[Senate Hearing 108-970]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 108-970

                    INTERCITY PASSENGER RAIL FINANCE

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 5, 2003

                               __________

    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 EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel
                                 ------                                

       SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE

                 KAY BAILEY HUTCHISON, Texas, Chairman
TED STEVENS, Alaska                  DANIEL K. INOUYE, Hawaii, Ranking
CONRAD BURNS, Montana                JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON H. SMITH, Oregon              RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
                                     FRANK R. LAUTENBERG, New Jersey















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 5, 2003.....................................     1
Statement of Senator Hollings....................................     2
    Prepared statement...........................................     3
Statement of Senator Hutchison...................................     1
Statement of Senator Lautenberg..................................     5
Statement of Senator Lott........................................    44
Statement of Senator Smith.......................................    47
    Prepared statement...........................................    47
Statement of Senator Wyden.......................................     7

                               Witnesses

Hall, Sonny, President, Transport Workers Union of America, AFL-
  CIO; President, Transportation Trades Department, AFL-CIO......    34
    Prepared statement...........................................    36
Hamberger, Edward R., President and Chief Executive Officer, 
  Association of American Railroads..............................    15
    Prepared statement...........................................    16
Morales, Jeff, Director, California Department of Transportation 
  (CALTRANS).....................................................    24
    Prepared statement...........................................    26
Query, James (Rocky), Senior Vice President, Lehman Brothers.....    39
    Prepared statement...........................................    42
Rutter, Hon. Allan, Administrator, Federal Railroad 
  Administration.................................................     9
    Prepared statement...........................................    11
Serlin, Robert, President, Rail Infrastructure Management, LLC...    30
    Prepared statement...........................................    31

                                Appendix

Capon, Ross B., Executive Director, National Association of 
  Railroad Passengers, prepared statement........................    55
Response to written questions submitted by Hon. Ernest F. 
  Hollings to:...................................................
    Allan Rutter.................................................    60
    Edward R. Hamberger..........................................    61
    Jeff Morales.................................................    64
    Robert Serlin................................................    67
    Sonny Hall...................................................    72
    James (Rocky) Query..........................................    73
Simpson, Thomas, Executive Director, Railway Supply Institute, 
  Inc., prepared statement.......................................    57

 
                    INTERCITY PASSENGER RAIL FINANCE

                              ----------                              


                         THURSDAY, JUNE 5, 2003

                               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 10 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Kay Bailey 
Hutchison, Chairman of the Subcommittee, presiding.

        OPENING STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Good morning. I'm very happy to see all 
of you. This is the second hearing that the Commerce Committee 
has had pertaining to Amtrak reauthorization and today the 
Subcommittee is going to examine the financing issues for 
intercity passenger rail. I support Amtrak. I believe we can 
have a viable national passenger rail system. Unfortunately, 
we're not realizing that goal. Outside the Northeast Corridor, 
trains seldom run on time and service is abysmal. Lateness is 
often measured in days, not hours. Several years ago, when 
airlines' on-time rate fell below 75 percent, it was considered 
a national emergency. At Amtrak, on-time records under 50 
percent are business as usual.
    Rail critics point to low ridership as the reason why we 
starve the national system. I contend that starvation is a big 
part of the reason for low ridership. In the Northeast, a 
passenger can board a train at Union Station and reasonably 
expect to be in New York City, about 225 miles away, in less 
than 3 hours. If one of my constituents buys a ticket from 
Austin to Forth Worth, a trip 38 miles shorter than D.C. to New 
York, the best she can expect is a ride of 4\1/2\ hours.
    The Texas Eagle meets its schedule 35 percent of the time, 
so we are going to try to improve service on the national 
system, but it will require creative thinking and innovative 
financing. We can't continue to fund Amtrak just enough to keep 
it going until the next crisis. What we must look at is private 
investment, state participation, and the cooperation of the 
freight railroads all being critical to achieving service 
upgrades. We will never have a better opportunity to accomplish 
this goal than now, in the reauthorization cycle. That is why I 
plan to introduce legislation to bring the national system up 
to Northeast Corridor standards.
    In Texas, most trains are forced to operate at less than 30 
miles per hour because of track conditions and freight 
operations. The national system needs at least $40 billion in 
capital improvements to allow both freight and passenger trains 
to meet a reasonable schedule. The Northeast Corridor requires 
approximately $10 billion to avoid an increased risk of 
accidents and a systemwide slowdown. Passenger rail should have 
the same commitment that we give to our highways and mass 
transit programs, and I believe Amtrak must meet these 
objectives to avoid deterioration of our rail system.
    Making this investment will include leveraging capital and 
that is what I think is going to be the key ingredient. 
Municipal bonding and private investment are necessary 
components of any plan to restore and improve rail 
infrastructure. Making the investment will upgrade freight 
operations throughout the country and improve passenger 
service. In exchange for investment in upgrading the tracks, 
the freights must agree to allow Amtrak to meet its schedule.
    I realize the critical role played by freight railroads in 
the American economy. I know this industry has seen better 
days. That is why I urge them to work with us to achieve a 
mutually beneficial solution. If we work together, freight 
railroads will enjoy capital improvements that they could not 
otherwise hope to afford as we secure the future of passenger 
rail in this country. It should be a win-win situation.
    I agree with Amtrak's critics that the railroad stewardship 
of the national system has been inadequate, and I was deeply 
disappointed to see Amtrak's proposed 5-year capital plan call 
for nearly all of its capital budget to be spent in the 
Northeast Corridor. The national system deserves more than the 
crumbs left over after the Northeast Corridor needs have been 
met. We must be required to have an 80 percent on-time arrival 
rate, and once that has happened, we think that it can fairly 
be evaluated from a cost-benefit perspective. If Amtrak is 
unable to meet this performance requirement on a route 80 
percent on-time delivery, that route should be open to other 
operators for bidding.
    We must decide whether we want to create a viable national 
system or settle for a single rail corridor providing ever-
deteriorating service to only one sector of the country. When 
President Eisenhower put the national highway system in place, 
he asked for the commitment of everyone for the entire system. 
That is what I think we should require for Amtrak today, not 
just the Northeast Corridor, but it will also be in the best 
interest of the Northeast Corridor if we have a full national 
system.
    Thank you, and I would like to now turn to the 
distinguished Ranking Member of the Committee, Senator 
Hollings.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Hollings. Thank you very much, Madam Chairman. Let 
me commend you on having this hearing, and particularly your 
leadership on this score. As you well know, we have before the 
Committee a bipartisan bill of authorization for Amtrak with 32 
co-sponsors, and we are delighted to yield to your leadership 
and work with you on fashioning your bill. Let's see if we can 
get something really done.
    Let me ask consent that I include my prepared statement. 
I'm sorry for the conflict. I have to go to another one.
    Senator Hutchison. Without objection.
    Senator Hollings. The frustration is that with this 
Administration, quite candidly, we keep meeting and we don't 
get anything from them. I don't know whether Mr. Rutter has a 
national plan for a national passenger rail system, but we will 
see and listen.
    I've been on this Committee now since we joined with 
Transportation, even before the Transportation assignment was 
given to us. We've got a dedicated system for air, we've got a 
dedicated funding for the highways, we've even got it for the 
Coast Guard, the inter-waterways system and everything else of 
that kind, but when we come to the rail, we go down off on this 
tangent of privatizing, and by reference, we don't have to 
print the book, let me ask that this ``Amtrak Privatization: 
The Route to Failure,'' by the Economic Policy Institute, be 
included.
    Senator Hutchison. Without objection.
    [The information previously referred to is retained in the 
Committee files.]
    Senator Hollings. I thank the Chairman. As you can see, 
we've tried privatization. In fact, when I was here, the 
private rails came to us and said, ``for Lord's sakes, take it. 
We'll give you the equipment and everything else. We can't run 
it.'' They'd had it in the early seventies and turned it back 
over to us.
    I have studied all of the Japanese, French, German, 
British, and other systems and if you can find me one that 
operates at a profit, I will be glad to adopt it. We can't find 
one. There isn't such a thing. The privatization, if you go to 
London, which I've just come through, there's complaint after 
complaint after complaint of everything being a disaster there, 
that so-called privatization. We can use private assistance of 
a combined effort, fine, but let's stop kidding ourselves and 
continue now.
    This has been now 2 years going on 3 years that we have 
danced around the fire. We've talked about a passenger rail 
system. Your leadership has really called for a national system 
that I believe in. Otherwise, the President has got an 
outstanding individual in Mr. Gunn, who's ready, willing, and 
able to run one. If we don't give him the assistance, rather 
than each year struggling to give him enough to keep up, repair 
the equipment or keep a few lines going and not knowing where 
he's going and everything else, someone of that caliber is just 
going to leave us.
    So we've reached a critical point here on the Committee and 
in the Congress for really providing for a national rail 
system, find out how we're going to get a dedicated support of 
funds for it, so I thank you, and yield.
    Thank you, ma'am.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    We are now facing a transportation crisis that is going to force us 
to decide how we are going to save passenger rail service in this 
country. Until now, we have been supporting our passenger rail system 
with piecemeal legislation that year after year provided money for 
Amtrak to survive but never thrive. The last time we reauthorized 
Amtrak, in 1997, the legislation did nothing to strengthen passenger 
rail but outlined a self-fulfilling prophecy for Amtrak's critics to 
use against the passenger railroad. We agreed to language requiring 
Amtrak to be profitable, imposing a business model on a public service. 
The business model is is not appropriate for transportation services, 
which is essentially a government function. Yesterday, the Economic 
Policy Institute issued an insightful analysis of Amtrak privatization, 
written by Professor Elliott Sclar of Columbia University, which I 
would like to provide for the record.
    Now, we hear a lot about how Amtrak's problems come from years of 
mismanagement, corporate inefficiencies and poor routing. But Amtrak's 
problems were not created by mismanagement, inefficiencies, and bad 
routes. They were created by us and our lack of commitment to properly 
invest in Amtrak's infrastructure and a whole transportation system so 
vital to our country. David Gunn has worked wonders to cut costs, 
eliminate waste, and improve Amtrak's credibility. But even if he finds 
a way to manage the railroad without wasting so much as a paper clip, 
he cannot perform enough miracles to make Amtrak live up to its 
potential until passenger rail receives strong Federal support and 
steady infrastructure funding.
    I understand that we are not here today to talk about Amtrak in 
particular. We are here to talk about how we are going to pay for 
intercity passenger rail travel. But whether it is Amtrak or some other 
intercity passenger rail operation, the issue is the same. Our 
passenger rail system needs two things. The second thing it needs is 
long-term planning, because it is only through a long-term planned 
funding stream that we will be able to get it the first thing it needs, 
which is money.
    In the past 50 years, we have given strong Federal leadership and 
extensive funding to develop our interstate highway system and our 
aviation system. Between 1971 and 2001, we invested over $570 billion 
of Federal funding in our highways and in our aviation system. At the 
same time, we spent a mere $25 million on passenger rail. In fact, the 
amount of funding that only the aviation industry has received during 
the last two Fiscal Years is almost double the funding that has been 
invested in passenger rail over the last 30 years. Why, then, is 
everyone so surprised and dismayed that Amtrak is in a deep financial 
crisis? If passenger rail is to succeed, it must be a real Federal 
priority. We must invest in the development of its infrastructure using 
Federal dollars to support both capital and operating needs like we 
have done in the other modes of transportation.
    High speed passenger rail has proven to be effective between 
Washington, D.C. and Boston where Amtrak's Northeast Corridor relieves 
the pressures of congestion on highways and at airports, and provides a 
more balanced system of transportation alternatives. In fact, as many 
people choose to take the train as the plane between New York City and 
Washington, D.C., and the majority of travelers between Washington and 
Philadelphia choose the train over flying (83 percent v. 17 percent).
    Passenger rail also provides security through transportation 
alternatives. Of course, we all know the great service Amtrak was able 
to provide for the Northeast Corridor after September 11 when airports 
were closed (and remember, National Airport was closed for weeks) and 
American travelers in the East were desperate for an alternate means of 
transportation. We need to determine how we should invest in our 
passenger rail infrastructure in the Northeast and then duplicate its 
success in the rest of the country.
    For our passenger rail system, we have neglected to furnish a long 
term, stable funding source like we did for aviation, highways and 
transit systems. Without a major Federal commitment, national passenger 
rail service will be a thing of the past. Congress is being presented 
with a number of ideas for financing rail passenger service in the 
future. There are tax credit bonds, tax credits, a rail trust fund, and 
loan guarantees. In the last Congress, I introduced the National 
Defense Rail Act, S. 1991, which received the approval of this 
Committee in a vote of 20 to 3. I have re-introduced The National 
Defense Rail Act, S. 104, in this Congress with bi-partisan support of 
more than 30 cosponsors. This legislation provides for the development 
of high-speed rail corridors, which are the building blocks of a 
national passenger rail system, and it fully funds Amtrak operations. 
My legislation would be funded through general revenues, but I am 
interested in working with Chairman Hutchison on how we might provides 
long term financing for a national high speed rail system.
    There are those who argue that we can best achieve success if we 
restructure our passenger rail system through privatization. 
Privatization initiatives used in other countries are often touted as 
holding the secret to Amtrak's future success. However, we must not be 
led to believe that the privatization of Amtrak will decrease the 
Federal cost of passenger rail. Many countries in Europe and in the 
Pacific Rim have highly successful and effective passenger rail 
systems. But every first-rate passenger rail system in the world--
whether it is public, private or something in between--has been 
expensive to build and to maintain. Those countries with first-rate 
passenger rail systems have them because they have chosen to invest the 
funds necessary to build them and run them. We must carefully examine 
any privatization proposal that tends to show we can save and even 
strengthen our passenger rail system ``on the cheap.'' We must ensure 
that any privatization scheme does not exacerbate the already delicate 
financial condition of passenger rail in this country, or worse, do so 
at an unacceptable cost to safety and service, as our friends in 
Britain have unfortunately experienced. After it was privatized, 
British Rail experienced tragic accidents, insolvency, and increased 
public subsidies, all the while private investors received returns on 
their investments in the failing rail operation.
    The time is now for the Congress to take strong leadership in 
preserving and expanding our passenger rail infrastructure, just like 
it nurtures our interstate highway system, our aviation system, and our 
transit systems with constant and sufficient funding. We have a world-
class highway system, a world-class aviation system, and we are 
investing steadily in developing world-class transit systems for our 
cities. It is time for us to commit to having a world-class passenger 
rail system.

    Senator Hutchison. Well, I certainly thank you for the 
interest that you have had and the commitment that you have had 
to Amtrak, and I do hope we can fashion a financing bill such 
as mine that will create the leverage needed to really have 
tracks that can work, or alleviate the freight railroads' 
problems of having Amtrak on their tracks, so I thank you for 
your interest, and hope that you will work with me on the 
legislation that combines everything with reauthorization.
    Senator Lautenberg.

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thank you, Madam Chairman. That wording 
always bothers me, but I don't know what else to call you 
except ``friend,'' so thank you, Madam Chairman.
    I appreciate the fact that we're holding this hearing 
today, and I believe that the single most important task for 
this Subcommittee this year is to address the passenger rail 
needs of our country. For too long, the Federal Government has 
been sitting idly by as a chronically underfunded national rail 
system has slowly deteriorated.
    The last passenger rail reauthorization mandate from this 
Committee to Amtrak in 1997 was simply unrealistic, and Amtrak 
was asked to do something that no railroad in the world does, 
as Senator Hollings has just said--operate at a profit. And I 
believe in American innovation, but we've never given Amtrak 
the proper tools to perform such a miracle, and I've said it in 
the past, and I will say again, I believe passenger rail is a 
vital component in the transportation system of this country, 
and I, too, Madam Chairman, would hope that we could bring rail 
service to other parts of the country. Obviously, coming from 
New Jersey, the Northeast Corridor sits right in front of my 
office all the time, and the volume of traffic that's carried 
and the congestion that otherwise ensues begs for an investment 
of serious proportion, but for too long, Lilliputian thinking 
has prevented us from truly making a meaningful investment when 
it comes to interests in rail.
    The Administration's SAFETEA proposal continues its theme 
by not addressing passenger rail infrastructure. Unless their 
forthcoming proposal on Amtrak contains real money to address 
real service needs, the traveling public will continue to lose 
out. The public pays for this neglect, by the way. $72 billion 
a year is the cost of highway congestion, measured in wasted 
fuel, wasted time, according to the Texas Transportation 
Institute, and that was in 1999.
    The importance of rail service became apparent in the 
Northeast long ago as we dealt with the myriad transportation 
planning and congestion issues that many other states are just 
now facing. These states are joining us Northeasterners in 
looking to the Federal Government to provide leadership needed 
to ensure that passenger rail is made a priority in our 
transportation system.
    Some claim that privatization is the answer to Amtrak's 
problems, but I think Senator Hollings adequately handled it. 
The birth of Amtrak came from private hands, and there is still 
this notion that the private sector can do things cheaper and 
more efficiently. Well, I spent more than 30 years in the 
private sector, and I'm aware of what wonderful things can be 
accomplished, but talk of privatizing rail passenger service is 
simply putting the cart before the horse. Without sufficient 
infrastructure no railroad, including Amtrak, can sustain.
    Have we learned nothing from other developed countries, 
Great Britain, Argentina, Australia, and Mexico? These 
countries, looking for cheap solutions for passenger rail 
service, paid more in the end. Japan and Germany, France and 
Sweden, those countries that invested in the necessary 
passenger rail infrastructure now have world-class systems, and 
those systems have paid dividends to their societies in ways 
that we can't even begin to imagine.
    Here in our country, the private sector was eager to rid 
itself of passenger rail service in 1970. That's why we have 
Amtrak. The Federal Government bailed out the freight railroads 
because they couldn't provide passenger, or didn't want to 
provide passenger rail service and make a profit doing it, and 
I haven't heard any of the freight railroads banging down the 
door of the Department of Transportation asking to be able to 
run trains again. They couldn't make money doing it 30 years 
ago. They still can't today.
    Railroads are highly complex operations. Running a railroad 
safely and efficiently costs money, but we have to realize this 
isn't going to change. The Federal Government needs to step up, 
take charge with a strong program to support passenger rail 
service. The states are interested, the traveling public is 
interested, and we risk paying more if we wait until another 
time when we have no other choice, no other choice, I point 
that out, but to invest.
    And all we have to do is look back to 9/11 and remember 
that horrible day and the consequences of that attack, but we 
have to remember that Amtrak was the only means of 
transportation between Washington and New York that was 
available that day. It was tragedy upon tragedy, people 
separated from their families, people doing important work to 
come from Washington and help solve the problem, there was no 
other way to get there. You could try it on the highway, but 
the chances of getting through were almost nil.
    So we have to remember that rail service is an important 
aspect of our transportation system, and you cannot avoid it, 
and when we wake up to the fact one of these days, and I hope 
it isn't a tragedy that brings us to the point, but one of 
these days we're going to look back and say why didn't we, when 
we had a chance to build a railroad that made sense at prices a 
heck of a lot less than they're going to cost years from now. 
We ought to get on with the task, and I look forward to hearing 
from our witnesses. Thank you, Madam Chairman, for indulging 
us.
    Senator Hutchison. Thank you, Senator Lautenberg, for your 
long-time support of Amtrak. Of course, you're vitally affected 
in the Northeast Corridor, but you've always helped look at a 
full national system, which I think is going to be essential 
for all of us, and except for having a very bad basketball 
team, you're very good on Amtrak issues.
    [Laughter.]
    Senator Lautenberg. I take back all of the nice things I 
said.
    [Laughter.]
    Senator Hutchison. One to zero.
    [Laughter.]
    Senator Hutchison. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Madam Chair, and having gone to 
school on a basketball scholarship, I'm not going to touch this 
basketball brawl, but I will say I'm very much looking forward 
to working with you, Madam Chair, on these issues. You have 
been just exceptionally helpful over the years as we have tried 
to come up with a plan for a nationwide system. It's very clear 
that people in this country, particularly in Texas and Oregon 
and other areas, don't want our communities to become 
transportation sacrifice zones where we see significant amounts 
of transportation dollars paid into the system and then get 
very little service in return, and you have really been a 
coalition-builder. I'm looking forward to working with you and 
our good friend from New Jersey as well.
    It's pretty clear, Madam Chair, that the country suffers 
from a chronic transportation deficit disorder, and I am of the 
view that it really threatens to paralyze our transportation 
system and our economy. What we've got to do is come up with a 
way to provide a transfusion of new funds to reverse this 
trend. Amtrak is going to need billions of dollars--$2 billion 
per year--certainly a big increase from the $721 million.
    The list goes on and on with respect to transportation 
needs. I've come to the conclusion that a real premium, Madam 
Chair, ought to be put on coming up with new, creative ideas to 
come up with additional revenue for transportation. Senator Jim 
Talent and I have found one, we believe, and I'm just going to 
discuss it briefly, but I'm anxious to work with you and 
Senator Lautenberg in the days ahead.
    What Senator Talent and I have introduced in the last few 
weeks is a program to issue $50 billion worth of bonds that 
would fund transportation projects in all modes of 
transportation, including rail, highway, transit, airport and 
waterway infrastructure. Under the Talent-Wyden legislation 
what we would issue are Build America bonds so that we could 
get the American people involved in building our 
infrastructure.
    I see, for example, our kids, and I know you have a 
youngster as well as I do, getting involved in our country's 
future when their parents and their grandparents give them a 
Build America bond that would be part of an effort to generate 
some additional money for transportation needs in our country. 
As I got involved with Senator Talent in this area, one of the 
things that I was struck by is that the Federal Government is 
about the only governmental entity on the planet that really 
isn't using a bonding capability in a creative way.
    We issue bond for state governments, we issue bonds for 
local governments, we issue all kinds of bonds, other than the 
Federal Government playing an activist role in the 
transportation area. At a time when we have these huge needs 
for capital investment I see America, the Build America bonds 
providing a significant chunk of additional money on top of 
what is already out there in a way that I think the private 
sector and the bond market will react well to, and will also 
give us a chance to involve every citizen of this country in a 
way to help bring about the positive changes that our 
transportation system needs.
    So I intend to ask some of our witnesses, some of whom 
already have been meeting with Senator Talent and myself about 
this issue, what they think, but I did want to discuss it just 
briefly this morning. I look forward to working with you and 
Senator Lautenberg on it. We've had an awful lot of battles 
over the years between regions, between modes of 
transportation. This is something that can bring different 
parts of the country together. It is consistent with the view 
that you and I have talked about that we need a national 
transportation system.
    It is bipartisan. We've gotten good reactions so far from 
business groups, labor groups, groups across the philosophical 
spectrum, and I look forward to working with you on it.
    Senator Hutchison. Well, thank you, Senator Wyden. I do 
think we need the leverage of public financing. Just straight 
cash outlays are not going to be enough, and I would love for 
you and Senator Lautenberg and Senator Talent to look at the 
bill that I have drafted that also has $50 billion of financing 
backed with the rail tax that is already in place--4.3 cents--
and Mr. Hamberger will have a few things to say about that, but 
it is a tax that is in place, and we believe that by leaving it 
there and having that be the backup for the revenue bonds or 
the municipal bonds that we would then be able to sell them 
easily and leverage that money, and give back to the railroads 
better trackage and perhaps get Amtrak out of their hair in 
some places, which they would also think is positive, so I 
think we have a lot of ideas, and I think the time is here for 
bold ideas.
    No longer do any of us want to continue to have Amtrak 
coming to Congress at the very last minute trying to get in 
supplemental appropriations and just living shoestring to 
shoestring. We need to fix this in a way that gives the 
capability to succeed, and that's what I would like to do as 
Chairman of this Subcommittee.
    With that, let me call on our first witness, and we want to 
hear fully from you. We will have a 5-minute light. If you can 
stay within that, it would be good, but certainly we have taken 
time, and we want to hear fully from you, so Mr. Allan Rutter, 
who is the Federal Rail Administrator.

STATEMENT OF HON. ALLAN RUTTER, ADMINISTRATOR, FEDERAL RAILROAD 
                         ADMINISTRATION

    Mr. Rutter. Thank you, Madam Chairman. As one UT graduate 
to another, I appreciate the invitation to appear before your 
Subcommittee this morning. I've submitted written testimony, 
and I ask----
    Senator Hutchison. Does this mean that you agree with me 
about Senator Lautenberg's team?
    [Laughter.]
    Mr. Rutter. Well, the team I was cheering for last night 
was not the Nets, let's just put it that way. I've submitted--
actually let me rephrase that. Yes, absolutely.
    [Laughter.]
    Mr. Rutter. I'm not really sure why I missed that one. I 
will ask the testimony we have submitted already be entered 
into the record. Before responding to questions about that 
testimony, let me say a few things about the purpose of this 
hearing and our vision at the Administration for the future of 
intercity passenger rail.
    First, any discussion about funds for intercity passenger 
rail inevitably gets to the question, why don't we have 
dedicated funding for rail when we have it for other modes? Why 
shouldn't rail have funding that's above the vagaries of the 
annual appropriations process? I think it might be instructive 
to spend a minute reviewing the circumstances that previous 
Congresses were responding to in creating dedicated funding 
sources.
    In 1956, with the creation of the interstate highway system 
and the highway trust fund, Congress was considering how to 
accommodate 76 million licensed drivers who were generating 631 
million vehicle miles. As a comparison, in 2002, Amtrak 
provided 368 million vehicle miles.
    In 1970, Congress created the aviation trust fund because 
there were 169 million commercial airline enplanements, 2 
billion vehicle revenue miles, and 108 billion passenger miles. 
In 2002, Amtrak generated 5.4 billion passenger miles.
    And in 1982, when public transit got its first dedicated 
penny into the mass transit account, there were 8 billion 
unlinked passenger trips. In 2002, Amtrak ridership was 23 
million.
    I think the relative scope of those transportation services 
explains why there might not have been a dedicated source of 
passenger rail funding to date, and we all need to also 
remember the trust funds themselves do not necessarily 
guarantee against year-to-year fluctuations. Highway funding is 
in flux due to the changing revenue-aligned budget authority 
that has proved unpredictable. Aviation trust funds are 
dwindling as incoming passenger tax revenues have contracted, 
just as commercial aviation has struggled.
    We're wrestling and struggling with the same facts that 
have led you to hold this hearing. Where is the money going to 
come from for passenger rail?
    As for a rail trust fund, not only would the current level 
of passenger traffic probably not support a trust fund for 
passenger rail, taxing freight railroads to create a trust fund 
frankly would exacerbate the competitive disadvantage railroads 
already face relative to motor carriers, and a rail shipment 
tax would likewise lead to a seismic shift in modal shares of 
total freight volumes which not only will leave railroads in 
dire financial shape, but could result in even more highway 
congestion as more trucks hit the roads.
    Well, what about bonds, or TIFEA, or even our own RRIF 
program? All of these mechanisms require repayment of principal 
and some level of interest. Few passenger rail operations, 
current or planned, will generate sufficient operating revenues 
to support debt repayment on top of operating and maintenance 
cost. Tax credit bonds are appealing to just about everybody 
but the folks responsible for the Federal Treasury, as the 
Treasury bears a disproportionate share of the cost of that 
kind of debt.
    What you're left with is general funds and annual 
appropriations, and frankly, each additional billion dollars 
for passenger rail has to come out of another Federal 
transportation program to fit within those budget allocations, 
a very tough choice for Congress to make. As more money within 
the transportation budget goes to passenger rail, whose airport 
won't get expanded, what highway projects won't get built, and 
whose transit property will wait for a new light-rail line?
    If money is that tight, and the choices of those modes are 
so dear, we believe we should invest some energy into getting 
more out of the money we spend, or want to consider spending. 
We're the first Administration in decades willing to propose a 
fundamentally new structure for delivering passenger rail. We 
are proposing a completely new program for Federal and State 
capital for passenger rail projects. We've heard from a number 
of states that we've been talking to as we're completing our 
legislation that 50 percent Federal capital dollars is better 
than what they have now, which is zero percent.
    We're proposing a capital partnership that offers the 
potential for multiyear capital projects that makes States' 
dollars go farther. We want to invest those dollars in a 
national passenger rail program that offers incentives for 
better choices. We want to offer Federal and State lawmakers 
more accurate information about what current services actually 
cost, how to control those costs, and what kinds of investments 
would be necessary to reduce operating subsidies of those 
services and provide higher quality service.
    We foresee a system that encourages choices for services 
that take people where they want to go when they want to get 
there using better technologies, operating newer equipment with 
higher reliability and more frequency. We see a system that 
maximizes the talents and contributions of the thousands of 
Amtrak employees that know how to operate, maintain, and staff 
passenger trains, and they'll be doing that regardless of the 
organizational structure chosen.
    Six years ago, the FRA produced an examination of the 
commercial potential for better passenger rail services and it 
outlined the circumstances under which travelers could choose 
passenger rail. Now, when we consider traveler's choices among 
modes now, much has changed since then. Rural highways are 
experiencing double digit increases in motor carrier volumes 
which makes long distance driving more difficult. Air quality 
conformity problems mean that many urban areas cannot make the 
kinds of highway investments that might lead to reduced urban 
congestion. Security considerations and a contracting aviation 
industry means that air travel takes longer, may cost more, or 
just not be available.
    All of this means that passenger rail has the potential and 
the possibility for competing better among travelers' modal 
choices in a number of major intercity markets. We want to 
create a system that offers a more competitive, higher quality 
passenger rail product. As we struggle with where to find the 
money, let's not lose sight of what better system that money 
could be used to produce.
    Thank you.
    [The prepared statement of Mr. Rutter follows:]

          Prepared Statement of Allan Rutter, Administrator, 
                    Federal Railroad Administration
    Chairman Hutchison and members of the Subcommittee, I appreciate 
this opportunity to appear before you today to discuss rail finance, 
focusing on equipment and infrastructure investments for intercity 
passenger rail service. I will be brief.
    In order to discuss rail finance, the Administration has focused on 
two questions that first must be answered: what intercity rail 
passenger service should America have and who decides this type of 
service? The answers to these questions strongly affect the answer to 
the question of how to finance intercity passenger rail service in this 
country.
    The present Amtrak route system has changed little over Amtrak's 
thirty years of existence, seemingly locked in place by history and 
politics. That is starkly anomalous in America's transportation system. 
What other transportation company or mode of travel has changed its 
routes and service so little in the last thirty years? Most 
transportation providers have changed their systems dramatically over 
that time span in response to changes in travel patterns driven by 
economics and demographics. If Amtrak's system were not so ossified, 
perhaps Amtrak would serve more passengers today than it did thirty 
years ago. It appears that moving decision-making on routes and service 
closer to the customers would be a very good thing.
    This observation appears to be borne out wherever states have taken 
a strong role in determining what routes will be operated to serve 
their citizens, what kind of equipment should be used, what kind of 
service should be provided, and on what schedule. The states of 
California, North Carolina, and Washington are all excellent examples 
of states stepping up to the plate and meeting this challenge, paying 
for what they want above and beyond what Amtrak would otherwise 
provide, and getting noticeably better rail service for their citizens 
as a result. Citizens have responded to those investments: three 
California state-supported routes have attracted 2.35 million riders in 
the first seven months of this Fiscal Year, almost 44 percent of the 
total ridership for the same period on the Northeast Corridor Acela, 
Metroliner and Regional services.
    The Administration proposes to build on the examples set by these 
states to reform and strengthen the Federal role in passenger rail to 
mirror much more closely the current Federal program supporting mass 
transit. The Federal Government would continue to define rail safety 
standards and enforce them. The Department of Transportation would 
provide capital grants directly to states and interstate consortia of 
states that want passenger rail. State government agencies would 
determine the level of passenger services needed and the price for such 
service, and contract with third-party operators to provide long-
distance and corridor trains. The same program would apply to legacy 
long distance routes, current and new corridor services--at higher 
speeds or not. To the extent that states' service choices require 
operating subsidies, state governments would be required to provide 
that subsidy.
    It is possible that in the early part of the authorization cycle, 
the Federal Government would provide limited subsidies for corridor and 
long distance trains, and fund the capital backlog for certain 
passenger rail projects. By the end of the authorization cycle, 
however, state governments would be responsible for at least 50 percent 
of needed capital investment for all intercity passenger rail service--
similar to Federal capital investments in the Federal Transit 
Administration's ``New Starts'' program. Similarly, by the end of the 
authorization period all rail operational costs will be borne by riders 
or states or state rail consortiums.
    We believe this an appropriate division of state and Federal 
transportation responsibilities. It reflects the way the Federal 
Government handles other transportation programs. After an appropriate 
transition period, only services states are willing to pay for would be 
continued.
    Like other Federal programs that invest in transportation, 
intercity passenger rail service would require careful thought and 
planning up front before either the states or the Federal Government 
make significant investments. Intercity passenger rail service should 
be part of state transportation plans already required by Federal 
surface transportation legislation. Careful passenger rail planning 
should go a long way toward overcoming the long-term problem that our 
modes of intercity passenger transportation, which were conceived 
independently for the most part, do not interrelate well. States, 
however, have a powerful interest in enabling their citizens to 
navigate our transportation system seamlessly. The states that do so 
stand to reap considerable economic advantages, such as being more 
attractive as a location for businesses. A sound planning process 
should also help make sure that intercity passenger rail service goes 
where people want to travel, when they want to go, and at an 
appropriate price.
    This may result, for example, in a lot more attention being paid to 
some of the submarkets along long distance routes, instead of the 
points of origin and of final destination for these routes. As I 
understand it, on many long-distance routes few passengers travel the 
entire length of the route. Instead, most passengers start and stop at 
intermediate points along the way. It would make sense for a state or 
two neighboring states having a submarket that attracts a lot of 
passengers to want more service on that part of the longer route and to 
invest accordingly. North Carolina is doing that between Charlotte and 
Raleigh. Oregon and Washington are doing that between Eugene, Portland, 
Seattle and Vancouver, British Columbia. Those states are reaping 
significant benefits from doing that and we should help them.
    In many places, states may decide that it is more important to have 
fast, frequent, timely, and reliable service in relatively short 
corridors that have a lot of business travel. In such corridors, rail 
can compete effectively with air and highway for business travelers. 
The Northeast Corridor, where Amtrak is the dominant carrier, is the 
best illustration of that prospect. Especially where airports and 
highways are already overcrowded and land is so scarce that it will be 
hard to build more airports or highways, it is especially important to 
make full use of existing rail capacity. Since states will be making 
the key decisions about whether to build additional airports or 
highways, it makes sense to have them make key decisions about 
passenger rail service and if it should be expanded, reduced, or 
eliminated altogether. Then the states can comprehensively plan the 
best ways to get their citizens from one place to another without 
needless constraints on modal choice.
    Another part of effective planning for transportation systems is 
compliance with environmental laws. Before major Federal funding 
decisions can be made, without regard to the type of funding used, 
assessments of environmental impacts must be completed, environmental 
impact statements or findings of no significant impact prepared, and 
all necessary permits obtained. State governments are very familiar 
with these processes and have learned to negotiate them successfully. 
They can be expected to handle compliance with the environmental laws 
as quickly and efficiently as it can be done. California, North 
Carolina and Virginia, and Florida are doing that very effectively 
right now for the additional rail service they are seeking with higher 
speed rail projects.
    Thorough planning also involves thorough discussions and 
negotiations with the freight railroads which own the rights-of-way and 
tracks over which most of the Nation's current and future passenger 
rail services operate outside the Northeast Corridor. Passenger rail 
services pose significant operational challenges for freight railroads, 
and expansions of current services or new service on intercity 
corridors should not impair the current capacity for carrying freight, 
lest such investments will lead to increased congestion of our highways 
by more trucks. Better yet, states considering passenger rail 
investments should make capacity improvements that benefit both 
passenger and freight users to maximize the congestion relief afforded 
by the projects. Policymakers may need to decide whether the current 
pricing mechanisms of passenger rail access at incremental costs will 
lead to the most efficient use of public and private infrastructure 
assets.
    Of course, it is also important to provide funding for intercity 
passenger rail service in a way that best assures that the taxpayers 
get their money's worth. The standard grant agreement relationship used 
by the Federal Government to provide most financial assistance affords 
reasonable controls on and accountability by recipients. Properly used, 
grant agreements make clear what the public will get, when the public 
will get it, and what it will cost. Reasonable and workable financial 
controls are used. All aspects of the program are ``in the sunshine'' 
and audited. This is a prudent means of seeing that Federal funds are 
well spent and produce the benefits intended by the Administration and 
Congress. This kind of thorough financial planning is also mirrored in 
proposals in the Administration's surface transportation 
reauthorization (``SAFETEA,'' mentioned below), in which states are 
required to develop financial plans for Title 23 projects over $100 
million.
    This Administration has a strong record of support for innovative 
financing for surface transportation projects, as the recently 
introduced Safe, Accountable, Flexible, and Efficient Transportation 
Equity Act (``SAFETEA'') reauthorization proposal demonstrates. The 
Transportation Infrastructure Finance and Innovation Act (TIFIA) 
established a Federal credit assistance program that is already 
available for intercity rail projects. SAFETEA proposes to expand the 
use of TIFIA credit assistance by broadening eligibilities to include 
private freight rail facilities and reducing the project size threshold 
for TIFIA projects to $50 million from $100 million. States would be 
allowed to impose user charges on federal-aid highways, including the 
Interstate System, provided that such charges were part of a program to 
relieve congestion and/or improve air quality. Transportation projects 
(highway facilities and surface freight transfer facilities) will be 
eligible for tax-exempt private activity bonds, exempted from a state's 
private activity ceilings, encouraging private operation of 
transportation projects. States will be given more freedom to use 
innovative project delivery methods such as design/build, which are 
often a key in setting fixed prices for projects to attract private 
investment.
    One of the common threads in most innovative financing mechanisms 
for surface modes--state revenue bonds, toll roads, TIFIA, Grant 
Anticipation Revenue Vehicles--is that most of these financial 
instruments require repayment. Debt instruments used for transit and 
road construction either pledge dedicated tax revenues, dependable 
funding streams from Federal or state programs, or reasonably expected 
revenues from transportation facility users.
    Various kinds of debt instruments are proposed from time to time to 
fund intercity passenger rail service. The Administration does not 
think dedicated debt instruments are suitable for this purpose. Unlike 
most other transportation debt financing mentioned above, intercity 
passenger rail does not generate adequate cash flows to service 
significant additional debt, nor is it supported by reasonably 
anticipated, long-term dedicated funding streams from the Federal 
Government. We believe that there may be corridors in which passenger 
rail services can cover costs of operations and maintenance, but few 
corridors will generate revenues sufficient to provide adequate 
coverage beyond operating and maintenance expenses to repay interest 
and principal of debt raised for project capital costs.
    Let me also speak in general terms about tax credit bond financing, 
even though such matters are not our agency's primary responsibility 
(and such matters are considered by tax-writing committees in the 
Congress). As an example of the concept, you may wish to learn more 
about Qualified Zone Academy Bonds http://www.ed.gov/offices/OESE/SST/
qzab.html), a program that offers limited amounts of tax credit bonds 
for equipment and rehabilitation of schools in empowerment zones and 
enterprise communities or schools serving a student population of which 
at least 35 percent are eligible for free or reduced-cost lunches. 
These are the only form of tax credit bond currently allowed. This 
program, by limiting the total term of the bonds, currently to fifteen 
years, roughly splits the cost of a qualifying project in half. The 
Federal Government pays the interest (through tax credits) and the 
local school district repays the principal. (As you can see, this equal 
sharing of financial exposure is similar to the kind of financial 
participation we contemplate in a federal/state capital partnership for 
intercity passenger rail). The total size of the Qualified Zone Academy 
Bond program is limited to $400 million per year in new issues, and 
only certain qualified buyers can purchase these bonds (lending 
institutions such as banks and insurance companies). These provisions 
limit the administrative complications and costs to the Treasury of 
these financial instruments.
    If larger amounts of tax credit bonds are issued, the permitted 
holders of these bonds would likely have to be expanded to include, for 
example, individuals and mutual funds, thus making them much more 
complex and increasing the administrative burdens placed on the 
Internal Revenue Service. If longer terms of maturity are considered 
for intercity passenger rail purposes, then the overall exposure of the 
Treasury is increased relative to any matching funds from passenger 
revenues or state participation. If the tax credit debt is issued in an 
amount that not only covers capital costs but is also used to create 
sinking funds from which principal is eventually repaid as interest 
accrues in the sinking fund then the Treasury is effectively footing 
the entire bill for the capital costs. Further, because there is very 
little liquidity in the market for these bonds the market would impose 
a significant premium, thereby reducing the amount of actual funding 
and raising the effective costs to the taxpayers of using this funding 
mechanism compared to more traditional means. For these reasons, the 
Administration would oppose such a financing mechanism for intercity 
passenger rail.
    Before Congress considers more debt for intercity passenger rail, 
Congress should consider the difficulty Amtrak is having with the 
enormous debt it has already incurred. Amtrak's total debt grew from 
$1.7 billion in 1997 to $4.8 billion in 2002. Figure 1 illustrates the 
growth in Amtrak's total debt.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Because of this increased debt, naturally Amtrak's annual debt 
service has grown substantially, adding a large up-front cost to its 
business plan. Annual debt service requirements (principal and 
interest) are forecasted to be $278 million in FY 2004 (up from $111 
million in 1997). This means that debt service will consume over 15 
percent of Amtrak's requested FY 2004 appropriation of $1.8 billion. 
Amtrak's accumulated debt is a significant burden weighing down future 
passenger rail development. The FRA is not surprised by this massive 
debt and calls for its accelerated retirement. In 1983, Amtrak was 
unable to pay the debt service on $880 million in loans guaranteed by 
the Government under section 602 of the Rail Passenger Service Act. FRA 
paid $1.119 billion to honor its guarantee of principal and interest on 
Amtrak's debt, and in return the Federal Government was given a lien on 
Amtrak's assets and given $1.119 billion of preferred plus to one share 
of preferred stock for each dollar of future financial assistance given 
to Amtrak. That preferred stock has a par value of $10 billion. So you 
can see that our past experiences with passenger rail debt, necessarily 
colors our current view that future financing for passenger rail 
depends on shaky promises of project revenues or future funding 
dependability.
    That is not to say that we are opposed to the involvement of the 
private sector in passenger rail development, either in service 
delivery or financial participation. Indeed, earlier testimony before 
this committee demonstrated our confidence in the ability of the 
private sector to become involved in a number of ways in providing 
passenger rail services to state governments. We are convinced that the 
private sector may be interested in pursuing commercial applications 
along the Northeast Corridor, and such commercial uses may provide 
income streams for future corridor capital projects. Yet, we have 
listened to many commuter rail agencies and freight railroads that use 
the Northeast Corridor and the states that support such operations, and 
they have cautioned us against private ownership and control of the 
Corridor. We are taking these comments and concerns under consideration 
as we continue drafting reauthorization legislation for the national 
passenger rail system.
    Thank you again for the opportunity to appear before this 
committee. I will be happy to answer any questions you may have.

    Senator Hutchison. Thank you very much. Mr. Ed Hamberger, 
representing the Association of American Railroads.

STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT AND CHIEF EXECUTIVE 
           OFFICER, ASSOCIATION OF AMERICAN RAILROADS

    Mr. Hamberger. Thank you, Madam Chair. On behalf of the 
AAR, I am grateful for the opportunity to present freight 
railroads' views concerning passenger railroading and the ways 
to finance it. At the outset, let me emphasize that freight 
railroads agree that passenger rail can play a role in 
alleviating highway and airport congestion, decreasing 
dependence on foreign oil, reducing pollution, and enhancing 
mobility and safety.
    At the same time, it is important for policymakers to 
remember that our freight rail system is a tremendous national 
asset that moves more freight more efficiently and at lower 
rates than any other system in the world. Freight railroads are 
responsible for moving 42 percent of our Nation's intercity 
freight goods, and therefore freight railroad already plays a 
key role in congestion mitigation by taking trucks off the 
highway, improving air quality, and saving energy, because we 
are, according to Government studies, at least three times more 
fuel efficient and environmentally friendly than our friends in 
the trucking industry, so policymakers must find a way to 
provide the passenger rail service that America wants and needs 
without placing operational or financial burdens on the freight 
rail system. In other words, to improve passenger rail at the 
expense of freight rail will not accomplish the laudable goals 
that this Committee seeks.
    Freight railroads are wiling to work with the relevant 
Government entities both at the State, local, and Federal 
levels to determine if and where a public-private partnership 
is appropriate. Consistent with my opening comments, of course, 
such a partnership must accommodate freight capacity.
    A number of proposals have been put forth regarding how 
public funding could be made available for passenger rail-
related projects, such as expansion of the CMAQ program, 
congestion mitigation air quality program, or expansion of the 
RRIF program that Administrator Rutter referenced. We support 
both of those approaches, and we also believe, consistent with 
Senator Wyden's opening statement, that a thorough evaluation 
of the various bond financing concepts being discussed must go 
forward expeditiously.
    We have adopted a series of principles regarding the future 
of passenger rail service to ensure that future development of 
passenger rail will not harm the ability of the freight rail 
industry to serve its customers. We will analyze the various 
proposals using these principles. There are six of them. I will 
run through them quickly.
    1. Passenger rail cannot exist without significant 
Government subsidy. Amtrak came into existence because freight 
railroads were losing several hundred million dollars annually 
running passenger trains. No passenger system in the world 
covers both operating and capital cost.
    2. Freight railroads should receive full compensation for 
the use of their assets by passenger operators. Today, we do 
not. Amtrak statutorily has access on an incremental cost 
basis. A recent analysis by the AAR shows that in 2001 Amtrak 
payments failed to cover freight railroads' variable costs by 
$240 million systemwide, so I point this out because there is 
already a cross-subsidy built into the statute where the 
freight rail is already subsidizing passenger rail over $200 
million annually.
    3. Freight railroads should not be expected to further 
subsidize intercity passenger rail service either through new 
taxes or the diversion of existing taxes, including the 
infamous 4.3 cents per gallon deficit reduction fuel tax and, 
of course, that does deserve special mention. It is in the 
energy bill that has passed the House, immediate repeal 
beginning January 2004.
    The Senate Finance Committee adopted an amendment offered 
by Senator Lott to immediately repeal that 4.3 cents, again in 
January 2004, and an amendment offered to divert that into a 
trust fund was defeated soundly 16 to 4, and the reason for 
that is because I think people agree with Administrator Rutter 
that such a tax merely exacerbates the already tilted playing 
field on which we find ourselves competing for business with 
the trucks, so we hope that this Committee will endorse the 
Finance Committee action.
    And just to divert a second, Madam Chair, the various bond 
proposals that are floating out there, I'm not the expert that 
some of our future witnesses are from Wall Street, but it seems 
as though there is a way to accommodate a bond proposal without 
using the 4.3 cents as the revenue stream, or a charge on rail 
freight, so I would ask that as you put together your bill, 
that you might take a look at that and see whether or not there 
is a way to accommodate it without using the 4.3 cents. It 
appears that, at least from the financial side of the house, 
that there is a way to do that.
    4. Safety requirements and the integrated nature of 
railroading necessitates that intercity passenger rail be 
provided by one entity, and we believe that entity should be 
Amtrak. A subsidiary part of this principle, Amtrak's right of 
access, preferential access rates and operating priority should 
not be transferred or franchised.
    5. The obligations of passenger railroads, notably those 
under the Railroad Retirement Act and the Railroad Unemployment 
Insurance Act, must not be shifted to the freight rail industry 
and its employees.
    6. And finally, future high-speed passenger rail corridors 
should be separate, dedicated, and sealed. A mix of heavy, 
slow-bulk commodity trains running with high-speed passenger 
trains does not work from either a safety or an operational 
standpoint. High-speed trains require different levels of track 
maintenance, and so we suggest that high-speed requires a 
sealed, dedicated right-of-way.
    Fashioning a realistic, fair, and workable solution to the 
serious financing problems facing passenger rail in the U.S. 
is, indeed, a difficult mission, but we look forward to working 
cooperatively with this Committee, the Administration, Amtrak, 
rail labor, and other stakeholders to achieve this worthy goal.
    Thank you.
    [The prepared statement of Mr. Hamberger follows:]

    Prepared Statement of Edward R. Hamberger, President and Chief 
          Executive Officer, Association of American Railroads
    On behalf of the members of the Association of American Railroads 
(AAR), I am grateful for the opportunity to present freight railroads' 
views concerning passenger railroading and ways to finance it.
    It is important to note at the outset that freight railroads agree 
that passenger rail has a role in alleviating highway and airport 
congestion, decreasing dependence on foreign oil, reducing pollution, 
and enhancing mobility and safety. Freight railroads will continue to 
work reasonably and cooperatively to help passenger rail succeed.
    We also know that passenger rail is extremely costly. Indeed, 
funding passenger rail has always been difficult--and continues to be 
so today, when budget constraints present enormous challenges to all 
levels of government.
    Freight railroads believe very strongly, though, that it is not the 
responsibility of our nation's privately-owned freight railroads to 
subsidize passenger rail. Indeed, as you consider the future of 
passenger rail in this country, we urge you to keep in mind that, while 
passenger railroading is important to our country, it pales in 
comparison to the importance of freight railroading. Our freight rail 
system is a tremendous national asset that moves more freight, more 
efficiently, and at lower rates than any other system in the world. The 
safe and cost-effective transportation service that freight railroads 
provide is critical to the domestic and global competitiveness of our 
nation. Freight railroads are responsible for 42 percent of our 
nation's intercity freight transportation service (measured by ton-
miles).\1\ Therefore, policymakers must find the most effective way to 
provide the passenger rail service that America wants and needs, but 
without burdening the freight rail system--operationally, financially, 
or in any other way.
---------------------------------------------------------------------------
    \1\ By contrast, Amtrak accounts for approximately 0.3 percent of 
intercity passenger travel nationwide.
---------------------------------------------------------------------------
    Freight railroads are willing to work with the relevant government 
entities to determine if a public-private partnership is appropriate. 
It is important to recognize, of course, that in such circumstances any 
public-private partnership must provide a replacement of freight 
capacity and a fair return on the private freight railroad assets used 
for public purposes.
Overview of Passenger Rail in the United States
    Any passenger rail system that operates on or crosses freight rail 
facilities is of interest to freight carriers. This applies especially 
to commuter rail \2\ and intercity rail.
---------------------------------------------------------------------------
    \2\ Commuter rail is distinct from heavy rail (also known as 
``subway'' or ``elevated rail'') and light rail (also known as 
``streetcar,'' or ``trolley car.''). Although most issues involving 
freight railroads and passenger rail involve intercity or commuter 
rail, to the extent that heavy or light rail operations also involve 
freight railroads in some fashion, the points made in this testimony 
apply to them as well.
---------------------------------------------------------------------------
    Commuter rail, which provides passenger rail service between a 
central city and its suburbs or an outlying region, is offered in 20 or 
so U.S. cities. In 2002, commuter rail accounted for approximately 1.5 
million unlinked passenger trips per business day, or 411 million trips 
for the year. Millions of these trips were on tracks that are actually 
owned by freight railroads but over which a commuter railroad has 
operating rights.
    Most existing commuter railroads plan to increase the frequency of 
their service, and several plan to extend existing lines or add new 
ones. In addition, in approximately 30 metropolitan areas throughout 
the country, entirely new commuter rail operations have been proposed. 
The vast majority of existing commuter passenger operators that want to 
expand their service, as well as nearly all proposed new commuter 
operations, hope to use freight railroad facilities for their 
operations.
    Amtrak is the sole provider of intercity passenger rail service in 
the continental United States. Amtrak operates over more than 22,000 
route miles, carries more than 23 million passengers annually, and 
serves more than 500 stations in 46 states and the District of 
Columbia. Amtrak is also the nation's largest contract provider of 
commuter rail service, serving an additional 54 million commuter 
passengers per year in California, Connecticut, Maryland, 
Massachusetts, and Virginia. Amtrak has 22,000 employees.
    Amtrak could not exist without the facilities and services of 
freight railroads. Amtrak owns approximately 730 route-miles, primarily 
in the Northeast Corridor bounded by Boston and Washington. Nearly all 
of the remaining 97 percent of Amtrak's system consists of tracks owned 
and maintained by freight railroads. Freight carriers also furnish 
other essential services to Amtrak, including train dispatching, 
emergency repairs, station maintenance, and, in some cases, police 
protection and communications capabilities.
    So far, 11 corridors have been designated by the U.S. DOT as high-
speed intercity rail corridors. Like Amtrak, these commuter and high 
speed proposals would involve service over existing freight lines, or 
acquisition of part of a freight railroad right-of-way to permit 
construction of passenger tracks.
    The map below illustrates the extent of existing and proposed 
passenger rail service in the United States and how it overlays the 
national freight rail network.


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Passenger Rail History
    As you deliberate the future of U.S. passenger rail service and 
ways to finance it, it might be helpful to reflect briefly on the 
history of passenger railroading and the conditions that led to the 
creation of Amtrak and other passenger rail carriers.
    Well into the 20th century, railroads were the primary means by 
which both people and freight were transported in this country. In 
1930, for example, the rail share of both the intercity freight and 
passenger markets was around 75 percent. Over time, though, a number of 
factors, especially the enormous expansion of our nation's highway 
system and the development of commercial aviation--both accomplished 
with the help of hundreds of billions of dollars in government 
subsidies--brought enormous competitive pressures to bear on passenger 
railroading.
    In fact, by the 1930s, passenger railroading had become clearly 
unprofitable. By the late 1950s, private railroads were losing $750 
million per year (nearly $4 billion in today's dollars) in fully 
distributed costs on passenger service, according to an Interstate 
Commerce Commission (ICC) study.\3\ In fact, a noted transportation 
scholar wrote ``it is no exaggeration to say that by 1958 railroad 
passenger service had demonstrated itself to be the most uneconomic 
activity ever carried on by private firms for a prolonged period.'' \4\ 
These massive losses continued largely because state and federal 
government regulators often refused railroad requests to eliminate 
passenger trains no matter how much money the railroads were losing.
---------------------------------------------------------------------------
    \3\ Interstate Commerce Commission, ``Railroad Passenger Train 
Deficit, Report Proposed by Howard Hosmer, Hearing Examiner, Assisted 
by Robert A. Berrien, Fred A. Christoph, and Raymond C. Smith, attorney 
advisers,'' Docket No. 31954, 1958.
    \4\ George W. Hilton, The Transportation Act of 1958, Indiana 
University Press, 1969, p. 13.
---------------------------------------------------------------------------
    By the late 1960s, railroads had managed to obtain regulatory 
approval to discontinue many purely local trains and were pursuing the 
elimination of major trains that comprised the basic elements of the 
national passenger rail network. By 1970, passenger rail ridership had 
plummeted to just 11 billion passenger-miles (an 88 percent decline 
from its 1944 peak of 96 billion) and the cumulative ``passenger 
deficit''--the losses that government regulators forced privately-owned 
railroads to bear through mandated passenger operations--had reached 
many billions of dollars.
    Unfortunately, the massive passenger losses, in combination with 
unrelenting competition for freight business from subsidized trucks and 
barges, led to railroad bankruptcies, line abandonments, deferred 
maintenance, service deterioration, and general financial decline. In 
1970, the largest U.S. railroad, the Penn Central, went into 
bankruptcy. At the time, it was the largest bankruptcy of any company 
in U.S. history. Not coincidentally, the Penn Central was also the 
largest passenger railroad in the country.
    In response to the crisis in passenger rail, in 1970 Congress 
passed The Rail Passenger Service Act of 1970 (RPSA). RPSA was a 
reaction to the real possibility that the United States would soon have 
no intercity passenger rail service at all, and a recognition that 
passenger rail losses were a serious threat to the viability of freight 
railroading. Given the huge financial pressure they faced, it is no 
surprise that when the RPSA created Amtrak, railroads welcomed the 
opportunity to rid themselves of their hopelessly unprofitable 
passenger obligations.
    However, the RPSA exacted a hefty price from freight railroads for 
permission to exit the intercity passenger rail business.
    First, freight railroads were required to capitalize Amtrak in 
cash, equipment, or services. These payments to Amtrak totaled $200 
million (approximately $750 million in today's dollars).
    Second, the RPSA authorized Amtrak to operate wherever it wished 
over the privately-owned freight rail network. Amtrak was also granted 
the power to force freight carriers to convey property to it (subject 
to constitutionally-mandated ``just and reasonable'' compensation) if 
the property were necessary for intercity rail passenger 
transportation.
    Third, the RPSA explicitly ordered freight railroads to grant 
preference to Amtrak trains over their own freight trains and all other 
customers.
    Fourth, the RPSA gave the ICC the authority to intervene if Amtrak 
and the host freight railroad could not agree on the compensation due 
the owner for Amtrak's access. A 1973 ICC decision that ordered Amtrak 
to pay a rate of compensation greater than incremental or avoidable 
cost was overridden by a 1973 amendment to the RPSA, which allowed 
Amtrak to pay just the incremental costs of the owning freight railroad 
caused by Amtrak's use of the tracks.\5\
---------------------------------------------------------------------------
    \5\ Incremental (or avoidable) costs are those direct costs which 
result from additional traffic/volume or which would be eliminated by 
the discontinuance of traffic or a particular activity. Fully 
distributed (or fully allocated) costs include a proportionate share of 
both variable and fixed costs (including the cost of capital necessary 
to provide the service) allocable to the traffic or service in 
question. As discussed later, freight railroads must reimburse Amtrak 
at a fully allocated cost level for the use of Amtrak's Northeast 
Corridor, even though Amtrak only reimburses freight railroads at the 
substantially lower incremental cost level for the use of their 
facilities.
---------------------------------------------------------------------------
    Railroads that refused to accept the statutory terms offered in the 
RPSA were required to continue their passenger operations--despite any 
losses they would incur--for at least four more years. Thereafter, they 
could seek relief before regulatory agencies, but received no guarantee 
that they would be permitted to discontinue unprofitable service at 
that point. All but a few of the railroads accepted the terms of the 
RPSA and immediately turned over passenger operations to Amtrak, rather 
than face continuing losses and the uncertainty of the regulatory 
process.
Access to Freight Rail Facilities by Passenger Railroads
    As noted above, by law freight railroads must grant Amtrak access 
to their track upon request and give priority status to Amtrak trains. 
Amtrak pays fees to freight railroads to cover the incremental costs of 
Amtrak's use of freight railroad tracks, but these fees do not come 
close to covering the full costs borne by the host freight railroads 
associated with the operation of Amtrak trains over their tracks.
    In fact, a recent analysis by the AAR found that in 2001 alone 
Amtrak payments to freight railroads were approximately $240 million 
less than the variable costs to the freight railroads associated with 
hosting Amtrak service.
    This figure substantially understates Amtrak's full cost 
responsibility for a number of reasons. First, it does not consider 
delay and opportunity costs. Operation of Amtrak trains over freight 
lines creates major scheduling difficulties, since Amtrak trains must 
be given priority, the typically higher passenger train speeds 
necessitate passing slower freight trains, and disturbances in one part 
of the rail network ripple through the system and disrupt freight 
operations elsewhere. Second, railroads' fixed costs (costs that do not 
vary with traffic levels) are excluded. Any company that wants to 
continue to operate must recover both its variable and fixed costs. 
Third, the additional costs to freight railroads associated with the 
higher level of liability inherent in passenger operations were not 
included. Fourth, a portion of Amtrak's route system is operated over 
freight railroads that were not participants in the study, and 
therefore their costs were not included.
    Non-Amtrak passenger rail operators, including commuter operators, 
do not have the same statutory rights as Amtrak regarding access to 
freight-owned track. Instead, they must first reach agreement with the 
owning freight railroad on a wide variety of engineering, operational, 
and legal issues--such as hours of operations, the number of passenger 
trains, access fees, liability provisions, and many others--before they 
can begin passenger service. Often, where freight railroad system 
capacity is available, mutually beneficial arrangements are negotiated 
and agreement is reached. Just last week, the Burlington Northern and 
Santa Fe Railroad and Sound Transit agreed on a plan that will result 
in the start of commuter rail service between Everett, Washington and 
Seattle later this year.
    Capacity issues have become increasingly important in recent years. 
In contrast to, say, 30 years ago, when the U.S. rail network had 
significant surplus capacity (and, not coincidentally, most U.S. 
railroads were in serious financial difficulty), today U.S. freight 
railroads operate networks that are carefully designed to match 
capacity with existing traffic levels or traffic levels expected in the 
near future. The intensely competitive environment in which freight 
railroads operate does not allow them the luxury of operating redundant 
main lines or a network of lightly-operated branch lines.\6\
---------------------------------------------------------------------------
    \6\ Prior to passage of the Staggers Rail Act of 1980, regulatory 
strictures made it very difficult for railroads to dispose of unwanted 
or excess lines. Between 1980 and 2002, Class I railroads reduced their 
miles of road owned by approximately 65,000 miles. Many of these former 
Class I miles were taken over by short line or regional railroads, 
rather than abandoned completely.
---------------------------------------------------------------------------
    At the same time that rail mileage has been falling, rail traffic 
has been increasing. Rail ton-miles--the movement of a ton of freight 
one mile, a standard measure of freight volume--rose from 919 billion 
in 1980 to 1.51 trillion in 2002, a 64 percent increase. The concurrent 
rationalization of low-density rail mileage and increase in traffic 
volume mean that the rail network is used far more intensively and far 
more productively today than in the past. Capacity constraints mean 
that many freight corridors have no capacity available for new or 
expanded passenger operations; in other corridors, expected increases 
in freight traffic will consume available capacity, precluding 
passenger operations, unless capacity is expanded.
    Ton-miles per mile of road owned, a measure of freight traffic 
density, illustrates the capacity issue. This metric has risen from 3.9 
million in 1970 (when Amtrak was established) to 15.1 million in 2002--
a 288 percent increase. Largely because of this enormous increase in 
the intensity of infrastructure utilization, train ``slots'' on major 
freight corridors have become increasingly valuable.


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    Moreover, because rail customers often no longer carry large 
inventories at their plants, railroads must meet their customers' 
requirements for ``just-in-time'' or more predictable freight arrival. 
Consequently, asset utilization has become a crucial management tool 
and rail infrastructure, crews, communications, and customer 
satisfaction have come to depend on precise and efficient operations.
    Thus, when passenger trains fill prized corridor ``slots'' at 
bargain prices, the result is a major cross-subsidy from freight to 
passenger service. It also limits the overall size of certain freight 
rail markets (because slots are not available to freight trains) and 
affects the reliability freight railroads can offer their customers. 
Indeed, priority status by passenger railroads results in detrimental 
impacts on the numerous freight trains on and approaching the corridors 
traveled by the passenger carrier that are typically much greater than 
simply the value of the ``slot'' occupied by that carrier.
    It is interesting to note that when freight railroads run freight 
trains over the Northeast Corridor, which is owned by Amtrak, Amtrak 
charges the freight railroads fully allocated costs, not just 
incremental costs. In fact, the fees that freight railroads pay Amtrak 
are many times greater (on a per car basis) than the fees which freight 
railroads must accept from Amtrak. Thus, railroads are prohibited by 
statute from treating Amtrak the same way that Amtrak treats freight 
railroads. Freight railroads should be fully compensated for Amtrak's 
use of their property as Amtrak is compensated for use of Amtrak's 
property.
Funding Capacity Enhancements
    The addition or expansion of passenger operations on freight-owned 
facilities requires a thorough analysis of the effect that passenger 
service would have on existing and future freight operations, and the 
investments needed to ensure safe operations that do not impede the 
owning freight railroad.
    Funding is, of course, a critical--and sometimes controversial--
issue. Each specific case must be evaluated based on its unique 
circumstances and merits, but in general freight railroads should be 
expected, and are willing, to pay for infrastructure investments that 
truly benefit them and that they actually want. Conversely, there is no 
reason to expect freight railroads to pay for investments that do not 
benefit them or that they do not want.
    This is a crucial point. As profit-driven entities, freight 
railroads cannot afford to make investments that yield primarily public 
benefits, and the benefits of passenger rail are primarily public 
benefits. Freight railroads have no shortage of potential 
infrastructure investment projects, but financial markets provide stern 
discipline to ensure that investments are made only where they will 
provide a reasonable promise of a direct economic benefit to the 
investing railroad. This discipline is necessary and appropriate in a 
market economy, but it discourages investments--including investments 
in capacity that would benefit passenger railroads--that would yield 
significant public benefits (e.g., congestion mitigation, emissions 
relief, enhanced mobility, improved highway safety), but only limited 
or no direct financial benefits to the railroad.
    A number of proposals have been put forth regarding how public 
funding can be made available for passenger rail-related projects. For 
example, funding for the Congestion Mitigation and Air Quality 
Improvement Program (CMAQ) could be increased, as could the amount of 
loans and loan guarantees available through the Railroad Rehabilitation 
and Improvement Financing (RRIF) program. Freight railroads support 
both of these approaches. The AAR also supports a thorough evaluation 
of the Transportation Finance Corporation concept recently presented by 
the American Association of State Highway and Transportation Officials 
(AASHTO), and similar proposals, some of which will be discussed today. 
Railroads do not yet have a position on these proposals, which are new 
and the details of which are still being ironed out.
    To repeat a critical point I made earlier, freight railroads should 
not be considered obligated to fund passenger rail service or suffer 
negative effects on their own operations because of passenger rail. 
That is a primary reason why freight railroads strongly oppose the 
creation of a ``rail trust fund'' to finance passenger rail if money 
for the trust fund is to be derived from freight railroads and/or their 
customers and suppliers.
Future Public Policy Directions
    Freight railroads cannot afford, and should not be expected, to 
subsidize others at the expense of their own needs. To this end, 
freight railroads respectfully suggest that you adhere to a series of 
principles regarding the future of passenger rail service. These 
principles call for future rail passenger public policy to acknowledge 
the extreme capital intensity of railroading and to ensure that 
railroads' investment needs can be met.
    Policies which add to freight railroads' already enormous 
investment burden, such as further saddling them with support of 
passenger rail infrastructure needs, or which reduce their ability to 
provide the quality service needed by their freight customers, must be 
avoided. To do otherwise would undercut our nation's freight rail 
capabilities and be counterproductive in addressing our country's 
congestion, environmental, safety, and economic concerns. After all, 
the goal of reducing pollution and highway congestion by expanding rail 
passenger service will not be realized if passenger trains interfere 
with freight service and force freight onto the highways.
    The freight railroad principles are outlined below.
1. Passenger rail cannot exist without significant government 
        subsidization
    Our nation's railroads learned the hard way how difficult it is to 
recover the full costs of passenger railroading. No comprehensive 
passenger system in the world operates today without significant 
government assistance. Once policymakers in the Administration, 
Congress, and the various states agree on the nature and scope of 
passenger railroading in this country, they must be willing to commit 
public funds on a long-term basis commensurate with that determination.
2. Freight railroads should receive full compensation for the use of 
        their assets by passenger operators
    The special statutory privileges regarding its relationship with 
freight railroads that Amtrak has enjoyed over the past 30 years--i.e., 
Amtrak's statutory right of priority access to freight railroads' 
tracks at incremental cost--have amounted to a significant, mandatory, 
and inequitable subsidization of intercity passenger operations by 
freight railroads. An incremental cost basis does not come close to 
reflecting the full market value of Amtrak's access to the owning 
railroad's tracks because it does not cover the full operating, 
capital, opportunity, and other costs freight railroads incur in 
hosting Amtrak trains.
3. Freight railroads should not be expected to further subsidize 
        intercity passenger rail service, either through new taxes or 
        the diversion of existing taxes (including the 4.3 cents per 
        gallon deficit reduction fuel tax)
    If policymakers determine that passenger service provides essential 
public benefits, then the costs of the passenger service (including the 
costs of maintaining and, where necessary, building new rights-of-way 
to passenger-rail standards) should be borne by the public, not by 
freight railroads. For 30 years, freight railroads have subsidized 
Amtrak. Forcing them to continue to do so, or forcing freight railroads 
to subsidize other types of passenger rail, would seriously hinder 
freight railroads' ongoing efforts to provide safe, efficient, and 
cost-effective freight transportation service.
    Indeed, to force freight railroads to subsidize passenger 
operations would be supremely inequitable. Freight railroads are 
suppliers to passenger rail. As such, they should be treated the same 
as those who supply locomotives, passenger cars, diesel fuel, 
electricity, and provisions for dining cars. Nor should freight 
railroads be held to a loftier ``public interest'' standard. Highway 
contractors are not required or expected to bid below cost because 
highways are in the public interest. The same rules should apply to 
railroads.
    The 4.3 cents per gallon deficit reduction fuel tax paid by 
railroads deserves special mention. This tax should be repealed--not 
diverted to any other purpose--so that freight railroads can channel 
these funds into needed infrastructure and equipment. Diverting this 
tax to fund passenger rail would perpetuate the inequities faced by 
freight railroads, because they would continue to derive no benefit 
from a tax they pay but their primary competitors do not.
    Forcing freight railroads to shoulder an inappropriate liability 
burden is another form of subsidization that should be avoided. It is 
almost inevitable that some accidents will occur on railroads, despite 
railroads' best efforts to prevent them. An accident involving 
passenger trains--which are generally far lighter than freight trains, 
often travel at much higher speeds, and, most importantly, have 
passengers on board--is far more likely to involve significant 
casualties than a similar accident involving only freight trains. 
Passenger operations also bring more people onto railroad property, 
resulting in a corresponding increase in risk. These risks make freight 
railroads extremely reluctant to allow passenger trains on their tracks 
without adequate protection from liability.
4. Safety requirements and the integrated nature of railroading 
        necessitate that intercity passenger rail be provided by one 
        entity--Amtrak. Further, Amtrak's right of access, preferential 
        access rates, and operating priority should not be transferred 
        or franchised.
    One of Amtrak's fundamental purposes was to amalgamate several 
hundred disjointed passenger trains operated by more than 20 individual 
carriers into a coherent intercity passenger rail system. It was 
envisioned that a single carrier would yield greater efficiency and 
innovation. This approach remains just as sensible today.
    Moreover, the terms and conditions by which Amtrak uses freight-
owned tracks were set by Congress more than 30 years ago under 
circumstances vastly different from today. As noted above, at that time 
freight railroads were given the proverbial offer they could not 
refuse: in order to be able to stop losing hundreds of millions of 
dollars per year on passenger trains they were forced by the government 
to operate, freight railroads accepted special, non-compensatory terms 
covering Amtrak's use of their tracks that under other circumstances 
would have been unacceptable. No such quid pro quo exists for non-
Amtrak passenger service, so other passenger operators are not entitled 
to the treatment legislated for Amtrak. Moreover, freight railroads did 
not agree to an ``open door'' policy and balkanized structure that 
would allow any number of state, regional, or local entities to claim 
access to their assets.
    Further, freight railroads knew that Amtrak's obligations were, in 
essence, the obligations of the United States and that Amtrak would be 
operated safely and professionally. Should Amtrak intercity services be 
transferred to other passenger operators, it is unclear under what 
circumstances the transfer would be made and what characteristics would 
apply to the operators. For example, private entities might have 
different degrees of financial backing; public authorities might or 
might not enjoy the full faith and credit of their sponsoring states; 
and some prospective passenger rail operators might be less committed 
to safety and sound operating standards than Amtrak.
    If others are asked to provide Amtrak-like services, freight 
railroads must retain the right to negotiate terms (at arms length, 
free of governmental intervention) under which those providers will 
gain access to the freight railroad's right of way. Proposals to 
summarily grant passenger carriers other than Amtrak access to freight 
facilities ignore the fundamental fact that freight railroads' rights-
of-way are private, not public. In the absence of agreement through 
voluntary negotiations, freight railroads should not be forced to allow 
passenger operators to use their assets any more than any other private 
business should be forced to allow another company to use its assets 
without its consent or at non-compensatory rates.
    In fact, freight railroads view the granting of statutory access to 
other passenger operators to be a ``taking'' of private property, which 
requires just and reasonable compensation under the Constitution.
5. The obligations of passenger railroads, notably those under the 
        Railroad Retirement Act and the Railroad Unemployment Insurance 
        Act, must not be shifted to the freight rail industry and its 
        employees
    Railroad employees and retirees are not covered by Social Security. 
Instead, they are covered by Railroad Retirement, a government 
sponsored and managed pension plan funded by payroll taxes on railroad 
employers and employees. Railroad Retirement covers the full rail 
industry, including freight, Amtrak, and commuter railroads; rail labor 
and trade organizations; rail lessor companies; and miscellaneous 
railroad affiliates.
    Like Social Security, Railroad Retirement is a pay-as-you-go 
system: payroll taxes from current employees are used to provide 
current retiree benefits. Railroad Retirement is also a pooled system 
in which all rail participants contribute at the same statutory rates, 
all rail industry employees receive standardized retirement and 
survivor benefits based upon their years of service and earnings, and 
participating employees are assured of benefits regardless of the fate 
of their particular employers.
    The integrity of such a system depends upon all participating 
entities contributing based on the current number of active workers 
employed. It would be inequitable for passenger railroads (Amtrak alone 
accounts for approximately 10 percent of the total rail industry work 
force) to suddenly be granted special relief from a pooled, pay-as-you-
go system. Simply removing Amtrak or other passenger railroads from the 
Railroad Retirement system, in whole or in part, would force the 
remaining participants--primarily freight railroads and their 
employees--to shoulder the burden of maintaining the viability of the 
system.
6. Future high-speed passenger rail corridors should be separate, 
        dedicated, and ``sealed''
    Amtrak's existing high-speed Northeast Corridor operations have 
proven popular over the years, and many envision high-speed rail 
service to be a primary component of future intercity passenger rail 
operation elsewhere in the nation. High-speed rail passenger service is 
an integral part of passenger rail operations in countries around the 
world, including France, Germany, and Japan. Where high-speed rail 
exists, however, governments have supplied the massive amounts of 
funding it requires.
    Given the huge expense involved, the expansion of high-speed 
passenger rail service throughout the United States presents formidable 
challenges. To operate safely, high-speed passenger rail operations 
require the construction of separate, dedicated tracks. Further, grade 
crossings must be eliminated (either through closure or through the 
construction of highway underpasses or overpasses). These are 
exceedingly expensive undertakings and will require firm, long-term 
commitments by the appropriate authorities, since they are necessary 
for successful implementation of high-speed projects.
Summary
    This Committee and others in Congress have before them a difficult 
mission: to fashion a realistic, fair, and workable solution to the 
serious financing problems facing passenger rail in the United States. 
In reaching that solution, we strongly urge you to incorporate the 
principles detailed above. Doing so will help ensure that freight 
railroads continue to play a vital role in our nation's economic 
prosperity and global competitiveness. Freight railroads look forward 
to working cooperatively with this Committee, with Amtrak, and with 
others to achieve this worthy goal.

    Senator Hutchison. Thank you very much. Let me just say, on 
the revenue stream, we certainly would like to look for all 
options. This would not be a new tax, and I would not support a 
new tax on freight, but I do think that if we can offer 
something in return to the railroads for the use of this tax 
that would increase the efficiency of the railroads, I think we 
need to try to work together, rather than just throwing down 
everything that is so far being proposed. We need some positive 
input, rather than just being against everything, or we'll be 
right where we have been.
    Mr. Hamberger. I agree, and as I said, we do want to work 
with you and the Committee, and we think the idea of public-
private partnerships, and we hope to be able to announce a 
major one in Chicago later this month, where the freight 
railroads, the passenger railroads, the community come together 
and we pay for the benefits that the freight railroads receive, 
and the public pays for the benefits the public receives in the 
form of congestion mitigation and increased passenger service, 
so we think that might be a better model than the 4.3 cent 
revenue stream, but we certainly want to work with you and the 
staff to see if that works.
    Senator Hutchison. Thank you. Mr. Jeff Morales.
    Senator Lautenberg. Madam Chairman, may I introduce Jeff 
Morales for a minute?
    I look at Jeff Morales with a considerable amount of pride. 
He got much of his training at the Lautenberg office. You can 
tell by the whip marks on his back.
    [Laughter.]
    Senator Lautenberg. But we're very proud of Jeff Morales, 
who started at a fairly low level doing transportation work for 
me in my office with the Appropriations Committee and 
authorizing committees as well, and we're very pleased to see 
Jeff Morales here in this very important post that he has in 
California, and my hope is that he hasn't forgotten his old 
friends.
    [Laughter.]
    Senator Hutchison. Well, thank you very much for adding 
that introduction, and with that, Mr. Morales is the Director 
of the California Department of Transportation.

 STATEMENT OF JEFF MORALES, DIRECTOR, CALIFORNIA DEPARTMENT OF 
                   TRANSPORTATION (CALTRANS)

    Mr. Morales. Thank you, Madam Chairman. Senator Lautenberg, 
thank you for both the training and for the good words, and I 
assure you, anything I say is not meant to come at the expense 
of the Northeast Corridor. I will not bite the hand that once 
fed me.
    California has the largest and the most successful State-
supported intercity passenger rail program in the country. Over 
the last few years, rail ridership in California has continued 
to grow, and is leading the Nation. Three of the five busiest 
Amtrak corridors in the country are in California, and this is 
happening in spite of a sluggish economy and in spite of the 
sense that Californians would never get out of their cars. This 
year, one of every five Amtrak riders nationally will be on a 
California train. State-supported intercity rail service saved 
265 million vehicle miles of travel and 4\1/2\ million gallons 
of gasoline in 2002 in California.
    The state has made major operating and capital commitments 
to rail. In 2002, the state paid Amtrak $67.8 million in 
operating costs. This was 53 percent of payments from all 
states. The state has provided $1.7 billion in capital funds 
since 1976. This has been enabled by several things, including 
the passage of two general obligation bond measures and the 
commitment of State public transit account funds. Last year, 
Governor Davis signed a bill that puts on the ballot in 
November 2004 another bond measure that would provide $10 
billion if approved by the voters, $9 billion of that going for 
the development of a high-speed rail system and $1 billion to 
continue to support commuter and intercity rail service, and 
Madam Chair, I would tell you that that bond measure absolutely 
anticipates and assumes both Federal support and a private 
investment in order to make those projects go forward.
    Governor Davis has been particularly supportive of 
intercity rail, dedicating close to $600 million in the last 4 
years. Our investments are targeted at making rail more 
competitive with other modes as a way of helping relieve 
congestion. For example, we have over $300 million of 
improvements in the Los Angeles-San Diego Corridor, and our 
goals there are to increase frequencies and ridership by over 
50 percent and reducing travel time to under 2 hours.
    I would like to raise several issues that I hope the 
Subcommittee will consider as it moves forward. A key issue is 
the relationship between private freight railroads and 
passenger rail service. That relationship is unique in many 
ways in transportation, and does need to be recognized as we 
move forward. As you know, Federal law gives Amtrak unique 
rights to access freight railroads at incremental cost. Thus, 
Amtrak has a significant competitive advantage. As long as this 
remains the case, true competition in passenger rail will not 
be possible, as other providers have to negotiate with the 
railroads for access, with no guarantee of getting it at all, 
and almost certainly at a higher price.
    We're conducting a study on competitively bidding intercity 
rail service to see if California could benefit under current 
law. The study will also look at how to best position us to 
continue our rail service in the event Amtrak is significantly 
restructured, or even liquidated. The study will also identify 
any potential changes to Federal law that we might want to 
propose.
    The Chair raised several issues about the relationship with 
freight railroads, and again I think it's critical that we 
recognize, as we make investments in their systems, we do need 
to get the cooperation to ensure that passenger service gets 
its fair share.
    While California has stepped up to the plate and delivered, 
I do not suggest or support the idea that the Federal 
Government should not have a role in California's passenger 
rail system. If the Federal Government invests in any 
corridors, it should be willing to invest in our productive 
corridors. Improved mobility in California has national 
benefits, and relieving congestion in California is just as 
worthy a goal as it is elsewhere. An ongoing, stable, Federal 
source of funding, capital funding, is necessary to allow 
California to keep pace with demand and growth. Stable Federal 
funding is also essential for the incremental development of 
high-speed service on key routes throughout the Nation.
    Additionally, we recommend that the Subcommittee consider 
the issue of equity in states' payments to Amtrak. Amtrak has a 
new policy that all states will make operating payments on the 
same basis. We hope the Subcommittee monitors Amtrak's 
timeliness in equalizing state payments.
    Finally, we believe the Congress should continue to 
increase the flexibility of Federal transportation funding. In 
California, intercity rail service augments commuter rail and 
provides congestion relief to parallel interstate routes such 
as I-80 in the Sacramento to San Francisco Corridor, and I-5 in 
San Diego. In those multimodal corridors, intercity rail 
projects should be given the same Federal funding opportunities 
now offered to commuter and urban rail capital projects, and 
total funding should be increased to accommodate intercity 
passenger rail needs.
    In closing, Madam Chair, let me just say much of what 
California is doing, and we're proud of what we're doing and 
we'll continue to do it, but it underscores, frankly, the lack 
of a national cohesive financing policy for rail, and we 
greatly appreciate the Committee's approach on this and its 
efforts to develop such a national policy, and look forward to 
working with you on it.
    Thank you.
    [The prepared statement of Mr. Morales follows:]

             Prepared Statement of Jeff Morales, Director, 
           California Department of Transportation (CALTRANS)
    Good morning, Madame Chairwoman and members of the Subcommittee, my 
name is Jeff Morales. I am the Director of the State of California's 
Department of Transportation. Thank you for giving me the opportunity 
to testify today.
Introduction
    Today, I would like to give you some thoughts on intercity 
passenger rail finance as it relates to state-supported Amtrak service 
in California. But first, let me introduce you to the exciting 
intercity rail program we are running in California in partnership with 
Amtrak. California has, by far, the largest state-supported intercity 
passenger rail program today, both in terms of dollars and riders, and 
is considered by many to be the model in State-supported intercity 
passenger rail service. The bottom line is our performance. 
Particularly over the last few years, rail ridership in California has 
continued to grow, and is leading the Nation. This is happening in 
spite of a sluggish economy, and the sense of many that Californians 
will never get out of their cars. This year, close to one of every five 
Amtrak riders nationally will be on one of California's trains.
    As a side note, I would also like to point out that we are seeing 
tremendous growth on our commuter rail lines in California. Although 
this is not the subject of today's hearing, these lines work in 
conjunction with our Amtrak-operated service, and are an increasingly 
important part of our overall transportation system.
    Amtrak operates three routes for the state: the Pacific Surfliner, 
San Joaquin, and Capitol Corridor Routes. In FFY 2002, the Pacific 
Surfliners and Capitol Corridor had the highest and second highest 
ridership, and the San Joaquins had the fourth highest ridership of all 
Amtrak routes outside of the Northeast Corridor. California's three 
state-supported routes had almost 3.6 million combined riders in FFY 
2002. This was 47 percent of the ridership on all corridor trains 
outside of the Northeast Corridor, and 16 percent of total Amtrak 
ridership in FFY 2002. In FFY 2003, we expect to carry over 4.0 million 
passengers or nearly 20 percent of total Amtrak ridership.
    In order to make our program successful, the state has committed 
major operating and capital funds to the program. On the operating 
side, California contributed $67.8 million in operating payments to 
Amtrak in FFY 2002. This was 53 percent of the total payments that all 
states made to Amtrak in FFY 2002.
    On the capital side, California has provided an unprecedented 
amount of funds to intercity passenger rail service. The state has 
provided $1.7 billion in capital funds since 1976. California is the 
only state that has designed and bought its own equipment that is now 
used on most of the state-supported trains. Governor Davis has shown 
particularly strong support for intercity rail, as he believes it is 
one of the keys to congestion relief. Under Governor Davis, close to 
$600 million has been dedicated to intercity rail capital.
Description of California's Three Routes
    Now, I would like to give you a little history and description of 
our Routes. In 1971, the year Amtrak was formed, Amtrak started by 
running three trains on the Pacific Surfliner Route (then called the 
San Diegans) in southern California, from San Diego to Los Angeles. 
California got involved when the state began supporting the route in 
1976 with a State-supported addition of a fourth train. Over the years 
service has increased significantly. Service was added in 1988 on the 
north end of the route from Los Angeles to Santa Barbara. Currently, 
the state covers about 67 percent of the net cost of operations for 
this Route, while Amtrak covers the remaining 33 percent. This is the 
only corridor route in California where Amtrak entirely supports a 
portion of the service.
    Today, the route is the fastest growing corridor in the country 
with 11 round-trips between San Diego and Los Angeles, and a 12th 
round-trip operating on weekends.
    Four trains extend north to Santa Barbara weekdays and five on the 
weekends, with one daily train extending further north to San Luis 
Obispo. Ridership in FFY 2002 was 1.7 million. Ridership has been 
particularly strong in FFY 2003. From October 2002 through April 2003 
ridership was almost 24 percent higher than the same prior year period. 
This impressive ridership increase is mostly due to ``Rail 2 Rail,'' an 
innovative joint ticketing and marketing program with Metrolink--the 
commuter rail service on the same corridor.
    California also has a north-south route called the San Joaquins. 
Amtrak service on this route started in 1974 with one round-trip 
between Oakland and Bakersfield. The state started supporting the route 
in 1979, and a second round-trip was added in 1980. In 1999, the first 
round-trip to terminate in Sacramento was added. There are currently 
four round-trips from Bakersfield to Oakland, and two round-trips from 
Bakersfield to Sacramento, for a total of six daily round-trips. The 
route has an impressive dedicated feeder bus network that connects 
riders to Los Angeles and further south, as well as to more rural 
communities throughout the State. In SFY 2001-02, almost 65 percent of 
all San Joaquin passengers used at least one connecting bus. Ridership 
in FFY 2002 was over 730,000. Ridership in FFY 2003 from October 2002 
through April 2003 was almost 9 percent above the same prior year 
period.
    Our newest route is the Capitol Corridor, serving the northern 
metropolitan area of the State. The state started service on this Route 
in December 1991 with three round-trips between Sacramento and San 
Jose, and one trip extending to Roseville. In July 1998, responsibility 
for administering the Capitols was transferred to the Capitol Corridor 
Joint Powers Authority (CCJPA). The state now provides funding and 
oversight to the CCJPA. Today, the Capitol Corridor has twelve weekday 
round-trips and nine weekend round-trips between Sacramento and 
Oakland. One daily train extends east to Auburn, and four weekday 
trains extend south to San Jose with six on the weekends. Ridership in 
FFY 2002 was almost 1.1 million. The Capitol Corridor added three 
weekday round-trips in SFY 2002-03. Ridership in FFY 2003 from October 
2002 through April 2003 was almost 7 percent above the same prior year 
period.
    Ninety-eight percent of the state's population lives in counties 
served by the three routes and their connecting bus networks. The state 
Department of Transportation estimates that as a result of state-
supported intercity rail service, 265 million vehicle miles and 4.4 
million gallons of gasoline were saved in 2002. These statistics 
illustrate that intercity rail travel in California provides a true 
alternative to auto travel, not just a token option.
California's Capital Support for its Intercity Passenger Rail System
    As I mentioned earlier, since 1976, California has provided $1.7 
billion in capital funds for track, signal and station improvements. 
$749 million of these funds went to the Pacific Surfliners, $403 
million to the San Joaquins, $196 million to the Capitol Corridor, $107 
million for maintenance and layover facilities and other projects, and 
$274 million for rolling stock. Starting in the early 1990s, with the 
passage of two general obligation bond measures, capital funding 
increased dramatically. Without these capital projects, the expansion 
of California's intercity passenger rail ridership from 1.3 million in 
SFY 1979-1980 to 3.6 million in FFY 2002 would not have been possible. 
Capital projects are necessary to expand track capacity for additional 
frequencies, improve service reliability, and reduce train running time 
so that rail service is competitive with the auto.
    Governor Davis has strengthened the state's commitment to intercity 
rail by proposing close to $600 million for intercity rail capital. 
$146 million was designated to construct 14 miles of triple track 
between Los Angeles and Fullerton on the Pacific Surfliners. An initial 
$28 million has been reserved for the design and environmental work on 
``run-through'' tracks at Los Angeles Union Station. This project will 
also benefit the Metrolink commuter trains that use Union Station. 
Also, $92 million is proposed to construct double tracks on the San 
Joaquins over three significant portions of the route.
Equipment Program
    The state also has an unusual and impressive equipment program. 
California is the only state that has designed and bought new intercity 
rail equipment. In the mid-1990s, the state pioneered the California 
Car design that allows faster loading and unloading, shorter dwell 
times at stations, and greater accessibility for disabled passengers. 
This design was used as the basis for Amtrak's new Pacific Surfliner 
fleet. California currently owns a fleet of 88 cars and 17 locomotives. 
The state supplies all of the 78 cars and 17 locomotives in the 
northern California fleet used on the Capitols and San Joaquins. Also, 
the state supplies 10 of the 50 cars used on the Pacific Surfliners. As 
I mentioned earlier, the state has spent $266 million to date for 
rolling stock. As the initial California Cars are aging, California has 
started a heavy equipment overhaul program, with $10.8 million budgeted 
in SFY 2001-02 and 2002-03.
California's System is a Significant Part of the National System
    Now that I have been able to describe to you California's intercity 
passenger rail system, I am sure that you realize how key it is to 
Amtrak's larger system. As I mentioned earlier, California's 3.6 
million riders made up 16 percent of Amtrak's total FFY 2002 ridership. 
California helps the national system by contributing riders to the 
long-haul trains. Almost 100,000 passengers transferred between 
California's three routes and long-haul trains in FFY 2001, and 
contributed $12.1 million in passenger revenue to the long-haul trains. 
These trains are the Coast Starlight, California Zephyr, Southwest 
Chief, and Sunset Limited. California's financial contribution to 
Amtrak is also significant. California's operating payments of $63.1 
million reduced Amtrak's total full cost operating loss of $772.2 
million by 8 percent in FFY 2001.
Issues California Would Like the Subcommittee to Consider in its 
        Discussions on Intercity Passenger Rail Finance
    I now have a few thoughts on issues California would like the 
Subcommittee to consider in its discussion on intercity passenger rail 
finance.
    Freight Railroads. A number of issues relate to the 
interrelationship between private freight railroads and intercity 
passenger rail service. As you know, under Federal law only Amtrak has 
the right to access freight railroads for intercity passenger rail 
service at incremental cost. Thus, Amtrak still has a significant 
competitive advantage over other potential service providers. The 
importance of this fact cannot be overemphasized. Until all service 
providers have the same access rights to railroads as Amtrak, true 
competition will not be possible, as other providers have to negotiate 
with the railroads for access--with no guarantee of getting it at all, 
and almost certainly at a higher price.
    Because California has spent significant funds to improve private 
railroad infrastructure for use in passenger rail service, the state 
would not employ a service provider that does not have long-terms 
rights to operate on a railroad. We believe to address these 
significant issues of equal access to freight railroads and stability 
of service, changes to current Federal law are necessary.
    As mentioned above, California has spent significant funds making 
capital improvements to freight railroads to provide additional 
intercity passenger rail capacity for new trains and to increase 
passenger speeds. Unfortunately, while passenger service has increased 
according to the State's agreements with the freight railroads, freight 
service often has used much of the additional capacity, leading to 
dispatching delays and poor on-time performance for the intercity rail 
passenger service. This is an issue that needs to be addressed 
cooperatively by state and Federal Government, Amtrak and the 
railroads.
    We would like to point out that the state has a good partnership 
with the Burlington Northern Santa Fe (BNSF), although we are still 
resolving issues with on-time performance. The State's relationship 
with the Union Pacific has improved in the recent past.
    In order to address some of the issues just mentioned, California 
has contracted with R.L. Banks and Associates to conduct a benefit/cost 
feasibility study on competitively bidding intercity rail, in order to 
determine if there are methods whereby competitive bidding could 
benefit California under current law. The study will also look at how 
to best position California to continue intercity passenger rail 
service in the event Amtrak is restructured or liquidated. The study 
will additionally identify any changes in Federal law that would be 
needed. The study is planned to be completed by the end of 2003.
    Federal Role in Intercity Passenger Rail Service. Another set of 
issues California is concerned with relates to the Federal role in 
intercity passenger rail. As I mentioned earlier, California's 
extraordinary intercity passenger rail capital program has made 
California Amtrak service possible. However, while California has 
stepped up to the plate and delivered, I do not suggest or support the 
idea that the Federal Government should not have a role. If the Federal 
Government invests in any corridors, it should be willing to invest in 
our productive corridors. Improved mobility in California has national 
benefits, and relieving congestion in California corridors is just as 
worthy a goal as helping address problems in the Northeast and 
elsewhere. Consequently, an ongoing stable Federal source of capital 
funding is necessary to allow California Amtrak service to just keep 
pace with population growth. Stable Federal capital funding is also 
absolutely essential in order to allow the incremental development of 
high-speed rail service on key corridor routes throughout the Nation.
    In a similar vein, California cannot continue to be required to 
increase its responsibilities to Amtrak for operating costs. It is 
essential that long haul trains continue to be exclusively the 
responsibility of the Federal Government. The states will not be able 
to pick up funding of the long haul services.
    Additionally, we recommend that the Subcommittee consider the issue 
of equity in states' payments to Amtrak for intercity rail operating 
services. Amtrak has begun to address this issue with its new policy 
that all States will make operating payments on the same basis. We hope 
the Subcommittee monitors Amtrak's timeliness in equalizing states' 
payments.
    In this era of scarce funding at all levels--Federal, state and 
local--we believe the Federal Government needs to continue to increase 
opportunities for flexible transportation funding. While ISTEA and 
subsequent legislation opened the transportation funding playing field 
considerably, intercity passenger rail funding was notably left out of 
this game. Unfortunately, intercity passenger rail is still not being 
given access to flexible transportation funding in the latest draft of 
SAFETEA. In California, intercity rail service augments commuter rail 
and provides congestion relief to parallel Interstate routes such as 1-
80 in the Sacramento to San Francisco Corridor and 1-5 in San Diego. In 
essence, intercity service has become a corridor management tool. We 
believe that in multimodal corridors, intercity passenger rail capital 
projects should be given the same Federal funding flexibility and 
opportunities as is now offered commuter and urban rail capital 
projects and that total funding should be increased to accommodate 
intercity passenger rail needs.
    Here is an example to point out the effect of the lack of funding 
flexibility. As Director of Transportation, I cannot use Federal 
highway funds on the Capital Corridor that serves the 1-80 corridor or 
the Pacific Surfliner route that serves the 1-5 corridor to relieve 
congestion on those interstate routes. The state should have that 
option.
Conclusion
    We appreciate the Subcommittee's initiative in convening this 
hearing. I would like to leave you with three key points from 
California's point of view. First, California has made a significant 
capital and operating investment in its intercity passenger rail 
system. We urge the Senate to ensure that this investment is protected 
as changes are considered to the relationship between passenger and 
freight rail and as Amtrak's future is considered. Second, we believe 
that a continuing and stable source of Federal funding for both capital 
and operating needs is necessary to successfully operate the national 
intercity rail passenger system. The sooner the issue of funding can be 
resolved, the better for the system. Finally, there has been much 
discussion about introducing competition to Amtrak. If Congress takes 
this route, we recommend that current law be changed to allow states, 
and by extension their franchisees, to access freight railroads at 
incremental cost.
    I want to thank you again for the opportunity to testify today 
before this Subcommittee, and would be happy to answer any questions.

    Senator Hutchison. Thank you. I will say California has led 
the way in state support, because they haven't had the luxury 
of the Northeast Corridor support of Amtrak, and you're not 
dealing with as bad a situation as the rest of the country with 
the freights, but you certainly have had to overcome obstacles, 
so we will look forward to working with you to strengthen the 
whole system.
    Mr. Robert Serlin, the President of the Rail Infrastructure 
Management.

            STATEMENT OF ROBERT SERLIN, PRESIDENT, 
              RAIL INFRASTRUCTURE MANAGEMENT, LLC

    Mr. Serlin. Good morning, Madam Chairman, distinguished 
Members of this Committee. My name is Robert Serlin. I am 
President of Rail Infrastructure Management, an entity 
organized to analyze opportunities for investment in the rail 
industry and to provide the public sector a partner with whom 
to develop innovative passenger rail solutions. As we look into 
the future of intercity passenger rail services, I believe that 
there are three major, immediate challenges facing Amtrak.
    The first challenge is to end the recent experience of 
almost regular financial crises. In this regard, I think that 
Mr. David Gunn, working with the Department of Transportation 
and Congress, deserves much credit.
    The second challenge is to restore the infrastructure to a 
state of good repair, and the third, perhaps most ambitious 
challenge, is to find a way to revitalize rail passenger 
service in the Northeast.
    The basic station pattern in the Northeast was laid out in 
the 1920s and the 1930s, and ridership has basically been flat 
throughout Amtrak's history. The Northeast Corridor is the most 
densely populated passenger corridor in the world. It has the 
potential for dramatically increased ridership, which will have 
a strong positive effect on Amtrak's financial results.
    Though most passenger railroads are owned by the public 
sector, the magnitude of capital required has unfortunately 
grown to a level well beyond that achievable through annual 
Federal or State appropriations. Future investment in passenger 
rail will require blending of public and private sectors, and 
as Secretary Jackson has said, a new business model. Secretary 
Mineta, Deputy Secretary Jackson, and Administrator Rutter have 
developed a set of principles that are a solid basis for a 
legislative proposal, and are consistent with my views.
    Amtrak currently manages two very different and in some 
ways conflicting businesses, the first providing passenger rail 
service, the second managing the 600 miles of owned 
infrastructure primarily located in the Northeast. The second 
business, the infrastructure, consumes significant Amtrak 
resources. It has been estimated that approximately 65 percent 
of Amtrak's cash losses are infrastructure-related. Therefore, 
the blue ribbon panel put together by Bud Schuster, the Amtrak 
Reform Council, and others have proposed separating Amtrak into 
two separate federally owned corporations.
    The separation of passenger transportation from 
infrastructure would free Amtrak to focus on its core 
competency and would liberate resources, both Federal and 
State, to be spent in a targeted manner to enhance the 
passenger rail system throughout the country.
    I believe that an infrastructure financing plan can be 
created and funded using nonappropriated funds generated from a 
combination of existing financial instruments. It's clear that 
financing is the key to creating a successful rail 
infrastructure company. Financial markets have developed to a 
point where almost any financing requirements can be addressed 
through a variety of products. Many, if not most of these 
products do not require Federal appropriations.
    The market for risk continues to grow. In this particular 
case, factors that will be critical for a successful public-
private partnership will include clear public policy, a 
realistic timeframe, credible operational plans, and 
accountability. By using available financial instruments, I 
believe the Federal Government will succeed in attracting the 
private sector to address this challenge.
    Now, we've heard much about the pitfalls of the British 
experience. Our experience in the United States, however, 
indicates that bifurcation works and is successful. Amtrak only 
owns a little more than 2 percent of the total route miles over 
which it operates. The other 98 percent is owned and is 
dispatched by others. To the best of my knowledge, nobody 
claims that Amtrak's operations over its nonowned tracks is 
either unsafe or unsuccessful. Nonetheless, the U.K. does 
provide instructive lessons, some good, some bad.
    In 1995, the U.K. Government privatized British Rail, 
creating Railtrack to manage the infrastructure. It also 
created a number of train service franchises, franchise holders 
that were licensed to run trains. These franchise holders 
brought focused private sector market experience to regional 
and long distance franchises, and by and large thrived. 
Ridership grew approximately 70 percent in 5 years, while over 
$4.3 billion was invested in new passenger rolling stock.
    Ultimately, Railtrack failed, mostly because it had failed 
to invest in its core business, the rail infrastructure. 
Instead, it focused on developing center-city London real 
estate. It's in everybody's interest for the national rail 
passenger system to succeed. The approach I've outlined here 
will mean better service and greater passenger usage. The 
precedents exist for utilizing the best of private and public 
resources. We have seen this approach work in freight programs, 
we have seen it work for toll roads. By funding and reinvesting 
in the Northeast Corridor, we could create a living and working 
business model that will serve as an example for the 11 other 
designated high-speed rail corridors.
    Thank you for providing the opportunity to testify, and I 
welcome your questions.
    [The prepared statement of Mr. Serlin follows:]

            Prepared Statement of Robert Serlin, President, 
                  Rail Infrastructure Management, LLC
    Good morning Madame Chairman and distinguished members of this 
committee. My name is Robert Serlin. My background has been developing 
business solutions for revitalizing capital-intensive transportation 
and basic commodities businesses. I appreciate the opportunity to 
testify before the Subcommittee today.
    I am a President of Rail Infrastructure Management, LLC, an entity 
initially organized in 1997 to analyze opportunities for investment in 
the rail industry and to provide the public sector a partner to develop 
innovative rail passenger solutions. The need for such an effort was 
identified in a report produced by the so-called Blue Ribbon Panel--the 
``Working Group on Intercity Rail Passenger Service''--which was 
convened in 1997 by House Transportation and Infrastructure Chairman 
Bud Shuster to address Amtrak's organization and financial structure.
    There has rarely been a time when the topic of passenger rail 
deserved as much focus from a public policy perspective as the one in 
which we live. Our highway capacity fails to meet demand and further 
highway build-out in urban areas is unlikely, population growth 
continues, and the airline industry struggles to identify an 
economically viable business model. Yet, the one truly scalable means 
of transportation--the passenger railroad--a transportation mode that 
can be fast, safe, environmentally desirable, and consumer friendly, 
has been ignored or minimized.
    As we look at the future of inter-city passenger rail service, I 
believe that there are three major, immediate challenges facing Amtrak.
    The first challenge is to end the recent experience of almost 
regular financial crises. In this regard, I think that Mr. David Gunn, 
working with the Department of Transportation and Congress, deserves 
much credit.
    The second challenge is to restore the infrastructure to a state of 
good repair.
    The third and most ambitious challenge is to find ways to 
revitalize rail passenger service in the Northeast. The basic station 
pattern in the Northeast was laid out in the 1920s and 1930s and 
ridership has been basically flat for much of Amtrak's history. The 
Northeast Corridor is the most densely populated corridor in the world. 
It has the potential for dramtically increased ridership, which will 
have a strong positive effect on Amtrak's financial results.
    Though most passenger railroads are owned by the public sector, the 
magnitude of capital required has, unfortunately, grown to a level well 
beyond that achievable through annual Federal or state appropriations. 
Future investment in passenger rail will require a blending of the 
public and private sectors and, as Secretary Jackson has said, ``a new 
business model.''
    We have recently seen innovatively financed infrastructure projects 
such as the Alameda Corridor in Southern California. Several states are 
seeking ways to work in partnership with the Nation's freight railroads 
to develop other new corridors. These publicly owned rail 
infrastructure corridors will need to be maintained and operated in 
accordance with Federal laws and regulations. Amtrak has strived to be 
a catalyst for change, but being chronically short of funds, it can 
only offer moral support and limited equity.
Stakeholder Needs Guide Solutions
    I am going to focus my comments here on Amtrak, though they are 
equally applicable to the other eleven DOT-designated high speed rail 
corridors.
    A solution cannot be created without first identifying the 
stakeholders and understanding their needs. The interests of critical 
stakeholders such as labor and the states, as represented here today by 
Mr. Sonny Hall and Mr. Joseph Boardman, Chairman of the Transport 
Workers Union and Commissioner of NY State's Department of 
Transportation respectively, must each fully be taken into account and 
incorporated into any such public-private partnership. The vested 
commuter carriers and the freight railroads with operating rights are 
also key stakeholder. Amtrak, another critical stakeholder, must be 
able to run its high speed trainsets at up to 150 mph, and connect New 
York and Washington in as few as two hours.
    The Federal Government is, perhaps, the most important stakeholder. 
Secretary Mineta, Deputy Secretary Jackson and Administrator Rutter 
have developed a set of principals that are a solid basis for a 
legislative proposal and are consistent with my views.
Solution is Contained in the Blue Ribbon Panel's Report
    Amtrak currently manages two very different and, in some ways, 
conflicting businesses:

   The first, providing passenger rail service, operating 
        trains for many constituencies and markets over 23,000 route-
        miles in 46 states.

   The second, managing the 600 route-miles of owned 
        infrastructure, primarily located in the Northeast, which 
        represents an integral part of the Northeast states regional 
        transportation system.

    This second business, the infrastructure, consumes significant 
Amtrak resources. It has been estimated that approximately sixty-five 
percent of Amtrak's cash losses are infrastructure-related. Therefore, 
the Blue Ribbon Panel, the Amtrak Reform Council and others have 
proposed separating Amtrak's operations into two separate, Federally 
owned corporations.
    Under such a proposal, each corporation would control its 
respective assets. Amtrak would retain the rolling stock, shops, 
reservation system, and operating rights over the Nation's freight 
network. Amtrak would continue to run its trains throughout the Nation 
and the Northeast Corridor. Freed of the owned infrastructure, the cost 
of operating specific rail services could more easily be quantified 
since each service would be largely a variable cost enterprise and 
unburdened by infrastructure allocations. Amtrak could more easily 
attract new capital since it would be easier to match revenues to 
costs.
    The separation of passenger transportation from the infrastructure 
would free Amtrak to focus on its core competency and would liberate 
resources (both Federal and state) to be spent in a targeted manner to 
enhance the passenger rail system all across the country.
Financial Approach
    Based upon figures published in oversight reviews and independently 
conducted surveys of potential private sector investors, I believe that 
an infrastructure financing plan can be created and funded using non-
appropriated funds generated from a combination of existing financial 
instruments.
    It is clear that financing is the key to creating a successful rail 
infrastructure company. The financial markets have developed to a point 
where almost any financing requirement can be addressed through a 
variety of products. Many, if not most of these, do not require a 
Federal appropriation.
    The market for risk continues to grow rapidly. In this particular 
case, factors that will be critical for successful public-private 
partnership will include: (i) clear public policy; (ii) realistic 
timeframe; (iii) credible operational plans; and (iv) accountability. 
Let me talk about each of these briefly.

   Public policy needs to address the parameters and 
        requirements of what must be done. In this case, it would 
        include separating passenger transportation services from 
        infrastructure management.

   A reasonable time-frame must be stipulated, such as between 
        thirty and fifty years, given the investment required to 
        reverse the deferred maintenance and turn an operating profit. 
        Profitability can only be achieved by removing choke-points in 
        the infrastructure that constrain train through-put, limit 
        maximum speed and make journey times non-competitive. Our 
        projections indicate that it will take between thirteen and 
        fifteen years to reach cash breakeven.

   A framework for supervising the infrastructure manager and 
        the relationships between the multiple infrastructure-users 
        must be found. The solution should use existing entities, such 
        as the Federal Railroad Administration and the Surface 
        Transportation Board. Guidelines for accountability should be 
        explicitly laid out under current FRA safety regulations and 
        applicable portions of the Railway Labor Act.

   Accountability can be provided both through the mandates of 
        the enabling legislation and the private financial markets. The 
        enabling legislation can create a framework that, for example, 
        establishes operational and safety requirements, preserves 
        existing passenger rail relationships, recognizes labor's role, 
        and perhaps even provides additional funding for Amtrak and 
        other regional organizations contemplating new rail passenger 
        corridors. Private financial markets impose financial 
        discipline and performance requirements.

    By using available financial instruments, I believe that the 
Federal Government will succeed in attracting the private sector to 
address this challenge. It will succeed in making available 
appropriateable funds that can be spent on the national passenger rail 
system where need and public purpose demand.
Not the British Experience
    We have heard much about the separation pitfalls experienced in the 
United Kingdom. Our experiences in the United States, however, indicate 
that bifurcation works and is successful. Amtrak only owns a little 
more than two percent of the total route miles over which it operates. 
The other ninety-eight percent is owned and dispatched by others. To 
the best of my knowledge, nobody claims that Amtrak's operations over 
its non-owned tracks is either unsafe or unsuccessful.
    Nonetheless, the U.K. does provide instructive lessons: some good 
and some bad. In 1995, the U.K. government privatized British Rail 
creating a publicly traded company called Railtrack to manage the 
infrastructure. A number of train service franchise holders were 
licensed to run trains. They brought focused, private sector marketing 
experience to the regional and long distance franchises and, by in 
large, thrived. Ridership grew approximately seventy percent in five 
years while over $4.3 billion was invested in new passenger rolling 
stock.
    Railtrack ultimately failed because it did not invest adequately in 
its core business--the rail infrastructure. Instead, it focused on 
developing center city London real estate. Factors attributable to 
Railtrack's demise include:

   initial planning that did not match reality: for example, 
        the company encouraged increased track usage before completing 
        the infrastructure improvements and maintenance necessary to 
        support such an increase;

   no government regulatory framework: Railtrack did not 
        operate under any operating regulatory agencies such as our 
        Federal Railroad Administration. This resulted in adversarial 
        relationships between the track users and the track manager; 
        and

   a legal system unsuited to making infrastructure management 
        decisions: under British law, Railtrack's leadership was 
        personally liable for the actions it took and, therefore, 
        outsourced all essential operating functions. This resulted in 
        a chaotic response to a string of major derailments in 2001.

    In the United States there currently exists a regulatory system 
with over one hundred years of history to prevent these pitfalls. In 
addition, it is understood that infrastructure improvements, including 
third tracks, new bridges, tunnels and stations, need to be made before 
ridership can be allowed to increase.
Conclusion
    I am not here to judge whether Amtrak could or could not have done 
a better job. I am impressed with Mr. Gunn's efforts to impose 
financial discipline on Amtrak and to focus Amtrak on its primary 
operating mission. But nonetheless, Amtrak's structural problems 
remain.
    It is in everyone's interest for the national rail passenger system 
to succeed. The approach I have outlined here will mean better service 
and greater passenger usage.
    The precedents exist for a solution utilizing the best of private 
and public resources. We have seen this approach in new freight 
projects. We have seen it in private toll roads. And in essence, we see 
it in the construction and landside operations of airport facilities. 
The challenge is to optimize that mix by letting the private sector 
address issues, such as infrastructure, that need in excess of ten 
years to be implemented.
    This will necessitate that the private and public sectors each 
acknowledge the importance of the other and that each permit the other 
to do their work. I agree with DOT's Inspector General, Mr. Ken Mead, 
who said before you a little over a month ago: ``Allowing an 
infrastructure company to operate ``like a business'' may mean 
relinquishing control over . . . which capital investments are made.''
    I would be the first to acknowledge that this is but a small part 
of fixing the larger puzzle of creating the best national passenger 
rail service possible. By funding and reinvesting in the Northeast 
Corridor, we can produce a living and working business model that will 
serve as an example for the other eleven designated high speed 
corridors.
    Thank you for providing me the opportunity to testify and I welcome 
questions you might have.

    Senator Hutchison. Thank you, Mr. Serlin.
    Mr. Sonny Hall, President of the Transport Workers Union of 
America of the AFL-CIO.

         STATEMENT OF SONNY HALL, PRESIDENT, TRANSPORT

         WORKERS UNION OF AMERICA, AFL-CIO; PRESIDENT,

           TRANSPORTATION TRADES DEPARTMENT, AFL-CIO

    Mr. Hall. We as well, Madam Chairman, will be summarizing 
our report, which we've already submitted.
    Chairman Hutchison, Ranking Member Inouye, and Members of 
the Subcommittee, my name is Sonny Hall, and I'm the 
International President of the Transit Workers Union, TWU, and 
as well President of the Transportation Trades Department, AFL-
CIO, TTD, and appear today in both capacities.
    TWU represents workers at Amtrak and in the freight rail 
industry, and TTD consists of 35 AFL-CIO unions across the 
entire transportation industry. Thank you for inviting me to 
testify today and for seeking new and innovative ways to fund 
passenger rail service.
    Transportation labor has long argued that our nation must 
make a serious and long-term financial commitment to Amtrak. We 
must recognize that Amtrak is a public service, just like 
highways, just like transit and other infrastructure that 
should serve the public's transportation needs and not be 
driven by profit motives.
    Understandably, there's a desire to look for new ways to 
increase the pot of money available, but in this current debate 
we must not forget how we got here. Amtrak was created in 
response to the financial bleeding of the Nation's freight rail 
carriers in trying to operate passenger rail. In plain English, 
Amtrak was nothing less than a bail-out of failing private 
passenger rail operations, an acknowledgement that there was no 
profit to be made here.
    The 30 years that have followed have been filled with one 
financial crisis after another. Amtrak has struggled to secure 
enough funding to simply remain in operation. Through these 
many dark days, Amtrak workers have repeatedly made the 
sacrifices needed to keep the trains running, but regrettably 
some have chosen to scapegoat Amtrak workers, saying they are 
part of the problem. This is not only untrue, but deeply 
offensive to those who have made years of sacrifice.
    As part of my testimony, I am submitting a report by noted 
economist Thomas Roth which decisively concludes that labor 
costs at Amtrak have remained constant over the past 21 years 
and have actually declined in real dollars. In fact, Amtrak 
wages have lagged far behind cost-of-living increases and trail 
the raises of freight and commuter rail workers. Just as the 
myth that Amtrak can exist without subsidies must end, so, too, 
must the myth and the scorn it breeds that Amtrak workers have 
made too much and too little sacrifice.
    Transportation labor will insist that jobs and livelihoods 
of Amtrak employees are not ignored or cast aside. As well, 
it's imperative that new collective bargaining agreements are 
completed without further delay, contract agreements that are 
already 3-1/2 years delayed, and of course any new financing 
mechanisms must protect the rights of the men and women who 
have built this railroad and have done everything they can and 
more to keep it running. The entire labor movement would 
strongly mobilize against any legislation that turns its back 
on Amtrak workers.
    I want to call the Committee's attention to a study 
released yesterday by the highly regarded Economic Policy 
Institute. The report, ``Amtrak Privatization: The Route to 
Failure'' challenges the myth that the solution to Amtrak's 
problems is to privatize the system. I understand that EPI has 
submitted a copy of this report for the record, and I urge 
members of the panel to use it as a guide as you consider 
various passenger rail legislative proposals.
    As chronicled in the EPI study, privatization of Amtrak is 
hardly the answer. In the mid-1990s, the British Government 
privatized passenger rail, and what happened? Rampant delays in 
service, higher accident rates, shoddy maintenance, and 
increased fares. Things got so bad that England has been 
spending the last few years trying to re-nationalize the system 
and the political party that came up with the idea to privatize 
in the first place has promised that if they get back into 
power they will surely not do it again.
    The EPI report questions how breaking up into a number of 
pieces would make things any better. Amtrak is drowning under a 
deficit, struggling to turn around a significant deferred 
maintenance crisis, already paying substandard wages, and is 
subject to an unprejudicial and highly volatile funding source. 
What EPI recommends, and the transportation labor endorses, is 
instead of privatizing Amtrak or reshuffling the deck chairs in 
a bureaucratic shell game, we should tackle the problems head-
on by making a strong, long-term financial commitment to 
Amtrak.
    TTD has specifically endorsed the $1.8 billion that Amtrak 
is seeking for Fiscal Year 2004, and we would hope that all 
Senators who are looking at a new funding plan would support 
this request as a baseline level. We must be crystal clear in 
rejecting the fable that Amtrak can and should make a profit. 
Every other mode of transportation receives Government support 
to survive. Why do we insist on holding Amtrak to a higher 
standard?
    As the EPI study points out, highways receive 43 times the 
funding level that rail receives, and I think these are 
significant numbers, and all certifiable. Aviation receives 20 
times as much, and transit, which EPI candidly refers to as the 
other stepchild in the Federal budget, received eight times as 
much Federal support. Overall, passenger rail received just 
over 1 percent of all Federal transportation dollars and about 
one-third of 1 percent of combined Federal, State, and local 
spending. Amtrak must be given the same chance to succeed that 
our nation's highways, air and water transportation systems 
have appropriately been given over the years.
    This concludes my testimony. I hope we can work together to 
fund and support Amtrak's system that serves the interests of 
the passengers, communities, and workers, and I'll add, I know 
we can work together.
    [The prepared statement of Mr. Hall follows:]

 Prepared Statement of Sonny Hall, President, Transport Workers Union 
             and Transportation Trades Department, AFL-CIO
    Chairman Hutchison, Ranking Member Inouye and members of the 
Subcommittee, my name is Sonny Hall and I am International President of 
the Transport Workers Union (TWU) as well as President of the 
Transportation Trades Department, AFL-CIO (TTD) and appear today in 
both capacities. TWU represents workers at Amtrak and in the freight 
rail industry and TTD consists of 35 affiliated unions across the 
entire transportation industry, including the 12 rail unions that make 
up our Rail Labor Division.\1\
---------------------------------------------------------------------------
    \1\ The following TTD affiliates are members of our Rail Labor 
Division: American Train Dispatchers Department/BLE; Brotherhood of 
Locomotive Engineers; Brotherhood of Maintenance of Way Employes; 
Brotherhood of Railroad Signalmen; Hotel Employees and Restaurant 
Employees Union; International Association of Machinists and Aerospace 
Workers; International Brotherhood of Boilermakers, Blacksmiths, 
Forgers and Helpers; International Brotherhood of Electrical Workers; 
National Conference of Firemen & Oilers/SEIU; Sheet Metal Workers 
International Association; Transportation · Communications 
International Union; and Transport Workers Union.
---------------------------------------------------------------------------
    Let me first thank you Chairman Hutchison for inviting me to 
testify today on this extremely important and timely subject. This 
Committee has a history of seeking the views of transportation workers 
and their unions and I applaud you for including us in your 
deliberations over the future of Amtrak. We might not always agree, but 
I think including us in this critically important debate will only 
enhance this Committee's consideration of how to improve and support 
passenger rail service across America.
    The Committee has called this hearing to discuss ways to finance 
intercity passenger rail service. We applaud your leadership in 
tackling this difficult issue. Transportation labor has long argued 
that this country needs to make a real, long-term financial commitment 
to Amtrak and to recognize once and for all that passenger rail service 
is a public service--not a ``for-profit'' endeavor. Unfortunately, 
Congress and this Administration have failed to provide Amtrak the 
level of support it needs to succeed as a viable national rail 
passenger service. In short, Amtrak suffers from too many years of 
chronic under-funding and any solution considered by Congress must 
reverse what has been throughout Amtrak's existence wildly unrealistic 
transportation policy.
    As I will discuss in more detail, yesterday the Economic Policy 
Institute (EPI), a highly respected Washington, DC-based think tank, 
released a study that debunks the myth that the solution to Amtrak's 
problems is to privatize the system. It is our understanding that EPI 
has submitted a copy of this report for the record and I urge members 
of the panel to review it and to use it as a guide as you consider 
various passenger rail legislative proposals.
    We have long understood that calls to privative Amtrak, or to 
insist that the carrier somehow turn a profit, are simply a way to 
expect the impossible from a national rail system and in the end use 
the operation's financial distress to call for its elimination. From a 
transportation policy perceptive, as well as from a labor perspective, 
we find this result unacceptable and we are heartened by the fact that 
so many Members of this Committee agree with us. We sincerely hope that 
EPI's in depth analysis of the perils of privatization will allow this 
Committee and other policy makers to close the book on this dangerous 
experiment and instead properly direct attention to more sensible 
solutions.
    I know there is a great deal of interest on this Committee, and 
from many members of this panel, in finding new and innovative ways to 
fund national passenger rail service. As we have in other sectors of 
transportation, we support finding new ways to attract badly needed 
capital for passenger rail infrastructure, and I will discuss this 
issue in more detail later in my testimony. But let me say now that we 
need to first and foremost support the national passenger rail system 
we have today. And as we look to the future, we must remember the 
history behind Amtrak's creation and the financial hardship inspired by 
many years of neglect and inadequate Federal investment. Moreover, we 
must learn from that experience as we venture to make Amtrak a 
successful national railroad operation.
    Amtrak was created three decades ago with a simple goal in mind: to 
establish a modern, efficient intercity passenger railroad that can 
provide a truly national network of passenger transportation. Amtrak 
was charged with operating and revitalizing intercity passenger rail 
service and integrating such service into our national transportation 
system because it was clear in the late 1960s that freight carriers 
were unable and unwilling to sustain the severe financial losses 
associated with operating passenger rail service. Simply stated, Amtrak 
was created in response to the financial bleeding associated with the 
rail passenger operations of the Nation's freight rail carriers. In 
plain English, Amtrak was nothing less than a bail-out of failing 
private passenger rail operations.
    Unfortunately, the history of Amtrak is filled with one financial 
crisis after another as the carrier has struggled to secure adequate 
funding simply to remain in operation. Amtrak workers have made 
repeated sacrifices to help the railroad survive through some of its 
darkest days, including efforts in the past to eliminate or slash 
Amtrak's Federal funding. Amtrak workers have taken the brunt of the 
railroad's financial hardships year after year. But, regrettably, some 
have chosen to scapegoat Amtrak workers, saying they are part of the 
problem. This is not only untrue, but deeply offensive to those who 
have made years of sacrifice.
    Several weeks ago, rail labor released a study on Amtrak wage data 
prepared by noted economist Thomas Roth. The report, which I am 
submitting as part of my testimony, definitively demonstrates that 
labor costs at Amtrak, including wages and benefits, have remained 
constant over the past 21 years and have actually declined in real 
dollars. In fact, Amtrak wages have lagged far behind cost-of-living 
increases. Amtrak employees earn well below the prevailing rates of 
their counterparts in the freight and commuter rail industry.
    A typical Amtrak worker today earns on average 22 percent less than 
a worker performing the same job on a freight railroad. It is also 
significant that as a percentage of total operating expenses, Amtrak's 
employment costs have not increased in almost 20 years. Just as the 
myth that Amtrak can exist without subsidy must end, so too must the 
myth--and the scorn it breeds--that Amtrak workers make too much and 
sacrifice too little.
    We were happy to hear Mr. Gunn testify recently that Amtrak's 
workers' wages are not the problem. Amtrak employees have been without 
a new contract for three and one-half years, and are grossly underpaid. 
In fact, Amtrak employees have not had a wage increase in this century, 
and since their contracts became amendable 1999, have received a COLA 
built in to the old contract of a total of 59 cents per hour. Over that 
four year period, that works out to a little over a penny per month.
    Ms. Chairwoman and members of this Committee, rail labor wants 
Amtrak to succeed. We want Amtrak to prosper. However, we also must 
respect and properly acknowledge the frontline men and women who do 
their best every day to move people safely and efficiently from one end 
of this country to the other over tens of thousands of miles of 
railroad track. As TTD's 35-member Executive Committee resolved earlier 
this year, ``As Congress and the President secure Amtrak's future, 
transportation labor will insist that the jobs and livelihoods of 
Amtrak employees are not ignored or cast aside and that new collective 
bargaining agreements are completed without further delay.''
    As chronicled in the EPI study, privatization of Amtrak is hardly 
the answer. We need only look at Great Britain's failed experiment to 
see what can happen when we allow a public service to be hijacked by 
private interests. Beginning in 1994 and ending in 1996, British Rail, 
motivated by the zeal for broad privatization of various public 
services, was transformed from a publically run service into a 
``competitive'' railroad market. The story of British Rail underscores 
the threats of ideologically driven policy experiments such as rail 
privatization. British passengers were saddled with increased fares, 
shoddy maintenance practices, and dangerous cost cutting including 
excessive job reductions. This resulted in higher accident rates, 
deteriorated service and coordination problems within a maze of poorly 
managed providers. And the British people were left with an operational 
meltdown of unprecedented proportions.
    By 1999, with problems mounting, the government began to undo the 
privatization experiment and sought to disengage the so-called market 
model. In the end, as pointed out by EPI, Britain will have a system 
that looks a lot like Amtrak--but better funded. I should note, and 
this fact is cited in the EPI report, that the Conservative shadow 
Secretary of Transportation recently pledged to voters that if the 
Torries are returned to power, they will never attempt to re-privative 
the rail system.
    Let me also comment on proposals put fourth by the Amtrak Reform 
Council, the Administration and others that would solve Amtrak's 
problems by breaking up the system and dividing various 
responsibilities. ARC's proposal, for example, would slice Amtrak into 
component operations and then turn to some very complicated contracts 
to ensure basically the same service that Amtrak provides today. 
Besides raising transaction costs (a major problem with British Rail) 
and creating additional layers of bureaucracy, I am not sure what will 
be accomplished by this or other models following a similar course. Is 
Amtrak run perfectly today? No. There are of course areas for 
improvement and we want to work with the carrier and this Committee on 
that effort. But how is dividing the franchise into various parts 
inherently any better then the current framework? Amtrak is drowning 
under a deficit, struggling to turn around a significant deferred 
maintenance crisis, already paying substandard wages to employees and 
subject to unpredictable and highly volatile funding sources. These are 
the issues that deserve the immediate attention of this Committee.
    We understand that some members of this Committee and other 
interests are pursuing new ways to fund transportation projects, 
including inter-city passenger rail. In particular, focus has turned to 
bonding initiatives that are designed to raise billions of dollars for 
capitol and related improvements. Obviously, we welcome any attempt to 
increase the pot of money available and to create the operational, 
maintenance and construction jobs so badly needed in America. But these 
initiatives must be carried out responsibly and the interests of 
employees must be protected. First and foremost, any funding plan must 
adhere to existing and longstanding employee protections. Any of the 
funding initiatives would be Federal in nature and the inclusion of 
labor standards is consistent with longstanding and successful 
transportation policy previously enacted on a bipartisan basis. We 
would be forced to oppose such legislation if the interests of 
employees are not protected.
    In addition, we urge against speculative funding proposals as a 
substitute for supporting our existing national rail system--Amtrak. 
TTD has specifically endorsed the $1.8 billion that Amtrak is seeking 
for FY 2004 and we would hope that all Senators who are looking at new 
funding plans would support this request as a baseline level. Let us 
mobilize to reject the principle that Amtrak must make a profit because 
it is that basic notion that has doomed Amtrak to failure for three 
decades. As EPI points out in explicit detail, highways receive 43 
times the Federal funding that rail receives; aviation receives 20 
times as much; and transit--which EPI candidly refers to as ``the other 
stepchild in the Federal budget''--receives 8 times as much Federal 
support. Since 1971, Amtrak has received about $21 billion in Federal 
dollars--less than the $23.6 billion that highways received in 1999 
alone. And overall, passenger rail receives just over 1 percent of all 
Federal transportation dollars and about one-third of one percent of 
combined federal, state and local funding. What is clear is from these 
figures is that Amtrak must be given the same chance to succeed as our 
Nation's highway, air and water transportation systems have been given 
over many decades.
    Again Madam Chairman, thank you for allowing transportation labor 
the opportunity to present our views on the future of Amtrak and inter-
city passenger rail service. This issue is critically important to us, 
not only for the jobs that such a service creates and supports, but 
because we agree with you and many of your colleagues that national 
passenger rail service is an integral part of our overall 
transportation system. I hope we can work together to fund and support 
an Amtrak system that serves the interests of passengers, communities 
and workers.

    Senator Hutchison. Thank you, Mr. Hall. Mr. James Query, 
the Senior Vice President of Lehman Brothers in Philadelphia.

               STATEMENT OF JAMES (ROCKY) QUERY, 
             SENIOR VICE PRESIDENT, LEHMAN BROTHERS

    Mr. Query. Thank you, Chairman Hutchison, Senator 
Lautenberg, for the invitation to participate in this 
discussion this morning. Again, my name is James ``Rocky'' 
Query. I'm a Senior Vice President, as you said, in the Public 
Finance Department of Lehman Brothers, an international 
investment banking firm. The firm has been very active through 
the years as one of the largest providers of investment banking 
services both to governmental as well as corporate clients in 
the transportation industry.
    Over the last 20 years or so, I've had the opportunity to 
develop financing programs on behalf of a number of the largest 
transportation agencies in the country across all sectors, 
including highways, transit, airports, marine ports, as well as 
intercity passenger rail, and of perhaps particular relevance 
to this Subcommittee I've previously executed transactions and 
provided financial advisory services for Amtrak.
    Presently, my colleagues and I at Lehman Brothers are also 
members of a private consortium led by Fluor Daniel and 
Bombardier, which is one of two finalists selected by the 
Florida High Speed Rail Authority to develop new high-speed 
passenger rail service between Orlando and Tampa as the first 
phase of the development of a statewide high-speed intercity 
rail system in Florida.
    I appreciate the opportunity to comment on funding 
requirements and financing alternatives that you're 
considering. The efforts and the discussion this morning 
recognize the growing demand rather than stagnant demand or 
declining demand, but increasingly rapidly growing demand for 
reliable intercity passenger rail service across the country. 
It's not only travelers, clearly, in the Northeast Corridor who 
continue to be highly dependent on such service.
    As service levels grow on the West Coast, as has been 
described, the essentiality of intercity rail in that corridor 
continues to grow as rapidly, if not more rapidly, than it has 
in the Northeast Corridor, as you've said so clearly this 
morning as well. Across the country, both in Texas as well as 
Florida, throughout the Midwest, throughout the Southeast, 
transportation planners and policymakers are all looking to 
passenger rail service as a way to address growing congestion 
concerns faced by their transportation network, and clearly, as 
has already been stated this morning as well, September 11 
demonstrated that just a series of corridors is not sufficient, 
either. The importance of maintaining a national passenger rail 
transportation system is very definitely an essential part of a 
diversified and well-balanced transportation system.
    I would emphasize several elements that would be most 
beneficial from my perspective in establishing a funding 
framework and particular financing tools that could be most 
helpful in addressing these needs. First, I would emphasize the 
importance of establishing a reliable source of long-term 
funding and funding formulas for intercity passenger rail 
projects. This is in my opinion the single most important 
measure the Subcommittee could take to support capital funding 
for such projects.
    In 1997, when Congress passed the Taxpayer Relief Act, it 
provided a multiyear funding package for Amtrak, and that was 
the first time in Amtrak's history, I believe, that that had 
actually taken place. Ideally, capital-intensive infrastructure 
programs such as rail are best supported, obviously, by a 
dedicated source of ongoing revenues, but if you can't have a 
dedicated source of revenues, a multiyear package of funding is 
the next best thing, and Amtrak was able to take that multiyear 
commitment in the 1997 legislation, and it became an essential 
ingredient in Amtrak's ability to establish an investment 
credit rating that enabled it to use the markets effectively to 
achieve cost-effective financing for the improvements in the 
high-speed rail service in the Northeast Corridor that allowed 
for the electrification of the system up to Boston and 
expanding service in the corridor.
    The second important point would be eliminating the 
disparity in available funding for intercity rail projects 
compared to other surface transportation modes such as highway 
and transit. I fundamentally agree with the comments made this 
morning with regard to how beneficial it would be to states 
like California. I think from sitting in the seat of the 
director of transportation in any state to be faced with a 
situation where if you fund highways or fund transit you know 
there will be 80 percent matching funds coming, but if you fund 
something that is called intercity rail there's no funding 
coming. It makes it very difficult, I think, from both a 
transportation planning perspective as well as budget planning 
purposes.
    The challenge in simply adding intercity rail to the 
existing programs, though, clearly is that trust fund resources 
are viewed by many as inadequate already to meet just the needs 
of highway and transit alone. Simply adding a new category of 
eligible spending will only increase the level of competition 
between modes for available funds.
    Third, the framework provided by current State 
transportation improvement plans from my perspective provides 
perhaps the most effective mechanism for establishing 
priorities among competing highway and transit projects, so by 
allowing states to take the lead through their transportation 
improvement plans, and identifying and developing specific 
projects, can be an effective way to establish intercity rail 
priorities as well.
    Fourth, a recognition that intercity rail projects are 
different than transit projects--they often cross state lines, 
just by way of example, and so funding programs should 
encourage State efforts to act collectively by allowing them to 
combine resources to meet matching fund requirements.
    Fifth, intercity rail projects should enjoy the same access 
to tax-exempt financing as is currently enjoyed by other 
transportation modes such as airports and seaports. Most 
capital spending for intercity rail is done by Amtrak or the 
freight railroads, none of whom have the ability to issue tax-
exempt debt. Congress could provide for the issuance of exempt 
facility, tax-exempt debt, free from volume cap restrictions 
for qualifying passenger rail projects, as is presently allowed 
for airport and seaport projects.
    Sixth, tax credit bonds can be a highly effective way for 
the Federal Government to provide long-term capital funding 
support for intercity rail needs. The experience with tax 
credit bonds to date in the context of the QZAB program for 
school construction projects from my perspective should be 
viewed as encouraging, rather than discouraging. Clearly, the 
dollar volumes that are being discussed are quite different, 
but the use of QZAB bonds continues to grow, as does the 
private investor support for such projects. Recent proposals 
for using the tax credit bond mechanism for transportation 
projects all share a number of key provisions that will 
increase the level of investor interest and market receptivity 
for such programs. Some of those key features are the ability 
to separate the tax benefits themselves from the repayment of 
principal, so-called stripability.
    Other key factors for effectiveness will be including an 
appropriate interest rate formula to establish the level of tax 
benefit, and provisions regarding the potential risk of 
recapture of tax benefits from investors should project 
sponsors fail to comply with program requirements.
    Seventh, outside of the Northeast Corridor, passenger rail 
service is dependent on the conditions of rail and right-of-way 
owned and maintained by private freight rail companies. Finding 
adequate capital to meet the service levels required for 
passenger traffic is difficult for these companies as well. 
Access to tax-exempt financing for projects on private right-
of-way which have been included in a State transportation 
improvement plan, as well as measures to address liability 
concerns, could be very helpful incentives to encourage greater 
freight rail investment and necessary upgrades for passenger 
rail service.
    And then last I would say, in terms of public-private 
partnerships, these can very much be an effective mechanism for 
development of new passenger rail projects. As I mentioned, 
Lehman Brothers is currently a member of a consortium that is 
one of two finalists who have proposed a plan for the Florida 
High Speed Rail Authority. Our proposal utilizes a unique 
combination of public and private sector funding for the 
system, rolling stock as well as infrastructure. Very 
importantly, our proposal depends upon the availability of tax 
credit bond support totaling nearly $2 billion over the next 6 
years. In conjunction with the issuance of tax credit bonds, 
Fluor Daniel and Bombardier will be placing private capital at 
risk to help fund system capital as well as operating costs.
    So as you evaluate other public-private initiatives that 
may be proposed such as the one described by either the AAR or 
rail infrastructure management, for example, we would encourage 
you to recognize that intercity rail projects, like all other 
public transportation modes, will require some level of ongoing 
public support, and this operating and capital subsidy is not 
evidence of management failure in any way. Long-term, reliable 
Government support is a necessary ingredient for dependent and 
efficient public transportation system. The task clearly is one 
of providing the necessary support in the most cost-effective 
fashion.
    I've not tried to comment on all of the financing proposals 
that have been made, but I welcome any specific questions, and 
thank you again for your efforts to address this issue.
    [The prepared statement of Mr. Query follows:]

   Prepared Statement of James (Rocky) Query, Senior Vice President, 
               Public Finance Department, Lehman Brothers
    Chairman Hutchinson and Distinguished Members of the Subcommittee:

    My name is James (Rocky) Query. I am a Senior Vice President in the 
Public Finance Department of Lehman Brothers, an international 
investment banking firm. The Firm is one of the largest providers of 
investment banking services to governmental and corporate clients in 
the transportation industry. Over the last twenty years I have had the 
opportunity to develop financing programs on behalf of a number of the 
country's largest transportation agencies serving all transportation 
sectors including highways, transit, airports, marine ports and 
intercity passenger rail. Of particular relevance to the Subcommittee, 
I have previously executed transactions and provided financial advisory 
services for Amtrak. Presently, my colleagues and I at Lehman Brothers 
are also members of a private consortium led by Fluor Daniel and 
Bombardier which is one of two finalists that have been selected by the 
Florida High Speed Rail Authority to develop new high speed passenger 
rail service between Orlando and Tampa, Florida as the first phase of 
the development of a state-wide high speed intercity rail system.
    I appreciate the opportunity to comment on funding requirements and 
financing alternatives that you are considering to address the capital 
needs for conventional and higher speed passenger rail service. The 
Subcommittee's efforts recognize the growing demand for reliable 
intercity passenger rail service across the country. Travelers in the 
Northeast Corridor continue to be highly dependent on such service. As 
service levels grow on the West Coast, the essentiality of intercity 
rail service in that corridor has grown as well. The high priority 
placed on funding for passenger rail service by groups such as the 
National Governor's Association, the States for Passenger Rail 
Coalition, the National League of Cities and other municipal 
organizations is the best evidence that a broad-based group of 
transportation planners and policymakers in the Midwest, the Southeast, 
Florida and Texas are all looking as well to new passenger rail service 
to address growing congestion concerns faced by their transportation 
networks. Beyond the demonstrated demand for improved rail service in 
select corridors, the events of September 11th also emphasized for 
many, the importance of maintaining a national passenger rail 
transportation system as part of a diversified and well-balanced 
transportation system.
    As this Subcommittee considers the funding framework and financing 
tools that can best address these needs, I would emphasize several 
elements that would be most beneficial:

        First, establishing a reliable source of long-term Federal 
        funding and funding formulas for intercity passenger rail 
        projects is the single most important measure this Subcommittee 
        could take to support capital funding for such projects. In 
        1997, Congressional passage of the Taxpayer Relief Act provided 
        a multi-year funding package for Amtrak. Ideally, capital 
        intensive infrastructure programs such as rail are best 
        supported by a dedicated source of ongoing revenues. Multi-year 
        funding is the next best thing. The multi-year funding provided 
        to Amtrak in the 1997 legislation was an essential ingredient 
        in Amtrak's ability to establish an investment grade credit 
        rating that enabled it to achieve highly cost-effective 
        financing for the improvements in high speed rail service in 
        the Northeast Corridor that were launched over the past few 
        years.

        Second, eliminating the disparity in available funding for 
        intercity rail projects compared to other surface 
        transportation modes such as highway and transit is essential. 
        Highway and transit projects established as priorities in a 
        state's transportation improvement program receive similar 
        levels of Federal matching support under existing trust fund 
        formula programs. The same should be true for intercity 
        passenger rail priorities as well. The challenge, of course, is 
        that trust fund resources are viewed by many as inadequate 
        already to meet the needs of highways and transit alone. Simply 
        adding a new category of eligible spending will only increase 
        the level of competition between modes for available funds.

        Third, the framework provided by current state transportation 
        improvement plans provides an effective mechanism for 
        establishing priorities among highway and transit projects. 
        Allowing states to take the lead through their transportation 
        improvement plans in identifying and developing specific 
        projects can be an effective way to establish intercity rail 
        priorities as well.

        Fourth, intercity rail projects often cross state lines. 
        Funding programs should encourage state efforts to act 
        collectively by allowing them to combine resources to meet 
        matching fund requirements.

        Fifth, intercity rail projects should enjoy the same access to 
        tax-exempt financing as is currently enjoyed by other 
        transportation modes such as airports and seaports. Most 
        capital spending for intercity rail is done by Amtrak or the 
        freight railroads, none of whom have the ability to issue tax 
        exempt debt. Congress could provide for the issuance of exempt 
        facility tax exempt debt free from volume cap restrictions for 
        qualifying passenger rail projects as is presently allowed for 
        airport and certain seaport projects.

        Sixth, tax credit bonds can be a highly effective way for the 
        Federal Government to provide long-term capital funding support 
        for intercity rail needs. The experience with tax credit bonds 
        to date in the context of the QZAB program for school 
        construction projects should be encouraging. Use of QZAB Bonds 
        continues to grow as does the private investor support for such 
        projects. Recent proposals for using the tax credit bond 
        mechanism for transportation projects have shared a number of 
        key provisions that will increase the level of investor 
        interest and market receptivity for such a program such as the 
        ability to separate the tax benefits from the repayment of 
        principal (strippability). Other key factors that will 
        determine effectiveness include the interest rate formula that 
        will be adopted to establish the level of tax benefit and 
        provisions regarding the potential risk of recapture of tax 
        benefits from investors should project sponsors fail to comply 
        with program requirements.

        Seventh, outside of the Northeast Corridor, passenger rail 
        service is dependent on the conditions of rail and right-of-way 
        owned and maintained by private freight rail companies. Finding 
        adequate capital to meet the service levels required for 
        passenger traffic is difficult for these companies as well. 
        Access to tax-exempt financing for projects on private rail 
        right-of-way which have been included in a state transportation 
        improvement plan and measures to address liability concerns 
        could be helpful incentives to encourage greater freight rail 
        investment in necessary upgrades for passenger rail service.

        Eighth, public private partnerships can be an effective 
        mechanism for development of new passenger rail projects. As I 
        mentioned, Lehman Brothers is currently a member of a 
        consortium led by Fluor Daniel and Bombardier that is one of 
        two finalists who have proposed a plan to the Florida High 
        Speed Rail Authority to provide high speed passenger rail 
        service between Orlando and Tampa, Florida as the first phase 
        of a state-wide system. Our proposal utilizes a unique 
        combination of public and private sector funding for the system 
        rolling stock and rail infrastructure. Importantly, our 
        proposal depends upon the availability of tax credit bond 
        support totaling nearly $2 billion dollars over the next six 
        years. In conjunction with the issuance of tax credit bonds, 
        Fluor Daniel and Bombardier will be placing private capital at 
        risk to help fund system capital and operating costs.

    As you evaluate other public private initiatives that may be 
proposed, such as the one described by Rail Infrastructure Management, 
we would encourage you to recognize that intercity rail projects, like 
all other public transportation modes, will require some level of 
ongoing public support. Operating and capital subsidies are not 
evidence of management failure. Long-term reliable governmental support 
is a necessary ingredient for any dependable and efficient public 
transportation system. The task is one of providing the necessary 
support in the most cost-effective fashion.
    A number of specific measures have been proposed for the 
Subcommittee's consideration. I have not tried to comment on all of the 
financing measures that have been proposed, but I welcome any specific 
questions you may have . Thank you again for your efforts to address 
this important issue.
    James (Rocky) Query is a Senior Vice President with Lehman 
Brothers, an investment banking firm. He is a member of the Firm's 
Public Finance Department responsible for its work with many public 
transportation agencies in several sectors including highways, transit, 
intercity rail and airports. He has more than twenty years of industry 
experience and has worked with many of the country's largest rail 
programs. He has previously served as financial advisor and underwriter 
for transactions on behalf of Amtrak. Lehman Brothers is currently a 
member of a consortium led by Fluor Daniel and Bombardier which has 
proposed to develop high speed rail service between Orlando and Tampa 
Florida as the first phase of the development of a state-wide high 
speed rail system.

    Senator Hutchison. Thank you very much, Mr. Query.
    Senator Lott needs to leave, and Senator Lautenberg has 
agreed to let him take his time, and I will certainly defer 
until after you've left.

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. I thank you very much, Madam Chairman. Mainly 
I wanted to thank you for having this hearing. I want to thank 
the witnesses for being here. It's been very interesting, and 
we're looking for some answers and some solutions. 
Unfortunately, a lot of people come to us and say, don't do 
this, don't do that, don't do something else, we can't do this, 
we can't do that. We're looking for answers here on what we can 
do.
    I think Mr. Query, maybe you did begin to touch on 
specifics that we should consider, but we thank all of you for 
being here. I continue to be a supporter of Amtrak. I think we 
should have a national rail passenger system, not one that is 
just on the Eastern Seaboard, although obviously that is very 
important. I think we just are going to have to make up our 
minds what are we going to do to fund it, and if we're not 
prepared to fund it, then probably we should go ahead and cut 
our losses now.
    I don't advocate that. I think we should try to find a way 
to get this done without it interfering with a viable freight 
service or other things that are being discussed here, and I 
think the Administration is going to have to help us come up 
with some solutions and make tough decisions on how we're going 
to do that, and I know that Chairman Hutchison is going to be 
looking for some ideas that we can put together in legislation 
and act on this year, and I just wanted to thank you for having 
this hearing.
    Senator Hutchison. Well, thank you, Senator Lott. I 
certainly--I have a bill that is another way to finance 
infrastructure. I think we must do something bold or we are 
going to be continuing to try to catch up, and run and catch 
up, and run and catch up, and never catch up, so that is my 
goal, and I look forward to working with you on that.
    Senator Lott. Thank you.
    Senator Hutchison. Thank you. I'm going to defer my 
questions until Senator Lautenberg and Senator Smith have had a 
chance to talk, because I appreciate their interest in the 
hearing, and then I will have a few questions at the end.
    Senator Lautenberg.
    Senator Lautenberg. Thank you, Madam Chairman. That's very 
generous of you in view of the threat that the Nets bring to 
San Antonio, and it is gallant.
    The testimony that we heard is all good, not good good, if 
you know what I mean, but all interesting, let's say, and there 
are enough differences of view to muddy up the issue, not 
intentionally, but, because these are points made with a degree 
of validity. However, it comes down to just a couple of things, 
and I think, Madam Chairman, we have got to kind of resolve 
this. We have to drop the notion that passenger rail service 
can support itself. I think you've said it, and it has to be 
understood it's a service.
    Neither can aviation support itself, and we certainly don't 
expect the highway system to be carried entirely by taxes that 
are derived within a particular state. That's the investment in 
our democratic society, to try to provide as much pollution-
free travel as we can and reduce as much congestion time as we 
can. If we start there and say, look, we are hopelessly 
entangled with passenger rail service, and all you have to do 
is look at the statistics, don't look at Amtrak's balance sheet 
or operating statement as directly as one might when looking at 
a company. We know that lots of companies fail, and government, 
when they try government-type services. Where else has 
passenger rail gone private and done well? I can't think of it, 
unless it's a tourist attraction into the Land of the Jungle, 
or something like that, but otherwise it just doesn't happen.
    Second, revenues. The source of revenues for airlines is 
considerably diminished in these tough years and months, so 
what's the answer there? Have the Government bail out the 
airlines. You don't hear me protesting it. I must tell you, 
there are questions about it, but the fact of the matter is, we 
need aviation. We need those airplanes flying overhead very 
day, and if we didn't have them simply on the Northeast 
Corridor I would think we would need some 10,000 flights 
additionally passing overhead to carry people from Boston and 
New York to Washington. So we pony up to the bar, as they say, 
when these crises arise.
    I do think there are other ways, and I commend the 
Chairman. The Chairperson tries to help by thinking through 
ways of new financing, but remember, when you borrow you've got 
to pay back, and you pay not only principal, but you pay 
interest, so if you take $50 billion worth of bonding and you 
extended that over 25 years, which is a reasonable period of 
time, you're looking at $2 billion a year minimum of principal 
payments, and what's the interest? If the interest is 4 
percent, you've got another couple of billion dollars worth of 
interest that come due on a regular basis.
    So with that lecture, forgive me, I want to just ask a 
couple of questions here. Mr. Hamberger, I know the DOT 
projects annual domestic freight volumes substantially higher, 
basically double, to increase to 22\1/2\ billion tons by 2020. 
How is the railroad industry going to keep up with the 
infrastructure improvements that it needs to sustain that 
amount of traffic?
    Mr. Hamberger. Well, thank you for that question, Senator, 
because it does go right to the heart of this issue that we're 
discussing today, and that is the freight railroads need to 
continue to expand their capacity to upgrade their lines so 
they can get more efficient use out of the capacity that is 
there, and what we have been doing over the past 5 years, we've 
reinvested 18.3 percent on average for the past 5 years, 18.3 
percent of all revenues have been reinvested back into the 
infrastructure of this industry, and I'm pleased to say that 
with the announcements that were made for Fiscal Year 2003, the 
industry has continued that, and in fact a number of companies 
have even increased beyond that, so we recognize that the 
business is there, and we're investing to try to get more of it 
onto the freight railroads.
    Senator Lautenberg. Mr. Hamberger, this sharing of 
facilities with passenger rail is obviously one that perplexes 
or at least alienates the freight carriers, and we're using the 
same highway in lots of places, and there are no other rights-
of-way. How do we do it beside cooperation? We can't say that, 
OK, they've got to pay more and more and more. The freight 
railroads are doing pretty well these days.
    Mr. Hamberger. Well, let me just go to the point of whether 
or not we're alienated, and in fact I think it is a little 
known fact that in 2002, 400 million riders rode commuter rail 
passenger service. A great majority of that was on freight rail 
property. In fact, our members every day are trying to work 
with local communities.
    I know one of our members just signed a Memorandum of 
Understanding with the two Senators from the State of 
Washington and the Governor of Washington for the Sounder 
Transit out in Seattle-Tacoma, and so in fact I believe that we 
are good corporate citizens. We recognize the right-of-way is 
in existence, and what we try to do is sit down with the local 
leaders and accommodate both the need for passenger and the 
need for freight, and I guess the idea is that that needs to be 
done on an arm's-length negotiating basis, as opposed to having 
it just imposed from on high, and so we do try to recognize 
that that is--to your point, that that is a valuable asset for 
the community and for the public, and that we try to work with 
the local communities to accommodate both.
    Senator Lautenberg. AASHTO estimates that total freight 
rail capital investment cash needs will be somewhere $175 
billion to $195 billion over the next 20 years. The private 
rail industry will only be able to provide up to $142 billion 
based on the AASHTO statement. The remainder of somewhere, $50 
billion, would require public investment. Where might that come 
from?
    Mr. Hamberger. Well, there are two, I think, answers to 
that. One is, those are projections as to what our industry 
will invest and given the rate of return and what can be 
accomplished, there's always the possibility that there will be 
more private investment, but I think as you take a look at that 
bottom line report, and it was a great report written by 
AASHTO, what it says is that the private sector will invest at 
a certain level, $142 billion, because that is the economically 
defensible rate of return to invest to get that much more 
business, that much more capacity, but the report goes on to 
say that freight rail itself has public benefits, that freight 
rail has public benefits in congestion mitigation, clean air, 
fuel use improvement, and that what it calls for is a public-
private partnership, a new partnership where, if the public 
wants to achieve those public benefits, then that delta would 
be a public investment, and we certainly are willing and ready 
to work with, as that report calls for, a new partnership.
    Senator Lautenberg. Who is the public that is investing, as 
you describe it?
    Mr. Hamberger. Well, AASHTO calls for a new partnership 
between the States, the local governments, and the Federal 
Government and the private sector.
    Senator Lautenberg. So Government contributions?
    Mr. Hamberger. For the public benefits, exactly. We can be 
expected to invest up to the level and then we would----
    Senator Lautenberg. You helped enormously to straighten out 
the definition. If we give it a different name, it is still a 
public investment. It is still subsidy and it still is required 
by what is a profitable industry. And by the way, I'm not 
saying give up your profits. I'm saying, go for it, and see 
whether you can get that source, but don't deny that Amtrak and 
the other passenger rail carriers don't need the same kind of 
funding source. They don't have the same advantage of revenue 
that the freight carriers do.
    Listen, nobody's the bad guy in this thing. That is not the 
suggestion at all, but we have to recognize that we are going 
to defend the ability of rail passenger service to operate in 
this country, and it's going to be a fight to the end that 
we're going to conduct. People are entitled to have that kind 
of service, and every time we open a new line, whether it's a 
commuter line, rail service, or other, people come. They say: 
``build it, and they will come.'' Well, they do come, and we've 
got to find a way, Mr. Rutter, to include this in surface 
transportation reauthorization legislation.
    We don't see anything in SAFETEA about it, and I don't know 
whether The Administration feels that passenger rail service is 
an integral part of our national transportation network, but I 
think it is.
    Thank you for your indulgence.
    Senator Hutchison. We can go around for a second time if 
you would like to, but I would like to give Senator Smith a 
chance to speak as well.

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

    Senator Smith. Thank you, Madam Chairman. I have an opening 
statement. I would like to include it in the record.
    Senator Hutchison. Without objection.
    Senator Smith. It focuses on the problems railroads are 
having with capital investments, and how critical it is that we 
do what we can to help our rails to continue to operate and to 
make those investments.
    [The prepared statement of Senator Smith follows:]

  Prepared Statement of Hon. Gordon H. Smith, U.S. Senator from Oregon
    Thank you Chairman Hutchinson. I appreciate you for holding this 
hearing on a very important issue to my state of Oregon and our 
country.
    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 sponsored legislation last year 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. Although the bill was reported out of 
this Committee last year, it did not have the opportunity to be 
considered on the Senate floor. I would like to announce my plans to 
introduce similar legislation this month.
    As this hearing considers intercity passenger rail finance, one 
area of improvement I would like to see is more equitable participation 
by all the states in supporting Amtrak. In the Pacific Northwest, the 
states of Oregon and Washington provided $16.5 million in operating 
support in 2002.
    In addition, according to Amtrak, since 1992, Amtrak, the states of 
Washington and Oregon, and their freight partners have committed more 
than $600 million in track and signal upgrades, train equipment and 
station improvements on the Pacific Northwest Rail Corridor. Many other 
states with Amtrak service, however, contribute nothing. As we debate 
the future of Amtrak, I hope we can devise a system whereby all states 
make a fair contribution to supporting intercity passenger rail 
service.

    Senator Smith. A question I have for Mr. Rutter relates to 
the 13 states that are contributing annually over $125 million 
in operating support for Amtrak in their corridors, but it's my 
understanding that many states that have Amtrak going through 
it do not contribute, and I'm wondering if the Administration's 
proposal gives any kind of requirement to them that they do 
contribute to Amtrak. For example, Oregon and Washington 
together have invested over $600 million in the Cascade 
Corridor over the past 10 years, and I'm wondering what 
Oregon's required capital contribution would be under the 
Administration's proposal, whether it will increase or 
decrease.
    Mr. Rutter. Well, there are two questions there. One is 
about operating support and putting a level playing field in 
place for all States, and our proposal, in focusing Federal 
funding on capital assistance, presumes that at the end of a 
gradual transition after 6 years that the difference between 
the revenues generated by passenger service and those expenses 
would be covered by states, whether it's state-supported now or 
not state-supported now.
    We think all of those services should have that difference 
between revenues and expenses covered by the states, and to the 
capital need is that while I can't give an exact number of how 
much Oregon would benefit, we would like to see those states 
like Oregon, California, Washington, North Carolina, others 
that are investing in capital improvements, have a Federal 
partner to match those dollars so that those state dollars 
could be leveraged and go that much farther.
    Senator Smith. Thank you, Madam Chair.
    Senator Hutchison. Mr. Rutter, I just heard that exchange, 
and it just seems to me that the emphasis in the Administration 
is more toward the Federal Government phasing out rather than 
becoming a partner with states, and my question to you is, is 
that not the case, and if so, are you looking at a long-term 
commitment from the Federal Government that would stay in 
place, because so far I haven't seen very much concrete that 
would have a lasting impact. It looks to me like everything is 
meant to be phased out toward the end.
    Mr. Rutter. Well, I appreciate the question. We do have as 
a part of the bill we are in the process of drafting a 
commitment to long-term Federal-State partnership on the 
capital front. We think one of the ways we can help address 
helping states address those operating subsidies is part and 
parcel of our idea of separating the Northeast Corridor from 
Amtrak operations elsewhere.
    One of the things we've noticed in trying to allocate costs 
by route is that about half of Amtrak's expenses can't be 
assigned to an individual route. Some of that may be shared 
services that a number of different routes bear, but we think 
that an awful lot of those overhead expenses are expenses that 
have to do with keeping up the Northeast Corridor, and if we 
were to put accurate accounting on what it takes to manage the 
corridor, then what's left is operating expenses that are not 
as huge a lift to make.
    The other thing to consider is that not every long-distance 
train of those 17 is equivalent. There's an awful lot of both 
Western and Eastern trains that are close to covering their 
avoidable costs, which is what I think we focus on that subsidy 
difference being, so that when we talk about migrating to a 
system where those subsidies are made up by states and groups 
of states, the actual per-passenger subsidies won't be as huge 
as they are right now, and some illustrations of that are that 
the Silver Star service between the Northeast and Florida has 
an avoidable cost, or avoidable loss per passenger of only 
$1.64. The Crescent, Senator Lott's line, is about $10.66 per 
passenger avoidable loss, those losses that can be allocated to 
the route itself.
    So we think that if the overhead costs are properly 
assigned to where they're being generated----
    Senator Hutchison. Would you go back for me and define 
avoidable loss again?
    Mr. Rutter. The best way that we know how, given the amount 
of accounting information we can extract from Amtrak, and 
that's getting better, since we now have a grant relationship 
with them, is those costs associated with the operation of that 
particular route that, absent that route, those costs wouldn't 
be there. We think that's a more accurate assessment of what 
that route actually incurs in terms of cost, and we would like 
to see the need for having an equivalency across states so that 
all of them are being asked to bear that same proportion, that 
if California and Washington and Oklahoma are paying for that 
avoidable cost difference, then other states should do so, but 
on the same calculated basis.
    Senator Hutchison. Where do you factor in the abysmal on-
time problems in that, where people cannot gauge within 10 
hours that they're going to be able to go 300 miles? How do you 
factor that in? Is that an avoidable----
    Mr. Rutter. It certainly has to do with the amount of 
revenues that are generated by that particular route against 
the expenses that route incurs, and one of the benefits to 
looking at route-by-route comparisons on that basis is that you 
be able to consider what kinds of capital investments might be 
necessary to maybe improve the on-time service of a particular 
route, and is that amount of investment going to generate the 
kinds of revenue that close the gap between those expenses and 
revenues? It might, in certain instances. In some other 
instances, where you've got expenses that are twice as much as 
the revenues that are being generated now, it might be more 
difficult to make that happen.
    Senator Hutchison. I just hope that when you're trying to 
make these comparisons, that you will have a factor that can be 
quantified with this issue of time. How do you know how many 
people are not riding because they cannot possibly assume that 
they're going to be at a destination within a 2- to 5- to 10-
hour timeframe, and to compare a California system where there 
is relatively good on-time delivery versus one of these long-
haul routes that has UP/SP, which is not cooperating, and have 
abysmal on-time records, so how are you going to factor that 
in?
    Mr. Rutter. Well, part of the factoring in is, the 
circumstances that California has achieved that on-time 
performance is by making capital investments. Because there's 
no Federal partner, they made all those investments themselves.
    If you look at trying to increase the on-time performance 
on other routes owned by freight railroads, you're going to 
have to consider what kinds of investments would be necessary 
to get better throughput for both passenger trains and for 
freight, and is that amount of investment going to be borne by 
the amount of additional revenue you'd achieve through 
additional riders.
    It's important to note that Amtrak operates on about 16 
percent of the Class I system, but that percentage of the Class 
I system carries about 30 percent of the total freight, so 
Amtrak currently operates on freight lines that are very busy 
freight lines, and so whatever we do to increase the amount of 
capacity for those routes would have to be done in a way that 
acknowledges the fact that you can't impair the existing 
capacity of the freight moving on there.
    Senator Hutchison. Let me just ask, going to the next step, 
which is to try to get the capital infrastructure, and I think 
states certainly should step up to the plate and have some 
reasonable requirement to share in those costs, but I think we 
are going to have to have funding for capital at the Federal 
level, and I think my approach is to try to get some leverage 
of Federal and State dollars through private investments, of 
bonds, so my question to you and to Mr. Query is, you mentioned 
in your statement the tax credit bond financing, and that was 
also mentioned by Mr. Query, and I would just like for you to 
expand on whether you think that would be a feasible approach, 
and how do we assure that we have enough of a basis that these 
would be attractive bonds to be sold? I mean, I love Senator 
Wyden's idea, but you do have to sell these bonds, and someone 
has to be willing to buy them.
    Mr. Rutter. I will defer to Mr. Query. The extent of my 
expertise on tax credit bonds is about exhausted in the 
testimony I submitted. What I would say, though, is that as 
this Committee is considering those kinds of instruments I 
would certainly be willing to go talk to Treasury Secretary 
Snow, who's got some railroad background of his own, about 
putting some people in contact with you to better understand 
Treasury's overall outlook about tax credit financing, the ways 
that they're encouraged by it and the ways that they want to 
build some controls in.
    Senator Hutchison. Mr. Query.
    Mr. Query. Chairman Hutchison, one thing that I tried to 
emphasize in the testimony occasionally, the QZAB program, 
which really is the best example so far of how tax credit bonds 
would operate, is pointed to many as being discouraging, 
because in fact the transactions have been quite small, and the 
total amount of bonds that have been issued under that program 
very slowly grew to any significant level and was far below 
what was originally estimated. Rather than take that as 
discouraging, I actually take it as encouraging. It's an 
example simply of the fact that a program takes time to grow, 
and markets take time to grow as well.
    With regard to the tax credit bond mechanism itself, the 
investor base for that particular structure I think is both 
large and will develop quite well. There are clearly issues in 
any new offering like this, but we're actually very confident, 
and I think our confidence is shared by other major market 
participants as well that there should be a very ready market 
of institutional investors, large institutional investors for 
securities like this.
    Senator Hutchison. Any other comments from anyone else on 
that subject?
    [No response.]
    Senator Hutchison. If not, did you have another round of 
questions, Senator?
    Senator Lautenberg. If I might. Thanks again for your 
indulgence, Madam Chairman.
    The question that I wanted to ask is to see whether or not 
we can turn some reality onto the proposals. Mr. Query, you 
still see tax credit bonds as a viable instrument for 
financing, and I know you've had a lot of experience and I know 
Lehman has a lot of experience in that regard. What about the 
question I raised before? Now you're saying that the tax credit 
would therefore be a contribution from the Federal Government 
to the operation, and the ability to repay the principal on 
these would have to derive from the railroad's capacity to earn 
something significant above their expenses in order to do that. 
Is that not the case?
    Mr. Query. Senator, in various tax credit proposals there 
have been different mechanisms established for repayment of 
principal, and I think those mechanisms clearly need just as 
much focus as the interest component, how the tax credit is 
actually delivered as well. Some of those, the old high-speed 
rail proposals of a couple of years ago focused on the state 
matching contribution as being the source of repayment of that 
principal amount when it came due. Others have used a portion 
of the amount that's being raised upfront as a set-aside to 
essentially repay that principal amount when it comes due 25 
years in the future.
    Senator Lautenberg. They can be serially issued so that 
there is another issue, and the repayment of principal comes in 
smaller issues as time goes on, because we know very well that 
issuing bonds as a routine rarely includes, I shouldn't say 
rarely, but occasionally doesn't include full repayment of the 
principal, but rather it begets another issue.
    We do it in the Federal Government all the time, so it does 
make sense, but one thing, and I think Senator Hutchison said 
it, and that is that there has to be some outright grants as 
well. I'm reminded here that in aviation there was a terrible 
event that occasioned much of this. Some of it was 
overexpansion, $18.2 billion in bail-outs provided to aviation 
since 2002, and it was done in a flash because we wanted to 
keep those folks operating.
    Mr. Serlin, it's suggested that maybe we could find a 
private company to divide the two companies into capital and 
operating companies. Wouldn't that present a particular 
situation that has Amtrak capital and Amtrak operations 
competing for the same dollars? I mean, when someone hears 
Amtrak here, they're going to say, oh, Amtrak, capital 
separated from operations, what does it all mean, and included 
in the same question is, why aren't there firms that know how 
to run railroads? The freight, the Class I freight railroads, 
why don't they jump at the chance to operate the Northeast 
Corridor? Do you think they would be interested in taking over 
that part of it?
    Mr. Serlin. Senator, they might be.
    Senator Lautenberg. You proposed that.
    Mr. Serlin. Correct. They might be, but the growth 
opportunity here is very different from the targeted growth 
opportunity of the freight railroads. What you have here is the 
opportunity to expand the rail passenger system. The Northeast 
Corridor is the highest density corridor of any in the world, 
bar none, yet the station pattern, the layout, the operational 
techniques have remained exactly the same for almost the last 
three-quarters of a century.
    The techniques which the freight railroads have are 
freight-oriented. What we have here is the opportunity to build 
new passenger stations, integrate them with the highway system, 
attract people from the suburbs and bring them to the rail and 
increase the use of the rail infrastructure, which is a very 
different business from the freight business.
    Senator Lautenberg. But the fact of the matter is that 
there are, and I'm for upgrading that infrastructure, heaven 
knows, and I've seen it done where we've done it now at Newark. 
There's a stop on the main line that enables passengers to go 
to Newark Airport, the same thing with Baltimore, the same 
thing with Route 128, just south of Boston.
    Those things are happening, but you can't send out a rinky-
dink railroad and ask people to be joyful about getting there 
when either it's late or missed its target because the signal 
system isn't working properly, or the equipment is just too old 
and too tired to continue functioning. I used to run a fairly 
good size corporation, and I like joint ventures, as long as we 
own the joint.
    [Laughter.]
    Senator Lautenberg. And so it is with other, I think, 
private people connected with Government, a Government partner, 
you pay and we'll spend, and it is a nice theory, but I'm not 
sure how it all works.
    Mr. Hamberger, why do you think that the Class I freights 
aren't happy, or aren't just standing at the gate waiting to 
jump on passenger rail service and get it going?
    Mr. Hamberger. Obviously, there is a history here that goes 
back to the creation of Amtrak in the seventies, but I will 
point out that many of our members do operate, under contract, 
commuter rail operations, where they are the contractor but not 
the owner, if you will, of the service, so they do operate 
under contract with local service providers.
    But if I might, Madam Chair, I would like to make sure I 
did not leave a misimpression when Senator Lautenberg and I 
were discussing earlier the AASHTO bottom line report. The 
additional public investment that the AASHTO report calls for 
is to achieve public benefits and we are not requesting that. 
We do not consider it a subsidy. It is not something we seek, 
because we believe that we will be creating an investment pool 
of our own that will address the growth of traffic as 
economically feasible for us to attract, so you characterized 
it as a subsidy there at the end. That is not the way we see 
it. We see it as a public investment overlay on top of the 
economic investment that the private sector would be making.
    Senator Lautenberg. I like your language. We get to the 
same thing. Thanks very much, Madam Chairman.
    Senator Hutchison. Well, I know that we have spent a lot of 
time here. I just have a couple of other points. One, I want to 
just talk for a minute, Mr. Hamberger, about, I do think we are 
all looking for the same end. We want better infrastructure, 
and the freight rails would like to have the ability to use 
their own tracks and not have all of the hassles of passenger 
rail on their tracks, and it just seems to me that we ought to 
be able to come up with a formula in which there is a Federal 
role, there is a state role, and with some backing of the bonds 
from the tax that is already in place we might be able to 
leverage more than the railroads could do on their own.
    By putting out cash you get maybe a foot, but by leveraging 
that with the tax-exempt bond market, which you would not have 
access to without the Federal Government role, you could go 2 
feet, and it just seems to me that together we could work on 
something, and frankly I took the 4.3 cents because it is a tax 
in place. I only wanted to take half that, but then my bill 
would have to go to the Finance Committee, so I'm certainly 
willing to talk about some way to work with you where we could 
do more with the railroads than they can do on their own, and 
the railroads would also get a partial repeal of the tax. I 
just couldn't do it in my bill because of the bureaucracy in 
the U.S. Senate.
    So I would hope that there would be an open mind that would 
allow some creativity, allow some strength for the 
infrastructure, because we can talk about little dollars and 
we're going to go a little way. We are never going to solve the 
problem that we have with trying to make an infrastructure with 
capital improvements that will be substantial enough to really 
provide bypasses, which David Gunn mentioned in the last 
hearing we had, that would allow freight in its congested areas 
to have bypasses, and not have to worry about the deference to 
the passenger rail.
    So I would hope we could open this dialogue and work 
together in a way that is beneficial for the freight rail and 
also combines all of the potential resources to make a solid 
system that is national and not just a Northeast Corridor, or 
even a Western Corridor. I know many mass transit systems have 
done more at the local level than the older systems, which are 
more federally supported, and I think in the case of California 
you've done that with rail as well. But I do think there should 
be a Federal role here that does give some commitment, just as 
we have had in highways and for airports, and we have not ever 
had that for passenger rail, and we're just trying to find a 
way to have a strong system, so I will just end it there, and 
if there is any further comment please take this opportunity.
    Mr. Hamberger. I guess just for the record, Madam Chair, I 
need to get on the record that it is our belief that the 
freight system needs as much revenue as it can possibly get to 
invest to meet the demands that Senator Lautenberg was talking 
about, and we believe that that money should be returned to the 
freight railroads for investment to meet our customers' needs, 
but having said that, obviously we want to sit and work with 
you to see if there are other options that are out there.
    But with respect to the 4.3, it is our hope that the Senate 
will follow the House and pass the repeal later this year.
    Mr. Morales. Senator, if I could, just to follow on your 
last point, I really want to reinforce that, and I think part 
of this whole process really needs to include a recognition on 
a policy level that passenger rail is a viable and an important 
part of a balanced transportation system and needs to be looked 
at the same way we look at highways, at aviation, at transit. 
We are absolutely using investments in intercity rail as a way 
of managing our entire system. The difference is, we know we 
can make plans, we can make investments on the highway side, on 
the transit side with reasonable assurances that money will be 
there. We can't make those same assumptions on the rail side, 
and we ought to be able to.
    Senator Hutchison. That's a very good point. I thank all of 
you for your time. I think this has added one more layer of 
information to the record, and I hope we can produce an Amtrak 
reauthorization that is not just another Band-Aid, but rather a 
vision and a commitment to the future.
    Thank you.
    [Whereupon, at 11:50 a.m., the hearing was adjourned.]
                            A P P E N D I X

   Prepared Statement of Ross B. Capon, Executive Director, National 
                   Association of Railroad Passengers
    The National Association of Railroad Passengers is a non-partisan 
organization funded by dues and contributions from approximately 16,000 
individual members. We have worked since 1967 to support improvement 
and expansion of passenger rail, particularly intercity passenger rail.
    The Association's central point about a new source of funding 
begins at page 5 of the statement I filed in the record of the full 
committee's April 29, 2003, hearing--a Railroad Finance and Development 
Corporation that issues tax credit bonds. I will not repeat that here.
I. Operating Grant Requirements for National Network (Long-Distance) 
        Trains
    We believe that this should remain a 100 percent Federal 
responsibility. Some have suggested that Amtrak should be treated the 
same as transit commuter systems, requiring states or localities to 
pick up all the operating costs. Transit systems are local and started 
by local initiative. Amtrak began because of a Federal initiative. It 
provides interstate service, and the Federal Government should have the 
responsibility for any operating costs not covered by revenues.
    Our view does not change in light of new analysis showing 
remarkably low, short-term costs for some of these trains. As 
previously indicated, it is a challenging task to maintain existing 
state funding programs for intercity passenger rail--programs focused 
on short-distance trains which were initially added solely because a 
state or states agreed to offer partial financial support for them. 
States now are being pressed to provide full funding for those trains.
    It is not realistic to superimpose on that pressure the requirement 
that states also fund long-distance trains. The likelihood of getting 
every state along any given route to provide funding is small, as is 
the likelihood of getting states to agree on a proper cost allocation 
method or, in some cases, the right schedule. The most economic 
schedule for such trains must be set around providing attractive times 
at the endpoints. That includes the need to take into consideration 
proper connections with other long-and short-distance trains at those 
endpoints. Yet, by definition, some points must be served in the middle 
of the night.
    When Secretary Mineta many months ago was asked, ``what if a state 
refused to pay,'' he answered that the train could run closed-door 
through that state. That is not practical. Suppose every state but 
Colorado agrees to fund the Chicago-Bay Area ``California Zephyr.'' 
Having the train skip Denver (as well as Glenwood Springs and Grand 
Junction) simultaneously would make the train vastly less useful to the 
other states along the route, and--as a consequence--drive up the 
amount of operating losses they would be required to pay. Or imagine 
Illinois not agreeing to pay for any long-distance trains. The system 
could not function even if Illinois stood alone.
    It makes much more sense to press Amtrak to operate the most 
efficient national system possible, and to allow states to proceed with 
what many of them have wanted to do for a long time--improve short-
distance corridors. Those improvements, incidentally, will benefit the 
long-distance trains as well. The most dramatic, recent example of this 
is the rail/rail grade separation in Los Angeles used by Metrolink 
commuter trains, Amtrak's San Diego line, and Amtrak's Southwest Chief 
But almost every long-distance train stands to benefit from one or more 
corridor projects--and these projects often address the most congested 
segments of the long routes.
    It is, however, reasonable to expect states and localities to pay 
for stations.
II. On-Time Performance of Amtrak Trains
    It will be difficult for new legislation to produce better on-time 
performance if the track owner acts like it doesn't care. In any event, 
any legislation should take into account the subject's complexities.
    First, it should be noted that On Time Performance (OTP) on the 
California corridors is far from ideal. To be sure, lateness normally 
is not calculated in terms of hours. On the other hand, riders who 
think they are taking a trip whose total duration is a few hours have 
much higher OTP expectations. On June 9, 10 and 11, I rode three 
Capitol Corridor trains and two San Joaquins with the following 
results:

   June 9: The 3:45 pm SJ from Bakersfield on June 10 
        originated only two minutes late but departed Stockton (where I 
        got off) 34 minutes late.

   June 10: The 12:30 pm Capitol Corridor train from San Jose 
        left on time but departed from Emeryville (50 miles later, 
        where I got off) 33 minutes late.

   Train 538 (3:30 Oakland-to-Sacramento) left Emeryville 3 
        minutes late, Martinez 7 minutes late--the only satisfactory 
        trip out of the five.

   The 4:05 pm from San Jose departed Martinez 47 minutes late 
        and arrived Sacramento 39 minutes late.

   June 11: The 6:35 am San Joaquin departed Sacramento two 
        minutes late and arrived Bakersfield one hour 48 minutes late. 
        The bulk of the delay was due to vandalism--the train struck 
        some debris on the tracks. However, the train was 31 minutes 
        late leaving Wasco--the last station before hitting the debris 
        (and the last station before Bakersfield).

    My understanding is that the two Capitol Corridor trains from San 
Jose were delayed by Union Pacific freight problems, including two 
trains with ``outlawed crews,'' that is, trains which needed relief 
crews under the Hours of Service Act before they could proceed. On the 
San Joaquin Corridor, a tremendous growth in BNSF freight traffic 
followed--and partly consumed-state-funded capacity investments.
    When Amtrak OTP percentage figures are reported, they generally 
indicate simply the percentage of runs that reached final destinations 
within x minutes of the scheduled time, where x = 30 minutes for long-
distance trains, and lesser amounts (sliding scale based on miles 
traveled) for short-distance trains.
    However, this percentage figure does not tell much about service 
quality. Consider these two situations, based on operating 14 trains 
per week (seven in each direction) on a long distance route.
Example A
    All trains operate between 31 and 45 minutes late--0 percent on-
time performance. Average minutes late per trip is roughly 38 minutes.
Example B
    12 trains operate either on-time to the minute or less than 30 
minutes late two trains are six hours late. The route has an 86 percent 
on-time performance. Average minutes late per trip is roughly 60 
minutes.
    The two calculations produce opposite results. Notice that the 
average minutes late method more closely reflects passenger 
satisfaction levels, while the Amtrak calculation is at odds with those 
levels.
    For Example A, the Amtrak calculation has the worst possible result 
(zero percent on time) even though, if that long distance route 
actually achieved that type of performance consistently, the on-time 
issue would barely be on anyone's radar screen. Related issues:

  1.  Incentives for railroad performance. With a simple yes-or-no on-
        time calculation, as soon as the train is so late as to make it 
        fall outside the 30 minute window, the railroad loses any 
        incentive to handle the train decently, and the train could get 
        later still. When total minutes of delay are counted, the 
        railroad has an incentive to continue to deliver the best 
        possible performance no matter how late the train gets.
  2.  At how many points is on-time performance counted? Amtrak 
        schedules (not unlike those for intercity buses and airlines) 
        typically are strung with recovery time before major cities, to 
        allow for a limited amount of delay while keeping actual 
        performance closer to expectations for the majority of 
        customers. Depending on the size of the recovery time, however, 
        this can mean substantial lateness at intermediate points even 
        when the train is on-time at major points.
  3.  Does the railroad respond to incentives? So far, some like BNSF 
        do respond, UP does not. That BNSF cares is evident from their 
        big operations center in Fort Worth. All the dispatchers face 
        about six huge screens of data--one of which is devoted to 
        various measures of Amtrak trains' on-time performance on BNSF. 
        That is one of many ways BNSF top management tells its people 
        that it cares about earning the incentives for good on-time 
        performance that are built into Amtrak's contracts with most 
        railroads.
  4.  The significance must be considered for different causes of 
        delay. For example, in Amtrak's contracts freight railroads 
        generally are not liable for minutes of delay associated with 
        causes like malfunctioning Amtrak passenger cars and 
        locomotives. Other causes are treated differently, including 
        the vandalism problem cited above, where arguably neither 
        Amtrak nor the railroad is to Name.
  5.  The suggestion that a route be ``open for competitive bid'' if a 
        certain level of OTP is not achieved implies that most causes 
        are Amtrak's fault and that things will get better if another 
        operator is assigned. A top priority of the freight railroads 
        is to insure that Amtrak's track access rights are not 
        transferred to anyone else. Certainly, in the unlikely case 
        that the railroads are defeated on this issue, it's not clear 
        why Union Pacific would provide better service to a different 
        operator. In fact, it may be worse.
  6.  Evaluating true causes of dispatching delays. The following 
        issues impact the quality of handling Amtrak trains get from 
        dispatchers:

      (a) Relationship of track capacity to total traffic on the line

      (b) Attitude of host railroad's top management towards passenger 
            trains

      (c) Attitude of dispatchers towards passenger trains

      (d) Skills of dispatchers

  7.  The analysis of capital investment needs for chokepoints should 
        be independent and should consider the factors in #6. It would 
        be unfortunate if a publicly funded investment program rewarded 
        railroads that did a poor job of handling Amtrak trains and 
        penalized railroads who did a good job.
                                 ______
                                 
       Prepared Statement of Thomas Simpson, Executive Director, 
                     Railway Supply Institute, Inc.
    The Railway Supply Institute appreciates the opportunity to provide 
this committee with our suggestions on financing intercity passenger 
rail and addressing other railroad infrastructure needs.
    Earlier this year, RSI endorsed the creation of a private, non-
profit, federally chartered corporation authorized to issue tax-credit 
bonds for capital investment in rail-related infrastructure not 
generally eligible for transportation trust fund expenditures under TEA 
21.
    Under our proposal this corporation would provide financial support 
for capital projects that:

   Develop higher speed intercity rail corridor passenger 
        services, including infrastructure and equipment;

   Meet the backlog of capital needs on the Northeast Corridor 
        Infrastructure;

   Provide efficient rail access to ports;

   Support development of intermodal terminals, transloading 
        facilities and rail access thereto;

   Facilitate high frequency rail access to airport terminals;

   Enhance capacity on the Nation's rail freight network 
        designed to enhance security, reduce congestion, improve air 
        quality and improve efficiency;

   Support the capital needs of short line and regional 
        railroads for infrastructure improvements to serve rural and 
        smaller communities and accommodate 286,000-pound freight cars;

   Support relocation and/or consolidation of rail lines and 
        facilities in urban areas.
Financing
    Modeled on existing federally chartered entities such as Fannie 
Mae, RFDC would be authorized to issue up to $50 billion in Federal tax 
credit bonds to states and public/private partnerships to finance 
eligible rail-related capital projects. Specific criteria to be 
included in the RFDC's authorizing legislation would govern project 
eligibility, selection, financing and repayment obligations.
    RFDC would establish a principal sinking fund to secure payment of 
the principal at maturity. A 20/30 percent non-federal match (depending 
on what the current interest rates may be), contributed by state, 
localities or other project participants, would form the primary basis 
of the sinking fund for each bond issuance, supplemented by additional 
Federal contributions as may be required.
Governance
    This corporation would be governed by a Board of Directors 
appointed by the President of the United States. The function and 
authority of this corporate entity would be subject to the oversight of 
the Congressional committees of jurisdiction.
Transportation Finance Corporation
    This is a variation of the AASHTO approach that proposed to create 
a Transportation Finance Corporation (TFC). This concept is designed to 
help create more balance in both transportation policy and funding by 
creating a Railroad Finance and Development Corporation (RFDC) to help 
finance those capital projects that are not currently covered by the 
guaranteed spending programs created by TEA 21 and AIR 21. The non-
covered programs include passenger and freight railroads, short line 
railroads, ports, high-speed rail and MagLev projects. The creation of 
the RFDC would enhance the prospects of projects that do not have the 
benefit of guaranteed funding.
    This proposal would place the RFDC within the jurisdiction of the 
Congressional authorizing committees that currently have oversight 
responsibility of these non-guaranteed programs (even though the 
legislation is in part a tax bill and would need to be enacted by the 
tax committees), providing the authorizing committees with the 
legislative authority to create the structure of the organization, 
establish guidelines for the allocation of the resources generated by 
the proceeds from the sale of the bonds and establish standards for 
projects eligible for funding with these proceeds. The authorizing 
committees already have a long list of rail needs that they have been 
unable to fund through the authorization process because no matter how 
much is authorized there is no room in transportation appropriations to 
fund these needs out of the 30 percent of funds left over after 
guaranteed spending programs are addressed.
Paying the Principal
    The idea of a RFDC removes some of the concerns expressed by states 
over accumulating more debt financing that arose when bonding authority 
was proposed to deal with Amtrak's needs. In this case there will be a 
separate, federally chartered corporate entity designed much like 
Fannie Mae, the successful Federal National Mortgage Association, which 
would sell the bonds and administer this program. The RFDC would be set 
up as a federally chartered corporation governed by a Board of 
Directors appointed by the President of the United States. The RFDC 
could have the authority to sell up to $50 billion in bonds. The Board 
would select a Chief Executive Officer and appropriate staff. There are 
a number of ways that can be devised to repay tax credit bond 
principal. As mentioned, AASHTO uses a sinking fund with a portion of 
the bond proceeds. The original Amtrak proposal assumed states would 
contribute matching funds (30 percent) deposited into escrow accounts/
sinking funds to secure principal repayment.
    The point here is that the sponsor/borrower would be responsible 
for principal repayment only--effectively providing zero percent 
borrowing. From the government's prospective, this is cheaper than a 
grant over the short-term and from the borrowers perspective, much more 
cost-effective than conventional borrowing or credit instruments like 
RRIF. The present value of $100 borrowed is about $70 while the 
budgetary cost to the government (tax revenue lost) is about $30.
    Much of the costs associated with a proposal of this nature could 
be offset. The Center on Budget and Policy Priorities has indicated 
that the Senate passed tax provisions that were dropped from the 
recently enacted tax bill included measures to close abusive corporate 
tax shelters that could produce significant revenue enhancers that 
could help cover losses associated with other tax measures. As The 
Washington Post has reported, the Senate Bill ``included provision to 
crack down on abusive corporate tax shelters, combat some accounting 
scams such as those pursued by Enron Corp., prevent U.S. companies from 
moving their headquarters to post office boxes in offshore tax havens 
such as Bermuda and limit grossly inflated deferred compensation plans 
for corporate executives.'' The Senate provisions would have saved more 
than $25 billion. All of these provisions were dropped in conference 
and are available to help address the much needed rail infrastructure 
improvements we are concerned about.
Why We Need This Proposal
    Despite significant investments in highways and aviation, the 
American economy continues to lose billions of dollars each year as a 
result of traffic congestion. It has been estimated that aviation 
delays alone costs the U.S. economy about $10 billion per year today 
and by 2015 it will be over $30 billion per year. That is a total of 
more than $150 billion over the next decade. The cost of congestion on 
highways is even more staggering. Creating a funding mechanism like the 
TFC for non-guaranteed transportation programs that are designed to 
help reduce congestion on highways and at airports could substantially 
reduce the cost in delays to the U.S. economy, help stimulate job 
growth and help balance our transportation system.
    Most states are facing the prospect of large budget deficits. 
Nationally, it is now estimated that state deficits for the coming 
Fiscal Year will be $80 billion. There is little prospect that states 
will have the resources to undertake transportation infrastructure 
projects like high-speed rail in this environment without a Federal 
partner. In fact, Florida's governor is seeking a special election to 
overturn the state approved initiative to build a high-speed train 
across the state. States are now looking to the Federal Government for 
assistance for critical infrastructure needs that provide a public 
good. The concept of a RFDC provides a reasonable and cost effective 
alternative to traditional grants or revenue sharing for states. It 
also encourages the type of public/private partnerships that are 
essential if we are to meet the needs of those surface transportation 
projects that are not covered by the guarantees provided in TEA 21 and 
AIR 21.
    Knowledgeable railroad experts continue to express concern over the 
future of freight railroads because of their inability to cover their 
cost of capital. Most of the big freight railroads will admit that this 
is a problem. Maintaining the status quo for the freight railroads 
according to some officials will result in one of two things: the 
industry will be forced to shrink OR the Federal Government will be 
forced to take over the railroad infrastructure at a very high cost. 
There is a real fear that railroads may be up against the same kind of 
crisis they went through in the 1970s when many of them faced 
bankruptcy. In an environment where a significant amount of government 
support pays for the transportation infrastructure of their 
competition, railroads cannot afford to continue to only use private 
funds to finance their infrastructure needs, especially for projects 
that provide a public good. Financial markets require railroads to only 
make infrastructure investments where there is a reasonable rate of 
return and discourage investments where the primary benefit is for the 
public good (fuel conservation, air quality, congestion relief, safety 
and security). Some policy makers are proposing the creation of a Rail 
Trust Fund that would use the revenues from the railroad fuel tax to 
fund it. A concept like the RFDC proposal would result in a source of 
capital assistance for rail projects that have a public benefit and 
would not depend on the fuel tax revenues as a source of funding. In 
addition, it has the potential of helping the Federal Government avoid 
a huge bailout in the future if the Class I railroads continue to have 
constraints on how much they can devote to infrastructure spending. 
Also, infrastructure investments in rail projects that result in a 
public good and help attain public policy goals like cleaner air, less 
congestion on highways, creation of jobs and a stimulus to the economy, 
is good public policy.
    Ports have been clamoring for more efficient on dock railroad 
freight access to their facilities that would assist them in avoiding 
the high cost and congestion of shipping goods by truck in and out of 
ports. In testimony before Congress recently, the American Association 
of Port Authorities indicated that some forecasts show that imports and 
exports will increase eightfold by 2040. This kind of growth would mean 
about 10,000 more trucks a day just along the I-95 corridor. That is a 
truck about every 270 yards between Miami and Boston! This funding 
mechanism would set in place a way for ports to shift more of their 
connecting traffic to rail and help avoid that kind of highway 
congestion. In addition, it could help address much needed security 
measures at our ports by using the RFDC to fund demonstration projects 
on new security technology in connection with the rail infrastructure 
improvements.
    The short line railroads have a significant infrastructure problem. 
They cannot afford the cost of capital to upgrade their tracks to 
handle heavy freight cars to serve shippers along their lines. There is 
no Federal program in place to assist them primarily because there are 
no funds in the transportation appropriations process available. If 
these low density lines, that play such an important part in connecting 
rural areas to the national rail freight network, cannot get some 
assistance for their infrastructure needs they may eventually face 
abandonment.
    There are many deserving high-speed rail projects that are on the 
shelf due to lack of funding. States will not be able to carry this 
burden alone. They need a Federal partner. Every industrialized nation 
in the world has made significant investments in high-speed rail, 
leaving the United States far behind in the development and 
implementation of this technology. And, it is this technology that can 
do the most to alleviate congestion on highways and at airports.
    Finally, Amtrak has significant infrastructure costs in the NEC 
that will require much more support from the Federal Government than 
they have been able to provide in the past. Now Amtrak is asking for 
$1.8 billion in Federal funding, much of which is for infrastructure 
costs in the NEC. This level of funding will be very difficult to 
obtain through the appropriations process. Creating a RFDC would 
relieve Amtrak of the burden of finding all its infrastructure needs 
for the NEC in the appropriations process and allow the NEC states to 
play a larger role by seeking funds from the RFDC for capital projects 
in the Northeast Corridor. The RFDC could provide resources for the NEC 
infrastructure leaving Amtrak to depend on the appropriations process 
for its operating subsidy.
Conclusion
   The appropriations process has become a less dependable 
        source of funding for rail infrastructure since the enactment 
        of guaranteed spending laws;

   There is an enormous need for rail passenger and freight 
        infrastructure capital that may not have a high rate of return 
        on the investment but would address such public policy issues 
        as security, congestion relief, safety and security;

   Amtrak may not be able to obtain the $1.8 billion it needs 
        to operate the national system and invest in its infrastructure 
        out of the annual appropriations process;

   Increasing the fuel tax or using the revenues from fuel 
        taxes paid by railroads to cover rail infrastructure costs does 
        not appear to be a realistic alternative;

   There is a growing interest among policy makers to use the 
        tax code, especially tax credit bonds, as a funding source for 
        transportation infrastructure when funding is not available 
        through the appropriations process;

   There is a strong public policy argument to provide a more 
        equitable policy among all transportation modes by creating a 
        funding mechanism for those modes of surface transportation 
        (railroads) that are not protected by guaranteed spending 
        programs;

   States are facing large deficits and will be unable to 
        address critical infrastructure needs and are unable to assume 
        any additional debt;

   The United States has fallen behind the rest of the 
        industrialized world in preserving and improving its rail 
        infrastructure; and

   The idea of a Railroad Finance and Development Corporation 
        financed by tax-credit bonds for non-covered transportation 
        programs has the potential of creating a coalition of all those 
        who benefit from the proceeds to get this done in a way that is 
        good for them and good for the country. Unlike proposals that 
        would use the proceeds from Federal diesel fuel taxes, taxes on 
        rail equipment, commuter ticket taxes, etc., this concept would 
        not divide the transportation community--it would unite it.

    Thank you for the opportunity to provide this committee with the 
views of the Railway Supply Institute.
                                 ______
                                 
       Written Questions Submitted by Hon. Ernest F. Hollings to 
                              Allan Rutter
    There is no record of Mr. Rutter's response to Senator Hollings' 
questions.

    Question 1. Your testimony indicates that states with passenger 
rail service going through them will have to fund the Federal subsidy 
at a 50/50 match. This is unprecedented and wrong; no other 
transportation system within the United States has a match of 50/50. 
Most transportation programs have a match of 80/20 for states included. 
Moreover, your testimony indicates that the Administration will expect 
states to bear all rail operational costs by the end of the 
authorization cycle. Are states required to bear all of the costs of 
operating airports? Transit systems? How will the Administration's 
vision for financing passenger rail work with states' current and 
future deficits? Will this plan not cause states to raise taxes to fund 
passenger rail?

    Question 2. The Administration seems to envision transitioning our 
passenger rail system into piecemeal corridor operations funded largely 
by states or consortiums of states. What happens when one state along a 
needed corridor cannot, or will not, contribute the necessary funding 
to maintain and operate its portion of the corridor? For example, one 
obvious corridor would extend south of Washington, D.C. to Florida. But 
this corridor would necessarily have to cross South Carolina. What if 
South Carolina simply cannot afford to support this kind of investment? 
What would happen to that corridor? Would the folks in Virginia and in 
Florida have to suffer because the folks in South Carolina cannot 
afford to tax themselves for railroad service?

    Question 3. In your testimony, you seem to criticize Amtrak for 
changing so little and becoming so ``ossified'' that it no longer 
serves the most needed rail markets. You compare Amtrak to other modes 
of transportation which you imply have been more agile and flexible. 
This criticism seems unfair considering that other modes of 
transportation have received massive infusions of Federal money on a 
dependable basis, allowing them to make changes as they became 
necessary. More importantly, other modes of the transportation are not 
so dependent on infrastructure owned by other companies. Because any 
passenger rail operation in this country, whether run by Amtrak or by a 
state, will most likely have to operate in cooperation with freight 
railroads over freight railroad tracks, what would you suggest is 
changed so that future passenger rail operations do not become 
ossified? If states raise taxes to develop a passenger rail corridor, 
how agile do you think they will be in changing those corridors?

    Question 4. You state that unlike other transportation debt 
financing, intercity passenger rail does not generate enough cash flow, 
nor does it have a Federal long-term dedicated funding stream, to 
service significant debt. I couldn't agree with you more. Highways 
don't generate cash flow, but they have a wonderful Federal long-term 
dedicated funding stream. If we can establish a funding stream for 
passenger rail, just as we have done for highways, aviation, and 
transit, wouldn't passenger rail then have greater access to debt 
financing that would allow it to become more competitive in the 
transportation market?

    Question 5. Regarding tax credit bonding for passenger rail, if 
bonds were sold by a centralized non-Federal entity, wouldn't 
Treasury's only exposure be to the cost of the tax credits? And if the 
tax credit rate is fixed for the life of the bonds, and a non-Federal 
entity issues them, wouldn't Treasury's cost be rather predictable?

    Question 6. If the Administration believes passenger rail is a 
priority, does it have any meaningful proposals for funding along the 
traditional lines? What other mechanism do you see within the Federal 
Government to raise the adequate funds needed to cover the capital 
backlog on the Northeast Corridor, the infrastructure improvements for 
high speed rail in new corridors and improvements to services currently 
operated by Amtrak? And how much would all of that cost? Certainly, you 
can't expect the annual appropriation process to cover this amount?

    Question 7. You mention that the lack of funding dependability for 
Amtrak has soured the DOT's experiences with Amtrak and debt. Isn't the 
answer then to develop a dependable funding source?

    Question 8. Can you discuss the cautions from states and freight 
railroads that you have received regarding separating the NEC 
infrastructure for private operation and control?

    Question 9. In your testimony, you raise California as an excellent 
example of a state that is taking a proactive role in supporting 
passenger rail. Are the services that California is subsidizing the 
type of services that you consider to be based on ``sound economics''? 
If not, what service in the U.S. is?

    Question 10. You mention that operating support for passenger rail 
should not be a Federal responsibility, yet through the FTA, essential 
air service, and FAA air traffic control, the Federal Government is 
providing direct operating support for our other modes. Why should 
passenger rail be different?

    Question 11. You mention the importance of proper planning to the 
success of passenger rail service. Under your new plan for Amtrak, 
would the FRA offer direct assistance or grants to states for passenger 
rail planning? Or would you support making this activity specifically 
eligible under current TEA-21 planning programs?

    Question 12. You say that since states already make the key 
decisions about their airports and highway facilities, they should have 
similar power over passenger rail decisions, in effect leveling the 
playing field. However, isn't it unreasonable to expect choices to be 
made on the basis of transportation utility alone when there is 
inequity between Federal support for the different modes, with highways 
receiving an 80/20 match, while rail would receive only 50/50?
                                 ______
                                 
     Response to Questions Submitted by Hon. Ernest F. Hollings to 
                          Edward R. Hamberger
    Question 1. There have been a number of proposals that could result 
in numerous passenger rail system operations using freight rail lines. 
Currently, the freight railroads deal with one passenger carrier for 
long-distance routes. If we follow a course of action where long-
distance routes are franchised to various operators, how do you think 
the freight railroads will react?
    Answer. The AAR believes that safety requirements and the 
integrated nature of railroading necessitate that intercity passenger 
rail be provided by one entity. Therefore, freight railroads do not 
support ``franchising'' to various operators.
    Our opposition to ``franchising'' is based on a number of factors. 
First, one of Amtrak's fundamental purposes was to amalgamate several 
hundred disjointed passenger trains operated by more than 20 individual 
carriers into a coherent intercity system. It was envisioned that a 
single carrier would yield greater efficiency and innovation. This 
approach remains just as sensible today.
    Second, railroads are an interconnected, interdependent network. 
This means that events or problems at one particular point--say, a 
derailment near Tulsa, or a delayed freight train caused by a conflict 
with a passenger train near Los Angeles--can have serious ramifications 
hundreds of miles away. To operate a rail network of the scope we have 
in this country is enormously difficult and complicated. That task is 
made even more difficult with the addition of passenger trains, which 
generally travel at different speeds and have substantially different 
scheduling, operational, and infrastructure needs than freight trains. 
In order to operate the entire rail network as efficiently as possible, 
it is crucial that all parties are, to borrow a phrase, ``singing from 
the same hymnbook''--in terms of consistent operating practices, 
reliable communications channels, the development of healthy working 
relationships with appropriate personnel, and so on. In our view, it is 
far more likely for this to happen with a single operator than with a 
variety of franchisees.
    Third, when Amtrak was created, freight railroads knew that 
Amtrak's obligations were, in essence, the obligations of the United 
States and that Amtrak would be operated safely and professionally. 
Should Amtrak services be picked up by others, it is unclear what the 
circumstances would be. For example, private entities may have 
different degrees of financial backing. Public authorities may or may 
not enjoy the full faith and credit of their sponsoring states. Some 
prospective passenger rail operators may be less committed to safety 
and sound operating standards than Amtrak. Serious labor issues could 
arise. Clearly, the status quo would be altered in respects that are 
impossible to know beforehand.
    Finally, freight railroads view the granting of statutory access to 
other passenger operators to be an unconstitutional ``taking'' of 
private property.

    Question 2. If Congress were to charter a non-profit company to 
issue tax credit bonds to provide grants to states for rail 
infrastructure capital projects on a matching basis, do you think the 
freight railroads would be supportive of such an idea? Would railroads 
be willing to partner with states in providing matching funds for 
projects on a voluntary basis?
    Answer. This type of financing mechanism for public-private 
partnerships appears to hold promise and is clearly worthy of further 
investigation.

    Question 3. Amtrak has the statutory right to operate over the 
freight lines with a statutory grant of movement preference over 
freight traffic. If successors to Amtrak do not have similar 
advantages, how efficient will the integration of passenger traffic 
with freight traffic be?
    Answer. There is a potential tradeoff to be made. As important as 
passenger rail may be, in this country it is minor in comparison to the 
importance of freight railroading. To arbitrarily superimpose passenger 
operations on the freight rail network without regard for the needs of 
freight service would compromise safety and hamstring the efficiency of 
the Nation's freight railroads, thereby jeopardizing their ability to 
provide the efficient, cost-effective freight transportation service 
that our Nation desperately needs.
    That said, the absence of a statutory grant of movement preference 
over freight traffic does not mean that the efficiency of the 
integration of passenger traffic with freight traffic needs to suffer. 
Just as freight railroads work diligently with commuter railroads (who 
do not have statutory Amtrak-like preferences) to provide efficient, 
problem-free commuter rail service, so too would they work diligently 
to ensure that intercity passenger operations are integrated with 
freight operations as smoothly and efficiently as possible.

    Question 4. Currently, Amtrak is charged with incremental costs for 
operating over freight lines. How likely is it that this practice would 
continue if Amtrak operations are distributed to other passenger 
carriers?
    Answer. I cannot say how likely it would be for any successors to 
Amtrak to be charged only the incremental costs for operating over 
freight lines, since that is ultimately a public policy decision to be 
made by Congress. I can say, though, that freight railroads strongly 
oppose such an arrangement and would work strenuously to see that it is 
not adopted. As noted in my testimony, the fees Amtrak pays to freight 
railroads do not come close to covering the full costs borne by host 
freight railroads associated with the operation of Amtrak trains. A 
recent very conservative analysis by the AAR found that in 2001 alone, 
Amtrak payments to freight railroads were approximately $240 million 
less than just the variable costs to the freight railroads associated 
with hosting Amtrak service. The total subsidy to Amtrak from freight 
carriers, which would include delay costs, opportunity costs, and a 
portion of freight railroads' fixed costs, is considerably higher.
    Simply put, freight railroads should receive full compensation for 
the use of their assets by passenger operators. Just as highway 
contractors are not required or expected to bid below cost because 
highways are in the public interest, nor should freight railroads be 
required or expected to accept less than full compensation for the 
services they provide.

    Question 5. In your testimony, you mentioned that freight and 
passenger operators (other than Amtrak) have reached operating 
agreements where mutually beneficial arrangements have been negotiated. 
You gave as an example the BNSF and Sound Transit in Washington State. 
How long is the agreement good for? What happens to the agreement if 
BNSF's traffic volume changes on the line? Do Sound Transit trains have 
preference over BNSF's trains on the line?
    Answer. I am not privy to all the details of the agreement between 
BNSF and Sound Transit. Agreements of this type often contain sensitive 
commercial information which the parties consider confidential. I 
respectfully suggest that this question is best directed to the parties 
involved.

    Question 6. The railroads favor the repeal of the 4.3 cents per 
gallon deficit reduction fuel tax so that they can channel the funds 
into needed infrastructure. Would the railroads endorse a plan to 
channel the tax into an endeavor that would benefit freight railroads, 
passenger rail, and enhance public safety, such as the closing of 
highway rail grade crossings on designated high speed corridors?
    Answer. The deficit reduction fuel tax currently costs freight 
railroads more than $170 million per year. This tax should be 
repealed--not diverted to any other use.
    Freight railroads should be expected, and are willing, to pay for 
what truly benefits them and what they actually want. Conversely, there 
is no reason to expect freight railroads to pay for what does not 
benefit them or what they do not want.
    Freight railroads respectfully disagree that the closing of highway 
rail grade crossings on high-speed corridors constitutes a significant 
benefit to freight railroads. It has long been recognized 
authoritatively that highway-rail grade crossings, by their very 
nature, are primarily motorists' responsibilities. The Federal Highway 
Administration's own regulations today stipulate that ``projects for 
grade crossing improvements are deemed to be of no ascertainable net 
benefit to railroads and there shall be no required railroad share of 
the costs.'' \1\ (For more information on this point, please see my 
June 27, 2002 testimony to the House Subcommittee on Highways and 
Transit, which is attached.)
---------------------------------------------------------------------------
    \1\ See Code of Federal Regulations, Title 23, Chapter 1, Section 
646.210.
---------------------------------------------------------------------------
    Freight railroads believe that the safety of passengers requires 
high-speed passenger rail operations to operate over separate, 
dedicated tracks on which grade crossings have been eliminated, either 
through closure or through the construction of highway underpasses or 
overpasses.
    Freight railroads are also unequivocally opposed to a ``railroad 
trust fund'' to help cover the costs of rail infrastructure projects, 
highway-rail grade crossing improvements, or any other purpose. A rail 
trust fund would be inherently inefficient, since railroads would 
provide substantial resources to the fund, only to have the government 
dole the money--minus inevitable bureaucratic overhead--back out. A 
trust fund would lead to substantial government interference in, and 
loss of railroad control over, billions of dollars of rail spending. 
And while Class I freight railroads and/or their customers would 
undoubtedly be the primary source of rail trust fund revenue, the 
pressure to use these funds to finance non-Class I projects--including 
passenger rail, highway-rail crossing traffic control devices, or short 
line railroad infrastructure--would be tremendous.
    If government policymakers determine that these types of projects 
provide public benefits worthy of support, then policymakers must be 
willing to commit public funds commensurate with that determination, 
rather than rely on major freight railroads to cross-subsidize these 
efforts to the detriment of their own needs.

    Question 7. Your statement says that proposals to grant passenger 
carriers other than Amtrak access to freight railroads' assets, such as 
freight facilities and rights-of-way, will be viewed by railroads as a 
``taking'' of private property. Would the railroads make the same 
argument under legislation that requires freight railroads to donate 
portions of their unused rights-of-way for passenger operations to 
construct separate track lines?
    Answer. Yes. Like any other for-profit entity, freight railroads 
properly expect to be compensated for use of their assets.

    Question 8. How much does it cost to build one mile of track 
suitable for carrying a passenger train at 79 mph? Does this number 
include the costs of signals and turn-outs? How much does it cost to 
maintain one mile of Class 6 track?
    Answer. The cost to build and maintain a particular stretch of 
railroad track, like the cost to build and maintain a particular 
stretch of highway, can vary enormously depending on variables such as 
location, topography, climate, whether it is entirely new construction 
or a rehabilitation of existing lines, and many other factors. 
Consequently, it is difficult to answer this question with specificity.
    That said, as a rule of thumb, excluding right of way costs, a cost 
somewhere in the neighborhood of $2 million per mile is a plausible 
average cost to build one mile of track suitable for carrying a 
passenger train at 79 mph. This figure would support some level of 
signaling and turnouts, but would not include the extensive signaling 
or turnout installation often required. This figure would also not 
include extensive cutting and filling to achieve a level, straight 
roadbed, or the construction of tunnels, bridges, or flyovers.
    Estimating the cost to maintain one mile of Class 6 track, is a 
highly speculative exercise. In addition to the variables identified 
above, the cost to maintain track will, in part, be dependent upon the 
quality of the original materials and components installed, the age and 
condition of the structures and their remaining life, the density and 
frequency of service over the line, axle weights of the equipment 
traversing the track, the speed of the trains, track curvature and 
gradient, underlying soil conditions and drainage quality, the 
frequency of bridges and culverts, etc. Due to the many criteria which 
can materially impact maintenance costs, per mile annual cost 
requirements can be widely variant. For instance, a high quality, new 
section of track which has been expertly installed and which supports a 
very low density of traffic may theoretically require as little as 
$10,000 per mile per year to maintain--not much more than the cost of 
safety inspections and small levels of repair work. On the other hand, 
heavily used track that is not new and may be subject to certain 
locational or operating conditions could necessitate annual maintenance 
outlays of $100,000 or more. Indeed, there is no readily identifiable 
upper limitation on the annual per mile cost that may be essential for 
safe and efficient train operations.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Ernest F. Hollings to 
                              Jeff Morales
    Question 1. You mention the tremendous capital and operating 
support that California has poured into Amtrak service in your state. 
Why is California the leader in this respect?
    Answer. In part because of Amtrak's focus on the Northeast 
Corridor, California recognized early on that if it wanted to have 
intercity rail, it was going to have to make it happen. This focus has 
expanded under the Davis Administration, as we are viewing rail as a 
valuable tool to help alleviate congestion and provide an alternative 
to driving. To the credit of California voters, The state has had the 
funds and the public interest in investing in intercity passenger rail. 
A major investment came in June 1990 with the voter's passage of 
Proposition 108--The Passenger Rail and Clean Air Bond Act of 1990 for 
$1 billion and Proposition 116--The Clean Air and Transportation 
Improvement Act of 1990 for $2 billion. $223 million in Proposition 108 
funds and $506 in Proposition 116 funds have been used for intercity 
passenger rail capital. (The rest of the bond funds were used for 
commuter rail and mass transit projects.)
    The state has also reserved other funds for intercity rail 
passenger capital projects. Since 1988, $531 million in State Highway 
Account (SHA) funds have been expended or reserved. The SHA is funded 
primarily from state gas taxes and motor vehicle weight fees. Also, 
over the life of the program $239 million in Public Transportation 
Account (PTA) funds have been expended or reserved--almost $100 million 
of that since 2000. The PTA is funded from sales tax on diesel fuel and 
a portion of the sales tax generated from excise tax on gasoline. Since 
1999 almost $50 million in General Funds, all for rolling stock, has 
been reserved. Finally, the new Traffic Congestion Relief Program 
includes $200 million for intercity rail capital. Under Governor Davis, 
close to $600 million has been dedicated to intercity rail capital.
    The PTA was designated as a trust fund for transportation planning 
and mass transportation purposes under Proposition 116. Since that 
time, the Account has served as a reliable source of operating, 
administrative and marketing funds for intercity rail.
    In addition to funding, California has geography and population 
that give rise to successful intercity rail passenger routes. All of 
California's routes go from one major population center to another, 
with significant population centers at midpoints of the routes. All 
three routes are over 100 miles in length, which is a distance that is 
appropriate for intercity rather than commuter rail service. The routes 
have significant recreational, tourist and business destinations, as 
opposed to simply commuter destinations. The characteristics of the 
California routes are similar to the characteristics of the Northeast 
Corridor (NEC) routes that make those routes successful. However, NEC 
operations are federally funded, unlike the California routes that are 
primarily state funded.

    Question 1a. Do you believe other states can, could, or should 
follow your state's lead?
    Answer. Most other states have either not chosen to pursue 
increased intercity rail service, or have been able to gain that 
largely through Federal investment, via Amtrak. Several other states 
have state-supported intercity passenger rail programs, including: 
Illinois, Maine, Michigan, Missouri, New York, North Carolina, 
Oklahoma, Oregon, Pennsylvania, Vermont, Washington and Wisconsin. 
While I recognize that increased state support for intercity rail is a 
difficult choice for some states, I also note that it is exactly the 
choice that Californians have stepped up to the plate and made. A 
combination of increased flexibility of Federal transportation funding 
and new funding along the lines of what is being discussed by the 
Committee likely would result in more states making that decision.

    Question 1b. What about other states on your border like Nevada and 
Arizona?
    Answer. Although much smaller in relation to California, Oregon and 
Washington are the two states that have made investments most like 
ours. California has studied and had discussions with the state of 
Nevada about service between the San Francisco Bay Area and Reno. A 
study on extending the Capitol Corridor Route to Reno is being 
conducted, and will explore the possibility of joint California/Nevada 
funding for the service.
    Amtrak has developed a proposal for Los Angeles--Las Vegas service. 
However, Amtrak budget constraints have delayed the start of service.

    Question 1c. What keeps them from making similar investments?
    Answer. I want to be careful in not speaking for my counterparts in 
other states. But, in general, I would say that two things probably 
factor into their decisions. One, they may not see the need for 
increased passenger rail service. Two, they may benefited from Amtrak 
investment of Federal funds that kept them from having to choose to 
dedicate state funding.

    Question 2. Can the services that California currently supports 
ever be profitable?
    Answer. The performance on each of our routes continues to improve, 
and we will continue to work to improve on that record. However, while 
certain segments of the routes may approach or reach full cost-
recovery, it is not realistic to assume that intercity passenger rail 
service can be profitable. Further, it is important to note that our 
investments in passenger rail, both intercity and commuter, are as part 
of an integrated transportation system. A benefit of increased 
ridership on the Capitol Corridor route, for example, is reduced 
congestion on Interstate 80 between Sacramento and Oakland. Therefore, 
we are getting returns from our investments that do not show up in a 
traditional measurement.

    Question 2a. How much does the level of required operating support 
factor into your decision to subsidize trains?
    Answer. There is a balance in this equation. On one hand, increased 
service generates new ridership, a key goal of our program. On the 
other hand, cost is a major limiting factor in deciding to operate new 
service. As discussed above, operating funds come entirely from the 
PTA. In years when the economy is such that PTA funds are up, there is 
more opportunity to expand services. The operating budget for FY 2003 
for state-supported service is $73.1 million. The operating budget has 
increased considerably over the years as the result of expansion of 
service, and Amtrak increasing the share of costs that states are 
required to pay for state-supported service. With the State's current 
budget crisis and the high level of the existing intercity rail 
operating budget, opportunities for expansion are much more limited 
than in the recent past.

    Question 2b. What other factors determine whether your state should 
invest in passenger rail?
    Answer. In addition to funding availability, a number issues factor 
into a decision to increase intercity rail service

   10-year Capital and Operating Plan--the state develops its 
        operating and capital program for expansion. However, 
        occasionally Amtrak may offer an expansion opportunity that 
        California will consider because it is cost-effective.

   Demand--the state monitors demand based on current ridership 
        levels and ridership modeling. (The state and Amtrak have joint 
        ownership of a state-of-the-art ridership model for the 
        California intercity rail routes.)

   Capital Improvements--the necessary track, signal, and 
        station improvements have to be in place for expansions to be 
        possible. Also, adequate equipment has to be available.

   Railroad Agreement--the state must have secured agreements 
        with the operating railroad before service can be expanded. 
        Often specific track projects to provide increased capacity on 
        the private railroads are linked to agreements for intercity 
        rail service levels.

   Local Support--virtually all new or expanded service in 
        California has come with a base of support from local 
        communities along the route.

   Legislative and Executive Branch Support--this support is 
        necessary to start or expand service.

    Question 2c. How does the state define success for passenger rail 
service?
    Answer. As noted earlier, we are increasingly using passenger rail 
as a tool for managing congestion in key corridors throughout the 
State. That contribution is a component of our success in improving 
mobility. In looking specifically at the rail service, the state uses 
performance measures in three categories: usage, cost efficiency, and 
service quality. The main measure to assess usage is route ridership. 
Secondary measures include passenger mile per train mile (PM/TM). The 
main measure to evaluate cost efficiency is farebox ratio. Secondary 
measures include yield, and train expense per passenger mile. Service 
quality measures include on-time performance, customer satisfaction 
index scores, and percent of California car equipment available for 
revenue service.

    Question 2d. How should the Federal Government determine success 
and where and how to invest in passenger rail?
    Answer. First, and consistent with my previous answer, I would 
encourage the Federal Government to look at passenger rail as a 
complement to other modes, and evaluate its success accordingly. In 
addition, We would recommend that the Federal Government use similar 
measures and criteria as discussed in 2.b. and 2.c. above.

    Question 3. I believe California is also looking to make investment 
in the existing freight rail infrastructure in order to reduce 
congestion and the number of trucks on the road. Do you see a need for 
a greater Federal partnership with states for rail infrastructure 
investments, both passenger and freight?
    Answer. Yes, in California there is a great need for capital 
improvements on freight railroads. The state needs to have a 
partnership with the Federal Government in order to handle this 
problem. To the extent that freight rail can continue to carry freight 
and expand capacity to carry freight, this will relieve truck 
congestion and roadway wear on public roads and highways. Class 1 
mainline railroads have particular need for capacity expansion through 
double tracking projects on heavily used segments. Shortline railroads 
have a need for infrastructure upgrades to accommodate the new 286,000-
pound railcars.
    As far as passenger rail, if the Federal Government invests in any 
corridors, it should be willing to invest in productive corridors. 
Improved mobility in California has national benefits, and relieving 
congestion in California corridors is just as worthy a goal as helping 
address problems in the Northeast and elsewhere. Consequently, an 
ongoing stable Federal source of capital funding is necessary to allow 
California Amtrak service to just keep pace with population growth. 
Stable Federal capital funding is also absolutely essential in order to 
allow the incremental development of high-speed rail service on key 
corridor routes throughout the Nation.

    Question 4. If Congress were to charter a non-profit company to 
issue tax credit bonds to provide grants to states for rail 
infrastructure capital projects on a matching basis, do you think 
California would be interested in taking advantage of such an 
opportunity?
    Answer. Without having the benefit of the particulars of such a 
proposal, I would say that there is no question that new Federal 
investments in rail could have a tremendous benefit in California and 
elsewhere. Since we have been willing to dedicate state funding to such 
projects, we would welcome the opportunity to leverage our funds to 
accelerate and expand rail improvements.

    Question 5. What would California's rail system look like today if 
the state had not invested the ample funds that it has over the past 20 
years?
    Answer. The service and ridership would be a fraction of what they 
are today. The only portion of the system that supported by Amtrak as 
``basic system service'' is 33 percent of the Pacific Surfliners. 
Without any state support, Amtrak would probably be running around six 
Los Angeles--San Diego trains in California. There would be no Capitol 
Corridor or San Joaquin service and probably no Pacific Surfliner 
service north of Los Angeles.

    Question 6. What percentage of California's total transportation 
budget is dedicated to rail projects?
    Answer. It's important to keep in mind that we have record levels 
of investment underway. The California Department of Transportation's 
entire budget in 2002-03 was $8.9 billion: $3.7 billion for capital 
outlay (41 percent); $3.0 billion for state operations (34 percent); 
and $2.2 billion for local assistance (25 percent).
    The Division of Rail's 2002-03 operating budget was $95.5 million: 
$73.1 million for operations; and $22.4 million for support, including 
administration, marketing and equipment overhaul. $55.7 million in rail 
capital projects were programmed for 2002-03.
    Thus, rail operations were 3.2 percent of the Department's 
operations budget ($95.5 million/$3.0 billion). Programmed rail capital 
projects were 1.5 percent of the total capital outlay budget ($55.7 
million/$3.7 billion). In addition, we have other projects that do not 
show up as direct rail capital projects, but that are intended to 
benefit rail. For example, we are building park and ride facilities, 
and providing freeway access to passenger rail stations with the intent 
of making them more accessible and successful.

    Question 7. How would California's state-supported service be 
affected by the shutdown of Amtrak's long distance trains?
    Answer. Discontinuance of Amtrak long-haul routes that travel 
through California would increase costs and reduce riders and revenues 
on California state-supported routes. Also, all train service would be 
lost in certain parts of the state.

   Costs to California state-supported routes would increase 
        because, those fixed costs that are now shared between long-
        haul services and State-supported services would have to be 
        borne entirely by the State-supported routes, to the extent the 
        costs could not be eliminated. The higher fixed costs would be 
        for maintenance facilities, stations, crew bases and Amtrak 
        Western Regional overhead costs.

   The state-supported services act to extend service on some 
        of the long-haul routes in California. For example, the Coast 
        Starlight terminates in Los Angeles. Passengers can transfer 
        from the Coast Starlight to the Pacific Surfliner to travel 
        south to San Diego. If the long-haul routes were terminated, 
        the State-supported services would lose the ridership that now 
        transfers from the long-haul trains to the State-supported 
        trains. Almost 100,000 passengers transferred between 
        California's three routes and long-haul trains in FFY 2001. 
        These riders provided almost $1.4 million in ticket revenues to 
        state-supported trains.

   From a service perspective, California would lose its only 
        rail service in the far north part of the state (from the Bay 
        Area north through Redding, and into Oregon) and north/south 
        service on the coast from San Jose to San Luis Obispo--on the 
        daily Coast Starlight. The daily California Zephyr provides the 
        only service in California from Sacramento to Reno. The daily 
        Southwest Chief provides the only service through from Los 
        Angeles to east to Needles. And the three times a week Sunset 
        Limited provides the only through service from Los Angeles to 
        the southeast corner of the state and into Arizona.
                                 ______
                                 
Responses to Written Questions Submitted by Hon. Ernest F. Hollings to 
                             Robert Serlin
    Question 1. Your proposal calls for a private organization to lease 
the Northeast Corridor (NEC) from the U.S. DOT and then be allowed to 
issue $15 billion in tax credit bonds to fund infrastructure 
development. Based upon these investments and the organization's 
management of the NEC, the organization would be expected to generate a 
profit after some period of time. Why shouldn't the government make 
this investment on its own, or through a government-chartered non-
profit corporation, thereby making the same investments but without the 
premiums a private organization would charge for profits?
    Answer. The IMO proposal is a response to the U.S. Government's 
difficulty in directly appropriating the funds needed to restore the 
Northeast Corridor to a state of good repair. When the history of 
Amtrak appropriations is compared to authorizations, Amtrak rarely gets 
half of what it is authorized.
    The government could make the $15 billion investment required to 
restore and upgrade the NEC infrastructure through annual 
appropriations, but it would require a major and sustained commitment 
by Congress and the Executive Branch in a display of unity that has not 
been present in recent years. Furthermore, it is extremely critical 
that the appropriations be front-end loaded, since rail infrastructure 
projects require three to five years of intense activity before results 
are evident.
    Unless the entire $15 billion were appropriated in the first one or 
two years of a ten year program and available until expended, the 
current practice of doing piecemeal improvements, parsed to match the 
various tradeoffs of the budget resolution and demands of the other 
transportation modes, would continue. Under these conditions, it would 
be excessively risky to undertake the required infrastructure 
investments since funding would be dependent on a series of annual 
appropriations and subject to each year's variable influences. We have 
structured our proposal to represent what amounts to a private sector 
funded ``intercity rail trust fund'' to solve one piece of the Nation's 
rail needs. The IMO proposal permits Congress to fund the NEC 
infrastructure at the levels it requires while avoiding ``anti-
deficiency'' restrictions.
    It also will allow Amtrak to maintain national rail service within 
annual appropriations bounds that we have been told by many in 
government are achievable.
    There are increasing numbers of examples of public/private 
partnerships that have successfully taken advantage of the strengths of 
each partner to benefit the undertaking as a whole. In this instance, 
the traveling public and the many governmental users of the NEC would 
benefit from a neutral, professional infrastructure manager committed 
to long-term improvement and growth, and responding quickly to market-
driven demand, while relieving the Federal Government of on-going 
funding obligations and the day-to-day responsibility for managing the 
infrastructure.

    Question 2. A market economy is based upon competition between 
providers of goods and services to keep services up and prices low. 
Many groups are advocating at least some privatization of rail 
passenger service as a means to make it more competitive, the premise 
being that competition within the industry would keep services up and 
prices low so that passenger rail can effectively compete in the 
transportation market. The RIM proposal would turn over the development 
and maintenance of the NEC infrastructure to a single Infrastructure 
Management Organization (``IMO''). Who would be the IMO's competitor 
within the industry?
    Answer. With regards to the award of the concession, under the 
enabling legislation, the award of the IMO role will be through an open 
competition managed by the Surface Transportation Board.
    With regards to the competition on the NEC, currently there is no 
rail competition. The competition is the highway. The IMO's challenge 
is to create competition to the highway and to draw people from their 
passenger cars into the train cars.
    The U.S. Government would continue to be the sole owner of the 
infrastructure regardless of whether Amtrak or another government 
entity manages it. The IMO is the agent for the U.S. Government in 
funding and implementing the needed infrastructure investments.
    As part of the enabling legislation, the Federal Government will 
specify those conditions it feels are necessary to ensure appropriate 
economic safeguards for existing and future TSPs. The NEC will be a 
transportation infrastructure ``platform'' similar to the Interstate 
Highway system, air traffic control system, and ports and waterways, 
with equal and open access to all potential TSPs. This model is 
consistent with the competitive market economy model. It is more open 
to, and in fact is dependent on, supporting existing TSPs than the 
current model, while promoting additional TSPs, with the attendant 
market benefits from increased competition, increased service and lower 
prices.

    Question 3. Under the RIM proposal, the main incentive for the IMO 
to operate profitably is to make the company attractive on the 
investment market, because without investors, the company cannot exist. 
This system works well if investments needed by the company lead 
directly and quickly to profits for the investors. What happens when 
investments necessary to effectively operate the company run counter to 
the needs of investors to capture a good return on their investments? 
Might this not lead to cuts in services and maintenance that could 
endanger the safe and efficient operation of passenger rail, as 
happened in Great Britain?
    Answer. With regards to the British model, please see the response 
to Question 5.
    Under the IMO model, investors are likely to be restricted to major 
institutional participants looking for long-term results. The enabling 
legislation will mandate that investors cannot take returns until the 
operation reaches break-even, which is assumed to be around fifteen 
years after becoming the IMO. Given the timeframes, it is in the 
investor's interest to maximize investment in the infrastructure to 
increase operating capacity and throughput. Increased safety and 
efficient operations are essential to increasing traffic volume. The 
enabling legislation would, in effect, make it impossible for the IMO 
to be publicly traded, thus avoiding the quarterly earnings pressure.

    Question 4. Under the RIM proposal, how would passenger rail in the 
NEC be able to compete profitably in the transportation industry with a 
one-time $15 billion investment while its nearest competitors (airlines 
and highways) continue to receive massive government investment year 
after year?
    Answer. Under the IMO proposal, for the first time, intercity rail 
is put on the same basis as the other modes. The $15 billion is being 
used to offset years of infrastructure underfunding. No other mode has 
had the same underfunding for such an extended period of time.
    Amtrak has done a formidable job of growing its marketshare of 
common carrier trips in the Northeast and we believe that the IMO plan 
is the foundation for further growth by both Amtrak and commuter 
carriers.

    Question 5. The RIM proposal would split a fully integrated 
railroad into several parts, separated by geography and by function. 
The first step would be to carve off the rail infrastructure owned by 
Amtrak (mostly in the NEC) creating a separate government corporation, 
the National Railroad Infrastructure Corporation (NRIC). The NRIC would 
turn over the maintenance of the track infrastructure to an IMO and 
actual rail operations to various Transportation Service Providers 
(TSPs). In Britain, the infrastructure was turned over to an 
infrastructure manager (Railtrack), the trains were turned over to 
rolling stock leasing companies (ROSCOs), and the operations were 
turned over to train operating companies (TOCs), all of which sought to 
make a profit. The result was poorer service, higher prices, and 
decreased safety. RIM claims that its proposal is not based on the 
British model, but the similarities in the NEC are striking. How does 
the RIM proposal differ from the British model?
    Answer. During Railtrack's tenure, the United States and Britain 
differed significantly in their regulation and management of the 
railroad industry. The most important difference was the U.S.'s 
extensive body of safety regulations contained in Title 49 of the Code 
of Federal Regulations and enforced by the FRA Office of Safety. 
Britain had no such body of regulations and only now, in 2003, has it 
formed its first independent safety organization.
    Another major difference is that under British law, the officers of 
Railtrack were personally liable for the decisions they made. In order 
to minimize personal liability, Railtrack's managers contracted out 
virtually every railroading task and function. This resulted in 
Railtrack not having the core railroading competencies necessary to 
evaluate and respond wisely to problems, such as the derailments in 
2001.
    Railtrack instead became a developer of its owned rights-of-way and 
station properties--a real estate developer. In contrast, the NEC has 
little or no developable real estate.
    Furthermore, by the enabling legislation, the IMO will be a 
statutory railroad and will be obligated to use Amtrak's existing, 
experienced infrastructure workforce. That workforce knows the NEC, and 
the rules and regulations to effectively and safely manage the 
railroad. Whereas Railtrack viewed itself as a property manager first 
and a railroad second, the IMO can only be--and will be--a railroad.
    The creation of the ROSCOs in the UK was an unnecessary 
complication. Under the IMO plan, Amtrak will continue to own and 
manage all of its own rolling stock as well as its maintenance of 
equipment yards and facilities.
    Currently, about 98 percent of Amtrak's route miles are owned, 
managed, and dispatched by other railroads functioning as an IMO with 
regard to Amtrak. Far from ``splitting a fully integrated railroad into 
several parts'', the RIM proposal would, in fact, result in all of 
Amtrak's train operations being under a uniform arrangement for the 
first time since 1976, when Amtrak acquired the NEC.
    Both the IMO and Amtrak would be subject to the Federal Railroad 
Administration, which would continue to monitor and enforce all aspects 
of safety. Also, where applicable, the IMO would be subject to the 
Surface Transportation Board for rate-setting and schedule protection.
    Additionally, as indicated above, the proposal is funded by long-
term investors, which would not be allowed to take any distributions 
for about fifteen years, eliminating the pressure for quick returns. 
These conditions will be written into the enabling legislation.

    Question 6. The infrastructure that Amtrak owns in the NEC is 
actually its best asset and revenue generator. Yet the RIM proposal 
would remove this asset from Amtrak, for the benefit of private 
investors, and intercity rail operations in the rest of the country 
would go to the other government-owned corporation, the National 
Railroad Passenger Corporation (NPRC). How is NPRC to be funded? Would 
it be funded entirely by government subsidies? How much money would be 
required each year to continue operating the NPRC?
    Answer. Intercity rail operations in the rest of the country would 
continue to be the responsibility of Amtrak, whose formal corporate 
name is the National Railroad Passenger Corporation (NRPC). Mr. Gunn 
has said that the long distance trains lose about $300 million 
annually. The IMO cannot influence this. Even with Amtrak paying an 
annual access fee for use of the NEC, it is expected that Amtrak would 
continue to require Federal funding at a level not significantly 
different from this $300 million level, depending on Mr. Gunn's success 
in continuing to improve Amtrak's operations.
    The NEC infrastructure may be Amtrak's most visible asset, but it 
is the NEC trains, which would remain with Amtrak, that are the 
significant revenue generator. The infrastructure is an enormous 
financial burden, over $1 billion annually, utilizing figures derived 
from Amtrak president, David Gunn. Since Amtrak's annual appropriation 
has seldom matched it's funding request, the NEC infrastructure has 
historically been underfunded as available monies have been diverted 
into non-NEC priorities, including rolling stock and facility 
maintenance.
    As part of the proposed legislation the IMO would furnish Amtrak $2 
billion, assume its infrastructure-secured debt and absorb the loses 
associated with the infrastructure. This will give Amtrak breathing 
room to redesign its accounting systems and restore its rolling stock 
to ``like-new'' condition.
    In any event, the need for Amtrak appropriations would be 
significantly reduced from the $2 billion currently being requested, 
Amtrak's interest and principal payments will be lower, and Amtrak will 
have the funds furnished to it by the IMO.

    Question 7. Under the RIM proposal, who would own existing NEC 
assets? Who owns the improvements?
    Answer. The Federal Government would own all the NEC assets and as 
well as all the improvements to those assets, regardless of the 
circumstances under which the management contract with the IMO might be 
terminated.

    Question 8. For the tax credit bonds, who is the issuer? What is 
the term of maturity for the bonds? How is the amount of tax credit 
established? How is principal of tax credit bonds to be repaid?
    Answer. The IMO proposed ``tax credit bonds'' are not traditional 
tax credit bonds that cost the government more each year. They are one-
time tax credits to which taxpayers funding a loan on behalf of the 
Federal Government to the IMO shall be entitled. The tax credits are a 
loan from the public sector to the private sector, NOT a grant as is 
traditionally the tax credit case.
    A bond issued by or on behalf of the IMO in favor of the government 
secures the repayment at the end of the concession period--fifty 
years--of the tax credit loan. The bond is a third-party secured, 
strippable, negotiable, investment grade instrument transferred to the 
government at the time the tax credits are utilized. The bond 
guarantees repayment of the tax credit loan to the Federal Government.
    The Federal Government can either hold or monetize the guarantee 
instrument.

    Question 9. What level of private investment is assumed aside from 
the investment made by holders of the tax credit bonds? What rate of 
return is assumed for such investment?
    Answer. Over the concession lifetime, it is estimated that the 
private sector will invest between $30 billion and $50 billion. Of that 
amount, roughly the first $13 billion will be derived from tax credit 
sources. Investments will be project specific, and the rate of return 
will depend upon market conditions at the time and the precise nature 
of the investment. Different investments and different investment 
instruments have various target rates of return, which are time and 
market specific.

    Question 10. Does the RIM proposal assume that access charges will 
be paid by the intercity, commuter and freight rail companies? How will 
access charges be set? Who will establish access priorities for 
dispatching and on what basis? What access charges are projected? How 
do projected access charges for intercity passenger rail service 
compare to existing annualized infrastructure costs paid by Amtrak?
    Answer. The legislation will mandate that all agreements, be they 
with commuter agencies, freight railroads or anyone else, must be 
assumed ``where is, as is''.
    All users of the infrastructure will pay access fees. Amtrak will 
pay an access fee for use of the NEC equivalent to that which it has 
negotiated with the commuter carriers for similar services. Based upon 
Mr. Gunn's Congressional testimony the owned infrastructure cost burden 
is over $1 billion annually. Amtrak's access charges would be a small 
fraction of that figure.
    Under the legislation: commuter carrier rates and service patterns 
will be protected and, where applicable, the Surface Transportation 
Board will have oversight to assure access to the infrastructure under 
fair and reasonable terms and conditions. The freight carriers would 
continue to have the same protections they currently do.
    Currently, dispatching priorities are established by the Multi-use 
Timetable Committee that creates the official operating timetable. This 
would continue. When trains are late or there are extra movements, 
dispatching will give preference to trains that are on schedule 
according to the operating timetable.

    Question 11. Who establishes priorities for infrastructure 
investment? What keeps you from spending $15 billion on real estate, 
transmission right-of-way, and freight service improvements?
    Answer. The enabling legislation will mandate that the IMO develop 
and maintain a rolling five year capital plan of improvements requested 
by individual states, the TSPs and the United States. This plan will be 
required to be transmitted annually to all affected parties.
    The IMO will identify those projects and improvements that are 
consistent with optimizing use of the infrastructure and by setting the 
IMO's investment in each such request, if any. If the IMO declines to 
fund a project or improvement, then it may be totally funded by the 
requestor(s) in which case the IMO shall be legislatively obligated to 
implement the project or improvement, provided that the requested 
project or improvement does not injure or diminish any other TSP's 
ability to perform or deliver contracted rail service.
    Additionally, the IMO will be mandated to file an annual report 
with the President and Congress, no later than February 15 each year, 
summarizing its operations, activities, and accomplishments. The report 
will include a discussion of the state of infrastructure and a summary 
of major projects and programs accomplished. Furthermore, the enabling 
legislation will require the re-establishment of the Northeast Corridor 
Safety Committee as a forum for all stakeholders to voice concerns and 
share requirements.
    The enabling legislation will also prohibit the IMO from investing 
in equities, non-high quality debt and, in any form, a related party or 
a related party transaction. The only way the IMO can make a sufficient 
amount of money to survive the full fifty year concession period and 
provide its investors a return, is by investing in the passenger rail 
business and infrastructure. In fact, the enabling legislation will 
mandate that the IMO may only invest in activities consistent with the 
purposes of the enabling legislation.
    The NEC is, was and will be a passenger railroad. Under the 
enabling legislation, the concession is revocable unless the IMO 
invests appropriately in the passenger infrastructure. Additionally, 
the IMO will have limited borrowing ability since it will not be able 
to use the Government's assets as collateral. Thus, if it does not earn 
a return on its investments, it will be out of business. The train 
throughput volume, and therefore the money (i.e., return on 
investment), is in the passenger business.
    Despite Amtrak's aggressive marketing efforts, non-transportation 
income is on the order of $50 million per year. Today there is little, 
if any, developable real estate and, in the event that the IMO does 
identify and capitalize on a real estate opportunity, the long-term 
benefits therefrom will flow to the owner of the real estate--the 
Federal Government.
    Freight revenue from NEC usage is not significant due to post-
Conrail spin-off investments by the affected carriers in their own 
infrastructures.

    Question 12. Why can private management be assumed to have greater 
success in developing ancillary revenues from activities such as power, 
real estate and freight service?
    Answer. The success of the IMO neither can nor should be dependent 
on its successful development of ancillary revenues. Furthermore, the 
IMO could not survive on the ancillary revenues. Additional revenue 
from ancillary sources, such as freight traffic, is expected to be 
minor. Most assets with potential ancillary revenue generating value 
have already been sold or leveraged by Amtrak and its predecessors, 
including most of the major stations and longitudinal utility 
occupancies.
    The IMO only makes money through increased utilization of the 
infrastructure. Through judicious investment in the infrastructure, the 
IMO must make the infrastructure more convenient to use and more easily 
accessible. Only by causing more trains to move more people can the IMO 
survive and prosper.

    Question 13. What assumptions have been made regarding the 
repayment of existing obligations outstanding on existing NEC assets?
    Answer. Under the enabling legislation, the IMO will assume the 
obligation to fully repay all non-Federal Government infrastructure-
secured debt. It will not be allowed to refinance that debt or obtain 
new debt using the infrastructure as collateral.

    Question 14. Why is management of infrastructure separate from 
operations more effective and less costly from either the government's 
or the consumers' perspective?
    Answer. Under the enabling legislation, separation of the 
infrastructure management from train operations and passenger services 
will permit Congress to achieve its infrastructure development goals, 
while eliminating the need for Congress annually to appropriate funding 
to maintain the NEC infrastructure. Almost 98 percent of the route-
miles over which Amtrak operates are owned and maintained by third 
parties. From the perspective of Amtrak and, thus the Federal 
Government, Amtrak carries the infrastructure management fixed cost. 
These fixed costs, estimated at $1 billion per year, are virtually the 
same, whether managing 2 percent or more of the total Amtrak system. 
Separation of functions will permit both components to focus on their 
core areas of expertise. This will make the management of each function 
more effective.
    As evidenced by other modes, consumers can expect costs to go down 
as traffic and transportation options increase.

    Question 15. Separating operations from infrastructure has been 
problematic elsewhere (Great Britain). By way of example, if you build 
new stations, different train sets may be required, requiring different 
staffing for any operating company. How is this type of issue managed?
    Answer. New stations will be constructed to assure compatibility 
with existing NEC equipment standards--standards that are followed by 
all NEC users. In addition, the APTA/FRA intercity and commuter 
standards will be used as the basis for qualifying new rolling stock 
using the infrastructure.
    From the IMO's point of view, it is indifferent to the type(s) of 
equipment the TSPs operate as long as the operators and equipment are 
run in a safe manner complying with the industry standards.
    Station staffs will be addressed on a station specific basis under 
existing collective bargaining agreements.

    Question 16. What is the assumed total capital cost just for 
maintenance of existing system over the next fifty years?
    Answer. It is assumed that the IMO will spend on maintenance, 
deferred maintenance and improvements between $30 billion and $50 
billion over the next fifty years. After the first year, the enabling 
legislation will mandate that no less than an average of $600 million 
be spent on the infrastructure per year. Should the IMO fail to invest 
$600 million per year in the infrastructure or allow utility levels to 
decline, the concession is revocable.

    Question 17. What impact will the RIM proposal have on existing 
contracts with commuter railroads, utilities, local governments and 
other third parties?
    Answer. The enabling legislation will mandate that all existing 
contracts be assumed and honored by the IMO. Consequently, there should 
be absolutely no effect on the contracts with commuter railroads, 
utilities, local governments and other third parties. As the state of 
good repair is restored, the commuter railroads can be expected to 
experience greater reliability.
                                 ______
                                 
       Written Questions Submitted by Hon. Ernest F. Hollings to 
                               Sonny Hall
    There is no record of Mr. Hall's response to Senator Hollings' 
questions.

    Question 1. In your testimony, you referenced the Roth report on 
worker wages. It seems to me that the Roth report confirms what you 
have been saying for years--that Amtrak workers make less than their 
counterparts and have sacrificed to keep Amtrak going. What effect is 
this having both on the workers you represent and Amtrak itself?

    Question 2. How do labor costs on Amtrak compare to labor costs on 
freight railroads and commuter railroads?

    Question 3. The Roth report consistently shows that workers on 
other railroads earn more money than do Amtrak workers in comparable 
jobs. Are workers on other railroads better trained?

    Question 4. Do the cost-of-living raises built into Amtrak workers' 
contracts generally keep pace with the rate of inflation?

    Question 5. We continue to hear a lot of talk that Amtrak would 
operate much more efficiently if we simply privatized the system. I 
know Britain recently experimented with this policy. Could you share 
your views on what we can learn from the British rail experience?

    Question 6. Transportation labor has come to this Committee in 
support of major infrastructure bills for other modes. Landmark 
reauthorization bills have come out of this Committee to improve our 
highways, transit systems, airports and other modes. Why is it that we 
can't do the same for Amtrak that we do for highways, transit, airports 
and other modes?

    Question 7. Mr. Hall, I found your comments about Amtrak workers 
having to sacrifice to keep Amtrak operating very disturbing. 
Unfortunately, there seems to be a trend going on here. We have seen 
airline employees having to bear the brunt of management's mistakes. 
Workers gave back million. I know as the union president representing a 
large sector of workers at American Airlines that you understand this 
problem well. I think the problem here is that we keep blaming workers 
instead of focusing on solving institutional problems. What do you 
think?
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Ernest F. Hollings to 
                          James (Rocky) Query
    There is no record of Mr. Query's response to Senator Hollings' 
questions.

    Question 1. From the market's perspective, who should be the issuer 
of potential tax credit bonds be?

    Question 2. Would states rather be able to issue tax credit bonds 
or tax-exempt bonds?

    Question 3. Can states currently use tax exempt bonds for intercity 
rail projects? If they can, why don't they do it more often?

    Question 4. Doesn't current law allow for the issuance of exempt 
facility bonds for high speed rail projects? How do you suggest that 
current law be changed?

    Question 5. Given the experience with the QZAB program to date, are 
you concerned about the size of the investor market for billions of 
dollars in proposed tax credit bond issuance?

    Question 6. Are there particularly problematic issues facing states 
who might want to use tax credit bonds for intercity passenger rail 
projects? For investors?

    Question 7. If Congress were to charter a non-profit company to 
issue tax credit bonds to provide grants to states for rail 
infrastructure capital projects on a matching basis, do you think the 
financial markets would interested in taking advantage of such an 
opportunity? By having a single issuer and issuing sizable amounts of 
bonds, do you believe such bonds can be handled efficiently in the 
market?

    Question 8. If a sinking fund, made up of state matching funds and 
a small portion of bond proceeds, was managed by this nonprofit 
corporation to repay the bonds upon maturity, would the markets view 
this as a sufficiently sound way to ensure bond repayment?

                                  
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