic power. Not 
only did these policies lead to the population of the west and 
development of agricultural and other natural resources, but it helped 
to stimulate the development of an industrial economy mobilized to 
process and manufacture these western shipments arriving by rail.
    The same policies that helped stimulate development of the rail 
system and our economy, and resulted in the railroads becoming a 
dominant mode of transportation, also created a dependance on railroad 
service, and a need to regulate railroad behavior to protect against 
abuse of power. Because of their efficiency and the ability to lay 
track through varied terrains, railroads effectively have monopolies in 
the transportation of large volumes of bulk commodities in certain 
areas, and entire regions dependant on the production of these bulk 
commodities were captive to the railroad. The government had to step in 
to regulate those railroads that did not have competition from other 
alternative modes of transportation, such as barges or pipelines, to 
make sure that they did not abuse their position of power.
    That same tension that existed over 150 years ago or 100 years ago, 
in the days of JP Morgan, James Hill and Jay Gould, still exists today. 
However, while the tension is the same, it is incumbent that we 
evaluate the state of competition given the current system of rail 
service that exists. We have to evaluate the need for regulation based 
on the state of competition in the industry. My predilection is 
ordinarily to support competition, and to oppose the mandate government 
intrusion into commerce, however, if the competition is of such a 
limited nature or quality--I firmly believe that the government has a 
right, if not an obligation, to take steps to prevent abuses that 
result from the lack of competition.
    In 1980, we deregulated an admittedly unhealthy and over-regulated 
railroad system, and provided railroads with greater flexibility in 
providing services and determining price. In 1980, there were 40 Class 
I railroads operating in the United States, today there are 8 Class I 
railroad systems.
    I strongly believe that it is in our nation's interest to have a 
healthy and viable system of railroads. However, today we will hear 
from shippers in particular, to determine whether the degree of 
railroad concentration and power is too great, and to determine whether 
the existing regulatory structure includes sufficient protections to 
ensure railroads do not use their position of market dominance at the 
expense of our country's economic health. Recently I received a letter 
signed by hundreds of shipper CEO's stating that there is a problem 
with the existing regulatory structure. Today, I hope we can discuss 
possible solutions. I look forward to this morning's testimony.

    Chairman Hollings. And Mr. Chairman, I appreciate your 
leadership, and particularly this hearing. I have another 
commitment and need to duck back upstairs. I just want to 
commend Linda Morgan, the Chairman of our Surface 
Transportation Board. She served for many, many years as the 
general counsel of our Committee here, and when she got this 
particular post I knew she would do a good job, but I did not 
know she would satisfy everybody. I do not know how you satisfy 
everybody in this town, but I think she has done an outstanding 
job, and I appreciate the task and the job and the leadership 
that she has given to the problems of surface transportation.
    Thank you very much.
    Senator Breaux. Thank you, Mr. Chairman. We all echo that 
sentiment. Ms. Morgan, do you want to respond to your Chairman?
    Ms. Morgan. Just to say thank you very much, Mr. Chairman, 
and you showed me how to do it right, so I am just following 
your lead.
    Senator Breaux. Senator Rockefeller, any opening statement?

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Yes, Mr. Chairman, and I was moved by 
the exchange. I have somewhat of a difference regarding whether 
or not, Linda Morgan, you satisfy everybody, and we will go 
into that in the questioning period, but I just wanted to say--
--
    Ms. Morgan. I certainly would not argue with the Chairman 
on that.
    [Laughter.]
    Senator Rockefeller. I know.
    [Laughter.]
    Senator Rockefeller. And that has sort of run through these 
years just a bit.
    Obviously, Chairman Breaux, I am happy that we are doing 
this. The STB determines the major players in the rail industry 
are not revenue adequate, has for years. I will have questions 
of them, as I will of you, Chairman Morgan, about all of this.
    This industry, the railroad industry, is incredibly 
important to the State of West Virginia. I do not know of 
anybody in this building or in this town who cares more about 
railroads and what they do, both being good and efficient, as 
well as being responsive, than I do. I think that has been the 
case now for some 18 consecutive years. What they are doing to 
many shippers in my State and Senator Dorgan's State and all of 
our States is using what I would call regional monopolies, 
based upon the fact, as the Chairman said, that they have gone 
from 50 Class I railroads, I would say to five, he would say to 
eight. It does not really matter. It is a strong reduction, and 
they are using those monopolies to gouge their customers. I do 
not know of any other way to put it. I tried to think of a 
nicer term, but I could not. By extension, therefore, this 
impacts every single customer that they serve, in the country, 
where there is not competition involved in the railroad line.
    There are some who say that my goal is to re-regulate the 
railroad. That is so ludicrous. My goal has always been simply 
to carry out the purposes of the Staggers Act, which was very 
clear. It has never been to re-regulate. If I wanted to re-
regulate, there could be all kinds of other things that I and 
others could do. I am not interested in doing that.
    If I had to start all over again, knowing what has happened 
in the intervening years, and had I been in the Senate, in the 
Congress when the Staggers Act was passed, I do not think I 
would have voted for it knowing what I now know. I did not know 
that there was not going to be a focus on small shippers and 
large shippers, and I notice in the meeting this morning we 
have smaller shippers. We do not have large shippers. But I am 
interested in both railroads and I am interested in shippers, 
and I want that to be clear to all present.
    The railroads are always seeking to merge, and they always 
promise better service, and it does not come to the people that 
I am concerned about, and I think I have a right, in sincerity 
and a sense of honor, to be worried about that 20 percent of 
the shippers of this country which are not served by 
competition. That is a lot of people. That is a lot of jobs. We 
do a lot of things to try to help people. We undo a lot of 
things by not, in my judgment, at least enforcing this Staggers 
Act aspect. I would just say that when the system runs the way 
it appears to have been running for all these years, I think 
that everybody loses. Even the railroads I think lose, because 
if you have to use monopoly power against the shippers, they 
then suffer financially, and of course no group suffers more 
than the consumers at the end of the line, because they have to 
pay too much.
    It strikes me as sort of incontrovertible logic, and we 
have been through a lot of things. I will not go through some 
of the things we have been through before during our 
discussions this morning, but I am kind of stunned by the last 
18 years. I understand some of the relationships and politics 
and all the rest of it, but I really do think about hundreds of 
thousands of shippers in this country. I really do think about 
the mergers. I really do think about the service.
    I think about what happened out West of the Mississippi 
when they had that foul-up, and the problem of Norfolk Southern 
and CSX in splitting up Conrail, two different cultures, what 
has happened to coal, steel, granaries, all the rest of it. It 
is a very serious subject. It has not been addressed under your 
tenure, Chairman Morgan, in my judgment. It has not been 
addressed by the Congress, and I regret that.
    Mr. Chairman, I thank you.
    Senator Breaux. Thank you, Senator. Senator Dorgan, any 
comments?

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

    Senator Dorgan. Yes, Mr. Chairman. Thank you very much.
    First of all, we appreciate this hearing. You made a 
commitment to have this hearing and are keeping that 
commitment. My hope is that we will also get a commitment to 
move legislation in this Congress. We are almost out of 
patience, those of us who have been waiting a long, long while 
to try to move some legislation.
    Part of the reason we want legislation moved is, Ms. Morgan 
has told us that she does not have the authority to do all that 
Senator Rockefeller, myself, and others would want her to do. I 
do not know whether that is the case. I have not had a battery 
of lawyers study all that. Some of what has happened at the 
STB, such as the decision by the STB for a moratorium, I 
supported. I thought that was gutsy. That was a moratorium on 
mergers. They took a step that I think was aggressive.
    In other areas, as Ms. Morgan knows, I have been less than 
enthused, because I would like a regulatory body to be 
aggressive and active, and trying to find as much ability as 
they can to use the authority that exists to try to write the 
wrongs.
    Mr. Chairman, I have long had a fascination with railroads 
and trains. I grew up in a town of 400 people, and when the 
train whistle blew in our town we knew that the train called 
the Galloping Goose was going to come through our region. It 
was going to stop and pick up cream cans. I mean, it stopped at 
the cream station, and the Galloping Goose would come, pick up 
cream, and away it would go. It was a big deal. I mean, when I 
was a kid my eyes were the size of dinner plates when that 
train would come through. I liked watching that train. I have 
always had a fascination with trains.
    But as I grew up and understood what is going on with 
respect to trains and railroads in this country, it is clear to 
me that what has happened is, we passed the Staggers Act and 
through a whole series of things we now come to a country with 
essentially two railroads on the west side and two railroads on 
the east side that command most of the traffic and most of the 
activity, and the fact is, when you have fewer participants, 
you have less choice.
    When you have less choice, you have less price competition. 
Less price competition means that those who are captive 
shippers are held captive by those who want to extract prices 
that are unfair, and that is why we have been left with 
deregulation that gives us regional monopolies who can, and do 
use their muscle to price in ways that are unfair.
    I think it would be interesting to tell you about a hearing 
I held in Bismarck, North Dakota. North Dakota is a big state. 
It is ten times the size of Massachusetts. There is a farmer 
that lives near Dickinson, North Dakota, which is on the west 
side of the State. We have a railroad serving our state, 
Burlington Northern, a big old carrier that serves our state. 
They decided to impose what was called inverse rates, inverse 
rail rates. It was rates that they devised for certain areas of 
the state, and our grain elevators protested it and farmers 
protested it. They thought it was unfair.
    Let me tell you the example of what inverse rate pricing 
did for one farmer in Dickinson. That farmer put his grain on a 
truck from Dickinson and moved it 160 miles east, 160 miles 
east, and he made 50 round trips, put 16,000 miles on his 
truck, to load the grain 160 miles east of his farm, and then 
the train with his grain came right back through his farm on 
the way to the West Coast.
    Why did he do that? Because of inverse pricing, inverse 
rates, the railroad said, ``here is what we charge, do not like 
it, tough luck, there is not a thing you can do about it.'' 
Now, they have made some alterations just in the last month on 
that, and good for them, but my point is, that farmer thinks 
that this strategy is just nuts, and injures him. It injures 
those who are captive shippers, and ought not be allowed to 
stand. That is just one example, and there are so many others.
    If you are shipping wheat from the middle part of North 
Dakota to the Pacific Northwest, as opposed to shipping it from 
Grand Island Nebraska, we are 400 miles closer, but we will pay 
$1,000 more per car. If you are shipping to the Gulf of Mexico, 
we will pay $1,700 surcharge per car. If you are shipping corn, 
it is $500 cheaper to ship it from Iowa to the Northwest, which 
is much further, than to ship it from North Dakota to the 
Northwest. Why? Because that is what the railroads say they are 
going to do, and if you do not like it, tough luck.
    Try getting a rate case through a regulating body. I mean, 
it has changed a bit, but the fact is, it is expensive, almost 
impossible, and if you are very lucky your great-great-
grandchildren will be around to see the result.
    So you know, what we are trying to do is say, let us even 
the odds a bit. The market system works when you have 
competition. There is limited competition here, monopoly 
pricing. Railroads use their muscle to extract prices they 
choose to extract, and you know, we think we need to even up 
the odds. We need to have regulators who regulate. They need 
the authority to regulate effectively, and we need legislation 
of the type that we have talked about, the Rail Competition 
Enforcement Act, which takes away the special status the 
railroads enjoy by being the only industry whose mergers are 
not subject to Justice Department review, and then the second 
bill, called the Railroad Competition Act, which is a bit more 
complicated, but is critically needed, in my judgment.
    Now, having said all of that, let me also end as I began. 
This is not just about wheat. It is about people that ship 
chemicals and coal and so many other commodities, and it is 
about people on Main Street and on America's farms who have to 
pay that shipping cost, a cost that in many ways is now applied 
in a very unfair way.
    You can make a case, as some will, that rail rates have 
actually come down in some areas. Yes, that is true. That is 
certainly true, and I concede that. It is also true that in 
areas where you have monopoly service, prices have gone up, up, 
way up in a terribly unjustified way.
    So, Mr. Chairman, I must say a lot of us are nearly out of 
patience on this issue. We have been struggling for a long, 
long time just to take a baby step forward, and we have not 
made much progress, because there are a lot of bodies blocking 
the way. What is happening in this country with rail rates is 
fundamentally unfair to a lot of small businessmen and women, 
family farmers and other shippers. We have a responsibility, 
working with the regulators, to change it.
    Thanks for your indulgence. I took more time than I 
expected, but I think it is very important.
    Senator Breaux. Thank you, Senator. I know your interest in 
this matter.
    Senator Allen from Virginia.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. I thank you for 
calling this hearing to discuss the state of freight railroad 
transportation in our country. I am pleased that you are 
focusing on this issue. I am not a member of the Subcommittee, 
but have a keen interest in this matter as do, I think, all 
Americans, in that we recognize the railroads play a vitally 
important part of our economy.
    As was stated by Senator Dorgan, it is not just about wheat 
and grains. About 50 percent of everything that we consume or 
use, whether it is automobiles, equipment, chemicals, and 
Senator Rockefeller knows coal in particular, are transported 
by rail. When one considers railroads and how important they 
are to our economy, he also recognizes that they are 
environmentally friendly. It is an efficient way of 
transporting all goods and products, and it thereby makes us 
less dependent on foreign oil. When you consider the hauling of 
coal, that means rail is fueling our main source of electricity 
as well.
    Also, by using rail, as opposed to trucking, we reduce 
congestion on our highways.
    Now, being from the Commonwealth of Virginia, we are very 
proud that we have two major railroads headquartered in 
Virginia, Norfolk Southern and CSX, and I am glad to see that 
John Snow is on this panel. I am also glad to see Ms. Linda 
Morgan is here on the first panel. My view of Ms. Morgan and 
her leadership, she is no-nonsense, she is fair, she is 
practical, she has been a very strong leader, and I thank you, 
Ms. Morgan, for your dedicated leadership in some very, very 
trying times. I think everyone, regardless of whether they 
liked your decisions or not, recognized you came about them in 
a fair, impartial, and pragmatic way, and thank you for your 
service.
    Now, the railroads in Virginia mean a lot to us, obviously, 
with jobs and economic contributions and so forth, but let us 
look at history since the Staggers Act in 1980. The Staggers 
Act was a successful policy program created by Congress. Since 
that time we have experienced a rebuilding and renewal of the 
industry.
    The employees and the companies have made significant 
technological innovations and investments of $260 billion in 
capital to rebuild the infrastructure with advanced, more 
modern locomotives and replenished freight car fleets. These 
investments have enabled the industry offer a better quality 
service. The railroads also have been able to squeeze more 
efficiencies into their systems, and regardless of what you may 
read, the railroads are operating more safely, and prices for 
their services based have declined.
    I know that there are several bills before this Committee 
which could conceivably undo the progress the railroads have 
made since 1980. I think that we ought to be looking at 
competition. When one worries about antitrust matters, having 
watched the acquisition of Conrail by CSX and Norfolk Southern, 
that was not some easy slam dunk issue. That was a very, very 
difficult negotiation. The Surface Transportation Board had a 
great rule. Everything the Department of Justice would have 
done the Surface Transportation Board did with its leadership.
    On top of it all, you had the two railroads vying for 
different stretches of Conrail, which was a Government-run 
railroad for all intents and purposes, and clearly a monopoly. 
Then you had the different jurisdictions in cities and what 
they wanted to see done by the railroads, and so acquisitions 
and mergers are not a very easy matter to go through.
    I am not sure of how more mergers will go forward, but 
nevertheless, I think the acquisition of the Conrail system by 
Norfolk Southern and by CSX has actually created more 
competition, has been a benefit to the Northeast, where they 
only had one railroad serving, for example, the Port of New 
York and New Jersey. Now they have two railroads serving that 
port, so that has in my view been beneficial.
    I think that competition should be the rule of the 
marketplace, obviously with sufficient safeguards in place, as 
there are now, to prevent rate abuses. It is important for the 
railroads and, obviously, their customers to work together to 
address their contract and pricing issues outside of the scope 
of unnecessarily meddlesome or overburdensome Federal 
regulation. I think we ought to be creating a climate where the 
rail industry generates sufficient revenues to support 
investments and their infrastructure that are so critical, 
absolutely critical and essential for the railroads' ability to 
serve their customers.
    So, Mr. Chairman, I thank you again for holding this 
hearing. I look forward to working with you as a Member of the 
full Committee to make sure that all our shipping industries, 
including rail, can best serve the carriers, shippers, retail 
establishments, our ports and consumers as well, and I thank 
you again.
    Senator Breaux. Thank you, Senator, and thank all of our 
colleagues. I would observe for all of our colleagues that we 
are supposed to have sort of a vote-a-rama with I think four 
votes beginning at approximately 11:00, so we are going to ask 
our witnesses to summarize when they can, so we can proceed to 
questions.
    We are delighted to have Chairman Morgan as our first 
witness. Linda, welcome back to the Committee, and I echo the 
fine compliments that you received from our other colleagues 
for the job that you have done, and we welcome you to present 
your testimony.

         STATEMENT OF HON. LINDA J. MORGAN, CHAIRMAN, 
                  SURFACE TRANSPORTATION BOARD

    Ms. Morgan. Thank you very much. As you know, I have 
submitted written testimony which I would ask be included in 
its entirety.
    I have listened to the opening statements, and I am 
prepared today to discuss railroad rates and competitive 
options and, in particular, the case-handling process at the 
board. I know in particular that there will be concern 
expressed today by shippers about how long it takes to resolve 
rail rate cases. I certainly understand and appreciate that 
concern. In fact, one of my highest priorities since I have 
been Chairman has been to expedite the board's decision making 
process, and we have taken specific steps to move rate cases 
along and to resolve them.
    As we continue to focus on how to better move these cases 
along, we should keep several facts in mind. First of all, as 
we all know, railroad economics are not simple. Railroad 
business is made up of competitive and captive traffic, and 
there are many costs associated with providing service to all 
of this traffic that need to be recovered.
    However, a simple cost-based formula for cost recovery does 
not work for the rail industry. The rates for competitive 
traffic cannot be raised high enough to cover its share of cost 
without diverting that traffic to other modes, so some shippers 
do pay more than others, and the board's job is to develop rate 
procedures that protect captive shippers from paying too much. 
The stand-alone cost methodology, the so-called SAC process, 
does that better than any other approach by making sure that no 
shipper pays a cross-subsidy for facilities from which it does 
not benefit, but the SAC analysis is not a simple one.
    Even given the complexity of the process, the board has 
focused much attention on doing what it can to streamline the 
rate case process and establish appropriate substantive ground 
rules for the disposition of these cases. It has set deadlines, 
put limits on discovery, simplified market dominance 
procedures, and provided for the pursuit of certain challenges 
to bottleneck rates, resulting in four such cases being filed.
    With these procedures in place, the board has resolved five 
large rail rate cases. Of these cases, four have been decided 
favorably for shippers, who have been awarded significant 
reparations. The board also decided one complex pipeline rate 
case in favor of the shipper.
    In the past 2 years, nine new rail rate cases have been 
filed, perhaps in part a reflection of some faith in the rail 
rate process. Certain of these cases involve issues of first 
impression, as parties pursue new ways of looking at the rate 
review process.
    One shipper witness here today is a party in one of those 
cases, presenting issues of new impression, and I know that it 
is concerned about the time that it is taking for his case to 
be resolved. While I cannot talk about the merits of that 
proceeding, I can say that we have already issued three 
important decisions in that case favorable to the shipper's 
position, with a fourth decision very much in process.
    The original complaint has been amended to include new 
routings, and so the case now involves what could be viewed as 
three separate complaints requiring a different level of 
attention than the original complaint. The amended complaint 
has raised new issues about how the rate review process is to 
work, and the board's resolution of these issues will dictate 
how the SAC analysis is considered in the future.
    In all of these rate cases, much time is spent at the front 
end of the process, with both sides filing motions about 
discovery and other pre-decisional matters. Particularly, with 
nine pending cases at this point, we understand the importance 
of resolving these matters as early as we can so that the 
process can continue, and I can assure you that we are 
continually revisiting our internal process to make sure that 
we can stay on top of this early phase.
    In bringing these rate matters to closure, I am mindful of 
the old adage that the perfect should not be the enemy of the 
good, and that we cannot take too long to get it right, but 
given the importance of these cases, and the risks associated 
with decisions that are not upheld in court, we must try to get 
it as right as we can in as timely a manner as we can. Of 
course, there is always room for improvement, and we continue 
to take our responsibilities in this rate process area quite 
seriously.
    There also continues to be concern about the burdens 
associated with bringing a small rate case. We have simplified 
procedures in place for these cases, but they are not being 
used. In this regard, I recently wrote the Committee 
summarizing the record compiled in a board proceeding that 
sought public views on whether Congress ought to legislatively 
mandate arbitration for small rail rate cases. I do understand 
the continuing concern in this area.
    I also know that certain shippers believe that their rates 
would be lower if the board allowed for more open access and 
broader challenges to bottleneck rates. As I have said before, 
I believe that board decisions changing its rules in these 
respects would not be consistent with existing law, and would 
be difficult to defend in court.
    As I have also said before, while the short-term impact of 
these types of actions would be to reduce rates in certain 
situations, the revenues flowing into the rail system would be 
reduced. This revenue reduction could very well result long 
term in a smaller system that we have today, serving fewer 
customers at different service levels, and possibly at higher 
rates. As we make decisions about the rail policy of the 
future, we must make sure that the result is the type of rail 
network that we want and need.
    Before closing, just a personal note. As this is likely my 
last formal appearance before the Commerce Committee in this 
capacity, let me say that while the last 8 years have been 
challenging indeed, it nevertheless has been an honor and a 
privilege to serve in this way, which I have done to the best 
of my ability.
    I would be happy to answer any questions.
    [The prepared statement of Ms. Morgan follows:]

Prepared Statement of Linda J. Morgan, Chairman, Surface Transportation 
                                 Board
Introduction
    My name is Linda J. Morgan, and I am Chairman of the Surface 
Transportation Board (Board). I am appearing today at the 
Subcommittee's request to discuss issues of concern to railroad 
shippers. As I have testified about these and other Board matters 
numerous times before Congress in the past several years, my testimony 
today will offer a brief summary of the Board and its recent 
activities, with a particular emphasis on certain issues that are of 
concern to shippers.\1\
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    \1\ In this Congress, I have provided testimony to this Committee 
on 3 occasions: 1) on March 21, 2001, I testified about the Board's 
activities in general; 2) on June 28, 2001, I gave testimony on the 
Board's recently issued major rail merger rules; and 3) I submitted 
testimony on the rail rate complaint process for the North Dakota field 
hearing on March 27, 2002.
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Overview of the Board
    I first came to the Board's predecessor, the Interstate Commerce 
Commission (ICC), in the Spring of 1994, just before the House voted to 
terminate funding for the ICC. While legislation eliminating the ICC 
was not approved that year, Congress the next year did pass the ICC 
Termination Act of 1995 (ICCTA), which became effective on January 1, 
1996. The ICCTA continued the trend toward less economic regulation of 
the surface transportation industry by eliminating the ICC and, with 
it, certain regulatory functions that the ICC had administered. The 
ICCTA established the Board as a three-member, bipartisan, decisionally 
independent adjudicatory body organizationally housed within the 
Department of Transportation (DOT). It transferred to the Board core 
rail adjudicative functions and certain non-rail adjudicative functions 
previously performed by the ICC, and provided it with limited resources 
to carry out these responsibilities.
    The Board continues to be funded on an annual basis, operating at 
essentially the same resource level since its establishment in 1996, 
although, largely because of the debate over how the railroad industry 
ought to be regulated, the agency has not been reauthorized. 
Nevertheless, the Board has adapted to its mission and its resources. 
Even with limited resources, it has worked through its significant 
caseload, resolved many cases that had languished at the ICC, and 
tackled head-on the many hard issues that have confronted the rail 
sector in the last several years. In order to continue to perform its 
duties expeditiously and effectively, the Board's principal focus for 
the foreseeable future continues to be on hiring new employees capable 
of replacing the many experienced employees eligible to retire from the 
agency.
The Board's Approach to Its Work
    The Board, I believe, has been a model of ``common sense 
government,'' looking ``outside of the box'' for creative solutions to 
the serious regulatory issues entrusted to it, and promoting private-
sector initiative and resolution where appropriate while undertaking 
vigilant government oversight and action in accordance with the law 
where necessary to address imperfections in the marketplace. This 
approach has been successful for addressing in a timely and effective 
manner a variety of difficult matters involving the rail sector.
    For example, this approach worked in resolving the rail service 
crisis in the West during the late 1990s, which, as I have discussed 
with Members of this Committee on various occasions, had to be handled 
in such a way as to not inadvertently hurt some shippers in an effort 
to help others. The approach proved successful in addressing the less 
extensive disruptions associated with the Conrail transaction, and it 
has helped the Class I railroads in improving the operations of the 
Chicago terminal, a major gateway between the East and the West. 
Because of the Board's prodding, we now have industry-wide operational 
reporting that allows us to monitor carrier performance in a way that 
we could not before; we have more cooperation among carriers with a 
view toward expanding and improving rail service; and we have private-
sector agreements and other mechanisms in place to address issues that 
arise between various segments of the rail sector. And the Board's 
pragmatic approach also has worked in many individual cases in which 
the Board has facilitated private-sector solutions. Such an approach 
can produce the best solution to a problem: a private agreement will 
more likely reflect the interests of the parties to the agreement; the 
parties who have negotiated the agreement have a real stake in its 
success; and a private-sector resolution can provide more benefit to 
the parties involved than the Board can provide, given the limits of 
its authority. As a result of the efforts of the last several years, 
interactions among the various stakeholders are more constructive and 
rail service is more responsive overall than in past years.
    Sometimes a private-sector solution is not forthcoming, however, 
and in those cases we do intervene aggressively when appropriate. Thus, 
after holding extensive hearings on access and competition in the 
railroad industry, in 1998, in addition to promoting private-sector 
initiatives, we pursued a variety of government actions, including the 
revision of the ``market dominance'' rules to eliminate ``product and 
geographic competition'' as considerations in rate cases. Similarly, 
although some rate cases have settled, others have not, and in those 
cases the agency has acted decisively, in decisions that were more 
often than not favorable to shippers, to establish the rules of the 
road for the disposition of these important matters. And beyond the 
resolution of individual cases, I should note that the Board has 
handled tough problems by issuing rulings of broad applicability. As an 
example, in its ``bottleneck'' decisions, the agency read the law 
creatively so that it could give shippers an opportunity for relief 
while respecting the rate and routing freedoms that the law provides 
for railroads. I know that certain shipper interests consider the 
bottleneck relief illusory, but in fact a number of bottleneck 
complaints have been filed before the Board.
Rail Rate Cases
    Overview. When I came to the ICC, the agency had rate guidelines in 
place, but it had decided virtually no cases under these guidelines. 
One of my main goals as Chairman was to resolve these cases with a view 
toward clarifying how the guidelines would be applied so that parties 
would know where they stood, and leveling the playing field by ensuring 
that the formal process would not be used simply as a delaying tactic. 
Also, by setting up fair and understandable procedures, and focusing on 
timely case disposition, I hoped to encourage private-sector resolution 
whenever possible. I believe that we have achieved those objectives, as 
many rate disputes have been resolved without Board intervention, and 
several cases that had been brought to the agency were settled before 
the agency issued a decision. Of course, not all cases are settled, and 
we are actively moving forward with several rate cases at this time. 
Rate regulation, however, is not a simple exercise, and so the cases 
take time.
    Market Dominance. Congress has decided that there should not be 
rate regulation where there is effective competition, and so the first 
step in a rate case is the determination of market dominance (defined 
as an absence of effective competition for the transportation to which 
the rate applies). The first component of a market dominance inquiry is 
to determine the ``variable costs'' of providing the service. 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-percent of the ``variable costs'' of 
providing the service, which means that this 180-percent revenue-to-
variable cost (r/vc) percentage is the floor for regulatory scrutiny.
    For situations in which the 180-percent threshold is met, the 
second component of a market dominance inquiry involves a qualitative 
analysis in which the Board must determine whether there are any 
feasible transportation alternatives that could be used for the traffic 
involved. Currently, in its market dominance determination, the Board 
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). As referenced 
earlier, the Board 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. (The Board's decision is still under judicial review.)
    Rate Reasonableness Standards. Thus, although the market dominance 
inquiry is still not easy, we have tried to simplify it. And even 
assuming that the elimination of product and geographic competition 
will be upheld in court, the remainder of the rate review process is 
quite complex. Although a cost-of-service approach might be relatively 
simple, we cannot use such a methodology for two reasons. First, 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. And second, 
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 Board uses demand-
based differential pricing principles. In other words, the Board 
expects railroads to 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. 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.
    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 unwanted cross-
subsidies from one shipper to another and to have optimal efficiency 
reflected in the rate base. 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 
the shipper 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 
(with decisions favorable to the shippers in 4 out of the 5 cases cited 
above).\2\ One complainant 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-percent. 
Another shipper was awarded over $20 million in reparations and 
obtained a 40-percent rate reduction.
---------------------------------------------------------------------------
    \2\ The Board also resolved during this period a complex pipeline 
rate case in a judicially affirmed decision that resulted in 
substantial rate reductions and reparations.
---------------------------------------------------------------------------
    Timing Issues. Some parties argue that it takes the Board too long 
to decide rate cases. I understand their concern. However, the review 
is an inherently complex one. And the parties themselves add to the 
time needed for resolution by asking the agency to resolve numerous 
discovery disputes, many of which they ought to be able to settle 
themselves, as well as other preliminary matters. With respect to the 
cases themselves, we must make hundreds of ``calls'' on the many 
substantive issues that come up in each proceeding. As these cases are 
data-intensive and quite technical, we have to be very careful, because 
a mistake on even one of these issues could result in a remand by a 
reviewing court. And we also have to spend considerable time on 
administrative petitions for reconsideration that are frequently filed, 
as well as court challenges to our rate decisions. All of this is 
handled by a small cadre of highly skilled and dedicated employees, who 
I can assure you are focused on producing a defensible product in these 
and the many other cases on which they work.
    Additionally, I should note that the nature of the calls that we 
are required to make has changed with the recent filings. In the past, 
the questions that arose--even the theoretical questions--typically 
concerned more confined issues such as how to value property, the 
configuration of the hypothetical railroad's network, and the 
projections of the tonnage and revenues associated with the 
hypothetical railroad. More recently, however--now that many of those 
matters have been resolved--parties have attempted to test the 
boundaries of a SAC case, and so we have been faced with a series of 
issues that go to the broad principles underlying the SAC analysis. 
Rather than resolving these questions after the parties and their 
consultants have made their entire cases, we have been called upon to 
address them at an earlier stage in order to guide the parties in 
presenting their evidence and arguments. Thus, late last year, we 
published a decision providing guidance on certain fundamental issues 
outstanding in several pending cases, including the Arizona Electric 
case. The Arizona Electric parties asked for further guidance, and we 
expect to issue a further decision in the very near future on that 
matter.
    Small Rate Cases. In 1996, the Board issued simplified guidelines 
for the disposition of those rate cases where the amount of money 
involved does not justify pursuing the more complex method used in 
larger cases. No case has been filed seeking application of those 
guidelines, as some may view them as not being simplified enough, and 
not worth bringing given the amount of money at stake. In December 
1998, I wrote to the Committee on a number of matters and suggested 
that, if Congress shared that view, legislation would be necessary to 
establish another approach. In May of this year, I again wrote the 
Committee summarizing the mixed record developed in a Board proceeding 
that explored whether legislatively mandated arbitration might be an 
appropriate approach to handling these cases.
Rail Mergers and Competition
    Background on Past Rail Mergers. The trigger for much of the debate 
over access and competition was the move during the 1990s toward 
continued consolidation in the railroad industry. Since I came to the 
ICC, four Class I rail mergers have been approved, with substantial 
Board-imposed competitive and other conditions. The conditions in a 
variety of ways provided for significant post-merger oversight and 
monitoring that have permitted us to stay on top of both competitive 
and operational issues that might arise. They provided for the 
protection of employees and the mitigation of environmental impacts, 
and our recent decisions employed a ``safety integration plan'' that 
draws on the resources of the Board, the Federal Railroad 
Administration, and the involved carriers and employees.
    In varying degrees, these mergers have had the support of segments 
of the shipping public, as well as employees and various localities, 
and were considered by a number of interested parties to be in the 
public interest. A variety of shippers actively supported the 
Burlington Northern/Santa Fe (BN/SF) merger, the inherently 
procompetitive Conrail acquisition, and the Canadian National (CN)/
Illinois Central merger. While the Union Pacific/Southern Pacific (UP/
SP) merger was opposed by certain segments of the shipping community 
(although it was supported by others), the Board believed that merger 
was necessary not only to aid the failing SP, but also to permit the 
development of a second rail system in the West with enough presence to 
compete with the newly merged BN/SF. I should note that the conditions 
that the Board imposed in approving the UP/SP merger made it possible 
for UP/SP's main competitor, BNSF, to participate in several ``build-
outs'' designed to produce new competitive service that did not exist 
before the merger, and that would not have been possible without the 
Board's conditions.
    Some have said that rail mergers are inherently anticompetitive, 
that they cause service problems, and that the agency should have more 
actively discouraged them. But our approvals were based on public 
interest determinations made on extensive records and were conditioned 
to preserve and promote competition, ensuring that no shipper's service 
options were reduced to one-carrier service as a result of a merger.
    New Major Rail Merger Policy and Rules. These recent mergers have 
changed the way the rail system now looks. In the United States, we now 
have two competitively balanced systems in the West and two 
competitively balanced systems in the East. Future merger proposals 
would likely result in a North American transportation system composed 
of as few as two transcontinental railroads.
    Given this prospect and the service disruptions associated with the 
most recent round of mergers, when the BNSF and CN rail systems 
announced their intention to merge in late 1999, the Board issued a 15-
month ``moratorium'' designed to prevent the filing of merger proposals 
pending the development of new rules.\3\ Before the moratorium ended, 
the Board revised its rail merger policy with a view toward more 
affirmatively enhancing competition, and ensuring that the benefits of 
a future merger proposal truly outweigh any potential harm. Given that 
the next round of mergers would put in place the rail network of the 
future, applicants under the new rules bear a substantially heavier 
burden in demonstrating that a merger proposal is in the public 
interest. Key provisions in the rules require applicants to more 
clearly show that the transaction would promote competition and improve 
service, and indicate that enhanced intramodal competition would be 
viewed as a benefit weighing in favor of approval. The rules also 
direct more accountability for benefits that are claimed and a showing 
that such benefits could not be realized by means other than a merger. 
And they require more details up front regarding the service that would 
be provided, as well as contingency planning and problem resolution in 
the event of service failures.
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    \3\ I appeared before this Committee in the Spring of 2000 to 
discuss the moratorium and the merger policy rulemaking.
---------------------------------------------------------------------------
    Some say that, if the current industry structure warrants 
conditioning any new merger on the enhancement of competition, then it 
also ought to warrant across-the-board competition-enhancing actions--
in particular, revision of the competitive access rules and the 
bottleneck rate challenge procedures--outside of the merger context. 
The new merger rules were adopted to address a scenario in which the 
industry would be moving toward two transcontinental systems. Absent 
any new major mergers, I believe that it would be difficult to defend 
actions reversing the longstanding competitive access rules or the more 
recent bottleneck procedures--both of which have been judicially 
affirmed--essentially to provide for two rail competitors upon request.
    Rail Service. The merger integration process over the last few 
years has produced serious service disruptions. However, after 
significant efforts on the part of the rail carriers and extensive 
oversight by the Board, those service problems have been alleviated and 
rail operations overall are much improved. The performance metrics 
provided by the carriers show clear improvement, and the Board's Rail 
Consumer Assistance Program shows a steady decline in service issues 
brought to us for informal resolution. The 15-month merger moratorium 
imposed by the Board has ensured that the railroads have focused on 
running better the businesses that they now have in place without the 
distraction of more mergers.
Rail Line Construction Cases
    The market, through new construction activities, is directing where 
new competitive services will be introduced. In addition to the build-
outs initiated as a result of the Board's UP/SP merger conditions that 
I referenced earlier, during the past few years, railroads have pursued 
several new construction cases. The largest, and most controversial, 
has been the case involving the application of the Dakota, Minnesota 
and Eastern Railroad to extend its coal-hauling capability into the 
Powder River Basin, which the Board approved earlier this year with 
substantial environmental mitigation conditions, and which is now in 
court. The Board has also approved, or is in the process of reviewing, 
several other rail construction cases geared to produce new competition 
where the market will support it. While these projects are typically 
supported by shippers, they are often opposed by local groups with 
concerns about environmental and community impacts. The Board must 
balance these concerns against the transportation benefits that the new 
projects are designed to produce in resolving these matters in a timely 
and judicially defensible manner.
The Rail Sector Today
    The last few years have presented many challenges for the rail 
sector, and the Board has likewise been challenged. However, I do 
believe that good progress has been made in meeting these challenges. 
Service overall is much better and more customer-focused; the railroads 
are stronger operationally; and there is much more constructive 
commercial communication among the various segments of the rail sector.
    And the Board has done its part. It has brought parties together 
informally to resolve their differences in a way that ensures that rail 
service is more responsive to the needs of the customers. And it has 
moved cases before it to resolution as expeditiously and effectively as 
possible.
    Of course, there is always more work to be done. The industry must 
continue to strive to be a customer-focused industry that can remain a 
vital part of our Nation's transportation system. And the Board must 
continue its efforts toward that end, working formally and informally 
to resolve disputes in a timely and effective manner. While I know 
concerns still remain, we must work to ensure that the progress that 
has been made will be sustainable into the future.

    Senator Breaux. Thank you very much, Ms. Morgan.
    Let me recognize Senator Smith.

                STATEMENT OF HON. GORDON SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Mr. Chairman. You and I are in 
and out of the floor right now, and I wanted to thank----
    Senator Breaux. I would rather keep you here.
    Senator Smith. Yes, I know that. We are on opposite sides 
of this issue.
    But Ms. Morgan, thank you so much for your testimony and 
your service, and Mr. Chairman, I would like to include a more 
lengthy statement for the record, and I particularly wanted to 
welcome Dennis Williams, who is the manager of transportation 
services for Roseburg Forest Products, who has come to testify 
at this hearing at my request, and I appreciate that, and I am 
anxious to hear from as many witnesses as I am able.
    Thank you, sir.
    [The prepared statement of Senator Smith follows:]

   Prepared Statement of Hon. Gordon Smith, U.S. Senator from Oregon
    Thank you Mr. Chairman. In my capacity as Subcommittee Chairman 
last year, I began a series of hearings covering a wide range of rail 
transportation issues. I established such a hearing agenda because I 
believed at the time, as I still do, that given the complexity of rail 
transportation issues, our Members would benefit greatly through a 
series of hearings dedicated to rail issues. While the first two 
hearings in the series, focusing on actions taken by the Surface 
Transportation Board (STB) and the state of the rail industry were held 
in the spring of 2001, the shipper hearing was delayed by the events 
and aftermath of the September 11th terrorist attacks. I am pleased 
that Chairman Breaux has remained committed to holding this hearing to 
receive the shipper perspective on railroad issues.
    Oregon is fortunate to be served by two Class I freight railroads, 
19 shortlines, and Amtrak. One of my concerns about the rail industry 
is that the carriers--particularly shortline and regional railroads--
are not earning enough to properly maintain their track and equipment. 
As we all know, railroads are extremely capital intensive. To assist 
smaller railroads, I have sponsored legislation with Senator Breaux (S. 
1220) to establish a capital grant program to rehabilitate and improve 
the track infrastructure of Class II and III railroads, including 
projects to handle 286,000-pound railcars. The bill authorizes grants 
of $350 million in each of fiscal years 2003 through 2005. S.1220 was 
reported out of Committee on April 18.
    Another concern I have is the quality of rail service. Like the 
rest of the country, Oregon shippers suffered through the service 
disruptions of the Union Pacific--Southern Pacific and the ripple 
effects of the Conrail integration. I will be very interested in 
hearing from Mr. Snow and from the shippers about what the industry is 
doing to improve service reliability, car availability, customer 
service, and ease of doing business.
    As I stated when I initiated this series of hearings, their purpose 
is to gather information about the many complex rail issues involving 
rates and service. My goal is to try to find common ground on some of 
the problems and collectively develop reasonable solutions to those 
problems, whether through ``a meeting of the minds'' or perhaps through 
legislation. I believe that the only way legislation is going to be 
advanced is if a consensus product--one that is acceptable to both 
shippers and industry.
    I would like to take this opportunity to welcome Dennis Williams, 
Manager of Transportation Services for Roseburg Forest Products, who 
will be testifying on the shipper panel. Roseburg is a large 
manufacturer and distributor of forest products headquartered in Oregon 
that relies heavily on rail to move its products to market. I am very 
interested in Mr. Williams' comments about his company's experience 
with rates and service under the Staggers Act and the impact of recent 
mergers on rates and service.

    Senator Breaux. Thank you, Senator.
    Senator Rockefeller, questions, comments?
    Senator Dorgan.
    Senator Dorgan. Yes. Commissioner Morgan, let me ask about 
these nine complaints. Gosh, you know, I can find nine 
complaints in the morning about rail rates, so what is it that 
prevents complaints from coming to your office? Nine complaints 
is in my judgment rather minuscule. It is too costly, too 
cumbersome, too time-consuming, too much of an expectation that 
nothing is going to happen anyway? Tell me why we see a period, 
in which you describe, in which only nine complaints have been 
filed.
    Ms. Morgan. Well, obviously, I am not sure what the answer 
to that is. I can certainly speculate. I do feel, though, that 
nine complaints is a significant number relative to where we 
have been in the past, and it may be that because the board did 
move cases to resolution, and did set some guidelines and send 
some messages, people then have decided that the process does 
work, and they are prepared to pursue it further, so I do not 
see nine cases as indicating that there is no interest. I see 
that as an indication that they have a process out there now 
that they believe is in place, and is working, and they are 
prepared to pursue it.
    Now, having said that, I----
    Senator Dorgan. What does it cost to file a complaint?
    Ms. Morgan. The filing fee for a larger rate complaint, and 
we have had this discussion before, is $60,000 for a filing of 
a large rate complaint, and $6,000 for a small rate complaint, 
and again, you know my position on user fees in general, but we 
do not need to go there.
    Senator Dorgan. Right. I mean, my point is that I think I 
could find 20 people in Stark County, North Dakota this morning 
that would like to file a complaint. I do not know that all 20, 
or any of the 20, would have $6,000 to spend to file a 
complaint, but I do not view nine complaints as encouraging. I 
mean, I view that you have received only nine complaints as 
inhibiting the process, and I suspect it is because of fees. I 
expect it is also because people think it is fruitless. For 
decades, filing a complaint with respect to rail rates is a 
sort of empty activity.
    Has the small rate complaint process been used at this 
point?
    Ms. Morgan. No. As we have discussed previously----
    Senator Dorgan. So the nine are all large rate cases, and 
they are submitted with the filing fees?
    Ms. Morgan. Yes.
    Senator Dorgan. Tell me why you think the small rate 
complaint process is unused.
    Ms. Morgan. I am speculating now that the perception is 
that even the simplified guidelines that we have in place are 
simply too complex and too burdensome, which is why I collected 
a record about which I have communicated to the Hill regarding 
mandatory arbitration.
    Senator Dorgan. Let me just try to summarize this. Do you 
not agree, then, that if there are no complaints being filed 
under the small rate complaint process, that should not be 
interpreted that small shippers out there are delighted with 
rail rates? Would you not expect that there are a lot of 
complaints out there, but small shippers do not have the 
wherewithal to put down $6,000 so that they can make that 
complaint with you, and the process therefore is broken and it 
needs fixing?
    Ms. Morgan. I have no reason to disagree with your 
assessment, so that may very well be the case, yes.
    Senator Dorgan. Looking from your vantage point, if it is 
that patently obvious that a small shipper really has no chance 
out there at this point, the deck is stacked against them, they 
cannot even afford to file a complaint in most cases, why do 
you think we are unable to get legislation passed?
    I am asking you that as an observer. You watch this from 
the Commission. In fact, you have testified that you would like 
legislation. You would like additional authority. You would 
like to streamline the process. What impedes that, in your 
judgment, in public policy?
    Ms. Morgan. Well, with respect to all of the pieces of 
legislation, and I certainly do not want to pick and choose 
among them, and put value on them, but I think it is important 
to make sure that we focus on the real issues and then try to 
address the real issues. A lot of the legislation that is out 
there is not just focused on the process, it is also focused on 
the fundamental policy of the statute, and those are clearly 
two different approaches, and they raise different issues, and 
they raise different controversies, so I think the question 
from a strategic perspective is, if there is a particular 
concern with small rate cases and addressing that, then perhaps 
that is the focus that should be pursued. Other issues that are 
perhaps more controversial might not be in that mix, but you 
know, this is not my business. This is certainly your business.
    Senator Dorgan. But now, since this is likely your last 
appearance, as you leave, there is nothing at all wrong with 
your sticking your nose in our business here and saying things 
that could get you in trouble. What trouble can you get into at 
this point on your way out?
    Ms. Morgan. I have already been in so much trouble.
    [Laughter.]
    Senator Dorgan. Yes, so let me ask you this. You, either 
because of the adjudication of rate cases, or the lack of 
adjudication, or the lack of filing among small rate 
complaints, you know about rail rates. You know about rail 
rates because you work in these areas. If you were not in your 
current position, but instead were a farmer, and you know what 
I have told you about rates, you are a chemical company, you 
are hauling coal, or any one of a dozen other circumstances, do 
you think that you would be pounding on the table demanding 
that Congress do something about rates that are fundamentally 
unfair, or do you think, gee, things are just swimming, things 
are really going along well, and let us not do anything to rock 
the boat?
    Ms. Morgan. Well, obviously if people have concerns out 
there, that means that things are not perfect, and my view is 
always, if someone has a concern, we need to try to address it. 
The question really is how you address it, and I think what I 
have said in the past is that I do have concerns about 
legislation that would in essence result in two rail 
competitors at all points upon request, because I do think that 
long term the risk of that is yes, while rates will come down 
in the short term, the system will look very different long 
term because the financial needs of retaining the system will 
not be met.
    Having said that, I think the issue of moving cases along 
and addressing the process, and making the process work better, 
is something that I have tried to do as Chairman, and I do not 
want to spend a lot of time on that, because you and I have had 
that discussion, but I did arrive at an agency with a huge 
backlog, and I have attempted to address that backlog and 
attempted, within the confines of my process, to work through 
that backlog.
    I think the small shipper case issue is one of concern, and 
that is why I have communicated with this Committee on a number 
of occasions about alternative legislative approaches that you 
could take to that, but I will say on the broader issue of 
providing for two competitors upon request, I do have a concern 
about that.
    Senator Dorgan. My time is up. I would love to talk to you 
about that at great length, but let me just say this. The 
financial interest that you describe--financial interest, you 
were talking about keeping railroads solvent and so on. There 
are competing financial interests, as you know. The fellow that 
drove 16,000 miles with an 18-wheeler to put wheat on a 
railroad that then ran it back through his yard on the way to 
the West Coast, he also has financial interests. Those are the 
financial interests, in my judgment, that are not very well 
represented in the considerations both in Congress, and also in 
the considerations by regulatory agencies.
    Senator Breaux. Thank you, Senator. Senator Allen.
    Senator Allen. Just a brief overview from Ms. Morgan. What 
have been the facts, and I hope you have the facts, of the 
effect on actual, rail rates since the passage of the Staggers 
Act?
    Ms. Morgan. Well, we have done studies, but also the 
General Accounting Office has done similar studies, and we have 
arrived at essentially the same conclusion, which is that rates 
overall have declined since passage of the Staggers Act.
    Now, having said that, there are certain rates which have 
either not declined, or have increased, and there are certain 
movements where that has occurred, and that, of course, is a 
dynamic of differential pricing that occurs in the rail sector, 
but overall, if you look at the graphs for various sectors of 
the shipping community, you will see rates in a steady downward 
trend.
    Senator Allen. All right, and so you are saying the rail 
rates overall, while some few may be up, overall--and some may 
have actually stayed relatively the same, and I assume that 
these rate figures are based on calculating inflation and so 
forth.
    Ms. Morgan. Yes.
    Senator Allen. But overall, you are saying rates are less 
now for shipping by rail than they were in 1980.
    Ms. Morgan. That is correct.
    Senator Allen. Could you say the same as far as other modes 
of transportation? I know you are the Surface Transportation 
Board.
    Ms. Morgan. I would not really want to speak to that. I 
might speculate, but I think I am in enough trouble already, so 
I will stay away from the other modes.
    Senator Allen. OK. Do you have a percentage of how much the 
reduction in rates has been since 1980, as far as rail?
    Ms. Morgan. Well, we have the figures that show up to a 40-
percent reduction overall in rates.
    Senator Allen. So overall there has been a 40-percent 
reduction in rail rates since 1980. Thank you. I have no 
further questions, Mr. Chairman.
    Senator Breaux. Senator Rockefeller.
    Senator Rockefeller. Thank you, Mr. Chairman.
    Chairman Morgan, the GAO study that you refer to, of 
course, obfuscates, and therefore I think eliminates the 
argument that you answered in terms of Senator Allen's 
question. The GAO did not compare rates charged to specific 
shippers. It did not do that. It relied on something called the 
average revenue per ton mile calculation, that obscures the 
competitive circumstances of individual shippers, so you know, 
it has gone down for some, it has gone enormously up for 
others.
    You expressed concern, I was very interested by that term, 
about small shippers and other shippers. My interest is much 
greater than a general concern. You talked about increasing the 
action on the backlog. Well, that is only the people who are 
there, and you have had 20 cases in your 8 years that have come 
before you. I would guess there is probably several thousand 
out there, because for large shippers even, it has gone from 
$54,000 to $61,000 just to get before you, to try to get before 
you. All the discouraged people cannot possibly be counted.
    As you know, you have always said that you think the STB 
lacks the authority to do what I and others would like to see 
done. My own view, being very frank, is that I think that the 
STB has really looked more at the profitability of railroads 
than at your so-called concern about shippers. You have done 
nine things, and that is good, but you know, that is not much 
in 8 years, from my point of view. So let me ask you a couple 
of hypothetical questions, and the Chairman will cut me off 
when my time is over.
    Assume that your view as to the extent of the STB's 
authority is absolutely the correct one, and I am all wet. 
Given the extent of shipper discontent that Senator Dorgan and 
others who might be here, you now have a successor who has been 
appointed. We have not had a hearing for that person yet. 
Assuming that discontent, and taking your word, concern, very 
seriously, what is it that you would advise your successor to 
pursue to lessen the concerns and to increase competition? In 
fact, what will you, because you will talk with him.
    Ms. Morgan. Yes, I will talk with him.
    I think in terms of the board activities, I would suggest 
that he continue--and I know you do not put much value in this, 
but that he continue to focus on moving the cases that we have 
in the building to resolution, because I do feel very strongly 
that the more cases are resolved, the more people understand 
the process and will avail themselves of the process if that 
seems to be the appropriate thing to do, but I realize you and 
I do not agree on that, but that is what I would tell him.
    I would also tell him that as concerns are raised, as the 
board has done, not to the extent that you would have liked us 
to have done it, make sure that you do look at the law, and do 
try to apply the law in a way that does address the concerns, 
and again, we have done that, not to the extent that you would 
have liked, but I think we have moved issues in a direction to 
address the concerns that have been raised.
    Senator Rockefeller. OK. That makes it a little harder for 
me to follow up, because there is nothing specific there. I 
mean, you speculated that probably Senator Dorgan was not 
incorrect about all those people lined up out there.
    Now, if you have got a civil rights case, you get to bring 
it. If you have got any other kind of case, you get to bring 
it. Somehow these people never get to bring it, partly because 
the Association of American Railroads is the most powerful 
lobby in Washington. It operates under the radar. It does all 
of its work so nobody can see, and it appears to have a 
friendly Surface Transportation Board. So your concern, I take 
it, therefore is not translated into any specific 
recommendations to your successor, other than to continue 
focusing on those cases which are before you. Not necessarily 
doing anything to make it easier for people who legitimately 
could appear before you to be able to do so.
    If I were in your position, I would be sleepless at nights 
worrying about that type of thing.
    Ms. Morgan. Well, you might be surprised that I do have 
sleepless nights. I care about this as much as you do, and I do 
try to resolve these matters in a way that I feel is 
appropriate.
    I do think that, again, moving the docket forward is not an 
insignificant issue, because I think part of what has gone on 
in some areas at the board, and before at the commission, was 
that there were areas that were just left without attention, 
and I think that what we have tried to do is to give those 
areas attention, set the guidelines, make the substantive 
decisions. I discussed that in my oral presentation. I think 
that is important, and I think the head of that agency should 
continue to pursue that approach, and I think that is not 
general, it is very specific.
    Senator Rockefeller. Your successor would concern himself 
only with those cases which have in fact made it to you, and 
not concern himself with all the hundreds, thousands of cases 
which have not been able to afford, have given up, been 
discouraged, peer-pressured or whatever, not to bring their 
cases before you. Those do not matter so much. The cases before 
you do matter. That is what you would ask him to focus on?
    Ms. Morgan. I think that by resolving what is before us, we 
are indicating that we care about what is before us and what is 
not yet before us, because by resolving what is before us, we 
help those who are not before us to decide whether they want to 
move forward.
    Now, with respect to user----
    Senator Rockefeller. I do not think that is the case. My 
time is up. I really do find that answer extraordinary. Is it a 
matter of cost? Is it a matter that we are not going to get 
anywhere? They have only got a few cases before them that 
usually work out the wrong way, they take forever to decide, 
surely you understand that it takes a lot more than just if you 
do your 14 or 20 cases that you are working on. Some of them 
get resolved in the favor of shippers. Somehow it is going to 
take all this body out there and encourage them to exercise 
their due grievance.
    Senator Breaux. Thank you, Senator.
    Senator Smith.
    Senator Smith. Thank you, Mr. Chairman, and Ms. Morgan, I 
began my earlier comments by thanking you for your service. I 
did so because I see you having to play a very difficult role, 
and perhaps the role of Solomon in trying to settle these 
differences.
    I hear often the plight, the plea, the frustration of 
captive shippers and their seeking of relief. I also look at 
the balance sheets of the railroads, and I do not see them 
exactly swimming in it either, and I am very worried that the 
amount of reinvestment in our rails in this country is falling 
behind, and I am also mindful that the gap between the cost of 
capital and return on investments in railroads has closed, but 
certainly there is still a considerable gap existing, so the 
probability is that we will continue to underinvest in our rail 
infrastructure in this country.
    I would like to ask you, as the railroads have closed this 
gap on the cost of capital and return on investment, in your 
opinion, how have they done it? Have they done it through rate 
increases? Have they done it through cost containment? Have 
they done it through rate improvements in the Staggers Act? 
What accounts for that? How have they done it?
    Ms. Morgan. Well, I think, depending upon which period of 
time we have been in, I think it has been a combination of a 
lot of different efforts. I think that since 1980 the railroads 
have streamlined their network, have cut costs, have become 
more productive, have learned how to invest in a smarter way in 
their infrastructure and, of course, the Staggers Act allowed 
that sort of freedom, and so I think it has been a progression 
of a lot of different activities.
    I think what we see right now is that a lot of what I have 
termed the big silver bullets, the big areas where you could 
reduce costs and so forth, well, we do not have that any more, 
so what the carriers are faced with now is really I guess what 
I would call blocking and tackling, a very surgical effort to 
go into all aspects of their operations, and continue to become 
more and more efficient, continue to streamline the cost, and 
also look very carefully at the service that is being provided, 
making sure that the investment is smart in connection with the 
service, and that the pricing reflects the service being 
provided.
    Senator Smith. Do you think our investment as a Nation is 
sufficient in the rail infrastructure?
    Ms. Morgan. Well, the freight rail infrastructure, of 
course, is privately invested in, so----
    Senator Smith. But nevertheless has a real impact on our 
roads, and the amount of wear and tear there, and the amount of 
congestion. You know, how do you view the health of our rail 
infrastructure?
    Ms. Morgan. Well, I think we need to continue to pay 
special attention to it. I think the concern that you have 
expressed is one that we need to all have in our minds, because 
it is a privately invested-in infrastructure, and the freight 
rail network is important to the transportation system, and if 
we want to make sure that it continues in the private sector, 
we need to make sure that the policies that we have in place 
encourage the kind of continued infrastructure----
    Senator Smith. Are there any policies that we have in place 
that we ought to change to facilitate that?
    Ms. Morgan. Well, in terms of the regulatory policies, 
certainly----
    Senator Smith. Or taxes?
    Ms. Morgan. Well, taxes are not my particular area of 
expertise, although I know that there is discussion of some 
sort of incentives that would encourage continued investment. 
There is also discussion of specific funding for particular 
transportation projects that might involve railroads.
    In terms of regulatory philosophy and policy, I think that 
we need to make sure that we continue to have a policy in place 
that provides the kind of revenue flow that allows for 
continued infrastructure investment.
    Senator Smith. Thank you, Mr. Chairman.
    Senator Breaux. Thank you.
    Madam Chairman, what does the average time for a rate case 
on challenging the reasonableness of the rate take on average, 
from the time it is filed to the time it is completed by the 
STB?
    Ms. Morgan. Well, of the cases that we have resolved, it 
has taken anywhere from 1\1/2\ years to 3 years. Now, we have 
nine pending, as I indicated to you. Some are further along 
than others. We have some that are in the early stages of 
discovery. The one case that I mentioned that has some 
complexities to it is still in its early stage, so that has 
been with us----
    Senator Breaux. Okay, 1\1/2\ to 3 years, and I am told by 
some of the shippers who have participated in this, and I am 
sure from the railroad's perspective as well, you are generally 
talking about hundreds of thousands, if not millions of dollars 
in legal fees and consulting fees and economic studies, and all 
of these things that go into one single rate case. Is there not 
a better way, a better process that could be set up?
    Some have suggested the concept of arbitration, where you 
bring in the shipper and you bring in the railroads before the 
STB and you say, look fellows, can you all get together? We are 
spending up to 3 years to determine these cases, and like 
Senator Dorgan said, I am sure for every one case that is 
brought there are probably 100,000 complaints that cannot get 
brought, because they do not have the legal-financial 
wherewithal to do it.
    It seems like the process is just so time-consuming, so 
complicated, so technical that some have suggested some type of 
arbitration procedure may be a lot faster and quicker if just 
people could say, look, you folks come up with a solution to 
this, and if you do not, there are going to be penalties.
    Ms. Morgan. Well, of course, right now parties can 
voluntarily go to arbitration under our procedures.
    Senator Breaux. Does the STB have the authority to order 
arbitration?
    Ms. Morgan. No. Mandatory arbitration would require 
legislation.
    Senator Breaux. Would that be a good thing from your 
outgoing Chairman's perspective, now that you are free to speak 
your thoughts, that you would have the authority to say, look, 
this case should not take 3 years, I am going to appoint an 
arbitration panel and tell them in 30 days, or 60 days, to 
settle it?
    Ms. Morgan. Well, I feel that many of these cases should be 
handled in more of a private sector situation anyway, and we 
have arbitration in the private sector for certain cases 
involving the National Grain and Feed Association and the 
smaller railroads and the larger railroads, so I think 
arbitration is something that needs to be looked at carefully 
in the context of resolving these cases.
    Senator Breaux. Could it be helpful?
    Ms. Morgan. I think, you know, anything can be helpful, 
because obviously I hear people's concern here about how long 
these cases take. You know, we can get as frustrated as you do 
about how long they take. As with any litigation, once it gets 
into a litigious situation, then, of course, the due process 
kicks in, and then it takes time. Arbitration is certainly a 
way around that.
    Now, I will say that there are parties out there that do 
not have a consensus on what should be arbitrated and what 
should not be. When I instituted this proceeding for 
arbitration on smaller rate cases, there was not even consensus 
there as to what type of case should be covered, where the 
cutoff would be, whether it would be appealable, and so forth, 
so there were a lot of issues associated with arbitration, and 
then there was concern raised about, if a case has great 
financial impact, and it is arbitrated, does that decision 
somehow set some sort of precedent for future cases, and then 
you of course get back into the whole policy in the Staggers 
Act of balancing the needs of the shippers with the financial 
health of the industry.
    Senator Breaux. Well, I think it is something that we 
should at least consider.
    The only other question I have is on the bottleneck rate 
cases. Currently, as I understand it, a railroad must quote a 
bottleneck rate only if there is a contract for that portion of 
the line that is not part of the bottleneck. It would seem to 
me, that sometimes from a shipper's perspective, there is a 
hesitancy on other railroads to compete on the non-bottleneck 
portion of the shipping lane.
    Is it not possible, just to look, without having a 
contract, just look at the bottleneck section and ask the 
railroads what is the charge for that portion, without having 
to show the shipper that there is a contract on the non-
bottleneck sector? If the complaint is on the bottleneck 
section only, why do we require a shipper to show that there is 
a contract on the non-bottleneck section before we can find out 
what is being charged for the bottleneck portion?
    Ms. Morgan. Well, first of all let me say that, with 
respect to bottlenecks, we have had four cases under our new 
policy, which is that if you have a contract with the non-
bottleneck carrier, then you can seek a bottleneck rate.
    Senator Breaux. Which is very difficult sometimes to get.
    Ms. Morgan. But we have had four cases, so that reflects 
that there is some activity out there in response to our 
policy.
    Now, with respect to the other, to the broader question, a 
full movement that involves a bottleneck and a non-bottleneck 
has a cost associated with it, and it is very possible that the 
rate for the non-bottleneck segment is a competitive rate, and 
a lower rate, combined with the bottleneck rate, which may be a 
little higher, makes sure that the revenues coming in for that 
entire movement cover the costs associated with that entire 
line.
    The concern is that if you go in and review each and every 
bottleneck rate, that bottleneck rates will come down. Then the 
combination of the lowered bottleneck rate and the non-
bottleneck rate is not enough revenue to cover the costs 
associated with maintaining that line.
    Senator Breaux. Well, we are going to hear from the 
shippers, who have some specific concerns about that 
requirement.
    Madam Chairman, thank you very much. Thank you for your 
service, and I look forward to continuing to work with you.
    Do you have another question? Senator Rockefeller has one 
other question.
    Senator Rockefeller. Chairman Morgan, would you agree or 
disagree with any of the following statements:
    Shippers have been forced to buy their own rail cars and 
both their related capital and maintenance costs.
    Ms. Morgan. I agree that that is out there. I do not know, 
you know, what it is with each and every shipper, but yes, 
shippers do have shipper-owned cars.
    Senator Rockefeller. Fundamentally, you agree?
    Ms. Morgan. Yes, that is out there.
    Senator Rockefeller. OK. Shippers have been required to 
spend millions to improve loading facilities to qualify for a 
railroad's bulk rates. Agree or disagree.
    Ms. Morgan. I think that is out there, yes.
    Senator Rockefeller. Shippers have been forced to pay for 
intermodal hauls on highways to take advantage of better rates 
at centralized bulk loading facilities. Agree or disagree.
    Ms. Morgan. No particular example of that has been brought 
to my attention. The examples of the others have, but I have no 
reason to disagree with you.
    Senator Rockefeller. Shippers have been forced to pay 
increased rates to third-party cargo facilities, demurrage 
fees, with no improvements in service. Agree or disagree.
    Ms. Morgan. Well, I have heard that claim. Whether that is 
true or not, I cannot tell you. I have received some letters on 
that, yes. I have not investigated to see if that is actually, 
with no improved service whether that is actually going on or 
not, but I have had letters indicating that demurrage rates 
have gone up, yes.
    Senator Rockefeller. Well, I think I will kind of leave it 
at that, Mr. Chairman, except that I have a letter from the 
President and Chief Operating Officer of Bayer, Incorporated, 
and I want to make this letter a part of the record, and in the 
letter he says the STB is the only agency, that is for the 
chemical industry, with authority over complaints about 
unreasonable service and rates. Bringing a complaint before the 
STB can cost between $500,000 and $3 million as a larger 
shipper obviously. And may take, as he says, as long as 16 
years to resolve, and the man is experienced and presumably had 
counsel helping him in writing this letter. Many companies 
obviously find these costs prohibitive and rarely productive.
    [The information referred to follows:]

                                          Bayer Corporation
                                                     Pittsburgh, PA
Hon. John D. Rockefeller IV,
531 Hart Senate Office Building,
Washington, DC.

Dear Senator Rockefeller:

    Although we have not had the pleasure of meeting, I hope to rectify 
that by visiting your office in September. As you know, Helge 
Wehmeier's retirement was effective July 1, and I have assumed the 
mantle of President and Chief Executive Officer of Bayer Corporation.
    I have been informed that Senator John Breaux, Chairman of the 
Surface Transportation and Merchant Marine Subcommittee of the Senate 
Commerce Committee, will be holding a hearing on July 31 to hear views 
of shippers and railroads on the current state of rail competition.
    Bayer Corporation, which has more than 23,000 employees and sales 
of $10.1 billion in the year 2001, is a major producer of basic 
chemicals including Isocyanates, Polyols, Prepolymers and Plastics 
Resins. Bayer has major chemical plants in Ohio, Texas and West 
Virginia.
    At Bayer Corporation the rail mode of transportation is very 
important to our chemical business. Bayer supports legislation, which 
would promote effective rail competition. We believe that effective 
rail competition can be achieved only by legislation which will result 
in service by at least two competing railroads at all shipping and 
receiving sites.
    We greatly appreciate your leadership, Senator, for introducing the 
bill, which provides up to 35 billion dollars in loans and loan 
guarantees for infrastructure, improvements, and enables companies to 
construct rail spur ``build-outs'' in order to obtain competition. We 
commend the Senate Commerce, Science, and Transportation Committee for 
adopting your amendments and passing S1991.
    Competition brings strength to global and domestic markets in all 
lines of business. We know that a healthy dose of competition will do 
the same for railroads. Indeed, the Burlington Northern/Santa Fe (BNSF) 
communicated to the Surface Transportation Board (STB) that, ``only the 
introduction of an independent second competitor can ensure continued, 
genuine competition.'' Bayer Corporation fully supports that statement.
    Only four major railroads now serve the industry; namely, Union 
Pacific, Burlington Northern, Norfolk Southern, and CSXT. Of these 
railroads, CSXT has consistently opposed legislation which would permit 
competitive access under which shippers and receivers of rail freight, 
now served by only one railroad, would have the option to seek the 
services of a second railroad by use of the first railroad's facilities 
on a reasonable basis.
    Our nation needs and deserves improvements in competitive access 
and service reliability, so that products can be delivered efficiently 
all around the world. These conditions are necessary, if we are to 
successfully compete in a global economy.
    The Staggers Rail Act, passed in 1980, was intended to deregulate 
the nation's railroads, encourage competition, protect captive shippers 
from unreasonable rates and return the railroads to financial health. 
During the 22 years since enactment, the Surface Transportation Board 
(STB) has concentrated on the health of the railroads but has not 
focused on the pro-competitive provisions of the Staggers Act.
    As everyone knows, ``captive shippers'' are the ``cash cows'' of 
the railroad industry. Railroad customers who believe their rates are 
exorbitant can appeal to the Surface Transportation Board (STB). The 
STB is the only agency with authority over complaints about 
unreasonable service and rates. Bringing a complaint before the STB can 
cost between $500,000 and $3 million and may take as long as 16 years 
to resolve. Many companies, obviously, find these costs prohibitive, 
and rarely productive. Therefore, from Bayer Corporation's perspective, 
the current SIB complaint system and procedures are greatly in need of 
reform.
    At Bayer Corporation we have seen first hand what competition will 
do with direct rail-to-rail competition. At our Baytown, TX, plant 
site, we received, as part of the Union Pacific-Southern Pacific (UP-
SP) merger, competitive access at that plant. We have seen improvements 
in both cost and service at that location because there are now two 
railroads, namely Union Pacific and BNSF, competing for our business. 
Better service and lower costs would not have happened without 
competition. We have seen our rail rate levels drop from 20 to 50 
percent depending on the movement. It is no coincidence that Bayer 
chose to make its largest ever investment of $1.3 billion, at Baytown, 
TX.
    In 2000, Bayer Corporation acquired Lyondell's Polyol business, 
which includes a manufacturing unit at the South Charleston, WV, site. 
This location is ``open'' to both the CSXT and Norfolk Southern 
railroads. When comparing rates for that site to our New Martinsville, 
WV plant, which produces the same basic product, but is ``captive'' to 
CSXT, the rates are significantly higher--this fact clearly illustrates 
the need for competitive access.
    Bayer competes with numerous other producers of chemicals and 
welcomes that competition. We cannot expect the law to shield our 
business from competition, as is the case for the railroads. We simply 
ask that there be a level playing field under which no shipper is 
captive to a single railroad. Rather, each shipper should have 
available to it, the service of at least two railroads, so that all 
shippers may have equal access to competitive rail rates. There is no 
logic in a situation where two of our major shipping sites, namely 
Baytown, TX, and South Charleston, WV, should have two railroads 
competing for business, while our plant at New Martinsville, WV is 
captive to a single railroad. The enactment of competitive access 
legislation should assist in providing a level playing field for rail 
transportation, and permit shippers and receivers to compete on the 
basis of quality and service of their product, rather than on the 
existence or non-existence of rail competition.
    Let me close by thanking you again, Senators for tireless support 
of principles and goals cherished by Bayer Corporation, on rail 
competition and many other issues.

        Sincerely,
                                         Dr. Attila Molnar,
                             President and Chief Executive Officer,
                                                 Bayer Corporation.

    Senator Rockefeller. So I would say a bittersweet goodbye 
to you, if you do not come back to testify again. I think you 
are a smart person and a really good person. I just wonder 
about the whole concept of working on the relatively few cases 
that you have before you, versus the knowledge of all those 
other cases that cannot afford to come before you or get 
discouraged to come before you, who are real people doing real 
business, trying to really help America prosper, and their 
families, and have no attention paid to them.
    Ms. Morgan. May I just----
    Senator Rockefeller. Please.
    Ms. Morgan. Two things. User fees, because I started to get 
into that, but your time was up. I have had this discussion 
before on user fees. User fees are not my idea. If someone 
wanted to eliminate user fees entirely, that would be just 
fine. That is not something that I have necessarily embraced. 
It has just been around, and it is a policy in the Government, 
so I leave that issue to you.
    The second point is, the case that took 16 years, we have 
had this conversation before. That is McCarty Farms. Yes, that 
was around for 16 years. It was there when I got to the 
commission. I made it a top priority to resolve that case. 
There is no case in my building that has been around for 16 
years, so as I move on here, I want to make that perfectly 
clear. That was a case that was around before I got there, and 
I stepped up to the plate and resolved it, even though it was 
the one case that the shippers did not prevail on.
    Senator Rockefeller. Thank you, Mr. Chairman.
    Senator Breaux. Thank you, Ms. Morgan. I would like to 
welcome up our panel next consisting of Mr. John Snow, who is 
Chairman and President and CEO of CSX Corporation, Mr. Terry 
Huval from my State, representing the Lafayette Utilities 
System, Mr. Mark Schwirtz, who is Senior Vice President and 
Chief Operating Officer of the Arizona Electric Power 
Cooperative, Mr. Charles Platz, who is president of Basell 
North America, Incorporated, Mr. Steve Strege, who is Executive 
Vice President of the North Dakota Grain Dealers Association, 
Mr. Dennis Williams, manager of transportation services, 
Roseburg Forest Products.
    Gentlemen, welcome to the Committee. I thought that what we 
would do would allow Mr. Snow to testify last. We will allow 
the shippers to present their testimony and present their 
concerns, and then hopefully some of those concerns will be 
able to be addressed by Mr. Snow when he presents his 
testimony.
    So we will start, not with Mr. Huval, because I would like 
to be here when you testify. Let me start with Mr. Mark 
Schwirtz. Mark, if you would go ahead and go first, 
representing the Arizona Power Company.

          STATEMENT OF MARK W. SCHWIRTZ, SENIOR VICE 
 PRESIDENT AND CHIEF OPERATING OFFICER, ARIZONA ELECTRIC POWER 
                       COOPERATIVE, INC.

    Mr. Schwirtz. Thank you, Mr. Chairman, Members of the 
Subcommittee. My name is Mark Schwirtz. I am the Senior Vice 
President of Arizona Electric Power Cooperative, Inc.----
    Senator Rockefeller. (presiding) Please proceed.
    Mr. Schwirtz.--or AEPCO, and we are located in Southeast 
Arizona, primarily in Benson, Arizona, and AEPCO greatly 
appreciates the opportunity to be here today.
    I would like to introduce, or at least acknowledge our CEO 
who is here today because of the importance of this issue, and 
I also brought my daughter along with me for support and to 
witness Government at work. They are in the audience.
    AEPCO is a nonprofit rural electric cooperative. We serve 
our members, located primarily in rural, economically 
disadvantaged areas, on a cost pass-through basis. AEPCO 
generates the majority of its power by burning coal. Coal 
transportation and its procurement constitutes our largest 
single expense. Because AEPCO is a classic captive coal 
shipper, as we have heard about today, our rail rates are very 
high and flow directly into the rates our members pay.
    Our experience illustrates both the need for effective rate 
regulation, and the shortcomings in the regulatory process at 
the Surface Transportation Board. However, before explaining 
our own frustrations, I would like to note our deepest respect 
for Chairwoman Morgan and the dedication she has displayed in 
her service on the board. We also believe that much of the 
board's difficulties flow from the lack of resources to meet 
its substantial challenges.
    Unfortunately, AEPCO has been here before. During the 
seventies and eighties, AEPCO pursued a rate case against its 
carriers before the Interstate Commerce Commission. That case 
lasted over 10 years, during which our efforts to obtain relief 
were repeatedly blocked. Only after the Ninth Circuit likened 
our case to the interminable Jarndyce v. Jarndyce litigation in 
Charles Dickens' Bleak House and found that we, which I think 
this is important, suffered the arcane rigors of the regulatory 
process long enough, and only after Congress expressed its own 
concerns, was AEPCO able to achieve reasonable rates.
    Unfortunately, the rates achieved merely 15 years ago have 
been of fleeting value. Railroad costs have fallen 
substantially since then, as we have heard. While average rail 
rates have also supposedly declined, ours have risen 
continuously, and no longer bear any reasonable relationship to 
the railroad's cost of service.
    Accordingly, on December 29, 2000, AEPCO filed a new rate 
case with the board. This is the one Chairwoman Morgan was 
talking about. We first challenged only the rates for New 
Mexico coal. However, in response to railroad discovery, AEPCO 
amended its complaint to include rates from other origins. The 
railroads cancelled some of those other rates, refused to ship 
coal we had bought, moved to dismiss part of our complaint, and 
refused to comply with discovery. Major delay has resulted, 
even after the board has issued a decision on December 31st, 
2001. Additional pleadings have since been filed, but the board 
has not ruled. AEPCO's case continues to wallow in discovery 
and motions.
    The delay harms our coal procurement activities. We do not 
know what our rates will be and if we will even have rates from 
different origins in the West. Determining our cheapest source 
of coal has become an exercise in uncertainty. The uncertainty 
prevents us from making long term commitments and impairs our 
negotiations with coal suppliers. Under the board's regulations 
and governing statute, rate cases are to be decided in 16 
months. Our complaint has now been pending for over 19 months. 
No evidence has been filed, no procedural schedule exists. The 
board has said it will set one once discovery is completed, but 
discovery is stalled until the board rules on AEPCO's long-
pending motions.
    The ICC Termination Act of 1995 supposedly created the STB 
to remove some of the bureaucracy and streamline the process. 
This was effective in approving the recent Conrail merger, 
which took 13 months, but AEPCO has already been waiting 19 
months, and expects to be here at least another year or more.
    Unfortunately, we appear headed down the same regulatory 
path as 15 years ago. AEPCO urges this Committee to exercise 
oversight so that rate cases like AEPCO's are not forced to 
linger. One step is for the Committee to require the board to 
make a quarterly status report on rate cases and state if cases 
are on track and, if they are not, identify the cause of the 
delay and the actions taken to avoid further delay.
    Also, the board should receive the resources it needs to do 
its job. Given the difficulties AEPCO has experienced, the time 
has come to set a long-term goal of finding a more efficient 
way to achieve reasonable rates for captive shippers, for 
example, pro-competitive legislation, and a short-term goal 
that corrects the regulatory bottleneck that shippers face at 
the STB.
    I again thank you for the opportunity to bring our concerns 
before you, and respectfully request that my written statement 
be included in the record. Thank you.
    [The prepared statement of Mr. Schwirtz follows:]

  Prepared Statement of Mark W. Schwirtz, Senior Vice President, and 
   Chief Operating Officer, Arizona Electric Power Cooperative, Inc.
    My name is Mark W. Schwirtz. I am the Chief Operating Officer and 
Senior Vice President of Arizona Electric Power Cooperative, Inc. (or 
AEPCO), located in Benson, Arizona. AEPCO deeply appreciates the 
opportunity to appear before you today.
    AEPCO is a nonprofit rural electric cooperative, financed in large 
part through the Rural Utilities Service of the Department of 
Agriculture. AEPCO serves its ratepayers, located primarily in rural, 
economically disadvantaged areas of Arizona, on a cost pass-through 
basis. AEPCO generates much of its power by burning coal at its Apache 
Generating Station in Cochise, Arizona. The cost of coal together with 
coal transportation constitutes our single largest expense. Because 
AEPCO is a classic ``captive'' coal shipper, the transportation rates 
that we pay our carriers, the Union Pacific and the Burlington Northern 
Santa Fe, are very high, and factor directly into our rates for 
electric power.
    AEPCO's predicament vividly illustrates why captive shippers need 
to be protected from monopolistic, market-dominant carriers, and why 
this Committee must exercise diligent oversight over regulatory 
agencies that fall within its jurisdiction. Moreover, if, as now 
appears to be the case, regulatory agencies such as the Surface 
Transportation Board are unable to meet their statutory and regulatory 
duties, then more self-executing regulatory approaches, such as 
competitive access, should be implemented. In that regard, the 
legislative proposals that have already been introduced and assigned to 
this Committee merely call for the adoption of the sort of pro-
competition approaches to other ``natural'' monopolies that have been 
adopted in a myriad of other industries.
    From the late 1970's through the mid-1980's, AEPCO was engaged in a 
protracted rate case with the UP's and BNSF's predecessors before the 
Surface Transportation Board's predecessor, the Interstate Commerce 
Commission. That litigation lasted over ten years, during which our 
efforts to obtain a meaningful review of our carrier-imposed rates were 
repeatedly blocked. Only after the 9th Circuit, in AEPCO v. United 
States, 816 F.2d 1366, 1368 (9th Cir. 1987), likened our rate case to 
the interminable Jarndyce v. Jarndyce litigation in Charles Dickens's 
Bleak House, and found that AEPCO had ``suffered the arcane rigors of 
the regulatory process long enough,'' and only after Congress expressed 
its concern about the situation, was AEPCO able to achieve a settlement 
that afforded its ratepayers a modicum of reasonable rail rates.
    Unfortunately, the rates achieved nearly fifteen years ago have 
proven to be of fleeting value. Railroad costs have continued to fall 
very substantially since that time. While, as the railroads are quick 
to note, average rail rates, even for coal, have also declined, AEPCO 
has faced continuous railroad rate increases over that period. As a 
result, AEPCO's rail rates no longer bear any reasonable relationship 
to the railroads' costs of providing service.
    Accordingly, on December 29, 2000, AEPCO filed a new rate case with 
the Board. AEPCO originally challenged BNSF's and UP's rates for moving 
coal to AEPCO's Apache power plant only from the New Mexico origins 
that have always been AEPCO's primary source of coal. However, the 
railroads quickly initiated discovery designed to demonstrate that 
AEPCO will likely need to obtain significant volumes of coal from other 
sources in the future. AEPCO then amended its complaint on March 9, 
2001, to include rates from Colorado and Powder River Basin (or PRB) 
origins that BNSF and UP had previously established. AEPCO's objective 
in amending its complaint was to avoid the burden and inefficiencies of 
piecemeal litigation and obtain rates that covered all of its long-term 
coal supply options, including the PRB. The PRB is the nation's largest 
source of coal, and the coal is relatively low-priced and low in 
sulfur. AEPCO believed that including the additional origins in its 
rate case would make the litigation process as efficient as possible 
for all concerned, especially compared to bringing an additional rate 
case in a few years.
    The railroads responded by doing everything in their power to 
frustrate AEPCO's rate case. In quick order, they withdrew their PRB 
rates, refused to move the PRB coal that AEPCO had bought, sought to 
dismiss the PRB rate challenge, attempted to consolidate AEPCO's rate 
case with those of three other shippers, refused to respond to 
discovery, and even initially refused to reestablish PRB rates as 
ordered by the Board. All of these actions served to delay AEPCO's rate 
case.
    On December 31, 2001, over a year after AEPCO filed its original 
complaint, and over nine months after AEPCO amended its complaint, the 
Board finally denied the railroads' motion to dismiss the PRB rate 
challenge and addressed other discovery matters. However, the railroads 
promptly responded by refusing to produce the information AEPCO needs 
to proceed with its rate case, particularly regarding the PRB rates. 
The railroads even claimed that AEPCO needed to present separate 
evidence to challenge the Colorado and PRB rates. AEPCO has since filed 
additional motions to compel and has responded to other railroad 
motions, but the Board has not ruled on any of these pending matters. 
Indeed, both of AEPCO's motions to compel have been pending for longer 
than the 75 days that the Board's regulations provide are to be 
sufficient for completing all discovery. As a result of the Board's 
lack of action, AEPCO's rate case is, as of this moment, effectively 
dead in the water.
    The lack of progress in our rate case and associated uncertainty 
creates major operational problems for us. As long as the litigation 
remains pending, we do not know what our railroad rates will be and, in 
the case of the PRB and some other origins, whether we will even have 
any rates at all. Since our rail rates are subject to change or 
possibly termination, efforts to develop our delivered cost of coal 
from different origins involve exercises in substantial uncertainty, 
which undermines our ability to make important coal procurement 
decisions, and also to fulfill our duty to provide power to our members 
and other customers at the lowest possible cost.
    Moreover, AEPCO's experience has not been unique. Unfortunately, 
other western coal shippers have experienced very similar delays in 
their rate cases.
    The intolerable delay cannot be reconciled with the Board's 
obligations. Under the Board's regulations (49 C.F.R. Sec. 1111.8), the 
evidentiary filings in a rate case are to be completed within seven 
months of the filing of the complaint, and the governing statute (49 
U.S.C. Sec. 10704(c)(1)) specifies that rate cases should be decided 
within nine months of the completion of the evidentiary record. Hence, 
rate cases should be decided within sixteen months of filing. Moreover, 
the governing statute (49 U.S.C. Sec. 10704(d)) further instructs the 
Board to ``establish procedures to ensure expeditious handling of 
challenges to the reasonableness of railroad rates  . . . includ[ing] 
measures for avoiding delay in the discovery and evidentiary phases of 
such proceedings  . . . and for ensuring prompt disposition of 
motions.''
    These requirements have been completely disregarded in AEPCO's 
case. AEPCO's complaint has now been pending for over nineteen months, 
three more than the period in which cases are supposed to be decided. 
AEPCO's case has not been decided. In fact, not one page of evidence 
has been filed, and there is not even a procedural schedule. The Board 
has said that it will establish a procedural schedule once discovery is 
completed, but, so far, the railroads have been refused to respond to 
discovery on the PRB rates and other matters, even though their motion 
to dismiss the PRB rates was supposedly denied seven months ago.
    AEPCO, like other shippers, viewed the passage of the ICC 
Termination Act of 1995 and the establishment of the Board as a sign 
that rate cases would receive the attention they deserve and would be 
decided on a reasonably prompt basis. At first, the Board seemed 
interested in fulfilling that objective. More recently, however, the 
Board has seemed more interested in other matters, such as mergers, and 
has allowed rate cases and captive shippers to suffer from apparent 
neglect. At this point, it is difficult for AEPCO to discern any 
meaningful difference between the Board and the Commission that the 
Ninth Circuit criticized in no uncertain terms fifteen years ago.
    Accordingly, AEPCO urges this Committee to exercise its oversight 
function to ensure that the Board discharges its statutory and 
regulatory responsibilities in a timely manner. AEPCO would request 
that, as a minimum measure, the Committee require the Board to submit a 
quarterly report on the status of all pending rate cases, indicate 
whether the cases are ``on track,'' and if the cases are not adhering 
to the required schedule, identify the source of delay, which litigant 
(or the Board) is responsible for the delay, and what measures, if any, 
the Board is taking to ensure that the case proceeds to a timely 
resolution. Such a reporting requirement could do much to help focus 
the Board's attention and facilitate this Committee's efforts to remain 
informed.
    In addition, given the Board's current difficulties in fulfilling 
its regulatory responsibilities, it is also appropriate to consider 
changing the regulatory approach. In recent years, several 
``competitive access'' bills have been introduced to substitute 
competition for substantive rate regulation. While the railroad 
industry is quick to characterize these proposals as ``re-regulation,'' 
they are, in fact, deregulatory in nature, and are intended to subject 
so-called ``natural'' monopolies to the type of competition that is 
standard throughout the rest of the economy. These approaches may also 
require less in the way of regulatory resources. If the Board is not 
going to implement the rate regulation that currently exists, Congress 
should give serious consideration to these other types of proposals, 
which have been adopted in a myriad of other industries.
    Again, on behalf of AEPCO, I thank you for the opportunity to bring 
our concerns before you.

    Senator Rockefeller. Thank you very much, sir, and Mr. 
Williams, you will be next.

    STATEMENT OF DENNIS WILLIAMS, MANAGER OF TRANSPORTATION 
               SERVICES, ROSEBURG FOREST PRODUCTS

    Mr. Williams. Senator Rockefeller, I would like to thank 
Senators Breaux and Smith for inviting me to speak before your 
Subcommittee today on my experience in shipping via railroad. I 
have also prepared a more detailed summary that I wish to have 
entered into the record of this hearing.
    My name is Dennis Williams, and I am the Manager of 
Transportation Services for Roseburg Forest Products Company, a 
major manufacturer and shipper of forest products, with 
headquarters in Dillard, Oregon, and facilities located in 
southwestern Oregon and northern California.
    We have shipped each year approximately 5,000 carloads of 
inbound logs and veneer, and we ship outbound approximately 
12,000 carloads each year of finished product to our customers 
located throughout the Nation and eastern Canada.
    All of our facilities are located on the Central Oregon and 
Pacific Railroad, a 450-mile shortline that is contractually 
limited to interchanging traffic to the Union Pacific Railroad 
for its outlet into the mainstream railroads. Roseburg Forest 
Products is a captive shipper.
    My career in industrial transportation management began 
more than 34 years ago. Thus, I am really familiar with the 
intricacies involved in regulation prior to the enactment of 
the Staggers Act of 1980. As a member of the National 
Industrial Traffic League, I actively participated in the 
debate regarding the formulation of the Staggers Rail Act of 
1980. I supported the principles of the Staggers Rail Act when 
we were debating it and I support the principles now.
    I believe that competition in an appropriate quantity is an 
effective replacement for unduly burdensome regulation. 
However, the reduction in the number of Class I railroads 
through acquisition and merger has changed the quantity and the 
nature of competition envisioned by Staggers.
    Railroads enjoy a statutory franchise exclusivity coupled 
with pricing and service freedom enjoyed by no other industry 
in the Nation, a statutory recognition of the private property 
nature of railroads, and the importance of railroad service to 
the wellbeing of the national economy. This combination of 
freedom and protection is a special situation that is 
sufficiently different from the business situations faced by 
customers of the railroad particularly in their insulation from 
the consequences of their actions, that it creates a special 
condition for railroads.
    In other words, railroads are a special condition, and that 
naturally raises our concern as a business, so we pay more 
attention to railroads, not only regulators, but we pay 
attention as their customers. In no event does anybody wish a 
return to the unduly burdensome regulations that we faced prior 
to the enactment of Staggers.
    Our business is vitally dependent on railroads to move our 
products from our plant site to our customers while preserving 
their competitive value. Thus, we need reasonable 
transportation service at reasonable rates in order to survive. 
We are a captive shipper to Union Pacific, and our experience 
with railroad transportation is generally favorable.
    Although railroads tend to use their post-Staggers pricing 
freedom to build economic walls around their properties against 
competitors, they have also at times demonstrated strong 
partnership with their customers, notably Roseburg Forest 
Products, and form a vital link between our customers and us. 
We find this particularly true with Union Pacific, our serving 
carrier, and Norfolk Southern, although they are not entirely 
consistent.
    We enjoy large segments of our business as a direct result 
of our Class I railroad partners making a special effort in 
pricing and service to help us establish and maintain these 
customers. At the same time, Class I railroads are undeniably 
self-focused, and they pay real attention to the needs of their 
customers only with great difficulty. It is just the nature of 
the industry.
    As railroads have cut their internal costs, they have 
forced many of the functions they formerly provided back onto 
their customers, functions such as car supply, car cleaning, 
and now rate maintenance. Important interfaces, particularly 
representation by sales and marketing between railroads and 
their customers, are becoming less effective as railroads cut 
back the staff that they have.
    This inconsistency and continuing inward focus of railroads 
are symptoms that insufficient competition exists within the 
railroad industry and between railroads and other modes. In the 
current semi-deregulated environment, the willingness of 
railroads to vigorously compete has become largely a matter of 
choice and sound management, and is no longer compelled by the 
presence of a large number of competitors. For a railroad to 
state, as all have, that they must charge higher rates to 
captive shippers in order to enhance revenue levels that are 
depressed by the lower rates they charge non-captive shippers 
is a very clear symptom of a weakened sense of competition.
    For a railroad customer to avoid expressing criticism of 
its serving railroad, as many of my peers have, because they 
fear retaliation from that railroad, is a sad statement with 
respect to the relationship the railroad has with its 
customers. The shipping public and railroads are at a 
critically important point. I do not advocate new regulations 
that would impose more competition upon railroads. I believe 
that existing regulations such as those providing for 
enhancement of competition through reciprocal switching, and 
the ongoing negotiations regarding the elimination of paper 
barriers with shortline connections, are sufficient.
    I believe that both private and public negotiation between 
railroads and their customers, conducted in the spirit of 
mutual benefit and mutual self-interest, can overcome the 
primary disagreements that exist today. Railroads must, 
however, demonstrate their willingness to compete in order to 
retain both the exclusivity of franchise and pricing freedom 
they now enjoy. They must clearly state what they will do for 
their customers, and be prepared to be held accountable.
    Likewise, railroad customers must vigorously bring the 
railroads into their businesses. They must clearly inform 
railroads what they need, obtain the railroads' commitment to 
meeting those needs, and then be prepared to hold the railroads 
accountable. If these things do not happen, railroad customers, 
including Roseburg, will demand and impose new regulations 
designed to protect the interests of the shipping public.
    Thank you.
    [The prepared statement of Mr. Williams follows:]

   Prepared Statement of Dennis Williams, Manager of Transportation 
                   Services, Roseburg Forest Products
    To the Members of the Senate Subcommittee on Surface Transportation 
and Merchant Marine of the Committee on Commerce, Science, and 
Transportation:
    I thank Senators Breaux and Smith for inviting me to speak before 
your Subcommittee today on my experiences in shipping via railroad. I 
have also prepared a more detailed summary and paper that I wish to 
have entered into the record of this hearing.
    My name is Dennis Williams, and I am the Manager of Transportation 
Services for Roseburg Forest Products Company, a major manufacturer and 
shipper of forest products, whose headquarters are located in Dillard, 
Oregon, with facilities located in southwestern Oregon and northern 
California. We have shipped each year approximately 5,000 carloads of 
inbound logs and veneer and more than 12,000 carloads of finished 
product outbound to our customers located throughout the United States 
and eastern Canada. All RFP facilities are located on the Central 
Oregon and Pacific Railroad, a 450 mile-long switching railroad that is 
contractually limited to interchanging traffic to the Union Pacific 
Railroad. Roseburg Forest is a captive shipper.
    My career in industrial traffic management began more than 34 years 
ago; thus I am really familiar with the intricacies of the pre-Staggers 
regulatory environment. As a member of the National Industrial Traffic 
League, I actively participated in the debate surrounding formulation 
of the Staggers Rail Act of 1980. I supported the principles of 
Staggers then, and I support them now. Competition, in an appropriate 
quantity, was and is an effective replacement for unduly burdensome 
regulations. However, the reduction of the number of Class 1 railroads 
through acquisition and merger has changed the quantity and the nature 
of competition envisioned by Staggers.
    Railroads enjoy a statutory franchise exclusivity coupled with 
pricing and service freedom enjoyed by no other industry in the nation, 
a statutory recognition of the private property nature of railroads and 
the importance of the transportation service they provide to the 
economic well-being of our nation. This combination of freedom and 
protection is a special situation that is sufficiently different from 
the business situations faced by customers of the railroads, 
particularly in the immediacy of consequences to prices and actions, 
that railroad customers have been, and will continue to be, concerned 
with the railroad industry. In no event does anyone desire the return 
to a burdensome regulatory scheme.
    Our business is vitally dependent upon railroads to move our 
products from our plantsites to our customers while preserving their 
competitive value. Thus, we need reasonable transportation service at 
reasonable rates in order to survive. We are a captive shipper to Union 
Pacific, and our experience with railroad transportation is generally 
favorable. Although railroads tend to use their post- Staggers pricing 
freedom to build economic walls around their properties against their 
competitors, they have also, at times, demonstrated strong partnership 
with their customers, forming a vital link between our customers and 
us. We find this particularly true with UP and NS, although they are 
not entirely consistent. We enjoy large segments of our business as the 
direct result of our Class 1 railroad partners making a special effort 
in pricing or service to help us establish and maintain them. At the 
same time, Class 1 railroads are undeniably self-focused and pay real 
attention to the needs of their customers only with great difficulty. 
As railroads have cut their internal costs, they have forced many of 
the functions they formerly provided back onto customers, functions 
such as car supply, car cleaning, and rate maintenance. Important 
interfaces, particularly representation, between railroads and their 
customers are becoming less effective.
    This inconsistency and continuing inward-focus are symptoms that 
insufficient competition exists within the railroad industry and 
between railroads and other modes. In the current semi-deregulated 
environment, the willingness of railroads to vigorously compete is 
largely a matter of choice and sound management and is no longer forced 
by the presence of a large number of competitors. For a railroad to 
state, as all have, that they must charge higher rates to captive 
shippers in order to enhance revenue levels that are depressed by the 
lower rates they must give to customers who are not captive is a very 
clear symptom of a weakened sense of competition. For a railroad 
customer to avoid expressing criticism of its serving railroad because 
it fears retaliation from that railroad is a sad statement of the 
relationship the railroad has with its customers.
    The shipping public and railroads are at a critically important 
point. I do not advocate new regulations that would impose more 
competition upon railroads. I believe that existing regulations, such 
as those providing for enhancement of competition through reciprocal 
switching and the ongoing negotiations regarding the elimination of 
paper barriers with short line connections, are sufficient. I believe 
that both private and public negotiation between railroads and their 
customers, conducted in the spirit of mutual benefit and mutual self-
interest can overcome the primary disagreements that exist today. 
Railroads must, however, demonstrate their willingness to compete in 
order to retain both the exclusivity of franchise and pricing freedom 
they now enjoy. They must clearly state what they will do for their 
customers and prepare to be held accountable. Likewise, railroad 
customers must vigorously bring the railroads into their businesses. 
They must clearly inform railroads what they need, obtain the 
railroads' commitment to meet those needs, and then hold the railroads 
accountable. If these things do not happen, railroad customers, 
including Roseburg, will demand and impose new regulations that will 
protect the interests of the shipping public.

    Thank you for your attention.

                Railroad Competition and Competitiveness

                           Executive Summary

1. Roseburg Forest Products Company (RFP) Page 1
    Major manufacturer of forest products; facilities in Oregon 
        and California.

    70-percent of production moves by rail; 5000 cars logs and 
        veneer inbound and 12,000 finished product outbound. 50-percent 
        of carloads go to eastern U.S.

    Highly competitive markets, geographic and product 
        competition.

    Freight expense 10 to 50-percent of delivered price.
2. Roseburg Rail Service Requirements Page 2
    Cost-effective transportation at competitive prices from 
        plantsites to customers, timely delivery of product in useable 
        condition.

    Reliable supply of railcars suitable to transport products.

    Transit time influences customer inventory expense.
3. Pre- and Post-Staggers Railroad Environment Page 2
    Before 1980 Staggers Act, arcane and constrictive 
        regulations stifled the railroad system and national economic 
        growth. Slow orders from nationwide deferred maintenance, 
        northeast railroad bankruptcies stranded rail customers. (p.3)

    Competition among railroads utilized to replace most 
        regulations. (p.3)

    Railroads partially deregulated. They remain heavily 
        regulated. (p.4)

    Railroads initiated confidential freight rates and service 
        agreements. (p.4)

    Number of major railroads shrank from 30 to 7 between 1980-
        2000. (p.4)
4. Roseburg Experience Page 5
    These comments seek to make the system better meet our 
        needs, so they address more negatives than positives. RFP 
        experience generally positive. (p.5)

    Regulatory change fostering competition more helpful than 
        harmful. (p.5)

    Railroads compete for business, but build economic walls 
        around their properties to defeat competition, e.g. high rates 
        against competitor origins, rates for hauls over two railroads 
        higher than for single-line hauls. (p.5)

    Shippers ``captive'' to one railroad cannot obtain rates as 
        low as shippers with access to multiple railroads. Railroads 
        proprietary about customers. (p.5)

    Regulatory freedoms of Staggers generated vigorous 
        competition, improved railroad response time, and encouraged 
        service/rate programs that rewarded innovators and penalized 
        those who would not compete. SP market share of northwest 
        business dropped from 43 to 28-percent. (p.6)

    Roseburg gained more direct access to customers from 
        mergers among large railroads. Consolidation reduced the pool 
        of competitors envisioned in Staggers. Railroad willingness to 
        engage competition is a matter of choice, with most decisions 
        made to avoid competing head-to-head. (p.6)

    Competition has led to cost cutting by railroads. Many 
        essential railroad functions either displaced to customers or 
        no longer offered. (p.7)

    RFP sees deficiency of compelling competitive forces on 
        railroads. Regulations protect rail franchise exclusivity; 
        gives pricing freedom but shields them from competitive forces 
        faced by their customers. Railroads act for self-benefit at 
        customer expense but fear no business loss. (p.7)

    Railcar supply is inadequate and outdated--cars often 
        contain trash and 10-percent are mechanically unsound, causing 
        transit delays. Railroads claim insufficient capital to replace 
        aging cars and have told Roseburg and other shippers to acquire 
        and operate their own boxcars. (p.8)

    Railroads, notably UP, also engage in beneficial customer 
        partnerships, and provide competitive service and prices for 
        mutual benefit. (p.9)

    Specific departments at UP Railroad are sharply focused on 
        supporting RFP business for mutual benefit, how business should 
        work. (p.9)
5. Competitive Access Page 10
    Railroad mergers reduced competitive forces to the point 
        that a prudent amount of competition needs to be infused into 
        the industry. Deregulation, reregulation, and open access are 
        terms used to incite blind response to credible ideas. (p.10)

    Reciprocal switching. An existing statute whose purpose is 
        to allow the Surface Transportation Board to enhance 
        competition. The STB would require two or more railroads 
        located within the same switching district to open industries 
        located on their lines to linehaul service by other railroads, 
        including short lines, located within that district. (p.11)

    Bottleneck rates. A proposed new regulation in which STB 
        may require a railroad serving a captive shipper to establish 
        reasonable rates for that shipper to the nearest interchange 
        with a competitor railroad. (p.11)

    Paper Barriers. The STB could eliminate Class 1 railroad 
        restrictions that prohibit a captive Short Line railroad from 
        interchanging with competitors of the controlling Class 1 
        railroad. (p.11)
6. Captive Shippers Page 12
    RFP is effectively captive to Union Pacific, but, because 
        UP and Roseburg work hard to cooperate, the relationship has 
        been generally fruitful. (p.12)

    Captivity results in freight costs higher than RFP would 
        have with direct access to BNSF, but RFP has not yet pursued 
        access to BNSF. (p.12)

    Reprisal fear, long felt by many shippers, is now a 
        consideration at RFP. (p.12)
7. Railroad Capital Needs Page 13
    Railroads must add physical capacity to satisfy demand for 
        transportation, and they are spending billions to meet present 
        and future demand. (p.13)

    Short Line railroads in particular need cash to upgrade 
        lines to handle heavier loads (286,000 pounds per car) now 
        common on Class 1's. (p.13)
                                 ______
                                 
Hon. Gordon Smith,
Washington, DC.

Dear Senator Smith:

    Roseburg Forest Products Company (RFP) is a major manufacturer and 
distributor of forest products with facilities located in Oregon and 
northern California. Our products are lumber, plywood, particleboard, 
laminated veneer lumber, wood I--joists, and value-added products we 
make from these materials. We are located exclusively on the Central 
Oregon and Pacific Railroad, a 450-mile short line switching railroad 
whose Class I connection is contractually restricted to Union Pacific 
for rates, linehaul service, and railcar supply. We ship about 12,000 
carloads of outbound finished products each year throughout the U.S. 
and Canada, and receive another 5,000 carloads of inbound materials 
such as logs and veneer. We ship almost 70-percent of our annual 
production by rail, and nearly 50-percent of our carload shipments move 
to destinations east of the Mississippi River. RFP is a good partner to 
railroads and regulatory agencies, because we negotiate from a win-win 
basis, and we communicate accurately, plainly, and abundantly.
    We are vitally dependent upon railroad service, because our 
products are relatively low-value, compared to most inter-city freight. 
Since the volume of our production substantially exceeds demand for our 
products in the Northwest, we must move long distances to our 
customers. The importance of competitive freight rates is shown by the 
fact that freight expense is between 10-percent and 50-percent of our 
delivered prices, a substantial percentage compared with other products 
moving in intercity freight. Our markets are highly competitive and 
cost-sensitive. Our products compete with those made by manufacturers 
in the Northwest as well as those made by producers located closer to 
our customers than we are, whose freight expense is only a fraction of 
ours. Our products also compete with substitute goods made of concrete, 
steel, plastic, and other material. Railroads represent the only 
economical mode for moving the full volume of our products to distant 
markets. Trucking costs are too high to allow our products to be 
competitive over long distances, and waterborne modes are either too 
slow or do not serve sufficient destinations to support our business.
    Our perspective of railroads is focused on four primary aspects: 
(1. Freight rates, (2. Equipment, (3. Service adequacy, and (4. 
Strategic Transportation supply. With respect to rates, we, as does 
everyone, don't want to pay more than we have to, but we don't blindly 
engage in rate cutting. We require our rates to be genuinely 
competitive and to reflect the economies of scale our operations and 
shipping patterns generate for the railroad. We seek value and 
fairness. Our perspective on equipment is that while railroads have the 
exclusive right to supply equipment for loading, with that right comes 
the obligation to supply cars that are structurally and mechanically 
sound, reasonably clean, and fit the railroad's capabilities for 
freight cost optimization. When we speak of service adequacy, we refer 
to both linehaul and origin/destination switching. Railroad transit 
times must be competitive with other modes and origins, and they must 
be reasonably consistent. We disagree with the position that transit 
consistency is more important than transit time, because transit 
directly influences inventory levels that our customers maintain. Time 
and consistency are equally important. Strategically, we pay much 
attention to long-term railroad issues. We are convinced of the need 
for railroads to expand their plant capacity, because, as the nation's 
economy grows, demand for rail transportation will increase. Rail 
capacity must be adequate to meet demand, or it will stifle economic 
growth. We encourage railroads by our actions and words to foster 
capacity growth by developing adequate present and future 
transportation resources.
    The point of our transportation exercise is to move our products 
from our plants to wherever our customers want them while preserving 
their competitive value. To accomplish this, we require rail service 
that provides a reliable supply of cars for loading, moves our products 
at competitive prices with reasonably expedient transit times, and 
delivers our products in a condition useable by our customers. These 
factors are inextricably linked in determining our success in meeting 
customers' needs. Car supply reliability is important because customers 
expect their orders to ship within a specific agreed-upon period of 
time, so cars must be available when orders are ready to ship. Transit 
times affect the value of our products nearly as much as freight rates, 
because they directly affect the size of inventories, and capital 
investment in inventories, our customers maintain to support their 
business. Finally, customers purchase our products for a specific use, 
and, from their perspective, if our products arrive wet, damaged, or 
otherwise unsuitable for their purposes, we have failed to deliver them 
and might as well have not shipped them at all.
PRE-STAGGERS REGULATIONS
    The regulatory climate within which we purchase transportation 
service by railroad has evolved from an arcane and stifling system of 
regulation that existed for decades prior to enactment of the Staggers 
Rail Act of 1980. Railroads were treated as utilities and were governed 
by a constrictive set of regulations written to control monopolies. A 
good illustration of this oppressive system can be found in its 
treatment of rates. Before Staggers, all freight rates were calculated 
in accord with exact formulas prescribed by the ICC. Factors within 
these formulas were defined by case law and were interpreted and 
applied by railroad rate bureaus, regional groups of railroads that 
were granted antitrust immunity to collectively make rates. A rate 
could not favor one shipper over another, regardless of comparable 
economies of scale or operating efficiencies, and it had to apply over 
nearly every possible combination of railroads that existed between a 
shipment's origin and destination. A rate could not be changed without 
concurrence of every railroad that might possibly participate in using 
it. Rate reductions proposed by an individual railroad to gain new 
business were usually thwarted by that railroad's competitors who 
refused to give their concurrence, thus making new traffic difficult to 
obtain, even as railroads were losing their existing carload traffic to 
the trucking industry. The purpose of this constrictive regulatory 
system was to prevent railroads from abusing their power over the 
shipping public. The system made changes in railroad pricing and 
operation so onerous that they took forever to implement, so most 
railroads avoided change. That system was financially strangling the 
railroad industry. Immediately prior to enactment of the Staggers Act, 
nearly a third of the nation's railroad trackage was under slow orders, 
due to deferred maintenance, and the country's northeast was nearly 
paralyzed by a swarm of railroad bankruptcies.
    My transportation career began during this time, and I still 
shudder to recall the tedious minutiae that ruled this vital segment of 
the national economy. Few industry traffic managers and railroad 
employees today actually experienced this period. Most don't believe 
that we could return to the bureaucracies within railroads, government, 
and industry that pre-Staggers regulations required. I believe 
differently. The present health care billing system exemplifies how 
over-regulation used to stifle the railroad industry. The green eye 
shade and sleeve garter mentality flourishes within the bureaucracies 
created by HMOs, regulators, and industry staff that are required to 
contend with the ``new'' system. Any of these can glaze one's eyes 
every bit as quickly as used to occur from a freight clerk's 
explanation of the approximation of Class 100. The shipping public can 
not afford a return to that type of system in transportation.
THE STAGGERS ACT OF 1980--PARTIAL DEREGULATION
    Congress formulated The Staggers Act through cooperation and 
extensive negotiation between railroads and the shipping public. The 
new law's purpose was to obviate most previous regulatory constraints 
by fostering independent action and competition among railroads. 
Staggers envisioned that if railroads acted independently and competed 
with each other, they would conduct themselves more as normal 
businesses; focusing upon serving customers, the true source of their 
revenues, and thereby earn greater profits and attract much-needed 
capital. Concurrently, railroads would be unable to abuse their market 
power over their customers, because such acts would cause them to lose 
business to their intra- and intermodal competitors. The framers of the 
Staggers Act expected that a sufficient number of railroads would exist 
to provide effective competition for each other. It is important to 
note that Staggers did not deregulate the railroad industry--railroads 
were still heavily regulated and remain so to this day. Rather, 
Staggers allowed railroads more freedom to individually price and 
change their service product as other industries do.
    The Staggers Act allowed railroads to set their freight rates upon 
any basis they chose--cost or market or, sometimes, whim--with very 
broad latitude of action. On the low side, a rate must at least 
contribute to the going concern value of a railroad. On the high side, 
limits are set by commodity, with the ceiling set at replacement cost 
value. This interesting limit states that rates can be so high as to 
equal the cost a railroad customer would experience were they to build 
and operate their own railroad line between the points at issue--a very 
high ceiling, indeed. Staggers encouraged regulators to exempt specific 
commodities and identifiable classes of traffic from all pricing 
control. Forest products rates are exempt from price regulation; thus, 
railroads have complete freedom to set rates on our shipments.
    Staggers allowed railroads to enter into confidential contracts 
with customers. Prior law required all rates to be open to the public, 
and shippers knew their competitors' rates. Under confidential contract 
rates, we don't know all our competitors' rates, and they don't know 
ours. An interesting side note; despite ``common wisdom'' among 
shippers and railroads that rate confidentiality is a myth, my 
experience is that a shipper, through concerted effort, can keep its 
contracts confidential. Confidentiality is, of course, a two-edged 
sword. We benefit where it protects our business and are harmed by 
competitors who take away our business using confidential rates. 
Confidentiality also makes the task more difficult of identifying 
situations where we are hurt by unjustly discriminatory rate practices 
by railroads. Nonetheless, we accept confidentiality's importance to 
free enterprise in the real world. It forces all parties to do business 
better, rewarding efficiency and penalizing mediocrity.
    Staggers also eased the process for merger, acquisition, and 
abandonment among railroads. Until the Surface Transportation Board 
took ``time out'' before the proposed BNSF/CN merger, the ICC and its 
successor agency, the STB, allowed railroads to merge and acquire other 
railroads in every transaction that was not both blatantly anti-
competitive and accompanied by overt disregard for the regulatory 
process. Merger and acquisition have reduced the number of major 
railroads from more than 30, when Staggers was enacted, to the present 
level of 7, a reduction whose significance I will explain further.
ROSEBURG FOREST PRODUCTS COMPANY EXPERIENCE
    Some things work well within the present system and some don't. 
This letter's purpose is to help the system better meet our needs, and 
my comments will address more things that need improvement than those 
that work well. My experience is generally positive, especially with 
the UP railroad.
    At Roseburg, we have seen tremendous change, attributable to 
enactment of Staggers, in our ability to market our products using 
railroad service. Our present situation reflects change that has been 
much more beneficial than adverse. The most predominant initial effect 
of Staggers was that railroads began ``competing'' by building economic 
walls around their properties, insulating their on-line business from 
competitor railroads, a practice that continues today. The three 
primary railroads in the northwest, BN, UP, and SP used their Staggers 
freedom to either outright cancel their joint rates with each other 
(rates covering business shared with each other) or create rate 
differentials favoring single line (unshared) business. For example, a 
500-mile haul from a UP-served mill to a UP-served customer might carry 
a $500 single-line rate, and a 500-mile haul from a BN-served mill to a 
BN-served customer might have a $500 rate. However, a 500-mile haul 
from a UP-served mill to a BN-served customer is always more expensive 
than either single-line rate. Thus, shippers located on a given 
railroad realize an advantage to destinations located on their railroad 
and its ``friendly connections'' but are disadvantaged to destinations 
on a competitor railroad.
    Shippers who are restricted to linehaul by only one railroad are 
termed ``captive'' to that railroad. Roseburg Forest was ``captive'' to 
SP, and we remained ``captive'' when UP acquired SP. Our competitive 
circumstances contrast markedly with those of ``non-captive'' shippers. 
Generally, shippers whose facilities are open to linehaul service by 
two or more railroads have a substantial advantage over shippers 
located on a single railroad, because they have access to both 
railroads' single-line rates. These favorably situated shippers gain 
further advantage by leveraging one railroad against another, to common 
destinations, to obtain additional single-line rate reductions.
    Staggers provisions that allowed railroads to act independently 
from each other generated vigorous competition. Railroads began 
utilizing their own single-line tariffs and letter quotes (confidential 
contracts) to the extent that collective action in rate bureau tariffs 
virtually disappeared for rate publishing purposes. A significant 
change we noted was the improved speed with which railroads 
incorporated rate changes. Where Southern Pacific, our serving 
railroad, formerly took 6 months to respond negatively to our requests 
for reduced rates, Staggers provisions allowed it to shorten its 
reaction time to a couple weeks, and ultimately to a few days. Its 
response was still negative, but much faster. Following purchase of SP 
by UP, we enjoy quick response today from UP, and we note that its 
response is more often positive than negative.
    Railroads began developing and implementing innovative rate 
programs. When SP denied its origin traffic to BN and UP by canceling 
its joint-line rates with them, the two railroads, separately, 
initiated aggressive origin reload programs for the purpose of 
regaining SP-origin traffic volumes they previously enjoyed. In these 
programs, UP or BN contracted the services of a truck/rail transloader 
who was located on its line near a group of SP-served mills. The 
railroad then established very low contract linehaul rates from that 
``reload'' facility to eastern, SP-competitive destinations so that the 
combination of trucking, reloading, and UP or BN linehaul charges from 
the SP-served mill through the reload was lower than the SP rate from 
the SP origin. UP and BN, bluntly, ate SP's lunch. These programs, in 
several successive configurations, were so successful that UP and BN, 
acting in similar fashion but independently of each other, reduced the 
SP market share of forest products carload traffic from 43-percent to 
28-percent during the 1980's. SP served more than 60-percent of forest 
products manufacturing facilities in the Northwest, and the UP and BN 
accomplishment is noteworthy as an example of competition at a very 
effective level. Ultimately, SP reduced its rates to meet UP and BN 
competition. SP's action resulted in Northwest forest products' freight 
rates becoming more competitive in distant eastern markets, markets 
that were relatively unimportant to SP at the time, but which became 
extremely important to our business.
    Staggers provisions that eased merger and acquisition among 
railroads have dramatically affected our business. Class 1 railroads 
effectively control the nation's rail system. As the result of 
acquisition and merger during the past 20 years, the Class 1 railroad 
system is now composed of two primary western railroads (UP and BNSF), 
two primary eastern railroads (NS and CSXT), two Canadian railroads 
(CPRS and CN), and KCS. We at Roseburg have been fortunate during this 
consolidation process, in that we are effectively on UP, the nation's 
largest railroad, and have single-line access to the largest customer 
base of any railroad. During consolidation of several railroads into 
the present UP system, we gained single-line access to customers 
located on DRGW, UP, CNW, MP, WP, and MKT. We lost only ATSF as a 
friendly connection, as it merged with BN, a competitor of UP. All 
other Class 1 railroads are friendly connections, equally accessible to 
UP and BNSF. Thus, we gained more than we lost in the way of reasonable 
access to customers during these past mergers. However, we stand to 
lose access to customers as a result of future mergers.
    Consolidation of the nation's railroad system has removed almost 30 
railroads from the competitive pool that Staggers envisioned as a 
replacement to regulation. Competition is not so prevalent among 
railroads as it was when there were a large number of competitors, and 
the very nature of the competition that remains is different from the 
forces anticipated by Staggers. The degree to which railroads will 
recognize and engage competition is now largely a matter of choice, and 
their aggressiveness is dependent upon the individual railroad's will 
and ability to compete. Railroads face less competition, but their 
competitors are stronger and more formidable, and individual railroads 
are very wary of taking action against a competitor. We are often 
frustrated by a negative response from a railroad that chooses to not 
start a ``rate war'' with its competitor. Railroads, generally, are now 
more proprietary about their customers, particularly those who are 
captive. As railroads make more choices to not compete with each other, 
they have become more self-focused. Railroad action and attitude can be 
fairly characterized as cost-cutting for their own benefit, with many 
of the customer service functions they formerly performed now either 
pushed onto their customers or no longer offered. Importantly, we 
recognize that railroad cost reduction efforts have been mandated by 
their customers who, facing greater competitive pressure in their own 
businesses, have demanded rate reductions as part of their own activity 
to cut costs. At the same time, railroads are public companies with 
profit targets to achieve and stockholders to satisfy. I will 
illustrate some of the ways in which railroads have responded to these 
conflicting pressures.
    Generally, we sense that the nation's railroads feel a sufficient 
lack of competitive pressure from each other so that they believe they 
have substantial latitude to take actions that solely benefit 
themselves, at the expense of their customers, without fear of losing 
business to competitor railroads and trucks. Railroads price their 
services with the same degree of freedom that most businesses enjoy, 
but their specific situation contrasts sharply from most other 
industries that exercise pricing freedom. The remaining economic 
regulations that protect the exclusivity of railroad franchises serve 
to insulate railroads from the full force of economic consequences of 
their anti-competitive actions, unlike the forces with which other 
industries must contend. If one of our customers doesn't like our 
products, for any reason, they can readily buy like products from one 
of our competitors. However, if we don't like the service being 
provided by the railroad, we cannot economically buy commensurate 
service from its competitor. Railroad actions that created post-merger 
service crises, the severity of these service failures, and the 
prolonged recovery time from these crises are all symptomatic of 
railroads feeling little fear of competitive business loss.
    Railroads have begun limiting their handling of freight damage 
claims and overcharge claims. Deciding that small claims are not cost-
effective to process, railroads have advised shippers that they will no 
longer accept cargo damage claims of less than $250, even if they 
caused the damage. UP has recently announced it will not accept claims 
to recover freight bill overcharges, regardless of their cause, for 
amounts less than $100. Our experience has been that 95-percent of 
freight bill errors favor the railroad, and that the complex, 
confidential contract pricing system that predominates modern railroads 
is conducive to freight bill errors. Furthermore, railroads have begun 
imposing finance charges against their customers for payment of freight 
bills beyond their credit period, so the time we have to protect our 
interests by performing pre-payment freight bill audit is becoming very 
limited.
    Railroads charge exorbitant rates to switch cars coming from 
competitor railroads, within a given city, to their customers who are 
closed to reciprocal switching. This is to discourage shippers located 
on competing railroads from doing business with customers located on 
their lines. Unlike the rate structure for most industries, Forest 
Products freight rates, when more than one railroad is involved in a 
haul, uses combinations of single line rates, rather than single-
factor, joint rates available to most other industries. Railroads do 
establish joint rates, but they are almost invariably higher than the 
sum of each railroad's single line rates. Thus, a shipper on UP who 
ships to a customer located on BNSF must pay the UP linehaul rate to 
the UP/BNSF interchange and also pay a separate BNSF linehaul rate from 
interchange to the destination. Even if the customer's location is a 
city served by both UP and BNSF, if that customer is closed to 
reciprocal switching, the shipper must pay a BNSF minimum linehaul 
rate, about $800, in addition to the UP linehaul rate to that 
destination. Since most railroad single line rates are similar to each 
other between like points, a forest products shipper located on BNSF 
has a freight cost advantage of about $800 over its UP-located 
competitor. If the customer were open to reciprocal switching, a much 
lower BNSF switch charge would apply, and that switch charge would be 
absorbed by UP. Even so, BNSF apparently feels that the $800 penalty is 
insufficient to insulate its captive customers, so it raised its 
minimum linehaul charge to $1,124, a clearly anti-competitive move.
    The law requires railroads to provide reasonable car service, which 
means, in part, the railroad is obligated to provide equipment suitable 
for loading. With that obligation comes the right to be the exclusive 
supplier of equipment types the railroad chooses to provide, namely all 
major car types except tank cars. Despite the railroad's duty to 
provide equipment suitable for loading, we receive many, many boxcars 
for loading that contain debris and trash from prior loads of some 
other business. We have to either reject these dirty cars (losing use 
of that car spot for the entire day) or use our loading crews to clean 
and dispose of the debris, an expensive proposition. When railroads 
operated with 5-man crews, they inspected ``empty'' boxcars before they 
were removed from a customer's siding. If a car were found to contain 
debris from its prior load, the railroad crew refused to move it until 
the receiver cleaned it, and the receiver was subject to demurrage 
penalties for delaying the car's release. For some businesses, 
railroads even maintained a system of cleaning stations for empty cars 
prior to their being spotted for loading. Now, railroads don't take 
time to inspect cars, and they are closing the car cleaning stations. 
If shippers want cars suitable for loading, they have to bear the 
expense of cleaning them.
    We receive many, many empty boxcars that have holes in their roof, 
holes in their walls, bowed doors, or other mechanical defects that 
allow our products to be damaged by the elements. We have to thoroughly 
inspect every car we receive. Candidly, a large portion of the boxcar 
fleet the railroad provides for us to load should be reclassified as 
archaeological artifacts. We reject empty cars whose condition is 
obviously inadequate to carry our products, thus losing utility of that 
car space for the day. We repair holes in cars that are repairable and 
notify the railroad of the need for permanent repair to that car. 
Despite our care, nearly one in every ten of our shipments is delayed 
in transit because the railcar has to be mechanically repaired while 
enroute to our customer. It is important to note that poor car quality 
and inadequate car supply cost Roseburg revenue that we would have 
reinvested in our own plants, generating even greater revenue for both 
ourselves and for the railroad. The railroad has repeatedly advised us 
that it will replace this equipment, but it has not. The railroad 
states that it does not have sufficient capital to replace these cars 
with suitable equipment and has repeatedly advised customers to acquire 
their own boxcars.
    Fortunately, our experience is that we enjoy a very strong 
partnership with our serving railroad, CORP, and its Class 1 
connection, UP. In particular, the operating and commercial divisions 
of Union Pacific have demonstrated genuine desire to provide Roseburg 
with competitive service and prices. Service improvement implemented by 
UP since its acquisition of SP has been particularly gratifying. It has 
been a successful effort that is driven not only by the railroad's 
obvious desire for improved profit, but as part of a clear, customer-
oriented motivation that is shared throughout the leadership and rank-
and-file of the railroad's operating department. In some respects, UP 
creates the appearance of being unconcerned about its competitors' 
manifest traffic service levels, because its people are so focused on 
optimizing service over its own lines for the mutual benefit of itself 
and for its customers.
    In order to protect their existing business, some railroads, such 
as UP and NS, are noticeably more knowledgeable of their customers' 
markets and have become a valuable information resource to the shippers 
they serve. We often depend upon non-proprietary information from 
railroads to improve effectiveness of our marketing programs and gain 
insight into our customers' business from a different industry's 
perspective. Such information sharing helps all parties and promotes 
awareness of the partnership nature of our relationship with the 
railroad, a relationship that was beyond comprehension prior to 
Staggers. Railroads sometime reward distinctive business of individual 
shippers by differentiating rates among manufacturers of like products 
to protect that business.
    The UP and NS marketing and pricing divisions are sharply focused 
on the products that form the vast majority of our shipments, plywood 
and particleboard products, and they have made extraordinary effort to 
help us remain competitive to customers located on their lines. UP and 
NS have acted as genuine partners in pricing their service to 
cooperatively maintain and increase our mutual business. The commercial 
side of the UP railroad has supplied special equipment for our use to 
help reduce the negative effect of its normal, aged fleet. UP and NS 
have also repeatedly taken selective pricing action, as a supplement to 
our own actions, in very specifically defined, competitive business 
situations where we saw mutual opportunity to preserve and generate 
business and where contribution by the railroad was appropriate. UP 
will often use Roseburg to develop and validate innovative programs. We 
have often been advised by UP representatives as we discuss something 
new that, ``If it works for Roseburg, we can make it work for other 
businesses''. Benefit builds upon benefit. This is the way business 
with railroads is supposed to work.
COMPETITIVE ACCESS
    A major debate among railroads and their customers is the 
effectiveness of present levels of competition in replacing burdensome 
economic regulation of railroads. Hard-line proponents from each side 
in this debate have confused both issues and remedies to the extent 
that progress in identifying problems and their solutions is diffused 
and lags the economy's pressing need for resolution.
    From our perspective, the pressing issues in this debate are: (1. 
whether or not sufficient competition exists to achieve the goals set 
forth when railroads were partially deregulated, and (2. the need to 
provide proper definition to the terms ``deregulation'', ``re-
regulation'', ``open access'', and ``competitive access''.
    I believe that the competition-driven actions by railroads today 
are the result of choices by railroad management exercising sound (or 
unsound, in some instances) long-term business judgement. Insufficient 
raw competition exists among railroads to, by itself, compel railroads 
to provide service and prices that are needed by the businesses they 
serve. The numeric decline in major railroad participants of the 
industry, through mergers and acquisitions since the Staggers Act 
became effective, is sufficiently great that something needs to be done 
to infuse a prudent quantity of competitive forces into the system.
    ``Deregulation''--Representatives of railroads have repeatedly used 
the term ``deregulation'' to describe the present status of the 
railroad industry. This is an inaccurate description, because it 
implies that all former regulations pertaining to railroads have been 
eliminated. They have not. Staggers and subsequent regulations 
eliminated the unduly burdensome aspects of the law, but did not 
eliminate all economic regulation. The ICC and STB have exempted many 
specific segments of the railroad business from economic regulation, 
such as forest products and all traffic moving in boxcars. However, 
those exemptions are conditioned upon railroads acting in accord with 
existing regulations that spell out general standards of behavior, 
primarily that railroads will not abuse their market power over the 
shipping public. Exemptions that railroads and the shipping public 
presently enjoy are, by their own words, subject to reversal.
    ``Re-regulation''--The word ``re-regulation'' has also been used by 
railroad industry representatives to describe a return to the full book 
of economic regulations that existed prior to Staggers. The word has 
been applied to virtually any action that calls for any change in 
current regulatory language, usage that is as inaccurate and 
inappropriate in this debate as the word ``deregulation''.
    ``Open access'' is a phrase actually used by a small cadre of 
shippers to propose a controversial system in which railroads would be 
required to allow other railroads, and even non-railroads, to operate 
over their properties in competitive business. Aside from its obvious 
conflict with constitutional provisions regarding the taking of 
property without due process, the plan is unworkable in a private 
enterprise environment. The phrase is now used by railroads to paint 
any proposal to enhance competition among railroads.
    ``Competitive access'' has been used by shipper proponents of 
increased competition to describe a variety of pro-competitive 
remedies, including open access. There are three principal proposals 
that are embodied in this debate that could be described as 
``competitive access.'' They are:

    Reciprocal switching--Many railroad customers are located 
        in cities served by two or more Class 1 railroads, and are 
        designated by their serving railroad as ``open to reciprocal 
        switching''. This means that these customers, although served 
        directly by only one of these railroads, have equal access to 
        linehaul service, and single line rates, from both railroads. 
        In such instances, the railroad that directly serves the 
        customer will assess a switching charge to move the railcar 
        either to or from the competitor railroad. This switching 
        charge is absorbed by the linehaul railroad and is not added to 
        the linehaul railroad's single line rate. These railroads must 
        compete head-to-head with each other for those customers' 
        business. In the post-Staggers era, however, we and an 
        increasing number of our customers are ``closed to reciprocal 
        switching'', that is, their serving railroad demands a linehaul 
        move whose cost is added to a competitor railroad's single line 
        rates to that destination, a severe economic disincentive to 
        competition. An existing statute allows the Surface 
        Transportation Board, at its option, to prescribe reciprocal 
        switching, that is, to order competing railroads to open an 
        industry or group of industries to reciprocal switching as a 
        means to ``enhance competition'' within the railroad industry. 
        A reciprocal switching agreement prescribed by the Surface 
        Transportation Board would require railroads to open every 
        industry they serve within a given switching district to 
        linehaul transportation by competing railroads. Each railroad 
        would absorb the other's switching charges. Within the context 
        of this debate, the Surface Transportation Board would 
        prescribe mandatory reciprocal switching at all stations served 
        by two or more railroads, including industries on short line 
        switching roads who serve that station.

    Bottleneck rates--For shippers located at a station served 
        by only a single Class 1 railroad, the Surface Transportation 
        Board could require the serving railroad to establish a 
        reasonable rate to the nearest interchange with a competing 
        railroad. That competing railroad could then handle the 
        shipper's traffic in linehaul service. Presently, the serving 
        railroad can refuse to establish any rate whatsoever to its 
        competitor's nearest interchange. The STB would retain 
        jurisdiction over the serving railroad's bottleneck rate, and 
        if the bottleneck rate were unreasonably high, the STB could 
        prescribe a rate.

    Paper barriers--A railroad may, as part of the sale or 
        lease of trackage to a short line railroad, restrict or 
        prohibit the short line's interchange of traffic to any other 
        railroad. These restrictions are common in dealings between 
        Class 1 railroads and short lines that seek to acquire lines 
        formerly controlled by the Class 1. The proposal at issue would 
        eliminate such restrictions, allowing the short line to 
        interchange traffic with any railroad connection, including a 
        competitor of the granting railroad.

CAPTIVE SHIPPERS
    Railroad customers who are served by only one railroad and have 
little or no economic access to competing railroads are termed 
``captive''. Although simple economic principles of price and supply 
regarding transportation service suggest that captivity is a severe 
disadvantage, this has not been our experience. We at Roseburg enjoy a 
strong partnership with Union Pacific and our short-line connection, 
Central Oregon and Pacific, that our captive status has forced us to 
develop and maintain with the railroads. Concurrently, Roseburg 
represents a substantial share of UP's business in the Pacific 
Northwest. For its part, UP recognizes and demonstrates, in most of its 
actions, that by supporting our business and responding effectively to 
our needs, we will be competitive in our markets, and it will gain 
business.
    Despite the close relationship we enjoy with UP, we have 
experienced instances where UP, recognizing our captive status, has not 
responded as quickly and aggressively to our needs as our business 
required. Particularly noteworthy in this debate are the 
acknowledgements by railroads, including UP, that they do indeed charge 
higher rates to captive customers than they do to those who are not 
captive. Railroads repeatedly state that they must charge higher rates 
to captive customers to enhance railroad revenue levels that are 
depressed by the lower rates they must give to customers who are not 
captive; that is, those who have access to more than one railroad and 
have competitive options. We strongly object to the concept that 
captive customers must subsidize non-captive customers, particularly 
when those non-captive shippers are competitors of ours. Here, more 
than anywhere else, is a clear statement by railroads that they respond 
to competitive pressures, and will readily discriminate against 
customers who have limited competitive alternatives. The intent of 
partial deregulation of the railroad industry was to remove regulatory 
obstacles that prevented railroads from doing the things necessary to 
serve their customers better. The intent of Staggers was emphatically 
not to create a group of financially healthy railroads whose business 
existed in a vacuum, but to create entities who could provide better 
transportation service to the industries that comprise the nation's 
economy. We would be outraged to find that a former customer is being 
served by a competitor whose advantage over us stems solely from the 
fact that it has access to competing railroads, while we do not.
    Balancing the two sides of this issue, our present favorable status 
is dependent upon maintaining a cooperative relationship with UP and 
upon the good will of UP management toward our company. We have, in the 
past, experienced the effect of unfavorable management on railroad 
predecessors of UP, to the detriment of our business, and we realize 
the possibility exists that at some point in the future, we may again 
experience problems. Prudence suggests that we should pursue access to 
both UP and BNSF. The fact is, however, that we have experience with 
limited competitive access to BNSF, and that BNSF proved to be only a 
lukewarm competitor to UP. In view of the many benefits we derive from 
our good relationship with UP, we do not feel compelled to pursue 
competitive access to BNSF at the expense of our good will with UP. 
However, to correct competitive deficiency we see on other railroads, 
we would support a nationwide prescription by the STB of mandatory 
reciprocal switching agreements among all railroads as a reasonable yet 
minimally intrusive step toward enhancing competition.
    A final aspect of shipper captivity concerns the fear expressed by 
a great many railroad customers that if they openly criticize a 
railroad and its practices, they will be targeted by that railroad for 
retaliation. This fear is a sad commentary on the nature of the 
relationship between railroads and their customers, but it is a 
genuine, and sometimes paralyzing, concern for many companies. In my 
34-year career in industrial traffic management, I had never, until 
this year, experienced retaliatory action by a railroad. I have always 
been candid in my communication with railroads, and I have always found 
the predominant reaction, even when my comments were critical of 
specific railroad practices, to be reasonable. Railroads have disagreed 
with my assessment of a given situation, but, until recently, 
disagreement has always led to discussion, education, and ultimate 
improvement. That has changed, and the absence of effective competition 
is at the heart of the retaliation we have experienced.
    I noted in my earlier comments that nearly 50-percent of our rail 
shipments go to destinations east of the Mississippi River. For that 
distance, freight occupies a considerable percentage of our delivered 
cost, and our business is always at risk from competitive products. 
Therefore, we are particularly diligent in managing these costs. We 
strongly objected when one eastern railroad raised our rates by a very 
substantial amount to a customer of ours that was captive on its line, 
putting our business with that customer at risk to geographic 
competition. When the railroad refused to consider modifying our rates, 
we began looking for alternative ways of servicing this customer and 
others who were similarly situated. We determined that by positioning a 
forward inventory of our products at an intermodal facility (rail to 
truck transfer) in the vicinity of these customers and delivering their 
shipments by truck, we could realize inventory cost savings sufficient 
to maintain our previous delivered prices. At the same time, we could 
improve the reliability of our deliveries to these customers, 
increasing the value of our products and service. Since we had our 
choice of ``reload'' facilities, we offered this railroad the 
opportunity to bid on a competitive basis for this business, and it 
offered rates that were a substantial reduction to its normal prices, 
far below its initial rate levels. However, the rates it offered were 
not as low as rates offered by its competitors, and it lost the 
business. When advised of this outcome, that railroad responded by 
contacting our customer and literally accusing us of trying to 
``cheat'' that customer of the proceeds from a confidential allowance 
the railroad had entered into with our customer (and not with us) on 
movement of our products. Our customer, predictably, was outraged and 
threatened to terminate our business relationship. We are still working 
to restore that customer's trust.
RAILROAD CAPITAL NEEDS
    Railroads are capital intensive industries whose physical plants 
and rolling stock require substantial maintenance. UP estimates, 
reliably, that it needs to spend $1 billion each year on its plant just 
to maintain its condition.
    Economic growth of the nation will require substantial increase in 
transportation capacity, and railroads must add capacity to their 
plants if they are to avoid constraining the country's commerce. All 
major railroads, especially UP, have recognized this fact and have been 
spending billions of dollars to add capacity. Capital available to the 
railroads has been particularly strained by the number of major 
projects either planned or under way and will continue to be tight into 
the foreseeable future. This acute shortage of capital has also become 
a serious problem for smaller railroads. Class 1 railroad trackage is 
generally open to carry individual railcars weighing up to 286,000 
pounds gross weight on rail. However, most smaller railroads, 
especially Class 2 and Class 3 railroads associated with former Class 1 
branch lines, cannot handle such heavy loads without accelerating 
deterioration of their roadbeds, and many cannot handle them at all. 
They are faced with the expense of upgrading most, if not all, of their 
trackage to the 286,000 pound gross weight standard. Unless they do 
this, however, the customers they serve will face a severe competitive 
disadvantage in moving shipments to their markets. This capital 
challenge is approaching crisis proportions and has led to our support 
for specific provisions found within legislation before Congress that 
would provide grants and low-cost loans to railroads for purposes of 
upgrading their line capacities.
    Railroads have turned to their customers for help with their 
capital needs by encouraging shippers to acquire and utilize their own 
railcars. Because of the pressing need for railroads to continue giving 
emphasis in their capital budgets for basic plant expansion, we acted 
upon the railroad's request by offering to acquire, for the first time 
in our history, a fleet of boxcars to handle our shipments. 
Furthermore, in order to improve railcar utilization, we offered to put 
these cars under UP control for the purpose of its securing westbound 
re-loads from origins located on the lines of its friendly connections. 
This was an innovative program UP developed with Roseburg to complement 
our predominantly eastbound loading patterns, thereby improving railcar 
utilization and reducing railroad costs. The proposal we developed in 
conjunction with a major railcar builder/lessor contained a number of 
innovative, mutually favorable features designed to make it work to the 
benefit of all parties in the transaction, to partner with the 
railroads in the way a good partnership should work. However, UP 
allowed us to get to the point where we had only to say ``go'' to the 
car builder, then it denied us permission to proceed, invoking its 
statutory authority to be the sole provider of equipment. However, in 
subsequent discussion with UP we were able, with UP cooperation, to 
develop a final innovative plan that embraced the benefits we and the 
car builder had presented while working through UP's capital 
constraints. UP ultimately agreed to provide these cars under terms 
even more favorable than those we had been able to develop. Thus, we 
all won.
    Thank you for your attention, and I would be happy to discuss these 
matters further with you and your staff at any time.

        Respectfully,
                                           Dennis Williams,
                                   Manager Transportation Services,
                                  Roseburg Forest Products Company.

    Senator Rockefeller. Thank you, Mr. Williams, very, very 
much. I would like to turn now to Mr. Strege, representing the 
Grain Dealers of North Dakota.

     STATEMENT OF STEVE STREGE, EXECUTIVE VICE PRESIDENT, 
             NORTH DAKOTA GRAIN DEALERS ASSOCIATION

    Mr. Strege. Thank you, Senator Rockefeller.
    Senator Rockefeller. Could you pull that mike up?
    Mr. Strege. Thanks to all of you who had a part in setting 
up this hearing and for allowing us to be a part of it. Senator 
Dorgan, thank you for your persistent efforts on behalf of 
grain shippers and railroad shippers in general for all of your 
21 years here in Congress.
    Our association is a member of the National Grain and Feed 
Association, and the Alliance for Rail Competition. Our 
situation is similar to many in those organizations, and the 
reason I am here today boils down to this, that a decreasing 
number of ever-larger railroads have accumulated great economic 
and market power. This power is displayed through railroad 
rates, charges, penalties, and practices that could not exist 
in a truly competitive environment, and it is damaging many in 
our industry.
    This is much more than a debate about who is going to get 
what percentage of the economic pie. For grain elevators and 
many processors, it is about whether they will even remain in 
business to serve their customers, and it is about the 
viability of farmers, rural communities, and urban centers in 
the many areas of this Nation where agriculture is important. 
Large railroads will continue to operate whether grain shippers 
use them or not, but for each and every grain elevator 
dependent on rail, the railroad service and pricing are a 
matter of life and death. That is how important railroads are 
to us.
    The major Class I railroads have been granted their merger 
franchises by the Government. With those powerful franchises 
should come a greater level of responsibilities to the 
communities served than has been exhibited. What we are asking 
is that Congress redirect rail policy to correct this imbalance 
of interest.
    In the past year, we have seen a clear example of this 
life-and-death market power through the Burlington Northern-
Santa Fe inverse rates on spring wheat to the Pacific Northwest 
ports. Senator Dorgan has described that previously. All of a 
sudden, shippers in the western part of our State and in 
Montana woke up to find out that a few selected shippers many 
hundreds of miles farther east had a much lower rate than they 
did to the West Coast. This does not make sense, but it is a 
manipulation of the market by a dominant rail carrier, the 
BNSF.
    Now, the BNSF has announced that these rates expire today, 
after more than a year of doing market harm, but there is 
nothing to prevent them from putting those back into effect 
tomorrow. Indeed, their CEO has kept the door open for that 
kind of ratemaking in the future. Other examples of market 
power are in my written statement and that of the National 
Grain and Feed Association.
    This situation with the BNSF is so serious that it brought 
the Governors of North and South Dakota, Montana, Nebraska, and 
Wyoming together to write a joint letter of concern to the CEO 
of BNSF. The response caused our Governor, John Hoeven, to 
comment that, ``BNSF actions will not cause us to step back 
from pursuing Federal regulation and other measures that 
address a lack of competition in the grain shipping railway 
industry.''
    Gentlemen, we believe that where competition exists, 
competition should govern business activities, but where 
competition is nonexistent, or inadequate, then something else 
must be there to protect the interest of customers. During the 
past two decades the ICC and the STB were approving rail 
mergers, thus concentrating great market power in the hands of 
a few large railroads. Given this market power, acquired 
through Government action, we believe that Congress must now 
act to make oversight more effective.
    Page 11 of my written testimony lists some possible 
remedies for your consideration. I will also add that because 
we do not have certain remedies listed there that are suggested 
by others, we are not implying that we are opposed to them. I 
would just like to pick out a couple to emphasize here in the 
interests of time: to simplify the rate reasonableness 
proceedings for small volume shippers, and to put the teeth 
back into the anti-discrimination provision of the statute, and 
consider the arbitration as a way of resolving disputes with 
railroads.
    I would urge you to start on this agenda very quickly, 
because the clock is ticking on many shippers and segments of 
our industry as railroads flex their muscles. Railroads have 
the power to make or break shippers, receivers, or markets, for 
what they see as short-term gains for themselves, and once this 
economic landscape has been changed because of railroad actions 
not necessarily related to competitive economics, there will be 
no turning back.
    Thank you, and I will try to respond to questions later.
    [The prepared statements of Mr. Strege and The National 
Grain and Feed Association follows:]

     Prepared Statement of Steve Strege, Executive Vice President, 
                 North Dakota Grain Dealers Association
    My name is Steve Strege, executive vice president of the North 
Dakota Grain Dealers Association, a 91 year-old voluntary membership 
trade association which seeks to represent the interests of the 
approximately 400 country grain elevators of our state. We also have 
members in surrounding states, and are affiliated with the National 
Grain and Feed Association, which is submitting its own written 
testimony in this proceeding. Personally, I am a farm kid who once 
hauled grain by small truck to local country elevators for further 
shipment by rail. Thus my attention to the importance of railroads goes 
back more than 40 years, the last 26 of those with this association.
    Thank you for inviting me to testify on grain rail transportation 
issues. These are critical to farmers, grain elevator operators, food 
processors, the economies of our states and the nation, and all of us 
as consumers. All of us have an interest in a vibrant profitable rail 
system. But it seems we've gotten somewhat off the track in how to have 
such a network.

I will endeavor to cover these basic issues:

    1. The imbalance of market power between large railroads and grain 
shippers.
    2. Use of market power in treatment of shippers, especially captive 
shippers.
    3. Oversight is inadequate.
    4. Possible remedies for Congress and the STB to consider.
IMBALANCE OF MARKET POWER
    This first point is easily explained. The nation's railroads have 
consolidated down to four gigantic companies controlling 90-percent or 
more of intercity freight. Some of them dominate geographic regions of 
the country.
    On the other hand, grain shippers such as country grain elevators 
are many, and dispersed over the land to which they are tied for their 
grain volume. There are literally thousands of them. Some are fairly 
large companies; but most are relatively small. Originating and 
terminating locations of even the largest of these companies are most 
often dependent on one railroad. Some trucking to market for short 
hauls (250 miles or less) works. But across vast stretches of the 
Plains States and elsewhere the great distances and volumes make grain 
trucking unrealistic, and not a source of effective competition to 
rail.
    It should be noted that Class I railroads have created shortline 
spinoffs. Degrees of success vary. In our area the shortlines are 
service-oriented. Shippers like that. But due to physical connections 
and/or paper barriers, most shortlines do not provide competition to 
their parent Class I's. In many instances the Class I's set the rate 
and service parameters.
    An important part of the message I want to leave with you today is 
that this imbalance of power has given the large railroads the economic 
clout to:

    dictate unreasonable terms and charges to small and large 
        grain companies alike,

    charge exorbitant rates to captive grain shippers who have 
        no effective legal remedy,

    devalue shipper investments through changes in rates and 
        service offerings,

    determine which grain industry participants will survive 
        and which will not,

    force change in marketing methods that would not otherwise 
        occur,

    make or break markets,

    jeopardize our foreign markets through unusual rate-making 
        schemes,

    influence land values by limiting the income that land can 
        produce, and

    take advantage of farmers, agribusinesses like ours, and 
        the general public, with little fear of someone stepping in to 
        stop them.

    We believe that where effective competition exists, it can govern 
railroad practices and prices. Unfortunately effective competition does 
not exist for thousands of grain shipper locations, and it has been 
slipping away in a macro-sense as railroad mergers have proceeded over 
the past 20 years.
USE OF MARKET POWER
    Market power is demonstrated by extremely high grain rail rates for 
captive shippers. Many revenue to variable cost ratios on wheat 
movements from North Dakota and adjacent areas are in the 250-350 
percent range (some up over 400), as compared to a jurisdictional 
threshold of 180 percent. These rates exhibit the plight of captive 
shippers. Documentation of these ratios can be found in testimony 
presented by the Upper Great Plains Transportation Institute of North 
Dakota State University to a hearing chaired by Senator Dorgan in 
Bismarck, ND on March 27, 2002.
    Market power is also exhibited by railroad attempts to shape the 
grain marketing industry and domestic grain processing industry into 
fewer larger locations that fit the railroad's definition of 
efficiency. This goes beyond what would occur in a competitive 
environment. Incentives are offered to selected shippers to build and 
operate a 110-car loading facility at a location selected or approved 
by the railroad, and the industry must go along or risk being on the 
outside looking in. In my state and region the Burlington Northern 
Santa Fe is the dominant rail carrier. Its game plan in the grain 
business is promotion of a few big shippers primarily on its mainlines, 
with much less regard for the rest of its shipping and receiving 
customers who have made substantial investments to meet that railroad's 
previous demands. This has serious ramifications for farmers, grain 
elevators, rural communities and the entire region as grain gathering 
costs are shifted from the railroad to the public sector or others in 
the private sector. We can appreciate the need for efficiencies, but 
larger trains are often a mismatch with the diversity of crops produced 
and the increased number of quality segregations buyers want. It's like 
the proverbial square peg in a round hole. And when car cycle time 
gains for larger trains come partially at the expense of letting other 
sizes of train sit, then purported efficiency gains are exaggerated.
    BNSF refuses to allow grain elevators on its lines to co-load 110 
car trains, instead pushing for multimillion dollar investments in new 
facilities to serve this railroad's latest concept. Co-loading is two 
or more locations contributing loaded cars to a train. The other Class 
I railroad and all three shortlines serving North Dakota accept co-
loading. According to the testimony of the Upper Great Plains 
Transportation Institute referenced above, this co-loading between two 
stations would cost the railroad only about $50 more per car (less than 
two cents per bushel), which could be reflected in a higher freight 
rate. That way the existing elevators could participate in the 
available business to a greater extent.
    Market power is also demonstrated by other policies of railroads. 
Penalties for not loading railcars in the prescribed time, without a 
similar penalty on the railroad for untimely performance, is one 
example. Site lease charges and one-sided lease provisions are others.
Inverse Rates
    An example of rail market power in the northern plains started 
about a year ago when BNSF set up secret inverse contract rates on 
wheat to the Pacific Northwest (PNW). ``Inverse'' means the shorter 
haul pays a higher rate. Western North Dakota and Montana rates to the 
Pacific Northwest were kept high, while rates for a selected few large 
110-car shuttle train loading grain elevators in eastern North Dakota 
and western Minnesota were lowered. This disadvantaged other grain 
elevators in areas surrounding the selected few, and westward across 
North Dakota and Montana, with spillover effects on markets from South 
Dakota. Of course we support lower rates, but let's spread the benefit 
around and be equitable among shippers. This was an exercise in its 
monopoly power to select grain industry participants that the BNSF 
wanted to promote, while continuing to milk excessively high rates from 
more captive shippers and putting in jeopardy the investments of those 
and many of its other shippers.
    This rate action jeopardized our foreign markets by shipping non-
traditional grain into them. Wheat from traditional source areas in 
western North Dakota and Montana mills differently than wheat from 
spring wheat growing areas several hundred miles to the east. 
Complaints and concerns have come back from those foreign buyers. 
Bottom line is that unusual railroad rate actions can damage both 
shippers and markets.
    Another effect of this BNSF inverse rate action was short-
circuiting normal grain market forces. BNSF's stated reason for the 
rates was to maintain its market share of PNW exports in the face of 
drought-reduced crops in Montana. But there were millions of bushels of 
wheat in storage in Montana and western North Dakota when BNSF took 
these steps. Instead of the PNW market bidding up the price to get more 
wheat, the BNSF's inverse rate scheme held down or reduced grain prices 
for traditional farmer and country elevator suppliers. This is market 
manipulation. Meanwhile BNSF advocates free markets and noninterference 
by anyone in its pricing and practices. This is a double standard. 
Later in this statement I address the difficulties we encountered when 
we sought to consider a legal remedy for BNSF's actions.
    These inverse rates distorted normal marketing patterns to the 
point that a farmer from western North Dakota actually hauled 50,000 
bushels of wheat 160 miles east for loading on a train to move back 
west right past his normal delivery point 20 miles from his farm, that 
did not have the special rate. He reported driving approximately 16,000 
miles to do this.
    As of today the BNSF has discontinued these inverse rates. But BNSF 
CEO Matt Rose has left the door open to bringing them back.
NGFA
    The National Grain and Feed Association is submitting written 
testimony for this hearing. NGFA expresses similar concerns over 
growing railroad market power and its implications on the marketplace. 
NGFA cites railroad demurrage charges ten times their car ownership 
costs. NGFA references costly penalties on shippers for nonperformance, 
without any penalty on the railroad or comparable compensation to the 
shipper when the railroad fails to perform. And can anyone justify a 
$200 per car penalty for a clerical error on a bill of lading? That's 
$10,000 in penalty for a 50-car train!
    One NGFA example is of a shipper and his originating carrier 
agreeing on a reduced rate for a facility improvement making both 
parties more efficient. But when the connecting railroad to destination 
learned of this it raised its rail rates by the equivalent amount as 
rates were reduced by the originating carrier, thus extracting the 
entire rate benefit for itself. This clearly shows the market power 
railroads have to extract all additional revenues for their sole 
benefit.
Rate-Making
    This same take-it-all rate-making approach was confirmed in 
testimony to a hearing chaired by Senator Dorgan in my state in March. 
A BNSF Ag Commodities VP said BNSF sets rates through the following 
process: ``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 only reference is to how much the railroad can extract 
from the customers' margins and from the system. Only a monopolist can 
price that way.
    The railroad attitude displayed to shippers who complain is 
horrible. In one instance in my state the president of the board of one 
cooperative elevator stated it had recently spent close to $2 million 
to upgrade its facility to meet what was then the BNSF's optimum train 
size. Then suddenly, because of the inverse rate given to a competitor, 
this elevator was losing business from part of its trade area. BNSF's 
Ag Commodities Vice President said this shipper was ``a victim of its 
own poor planning''. (Bismarck (ND) Tribune Feb 3, 2002)
Governors Speak Out
    The situation with rail transportation in the northern plains is so 
serious that five governors recently wrote to the BNSF President and 
CEO about it. Attached to my testimony is the text of that May 10 
letter initiated by North Dakota Governor John Hoeven and signed by 
governors from South Dakota, Montana, Nebraska and Wyoming. It cites 
excessive rates charged by a market dominant carrier, inverse rates, 
preferential rates for a few, effects on grain markets, communities, 
and highway infrastructure of the states.
    About six weeks went by before our governor received any reply from 
BNSF. That itself says something about BNSF. When the reply came, it 
was not what we had hoped for. A portion of Governor Hoeven's public 
statement in response follows: ``I regret BNSF's decision, and I pushed 
Mr. Moreland (BNSF Executive Vice President) to lower prices in western 
North Dakota, rather than raise them in the eastern part of the state. 
The railroad's decision, moreover, fails to address the larger, 
underlying problem, which is a lack of shipping competition in North 
Dakota. BNSF must create a level playing field, with reasonable rates 
for all producers, to ensure that farmers get a fair market price for 
their commodities.
    ``In addition, BNSF's action yesterday still fails to address the 
extreme rate differential between large and small shippers, which BNSF 
could partly remedy by making co-loading available to middle-sized 
shippers. BNSF's action will not cause us to step back from pursuing 
federal regulation and other measures that address a lack of 
competition in the grain-shipping railway industry. In the coming 
weeks, we will continue to explore all avenues to ensure that BNSF does 
not exploit its dominant position as the sole railway grain shipper in 
North Dakota to manipulate markets and grain prices. BNSF must respond 
to market forces, rather than distort them.''
Alliance to Keep Rural America on Track
    In November 2001 a group of agricultural organizations up our way 
formed the Alliance to Keep Rural America on Track. This includes our 
association, Farmers Union, Farm Bureau, all the major commodity 
promotion groups in our state, the rural electric and telephone 
cooperatives associations, insurance agents association, and more. The 
Alliance has members from other states as well. Purpose was and remains 
to raise public awareness of what railroad dominance means to farmers, 
grain elevators, and other businesses in both rural and urban settings, 
and to communicate our needs to the railroads from a broader platform. 
The involvement of farm and business groups demonstrates that what's 
going on with our railroads is of concern to more than grain elevator 
operators.
OVERSIGHT IS INADEQUATE
    While these abuses go on, government oversight and protection, is 
ineffective. Complaint remedies, if you can even call them that, are 
havens for railroad lawyers to frustrate shipper interests with delays 
and expense. The railroad can drag out proceedings in the hope that the 
shipper will simply give up. Here are three examples.
    The first example is the McCarty Farms grain rail rate case in 
Montana that went on for 17 years in front of the Interstate Commerce 
Commission and Surface Transportation Board before ending a few years 
ago with no payment to the aggrieved parties and no prescribed 
reduction in rates. At one time during this process the complainants 
had actually received a favorable ruling. Then the railroad lawyers 
went to work and stretched it out an additional 15 years. In the years 
immediately following enactment of the Staggers Act in 1980, it seems 
the ICC went out of its way to protect railroads instead of shippers.
    The second example goes back to 1988 when some organizations and 
companies in the grain industry filed a complaint with the ICC against 
the Burlington Northern's Certificate of Transportation program. We 
went through a thorough discovery process. At one point the BN filed a 
motion for dismissal, which took the ICC many months to decide. It took 
four years to get an unfavorable ruling from the ICC in that case. A 
federal court later reversed portions of the ICC decision.
    A third and continuing example is the Surface Transportation 
Board's attempt to eliminate product and geographic competition as 
factors to consider in the market dominance test. (A shipper must prove 
that a railroad is market dominant before the rail rate can be 
challenged.) The STB initiated this proceeding in April 1998 and 
decided to eliminate product and geographic competition in December 
1998. The railroads quickly appealed. The DC Circuit Court of Appeals 
found for the STB, but remanded a portion back to the STB. When the STB 
issued its decision on that the railroads appealed again. That's where 
it stands today.
    An extremely troublesome regulatory impediment to much of the grain 
industry in the Upper Great Plains is the absence of any adequate 
recourse for rates that appear to be unreasonably high. The Upper Great 
Plains Transportation Institute, an independent organization associated 
with North Dakota State University, calculates roughly that BNSF wheat 
rates from North Dakota range between 270 percent and 400 percent of 
variable costs. Virtually all of these wheat shipments originate from 
country elevators, which individually do not have the shipment volumes 
necessary to justify the million-plus dollars expense of a rate case 
under the so-called Stand-Alone-Cost (SAC) methodology commonly used by 
large volume, high density shippers such as coal-burning electric 
utilities.
Simplified Rate Procedures
    The ``simplified'' procedures mandated by Congress are anything but 
simplified and do not solve the problem they were aimed at; the 
creation of a useable remedy for unreasonably high rates where the 
traffic volumes involved are not large enough to justify the huge 
expenditures necessary for a stand-alone cost case. Here are some of 
the reasons why the ``simplified'' procedures don't do the job.
    As directed by Congress, the ``simplified'' procedures are not 
available to any small shipper for use in any rate complaint, but 
instead are only available for ``determining the reasonableness of 
challenged rail rates in those cases in which a full stand-alone cost 
presentation is too costly, given the value of the case.'' This 
qualification led the STB to rule that, in each case where a shipper 
seeks to invoke the ``simplified'' procedures, there must be a showing 
that the case qualifies for treatment under the ``simplified'' rules. 
To make that showing, a shipper will have to retain experts who can 
prove that ``a full stand-alone cost presentation is too costly, given 
the value of the case.''
    A ``simplified'' case cannot go forward unless there is a showing 
of ``market dominance.'' The burden of proving ``market dominance'' is 
no different for a small volume shipper than for the largest coal-
receiving shipper in the nation and will involve the use of cost 
consultants, attorneys, and discovery.
    Use of the ``simplified'' methodology is far too complex to be 
attempted without lawyers and cost experts. The test involves the 
application of three ``benchmarks.'' The first is known as RSAM and is 
intended to assess the extent of a carrier's revenue needs that can and 
should be recovered through differential pricing. The second component, 
known as R/VC > 180, is designed to measure the degree of differential 
pricing actually being practiced by that carrier. The third component 
is R/VCcomp. This benchmark measures the markup taken on 
traffic priced at more than 180 percent of variable cost that involves 
``similar commodities moving under similar transportation conditions.'' 
Data to meet the first of these two tests is published by the STB. The 
third test requires extensive discovery. The STB concedes that there 
``may well be some cases in which there is no readily identifiable 
traffic that is truly comparable.'' Thus, the ability of the shipper to 
even find data with which to satisfy the ``simplified'' test is 
questionable.
    The outcome of a ``simplified'' case is uncertain even if the three 
benchmarks can be satisfied. Published STB data indicate that maximum 
rates prescribed under the first two benchmarks would be at 
approximately 230-250 percent of variable costs. Just how the R/
VCcomp. would impact that position has never been made clear 
by the STB.
    I am by no means an expert on the ``simplified'' rules adopted by 
the STB, but I have been advised by cost consultants and others that 
the use of those rules is highly likely to result in a maximum rate 
prescription that is not below 230-250 percent of variable costs, 
depending on the railroad involved. By contrast, large, high density 
shippers, whose traffic volumes justify use of the expensive SAC cost 
method, have been successful in reducing their rates to a 180 percent 
of variable cost level. Small volume shippers accordingly appear to be 
relegated to a decidedly inferior status for the correction of 
unreasonably high rail rates if using the STB's ``simplified'' 
methodology.
    Senator Dorgan asked Chairman Morgan about this problem, as appears 
in the attached correspondence. Her answer acknowledges the disparity 
between the type of rate remedy available to a large volume shipper as 
compared to that available to a small volume shipper. We suggest that 
this disparity needs to be corrected. There is no reason why a small 
volume shipper, shipping wheat over the same line of railroad that 
carries coal, for example, should be governed by a regulatory standard 
that virtually guarantees that the small volume shipper will pay 50 
percent more than the large volume shipper, and we question whether 
that is what Congress intended.
Discriminatory Rates
    There is also an inadequate remedy for unreasonably discriminatory 
rates. Before passage of the Staggers Act, inverse rates that favored 
some shippers over others might have been attacked under the anti-
discriminatory provisions of the statute. The Staggers Act, however, 
made the anti-discrimination provisions absolutely inapplicable to 
``rail rates applicable to different routes.'' While the ICC might have 
interpreted that provision in any number of different ways, it chose 
the broadest interpretation possible, ruling in one case that rates 
that applied over the same line of railroad to neighboring communities 
were rates that applied over different ``routes''. STB Chairman Morgan, 
asked recently by Senator Dorgan to comment on the possibility of 
removing the ``different route'' prohibition so that railroads once 
again could be called upon to justify disparate rate treatment, 
suggested that such a statutory change might be ``harmful'' because it 
``might reduce the revenues flowing into the rail network.'' The text 
of the relevant exchange of correspondence between Senator Dorgan and 
Chairman Morgan is attached to my statement. We suggest, however, that 
it would not be in the least bit harmful to permit shippers to bring an 
unreasonable discrimination claim against disparate rates controlled by 
the same railroad so long as the railroad retains the ability to defend 
itself, as it could prior to Staggers. There is no need to altogether 
bar such claims from being brought.
POSSIBLE REMEDIES FOR CONGRESS AND THE STB TO CONSIDER
    My organization and I personally are among those who believe 
strongly that effective competition not only is healthy economically, 
but far preferable to government regulation. However, when an industry 
has become characterized by excessive concentration of market power, 
some measure of regulation is necessary as a surrogate for competition. 
That was the theory of the Staggers Act. But today, it appears to us 
that the STB, and the ICC before it, is more focused on railroad 
economics than shipper economics. Many decisions have followed that 
track
    During the last two decades, while STB policies endorsed the 
elimination of rail routes through mergers, they simultaneously were 
authorizing the accumulation of vast market power in the hands of a few 
railroads and the decline of competition, at least for the 30 percent 
or so of rail business that appears to be captive to rail service. Most 
of that 30 percent consists of bulk commodities, including grain.
    Although railroads contend that they exist largely in a competitive 
environment and must be free to extract what the market will allow from 
their captive customers, we believe that Congress should not overlook 
the fact that railroads are, in effect, government franchisees who 
enjoy substantial benefits as a result of that status. Every STB 
approval of a railroad merger is, in effect, a government license or 
franchise, which carries with it valuable antitrust immunity 
unavailable to industries that are truly in the unregulated 
marketplace. Under present law, a railroad unilaterally, and with very 
limited notice, can impose new charges and terms on its customers 
through ``tariff'' publication--a prerogative available only to a 
franchised industry. The application of many state and even federal 
laws to railroads is preempted by the Interstate Commerce Commission 
Termination Act, narrowing their exposure for violations of the 
antitrust laws, or other activities that would be recognized as 
actionable under ordinary civil law. Railroads can implement their 
franchises through the right of eminent domain. Finally, at least some 
railroads currently are asking the government to use public money to 
subsidize railroad infrastructure projects.
    Given the substantial market power now enjoyed by the remaining 
Class I railroads and the fact that they acquired that market power 
through government-issued franchises and exercise--dare I say abuse--it 
with the aid of government-bestowed regulations, we respectfully 
suggest that Congress should now act to make regulation the effective 
tool originally intended by the Staggers Act to moderate railroad 
excesses where competition does not do so. We suggest the following 
remedies for your consideration.
    1. Adopt a resolution discouraging further mergers between Class I 
railroads and mandating that, in the event of any such mergers, 
necessary gateways must be kept open both physically and economically.
    2. Legislate simplification of the market dominance standard, at 
least to the extent recently recognized by the STB in eliminating 
product and geographic competition as considerations.
    3. Mandate ``bottleneck'' relief by requiring the monopoly carrier 
to quote rates on request to interchange points.
    4. Simplify rate reasonableness proceedings for small volume 
shippers and eliminate the disadvantage apparently imposed on those 
shippers by the STB's ``simplified'' maximum rate rules (a disadvantage 
which Chairman Morgan seems to acknowledge). There is absolutely no 
reason why small volume shippers should bear a larger burden of rail 
deregulation than large volume shippers. If no other substantive 
standards can be devised under which rate complaints for small volume 
shippers can be simplified, then Congress should direct an appropriate 
government agency to develop an objective, reliable computerized 
version of stand-alone-costs adaptable in small volume rate cases for 
use by small volume shippers.
    5. Consider granting shippers the option to utilize arbitration to 
resolve disputes with railroads, available with safeguards to insure 
that small volume shippers are not overwhelmed by railroad discovery 
requests.
    6. Put the teeth back into the anti-discrimination provisions of 
the statute.
    7. Require complaint case filing fees be kept within reach of 
shippers.
    8. Visit the paper barriers issue as a possible way to create more 
competition.
    This agenda must be started on soon. The clock is ticking on many 
shippers and segments of our industry as railroads flex their muscles. 
Railroads have the power to make or break shippers, receivers and, 
markets for what they see as gains for themselves. Once the economic 
landscape has been changed because of railroad actions not necessarily 
related to competitive economics, there is no turning back.
                                 ______
                                 
Mathew Rose,
President and Chief Executive Officer,
Burlington Northern Santa Fe Railway,
Fort Worth, TX.

Mr. Rose:

    As governors of states with prominent agriculture industries, we 
urge the Burlington Northern Santa Fe Railway to find an equitable 
solution to its preferential grain shipping rates policy.
    We recognize the importance of an efficient and vital rail shipping 
system; however, we believe that in some corridors BNSF is using its 
market dominance to charge excessive rates to captive shippers and to 
provide advantageous preferential rates to a handful of large-scale 
shippers. BNSF is also using its market power to impact grain markets 
by offering a discounted inverse rate for shippers that move grain 
greater distances. We request that your company immediately evaluate 
the negative consequences of selective grain shipping rates and commit 
to adjusting them.
    Our states are not opposed to shuttle shipment of agriculture 
products; however, we ask that the rate spreads be consistent and 
equitable. Your current business practices have the potential to 
negatively impact grain markets and rural communities as smaller 
elevators struggle to compete. These practices also shift the burden of 
shipping the bulky commodities to the states' highway infrastructure, 
which contributes to road deterioration and distorts longstanding 
traditional grain movement patterns.
    We ask BNSF to administer its pricing methods in a way that is fair 
to all of our railroad customers and grain elevators. In the absence of 
reasonable rate adjustments, we will have no other recourse but to look 
for alternatives that will provide equitable resolution of this issue, 
including support of federal regulatory intervention.
        Signed,
                                               John Hoeven,
                                           Governor of North Dakota
                                                Judy Martz,
                                                Governor of Montana
                                        William J. Janklow,
                                           Governor of South Dakota
                                              Mike Johanns,
                                               Governor of Nebraska
                                              Jim Geringer,
                                                Governor of Wyoming
                                 ______
                                 
Hon. Byron Dorgan,
United States Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Dorgan:

    You recently sent to me questions as a follow-up to the Senate 
Commerce Committee field hearing that you chaired in Bismarck, North 
Dakota, on March 27, 2002. For that hearing, I provided a written 
statement outlining the Board's jurisdiction over rail rates. Your 
questions relate to that written testimony.
    Attached please find the responses to your questions. Do not 
hesitate to contact me if you need anything further.

        Sincerely,
                                           Linda J. Morgan,
                                                        Enclosures.
                                 ______
                                 
    Question. 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. 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-
percent of variable cost--some say in the vicinity of 240-percent of 
variable cost--while the stand-alone methodology, utilized in large 
volume cases, is capable of achieving a maximum rate as low as 180-
percent of variable cost.
    A. Do you agree that the simplified methodology is likely to result 
in a maximum rate that is higher than 200-percent 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. 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-percent, 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.
    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.
                                 ______
                                 
                        National Grain and Feed Association
                                                      July 26, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Re: July 31, 2002 Subcommittee Hearing on Railroad and Shipper Concerns

Dear Chairman Breaux:

    This letter is being sent to you and to the Members of the 
Subcommittee on Surface Transportation and Merchant Marine in advance 
of the hearing scheduled for July 31 on railroad and shipper concerns 
before that Subcommittee. The National Grain and Feed Association 
(NGFA) was not invited to testify at that hearing, as a grain industry 
witness had been previously invited. We respectfully request that this 
letter be made part of the record in that hearing, and hopefully it 
will provide the Members of the Subcommittee information about the rail 
marketplace and aspects of it that concern our Members. We appreciate 
your efforts to pursue commercially reasonable solutions to rail 
customer concerns.
    The National Grain and Feed Association is the national voluntary 
trade association comprised of 1,000 member companies involved in grain 
buying, warehousing, merchandising, feed manufacturing, livestock 
feeding, grain processing, and exporting. Our members include privately 
owned, public corporations and farmer-owned cooperatives. Companies in 
our membership range from the largest bulk handlers and processors in 
the U.S. to relatively small country elevator and feed mill operations. 
We have about 400 companies in our membership that are active rail 
shippers or receivers.
    The grain industry has continuing concerns with the concentration 
of market power among the major rail carriers, and its impact on the 
marketplace, in particular the effect it is having on the business 
relationship between railroads and their customers and the potential 
long-term implications for both.
    Why can railroads treat their customers differently than other 
service providers? Quite simply, the structure of the market and the 
market power that is wielded by carriers--at least in the short run--
permits non-competitive and uneconomic charges and creates impediments 
to competition-driven enhancements in market efficiency. In the long-
run such behavior is damaging to both railroads and their customers, as 
any railroad customer that can ultimately find a different way (other 
than rail) to access a market, or find a new place to locate a plant 
where acceptable competitive business service is provided, will 
actively seek such solutions.
    Examples of railroad policies and approaches that are costly, often 
counterproductive, and that are made possible by limited competition 
(and are not generally seen in any other customer-supplier relationship 
in other industries) include:
    Example 1. One U.S. railroad charges almost $200 per car if a 
mistake is made on an electronic bill of lading. So, if the shipper 
transposes two numbers in a bill of lading generated at origin on a 50-
car unit, the railroad has the right to bill the shipper about $10,000. 
This absurdly high penalty for clerical errors may work 
counterproductively by encouraging the shipper to return to a less-
efficient operation by generating a hand-written bill and letting the 
railroad employee then generate the electronic bill, forcing the 
railroad to spend more of its resources. This way, if a mistake 
occurred, the shipper would not face such a steep penalty. We know of 
no other situation in the private sector analogous to such punitive 
business practices forced by the service provider on its customer base, 
particularly in situations where the customer is accommodating the 
business practices of the service provider by generating an electronic 
bill of lading.
    Example 2. Lease rates for certain types of rail cars are around 
$200 per month or less in today's market, or under $7 per day. Yet, 
some railroads are assessing demurrage rates at $75 per day for such 
equipment! While demurrage is intended in part to be a disincentive for 
inefficient performance, it is also intended to reflect car ownership 
costs. There should be some relationship between car values and the 
demurrage charges that are intended to improve efficiency by reducing 
effective cycle times between loading and unloading. Such wide 
differences exist because the supplier is dictating business terms in a 
non-competitive market. In a competitive market, alternatives would 
quickly evolve that would not allow such huge rate ``spreads'' between 
demurrage and car lease rates to exist.
    Railroads are tightening demurrage terms and raising demurrage 
rates ostensibly to boost shipper performance. However, if the carrier 
fails to perform, i.e., show up within the prescribed time frame or 
fails to meet schedules that force a plant to shut down, there is no 
penalty or comparable compensation available to the shipper. While 
railroads in general have improved their on-time performance, one rail-
dependent processor reports that since January 2002 one carrier has 
only been able to place 59-percent of shipments at destination within a 
72-hour window. Of course, no penalty applies to non-performance by the 
railroad, so there is little pressure for the railroad to improve. This 
kind of performance makes it difficult to manage a rail-dependent 
business. It is particularly frustrating when shippers are required to 
pay demurrage or storage charges for what the railroad calls ``excess'' 
shipper-controlled railcars being online. This is another clear example 
of rail market power, which contributes to impediments to further gains 
in market efficiency. In the short-run, the railroads can get by with 
this performance, and dictate terms. However, in the long-term it will 
damage their economic prospects.
    Virtually all tank cars in the agricultural market are either owned 
or leased by shippers, because the railroads refuse to supply such cars 
to soy oil or corn syrup manufacturers. These processors must have an 
adequate number of empty tank cars located at the facility to ensure 
the ability to continue processing, and to manage the uncertainty 
caused by railroad performance inconsistencies. In today's market, some 
rail carriers want the shipper to pay $25 per car per day in 
``storage'' charges to have the privilege of having empty tank cars on 
their line while waiting to load at a plant. Negotiations with the 
carriers have failed to produce any workable solution. Not only have 
the railroads been able to force the shipper to bear the cost of their 
inefficiencies and inconsistent performance by forcing shippers to buy 
or lease more rail cars than would be needed if the railroads 
performed; now there is an effort to extract additional revenues on 
what the railroads deem as ``surplus'' cars--leased cars that allow the 
shipper to ensure that plants can operate without interruption. This is 
another clear example that the rail car marketplace is anything but a 
reasonably competitive market. The rules of that market are controlled 
and dictated by the carriers and the rules can and are changed 
precipitously in ways that shippers' car investments are quickly and 
unpredictably devalued.
    Example 3. The market power of railroads to unilaterally define 
market outcomes can be observed in their ratemaking as well. In one 
recent example reported by an NGFA member, a shipper and originating 
rail carrier agreed that the shipper would upgrade his facility for the 
benefit of both the shipper and railroad. And, for that agreement, the 
originating railroad agreed to provide a rate incentive for a period of 
time that would partially compensate the shipper for the investment. 
Shortly after the investment was made, the connecting railroad raised 
its rail rates by the equivalent amount of the rate incentive provided 
by the originating carrier, thus extracting the entire rate benefit for 
itself (and leaving the shipper with no revenue stream to use in paying 
for the improvement). How could the connecting carrier do this? Because 
it has the unfettered market power to extract all additional revenues 
for its sole benefit, even though such action is clearly destructive to 
long term customer relationships and the desire to improve facilities 
to encourage greater use of railroads.
    Example 4. Credit terms of railroads are generally tighter than any 
other service provider known to our industry and the terms are entirely 
one-sided. In the not-too-distant past, after a shipment was unloaded 
at destination, a freight bill was cut and mailed to the customer, who 
then had 15 days from the mailing date to pay the bill. (Of course, 
most service providers bill after service is provided, but 30-days net 
is a more common receivables policy.) Today, railroads cut a freight 
bill as soon as a car is loaded at origin, and a freight bill is 
delivered electronically to the customer within hours after a shipment 
is loaded. Payment must be received in 15 days or is subject to 
penalties and interest. Thus, payment can be due prior to even 
completion of the shipment. While the payment terms are tighter than 
seen in any other industries, another enormous difficulty is that many 
rail bills contain errors forcing shippers to spend many man-hours 
auditing the invoices for mistakes. Industry companies report that 
between 10-percent and 50-percent (depending on railroad and reporting 
rail customer) of all rail invoices received contain errors. This 
auditing process requires time and money.
    If interest charges apply on a bill, railroads have been known to 
invoice for amounts less than 15 cents on a bill. If a shipper claim is 
submitted to a railroad in which the railroad owes the shipper money 
(often for long periods of time), the carriers refuse to recognize any 
interest charges that apply. As for claims for damaged goods that might 
be submitted by shippers to railroads, some rail carriers refuse to 
even consider claims for less than $35 per car. The imbalance in credit 
terms and other terms of service is a reflection of an imbalance in 
market power between the railroad and its customer base.
    Example 5. The ability of railroads to use market power to dictate 
terms is also being felt by customers that own or lease railcars. When 
railroads utilize customer-owned or leased rail cars to carry product, 
they compensate the customer through ``mileage allowances,'' which are 
intended to compensate for investment and maintenance costs to keep the 
car in service. When railroads operate cars owned by other railroads on 
their track, there are arrangements for ``car hire'' (rental paid by 
one railroad to another for freight cars, the conceptual equivalent of 
private car mileage allowances). In 1992, railroads agreed to ``de-
prescribe'' car hire charges for railroad-owned cars and phase such de-
prescription in over 10 years. The car hire rate was frozen at the 1990 
rate, but 10-percent of the existing fleet each year could be de-
prescribed by car owners and all new or rebuilt cars were de-
prescribed, allowing car hire rates on those de-prescribed cars to then 
``float'' with the market. The market in this case is one where the 
carriers mutually agree on a rate, and since large carriers are in a 
position that either could be a ``net'' seller or ``net'' buyer in a 
given period of time, there is incentive for both to establish a fair 
market price.
    One major railroad recently announced substantial reductions in the 
mileage allowances paid to shippers who furnish their own cars. In many 
cases, these private cars had been purchased or acquired under long-
term leases. The reduced mileage allowances will shrink revenue well 
below the investment cost for the entire fleet of cars owned or leased 
by the customer. While the railroads collectively understand their need 
to phase in such significant changes to avoid market disruption on 
their cars, the railroad making this particular change gave 5 months' 
notice to its customer base. Is it unreasonable for the rail customer 
to expect to be treated no worse than its railroad treats its own 
competing carriers?
    Example 6. As the U.S. railroad industry has evolved to be 
dominated by a few major players, carriers have developed rate and 
service structures designed to keep as much traffic moving on their own 
line as possible. There are, however, instances in which a given 
shipper can reach a small percentage of its customers via either of the 
two regional rail systems. Shippers report that, to a growing extent, 
what they face when they attempt to avail themselves of this limited 
competition is retaliation by the railroad that had been receiving all 
the traffic. A carrier whose ``competitive'' traffic is diverted to the 
second carrier raises the rates on its remaining captive traffic to 
recoup the diverted revenue. When both carriers in a duopolistic market 
behave in this manner, price competition is nullified.
    We appreciate the opportunity to submit our views to the 
Subcommittee. We would be pleased to respond to any follow-up 
questions.

        Sincerely yours,
                                          Kendell W. Keith,
                                                         President.

    Senator Rockefeller. Thank you, Mr. Strege. I would like to 
call now on Mr. Charles Platz, who is president of Basell North 
America in Wilmington, Delaware.

           STATEMENT OF CHARLES E. PLATZ, PRESIDENT, 
                   BASELL NORTH AMERICA INC.

    Mr. Platz. Thank you, Senators. Good morning. My name is 
Charles Platz, and I am the president of Basell North America. 
I also serve on the board of directors of the American 
Chemistry Council, and I in fact had letters from many of my 
colleagues supporting my testimony. I would like to have them 
included in the record, if possible.
    Senator Rockefeller. It will be done.
    Mr. Platz. Thank you.
    We have operations in Louisiana at both Lake Charles and at 
Taft, and I am also pleased to say that Mr. Dan Borne, 
president of the Louisiana Chemical Association is also here 
today. Besides Louisiana, Basell has production facilities in 
Bayport, Texas, and Jackson, Tennessee. By the way, our plastic 
products go into almost every consumer application, from 
medical to automotive.
    I am here today because safe and efficient rail service is 
vital to the business of chemistry. In fact, a strong, healthy 
railroad industry is critical to our success. That is why we 
strongly support the efforts of this Committee and this 
Congress to provide the necessary Federal resources to improve 
the Nation's rail infrastructure. However, competition between 
railroads is just as critical. With transportation representing 
such a large portion of our production costs, and as an 
example, at Basell is second only to feedstock, the existing 
lack of competition has a detrimental effect on our 
competitiveness.
    Nearly two-thirds of our industry's production facilities 
which rely on rail service are captive to one railroad, and 
therefore lack competitive price quotations and service 
options. At these captive sites, freight costs average 15 to 60 
percent higher than freight costs at non-captive facilities. 
Unfortunately, the regulatory scheme that has evolved all but 
removed any incentive for railroads to respond to the concerns 
of captive customers. To make matters worse, the remedy process 
established at the STB has proved inadequate to protect captive 
rail customers.
    Regulatory decisions have led to what amounts to 
monopolistic behavior which is not tolerated in other 
industries, and tolerating such behavior in the rail freight 
industry simply runs counter to the principles of a free market 
economy. Only Congress can resolve the problems faced by rail 
shippers who lack competitive service. We urgently request your 
help in remedying the situation and restoring the competitive 
balance envisioned by the existing Federal law.
    Now allow me to tell you how the lack of competitive rail 
service affects Basell. Basell depends on rail service to meet 
the needs of our customers around the country. We have invested 
in a fleet of rail cars valued at nearly $1/4 billion to serve 
these customers. This investment truly binds us to rail 
service. Basell's Lake Charles and Bayport facilities load 
their entire production directly into rail cars. These 
facilities are only 135 miles apart, and ship product to 
destinations with comparable lengths of haul. Lake Charles is 
not captive, and is served by three railroads. Bayport is 
served by only one carrier, and it is captive.
    Basell's costs at Bayport are consistently higher than at 
Lake Charles. In fact, the railroad serving our Bayport 
facility linked its prices for that business to our Lake 
Charles plant. In other words, Basell's only one practical way 
to reduce monopoly costs at our captive Bayport facility was to 
commit the shipments out of the non-captive Lake Charles site 
to the same railroad serving Bayport.
    The railroads call this practice bundling, yet in reality 
this practice draws on the power over a captive site that 
leveraged non-captive facilities in different locations.
    At great risk, Basell recently switched carriers at its 
Lake Charles facility. This action improved costs and service 
at Lake Charles. However, at Bayport Basell faced increased 
cost, reduced service, and an escalating adversarial customer-
supplier relationship.
    Like many rail customers, Basell loads product directly 
into rail cars which are then stored with rail carriers prior 
to shipment. In the last 2 years, Basell's costs to store cars 
loaded at the captive Bayport facility increased some 375 
percent, while Basell's storage costs at the non-captive Lake 
Charles site decreased. Amazingly, rail carriers will not 
entertain service-level commitments in contracts with captive 
customers, while they will do so for non-captive customers. 
Basell is caught in a really strange and strained relationship. 
Even though we pay more as a captive shipper, we are not 
treated as a valued customer, although what I just described 
here and in my written testimony is the net result of the 
existing regulatory environment.
    In closing, I would like to touch on action recently taken 
by Basell to become non-captive at its Bayport site. Basell 
joined with three other chemical companies in Bayport and a 
competing railroad to seek regulatory authority to construct an 
alternative rail line. That application is pending with the 
STB, and I will not address any of the specifics today. 
However, this project will liberate Bayport from captivity, and 
at the same time leverage Lake Charles.
    I would say, however, buildouts are not viable for most 
situations. Rail customers should not be forced to involve 
themselves in the business of railroading as the only means to 
create rail competition. Unfortunately, these investments are 
necessary under the existing regulatory environment. This was 
not intended by the Staggers Act, and points to the urgent need 
for Congress to restore balance to the regulatory process.
    Senators, I again want to thank you for the time and 
attention you are giving this important issue. We urgently 
request that you address rail competition through appropriate 
legislation as soon as possible, and we stand ready to assist 
you. Thank you.
    [The prepared statement of Mr. Platz follows:]

          Prepared Statement of Charles E. Platz, President, 
                       Basell North America Inc.
EXECUTIVE SUMMARY
    Safe and efficient rail service is vital for the member companies 
of the American Chemistry Council (``the Council''). In fact, a strong 
and healthy railroad industry is critical to the success and 
competitiveness of the chemical industry. That is why we strongly 
support the efforts of this Committee and this Congress to provide the 
necessary federal resources to improve the nation's rail 
infrastructure. Competition between railroads, however, is just as 
critical, and the lack of competitive rail service options has a 
serious and detrimental affect on the chemical industry's ability to 
compete in a global marketplace.
    The business of chemistry is second only to the nation's electric 
utilities in terms of its dependence on railroads and the size of its 
rail freight bill. Chemicals and plastics annually account for $5 
billion in rail service provider revenues paid to transport 150 million 
tons of rail freight into virtually every sector of the American 
economy, Canada, Mexico and to various U.S. ports for export worldwide.
    Nearly two-thirds (63-percent) of our industry's rail-served 
production facilities are captive to one railroad and lack competitive 
price quotations and service options. At captive sites, freight rates 
are 15-percent to 60-percent higher than freight rates at competitively 
served facilities, and decisions by the Surface Transportation Board 
(``STB'') have essentially removed any incentive for railroads to 
respond to customer service concerns. Captivity similarly impacts 
solely served customer freight destinations. To make matters worse, the 
processes established by STB to protect captive rail shippers have 
proven to be inadequate. Such monopolistic behavior would not, and is 
not, tolerated in any other industry, and should not be tolerable in 
the freight rail industry. It simply runs counter to the principles of 
a free-market economy.
    Only Congress can resolve the problems faced by rail shippers who 
lack competitive service, and the chemical industry urgently requests 
your help.
    Mergers approved by STB have left the only two major carriers in 
the East and two in the West. Due to captivity, however, even the 
existence of more than one railroad in a region does not provide 
competition. It is clear, therefore, that the process by which rail 
mergers are reviewed and approved must be enhanced to safeguard against 
further erosion of competition between rail carriers.
    On top of the diminished competition from merger approvals, certain 
other regulatory decisions have frustrated measures wisely enacted by 
Congress to correct competitive imbalances. These decisions impact 
important aspects of the rail industry's relations with its customers 
and must be examined. For example:

    The STB has essentially precluded captive shippers from 
        having their cars ``switched'' to other carriers at interchange 
        points in terminal areas.

    The STB's ``bottleneck'' doctrine effectively blocks 
        competition even where two railroads could each provide service 
        over a portion of a longer route.

    The exclusive forum to determine ``rate reasonableness'' is 
        fraught with administrative and regulatory barriers that 
        paralyze the process and deprive captive rail customers of the 
        protection afforded by statute.

    In conclusion, because the business of chemistry depends so heavily 
on railroads, we urge the Senate to promote the long-term health of the 
nation's railroads. We support improvements in our rail infrastructure. 
Equally important--as envisioned in the Staggers Rail Act of 1980--we 
must allow free-market forces to operate in a truly competitive manner 
in the railroad industry.
STATEMENT
    Good morning, Mr. Chairman and Members of the Surface 
Transportation and Merchant Marine Subcommittee. My name is Charles E. 
Platz, and I am the President of Basell North America Inc. 
(``Basell''). My business address is 2801 Centerville Road, Wilmington, 
Delaware 19808-1609. I serve on the Board of Directors of the American 
Chemistry Council (``the Council'') and I am representing the Council 
here today.
    As you know, Mr. Chairman, Basell is a proud corporate citizen of 
Louisiana, with production facilities in Lake Charles and Taft. I am 
pleased that Mr. Dan Borne, who is the president of the Louisiana 
Chemical Association, is accompanying me today.
    Basell also produces or compounds plastics at facilities in 
Bayport, Texas, and Jackson, Tennessee.
    Illustrating our company's dependence on rail transportation is the 
fact that 100-percent of the polymer resins we produce at Lake Charles 
and Bayport are loaded directly into railroad hopper cars. These 
operations account for the vast majority of our U.S. production. Rail 
is the preferred mode for shipping our product. Truck transportation is 
not a viable alternative. To meet the needs of our customers around the 
country, Basell has invested in a fleet of more than 4,000 hopper cars. 
Please note that Basell's entire fleet of hopper cars, which has a 
replacement value exceeding $260 million, is not supplied by the 
railroads. Instead, like many other rail shippers, Basell must provide 
its own specialized equipment by purchasing and/or leasing railcars.
    The American Chemistry Council represents the leading companies 
engaged in the business of chemistry. Council members apply the science 
of chemistry to make innovative products and services that make 
people's lives better, healthier and safer. Chemicals are essential to 
the production of virtually every product that consumers use--
computers, medicines, automobiles, cell phones, fabrics, etc. The 
Council is committed to improved environmental, health and safety 
performance through Responsible CareR, common sense advocacy 
designed to address major public policy issues, and health and 
environmental research and product testing. The business of chemistry 
is a $450 billion enterprise and a key element of the nation's economy. 
It is the nation's largest exporter, accounting for ten cents out of 
every dollar in U.S. exports. Chemistry companies invest more in 
research and development than any other business sector.
    Safe and efficient rail service is crucial for the Council's member 
companies. For the railroads, as with every industry, competition is 
the key to performance. The business of chemistry is second only to the 
nation's electric utilities in terms of its dependence on the U.S. 
railroad system and the size of its rail freight bill. Chemicals and 
plastics annually account for 150 million tons of rail traffic, which 
provides the railroad industry with $5 billion in freight revenues.
    On behalf of Basell and the Council, I appreciate the opportunity 
to address several important issues regarding the relationship between 
the railroads and their customers. Because Federal law governs this 
relationship, the Council appreciates the Subcommittee's examination of 
the difficulties that ``captive'' rail customers face on a daily basis. 
It is unfortunate that in a number of industries there are rail-
dependent companies whose business is essentially captive to--or, if 
you will, monopolized by--their rail carriers. Basell is one of those 
companies. Today I have brought with me a number of letters from other 
companies engaged in the business of chemistry. Those letters are 
attached to this statement and I request that the Subcommittee include 
this correspondence in its hearing records.
    Over the past several years the Council--on behalf of its members--
has become increasingly concerned about the lack of direct head-to-head 
competition between railroads. (When two railroads compete against each 
other for business at a specific shipping or receiving location, it is 
sometimes called ``rail-to-rail'' competition.) But in actuality rail-
to-rail competition occurs too rarely. For the Council's membership as 
a whole, 63-percent of all rail-served chemical plants in the United 
States are restricted to service by a single railroad. In other words, 
when it comes to rail transportation, nearly two-thirds of our industry 
is ``captive'' and therefore has no opportunity to obtain competitive 
price quotations and service options. The Council's member companies 
reported that their freight rates are much higher (ranging from 15-
percent to 60-percent more) where one railroad has a monopoly over the 
shipper's traffic than where there is competition between railroads. 
Nor is it surprising that the Council's members find rail carriers to 
be less responsive to customer service concerns at the many plant 
locations that do not have rail-to-rail competition. In fact, in our 
free-market economy, competition is what drives consistent and reliable 
service in any industry.
    I am here today because this lack of competitive rail service is 
damaging to the business of chemistry and increases costs to the 
American public. In fact, at Basell, rail transportation is our second 
largest cost (after feedstocks). The chemical industry's customers 
participate in virtually every sector of the U.S. economy--including 
motor vehicles, pharmaceuticals, computers, packaging, agriculture, and 
water treatment. We are under constant competitive pressure to supply 
them with our products on a cost-effective and timely basis. Moreover, 
as the nation's largest exporting industry, the business of chemistry 
also had to arrange for the movement of more than $80 billion worth of 
exports last year. Competing in export markets often requires rail 
service, either to reach customers in Canada and Mexico or to move 
products efficiently to various U.S. ports.
    I have underscored the importance of rail service to the business 
of chemistry. I would now like to explain the impact of the lack of 
competition between railroads at so many specific locations. Some 
shippers face captivity where their traffic is picked up by the 
railroad (e.g., chemical plant, coal mine, grain elevator). For others, 
one railroad has a monopoly hold on the delivery point (chemical 
customer, electric power plant, grain processor). In many cases a 
specific rail movement is captive at both its origin and its 
destination. Even if only one end of the rail movement lacks an 
alternative rail service provider, competition will be affected. For 
example, Basell's production site is served by more than one railroad 
in Lake Charles. But if a particular shipment is to be delivered to one 
of our customers at a point that is captive to one of those railroads, 
in virtually no case can another railroad bid for that traffic.
    In this regard, it is important to note that a captive shipper's 
difficulties are not alleviated if another of its own facilities is 
served by two competing railroads. Nor does the fact that some shippers 
use trucks or barges to move certain chemical products, for which those 
modes of transportation are feasible, somehow offset captivity for 
other rail-dependent shippers. To the contrary, as I will explain with 
reference to Basell's operations, a company with a captive production 
facility can even lose the benefits of the competition that exists 
elsewhere.
    Basell is not captive at Lake Charles. But one of the railroads at 
that location does have a monopoly on rail service at Basell's Bayport, 
Texas, facility. That railroad uses its market power to obtain leverage 
over our Lake Charles traffic. Because of this situation, Basell and 
three other shippers have joined with another railroad to create 
competition in Bayport. We have applied to STB for permission to build 
and operate San Jacinto Rail Limited, a partnership whose mission is to 
introduce and provide competitively priced rail-service options that 
are sensitive to public safety and the environment. (That application 
is pending.) Although my company would prefer to invest in plastic 
resin production facilities rather than rail assets, current regulatory 
policies compel us to do so.
    Let us begin by recognizing that such unbalanced competitive 
conditions were not envisioned when Congress passed the Staggers Rail 
Act of 1980. Indeed, that landmark legislation struck a careful balance 
between the needs of the railroads and the interests their customers. 
On paper, the law retains that balance. But two decades of regulatory 
decisions, first by STB's predecessor agency (the Interstate Commerce 
Commission) and subsequently by STB itself, have severely tilted the 
scales.
    The Council is acutely aware that STB's exclusive authority to 
review rail industry mergers has left this country with so few 
railroads that there are now only two major railroads in the East and 
two in the West. As I noted earlier, the reality is that nearly two-
thirds of all rail-served chemical production facilities have no 
competing rail service, even when another railroad has tracks within a 
few miles--or even closer. If the trend continues, the next round of 
rail mergers will almost certainly trigger successive transactions, 
resulting in an industry with only two major railroads in North 
America. With its members already subject to monopoly conditions at so 
many of their rail-served production facilities, the Council 
anticipates that the ``rail merger end-game'' will result in an even 
greater level of concentration and therefore even fewer alternatives 
for captive shippers.
    Ideally, the next-and-likely-final round of rail mergers should be 
reviewed from an antitrust perspective. The Council therefore urges the 
Senate to elevate the involvement of the U.S. Department of Justice in 
the approval of rail mergers, and to make that change before further 
mergers are announced. Given the extreme concentration that already 
exists in the rail industry and the market power that railroads exert 
over individual captive shippers, it would certainly be appropriate to 
give more authority to an agency with a more balanced view of 
competition.
    Turning from merger policy, I would like to comment on STB's 
governance of the on-going relationships between railroads and their 
customers. This is not a new topic. In fact, the laws that established 
STB recognize that there will inevitably be some captive rail freight 
customers. For that reason, Congress provided several methods to 
correct competitive imbalances. However, over two decades since passage 
of the Staggers Act, a series of agency-imposed policies have greatly 
weakened such provisions. Allow me to touch on just three important 
examples:

    Terminal Access. Some captive shipper facilities are 
        located in ``terminal areas,'' where two or more separate 
        railroads maintain tracks and interchange traffic. The law (in 
        this case, 49 U.S.C. Section 11102) permits a customer that is 
        located in a terminal area but is captive to Railroad A to seek 
        STB's approval to arrange for Railroad B to provide competitive 
        long-haul service. One way to accomplish this is for the 
        captive shipper's freight cars to be ``switched'' by Railroad A 
        (the monopoly carrier) to Railroad B (the other carrier with 
        facilities in that terminal area). Railroads regularly switch 
        cars within terminal areas, but they oppose the use of 
        switching as a pro-competitive alternative for captive 
        shippers. STB, following the precedent set in the Interstate 
        Commerce Commission's ``Midtec Paper Corp.'' decision in 1986, 
        has never granted captive shippers the type of competitive 
        service that is clearly contemplated in this existing statutory 
        remedy.

    Bottleneck Rates. Another form of relief that has been 
        denied involves what are known as ``bottleneck'' situations. 
        Captive shippers have asked Railroad C, the exclusive service 
        provider on the monopolized portion of a rail route, to quote a 
        rate for that specific portion only. The shipper's objective is 
        to benefit from the competition that exists between Railroad C 
        and Railroad D over the remaining--competitive--portion of the 
        complete movement from origin to destination. Several years 
        ago, STB examined this matter in a series of ``bottleneck'' 
        cases. (The bottleneck is the monopolized portion of the route, 
        which may be a small fraction of the total distance.) While 
        nothing in the statute explicitly prevents STB from requiring 
        Railroad C to offer a rate for its bottleneck portion of a 
        movement, the agency has consistently refused to do so. (STB's 
        only exception is to require Railroad C to provide a bottleneck 
        rate in the virtually non-existent situation where the captive 
        shipper has previously signed a rail service contract with 
        Railroad D covering the remaining competitive portion of the 
        movement.) Again regulators interpreted the law in a way that 
        denies captive shippers another form of competition.

    STB ``Rate Reasonableness'' Procedures. Finally, the law 
        establishes STB as the exclusive forum to resolve commercial 
        issues arising in the rail industry. This includes STB's 
        authorization to adjudicate the ``reasonableness'' of rates 
        paid by captive rail customers. (See 49 U.S.C. Chapter 107.) A 
        shipper must first clear a series of evidentiary hurdles to 
        demonstrate that it is truly captive (this is known in the 
        statute and regulations as finding that the railroad has 
        ``market dominance'' for that shipper's rail traffic). Then STB 
        is to decide the maximum reasonable rate that the captive 
        shipper must pay to the market-dominant railroad. In reality, 
        however, this process is vastly different than one would 
        expect, as shown in a 1999 study by the General Accounting 
        Office (``GAO''). STB's process actually deters shippers from 
        using the only forum provided by Congress. GAO surveyed 
        shippers of grain, coal, chemicals and plastics. Among the 
        barriers identified by GAO were: STB's filing fee (raised to 
        $61,400 as of April 8, 2002); the additional costs of lawyers 
        and consultants; the complexity of STB's procedures; the fear 
        of reprisal by the railroad; etc. Perhaps most telling is that 
        69-percent of the shippers surveyed by GAO believed that ``STB 
        will most likely decide on behalf of the railroads, so it is 
        not worth our effort to file a complaint.'' (``Railroad 
        Regulation: Current Issues Associated with the Rate Review 
        Process,'' GAO/RCED-99-46, pages 47-51).

    Basell ships approximately 14,000 carloads of plastic pellets per 
year. I can state that none of these three approaches--neither terminal 
access, nor bottleneck rates, nor STB ``rate reasonableness'' 
procedure--provide Basell with any opportunity to offset the effects of 
rail captivity. But in Canada, where my company also produces plastic 
resins and faces similar transportation circumstances, there are 
meaningful ways for captive shippers to negotiate with their rail 
service providers on a more level basis. While the Council stands ready 
to provide examples if the Subcommittee is interested, all I need to 
say today is that Canada--which is a two-railroad country--provides 
fair and workable mechanisms that address each of the three elements 
that I have just described.
    In conclusion, the American Chemistry Council thanks the Surface 
Transportation and Merchant Marine Subcommittee for the opportunity to 
participate in today's hearing. Because our members depend so heavily 
on the railroads, we urge the Senate to pass legislation that would 
promote the long-term health of the nation's railroads--as envisioned 
in the Staggers Rail Act of 1980--by allowing free-market forces to 
operate in a truly competitive manner.
    The business of chemistry needs and supports a strong rail 
industry. In our view, the nation's rail infrastructure needs to be 
upgraded to carry our products and those of other critical sectors of 
the economy. We also applaud Senators who have already introduced or 
co-sponsored pro-competitive rail legislation. We look forward to 
working with others in Congress to re-establish the appropriate balance 
on the issue of rail-to-rail competition. Finally, we strongly and 
urgently request that this Committee address rail competition by 
clarifying STB's role through legislation as soon as possible.

    Thank you for your interest and attention. I would be glad to 
answer any questions.
                                 ______
                                 
                                                Akzo Nobel,
                                          Chicago IL, July 31, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

    Thank you for holding today's hearing to address the competition 
and service concerns of rail shippers. This provides the industry with 
an important opportunity to address longstanding and growing problems 
faced by shippers who receive their service from only one railroad.
    Rail industry consolidation has decreased competition, diminished 
service, and above all significantly increased transportation costs for 
captive rail shippers. Unfortunately, the Surface Transportation Board 
(STB) has shown that it is unable to adequately and reasonably address 
these problems. We, therefore, believe congressional action is 
necessary to increase the competitive transportation options for 
captive rail shippers and to ensure the processes at the STB for 
protecting captive rail shippers are workable.
    Illuminating our concerns is the recent renewal of a Norfolk 
Southern Railroad/Akzo Nobel Chemicals Inc. transportation contract. 
The contract covers shipment of Sulfuric Acid by shipper owned tank car 
to two separate locations for one of our customers. Both sites are also 
captive to the Norfolk Southern. We requested that the contract be 
renewed for a three-year period since we had just entered into a new 
three-year supply contract with the customer.
    Instead of typical freight rate increases of 2-4-percent, as has 
been the norm over the past few renewals, the rates in this contract 
were increased 30-54-percent. Worse yet, we were initially presented 
with a six-month contract term instead of the usual and customary 
renewable one-year period. This strikes us as an unfair, predatory 
tactic.
    After lengthy discussions with our account representative, a 
revised quote on a one-year basis was conveyed with an optional 2nd and 
3rd year extension (with increases). The rates themselves were not 
reduced and in fact, one of the original rate offers was increased 
further, driving the total increase to 60-percent. Because of the rate 
increases, we were placed at an unfair advantage to our competitors. We 
were forced to take the exorbitant increases or cease doing business 
and at a risk of shutting down our production site and laying off 
employees in the process.
    We do not favor ``re-regulation'' of the railroads. We are simply 
asking that the pro-competitive provisions passed into law as part of 
the 1980 Staggers Rail Act be implemented by the STB in a way that 
encourages competition among railroads. We believe free market forces 
are the best way to ensure that the rail transportation market works 
best for everybody. As with our Sulfuric Acid business, we advocate a 
competitive marketplace that will lead to greater efficiencies, 
innovation, better service and lower prices.
    Again, we believe congressional action must be taken, and we ask 
you to ensure these matters are addressed in appropriate legislation as 
soon as possible. We look forward to working with you and your 
colleagues on the Committee.

        Sincerely,
                                              Jack Francis,
                                       Global Distribution Manager,
                                          Akzo Nobel Chemicals Inc.
                                 ______
                                 
                               ATOFINA Petrochemicals, Inc.
                                                      July 24, 2002
Hon. John B. Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Senator Breaux:

    First let me thank you for giving us the forum to voice our 
concerns about rail transportation and the issues of competition and 
service.
    I am representing ATOFINA, one of the largest chemicals companies 
in the United States. We have some forty manufacturing sites in the US 
and we make a variety of important chemicals.
    Some of our businesses are completely dependant on rail to ship our 
products. The combination of our rail dependency and the trend of rail 
companies consolidating, has created a situation that can only be 
labeled for what it is . . .a monopoly.
    With one rail company servicing two of our three plants, we are 
held captive to the pricing of that one rail company. We have limited 
negotiating power and leverage, and thus basically have no say in what 
we are charged.
    The price differential between shipping from a facility serviced by 
a single rail company with one that has competition is staggering. Our 
own experience shows there to be 30-60-percent differences in rail 
freight costs for captive facilities versus facilities with competitive 
rail service. This is why ATOFINA is currently involved in projects 
that attempt to bring competitive rail service to our Bayport, Texas 
facility and our Carville, Louisiana facility. Without competition 
there is no negotiation. The railroad increases its price and we pay 
it.
    Senator Breaux, we run top-notch manufacturing sites. We employ a 
lot of good people. And we produce useful products. We have tightened 
our belts in every aspect of running our business, and this is the one 
area where we have limited choices, limited options. We need your help.
    We are asking for your support in encouraging rail competition. We 
need Congressional action to enhance competition in rail service. We 
also ask you to encourage the STB to give full and literal application 
to the existing statutory provisions from the perspective of promoting 
rail-to-rail competition, and also to give full, fair and expeditious 
consideration to the pending requests before the agency relating to 
both the Bayport and Carville projects.
    Thank you for this opportunity, I look forward to hearing the 
results of your hearing.

        Sincerely,
                                             Steve Cornell,
                               VP Base Chemicals and Manufacturing,
                                            ATOFINA Petrochemicals.
                                 ______
                                 
                                           BASF Corporation
                                                      July 23, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Subcommittee on Surface Transportation and 
Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

    I am pleased to learn that you will be chairing a Senate Commerce 
Committee meeting on rail competition on July 31, and I am writing to 
urge your support for helping to make the U.S. freight rail system more 
competitive for all users. BASF Corporation is very concerned about the 
current lack of rail competition that exists. A competitive rail 
transportation system is essential for BASF and the chemical industry 
to receive raw materials and deliver products, i.e., to conduct its 
business.
    75-percent of BASF's U.S. sites are captive to using a single 
available railroad. Captive shippers pay 20-percent higher rates 
because of the lack of rail competition. These higher rates cost BASF 
an extra $8 million per year, which impacts our competitiveness.
    My experience is that service declines when there is no competition 
between railroads. This often results in late pick-ups and deliveries. 
When our products are delayed because of the monopoly-like abuses, BASF 
loses sales and customers.
    In many instances, transporting by truck is not a viable option. As 
service by these rail carriers declines, there is no recourse for us--
the railroad provider knows we have nowhere else to turn to move our 
products.
    This captive shipping scenario is the result of the many railroad 
industry mergers that have occurred over the past 25 years. In 1976, 
there were 63 major freight railroads operating in the U.S. Only seven 
are left today. The competition that once characterized the industry 
has been replaced with a system rampant with service delays and higher 
costs.
    As you know, the Surface Transportation Board (STB) is responsible 
for reviewing proposed mergers and setting service standards in the 
freight railroad industry. While BASF and others in the chemical 
industry have been active participants to revise the STB's rail merger 
guidelines, these revised guidelines do not go far enough. BASF 
believes that federal legislative action is necessary to further 
clarify and ensure competition in the freight railroad industry.
    BASF has 12,000 U.S. employees, including 1,300 employees residing 
in Louisiana. We thank you for holding these hearings and addressing 
needed changes to improve our freight rail transportation system in 
this country.

        Sincerely,
                                                 Otis Hall,
                                Vice President and General Manager,
                                                  BASF Corporation.
                                 ______
                                 
                                            BP America Inc.
                                      Naperville, IL, July 29, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Mr. Chairman:

    Thank you for holding the July 31st hearing to address 
the competition and service concerns of rail shippers. This is an 
important opportunity to address long-standing and growing problems 
faced by shippers who receive their service from only one railroad. 
Rail industry consolidation has decreased competition and diminished 
service for captive rail shippers. Unfortunately, the Surface 
Transportation Board (STB) has been unable to reasonably address these 
problems. BP, therefore, believes congressional action is necessary to 
increase the competitive transportation options for captive rail 
shippers and to ensure the adequacy of processes at the STB for 
protecting captive rail shippers.
    BP is a leading petrochemical manufacturer in the United States 
with over 42,000 employees and sales of more than $6 billion from U.S. 
based chemicals businesses. Our company is highly dependent on the rail 
industry for the safe and timely delivery of over 4 million tons of 
product and raw material while spending $110 million in freight cost 
annually. A strong, healthy, and efficient freight rail industry is in 
everyone's best interest, and BP will gladly work with this Committee 
and Congress to ensure a robust rail industry. This cannot be 
accomplished, however, without effectively addressing the lack of 
competition for captive rail shippers.
    BP can cite many examples of apparent overcharging by the railroads 
when a production facility or a customer delivery point is closed to 
competition. We have over 80-percent of our business captive at either 
origin or destination. An example of this impact is that one of our 
major businesses is significantly disadvantaged by lack of competitive 
access. Despite the efforts within the business to reduce 
manufacturing, site logistics, corporate overhead and other supply 
chain costs, we continue to be faced with high rail costs to 
competitively serve customers. In this business alone we pay an 
approximate premium of $9 million in rail freight annually, on a total 
spend of $35 million. This premium along with other competitive factors 
has caused BP to rationalize the business and shut down production 
sites and lines. Competition, much of which will be foreign in the 
future, requires us to have lower costs to compete. It is essential we 
have congressional support to allow us to be effective in meeting 
current and future competitive challenges.
    BP does not favor ``re-regulation'' of the railroads. We are simply 
asking that the pro-competitive provisions passed into law as part of 
the 1980 Staggers Rail Act be implemented by the STB in a way that 
actually encourages competition among railroads. We believe free market 
forces are the best way to ensure that the rail transportation system 
works best for everyone. We are advocates of a competitive marketplace 
that will lead to greater efficiencies, innovation, and better service 
at reasonable rates.
    Again, we believe congressional action must be taken, and we ask 
you to ensure these matters are addressed in appropriate legislation as 
soon as possible. We look forward to working with you and your 
colleagues on the Committee.
    Please do not hesitate to contact Mr. Mike Brien of our Washington 
Office, (202) 785-4888, if you have additional questions or concerns.

        Sincerely,
                                           George Tacquard,
                                    Business Unit Leader, Nitriles.
                                 ______
                                 
                                         Celanese Chemicals
                                          Dallas, TX, July 22, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

    Celanese employs 5,400 Americans in high tech high wage earning 
jobs in the manufacture and distribution of chemicals, plastics and man 
made fibers. Our industry is highly dependent on rail to deliver raw 
materials and pick up finished products on a predictable and timely 
basis. A strong, healthy, and efficient freight rail industry is, 
therefore, in our best interest, and we will gladly work with this 
Committee and the Congress to ensure a robust rail industry. This 
cannot be accomplished, however, without Congress effectively 
addressing the lack of competition for captive rail shippers.

    Rail industry consolidation has decreased competition and 
        diminished service for captive rail shippers. Unfortunately, 
        the Surface Transportation Board (STB) has proven unable to 
        adequately and reasonably address these problems. We, 
        therefore, believe congressional action is necessary to 
        increase the competitive transportation options for captive 
        rail shippers and to ensure the processes at the STB for 
        protecting captive rail shippers are workable.

    For Celanese, a freight premium of 30 to 40-percent is 
        typically imposed at our plants without rail competition. This 
        value gap is increasing, as railroads lower their prices in 
        competitive markets and offset the revenue loss by increasing 
        prices where they have no competition. Ultimately, this impacts 
        decisions on where product is made, putting the economic 
        viability of many existing plants and their communities at 
        risk.

    Let me be clear: we do not favor ``re-regulation'' of the 
        railroads. We are simply asking that the pro-competitive 
        provisions passed into law as part of the 1980 Staggers Rail 
        Act be implemented by the STB in a way that actually encourages 
        competition among railroads. We believe free market forces are 
        the best way to ensure that the rail transportation market 
        works best for everybody. We are advocating a competitive 
        marketplace that will lead to greater efficiencies, innovation, 
        better service and lower prices.

    Thank you for addressing the long-standing and growing problems 
faced by shippers who are captive to a single railroad for their 
distribution needs. We urge that these matters be addressed in 
appropriate legislation as soon as possible. We look forward to working 
with your Committee.

        Sincerely,
                                            Lyndon E. Cole,
                                                         President.
                                 ______
                                 
                       Chevron Phillips Chemical Company LP
                                         Houston, TX, July 23, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

    Chevron Phillips Chemical Company LP (CPChem), a competitor in the 
global plastics and petrochemicals/chemicals industry, wishes to thank 
you for holding hearings to address rail competition and service 
concerns of U.S. rail shippers. This is a timely opportunity to address 
important issues facing companies that rely upon our country's rail 
industry.
    While rail industry consolidations are beginning to deliver on 
their promises of improved rail service in many areas of the country, 
those same consolidations have almost eliminated any significant rail-
to-rail competition in both the eastern and western U.S. Congressional 
action is needed to increase the competitive rail-to-rail 
transportation options for captive rail shippers (origins) and captive 
rail receivers (destinations).
    CPChem has several rail ``captive'' manufacturing facilities and 
approximately 1/3 of our rail shipments are destined to ``captive'' 
customer locations. While we are not in favor of ``re-regulation'' of 
the railroads, we do think U.S. industry would be better served if the 
pro-competitive provisions passed into law as part of the 1980 Staggers 
Rail Act were implemented by the Surface Transportation Board (STB) in 
a way that actually encourages competition among railroads.
    Free market forces are the best way to ensure that rail 
transportation services work best for everybody. We are advocating a 
competitive marketplace that will lead to greater efficiencies, 
innovation, better service and lower prices. We believe Congressional 
action must be taken, and we ask that you ensure these matters are 
addressed in appropriate legislation as soon as possible. We look 
forward to working with you and your colleagues on the Committee.

        Sincerely,
                                         James L. Gallogly,
                              President and Chief Executive Officer
                                 ______
                                 
                                       Dow Chemical Company
                                         Midland, MI, July 30, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

    Thank you for holding a hearing to address the competition and 
service concerns of rail shippers. This is an important opportunity to 
address the long-standing and growing problems faced by shippers who 
receive their service from only one railroad.
    The chemical industry ships 143 million tons by rail each year and 
pays $5 billion in rail freight costs. 63-percent of all chemical 
facilities are captive to a single railroad. Surely, this is not what 
Congress had in mind when they passed the Staggers Rail Act. The number 
of major Class I railroads in the U.S. has declined from approximately 
42 to only four. These four railroads, which control 88-percent of 
originated chemical shipments, do not even really compete with each 
other because they serve different geographies. This consolidation has 
dramatically decreased competition, diminished service and increased 
costs. Unfortunately, the Surface Transportation Board (STB) hasn't 
adequately or reasonably addressed these problems.
    We depend on rail transportation for the cost-effective, efficient 
movement of our raw materials and products. With transportation being 
the second highest cost factor in chemical production, second only to 
feedstocks, one easily can see how the quality and cost of rail 
transportation directly affects our ability to compete in a global 
marketplace. Dow, as the world's largest chemical and plastics 
producer, is experiencing first-hand that captive shippers are paying 
the highest rates and receiving the poorest service. Dow is captive to 
the same railroad at its four largest U.S. plant facilities. It is well 
understood that being captive at a facility normally means rail freight 
costs about 30-percent higher than facilities served by two railroads.
    A strong and efficient freight rail industry is in everyone's best 
interest, and we will work with Congress to ensure a robust rail 
industry. This cannot be accomplished, however, without effectively 
addressing the lack of competition within the rail industry. We are not 
in favor of re-regulating the railroads, but rather ask that the pro-
competitive provisions passed into law as part of the Staggers Rail Act 
be implemented by the STB in a way that actually encourages competition 
among railroads. Again, we ask you to ensure that these matters are 
addressed in appropriate legislation as soon as possible.

        Kindest regards,
                                         Michael D. Parker,
                                                  President and CEO
                                 ______
                                 
                                                     Dupont
                                                      July 30, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

Re: Senate Hearings on Rail Competitiveness

    E.I. DuPont de Nemours and Company (DuPont) would like to express 
its appreciation to you and your staff for agreeing to hold hearings on 
the current state of competition and service concerns affecting the 
freight rail industry.
    DuPont, a U.S. corporation, headquartered in Wilmington, Delaware, 
is a global science and technology company engaged in the manufacture, 
sale and distribution of chemicals, crop protection products, paints, 
textiles, resins, plastics and related materials. Much of the raw 
material and finished products produced and/or utilized by DuPont's 
(insert number) U.S. manufacturing facilities are shipped by rail. In 
addition, as one of the largest exporter of U.S. manufactured chemicals 
and related products (according to Journal of Commerce figures, DuPont 
is currently the third largest U.S. exporter), DuPont is highly 
dependent upon the domestic rail system to service its global 
marketplace.
    The events of September 11, 2001, traditional safety concerns and 
fundamental economics surrounding the transportation of hazardous 
materials and bulk products have served to increase DuPont's already 
heavy dependence on freight rail transportation. A strong, healthy and 
efficient freight rail industry is essential to DuPont's ability to 
compete both within the United States and abroad.
    DuPont, however, is very concerned about the lack of effective 
competition within the rail industry. In 1980, when the Stagger's Rail 
Act was passed, Congress expressed it's concern about the then 
deplorable financial position present in the rail industry. The 
Stagger's Act recognized this condition and attempted to reduce 
expensive and counterproductive regulation in order to permit the 
industry to rebuild and recover its financial health.
    In the years since the passage of the Stagger's Act, the rail 
industry has been substantially restructured and has dramatically 
improved its overall financial position. However, during this process 
in kind competition between rail carriers has been greatly reduced. The 
competitive market place forces which Congress had correctly relied 
upon to ``regulate'' the industry have all but disappeared. This has 
resulted in a substantial increase in the number of ``captive 
shippers'', reduction in service (and security) options, a less 
responsive and innovative rail partner and the imposition of a 
``monopoly premium'' in excess of 30-percent being imposed upon captive 
shippers
    The time, therefore, has come to re-examine the Stagger's Act and 
its underlying premise. New mechanisms must be imposed and used to 
restore in kind competition among in kind rail carriers where such 
competition does not currently exist. DuPont believes that such 
competition in the rail industry will result in improved overall 
freight rail service and will serve to aid, the aid the rail industry 
in recapturing much of the freight and bulk transport business lost to 
motor carriers since the conclusion of WWII. The recapture of this 
business will increase the financial strength of the rail industry and 
result in a ``win-win'' solution for both the rail industry and its 
customers.
    DuPont does not believe in regulation (or re-regulation) where 
market forces can be effective. However, if competitive market forces 
are absent, some workable substitution must be discovered and applied 
if our economy is to maximize its potential. DuPont is most willing to 
work with the railroads, the Surface Transportation Board and Congress 
to find a viable and mutually beneficial solution to our current 
problems. We welcome your interest and look forward to meeting with you 
and your staff to begin this worthwhile effort.

        Respectfully submitted,
                                        Gerard J. Donnelly,
                                        Global Director, Logistics,
                                                            DuPont.
                                 ______
                                 
                                  Lyondell Chemical Company
                                         Houston, TX, July 24, 2002
Hon. John Breaux,
Chairman
Senate Subcommittee on Surface Transportation and Merchant Marine, 
Subcommittee,
Committee on Commerce, Science, and Transportation,
Washington, DC

Dear Chairman Breaux:

    I am writing to offer comments from Lyondell Chemical Company as 
the Senate considers captive rail issues at its July 31st Subcommittee 
hearing.
    Lyondell is a leading chemical manufacturer with 10 plants in the 
U.S., including one with 370 jobs in Lake Charles, LA. As the nation's 
leading export industry, the chemical business is a major contributor 
to our country's success. It produces the critical building blocks for 
products that make our lives safer, healthier and more convenient. 
Automobiles, housing, clothing, food packaging and consumer goods of 
all kinds are made better through the use of products manufactured by 
the chemical industry.
    The continued commoditization of the chemical industry is making us 
more and more dependent on an efficient logistics process to serve our 
global customers. Approximately 85-percent of chemical industry 
products are delivered in bulk via rail transportation.
    Almost two out of every three chemical plants in the U.S. are held 
captive by one railroad. When this non-competitive situation exists we 
find ourselves at a severe economic disadvantage, in that freight rates 
are up to 60-percent higher than in a situation where there are 
competitive options. The consequences of these higher costs and poorer 
service are eventually borne by the consumer.
    Fortunately, multiple rail carriers serve Lyondell's plant at Lake 
Charles. However, at Bayport, Texas, a lack of competitive rail access 
has driven Lyondell, Equistar Chemicals, ATOFINA Petrochemicals, Basell 
USA and the BNSF Railroad to initiate a rail infrastructure ``build-
out'' project. This $90 million, twelve-mile project, currently under 
review by the Surface Transportation Board, is necessary for us to get 
relief from a captive market situation and to obtain shipping rates 
that will allow us to cost-effectively supply our sites in the Bayport 
industrial district.
    As a chemical company we strongly prefer to invest in what we know 
best--the business of chemistry. However, when ``held hostage'' we, as 
captive shippers, have demonstrated that we can take decisive action to 
protect our business. Unfortunately, investing in these types of 
mandated rail projects comes at a high price. Since these projects 
deprive our core business its desired funding level, we increase the 
chance that our business growth objectives will fall short, reducing 
the benefit to company shareholders, employees, and the community at-
large.
    Thank you for holding this hearing so that we had the opportunity 
to comment to Congress about the serious need for better railroad 
access and for more railroad competition. We hope you remember and 
address the many shipper issues you will hear about on the 31st as 
Congress looks to reauthorize the Surface Transportation Board next 
year.

        Sincerely,
                                              Dan F. Smith,
                                                 President and CEO.
                                 ______
                                 
                                                    OxyChem
                                          Dallas, TX, July 29, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

    Thank you for holding the July 31, 2002 hearing to address the 
competition and service concerns of rail shippers. This is an important 
opportunity to address long-standing and growing problems faced by 
shippers, and particularly chemical shippers, who receive their service 
from only one railroad at a shipping location.
    The negative effect of being captive to a single railroad, or 
conversely the lack of rail competition, has grown over the years. If 
you roll back the clock to the late 1970's, we had over sixty Class I 
railroads in the United States. Now we're down to four major Class I 
railroads; two in the east and two in the west. Although the Staggers 
Act passed into law in 1980 had the foresight to give the regulating 
entity, the Interstate Commerce Commission and now its successor, the 
Surface Transportation Board (STB), the ability to create and enhance 
competition, the STB has proved unable to adequately and reasonably 
address the problem. For example, the chemical industry provides 
approximately 9-percent of the nation's rail volume and approximately 
13-percent of the rail revenue; a disproportionate relationship.
    The chemical industry is highly dependent upon the railroads to 
deliver both our outbound products and inbound raw materials. We 
believe a strong, healthy and efficient rail industry is not only in 
our interest, but also in the best interest of the overall economy and 
we are willing to work with this Committee and the Congress to ensure 
this happens. However, this cannot be accomplished without effectively 
addressing the lack of competition for the approximate two-thirds of 
the chemical industry that is captive to one railroad at any one 
location.
    Let me give you a specific example of how damaging the lack of rail 
competition can be. We ship large quantities of an intermediate 
material used in the process of producing PVC, by rail in company owned 
tankcars. We ship this product from our US Gulf plants to several 
locations. There are two receiving locations, one with two serving 
railroads and one with one serving railroad. Both destinations are 
approximately equal distance from the shipping locations. However, the 
freight rate to the location with one serving railroad is 60 to 76-
percent (depending upon actual origin) per mile higher than the freight 
rate to the location with two serving railroads.
    In fact, it would be much cheaper for us to ship to the location 
with two serving railroads and reship by rail from that site to the 
location with one serving railroad. However, the captive railroad won't 
provide a reasonable rate for that short movement (referred to as a 
bottleneck), so we're forced to pay this exorbitant premium.
    What we are asking for has sometimes been characterized by the 
railroads as ``re-regulation''. This is not what we seek. We are simply 
asking that the pro-competitive provisions passed into law in 1980 with 
the Staggers Act be implemented by the STB that actually encourages 
competition among railroads. Just as we operate everyday in the free, 
open and competitive market system, the railroads need also to ensure 
the best for everybody. Time and time again, we've seen that a 
competitive marketplace leads to greater efficiencies, innovation, 
better service and better value for dollars spent.
    We believe the only answer to the rail competitive issue is 
congressional action. We ask you to ensure these matters are addressed 
in appropriate legislation as soon as possible. We look forward to 
working with you and your colleagues on the Committee on this very 
important subject.

        Respectfully submitted,
                                        John L. Hurst, III,
                                           Executive Vice President
                                 ______
                                 
                                               Sunoco, Inc.
                                    Philadelphia, PA, July 29, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

    Thank you for holding today's hearing to address the competition 
and service concerns of rail shippers. This is an important opportunity 
to address long-standing and growing problems faced by shippers who 
receive their service from only one railroad.
    Rail industry consolidation has reduced competition and limited 
service options for captive rail shippers. Unfortunately, the Surface 
Transportation Board (STB) has proven unable to adequately and 
reasonably address these problems. We, therefore, believe congressional 
action is necessary to increase the competitive transportation options 
for captive rail shippers and to ensure the processes at the STB for 
protecting captive rail shippers are workable.
    The chemical industry is highly dependent on rail to receive raw 
materials and deliver finished products on a predictable and timely 
basis. A strong, healthy, and efficient freight rail industry is, 
therefore, in our best interest, and we will gladly work with this 
Committee and the Congress to ensure a viable rail industry. This 
cannot be accomplished, however, without effectively addressing the 
lack of competition for captive rail shippers.
    Sunoco ships and receives in excess of 38,000 rail carloads 
annually and we require safe, reliable and consistent service to supply 
our plants and customers. One rail service example illustrates why 
competition is critical to our rail operations. The rail carriers are 
willing to offer service accountability on select competitive 
movements; yet are unwilling to stand behind their service product on 
lanes where no competition exists. Our ability to deliver products 
competitively from two of our single railroad served plants is hindered 
by the local carrier being inflexible on economic demands; often 
necessitating supplying a customer from a much more distant 
competitively served site producing the same products.
    We do not favor ``re-regulation'' of the railroads. We are simply 
asking that the pro-competitive provisions passed into law as part of 
the 1980 Staggers Rail Act are implemented by the STB in a way that 
actually encourages competition among railroads. We believe free market 
forces are the best way to ensure that the rail transportation market 
works best for everybody. We are advocating a competitive marketplace 
that will lead to greater efficiencies, innovation, better service and 
lower prices.
    Again, we believe congressional action must be taken, and we ask 
you to ensure these matters are addressed in appropriate legislation as 
soon as possible. We look forward to working with you and your 
colleagues on the Committee.

        Sincerely,
                                             Bruce Fischer,
                                             Senior Vice President.

    Senator Rockefeller. Thank you, Mr. Platz, very much, and I 
now call upon Mr. Terry Huval--did I get that right?
    Mr. Huval. That is correct.
    Senator Rockefeller. From the Lafayette Utilities System, 
Lafayette, from some State called Louisiana.
    [Laughter.]

 STATEMENT OF TERRY HUVAL, DIRECTOR, LAFAYETTE UTILITIES SYSTEM

    Mr. Huval. Oui, Monsieur. Bonjour.
    Thank you very much for the invitation, and for the 
opportunity, and I certainly am impressed with the intense 
interest that both of you, Senators, are showing to this very 
important issue. I would like to also comment that I have my 
10-year-old son, Andre, who is here with me today to see good 
Government in action.
    I want to tell you a little bit about the Lafayette 
Utilities System. We are a publicly owned utility system. I 
have submitted some written comments also for the record.
    I am also representing the American Public Power 
Association, of which I am on the board of directors, and I 
also represent Consumers United for Rail Equity, or CURE. There 
are also hearing record statements on captive rail issues being 
offered by AEP, Southwestern Electric Power Company, Entergy 
Services, Incorporated, the Association of Louisiana Electric 
Coops, and the Louisiana Energy and Power Authority, LEPA, of 
which I am also on the board of directors.
    I find this an interesting issue that most of the time the 
investor-owned utilities and the coops and the municipalities 
have different ways of looking at things. This is one issue 
that we are all together on.
    LUS is a provider of electric, water, and wastewater 
services in Lafayette. We are the largest in the State of 
Louisiana as a public power entity. We are consumer-owned, 
locally committed. Every dollar we save goes back to the 
customer, either by virtue of the rates going down, or finding 
ways to help pay for the cost of local government. Our cost has 
historically been low, and our reliability has been high.
    Two-thirds of our electric generation comes from coal-fired 
capacity, of which we are co-owner. LEPA is another co-owner of 
that particular facility, and in that particular facility we 
have coal shipped from the Wyoming Powder River Basin to our 
plant, and I guess this is a good time to discuss our rail 
captivity problem.
    We are a bottleneck shipper, and this map behind me will 
indicate three colors of lines from Wyoming to Louisiana. One 
is red, one is green, and one is blue. The red is our existing 
provider of services, the green and the blue are two 
alternative carriers that we could have service us, or at least 
go to a particular location not very far from us.
    The last 19 miles of this 1,500-mile distance from Wyoming 
to our plant, the last 19 miles are obviously owned by one rail 
company. There is no competition there, so because of that 1.3 
percent of the total route being a monopoly, the entire route 
is a monopoly. We have no opportunity--reasonable opportunity--
we feel, to get competitive pricing, to build on the section 
that we could get competitive pricing, and in order to receive 
competitive pricing from another provider, we would have to 
have the cooperation of the existing provider, which of course, 
left to their own devices, has really no incentive to join in 
any type of cooperative effort that provides for competition, 
and as I said, therefore the entire route is a monopoly.
    As a result, our customers are paying more for electricity. 
I cannot discuss, because of the confidentiality of the rail 
contract, the specifics, but our experts tell us that we are 
spending about 50 percent more for rail transportation than we 
should be, with coal transportation being one of our single 
largest cost items. That amounts to about $5 or $6 million a 
year for our customers. That means the businesses, that means 
the homeowner, that means the mom and pops out there. They are 
paying more money for electricity because we do not have a 
choice in the transportation of our coal to our plant, and of 
course it creates an economic development issue also in trying 
to come up with competitive pricing to attract new development 
into the community.
    We have three limited options. One is to seek bottleneck 
relief, one is to pursue build-out relief, and the third is to 
have an origin-to-destination rate case filed. On bottleneck 
relief, as you discussed earlier, we have to get a competitive 
price before we can request a rate case for the bottleneck 
relief.
    Well, you cannot get a competitive price from the 
competitor. We have tried, and they have basically said, for 
you to get a competitive price from us, you have to build 
alternative facilities to attach to us, or have the ability to 
attach to us, which we cannot make happen, so it is kind of the 
chicken or the egg sort of scenario, and we cannot make that 
work.
    What you find in the industry, as I understand it, is a 
lack of poaching of each other's customers. I will not go on 
your turf and try and take your customers if you do not go on 
my turf and try to take my customers, so either the 
interpretation from the Surface Transportation Board needs to 
change, or either Congress needs to change the law, or 
otherwise we really have no option.
    The second option we have is build-out relief, and some 
utilities have built facilities to get competition, and 
generally from an operational perspective that can be worked 
out, if the rail companies want to work it out.
    We have investigated rail facility construction, but it 
just seems absurd to me that public policy is such that we have 
to spend tens of millions of dollars to build alternative rail 
facilities to our location when it is an issue of just that 
last 19 miles, and I will submit to you, I have learned since I 
submitted my testimony that there are some companies that 
actually have gone ahead and made the $40 and $50-million 
investments to get a second rail provider only to have that 
second rail sit essentially dormant because the initial rail 
provider came down on the price, so it is infrastructure being 
installed that is unnecessary in the long term.
    The origin-to-destination rate case relief, something that 
has been discussed earlier, is very prohibitive, especially for 
a small company, up to $61,000 filing fee, the shippers taking 
most of the burden of proof, taking over 2 years to complete 
and litigation costs in the millions of dollars. The difficulty 
that the Surface Transportation Board has had in hearing rate 
cases as far as the length of time associated with it, there 
has to be a simpler way to be able to get easier and less 
expensive rail transportation for us.
    And now I will come to my conclusion, how you and Congress 
can help us. We need reasonable access to competition. 
Specifically, we need to have shippers provide us pricing with 
a competitive option, such as the distance between Alexandria 
in Louisiana and Wyoming, and to have a fair, regulatory 
process that determines the pricing for the last 19 miles.
    We need to reduce rate case filing fees to perhaps no more 
than what is applicable in the Federal District Court. We need 
to reallocate some of the burdens in rate cases to the 
railroads and provide the Surface Transportation Board with 
sufficient resources.
    And the bottom line is, this country in the last 20 years 
has moved to a number of deregulation types of environments, 
some of them with varying successes, and certainly we support 
deregulation, but there needs to be in that environment an 
opportunity for those who are captive, those who have no choice 
to be able to get fair treatment.
    I thank you for your attention.
    [The prepared statement of Mr. Huval follows:]

Prepared Statement of Terry Huval, Director, Lafayette Utilities System
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity and the invitation to appear before you today to discuss 
captive rail shipper concerns.
    My name is Terry Huval and I am the Director of the Lafayette 
Utilities System in Lafayette, Louisiana. I am appearing today on 
behalf of Lafayette Utilities System and both the American Public Power 
Association (APPA) and Consumers United for Rail Equity (C.U.R.E.), of 
which we are members. In addition, Mr. Chairman, I am pleased to offer 
for the hearing record statements on the captive shipper issue from 
other utilities that provide power to Louisiana consumers: AEP 
Southwestern Electric Power Company, Inc., Entergy Services, Inc., and 
the Louisiana Energy and Power Authority (LEPA).
    In order to make the best use of our time, I have divided my 
statement into four sections: (1.) a brief introduction about the 
Lafayette Utilities System; (2.) a discussion about the coal-fired 
Rodemacher Power Station from which LUS receives much of its electrical 
generation; (3.) a synopsis of our rail captivity problems; and (4.) a 
summary of what we are asking Congress to do to help us.
1. Introduction
    First, a few statements about Lafayette Utilities System, or LUS. 
LUS was established in 1896 and provides electric, water, and 
wastewater services to the citizens of Lafayette, Louisiana. Today we 
provide electricity to households and businesses in a community of over 
110,000 people. As a customer-owned and operated utility, subject to 
the jurisdiction of our City Council and, ultimately, the people, we 
establish our rates, control our standards of service and, of course, 
retain all of the proceeds of our sales to provide substantial 
financial support to the remainder of our local government functions. 
LUS is committed to providing electricity to our customers at the 
lowest possible cost and the highest reliability of service.
2. Our Coal-Fired Generating Facilities
    The LUS system generates approximately 588.5 Megawatts of 
electricity, 327 Megawatts through three gas fired units and 261.5 
Megawatts through its 50 percent ownership share of the coal-fired 
Rodemacher Power Station Unit No. 2 located in Boyce, Louisiana.
    Rodemacher Unit No. 2 is a 523 Megawatt unit that also provides 
104.5 Megawatts of power to the Louisiana Energy and Power Authority 
(``LEPA''). LEPA is a joint action agency that collectively represents 
18 Louisiana municipalities that also own and operate their own 
electric distribution systems. The third co-owner of the remainder of 
the plant's capacity is responsible for plant operations and for 
obtaining coal transportation.
    The Rodemacher co-owners collectively purchase coal from mines in 
the Wyoming Powder River Basin. The only practical way to transport 
this coal from Wyoming to Rodemacher (a distance of over 1500 miles) is 
by rail. To facilitate our rail deliveries, the Rodemacher co-owners 
have obtained, at their own expense, four trainsets of coal cars (over 
500 cars).
3. Our Rail Captivity Problem
    Now, Mr. Chairman, let me share with you our experience in a non-
competitive rail situation.
A. LUS is a Bottleneck Captive Shipper
    I have appended a schematic to my testimony to help illustrate our 
situation. Two different railroad companies serve our Powder River 
Basin mine origin. Thus, we enjoy a choice of railroads at our coal 
origin. Alternative rail providers can transport our Powder River Basin 
coal deliveries to Alexandria, a distance of approximately 1506 miles. 
(The Official Railroad Station List shows railroad interchange traffic 
between our existing rail provider and an alternative rail provider in 
Alexandria, Shreveport, and other points in Louisiana. Alexandria is 
the nearest listed interchange point to Rodemacher). So, as you can 
see, there are competitive options for rail transportation for the 
entire length of the movement to Alexandria.
    Beyond that point, our current rail provider owns the only rail 
line between Alexandria and Rodemacher--a distance of approximately 19 
miles. As a consequence, the Rodemacher owners are ``captive'' to our 
current provider since it is the only rail carrier serving this plant. 
Under current law, the current rail provider's control of the last 19 
miles allows it to push its pricing monopoly all the way back to the 
Powder River Basin--turning a 19 mile monopoly into a 1500+ mile 
monopoly. Left to its own devices, our current rail provider will 
simply quote rates only from the Powder River Basin-to-Rodemacher. It 
has no incentive to join in any other co-operative bids with 
alternative rail carriers that would provide LUS the benefits of 
competition. Naturally, the current rail provider has no interest in 
competing against itself and will keep the Powder River Basin-to-
Rodemacher business to itself. Thus, the Rodemacher owners face a 
transportation monopoly from its existing rail provider.
B. Our Customers are Paying Higher Electricity Rates Because of our 
        Railroad Captivity
    Due to this monopoly, LUS pays substantially higher coal 
transportation prices than other western coal transportation customers 
that enjoy effective origin-to-destination rail competition. In common 
with most rail contracts, the Rodemacher co-owner's current 
transportation contract with its rail carrier precludes us from 
disclosing our actual transportation prices, or getting into the 
details concerning our freight rate levels. However, publicly available 
information suggests our current transportation prices are at least 50-
percent higher, on a mileage adjusted basis, than rates where there is 
rail-to-rail competition for long-haul western coal train deliveries.
    For the Rodemacher owners, and their customers, this lack of 
competition translates into millions of dollars per year in ``captivity 
payments''--the difference between what we pay our existing rail 
carrier compared to what we would pay if we enjoyed railroad 
competition. Specifically, for the case of Lafayette, Louisiana, the 
annual cost of these captivity payments is about $5 to $6 million. 
These higher payments are included in LUS' customers monthly electric 
bills and cause higher utility bills both for individuals and for the 
businesses in Lafayette. Please note in this regard, that the cost of 
coal transportation is one of the single largest cost items included in 
our electric generation costs.
C. Our Limited Options
    What can we do to obtain transportation competition? Our options 
under current law are limited.

    Bottleneck Relief. One option would be to ask the 
        alternative rail providers to contract with us for a 
        competitive market price for service between the Powder River 
        Basin and Alexandria. Under the Surface Transportation Board's 
        1996 ``Bottleneck Decision,'' if LUS were to secure such a 
        contract, our existing provider would be required to provide us 
        with a reasonable price to transport this alternatively 
        transported coal traffic the 19 miles from Alexandria to 
        Rodemacher.

    However, our experience has shown that getting a bid from a 
competitive provider under such a scenario does not occur. As we 
understand it, the large western rail carriers generally refuse to 
provide such bids. Their collective concern appears to us to be if 
Carrier A ``poaches'' Carrier B's captive customers by providing such 
contracts, Carrier B will then retaliate by ``poaching'' Carrier A's 
captive shippers. So unless either the Surface Transportation Board 
changes its interpretation of the law, or Congress changes the law to 
require railroads to quote ``bottleneck rates,'' this option simply is 
not available.

    Build-Out Relief. A second option is to look at rail 
        construction. Several utilities in the west and south have 
        broken their captivity to a single rail-delivery carrier by 
        constructing new access lines to obtain service from a second 
        rail carrier. With second carrier access, these shippers 
        usually report that they can obtain origin-to-destination 
        competitive rail service and competitive rail prices.

    In general, these ``build-outs'' are usually quite expensive, when 
they can be accomplished at all, and they result in the unnecessary 
duplication of existing rail facilities. I have been told that in most 
instances, there are no significant operating, or other, problems that 
would preclude a second carrier from using the incumbent carrier's 
existing rail line to serve a captive utility plant. However, the law 
generally does not require monopoly destination rail carriers to allow 
competitive carriers to use their track--even for short distances like 
the 19 mile line owned by our existing carrier which would be needed by 
an alternative carrier to serve the Rodemacher plant.
    In the past, LUS and its Rodemacher co-owners have explored 
constructing facilities that would allow direct alternative rail 
providers access to Rodemacher. In our case, any such access would most 
likely entail construction of a rail bridge or conveyor system across 
the Red River and Interstate 49. It seems absurd that current federal 
transportation policy is such that small municipal entities like LUS 
must even study such projects when other alternatives make much more 
sense, for example, requiring our existing carrier to transport our 
coal from Alexandria to Rodemacher at a fair price. With such a legal 
requirement, there would be no need for us to consider construction of 
costly, duplicative second carrier access facilities at a cost which 
would be passed on to our electric customers.

    Origin-to-Destination Rate Case Relief. A third option is 
        really no option at all, and that is to obtain origin-to-
        destination common carrier rates from our existing rail 
        provider to apply after our transportation contract expires. 
        Obtaining these rates would allow us to initiate a maximum rate 
        complaint with the Surface Transportation Board. Such a 
        complaint could result in a maximum rate prescription order 
        from the Surface Transportation Board for our Powder River 
        Basin-to-Rodemacher transportation. This option cannot, 
        however, produce competitive pricing under current law.

    By law, the Surface Transportation Board cannot set maximum rates 
at less than 180 percent of a railroad's variable costs (including 
capital costs). However, I am advised that in competitive coal 
transportation markets, the transportation rates should be 
substantially less than 180 percent of the railroads' costs (while 
still ensuring the railroads earn a healthy profit margin). As a 
result, the Surface Transportation Board relief simply cannot give us 
competitive market rate for the competitive segment of our rail 
transportation (Powder River Basin-to-Alexandria).
    I would also add that the Surface Transportation Board maximum rate 
process is most difficult for smaller entities like LUS. We understand 
that just to initiate a rate case requires the shipper to pay a filing 
fee of $61,400, that the shipper carries most burdens of proof, that 
the time required to complete such an effort would be a minimum of 2 
years and that the expected litigation costs would be in the millions 
of dollars.
    Finally, Mr. Chairman, it has been pointed out to me that the 
February, 1999 GAO Report entitled ``Current Issues Associated With the 
Rate Relief Process'' found that the Surface Transportation Board only 
has the resources to process two rate cases at a time. Twelve rate 
cases are currently pending at the Surface Transportation Board. 
Smaller entities like LUS need a simpler, easier, and less expensive 
process that produces fair results.
4. How Congress Can Help
    Mr. Chairman, let me describe how we believe Congress can help us. 
What we want the most is reasonable access to rail competition. If the 
Surface Transportation Board or the Congress would change the current 
decision regarding ``bottlenecks'' and require our existing rail 
carrier to provide reasonable rate and service terms from Alexandria-
to-Rodemacher, we would at least have competition from the Powder River 
Basin to Alexandria. This competition could result in reduced rates for 
the entire movement of our coal from the Powder River Basin to 
Rodemacher. We would also like to see Congress reduce the filing fee 
for rate cases to no more than the filing fee that is applicable in 
Federal district courts, reallocate some of the burdens of proof in 
rate cases to the railroads and provide the Surface Transportation 
Board with sufficient resources to process their rate cases in an 
efficient manner.
    Also, over the past two decades Congress has passed legislation de-
regulating a number of industries. In doing so, Congress has usually 
required non-discriminatory, and open access to existing 
infrastructure. It would appear to be consistent for similar 
legislation to apply to the rail industry.
    Mr. Chairman, in conclusion, we thank you for providing us the 
opportunity to appear before you today and we appreciate your interest 
in these important issues. 





    Senator Rockefeller. Thank you, Mr. Huval.
    John Snow, you are not going to believe this, but we are 
not doing what we are about to do deliberately. We have about 4 
minutes left on the first of four votes. That will take an 
additional hour. John Breaux is on his way back, because he has 
voted, had to give a final speech and has voted, will be back, 
and will hear your testimony. Byron and I probably will not, 
and it is not planned that way, all right. I want you to 
understand that. It is just the way the thing worked out, and 
as John said at the beginning, he wanted you to be the last 
person. The vote situation did not work out, so I apologize to 
you.
    We will be in recess just briefly until John comes back. We 
will have questions to submit in writing. We hope that you will 
respond, and again apologize.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, let me just make the point, 
the votes that are occurring will last perhaps up to another 
hour. I expect we are probably going to have to submit 
questions in writing to all of the witnesses. I regret that, 
but Senator Breaux went, as Senator Rockefeller said, to get 
the front end of this first vote so he can come back and take 
your testimony, Mr. Snow.
    Let me also say that while these things happen here in 
terms of scheduling, this is a very important issue, and we 
deeply appreciate the testimony that has been given. This is 
not some idle issue for debate. This affects people in a very 
significant way, and Congress needs to sink its teeth into this 
and come up with some solutions, so I appreciate all of you 
being here today. Mr. Snow, I will digest your testimony, I 
guarantee you, and I appreciate your being here as well to 
testify on behalf of the railroads.
    We will take a 5-minute recess. Senator Breaux should be 
here momentarily, at which point he will take the final 
testimony.
    Mr. Snow. Thank you very much.
    Senator Rockefeller. Thank you.
    [Recess.]
    Senator Breaux. The Committee will please come to order. If 
our guests could please take their seats. You have heard the 
expression, this is no way to run a railroad. This is probably 
no way to run a Committee, but unfortunately the Senate has a 
number of votes, and we were unavoidably interrupted, and will 
be again, but I understand from my colleagues that Mr. Snow, 
you are the witness that still needs to make his statement, and 
we will be delighted to hear from you.

  STATEMENT OF JOHN W. SNOW, CHAIRMAN AND CEO, CSX CORPORATION

    Mr. Snow. Thank you, Mr. Chairman, and with your 
permission, I will begin with a brief update for you and the 
Committee on the recent Amtrak derailment.
    Senator Breaux. That will be helpful. We talked about that.
    Mr. Snow. It is a very unfortunate incident. There is 
really nothing more painful about being in the railroad 
business than to experience a derailment. This was a derailment 
of an Amtrak train headed to Washington from Chicago carrying 
about 200 people, that derailed a little before 2:00 in the 
afternoon in Kensington, Maryland, just 10 or 11 miles from its 
ultimate destination.
    There were about 200 people on the train, and approximately 
90 were injured. Fortunately, only a handful, six, I think, 
were seriously injured, and there do not appear to be any life-
threatening injuries.
    I certainly want to express my appreciation and thanks to 
the good people of Montgomery County, the fire, the police, the 
medical personnel and, the rescue teams, as well as those in 
the D.C. Metropolitan Area generally, who came to the aid of 
the accident victims. It really was a terrific performance on 
the part of so many, and they acted with great professionalism, 
and undoubtedly made a terrible situation much better than it 
otherwise would have been, so my hat is off to them.
    We are working closely, Mr. Chairman, with the NTSB, the 
FRA, and Amtrak, to investigate the incident. Because the 
incident is the subject of an ongoing NTSB investigation, it 
would not be appropriate for me to speculate on the cause. 
However, because of the impact of the extreme heat--the track 
was at a temperature of 118 degrees--we immediately took 
proactive actions across the railroad to reduce the speed of 
all passenger trains to the speed of most of our freight 
trains. This should be helpful in these incidents.
    These are rare incidents, I must say. We have not had a 
passenger train incident in the prior decade that I am aware of 
that involved one of these so-called sun kinks, but we are 
taking precautions. We are looking at maintenance practices, 
and we are giving the matter every bit of our attention, 
working with the Federal authorities.
    Senator Breaux. May I just ask a question, Mr. Snow, on 
that? Who sets the speed of the trains on the tracks? Is that 
FRA's responsibility?
    Mr. Snow. The FRA sets speed limits, maximum speed limits 
for track quality, for track of certain grades. Amtrak track, 
track that can handle the intercity Amtrak trains on the 
Nation's freight rail system, as opposed to the Northeast 
Corridor, has a maximum speed of 79 miles an hour, and we, the 
freight railroad, will sometimes put in place slow orders where 
there are conditions that might require it, where track work is 
being done, where there is a concern about heat, or concern 
about freezing, and conditions that cause aberrations in the 
track.
    Senator Breaux. Is there any reason--I am struck by the 
fact that apparently we have one speed for freight railroads 
and one speed for our passenger Amtrak. Is there any logic--I 
thought, you know, the speed would be the same, whether it is a 
train carrying passengers, or whether it is a train carrying 
cargo. Why would we have one speed for freight, one speed for 
passengers?
    Mr. Snow. Well, because the passenger trains can safely run 
at higher speeds than the freight trains. We, for safety as 
well as just pure economic reasons, do not want to run the big 
coal trains that are carrying 12,000 tons of coal at 60 or 70 
miles an hour. If we ran them at those speeds the effect of 
that weight on the track structure would require very heavy 
maintenance. So, we run those merchandise trains more in the 
40, 45, 50 mph range and we run the heavy coal trains at much 
lower speeds, 35 or 40 mph.
    Senator Breaux. The Committee does not want to speculate, 
as you have said, on the cause of the accident, what needs to 
be done. Obviously, it is under investigation. We agree that 
the loss of lives did not occur, and that the response was 
really incredible, as far as what happened out there to take 
care of the passengers, and as they say, it could have been a 
lot worse, and thank goodness it was not, and we will follow it 
very, very closely.
    So you heard the testimony of the shipping panel, and if 
you could use your time to try and respond.
    Mr. Snow. I can briefly respond. The basic point of the 
shipping panel, if I interpreted it properly, is that railroads 
are charging rates that are too high, and those rates are the 
product of lack of effective competition in many markets.
    The railroad industry's response I think is very 
straightforward. The industry to sustain itself needs to engage 
in what is called differential pricing. We price to the traffic 
that is competitive through the marketplace, which sets those 
rates, and we try and secure from that competitive traffic the 
maximum we can. Some of that traffic makes only a small 
contribution over variable costs. Some makes a larger 
contribution over variable cost, but the traffic cannot provide 
a larger contribution than the contribution the market will 
permit and we are able to achieve.
    Then we turn to the so-called captive traffic. That is 
traffic which for one reason or another has less, fewer 
alternatives, and the captive traffic then, if we are going to 
sustain the freight industry, needs to pay a higher price.
    I think the Staggers Act was a very enlightened piece of 
legislation, and I take my hat off to you and your colleagues 
who were here in 1980, who brought that legislation about. That 
legislation was a response to the fact that large parts of the 
rail industry were in a state of utter decay, decline and 
deterioration, and if the forces of decay and decline and 
deterioration had been allowed to go on, we would not have had 
a private sector rail industry.
    I happened to have been in the Federal Government when Penn 
Central went bankrupt, when the Milwaukee went bankrupt, when 
the Rock Island went bankrupt, and it fell to me to work on 
policies to try to deal with those issues. The policies we came 
up with were to create a less-regulated, more market-based rail 
industry. Fortunately, those policies were continued under the 
Carter administration, and in October 1980 the Staggers Act 
became law.
    The heart of the Staggers Act was a recognition that the 
railroad industry operated in both competitive markets and in 
less-competitive markets. In the markets where it was 
competitive, competitive market forces should be allowed to set 
the rates. In markets that were not competitive, there was 
protection from price-gouging, excessive rates, through the 
Surface Transportation Board, then the Interstate Commerce 
Commission.
    Also at the heart of the Staggers Act was the recognition 
that the rail industry, if we were to sustain a private sector 
rail industry in America, had to have the opportunity to earn 
adequate revenue levels. To earn adequate revenue levels, the 
railroad industry has to engage in differential pricing.
    The gentlemen to my left and right, I think, take exception 
to the practice of differential pricing, but for the life of me 
I do not know how we can have on the one hand a successful 
private sector industry and on the other not have differential 
pricing, and that is the fundamental rub we have here. I think 
the STB tries to work its way through that balancing act in a 
fair and reasonable way. I must say, we seem to be losing more 
of those cases than we are winning lately, but I think the 
basic framework is sound.
    Our dilemma, Mr. Chairman, is a very real one in the 
freight railroad industry. At current earning levels, we simply 
are not generating enough cash flow to replace the plant, and 
if we cannot replace the plant, then we are not going to be 
able to sustain the quality of service and level of service the 
shippers receive today.
    I was struck, as I listened to the discussion, that if it 
had not been for the Staggers Act we could be having a very 
different discussion today. We could be having a discussion 
about how a nationalized freight rail industry is performing, 
and how the people that are running that nationalized freight 
rail system, the counterpart to Amtrak, are running service and 
setting rates.
    I think we are much better with a market-based freight rail 
system with reasonable regulation, and I must say, having been 
around this for a long time, I do not think the debate will 
ever end on how high a rate is too high a rate, or what really 
constitutes a reasonable maximum rate, but I would trust to 
qualified professional people at the STB to get that question 
about as right as anybody can, recognizing we are going to lose 
as many cases as we win.
    I thank you very much.
    [The prepared statement of Mr. Snow follows:]

 Prepared Statement of John W. Snow, Chairman and CEO, CSX Corporation
Introduction
    Mr. Chairman and Members of the Subcommittee, it is a pleasure for 
me to be here today to discuss with you the progress of the railroad 
industry under Staggers and related issues with respect to our 
customers. Both the railroads and our customers have an important 
parallel interest: the sustainability and growth of our respective 
businesses. In order for the railroads to meet their objective of 
sustained growth, it is clear that we must secure adequate revenues 
that earn our cost of capital over the long run. This has been the 
unachieved goal of the Staggers Act from the railroads' perspective, 
one that is important not only to the rail industry but to the 
customers that it serves. Only a financially strong industry can ensure 
the kind of service that our customers need to capitalize on their 
growth opportunities.
The Rail Advantage
    For 175 years, railroads have been an essential and enduring part 
of our nation's transportation infrastructure. The Baltimore and Ohio 
Railroad, the nation's first common carrier, was founded in 1827, and 
is part of the rich legacy of my company. The B&O and other pioneer 
railroads gave rise to the development of the fledgling nation, proved 
themselves in a variety of conditions that included wartime as well as 
peacetime, and have established a significant relevance in our modern 
era by our willingness to change, adapt and innovate.
    Today, U.S. freight railroads--the major Class I's, regionals and 
short lines--operate more than 144,000 miles of track. As much as 41 
percent of all intercity freight moves by rail, yet we generate only 
about 10 percent of freight revenues. This disparity between tonnage 
and revenues is explained by lower-rated bulk commodities, which make 
up much of what we carry. One of those commodities is coal; indeed, 
railroads carry two-thirds of the coal used to generate America's power 
needs and to fuel its factories. The automobile industry is a 
significant customer, too, with 70 percent of motor vehicles 
transported by rail. Chemical manufacturers, grain producers, and many 
other sectors of our industrial base rely on rail shipments. As you are 
keenly aware, passenger and commuter trains operate widely over the 
freight rail network, and we are constantly monitoring and maintaining 
our track infrastructure to ensure safety and reliability. Railroads 
truly do move America.
    Railroads are important to the national defense as well. The 
Department of Defense counts on rail carriers to transport ordnance and 
supplies during peacetime and in times of war. The Military Traffic 
Management Command has designated the Strategic Rail Corridor Network, 
consisting of 30,000 miles of rail corridors, to be essential to the 
national defense. We work hard at our ongoing and close working 
relationship with the military to assure its capacity, security and 
equipment needs. The events of Sept. 11, 2001, called once again on our 
national defense obligations and were a grim reminder of the increased 
need to ensure the security of our bridges, buildings, dispatch 
centers, tunnels, storage facilities, and cross-border and port 
gateways. We are working within our industry, with our customers and 
with appropriate regulatory authorities to ensure that our 
transportation is conducted in the most secure manner possible.
    Not to be overlooked is the environmental benefit railroads provide 
through reduced diesel emissions. Trucks emit from three to 12 times 
more pollutants per ton-mile than railroads, and traffic by rail means 
that fewer trucks must operate on our nation's highways. Railroads are 
three times more fuel-efficient than trucks, which helps to save energy 
and reduce our dependence on foreign oil.
    Safety is, of course, our highest priority, and railroads are a 
very safe transportation mode. Rail has the lowest employee injury rate 
among all the modes. Over the last 20 years, the freight rail 
industry's diligence has resulted in a 64 percent decline in train 
accident rates and a 71 percent decline in employee injury rates.
    At CSX, we operate an exceptionally capital- and labor-intensive 
business covering 23,000 route miles in 23 states, two Canadian 
provinces and the District of Columbia with assets that include 200 
yards and terminals across the eastern half of the country, 3,600 
locomotives and 100,000 railcars. Last year, we hauled 7.1 million 
carloads of freight more than 228 billion ton-miles. CSX is a 
significant part of the nation's rail freight network, and while my 
comments today will often reference my company, our experience is 
generally reflected across the industry.
    At CSX, our stated goal is to be the safest North American 
railroad, and we are well on our way. From 2000 to the first quarter of 
this year, CSX has shown a 57 percent reduction in derailments and a 48 
percent reduction in personal injuries. In a comparison of this year's 
first quarter and the same period in 2001, derailments were 25 percent 
lower, and we experienced approximately a 30 percent reduction in 
personal injuries. Safety continues to improve, as it must. We want our 
employees to go home in the same condition in which they arrive at 
their jobs. We want communities to trust us to operate safely, and 
investors, public officials and other constituencies to share that 
confidence. My testimony today will reflect that our safety efforts, as 
well as other important initiatives, rest upon our ability to invest 
properly in this capital-intensive business.
    As I've shown, we are a vital component of the transportation 
infrastructure with a keen focus on commerce, national defense, the 
movement of passengers and commuters, the environment and, most 
important, safety.
The Impact of Regulation in a Changing Environment
    In the mid 1970s, 22 percent of the nation's rail mileage was being 
operated under the gavel of bankruptcy courts. The equity markets were 
closed to the industry, and survival became a function of rate 
increases and deferred maintenance. By the end of the decade, the 
industry was becoming a wasting critical asset. Even those railroads 
considered healthy were suffering returns on investment that were 
dramatically below American industry in general. And with the high 
percentage of interline traffic--railcars exchanged among two or more 
carriers--even relatively healthy railroads often were forced to 
interchange time-sensitive freight with partners whose track conditions 
and service were substandard. Industrial assembly lines were affected 
and inventory costs soared due to inconsistent, unreliable rail 
service. The situation was exacerbated by locomotive shortages and 
reduced train speeds because of track conditions. The arrival of a 
railcar was something of a random event. As service deteriorated, 
market share spiraled downward and many shippers found other modes 
better able to satisfy their demands for reliable service.
    Yet this ailing industry remained vital to the nation's economy, 
supplying some 37 percent of its intercity freight transportation, 
creating tens of billions of dollars worth of economic activity, and 
employing hundreds of thousands of workers. Clearly, something had to 
be done if railroads were to continue performing their vital role. 
Congress, shippers and railroads agreed that a solution addressing the 
fundamental causes was necessary. Nearly a century after the formation 
of the Interstate Commerce Commission in 1887, railroads faced 
extensive competition from other modes of transportation. Despite this 
intense competition, railroads were still regulated as if they were the 
pre-eminent mode of freight transportation. Rail rates were set 
collectively through rate bureaus and could not be raised or lowered 
without ICC permission. Contracts with customers, so prevalent in the 
rest of the American economy, were prohibited in the rail industry. In 
fact, rail regulation became even more stringent to the point that 
there was regulatory oversight for virtually every management decision. 
Fortunately, Congress began looking at sound policies that would 
address the forces that had combined to bring about the railroads' 
deterioration. Those studies led Congress inexorably to the conclusion 
that a successful railroad industry could be recreated only through 
some fundamental reforms, which resulted in the 1976 Railroad 
Revitalization and Regulatory Reform Act (4R). While a step forward, 
the 4R Act did not go far enough and additional action was required.
Staggers--A Workable Solution
    The Staggers Rail Act of 1980 set out to reform the regulatory ills 
of the period by reducing some areas of regulation and preserving and 
enlarging others. Staggers recognized that railroads faced extensive 
competition in most markets, but that some shippers had fewer choices 
than others. Staggers addressed that situation by providing a robust 
regulatory environment to accommodate shipper interests where direct 
competition did not exist. The basic principle of Staggers recognized 
that railroads are a business and ought to be permitted to manage their 
assets and price their services appropriately so as to achieve revenue 
adequacy and reasonable profitability. Under Staggers, railroads were 
able to set reasonable prices that permitted needed re-investment, and 
negotiate confidential contracts with customers. In the new 
environment, safety and service improved, as did productivity, and 
damage to shipments was significantly reduced. With productivity 
increases, railroads were able to stabilize market share as measured in 
ton-miles.
    Throughout the 1980s, railroads learned how to engage in direct 
competition and to expand their market reach through mergers and 
consolidations with stronger roads. Shippers benefited from these 
improvements, too. Most saw significant reductions in prices with the 
introduction of customer contracts that promoted rate and service 
negotiations and innovations such as unit trains, in which like 
commodities are grouped in a single train for a common destination, 
eliminating the need for intermediate switching. The fact is, an 
industry on the brink of collapse was put on the path to competitive 
vigor through a combination of self-help and the Staggers Act. Partial 
deregulation and mergers were viewed as the twin engines of railroad 
revival. Yet, a central fact remains: no Class I railroad to date has 
been able to earn adequate revenues on a sustained basis.
CSX and Staggers
    CSX is a progeny of Staggers and bears witness to the positive 
consequences of this landmark legislation. Coincidentally, on the same 
day that House and Senate conferees approved Staggers--Sept. 23, 1980--
the ICC permitted CSX to take financial control of the 11,000-mile 
Chessie System and the 16,000-mile Seaboard System. On Nov. 1, 1980, 
CSX was officially created and began operating the two systems under 
its corporate umbrella, though the two rail systems' operations were 
not completely integrated until 1986. CSX and the industry spent much 
of the 1980s adjusting to the newfound freedoms and challenges of 
Staggers, which included productivity gains, cost reductions and other 
efficiencies brought about by mergers. Short-line railroads were 
created as the larger systems shed unprofitable or marginally 
profitable track segments. These short lines preserved rail service to 
light density areas, and maintained rail employment for those who 
otherwise would have been forced to relocate or find other work. After 
a century-long decline in short lines, 226 new ones were created in the 
1980s, a number that grew significantly in the 1990s. CSX produced many 
of those short lines as our system contracted from 27,000 miles in 1981 
to approximately 18,000 miles in 1998, a reduction of about one third 
(prior to the acquisition of 42 percent of Conrail in the late 1990s.) 
Even after the Conrail transaction, CSX operated 23,000 miles in 2001, 
or 4,000 miles below the 1981 level.
    With higher traffic volumes concentrated on an increasingly 
productive network, CSX found its groove in the 1990s with a sharper 
focus on its rail business and a renewed commitment to improve safety 
and service to our customers while lowering costs:

    Employee injuries were reduced, often by as much as 20 
        percent or more on a year-to-year basis;

    Service reliability was emphasized with process 
        improvements and capital investment that included hundreds of 
        more powerful and fuel-efficient locomotives;

    Costs were reduced with Performance Improvement Teams that 
        identified best practices across the spectrum of American 
        business and built action plans to address competitive gaps.

    CSX's gains were impressive in the two decades that followed the 
Staggers Act, particularly in productivity and cost reductions, and 
that picture is reflected across the railroad industry. Between 1986 
and 2001, CSX's revenue ton-miles grew by 62 percent, while the miles 
of road (including the effects of the Conrail transaction) remained 
essentially the same. We have significantly increased density as 
measured by ton-miles per mile of road.
    Since 1984, CSX employees and managers have improved productivity 
by 88 percent. By contrast, according to the Bureau of Labor 
Statistics, the cumulative improvement in the national multifactor 
productivity indexes for manufacturing, private business and private 
non-farm business during 1984-2000 was 24.6 percent, 15.1 percent, and 
12.6 percent, respectively. CSX indeed learned to do more with less.
    Like all the other carriers, CSX has invested heavily in plant and 
equipment, which has reduced operating costs substantially. For 
example, locomotive horsepower capacity has increased by 27 percent 
since 1986 (from 9.0 million in 1986 to 11.5 million in 2001) while the 
total number of units remained virtually the same. Much of that is a 
result of purchases of locomotives using breakthrough alternating-
current technology. More significantly, that 27 percent increase in 
horsepower--contributing to overall operating efficiency--enabled CSX 
to handle a 69 percent increase in gross ton-miles of traffic during 
this period.
    CSX also has dramatically reduced labor costs while maintaining one 
of the industry's best relationships with its contract-covered 
employees. We have developed a New Compact with labor that emphasizes 
effective communication and openness, which has dramatically reduced 
misunderstandings and disputes. Our workforce has been reduced by 29 
percent in the last 15 years, from 47,803 employees (measured by 
average employee count) in 1986, to 33,872 employees in 2001. This 
reduction also included the elimination of large numbers of 
administrative and support personnel, both contract-covered and 
managers. CSX also gained significant labor productivity by 
implementing crew-reduction agreements with labor unions that required 
substantial buy-out expenses in return for larger long-term cost 
savings.
Recent Industry Activity
    The 1990s also included another round of significant industry 
consolidation. Despite intensive planning and numerous examples of 
precise execution, those acquisitions and mergers caused temporary but 
significant disruptions to service during their start-up phases.
    The most recent major eastern transaction was carried out by CSX 
and Norfolk Southern, which began operating their respective portions 
of Conrail on June 1, 1999. Although there were starts and stops at the 
beginning, the assimilation pains and resulting service problems were 
largely resolved by early 2000. The integration has been successful for 
many months, and we are beginning to realize the potential of the 
acquisition of our 42 percent of Conrail. Safety has improved, service 
measurements are trending the right way, and almost all of the capital 
projects to produce those benefits are complete. In preparation for the 
Conrail transaction, CSX initiated a $220-million Capacity Improvement 
Project through Ohio and Indiana, including the construction of 100 
miles to make the line double track along its entire length. New 
intermodal terminals were built in Chicago and Philadelphia. During the 
past year, we finished three major projects at former Conrail 
facilities that today are key points on the combined network: Avon Yard 
near Indianapolis, Frontier Yard in Buffalo, and Selkirk Yard near 
Albany. In the Chicago area, we completed improvements at Barr Yard. We 
are adding almost six miles of main track in northern New Jersey, a 
multi-year project that is now more than 50 percent finished.
    Today, all of the key indicators of safety and operational 
performance are meeting or exceeding goals that we have set: employee 
injuries, derailments, total cars on line, overall train velocity, 
freight car dwell time in yards, and on-time departures and arrivals, 
among them. In recent oversight proceedings, the Surface Transportation 
Board recognized the significant improvements in CSX and NS service 
since the startup phase.
    Reduced injuries and fewer derailments are resulting from employee 
coaching and training, a revolutionary approach to managing safety, and 
considerable investment in track, signals and infrastructure. Service 
performance in yards and terminals has improved steadily. Freight car 
dwell has improved by 35 percent from 2000 to the first quarter of this 
year. On-time train originations have improved 80 percent, and the 
percentage of trains arriving at their destinations on time has 
improved 136 percent. CSX has been emphasizing its local service to 
customers by measuring car placements or pulls within a specified 
customer window. Local switching performance during this time has 
improved 12 percent, and there has been an improvement of 111 percent 
in originating local trains on time.
    Also during this period, overall velocity improved by 24 percent, 
and merchandise train velocity improved even more, by 34 percent. In 
terms of congestion as measured by the number of cars on line, the 
overall rail industry has achieved a 13 percent improvement since the 
beginning of 2000. At CSX, we have seen a 14 percent improvement in 
cars on line during the same time period.
    To further service improvements, we have created industry alliances 
that promote fast transcontinental service. These alliances attempt to 
achieve some of the benefits normally associated with rail mergers and, 
if coupled with strong financial performance of existing carriers, 
diminish the likelihood of rail consolidations in the foreseeable 
future. We are hearing and responding to the additional demands of our 
customers, making ourselves easier to do business with by using e-
commerce and other technology initiatives, and continuing productivity 
gains. We have translated those service improvements into modal 
conversion by offering economies and services that entice traditional 
truck customers to rail. One particular alliance is our Express Lane 
service with the Union Pacific in which we ship perishables and wine 
from the West Coast to markets in the Northeast and Southeast. With 
this alliance, we are producing truck-competitive transit times. Orange 
juice from Florida is another consumer product shipped on CSX. For a 
number of years, we have operated dedicated trains of orange juice from 
Florida to the Northeast and, more recently, to the Midwest. And we are 
re-capturing traditional rail products such as steel. Last year, we 
converted certain metals products to rail by soliciting business 
directly from the heads of the nation's financially pressed steel 
producers, creating significant savings for them and increasing our 
metals business. All told, we added more than 350,000 truckloads of 
freight worth more than $130 million to our railroad. This year's 
target is 450,000 truckloads.
    CSX is characterized today by consistent improvement, and safety 
and operational metrics confirm this progress. The next frontier is a 
zero-injury, zero-accident railroad employing the latest technology to 
reduce transportation variation and improve shipment management. Our 
ability to innovate is seen in the recent development of a 
revolutionary new locomotive operating system designed to reduce fuel 
consumption and diesel emissions. Our own patented Auxiliary Power Unit 
could result in annual fuel savings of 30 million gallons once our 
entire locomotive fleet is equipped. In freezing weather, locomotive 
operators have always idled diesel engines to keep vital fluids from 
freezing. The APU automatically shuts down the main locomotive engine 
idle, while maintaining all critical main engine systems at greatly 
reduced fuel consumption. The U.S. Environmental Protection Agency 
recently recognized the APU with a Clear Air Excellence Award.
    Through hard work and innovation, CSX and the rest of the industry 
have made enormous strides in improving safety, service levels and 
taking out costs.
Capital Intensity and Revenue Adequacy
    Despite all this progress on so many fronts, we are haunted by the 
simple fact that CSX, like the rest of the industry, remains revenue 
inadequate, thereby failing to achieve the principal goal of Staggers 
and a key ingredient to the industry's need for sustainable growth. CSX 
and the other carriers have squeezed inefficiencies out of their 
systems, and the productivity and efficiency gains have been passed on 
to consumers in the form of lower prices. The Association of American 
Railroads data shows that more than two thirds of the industry's 
productivity gains have been passed through to customers, including 
those who describe themselves as ``captive.'' The reduction in rates 
for our customers has applied to a broad range of commodities. For 
example, coal traffic has enjoyed significant rate reductions. On a 
revenue per ton-mile basis, CSX's coal rates since 1987 have fallen by 
more than 37 percent in real terms. Similarly, between 1987 and 2001 
the average revenue that CSX received per ton of coal declined, in real 
terms, by more than 21 percent. These rate reductions are a direct 
consequence of the partial deregulation--and competition--mandated by 
the Staggers Act.
    By giving railroads greater flexibility in ratemaking, you and your 
colleagues in the Congress appropriately made rates subject to 
marketplace disciplines. Intermodal, intramodal, geographic and product 
competition kept pressure on rates. Utilities today have tremendous 
market abilities by being able to shift production, wheel power and 
choose among competing energy sources. We face these competitive forces 
every day, along with other modal competition from barges, pipelines 
and trucks. Partial deregulation and changes in the trucking industry 
have greatly intensified its scope and effectiveness. The trucking 
industry has traditionally provided higher service quality with its 
inherent ability to deliver door-to-door and to choose optimum routing 
over subsidized federal and state highways and roads. As it should, 
competition acts as a marketplace regulator of our rates and service.
    While declining rates may be short-term good news for shippers, 
they create significant hurdles for the railroads in terms of achieving 
revenue adequacy and sustaining growth. As recent history has shown, 
these lower rates come at a substantial cost to the rail industry as we 
remain revenue inadequate and unable to earn our cost of capital. Of 
course, businesses that do not earn their cost of capital are forced by 
the marketplace to shrink, whereas those that do earn their cost of 
capital produce growth for themselves and their customers. Since the 
Staggers Act was enacted, industry revenues have declined 42 percent 
(adjusted for inflation). CSX's recent experience is in line with the 
industry's own record. Since 1986, CSX's freight revenue per revenue 
ton-mile has fallen nearly 43 percent on an inflation-adjusted basis, 
and 17 percent on a nominal basis, as shown in the table below.

 
------------------------------------------------------------------------
                                   Revenue per
                                thousand  revenue   Revenue per thousand
             Year                   ton-miles        revenue ton-miles
                                  (adjusted for       (nominal basis)
                                    inflation)
------------------------------------------------------------------------
1986                            $35.52             $35.52
2001                            $20.33             $29.52
------------------------------------------------------------------------

    To address our needs for revenue generation and capital investment, 
and to capture more of the value that we provide the transportation 
marketplace, we have recently increased prices in selected markets. 
These price increases are built on the substantial service improvements 
and overall value we offer.
    They also help to cover our enormous capital investment. Safe and 
efficient railroad transportation requires vast amounts of capital 
investment for track, signals, and structures; for locomotives and 
freight cars; for communications and data processing; and for 
technology application. Unlike federal highways, the inland waterways, 
and the nation's airways and airports, rail infrastructure is not 
subsidized. In future legislative debate, the question of dealing with 
modal inequities will be a critical one. When track is upgraded, when 
facilities are improved, when new equipment is purchased--rail carriers 
must make those expenditures. Freight rail carriers invest more than 20 
percent of their revenues back into their systems, in comparison with 
other industry sectors that on average invest less than 4 percent of 
their revenues. And it takes more for railroads to earn revenues. Rail 
carriers require $2.72 in invested capital to generate just $1 in 
revenue. In comparison, the trucking industry requires 70 cents of 
invested capital to earn each revenue dollar. In addition to capital 
expenditures to improve and upgrade roadway, structures and equipment, 
railroads spend large amounts for routine annual repair and maintenance 
needs. These activities are just as critical to safe and efficient 
railroad operations as activities capitalized over multiple years.
    Although CSX's capital investments have fluctuated from year to 
year, they have been substantial and have trended upward. Since 1986, 
CSX has made approximately $11.6 billion in capital expenditures, of 
which $7.1 billion was for road, $2.2 billion for locomotives, and $1.3 
billion for cars and other equipment. CSX has generally increased the 
amount of its capital expenditures as it has generated additional total 
revenues. The amount of CSX's capital investments is particularly 
striking because these investments have been made even as CSX's revenue 
per revenue ton-mile declined from 1986-2001 by more than 40 percent on 
an inflation-adjusted basis.
    CSX's capital expenditures for 2001, and the capital expenditures 
approved in its 2002 Capital Plan, are substantial. In 2000-2001, our 
railroad spent $840 million and $860 million in capital investment in 
each of those years, respectively. That compares to operating income of 
$713 and $847 million, and a free cash flow deficit of $373 million in 
2000 and positive free cash flow of $77 million in 2001 (Conrail 
included). CSX's 2002 Capital Plan anticipates approximately $920 
million in capital expenditures.
    As I mentioned earlier, our industry needs to earn its cost of 
capital to achieve sustainable growth. The results for 2000-2001 show 
that we have invested heavily in our rail properties while achieving 
limited operating profits and, as seen in 2000, incurring a negative 
cash flow. Clearly, if we are unable to improve upon these financial 
results, the marketplace will dictate shrinking investment in our rail 
assets, and that would be detrimental to our customers, employees and 
core business.
    With needed improvements to our revenue, we expect that the revenue 
adequacy shortfall will again narrow and, in fact, that has already 
begun to happen. In 2001, after three years of decline, CSX's return on 
investment was 4.6 percent--which represented an increase from the 
previous year's level of 3.6 percent. The gap between the 2001 return 
on investment and the cost of capital for that year (as calculated by 
the AAR) was 5.6 percentage points--below the gaps of 7.0 and 7.4 
percentage points for 1999 and 2000, respectively. Similarly, CSX's 
operating income increased.
    Nonetheless, the other factors that have contributed to the 
reduction in CSX's return on investment may continue. Both before and 
after the Conrail transaction, CSX's revenue levels consistently 
remained far below what would be required for its return on investment 
to equal or exceed the industry cost of capital. In 2000, for example, 
CSX's total revenues of $6.1 billion were $1.065 billion below the 
level that would have been required for the return on investment to 
equal the cost of capital.
    Despite CSX's expectations that its return on investment will 
improve, and that the revenue adequacy shortfall will decrease in the 
future, the shortfall is likely to continue to be substantial. As I 
indicated previously, CSX has passed on a significant part of its cost 
savings realized through productivity gains to customers to remain 
competitive.
    A recent report from the General Accounting Office to the House 
Committee on Transportation and Infrastructure confirmed that, for the 
period studied between 1997 and 2000, rail rates generally decreased. 
The Surface Transportation Board determined that the overall trend of 
declining rates is consistent with its own studies and analyses, and 
the Department of Transportation also agreed with the GAO conclusion. A 
substantial part of the remaining cost savings has been devoted to 
capital investment.
    Although we continue to develop ways to improve productivity, we 
must realistically look to the future, recognizing that our large 
productivity gains of the past will likely not be duplicated absent 
unforeseen consolidations or technological advances. Thus, at this 
time, our industry's best hope to achieve adequate revenues is through 
a more aggressive focus on enhancing revenues, even as we continue our 
efforts to reduce costs wherever possible.
Facing the Future
    Fortunately, demand for freight transportation is increasing. The 
Federal Highway Administration recently projected that demand for 
freight transportation will double over the next 20 years, with rail 
intermodal transportation estimated to grow almost 5 percent per year, 
the highest growth rate among the surface modes.
    As CSX looks toward meeting our customers' needs in the future, we 
of course begin with the overriding goal of ensuring a safe, 
environmentally clean and efficient mode of transportation. A few weeks 
ago, this Subcommittee held a hearing to consider rail safety issues. 
CSX has specific action plans in place to achieve our goal of becoming 
the safest North American railroad and reaching our ultimate goal of 
zero injuries and zero accidents.
    To meet safety and service goals, CSX must achieve a level of 
revenue and income that can attract capital at favorable rates and 
sustain our system in the long run. CSX's revenue-inadequate status 
makes it more difficult for us to attract capital. CSX must compete 
with all users of capital in the investment market, and therefore needs 
to produce a return on equity that is comparable to, and competitive 
with, other industries with similar risks. CSX, however, has 
consistently generated lower returns on equity than that of S&P 500 
companies as a group. Unless we can produce this return on equity, CSX 
will find it difficult to fund all of the necessary capital 
expenditures.
    Here, as a I mentioned before, that challenge will become far more 
difficult if certain parties are successful in persuading you to 
reverse the Staggers Act reforms and transfer more of the benefits to 
some customers at the expense of other customers and the railroads. 
When Staggers was introduced in 1979, Sen. Howard Cannon (then-Chairman 
of the Senate Commerce, Science, and Transportation Committee) noted 
that ``most observers agree that economic regulation has exacerbated 
the railroads' problems.'' Then-Secretary of Transportation William 
Coleman described the pre-Staggers era as characterized by an ``ever-
expanding web of outmoded and often irrational economic regulation.''
    Of course, the Staggers Act did not completely deregulate 
railroads. In addition to retaining authority over a variety of non-
rate areas, the Surface Transportation Board today has the authority to 
set maximum rates or take other appropriate actions if a railroad is 
found to have abused market power or engaged in anti-competitive 
conduct. This forms a ``safety net'' to address the needs of some 
customers who believe that their rail traffic is not subject to any 
effective competition. Nonetheless, some groups seek to jettison the 
regulatory reform that has worked so well and replace it with a kind of 
regulatory approach that has failed previously. While proposals to 
alter the current system of railroad regulation include different 
approaches, most of these ideas have been suggested in the past, some 
during your deliberations on the ICC Termination Act of 1995. Wisely, 
you rejected them.
    The end result of these proposed changes is the same: the 
government would force railroads to lower their rates to favor certain 
customers while disadvantaging other customers, rail investors, rail 
employees, and the general public. These proposals would alter in a 
fundamental manner the nation's rail policy by artificially 
manufacturing rail-to-rail competition. By contrast, real-world 
decisions today about which markets will--and will not--sustain 
multiple railroads set the level of competition.
    These proposals to undo the Staggers Act would wrest power from the 
marketplace and return it to the government. Control of the day-to-day 
operation of freight railroads would be stripped from the private 
sector, including the setting of rates, operating conditions, yard 
usage, and other elements necessary to provide rail service. By 
artificially requiring more competition than a market has shown is 
sustainable, legitimate competition eventually would be reduced. 
Railroads are already revenue inadequate and would be further behind if 
those proposals are successful. If demand-based pricing were eliminated 
as sought by some shippers, railroads would not be able to recover the 
costs of providing service across their systems. Shippers having the 
greatest demand pay a higher markup than do those with less demand, so 
that variable costs are covered and railroads are able to obtain 
different contributions to their high fixed costs from the most 
customers possible.
    Every segment of the economy engages in this kind of demand-based 
``differential pricing.'' A business traveler pays more for an airline 
ticket obtained at the last minute than does a passenger on the same 
flight who was able to make a reservation days or weeks in advance. A 
movie matinee ticket costs less than a ticket for an evening 
performance, a fact that reflects the relative market demand for each 
viewing. The matinee crowd, with its lower demand for movies, benefits 
by watching the same movie for a lower price, but the evening crowd 
also benefits because the theater's fixed costs are shared by more 
movie audiences. In this way, evening viewers pay less than they 
otherwise would if theaters did not show matinees.
    Railroads are no different from these and other businesses. The 
Staggers Act specifically identifies differential pricing as essential 
to the rail industry. Mandating that competition occur through 
governmental intervention would drive down rail rates to the point that 
full cost recovery would not be possible. Over time, the railroads 
would have to reduce their costs, either through foregoing maintenance, 
reducing the frequency or the quality of their service, deferring 
acquisition of new equipment, or by other drastic cost-saving methods. 
Ultimately, customers would lose service--precisely the opposite of the 
Staggers' goals and objectives.
    Also of concern is legislation introduced seeking to change the so-
called ``bottleneck'' cases at the STB. Under these proposals, a 
bottleneck railroad would have to agree to carry traffic only on the 
bottleneck segment of a route, even if it is able to serve the entire 
route and its rate for the entire route is reasonable. This is yet 
another attack on differential pricing. Consistently since at least the 
1920s, bottleneck railroads have been able to choose how they want to 
route shipments and structure freight rates. In so doing, they perform 
like trucks and barges which favor their long hauls and avoid the 
inefficiencies of multiple carriers in a single movement.
    But some shippers want to change the law to require a separate rate 
for the bottleneck portion. Then they could challenge the bottleneck 
rate as unreasonable under maximum rate regulation, even if the rate 
for the entire movement is reasonable. A shipper could thereby obtain 
competing rates for the non-bottleneck segment and combine them with 
the bottleneck rate. If this were to happen, the number of rate cases 
brought for resolution to the STB would skyrocket, and carriers would 
be deprived of the efficiency and revenue secured from their long 
hauls. Indeed, rates for non-bottleneck segments would be reduced 
almost to their variable cost, while regulation would limit the 
bottleneck segment rate. This would result in a huge revenue loss for 
rail carriers that would not be offset by expense reductions. This 
legislation would take us back to where we have already been, to a 
world of stifling rules, crumbling infrastructure and overriding safety 
concerns.
    These assaults on differential pricing all have fundamentally the 
same result: preventing railroads from earning revenues sufficient to 
operate their systems efficiently and making investments in the 
infrastructure necessary to remain competitive and operate safely.
    The future of the railroad industry is one of cautious optimism, 
based on the successes since the Staggers Act and the trends toward 
productivity improvements. I suggest respectfully that you in Congress 
must make fundamental decisions about the industry. Will it be an 
industry characterized by marketplace decision-making where customers 
have the opportunities to move their products at fair rates, and 
carriers are fairly compensated for their service? If so, we will see 
reinvestment of revenues in capital spending and efficient, productive 
rail operations. On the other hand, if unnecessary regulations and 
governmental intervention instead burden the rail industry's future, 
their harmful effects will again impair service to customers and 
deprive railroads of sufficient revenues to cover the costs of the 
national rail system.
Conclusion
    I urge the Subcommittee to focus on the future and to ensure that 
this industry, which is such a critical element of the nation's 
infrastructure, is able to achieve sustainable growth and appropriate 
reinvestment. Although the debate over economic regulation will 
continue, the record of Staggers is clear. Staggers has worked very 
well for the vast majority of the shipping public, with improved 
service and reduced rates. For the railroads, Staggers has fostered 
further competition and a new focus on the need to achieve revenue 
adequacy. At this juncture, the railroads have produced good results 
and shared them with the shipping public. However, the carriers now 
need to improve their revenue adequacy to ensure their continued 
investment in plant and people and their future profitability. Changes 
to Staggers now sought by certain shippers would only threaten our 
ability to provide safe, efficient and economical rail service and 
disable our return to a sound economic base. Rather than reversing our 
progress, we should now more directly focus our energies on fostering 
investment in rail infrastructure through both traditional capital 
markets and transportation policies that eliminate current biases 
against rail freight.
    Mr. Chairman and Members of this Subcommittee, please let me assure 
you that we at CSX will continue our efforts to provide our customers 
with the safest, most dependable service possible. We ask you to resist 
the calls by some to intervene in the marketplace, and we urge you to 
stay the course on the Staggers Act. The genius of the law today is 
that it delicately balances the legitimate interests of shippers in 
having dependable service at fair rates with the understandable need of 
railroads to earn sufficient revenues to reinvest in their highly 
capital-intensive infrastructure.
    I appreciate the opportunity to appear before you today, and would 
be happy to answer any questions.

    Senator Breaux. Thank you, and I thank all the panel, and 
once again, many of you have traveled some long distances to be 
with us. I appreciate it. Terry, thank you for coming, 
particularly, from Louisiana.
    I think in the Staggers Act we tried to set up a process 
that would say that when shippers think the rates that are 
being charged are unreasonable, there is a mechanism to be 
heard and to get redress from unreasonable rates. You all may 
have summarized this very well. Can anybody just tell me why 
that does not work?
    I have met with you individually, but for the record, why 
does a system that we set up that we thought was going to be 
the system to address unreasonable rates, in your opinion does 
not work? Anybody want to take a stab at that?
    Mr. Schwirtz. I will take a stab at it.
    Senator Breaux. Arizona?
    Mr. Schwirtz. Yes, sir.
    I think a couple of things. We are currently in a case, as 
you know. We tried to negotiate that case with the railroads 
prior to, and outside of the STB for over a year and a half, 
and were not able to achieve any type of negotiated settlement 
on rates, and to avoid the regulatory process. The reason we 
tried to do that is because the regulatory process is so 
ominous. We are not a big company. We do not have a lot of 
revenue in our company, and it is very difficult, very costly, 
and there is a lot of risk of going through the STB regulatory 
process, so we tried to avoid that at all costs.
    Senator Breaux. So the time and the cost are two of the big 
impediments that you see?
    Mr. Schwirtz. That is two of the big impediments, and the 
risk of not knowing what you are going to get after you invest 
the time and the cost.
    Senator Breaux. You heard me suggest, to the Chairman of 
the STB, Linda Morgan, about the possibility of looking at 
arbitration. I am just throwing something out here. It may be 
off the wall.
    But instead of going through this long drawn out legal 
fight, where the winners may be all the lawyers that everybody 
has to hire, and the economists and everything else, to kind of 
somehow set up an arbitration deal. We do this in other areas. 
We have been debating medical malpractice on the floor of the 
Senate, and arbitration has been used in many States to resolve 
these disputes before they have to go to court and be drawn 
out.
    Is the concept of the STB supervising arbitration between 
the carriers and the shippers something that should be pursued? 
Is that a possibility, Mr. Platz?
    Mr. Platz. I can make a comment on it. We also have 
operations in Canada, so we have two plants up there, and there 
are two railroads that serve Canadian shipments.
    In Canada, they have mechanisms to address two of the 
issues, and actually three of the issues that have been 
discussed today. One is bottleneck, another is terminal access, 
and finally the rate adjudication.
    Senator Breaux. How do they do it?
    Mr. Platz. They have arbitration, and it is a fairly simple 
thing. It is not very costly, and it is very effective.
    Senator Breaux. Is it speedy in comparison?
    Mr. Platz. It is very speedy, but what it does do is, it 
forces both the shipper and the carrier to really work 
together. In other words, they know that sitting behind there 
is going to be an arbitration of these rates. Now, most 
customer supply relationships would like to settle that 
themselves, but they know there is a mechanism that backs them 
up, so normally these rates really do not get to the 
arbitration. They are settled between the customer and the 
supplier. In other words, there is a healthy relationship which 
is established because the arbitration sits there.
    Senator Breaux. Maybe a forced healthy relationship.
    Mr. Platz. Exactly.
    Senator Breaux. But the result is the same.
    Mr. Platz. Is the same. Now, we have not used the STB 
system to settle rate disputes, but we have used it in Canada.
    Senator Breaux. You have used it in Canada?
    Mr. Platz. We have used it in Canada, and it works very 
effectively.
    Senator Breaux. Now, John, Mr. Snow, what is the railroad 
industry's take on that suggestion?
    Mr. Snow. Mr. Chairman, I am not sure we have given that 
the thought that would be required to really have a take on it. 
We do not operate in Canada to any degree, so I am not really 
familiar with that Canadian system, but it is certainly 
something to be looked into. It seems to me we ought to have a 
position on that.
    Arbitration, though, should occur against a backdrop of 
some controlling principles like those found in the Staggers 
Act.
    Senator Breaux. Let me ask this, if I could, of both Mr. 
Snow on behalf of the railroads and some of the witnesses here. 
If you all could possibly get together without antitrust 
implications and see if each of the two sides could maybe 
explore that concept a little bit further as a way of resolving 
unreasonable rates. In your opinion through an arbitration type 
process, what would the shippers like to see in that process?
    And then Mr. Snow, on behalf of the railroads, if you could 
coordinate with your colleagues, if Congress moved in that 
direction, what do you think would be part of that type of a 
system that you all would feel comfortable with. Any system has 
to be fair to both sides. That would be helpful.
    If we could ask you all, especially Mr. Platz, you seem to 
be familiar with it. If you could coordinate with your 
colleagues from that perspective, and anybody else you want to 
bring into it who would be helpful and then Mr. Snow obviously 
can do that with the railroad industry. Maybe at least let us 
explore this.
    What we have here is an effort by the Committee we have had 
three hearings on this. This is something we normally do, we do 
not spend that much time on one subject. We generally have one 
hearing and move on, but this is the third hearing just on this 
type of an issue, so the Congress is very serious about it.
    We have heard from the Huvals and the Schwirtzes and 
everybody else back home. We want to make sure that we have a 
viable railroad industry at the same time, but this is not 
insurmountable, so I want to ask both sides, if we can, to 
explore this further and see if we can make some 
recommendations for this Committee to do.
    Any other comments from anybody?
    Mr. Snow. Senator, I will commit to undertake to follow up 
on your suggestion.
    Mr. Platz. I will do the same.
    Senator Breaux. OK. Thank you, Mr. Platz.
    Yes, sir.
    Mr. Strege. Mr. Chairman, you are correct about the process 
not working very well. Mrs. Morgan talked about a case that had 
gone on for 16 years. That is from up in my part of the 
country, Montana, and that sort of a thing has intimidated 
shippers from filing rate cases.
    Filing fees were mentioned. Yes, they have to be kept in 
check, but that is just the start of it. Then you have the 
lawyers and the cost accountants and so forth.
    One of the things about arbitration, I think that we have 
to make sure does not happen is that the small shipper is not 
overwhelmed with information, or that there is a discovery 
process that could be used by the railroad to frustrate the 
small shipper. I do not want to take anything away from the 
large shippers, but we are basically an industry of small 
operators, so we are sort of at a disadvantage in that respect.
    Senator Breaux. Well, I thank each and every one of you for 
being with us. The testimony is good. I have read all the 
testimony. I have met with all the witnesses, and you have a 
very interested Senate Commerce Committee on this. I can pledge 
that something is going to happen. I do not know yet what, but 
something will.
    I thank you, and with that, the Committee will be 
adjourned.
    [Whereupon, at 11:50 a.m., the Subcommittee adjourned.]
                            A P P E N D I X

   Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
    Mr. Chairman, thank you for holding this hearing today. Rail 
competitiveness has been an issue that has come before this Committee 
on many occasions, and more frequently over the last five or so years 
as just about every major railroad struggled with some self-inflicted 
service problems.
    But concerns among the rail customer community about growing 
railroad monopoly power have not been limited to times of service 
crises. Many of us on this Committee have continued to be called upon 
by our constituents to use our policy-making powers to enable customer 
choice to all users of rail transportation.
    At the beginning of this Congress, this Committee embarked upon a 
series of hearings that focused on the concerns the various 
stakeholders has about railroad competitiveness. As part of this 
series, we've heard from Surface Transportation Board Chairman, who has 
testified that the Board is implementing the law as it is written and 
that any changes on how to address competitiveness issues will require 
action by Congress.
    We've also heard from representatives of the largest railroads, who 
oppose any changes that would impact their regional monopolies, 
claiming there's no other way for them to operate and make money, which 
is the same argument that's been made by every other industry 
monopolist we've ever heard from.
    I encourage my colleagues to listen to today's witnesses. Once you 
have heard their statements, you will agree that it is high time to 
move forward in giving serious consideration to what legislative 
actions we should take to resolve this impasse. All rail customers--not 
just a select few--should be able to make competitive choices, or at 
least begin to be able to negotiate with their rail carriers on a more 
balanced playing field.
    Last year, I joined with my colleagues Senators Rockefeller and 
Dorgan to introduce S. 1103, the Railroad Competition Act of 2001. 
After further discussions with my constituents and other Senate 
colleagues, I decided to introduce S. 2245, the Railroad Competition, 
Arbitration and Service Act of 2002, which as been cosponsored by 
Senators Craig, Crapo and Baucus, as another possible alternative along 
the lines of approaches adopted by this Committee in bringing 
competition to other network industries.
    And there may yet be other policy approaches out there that may 
deliver competitive choices to rail users. One thing's for certain: 
regionalized monopolies over rail transportation are not good for 
shippers, or for railroads, or for railroad investors or for our 
respective state economies, or for our national transportation network 
as a whole. Furthermore, this problem will not go away.
    Given the lateness of the legislative session, I recognize that 
reaching a consensus within this Committee this year on how to modify 
federal rail policy is unlikely. In the meantime, however, I hope each 
Member of the Committee will begin exploring these issues independently 
and in anticipation of Committee action on this issue next year. I'm 
sure all of us who have attached our names to legislation would like 
for the Chairman to commit to holding a hearing at the beginning of the 
next Congress that specifically explores possible solutions that will 
address the concerns we all hear repeatedly from our captive rail 
constituents.
    Thank you, Mr. Chairman.
                                 ______
                                 
 Prepared Statement of Diane C. Duff, Executive Director, Alliance for 
                         Rail Competition, Inc.
    On behalf of the members of the Alliance for Rail Competition, I 
respectfully request the following statement be included in the 
official record of today's hearing.
    The Alliance for Rail Competition represents captive rail customers 
moving primarily coal, chemicals and grains. Much of the reason these 
rail customers have so little rail-to-rail competition can be traced 
back to regulators, and we have a long, long history with regulators. 
In 1887, after years of monopolistic market abuses and inadequate state 
regulation, railroads in the United States came under federal 
regulation through enactment of the Interstate Commerce Act. 
Eventually, these controls became overly burdensome as the over-built 
railroad industry faced increasing competition from motor carriers, 
spurred by the development of the interstate highway system.
    Recognizing the growth of such intermodal competition, the Staggers 
Rail Act of 1980 deregulated much of the industry. But the Staggers Act 
was not one-sided. It was intended to implement a balanced public 
policy whereby regulation would be eliminated where competition 
prevailed, and competition encouraged where absent. Regulation was to 
be a poor, second-choice, safety net.
    Instead, regulators have interpreted the law in such a way as to 
virtually eliminate rail-to-rail competition, which has left 
approximately 30-percent of rail customers subject to railroad monopoly 
behavior because they cannot realistically turn to other modes of 
transportation. Furthermore, regulators have done little to provide a 
safety net for those whose competitive choices have been eliminated.
    Among other policies, the Staggers Rail Act was to allow 
competition to establish reasonable rates, to ensure effective 
competition among rail carriers, to reduce barriers to entry, and to 
avoid undue concentrations of market power--in essence, to promote 
competition as the basis of fulfilling the needs of railroad customers. 
And yet, just the opposite has occurred.
Mergers and Acquisitions
    Through mergers and acquisitions, the 36 Class I railroad systems 
that existed in 1980 have been reduced to seven, with four 
overwhelmingly dominating the industry. In 1980, the four largest 
railroads accounted for 43-percent of the industry's traffic, whereas 
in 1999, the figure had increased to 95-percent. These consolidations 
have permitted railroads to eliminate duplicate facilities and reduce 
their miles of track owned by 40-percent, from 165,000 miles in 1980 to 
an estimated 99,000 miles in 1999. At the same time, the consolidations 
resulted in the development of four regional monopoly infrastructures, 
in most cases without providing for service competition over those 
track structures. By allowing railroads to ``tie-in'' their operational 
service to the exclusive use of their fixed facilities, regulators have 
limited the competitive goals of the Staggers Rail Act to apply to only 
those customers who can use another mode of transportation.
The Railroad Pricing Myth
    Various studies have been released over the years--by the STB, the 
GAO and the Association of American Railroads--claiming that, despite 
the emergence of regional monopolies, rail rates have been declining 
for 20 years. The railroad industry has consistently used these studies 
as props to claim that rail customers have no reason for complaint. 
However, these reports rely heavily on data that does not measure the 
changes in actual railroad freight rates, but rather adopts a ``freight 
revenue per ton-mile'' (R/TM) financial measure as a surrogate for the 
general level of railroad freight rates. This is an improper use of 
that measure. History shows that railroad freight rates have often 
increased as R/TM declined, because R/TM is affected by a multitude of 
factors other than changes in freight rates. As the railroads have 
become more concentrated, they continue to offload rail costs onto rail 
customers. Railroads now make some customers invest in cars, larger and 
larger loading facilities, weighing devices, inspection facilities, and 
even locomotive power. Since the rates now don't include these 
components the railroads claim they are lower, when in fact, the rail 
customer is paying ever-increasing shares of the transportation cost.
    Furthermore, it is not the general level of railroad rates that 
should be of concern to policy-makers. The development of effective 
regulatory policies requires the analysis of railroad rates in 
individual markets, relative to operating expenses and service levels 
in those markets. What is consistently lost in these reports is that 
rail-dependent customers have incurred higher, albeit constrained, 
railroad freight rates. Furthermore, there has been no established 
means for measuring the differences in the service levels over the 
years provided by individual railroads to captive customers versus 
those who have competitive choices.
Policy Actions
    As the number of railroads serving any one market has dwindled from 
several to only one or two, very little has been done to balance this 
consolidation by implementing increasingly competitive policies. It is 
true that when rail mergers result in a particular market going from 
two rail carriers to just one, the STB has placed conditions on those 
mergers. However, the erosion of competition began long before any 
given market has faced becoming singly served, and nothing was done. 
Despite clear statutory language directing regulators to encourage 
competition to the maximum extent possible, regulators seem to have an 
overly narrow view of their responsibility to protect existing or 
encourage new competition among railroads. There were many policies 
that could have been modified over the years to address this dwindling 
amount of rail-to-rail competition, but instead protective policies 
were either adopted or left in place. For example:

    Under 49 U.S.C. 11102(c)(1), the STB may require rail 
        carriers to provide switching in terminal areas where it finds 
        such agreements ``to be practicable and in the public interest, 
        or where such agreements are necessary to provide competitive 
        rail service.'' Yet, despite its broad statutory authority, the 
        agency has significantly narrowed the focus under its 
        ``Competitive Access Rules.'' Since these rules were 
        promulgated in 1985, there have been six decisions further 
        interpreting those rules as they pertain to shippers. The 
        result: Shippers have not won a single decision, and the agency 
        has never granted a competitive access remedy in favor of the 
        shipper under those rules.

    The STB, and its predecessor, have consistently condoned 
        the act of Class I carriers creating ``paper barriers'' when 
        spinning off a branch line to form a shortline railroad. A 
        paper barrier essentially prohibits the newly created 
        ``independent'' shortline from interchanging traffic with any 
        railroad but the parent carrier. As a result of paper barriers, 
        the shortline and regional railroad community can also be 
        captive to Class I carriers.

    The STB determined that railroads are fully within their 
        right to exploit customers located on a bottleneck. A 
        ``bottleneck'' is a segment of rail track that serves either 
        the point of origin or the point of destination in any given 
        route. Because the bottleneck is controlled by one railroad, 
        that railroad can force any customer that needs to move goods 
        over that portion of track to use only that railroad's services 
        over the entire route, regardless of whether a second carrier 
        may be available to provide competing service for a majority of 
        that route.

    Had these policy questions been approached differently, regulators 
could have made significant progress in offsetting the reduced rail-to-
rail competition sanctioned through government-approved mergers. 
Alternatively, regulators could have decided to undertake a rulemaking 
that would have modified their previously adopted policies in light of 
a changing rail industry. Instead, regulators continue to adhere to the 
view that they have done what is required by the letter of the law, and 
any modification will require Congressional action. In light of the 
government-sanctioned franchise held by railroads, Congress must act to 
correct the balance between captive rail customers and their railroads.
The Captive Rail Customer's Experience
    While the nature of the captive shipper experience is different for 
every company depending on their size, location, and commodity shipped, 
railroads impose their monopoly over their captive customers fairly 
consistently. Generally, companies that try to negotiate reasonable 
rail rates have been told by their railroad representatives that the 
railroad would rather see the company go out of business than accept 
lower, more competitive rates. Companies ordering rail cars often don't 
receive them for days, sometimes weeks after expected. Then when they 
do arrive with little notice, rail users must be prepared to fill those 
cars within 24 hours or face substantial demurrage fees, even though 
the railroads may not return for weeks to pick them up. In case after 
case, the largest railroads are shifting responsibility for switching 
at the loading or unloading facility to their customers, allowing cost 
reductions that allow them to continue to conjure up data that appears 
to demonstrate that ``rates'' are falling when in fact they are showing 
merely an average of a complex array of cost data. And in the most 
blatant exercise of monopoly power, grain shippers throughout Montana, 
North Dakota, South Dakota, Idaho, Washington and Oregon have watched 
as the BNSF has wreaked havoc with their export wheat market. Steve 
Strege's testimony discusses the BNSF's discriminatory inverse rate 
scheme in great detail. The bottom line is that growers in these states 
have lost millions due to the BNSF's interference in their markets, and 
may lose more depending on how their dissatisfied customers' spending 
patterns change as a result. Although the grassroots efforts undertaken 
by ARC members in those affected states has succeeded in pressuring 
BNSF to suspend its inverse rate pricing scheme for now, there's little 
to prevent BNSF from re-instituting this discriminatory and market-
damaging pricing structure at any point in the future because there is 
no rail competition in these markets.
Individual Rate Cases
    While there is virtually no relief for service related problems 
outside of an informal intervention by STB personnel, captive customers 
do have the option of pursuing resolution to rate related problems 
before the Surface Transportation Board. For the largest shippers--
predominantly coal shippers--the rate case approach has been somewhat 
successful. Even though it takes upwards of two years and millions of 
dollars to argue a case, and tariff rates applied to their coal 
movements while the rate case is under consideration are substantially 
higher for the duration of the case, there have been some successes for 
large coal shippers.
    This is primarily because coal shippers are moving unit trains back 
and forth between two points. Large shippers of various other 
commodities that move between numerous origins and destinations have a 
far more complex situation, and would have to argue each rate complaint 
route-by-route. And the economics of a rate case for smaller shippers--
whether they are shipping smaller volumes or they themselves are 
relatively small--simply don't work.
    Consider: In 1996, the STB adopted rate guidelines for non-coal 
proceedings as a recognition that the regulatory framework used for 
analyzing rate challenges was so lengthy and costly as to be 
prohibitive in cases where the amount of money at issue was not great 
enough to justify the expense. The STB decision identifies three 
revenue-to-variable cost benchmark figures as starting points for 
determining the maximum rate for small shippers:

    1. The ``Revenue Shortfall Allocation Method'' (RSAM) benchmark is 
intended to measure the uniform markup above variable cost that would 
be needed from every shipper of potentially captive traffic in order 
for the carrier to recover all of its fixed costs.

    2. The ``Revenue to Variable Cost Comparison'' (R/VC Comp) 
benchmark is intended to provide a means of reflecting demand-based 
differential pricing principles. The benchmark measures the markup 
taken on traffic priced at greater than 180-percent revenue/variable 
cost that involves similar commodities moving under similar 
transportation conditions.

    3. The ``Revenue to Variable Cost greater than 180'' (R/VC 180) 
benchmark is intended to measure the degree of differential pricing 
actually being practiced by that carrier (i.e. the extent to which the 
carrier is marking up its ``greater-than-180-percent r/vc'' traffic on 
average). The purpose is to consider the fairness of the defendant 
carrier's rate structure to ensure that the complaining shipper's 
traffic is not bearing a disproportionate share of the carrier's 
revenue requirements vis--vis other relatively demand-inelastic traffic 
without good cause.

    While these three tests may seem commonplace among regulators, they 
are fraught with uncertainties that act as significant deterrents to 
testing the guidelines. First, they all require varying degrees of 
expert analyses, which is quite costly. In addition, one of the three 
factors depends upon access to the confidential waybill sample data, 
and you can't get access to the data unless you file a complaint. 
Finally, the STB's decision does not indicate how these three factors 
will be weighted or if they'll even be used, which makes it difficult 
to make an informed judgment as to whether pursuing such a rate case is 
worth the time and money at risk. While the Board has recognized that 
there are instances where its coal rate guidelines would be an 
unreasonable burden, there has never been a decision by the Board about 
what cases would qualify to use these alternative guidelines, so a 
shipper doesn't even know if he can qualify to use the rules. It is 
also worth noting that experts in rail economics have estimated that 
the best possible outcome for a rate case filed under the small shipper 
guidelines would be a rate of approximately 230-percent of variable 
cost--well above the legislated threshold of 180-percent. This sort of 
disparity would seem to reflect that--illogically--regulators have 
determined that smaller shippers should bear greater burden for 
railroad costs than larger shippers.
    These factors create a natural disincentive, particularly for 
smaller shippers, to pursue a regulatory remedy, and this is borne out 
in the record: despite numerous public complaints, no shipper has ever 
attempted to file a case under these guidelines. This should not be 
surprising considering that, regardless of size, shippers on the whole 
consider the Board's rate complaint processes to be too lengthy, costly 
and complex. (In a GAO survey, 75-percent of surveyed shippers believed 
that they were charged rates they did not consider reasonable, but 
asserted that barriers to seeking rate relief precluded them from using 
the Board's rate complaint process.)
    The Board could be given credit for its modest attempts to 
streamline rate cases and enhance competition, such as its 1998 
decision to eliminate product and geographic competition factors from 
the market dominance determination process and its 2001 merger policy 
changes which at least pay lip-service to the need for competitiveness. 
But why shouldn't its efforts have been more aggressive? And as the 
agency charged with regulatory oversight of the rail industry, why has 
the Board not requested additional authority to rectify what has 
clearly become an anti-competitive environment? Some rail customers 
have suggested that the Board has been overly influenced by the 
railroad industry. Regardless of the reasons, the Board's behavior 
reinforces the need for Congressional action to clarify the statute and 
rebalance the scales between the needs of railroads and the needs of 
their customers.
What Rail Customers Want
    In the simplest of terms, rail customers want to be able to make 
choices based on service quality and price. After years of STB 
statements reinforcing that it cannot or will not act to grant all rail 
customers the opportunity to choose among rail carriers for rail 
transportation services, only Congress has the power to allow rail 
customers that basic principle that drives virtually every other 
industry that makes up the U.S. economy.
    The data show that approximately 30-percent of rail users are 
paying rates that indicate captivity--in other words, the rates are 
high enough that if some other option were available to that customer, 
it is likely that the customer would exercise those options. Although 
it is reasonable to assume that approximately 70-percent of rail 
customers do have some amount of choice based on this data, there is 
too much emphasis on competition as a policy direction within the 
existing law to believe that Congress endorses a policy that would 
leave so many rail users captive to one railroad.
    Despite the drastic consolidation that has occurred over the last 
20 years, there are a number of options that would significantly 
improve the current monopolistic environment. Furthermore, most of 
these options have been applied in some form with great success either 
to railroads in Canada or to other heavily capitalized industries in 
the US.

    Final Offer Arbitration (FOA). Already in place in Canada, 
        and used in many private sector situations throughout the U.S., 
        FOA encourages private sector negotiations to resolve disputes. 
        If the dispute still cannot be resolved through negotiations, 
        one or more neutral arbitrators can be called upon at the 
        request of the disputing party to determine in a short period 
        of time whose proposal is most reasonable. This process would 
        allow a more cost-efficient alternative to the existing lengthy 
        and costly rate case, and balance the playing field between 
        railroads and their captive customers.

    Bottleneck Relief. By granting rail customers the right to 
        receive a rate quote over a bottleneck segment, those customers 
        could have the benefit of competitive choice over a major 
        portion of their route(s).

    Elimination of Paper Barriers. Paper barriers prohibit 
        smaller carriers from working with their customers to develop 
        the most efficient route according to the customer's needs. 
        There is no difference between a Class I railroad telling an 
        independent shortline that it must use the Class l's 
        infrastructure and Bill Gates telling computer makers that they 
        must install Microsoft's browser is that Bill Gates and 
        Microsoft. However, Microsoft is subject to anti-trust laws, 
        whereas railroads are exempt and carry the power of a 
        government-bestowed franchise.

    Trackage Rights. Trackage rights are used every day by 
        railroads at their own discretion. Furthermore, trackage rights 
        have been successfully imposed on portions of the Union Pacific 
        as a condition of its merger with Southern Pacific, with no 
        operational or safety problems. There is no reason why trackage 
        rights should be available nationwide, and market forces can 
        determine where trackage rights make the most sense. This 
        principle is a widely accepted approach that has been central 
        to Congressional efforts to deregulate other network 
        industries, such as telecommunications and electric utilities.

    Open terminal switching. Some argue the law already allows 
        this, but as noted previously, the Board does not adhere to 
        that interpretation. Nonetheless, a similar concept has been 
        successful in bringing competitive choices to Canadian rail 
        customers that are proximate to terminal areas. Furthermore, 
        this is not dissimilar to the shared asset areas established as 
        a condition to the division of Conrail between CSX and Norfolk 
        Southern.

    All of these concepts have been fleshed out in legislative language 
either in S. 1103, introduced by Senators Dorgan, Rockefeller and Burns 
or in S. 2245, introduced by Senators Burns, Craig, Baucus and Crapo. 
These bills deserve to be explored fully and acted upon by this 
Committee, particularly since an extensive hearing record exists 
demonstrating that rail customers' complaints are not regionally 
limited, nor are they limited to a particular industry.
    If we can agree that there are enough problems to warrant numerous 
Congressional hearings over the years, shouldn't we now be moving 
toward a more extensive discussion of the solutions and how to best 
implement them? Competition won't ruin railroads, but lack of action to 
get rail-to-rail competition in place will definitely have negative 
effects. Railroads will tell you today's policies benefit the public 
because there is no other way to earn the revenues necessary to sustain 
their high fixed-cost/low return businesses. This is simply not true. 
After all, even since the Railroad Revitalization and Regulatory Reform 
Act of 1976 enacted the annual revenue-adequacy determination, the 
railroad industry has never achieved revenue adequacy. This alone 
should highlight the need of railroads to seek an alternative approach 
to financial viability.
    Yet, over the past 20 years, railroads have been deregulated, 
downsized to the tune of saving tens of billions of dollars, shed of 
their uneconomical branch lines, described by the president of the 
Association of American Railroads as being in the second ``golden age 
of railroading,'' projected to save billions of dollars from mergers 
and acquisitions, self-promoted as the most productive railroad 
industry in the world, and re-monopolized to where four railroads 
account for over 95 percent of industry traffic. Furthermore, over the 
past eight years, the economy has sustained record growth and financial 
soundness. Given the state of railroad revenue inadequacy during such 
boom times, one can rationally conclude that cost cutting alone will 
not result in a rosier financial picture. Thus, it would be prudent for 
the railroads to explore ways to enhance revenue--specifically, by 
renting excess capacity in order to grow the traffic, increase asset 
utilization, and consequently add revenue.
    Additionally, many, many industries with similar cost structures 
function quite successfully in a highly competitive environment. They 
have figured out how to differentially price their services according 
to customer demands rather than monopoly control. Railroads refer to 
what they do as `differential' pricing when in reality all differential 
pricing in all other industries is based upon consumer demand, whereas 
in the rail industry differential pricing is really `discriminatory 
pricing' because it is based entirely on the level of captivity of the 
rail customer. The key is being willing to listen to your customers, 
providing the various tiers of services that will meet their needs, and 
pricing those services accordingly. For railroads to do this, they need 
to apply innovative solutions to their rampant service problems. We 
believe increased competition will cause the railroad industry to take 
the initiative to learn about the potential market and financial 
opportunities associated with a new customer-driven business model. 
Competition has regularly provided the necessary incentive for other 
former monopoly industries.
    Thus, the Alliance for Rail Competition urges this Committee to 
begin exploring the various legislative proposals that have already 
been made to resolve the litany of problems that rail customers face as 
a result of the lack of rail-to-rail competition. No one in the rail 
customer community believes that the Congress ever intended the rail 
industry to transform into regional monopolies, nor do we think it 
likely that the Congress finds the current state of affairs acceptable. 
These are complicated issues, made more controversial by the railroad 
industry's unwillingness to respond to its customers needs. But left 
unattended, this situation will not go away. In fact, it very well may 
get worse if and when additional major mergers are proposed.

    Thank you for your consideration.

                                 ______
                                 
   Prepared Statement of Dan S. Borne, President, Louisiana Chemical 
                              Association
    The Louisiana Chemical Association (LCA) is a Baton Rouge, 
Louisiana-based trade group representing chemical manufacturers doing 
business in the state.
    Unless Congress addresses rail reform issues quickly and 
substantively, the competitiveness of our facilities will be severely 
impinged and the result will be layoffs and a deterioration of our 
productive capacity.
    The LCA represents 67 member companies operating at approximately 
100 different manufacturing sites across Louisiana. LCA members employ 
nearly 30,000 men and women who use their training, education, and 
experience to manufacture safely the building blocks of our modern, 
safe, and convenient lives, producing everything from antibiotics to 
zoom lenses. Tens of thousands of other Louisiana citizens work in 
support businesses that provide the state's petrochemical industry with 
everything from pumps to paper clips to construction and maintenance 
services.
    Chemical manufacturing is a huge economic engine for Louisiana. It 
accounts for some 40 percent of all the value that is added in the 
state's manufacturing sector, shipping $20 billion worth of products 
annually.
    Today you will hear from a panel of outstanding witnesses and in 
submitted testimony about the high-handed, ``take it or leave it'' 
attitude of some railroads: ``Take the rate to move your product, or 
we'll leave it in your plant.''
    The chemical industry is at risk if railroads that hold some of our 
plants hostage are not compelled to offer rates that recognize the 
economic facts of today's manufacturing life.
    Louisiana is the third largest producer of chemical products in the 
United States, ranking behind Texas and New Jersey. LCA member 
companies receive raw materials and ship products by all transport 
modes, but they depend most heavily on water and rail. The reality of 
the Louisiana situation is that in many specific situations, chemicals 
must move by rail due to product characteristics; distance; customer 
preference; shipment size; or other factors.
    As major shippers of petroleum, base chemical, feedstock, and other 
bulk commodity products such as alumina and fertilizer, our members 
have a significant interest in working to resolve service problems that 
have evolved during the steady consolidation of the American railroad 
industry since 1980.
    The LCA therefore asks the Committee to address several rail rate 
and oversight areas that we feel need reform if our industry is to 
remain competitive and grow the American economy, not some other 
country's.
    What, then, are the problems?
    One problem is that our members suffer from a lack of railroad 
competition. Sometimes the problem exists because there simply are no 
transportation options to a single railroad physically available. The 
plant in this example would be ``captive'' to the railroad.
    ``Hostage'' is a better word.
    One of our plants recently got a rate increase notice from the 
railroad that would have raised the shipping rate to an amount equal to 
the delivered price the company was getting for its product! After a 
lot of noise, and after Congressional interest was shown, this plant 
was finally able to negotiate the same increase, but over three years 
instead of one, an effort to keep its manufacturing unit running.
    Otherwise, the high-handedness of the railroad, unilaterally 
imposing a rate hike, would have resulted in people at this plant 
hitting the bricks and heading to the unemployment line.
    What happens to a plant that is captive to a certain railroad and 
has no viable transportation alternative because competitive 
alternatives are not physically available?
    To be brutal about it, captive customers pay the most and receive 
the worst service. LCA members have suffered from poor service; delays 
and excessive transit times; high freight costs; and other disruptions 
that have put Louisiana manufacturers at a competitive disadvantage.
    At other times, there is the possibility of railroad competition 
only a short distance from the plant, but the railroad serving the 
plant will not allow access to that competing railroad. This is called 
the ``bottleneck'' problem.
    Several chemical companies in Texas, for example, are building 
their own railroad to overcome these kinds of problems! This is a 
misallocation of capital resources that could be better invested to 
make plants more competitive, but the companies simply have no choice.
    We commend the Committee for recognizing this critical issue and 
thank it for adopting the amendment to S.1991 that would allow captive 
shippers access to railroad infrastructure and loan guarantees. It 
would be instructive for the Committee to revisit the railroad 
industry's position on this build out amendment.
    In Louisiana, however, as Senator Breaux and Senator Landrieu well 
know, because of sensitive wetlands issues, a plant or group of plants 
may have no way to build their own track. The ultimate solution, then, 
is to force the railroads to solve the bottleneck problem by requiring 
them to de-bottleneck their systems.
    These problems are the direct result of consolidations in the rail 
industry and the status quo that protects the railroads from rail to 
rail competition. The railroad industry is the only deregulated 
industry in the nation that is not subject to the antitrust laws and is 
allowed to take actions to block its customers from gaining access to 
railroad competition. The Congress or the Surface Transportation Board 
therefore must change the STB's 1996 ``bottleneck'' ruling. One 
solution that we favor is requiring railroads to quote rates across 
their bottleneck facilities to competing rail systems.
    In fact, Mr. Chairman, the captivity that some of our chemical 
companies experience due to bottleneck problems is being projected onto 
their plants that have competitive options through railroad 
``bundling''. Under this mechanism, the railroad that has one plant 
captive will offer to charge a lower captive rate if the company will 
sign a transportation contract for their second, competitive plant--at 
a rate higher than they would otherwise need to pay in their 
competitive situation. One of our companies recently refused to yield 
to this ``bundling'' pressure and signed a contract at their 
competitive plant that includes rates 15-25-percent lower than the 
rates they had been paying under the ``bundled'' contract. Immediately, 
their rates at the captive plant escalated in double-digit figures and 
they were threatened with a new policy of ``cash in advance'' for their 
shipments if they did not cooperate. Congress needs to address the 
problem of ``bunding'' that results in captivity being projected onto 
competitive plants.
    Members of the Committee, there is yet another problem that 
presents itself when a captive shipper is faced with a unilaterally 
imposed rate hike. The company has the option of filing a rate case 
with the STB.
    In fact, rate cases are not a possibility for our chemical plants. 
They are incredibly expensive; they take too long to conclude; and 
their outcomes are uncertain. A company that envisions a rate case is 
derailed because railroads that hold them hostage are well aware of 
this and are adept at gaming the regulatory process. Business windows 
of opportunity open and close quickly and companies cannot put 
decisions on hold, waiting for the bureaucracy to work its cumbersome 
way.
    Members of the Committee, I want to conclude by thanking you for 
the opportunity to present our concerns to you and to thank you for 
your interest in the concerns of our Louisiana plants that ship 
products by rail. We need the railroads and the railroads need us, but 
for so many of our companies it is a stretch of track that only goes in 
one direction, the one favoring the railroad.
    We don't want to be treated favorably, just fairly.
We therefore ask the Congress to:

    Make STB Reauthorization legislation a top priority in the 
        108th Congress. This legislation is one appropriate vehicle for 
        making improvements in the shipper protections at the STB. The 
        legislation should also authorize sufficient resources for the 
        STB to discharge their responsibilities in a timely and 
        efficient manner.

    Require the railroads to quote rates to move traffic across 
        their bottleneck facilities to competing lines. This places 
        these movements in commerce and provides a chance for a 
        negotiation.

    Make shippers eligible for any loans and loan guarantees 
        authorized for rail infrastructure projects.

    Empower the STB to be pro-active in investigating anti-
        competitive strategies and practices and empower it to take 
        action.

    Mr. Chairman, the status quo does not work for Louisiana captive 
rail shippers. The captive rail rates our members are being forced to 
pay are having an extremely negative impact on our industry in 
Louisiana. The Surface Transportation Board has made it clear that 
either they don't care about our problems or they don't have the 
authority or resources to help us. If you and your colleagues don't act 
to help us, we will remain at the mercy of the railroads.
    Thank you again for the opportunity to submit testimony.
                                 ______
                                 
         Prepared Statement of Carolina Power and Light Company
Mr. Chairman, Members of the Subcommittee:
    This testimony is submitted on behalf of Carolina Power and Light 
Company (CP&L) to the Subcommittee on Surface Transportation and 
Merchant Marine in conjunction with the Subcommittee's hearing 
addressing railroad rate and regulatory issues, and other service and 
competition matters. CP&L appreciates this opportunity to share its 
views and respectfully requests that this testimony be included as part 
of the hearing record.
A. CP&L AND ITS COAL-FIRED PLANTS
    CP&L is a subsidiary of Progress Energy, Inc. (Progress Energy). 
Progress Energy is a Fortune 250 diversified holding company 
headquartered in Raleigh, NC, with $8.5 billion in annual revenues. 
Progress Energy is a regional energy company focusing on the high-
growth Southeast region of the United States with more than 20,000 
megawatts of generation capacity and serves approximately 2.9 million 
electric and gas customers. It is among the top 10 generators in the 
United States.
    Through its wholly owned regulated subsidiaries, CP&L, Florida 
Power Corporation (Florida Power), and North Carolina Natural Gas 
Corporation, Progress Energy is primarily engaged in the generation, 
transmission, distribution, and sale of electricity in portions of 
North Carolina, South Carolina, and Florida; and the transport, 
distribution, and sale of natural gas in portions of North Carolina.
    CP&L serves an area of approximately 34,000 square miles in 
portions of North Carolina and South Carolina, with a population of 
more than 4.0 million. Florida Power serves an area of approximately 
20,000 square miles in Florida, with a population of more than 5.0 
million. Approximately 40-percent of the Progress Energy generation is 
coal fired. Progress Energy's two major electric utilities, CP&L and 
Florida Power, procure, transport, and burn approximately 18 million 
tons of coal per year with 16 million tons dependent on rail 
transportation.
    Fuel costs constitute a very substantial component of Progress 
Energy's overall cost of producing energy--and transportation costs are 
a very important part of those costs. Coal transportation costs are 
ultimately paid by Progress Energy's electricity customers. As a 
business entity and as a public utility that generally is permitted to 
pass the cost of fuel to its customers through fuel adjustment clauses, 
it is incumbent on Progress Energy to make every effort to ensure that 
the transportation expenses it incurs, and its customers pay, do not 
exceed reasonable levels.
    In the case of CP&L, six of its eight coal-fired power plants are 
served solely by one railroad at destination, either Norfolk Southern 
Railway Company (NS) or CSX Transportation, Inc. (CSXT). In fact, 
because of the massive consolidation of the railroad industry in recent 
years, NS and CSX are the only two remaining ``Class I'' railroads 
operating in the majority of the eastern United States. Because NS and 
CSXT completely control the railroad service market in which all of 
CP&L's coal-fired plants are situated, CP&L is to a large extent at the 
mercy of the two railroads in obtaining transportation rates and 
service terms for the transportation of coal to its plants.
B. CP&L's COMPETITIVE PLIGHT AND RATE LITIGATION EXPERIENCE
    The important message CP&L wishes to convey to the Subcommittee is 
that the competitive problems facing captive rail shippers are real. As 
discussed below, it is CP&L's experience that captive shippers are 
being targeted with unreasonable rate demands by the railroads. Because 
of considerable problems CP&L has experienced in obtaining reasonable 
rail rate and service terms at its captive facilities in the commercial 
marketplace, CP&L has had no practical alternative but to resort to 
regulatory relief at the Surface Transportation Board (STB) by filing a 
rate case.

1. CP&L's Competitive Situation

    As indicated above, six of CP&L's eight coal-fired plants are 
captive to a single rail carrier at destination. This effectively gives 
the railroad that serves a particular plant a monopoly over the 
transportation of its needed coal supplies. This is particularly 
problematic with respect to CP&L's two-largest, baseload coal-fired 
plants, its Roxboro Station at Hyco, NC and its Mayo Station at Mayo 
Creek, NC, which are served only by NS. Collectively, these plants 
consume approximately 8 million tons of coal annually--or two-thirds of 
the total annual coal tonnage consumed at all of CP&L's coal-fired 
plants.
    Over the years, NS has transported coal to Roxboro and Mayo under a 
series of private rail transportation contracts going back to the early 
1980s. The parties' most recent contract expired March 31, 2002. Prior 
to the expiration of this contract, CP&L attempted to initiate 
meaningful negotiations with NS over the terms of a replacement 
contract for Roxboro and Mayo. Unfortunately, NS refused to negotiate 
with CP&L on any other basis than a large increase in CP&L's already 
high rate levels.
    Unwilling to accede to NS's contract rate demands, CP&L sought and 
obtained from NS common carrier rates, effective April 1, 2002. The 
rates NS established are extraordinarily high ($16.56 and above per 
ton), significantly above the rates applicable under the parties' 
expiring contract, and far above and beyond anything NS has ever 
charged CP&L in the past.\1\ Because CP&L has no practical rail or non-
rail alternative for the transportation of coal to Roxboro and Mayo, 
and to be able to meet its system load requirements, it has little 
choice but to pay these NS exorbitant rates while they are being 
challenged at the STB. As fuel costs are passed directly through to 
CP&L's electric ratepayers, they are borne by the ratepayers as part of 
their monthly electric bills until such time as the STB orders them 
reduced.
---------------------------------------------------------------------------
    \1\ While CP&L would very much like to report to the Subcommittee 
the exact extent of the rate increases imposed by NS and being 
challenged at the STB, CP&L is precluded from doing so because its 
contract rate terms are confidential.

---------------------------------------------------------------------------
2. CP&L's STB Rate Case Complaint

    In early February, 2002 CP&L filed its rate complaint with the STB 
challenging the reasonableness of NS's rates for transporting coal to 
its Roxboro and Mayo plants, and seeking the prescription of maximum 
reasonable rates (and reparations). STB Docket No. 42072, Carolina 
Power and Light Company v. Norfolk Southern Railway Company. By 
decision served March 12, 2002, the STB adopted a procedural schedule, 
providing for the submission of three rounds of written evidence. As of 
this writing, the first round of evidence has been filed.
    As CP&L's rate case is currently pending before the STB, this is 
not the time or place to discuss its merits. However, CP&L does want to 
comment on several important issues relating generally to railroad 
pricing and agency adjudication of rate cases, which it believes it is 
uniquely qualified to address, and which it believes will be helpful 
for the Subcommittee to understand as it evaluates the plight of 
captive rail shippers and the STB's rate-reasonableness process.

a. Railroad Pricing Issues

    The railroads, and specifically NS, often tout the ``fact'' that 
rail rates have dropped for shippers, including coal shippers and even 
captive shippers, since passage of the Staggers Act in 1980. These 
``reductions'' are completely illusory with respect to CP&L. In fact, 
both NS and CSX have made recent public pronouncements that they are 
attempting to engage in more proactive ``value billing'' for their 
services. From CP&L's perspective, that essentially is code for the 
railroads' attempts to squeeze all available profits from their captive 
customers. Such a price escalation strategy is exactly what NS is 
attempting to do in pricing CP&L's Roxboro and Mayo service.
    The Class I railroads' industry trade association (the Association 
of American Railroads) has made the remarkable statement that there is 
a ``myth that service to a shipper by a single railroad is equivalent 
to monopolization. In fact, railroads face extensive competition for 
the vast majority of their business, including cases where a customer 
is served by only one railroad.'' CP&L assures the Subcommittee that 
CP&L's status as a captive shipper subject to the railroads' 
monopolistic pricing demands, which have recently involved massive rate 
increases, is no ``myth.''
    To put the rates presently being charged by NS to transport coal to 
CP&L's Roxboro and Mayo power plants in context, it is illustrative to 
examine the recent STB rate litigation experience of other captive coal 
shippers. A common method of comparing rates on rail movements of coal 
is to compare them on the basis of mills (thousandths-of-a-dollar) per 
revenue ton mile (dividing the rate per ton by the route mileage in the 
loaded direction). In the most recent coal rate case decided by the 
STB, Docket No. 42051, Wisconsin Power and Light Co. v. Union Pacific 
R.R., Decision served September 13, 2002, the Board determined that the 
rate being challenged was unlawful, and prescribed a maximum rate (at 
180 percent of the railroad's variable costs of service) equal to 10.5 
mills to 10.7 mills.
    In stark contrast, NS's common carrier rates for the Roxboro and 
Mayo movements are 4 to 5 times higher than those prescribed by the 
Board in the Wisconsin case, with some moves approaching 56 mills.\2\ 
This comparison helps begin to explain the frustration experienced by 
CP&L over NS's imposed pricing scheme, and its decision to pursue 
regulatory intervention through its rate case.
---------------------------------------------------------------------------
    \2\ The Wisconsin case involved a western coal movement. To be 
fair, CP&L acknowledges that western coal moves generally are less 
costly than eastern coal moves due to the hilly Appalachian terrain, 
smaller mines, and lack of ``loop'' tracks for loading, etc. 
Nevertheless, any such differences in rail costs certainly are a small 
fraction of the difference between the rates prescribed for Wisconsin 
Power and Light and the rates presently being charged by NS.

---------------------------------------------------------------------------
b. Rate Regulatory Protection Issues

    CP&L emphasizes that there is a continuing vital need for federal 
regulatory supervision of rail rates in situations where a railroad has 
market dominance (i.e., an absence of effective competition).\3\ 
However, potential relief for captive shippers from unlawful pricing 
demands by the railroads can be only as effective as the underlying 
regulatory processes and standards that are in place to resolve rail 
rate disputes. In addition, the agency charged with administering these 
processes must have sufficient qualified personnel to carry out those 
important regulatory protection functions in a timely and efficient 
manner.\4\
---------------------------------------------------------------------------
    \3\ To be clear, maximum-rate litigation is a last-resort remedy 
for CP&L, as it believes is the case for all captive shippers. However, 
in the absence of any other transportation options, and in light of NS' 
insistence in imposing substantial rate increases, CP&L's only 
alternative was to file its rate complaint with the STB to protect its 
electric ratepayers and its business from NS's monopoly pricing 
demands.
    \4\ CP&L believes the STB's existing Coal Rate Guidelines, under 
which its rate case is being evaluated, currently provide bulk 
shippers, the railroads, and STB staff with an acceptable analytical 
framework for evaluating the reasonableness of rates charged for 
market-dominant rail movements. CP&L also believes that the STB is 
currently the most appropriate forum to decide such complex cases.
---------------------------------------------------------------------------
    Under its governing law and regulations, the Board is supposed to 
complete rate cases within 16 months (7 months for discovery and the 
completion of the evidentiary record and 9 months for the Board to 
decide the case). CP&L believes this time period is more than adequate 
for the Board to decide rate cases.\5\ CP&L cannot emphasize enough the 
importance that the STB do all it can to keep rate cases as close as 
possible to the mandated 16-month schedule. This is especially 
important to CP&L because of the very high level of rail rates it must 
pay over the course of its pending rate case proceeding. CP&L is 
supportive of any Congressional efforts to assist the Board in this 
regard, to ensure that the STB has a sufficient number of qualified 
personnel and resources to accommodate its case load, so that it can 
process rate cases in a timely manner.
---------------------------------------------------------------------------
    \5\ By way of reference, the STB's most recent major rail 
consolidation proceeding (completed in 1998), involving the acquisition 
of Conrail's assets by CSXT and NS, in which hundreds of partise 
participated, was completed only 13 months after the application was 
filed.
---------------------------------------------------------------------------
    It is vitally important to have in place sufficient regulatory 
``back stop'' protection laws, regulations, and processes to protect 
captive shippers from economic rate abuses by rail carriers. Based on 
CP&L's experience, the maintenance and improvement of such regulatory 
safeguards is as important today as it has ever been, if not more so 
given the railroads' recent pricing demands. Accordingly, it is 
critical that the Subcommittee closely monitor rate cases pending 
before the Board, and the governing regulatory processes, to ensure 
that shippers have an adequate remedy at law to address economic abuses 
by the railroads, and to ensure that the public interest is fully 
served.
    CP&L thanks the Subcommittee for this opportunity to share its 
views.
                                 ______
                                 
  Letter dated July 30, 2002 submitted by Gerard J. Donnelly, Global 
                Director, Logistics, to Hon. John Breaux
                                                      July 30, 2002
Hon. John Breaux,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce Science, and Transportation,
Washington, DC.

Dear Senator Breaux:

                Re: Senate Hearings on Rail Competitiveness

    E.I. DuPont de Nemours and Company (DuPont) would like to express 
its appreciation to you and your staff for agreeing to hold hearings on 
the current state of competition and service concerns affecting the 
freight rail industry.
    DuPont, a U.S. corporation, headquartered in Wilmington, Delaware, 
is a global science and technology company engaged in the manufacture, 
sale and distribution of chemicals, crop protection products, paints, 
textiles, resins, plastics and related materials. Much of the raw 
material and finished products produced and/or utilized by DuPont's 
(insert number) U.S. manufacturing facilities are shipped by rail. In 
addition, as one of the largest exporter of U.S. manufactured chemicals 
and related products (according to Journal of Commerce figures, DuPont 
is currently the third largest U.S. exporter), DuPont is highly 
dependent upon the domestic rail system to service its global 
marketplace.
    The events of September 11, 2001, traditional safety concerns and 
fundamental economics surrounding the transportation of hazardous 
materials and bulk products have served to increase DuPont's already 
heavy dependence on freight rail transportation. A strong, healthy and 
efficient freight rail industry is essential to DuPont's ability to 
compete both within the United States and abroad.
    DuPont, however, is very concerned about the lack of effective 
competition within the rail industry. In 1980, when the Stagger's Rail 
Act was passed, Congress expressed it's concern about the then 
deplorable financial position present in the rail industry. The 
Stagger's Act recognized this condition and attempted to reduce 
expensive and counterproductive regulation in order to permit the 
industry to rebuild and recover its financial health.
    In the years since the passage of the Stagger's Act, the rail 
industry has been substantially restructured and has dramatically 
improved its overall financial position. However, during this process 
in kind competition between rail carriers has been greatly reduced, The 
competitive market place forces which Congress had correctly relied 
upon to ``regulate'' the industry have all but disappeared. This has 
resulted in a substantial increase in the number of ``captive 
shippers'', reduction in service (and security) options, a less 
responsive and innovative rail partner and the imposition of a 
``monopoly premium'' in excess of 30-percent being imposed upon captive 
shippers
    The time, therefore, has come to reexamine the Stagger's Act and 
its underlying premise. New mechanisms must be imposed and used to 
restore in kind competition among in kind rail carriers where such 
competition does not currently exist. DuPont believes that such 
competition in the rail industry will result in improved overall 
freight rail service and will serve to aid the aid the rail industry in 
recapturing much of the freight and bulk transport business lost to 
motor carriers since the conclusion of WWII. The recapture of this 
business will increase the financial strength of the rail industry and 
result in a ``win-win'' solution for both the rail industry and its 
customers.
    DuPont does not believe in regulation (or re-regulation) where 
market forces can be effective. However, if competitive market forces 
are absent, some workable substitution must be discovered and applied 
if our economy is to maximize its potential. DuPont is most willing to 
work with the railroads, the Surface Transportation Board and Congress 
to find a viable and mutually beneficial solution to our current 
problems. We welcome your interest and look forward to meeting with you 
and your staff to begin this worthwhile effort.

        Respectfully submitted,
                                        Gerard J. Donnelly,
                                Global Director, Logistics, DuPont.
                                 ______
                                 
              Prepared Statement of Entergy Services, Inc.
    Mr. Chairman, Members of the Subcommittee:

    This testimony is submitted on behalf of Entergy Services, Inc. 
(``ESI'') to the Subcommittee on Surface Transportation and Merchant 
Marine on railroad rates, service, and competition issues. With the 
permission of the Subcommittee, ESI respectfully requests that this 
statement be included as part of the Subcommittee hearing record.
I. IDENTITY OF ESI/ENTERGY
    ESI is a wholly-owned subsidiary of Entergy Corporation 
(``Entergy''), an investor-owned public utility holding company, which 
through its subsidiaries, engages principally in the electric power 
business, including electric utility sales. Entergy has five wholly-
owned domestic retail electric utility subsidiaries: Entergy Louisiana, 
Entergy Arkansas, Entergy Gulf States, Entergy Mississippi, and Entergy 
New Orleans. These companies collectively provide retail electric 
service to approximately 2.6 million customers in Louisiana, Arkansas, 
Mississippi, and Texas, as well as engage in wholesale and governmental 
electric power sales. ESI provides management, administrative, and 
other services to these subsidiaries.
    Among its responsibilities, ESI provides for the acquisition of 
coal and related transportation services by railroad for Entergy's 
electric utility operating subsidiaries that utilize coal as a 
generating fuel. Coal transportation issues are of significant concern 
to ESI/Entergy because of the tremendous cost of purchasing coal 
transportation, and because these expenditures must ultimately be paid 
by electricity consumers as part of their monthly electric bills.
II. THE ENTERGY EXPERIENCE AND THE IMPORTANCE OF RAILROAD COMPETITION
    ESI would like to convey to the Subcommittee the important message 
that policies enhancing railroad competition are in the best interest 
both of rail shippers, in promoting efficient and cost-effective 
service, and the railroads themselves, in promoting a healthy and 
responsive railroad service industry. ESI's experiences with railroad 
service providers at Entergy Arkansas and Entergy Gulf States provide 
illustrative and supporting examples of this point.
A. Entergy Arkansas' Experience
    Entergy Arkansas' White Bluff and Independence plants burn 
significant tonnages of western coal as a boiler fuel (each plant burns 
approximately 6.5 million tons of coal annually, for a total of 
approximately 13 million tons). All of this coal is transported to the 
plants by rail, as there is no other practical means of moving the 
plants' required tonnages. Entergy Arkansas is one of the nation's 
largest railroad customers, operating 17 continuously-running unit 
trainsets from mine origins in Wyoming to its White Bluff and 
Independence plants. Each trainset consists of 135 high-capacity 
aluminum cars supplied by Entergy.
    Entergy Arkansas' present transportation arrangements for its White 
Bluff and Independence plants are pictorially described in the 
schematic attached as Exhibit No.1.

    1. Entergy's White Bluff Plant

    As shown in the attached schematic, two railroads, the Union 
Pacific Railroad Company (``UP'') and the Burlington Northern and Santa 
Fe Railway Company (``BNSF''), serve the origin coal mines in the 
Wyoming Powder River Basin (``PRB'') from which Entergy receives its 
coal. At destination, both of these carriers also serve its White Bluff 
plant (UP direct, and BNSF via trackage rights over UP to the plant). 
Obtaining dual carrier service at White Bluff was achieved only very 
recently (in 2001), and was the culmination of an extensive and 
involved process (including a severe UP service failure and 
accompanying litigation) which required tremendous effort, persistence, 
and expense on behalf of Entergy over a number of years.\1\
---------------------------------------------------------------------------
    \1\ BNSF trackage rights to serve the White Bluff plant were 
gained, in the face of strong opposition by the UP, through a 
combination of orders by the Surface Transportation Board (``STB'') 
during the UP/Southern Pacific merger proceeding in the late 1990s and 
multi-year litigation with the UP over severe contractual service 
problems Entergy suffered under the parties' former rail transportation 
agreement.
---------------------------------------------------------------------------
    With the real prospect of rail-to-rail competition finally in-hand 
at its White Bluff plant, Entergy was, for the first time, able to 
negotiate contracts with two railroads for transportation of coal to 
the plant. With the leverage of marketplace competition, Entergy 
ultimately was able to obtain efficient and cost-effective dual-carrier 
service. It now utilizes both UP and the BNSF as service providers to 
meet the plant's coal consumption requirements through private rail 
transportation contracts.
    While the terms of Entergy's contracts with the UP and the BNSF are 
confidential, ESI can state for the record that marketplace competition 
has worked very well. The economic benefits of this direct competition 
have inured directly to the benefit of Entergy Arkansas' retail 
electric customers in the form of pass-through reductions in its 
transportation-related electric generation fuel costs.
    The Subcommittee is likely to hear testimony from the railroads 
that the industry is more than adequately meeting its customers' 
competitive service needs and expectations, and that in order to 
sustain their expensive infrastructure and to meet investor 
expectations, the railroads cannot ``afford'' to be forced to compete 
for their captive coal customers' service. The Entergy Arkansas 
experience at White Bluff is directly to the contrary. For years, UP's 
service to the plants was indifferent at best, and abysmal at worst 
(especially during the infamous UP service crisis following its merger 
with the SP)--even though Entergy is one of UP's largest customers. As 
indicated above, this horrible service record by UP led to several 
years of litigation between the parties.
    When Entergy finally secured second-carrier access at its White 
Bluff plant allowing BNSF the opportunity to compete for its business, 
it was able to obtain competitive service terms and rates to the plant. 
Entergy's White Bluff plant has now been obtaining competitive rail 
transportation service from BNSF (and from UP) for the past year. 
Entergy emphasizes that BNSF is not forced to compete with UP for the 
White Bluff business. It does so voluntarily as a prudent business 
decision.\2\
---------------------------------------------------------------------------
    \2\ As noted above, BNSF serves the White Bluff plant via trackage 
rights over UP's lines. BNSF must pay UP trackage rights fees for use 
of its facilities to serve White Bluff. Because such fees, and the 
manner in which they are periodically adjusted, directly impact the 
competitiveness of alternate BNSF service to the plant, it is 
imperative that they be reasonable. This issue currently is the subject 
of a dispute at the STB between UP and BNSF over UP's attempts to 
include in its fees (for trackage rights acquired by BNSF as a result 
of the UP/Southern Pacific merger) the purchase premium UP paid for the 
acquisition of Southern Pacific. ESI views any attempts by UP to impose 
excessive trackage rights fees as completely unwarranted and 
anticompetitive, and it urges the Subcommittee to closely monitor this 
situation.
---------------------------------------------------------------------------
    Entergy's White Bluff experience demonstrates that competitively-
set coal transportation rates will not financially ruin the railroad 
industry. (If it feared that it would, Entergy would not be advocating 
the promotion of railroad industry competition for fear of inhibiting 
its ability to obtain essential transportation service.) To the 
contrary, competition forces rail carriers to compete in the 
marketplace, and provide better rates and service. When rail carriers 
fairly compete in the open marketplace, competition provides lower-
cost, more efficient, customer-focused service, while still generating 
substantial profits for the involved carriers.

    2. Entergy's Independence Plant

    In contrast to its White Bluff plant, Entergy's Independence plant 
remains captive to the UP for coal deliveries. As indicated on the 
attached schematic, two carriers reach the Independence plant, UP and 
the Missouri and Northern Arkansas Railroad (``MINA''). However, MNA, a 
``shortline,'' is effectively blocked from serving Independence by the 
terms of a lease agreement imposed by UP when it leased the trackage 
over which the MNA operates. That agreement, approved by the STB's 
predecessor, the Interstate Commerce Commission (``ICC''), imposes 
exorbitant penalty costs on the shortline if it interchanges more than 
a small percentage of traffic with a UP railroad competitor, and 
effectively prevents MNA from delivering BNSF-originated coal shipments 
to Independence in competition with UP.
    The Subcommittee may be aware of so-called ``paper barriers to 
interchange,'' by which is meant terms in rail line sales/lease 
agreements that penalize the buyer/lessor for interchanging traffic 
with competitors of the seller/lessor, or in some other fashion 
discourage or prevent such interchanges. Entergy Arkansas is a real-
life example of a company competitively harmed by such a paper barrier. 
The MNA lease agreement is a good example. Relevant excerpts of that 
agreement are attached to this statement as Exhibit No. 2.\3\
---------------------------------------------------------------------------
    \3\ As the cover sheet reflects, this is a public document that was 
obtained from a 1993 filing with the Securities and Exchange 
Commission.
---------------------------------------------------------------------------
    There are two provisions in the MNA lease agreement that ESI would 
consider paper barriers. The first appears in Section 4.03, at pages 9 
and 10. Under that provision if the MNA interchanges 95-percent or more 
of its traffic with the lessor (UP), the rent for the year is $0.00. If 
the MNA were to interchange more than 5-percent of its traffic with 
other carriers it would be required to pay annual rental amounts which 
begin at $10,000,000 and extend up to $90,000,000, based upon the 
percentage of traffic interchanged with other carriers.
    As though that were not enough, the lessor (UP) also retains the 
right under Section 3.04 (page 8) to step in and provide exclusive 
service to Entergy Arkansas' power plant at Independence, upon seven 
days notice. These two lease provisions effectively eliminate the MNA 
as a viable competitive option. Were it not for these provisions, BNSF, 
in conjunction with the MNA, could provide a competitive alternative to 
UP from origin to destination.
    ESI is unaware of any meaningful review by the STB (or the ICC) of 
the paper barrier issue and such barriers' impact on the railroad 
consuming public and the public interest. ESI also is unaware of any 
STB examination of the costs and other factors that the agency must 
balance when evaluating transactions that include unreasonable paper 
barriers to interchange (despite past requests from rail shippers that 
it thoroughly investigate such matters).
    ESI understands that terms in short line sales/lease agreements 
that impose a stiff financial penalty on the short line for 
interchanging traffic with the sellers/lessor's competitors are not a 
new phenomenon. However, third parties are rarely privy to the terms of 
the sales agreements/leases, so as to be in a position to protest them. 
At a very minimum, Entergy believes that it is imperative that 
transactions including needlessly restrictive barriers to interchange 
should not be approved by the STB. Transactions including paper 
barriers should only be approved if they include the least restrictive 
impact on real or potential competitive service, and only then, if the 
transaction's benefits clearly outweigh the competitive harm caused by 
the barrier and the paper barrier extends over a reasonable period of 
time rather than in perpetuity.
    ESI believes that the above-mentioned MNA lease agreement clearly 
constitutes a needlessly restrictive and anticompetitive paper barrier 
serving no justifiable public interest, and is completely unwarranted. 
Again, Entergy Arkansas has dual rail carrier service at both mine 
origin (UP and BNSF) and Independence plant destination (UP and MNA). 
Unfortunately, as described above, because of the involved paper 
barrier, Entergy Arkansas is foreclosed from utilizing MNA as a 
potential source of marketplace competition.
    Given the STB's apparent lack of interest in resolving the 
important issue of paper barriers, ESI believes that congressional 
intervention through legislation is necessary to resolve this issue. 
ESI would be happy to work with the Subcommittee on drafting 
appropriate legislation to resolve this important public interest and 
marketplace competition issue.

B. Entergy Gulf States' Experience

    Another example of recent competitive rail access at an Entergy 
power plant involves Entergy Gulf States' Roy S. Nelson power plant 
near Lake Charles, LA, which burns approximately 2.3 million tons 
annually of PRB coal. Until recently the Nelson plant was served 
exclusively by the Kansas City Southern Railway. In 1996-1997 Entergy 
Gulf States built a four-mile rail access line to the Southern Pacific. 
During the UP/SP merger proceedings Entergy sought a condition 
requiring UP to grant trackage rights to BNSF to serve Nelson so that 
it would have direct access to two competitive, single-line rail routes 
from the PRB all the way to Nelson via UP and BNSF. UP objected, and 
the STB denied the condition sought by Entergy.
    After the merger was consummated, as part of a re-arrangement of 
UP's and BNSF's operations between Houston and New Orleans, UP 
voluntarily gave BNSF direct access to numerous industries in the Lake 
Charles area formerly served exclusively by UP, including the Nelson 
plant. Thus both carriers are in a position to compete head-to-head for 
the Nelson coal business as well as the KCS. Although detailed savings 
information cannot be provided because of contract confidentiality 
requirements, it can be said that the pay-back period for Entergy's 
competitive rail access (``build-out'') project at Nelson has been well 
under two years.\4\
---------------------------------------------------------------------------
    \4\ However, construction of competitive rail access at Entergy's 
remaining plant (Independence) is not feasible due to environmental 
concerns. Moreover, it would be a tremendous waste of resources because 
it would essentially duplicate existing rail facilities that cannot be 
used due to paper barriers.
---------------------------------------------------------------------------
    The Nelson, White Bluff, and Independence situations indicate that 
the major carriers pick-and-choose where they want to compete with each 
other for coal movements. They do not have any problem competing with 
each other where it suits other corporate purposes. But this kind of 
decision should not be left to the carriers. The public interest in 
efficient, reasonably-priced rail transportation service mandates 
giving the STB authority and direction to authorize competitive access 
in those situations where it is operationally feasible but the carriers 
have decided not to compete with each other.
    ESI applauds the Subcommittee for commencing a review, through this 
hearing process, of substantive shipper protection and railroad 
competition issues. ESI believes that, given the STB's lack of 
attention to railroad competitive service issues, the time has come for 
the Congress to step forward and consider additional shipper protection 
measures, including elimination of unreasonable paper barriers, and to 
act to protect captive shippers from additional railroad economic 
abuses.
    ESI is willing to consider any reasonable legislative alternative 
that would result in an increase of intramodal rail competition. It is 
important, however, that the Congress make clear that promoting 
competition--not protecting reluctant railroad competitors from 
marketplace competition--is the Board's principal obligation under the 
law.
    ESI greatly appreciates this opportunity to present our views to 
the Subcommittee and will be pleased to provide the Subcommittee with 
any additional information it may need upon request.



    whether or not pursuant to necessary and proper regulatory 
authority as required by Section 3.02 of this Section III, Lessee will 
promptly relinquish to Lessor possession of the Leased Premises and 
this Lease Agreement will terminate as provided by Section XV of this 
Lease; PROVIDED, HOWEVER, any discontinuance of service or abandonment 
of any portion(s) of the Leased Premises which are inconsequential to 
rail freight service over the Leased Premises generally will be 
permitted and will not result in a termination of this Lease or require 
relinquishment of possession of the Leased Premises by Lessee.
    SECTION 3.04--Lessor may acquire the right to operate over the 
Leased Premises between milepost 259.05 at Diaz Junction and milepost 
270.00 near Independence to serve AP&L and, if this right is exercised, 
Lessee shall no longer have the right to serve AP&L, and AP&L shall 
become a closed industry served only by Lessor. This right shall be 
acquired effective seven days after Lessee's receipt of Lessor's 
written notice to Lessee that Lessor desires to begin operation over 
such trackage.

                               SECTION IV

                                  RENT

    SECTION 4.01.--In consideration of this Lease, and subject to the 
terms and provisions set forth herein, Lessee agrees to pay Lessor rent 
for the Leased Premises in the amount of Ninety Million Dollars 
($90,000,000) per year payable annually in advance on the 1st day of 
March; PROVIDED, HOWEVER, that subject to the provisions of Section 
4.02 hereof, for each lease year that 95-percent or more of all traffic 
originating or terminating on the Leased Premises is interchanged with 
Union Pacific Railroad Company or Missouri Pacific Railroad Company and 
any affiliated company, their successors and assigns, Lessor agrees 
that it will waive or partially waive the rent for that particular year 
in accordance with the schedule set forth in Section 4.03, The 95-
percent level must be achieved separately and simultaneously on the 
Pleasant Hill-Bergman (including connecting branches) and Guion-Diaz 
Junction segments.
    SECTION 4.02--The following traffic shall not be counted in 
calculating either total traffic or the percentage of traffic in 
Section 4.03: (a) Industries open to reciprocal switching at Ft. Scott, 
KS; Lamar, MO; Joplin, MO; Carthage, MO; Aurora, MO; and Springfield, 
MO as shown in Exhibit C, and (b) traffic that is local to Lessee, 
i.e., traffic which both originates and terminates at stations on the 
Leased Premises or at the stations served by Lessee pursuant to the 
Line Sale Contract between Lessor and Lessee which is being executed by 
the parties concurrently with this Agreement, and not involving line 
haul movement by any railroad other than Lessee. Lessor will consider 
further exceptions to this section on a case by case basis.
    SECTION 4.03--Upon request of Lessor, on or before the 1st day of 
February of each year following the commencement of this Lease, Lessee 
shall submit a report, signed by an officer of Lessee, certifying the 
amount and type of traffic originating or terminating on the Leased 
Premises during the prior calendar year, the railroads (if any) with 
which all or portions of such traffic were interchanged, the volume of 
traffic interchanged with each such railroad, and the total amount of 
rent due and payable for the previous calendar year. The rent due from 
Lessee for the Year shall be determined by reference to the percentage 
of the total traffic (as described in Section 4.01, subject to the 
provisions of Section 4.02) that was interchanged with Lessor, subject 
to the terms of Section 4.04, in accordance with the following 
schedule:

 
------------------------------------------------------------------------
  PERCENTAGE OF THE TOTAL TRAFFIC THAT
      WAS INTERCHANGED WITH LESSOR               RENT DUE LESSOR
------------------------------------------------------------------------
100-95%                                  $-0-
94-85%                                   $10,000,000
84-75%                                   $20,000,000
74-65%                                   $20,000,000
64-55%                                   $30,000,000
54-45%                                   $40,000,000
44-35%                                   $50,000,000
34-25%                                   $60,000,000
24-15%                                   $70,000,000
14-5%                                    $80,000,000
0-4%                                     $90,000,000
------------------------------------------------------------------------

    Lessee shall pay to Lessor all rent determined to be payable 
pursuant to this Section 4.03 on or before March 1st for each calendar 
year following the commencement of this Lease.
    SECTION 4.04--Rent shall be adjusted each year to reflect changes 
in the Producer Price Index--Finished Goods (the `Index'') and the 
amount due each year shall be determined as follows:
    The Index for the month of December 1992 shall be deemed to be the 
base index (``Bass Index''). Rent shall be adjusted annually as of each 
December thereafter by multiplying the rent shown in Section 4.03 by a 
fraction, the denominator of which is the Base Index and the numerator 
is the Index for the month of December in each year. The term 
``Producers Price Index'' shall mean the Producer Price Index--Finished 
Goods (Reference Base 1982--100), published by the United States 
Department of Labor, Bureau of Labor Statistics, or, if the Producer 
Price Index ceases to be published, such comparable index or measure of 
change in the
                                 ______
                                 
        Prepared Statement of Louisiana Energy & Power Authority
Mr. Chairman and Members of the Subcommittee:

    On July 31, 2002, the Subcommittee on Surface Transportation and 
Merchant Marine held a hearing on railroad shipper concerns. The 
Louisiana Energy and Power Authority (``LEPA'') is pleased to submit a 
written statement concerning these matters. We ask that this statement 
be included in the Subcommittee's hearing record.
    LEPA was created by the Louisiana Legislature in 1979. LEPA 
consists of eighteen Louisiana cities and towns, each of which 
maintains its own independent municipal power system. LEPA's current 
members are the cities and towns of: Abbeville; Alexandria; Erath; 
Houma; Jonesville; Kaplan; Lafayette; Minden; Morgan City; 
Natchitoches; New Roads; Plaquemine; Rayne; St. Martinville; Vidalia; 
Vinton; Welsh and Winnfield.
    LEPA is a joint-action agency working to provide its member 
communities with firm, stable sources of electricity at the lowest 
possible costs. LEPA is one of three co-owners of the coal-fired 
Rodemacher Power Station Unit No. 2 located in Boyce, Louisiana. 
Rodemacher Unit No. 2 is a 523 megawatt unit. This unit provides 
approximately 104.5 megawatts of power to LEPA. In July, 2002, the 
Subcommittee received testimony from Terry Huval, the Director of 
Lafayette Utilities Systems (``LUS''). LUS is also a co-owner of the 
Rodemacher Unit No. 2. LEPA joins in and supports Mr. Huval's oral 
statement, as well as the written testimony Mr. Huval submitted for the 
record.
    As Mr. Huval outlined in detail in his written remarks, Rodemacher 
Unit No. 2 is a ``captive'' facility. This captivity arises because 
only one rail carrier serves the Rodemacher station and, as a practical 
matter, the only way that the Rodemacher station co-owners can receive 
their coal purchases at Rodemacher is by rail. These purchases are made 
from mines located in the Wyoming Powder River Basin (``PRB''). The 
distance between the PRB and Rodemacher is over 1500 miles.
    The Rodemacher station rail captivity falls into the ``bottleneck'' 
category. Currently, all of our coal is being transported from the PRB 
to Rodemacher by a single rail carrier. However, a second rail carrier 
serves the PRB and that carrier, in conjunction with a third carrier, 
can carry our coal purchases all of the way to Alexandria, Louisiana--
which is only 19 miles from Rodemacher. Unfortunately, the last 19 
miles (between Alexandria and Rodemacher) is served only by our current 
rail carrier. As a consequence of this bottleneck captivity, LEPA pays 
transportation prices that are in excess of those that LEPA believes 
would be available if LEPA could obtain competitive rail pricing and 
rail service. These higher prices end up being paid by the electric 
customers of our members.
    LEPA joins LUS in urging Congress to take actions to allow 
bottleneck rail shippers to enjoy the benefits of existing rail 
competition. This competition should produce lower, competitive rail 
prices. To this end, we support changes in current law that would 
overrule the Surface Transportation Board's Bottleneck Decision. Such 
changes would allow LEPA to obtain the benefits of competition between 
the PRB and Alexandria. We also support other proposed changes in the 
law that would assist captive shippers in obtaining competitive rail 
pricing.
    On behalf of LEPA, I appreciate the opportunity to present our 
views to the Subcommittee.

        Respectfully submitted,
                       Louisiana Energy and Power Authority
                                                     Cordell Grand,
                                                   General Manager.
                                 ______
                                 
                 Prepared Statement of Minnesota Power
Mr. Chairman and Members of the Subcommittee:

    Minnesota Power, a division of ALLETE, appreciates the opportunity 
to present its written views on railroad shipper issues to the 
Subcommittee. We ask that this statement be included in the 
Subcommittee's July 31, 2002 hearing record.
INTRODUCTION
    Minnesota Power's interest in railroad shipper issues is two-fold. 
First, Minnesota Power transports significant volumes of coal, by rail, 
to its electric generating facilities. These facilities include the 
Boswell Energy Center located near Grand Rapids, Minnesota and the 
Laskin Energy Center located in Hoyt Lakes, Minnesota. Both of these 
plants are served by a single rail carrier. Secondly, several of 
Minnesota Power's large power customers are heavily dependant on rail 
service for transportation of both inbound and outbound products. In 
many instances our customers' facilities are solely served by a single 
rail carrier.
    Minnesota Power serves more than 130,000 electric customers and 16 
municipal systems across a 26,000 square mile service territory in 
northwestern Minnesota. A Minnesota Power subsidiary sells electricity 
to 14,000 customers, natural gas to 12,000 customers, and provides 
water services to 10,000 customers in northwestern Wisconsin.
    Minnesota Power also has a unique customer base. A dozen large 
power customers (requiring at least 10 megawatts of generating 
capacity) purchase about one-half of the electricity Minnesota Power 
sells. Minnesota Power's large power customers include five taconite 
producers who mine and process the iron-bearing rock that underlies the 
Missabe Iron Range. More than 60 percent of the ore consumed by 
integrated steel facilities in the United States originates from 
Minnesota Power's five taconite customers. Taconite processing requires 
large quantities of electric power. Minnesota Power's large power 
customers also include four paper and pulp manufacturers.
STATEMENT OF POSITION
    In 1980, Congress enacted the Staggers Rail Act. The Staggers Act 
was designed and intended to balance both shipper and carrier 
interests. Since the Staggers Act was enacted, the nation's railroads 
have aggressively implemented the various pricing and consolidation 
freedoms the Staggers Act accorded to them. These actions, aided first 
by the Interstate Commerce Commission (``ICC'') and subsequently, upon 
the sunset of the ICC, by the Surface Transportation Board (``STB''), 
have resulted in an unprecedented concentration of market power in a 
very few rail carriers. Just prior to the enactment of the Staggers 
Act, there were 42 Class I railroads. Today, that number has shrunk 
dramatically and the industry is dominated by a few behemoths.
    No shipper in the past fifteen years has been able to successfully 
prosecute a case under the competitive access provisions in the 
Staggers Act. While the railroads, with the ICC/STB's active support, 
have aggressively implemented the railroad pricing and consolidation 
provisions in the Staggers Act, the same can not be said for other 
provisions in the Staggers Act designed to offset carrier monopoly 
pricing power. These provisions were designed to open up captive rail 
facilities to competition. Similarly, the Board's controversial 1996 
decision in the Bottleneck Case effectively prevents bottleneck rail 
shippers from obtaining the benefits of competition. Finally, the ICC/
STB maximum rate process does not work for smaller shippers. These 
shippers simply cannot afford to file and prosecute their cases under 
current STB standards.
    Minnesota Power urges Congress to take necessary remedial actions 
to correct the above-referenced imbalance in the administration of the 
Staggers Act. To that end, Minnesota Power supports H.R. 141, Surface 
Transportation Reform Act, S. 1103, Railroad Competition Act of 2001 
and S. 2245, Railroad Competition, Arbitration and Service Act. While 
each of these bills differs in their details, they all are intended to 
increase captive rail shippers' competitive options and to ease captive 
rail shippers' litigation burdens. These are important changes in the 
law that would preserve and enhance the goals Congress sought to 
achieve in the Staggers Act. Most importantly, they would restore a 
fair balance of shipper and carrier interests.

                                 * * *

    In conclusion, Minnesota Power would like to thank the 
Subcommittee, once again, for the opportunity to submit our written 
views for the record in this important hearing. Congress has an 
opportunity, and an obligation, to address the concerns of rail 
shippers and the millions of consumers who are paying more than they 
should for products that are transported by rail. Minnesota Power would 
be happy to provide any additional or supplemental information that the 
Subcommittee may need.
                                 ______
                                 
           Prepared Statement of Western Coal Traffic League
Mr. Chairman, Members of the Subcommittee:

    This statement is submitted on behalf of the Western Coal Traffic 
League (``WCTL'') to the Subcommittee on Surface Transportation and 
Merchant Marine on railroad rate, regulation, and competition issues. 
WCTL respectfully requests that this statement be included as part of 
the Subcommittee hearing record.
IDENTITY AND INTEREST OF WCTL
    WCTL is an association formed in 1976 whose membership is composed 
of shippers and receivers of coal mined west of the Mississippi River. 
A list of WCTL's current members is appended to this statement as 
Exhibit A. WCTL members ship by rail more than 95 million tons of 
western coal annually. Coal transportation issues are of great concern 
to WCTL because of the tremendous cost incurred by our members to 
purchase coal transportation, and because these expenditures must 
ultimately be paid by our members' customers as part of their monthly 
electric bills.
    WCTL has actively participated in matters before the STB (and its 
predecessor, the Interstate Commerce Commission (``ICC'')), the courts, 
and Congress involving coal transportation and coal supply issues, 
including the legislative deliberations that preceded Congress's 
enactment of the Staggers Rail Act of 1980 and the ICC Termination Act 
of 1995. WCTL participated in the STB's 1998 hearings in Ex Parte No. 
575, Review of Rail Access and Competition Issues, which were held at 
the request of the Senate Commerce Committee. WCTL also most recently 
submitted testimony to the Subcommittee in the spring of 1999, the last 
time the Subcommittee formally addressed the reauthorization of the 
STB.
WCTL POSITION ON RAILROAD RATE AND COMPETITION ISSUES
A. The Efficient Processing of Rate Reasonableness Cases is Vitally 
        Important

    Appearing before the Subcommittee today is WCTL President Mark 
Schwirtz, Chief Operating Officer and Senior Vice President of Arizona 
Electric Power Cooperative, Inc (``AEPCO''). In his testimony, Mr. 
Schwirtz discusses the serious delays occurring in the processing of 
AEPCO's rail rate case pending at the STB, and the need for the 
Subcommittee to implement appropriate oversight to ensure that the 
agency is keeping cases on schedule. This issue also is of critical 
interest to WCTL and its other members.
    Five rate cases involving WCTL members are currently pending at the 
STB, including Docket No. 42058, Arizona Electric Power Cooperative v. 
The Burlington Northern and Santa Fe Ry. and Union Pacific R.R. (the 
referenced AEPCO case); Docket No. 42056, Texas Municipal Power Agency 
v. The Burlington Northern and Santa Fe Ry.; Docket No. 42059, Northern 
States Power Company Minnesota D/B/A Xcel Energy v. Union Pacific R.R.; 
STB Docket No. 42057, Public Service Company of Colorado D/B/A Xcel 
Energy v. The Burlington Northern and Santa Fe Ry.; and Docket No. 
41191, West Texas Utils. Co. v. Burlington Northern Railroad Co.\1\ 
Several of the League's other members have been involved in earlier 
rate cases, and others may be involved in such cases in the future. 
Accordingly, the timely administrative processing and resolution of 
rate cases is very important to WCTL.
---------------------------------------------------------------------------
    \1\ Another rate case, Docket No. 42051, Wisconsin Power and Light 
Company v. Union Pacific R.R., (STB Decision served Sept. 13, 2002) was 
recently decided by the STB, and is on appeal in the District Columbia 
Circuit in No. 02-1198, Union Pacific Railroad Company v. Surface 
Transportation Board and United States of America.
---------------------------------------------------------------------------
    WCTL is supportive of the STB's existing Coal Rate Guidelines, 
under which its members' rate cases are being evaluated, as providing 
an appropriate legal and analytical framework for determining the 
reasonableness of rates charged for market-dominant rail movements. 
WCTL also believes that the STB is currently the most appropriate forum 
for deciding such complex cases. However, based on the excessive delay 
being experienced by AEPCO in the processing of its litigation, as 
detailed at length in Mr. Schwirtz's testimony, clearly something has 
run amuck in the administrative processing of its case.
    If the STB can decide major Class I railroad merger proceedings, 
involving hundreds of parties, in just over a one year time period, 
surely it should be able to decide rate cases in the 16-month period as 
provided under the law and the STB's governing regulations. As 
described by Mr. Schwirtz in his testimony, this is especially 
important to WCTL members with pending cases at the STB, as these 
companies and their ratepaying customers must pay the high level of 
rail rates being challenged while their cases are pending, and may only 
obtain refunds at the end of the proceeding. Such delays also create 
operational problems for companies in making important fuel procurement 
decisions, and may ultimately act as a disincentive for shippers to 
seek rate protection at the STB to remedy a railroad's violation of the 
law.
    Accordingly, WCTL encourages the Subcommittee to assist the STB to 
ensure that it has the sufficient staff personnel and resources to keep 
rate cases on schedule, and to monitor closely progress in handling 
these cases.

B. Rail Competition Issues

    WCTL has testified before this Subcommittee in the past on its 
belief that the STB has interpreted its regulatory authority in a 
manner that emphasizes the railroad industry's financial needs at the 
expense of allowing competitive forces to operate as Congress intended 
when it enacted the Staggers and ICC Termination Acts. WCTL 
reemphasizes that the Board simply has not done enough to ensure that 
shippers are protected from the loss of competition resulting from the 
recent wave of mergers and consolidations in the railroad industry and 
from the railroads' refusal to adequately compete. For these reasons, 
it is essential that Congress act to protect captive shippers from the 
increasing economic power of an increasingly concentrated rail 
industry.
    WCTL has participated with other shipper associations in the 
development of STB regulatory reform legislation, including S. 1103, 
the Railroad Competition Act of 2001 (sponsored by Subcommittee Members 
Rockefeller, Dorgan, and Burns) and S. 2245, the Railroad Competition, 
Arbitration and Service Act (sponsored by Senator Burns). WCTL has long 
recommended that the STB take several of the specific steps included in 
these bills to improve the competitive rail transportation options of 
rail shippers. This includes reconsideration and reversal of the 
Board's 1996 ``Bottleneck'' decision, and modification of the Board's 
``competitive access'' rules (involving reciprocal switching and joint 
use of terminal facilities) by eliminating the requirement that the 
shipper prove anti-competitive conduct on the part of the incumbent 
rail carrier. Thus far, the STB has refused to adopt these proposals, 
indicating that it is the Congress, and not the Board, that should 
consider whether changes in the Board's enabling statutes are 
warranted.
    WCTL understands that railroad competition issues are contentious, 
and that more than one option exists for dealing with the competitive 
problems in the rail industry. WCTL welcomes the opportunity to 
participate in a dialogue on these issues as a part of future 
substantive hearings on regulatory reform legislation, which it 
suggests the Subcommittee commence this coming Fall.
    WCTL greatly appreciates this opportunity to present our views to 
the Subcommittee and will be pleased to provide the Subcommittee with 
any additional information it may desire on any of the matters 
discussed in this statement.
                                 ______
                                 
Exhibit 1

                  WESTERN COAL TRAFFIC LEAGUE MEMBERS

    Alliant Energy
    Arizona Electric Power Cooperative, Inc.
    Associated Electric Cooperative, Inc.
    Central Louisiana Electric Company, Inc.
    City of Austin, Texas
    City Public Service Board of San Antonio
    Kansas City Power and Light Company
    Lower Colorado River Authority
    MidAmerican Energy Company
    Minnesota Power
    Nebraska Public Power District
    NRG Power Marketing Inc.
    Omaha Public Power District
    Reliant Energy
    Texas Municipal Power Agency
    Western Resources, Inc.
    Wisconsin Public Service Corporation
    Xcel Energy

                                  
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