[Senate Hearing 109-1159]
[From the U.S. Government Publishing Office]




                                                       S. Hrg. 109-1159
 
   ECONOMICS, SERVICE, AND CAPACITY IN THE FREIGHT RAILROAD INDUSTRY

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



                                HEARING

                               before the

       SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE

                                 OF THE

                         COMMITTEE ON COMMERCE,

                      SCIENCE, AND TRANSPORTATION

                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 21, 2006

                               __________

    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 NINTH CONGRESS

                             SECOND SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
             Kenneth R. Nahigian, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director
                                 ------                                

       SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE

                   TRENT LOTT, Mississippi, Chairman
TED STEVENS, Alaska                  DANIEL K. INOUYE, Hawaii, Ranking
JOHN McCAIN, Arizona                 JOHN D. ROCKEFELLER IV, West 
CONRAD BURNS, Montana                    Virginia
KAY BAILEY HUTCHISON, Texas          BYRON L. DORGAN, North Dakota
OLYMPIA J. SNOWE, Maine              BARBARA BOXER, California
GORDON H. SMITH, Oregon              MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               FRANK R. LAUTENBERG, New Jersey
JOHN E. SUNUNU, New Hampshire        E. BENJAMIN NELSON, Nebraska
DAVID VITTER, Louisiana              MARK PRYOR, Arkansas


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 21, 2006....................................     1
Statement of Senator Burns.......................................     2
    Prepared statement of the Alliance for Rail Competition (ARC)     3
    Joint prepared statement of the National Barley Growers 
      Association and American Malting Barley Association........     4
    Prepared statement of the Montana Wheat & Barley Committee...     5
Statement of Senator Dorgan......................................    42
Statement of Senator Lautenberg..................................    45
    Prepared statement...........................................    45
Statement of Senator Lott........................................     1
Statement of Senator Pryor.......................................    51

                               Witnesses

Buttrey, W. Douglas, Chairman, Surface Transportation Board......    31
    Prepared statement...........................................    32
English, Hon. Glenn, CEO, National Rural Electric Cooperative 
  Association....................................................    60
    Prepared statement...........................................    63
Ficker, John B., President, The National Industrial 
  Transportation League..........................................    75
    Prepared statement...........................................    77
Hamberger, Edward R., President/CEO, Association of American 
  Railroads......................................................    80
    Prepared statement...........................................    82
Hecker, JayEtta Z., Director, Physical Infrastructure Issues, 
  U.S. Government Accountability Office..........................    10
    Prepared statement...........................................    17
McIntosh, John L., President, Chlor-Alkali Products, Olin 
  Corporation; on behalf of the Olin Corporation and the American 
  Chemistry Council (ACC)........................................    69
    Prepared statement...........................................    70
Schuler, Dale, President, National Association of Wheat Growers 
  (NAWG); on Behalf of NAWG, the National Barley Growers 
  Association (NBGA), the USA Dry Pea & Lentil Council (USDP&LC) 
  and Elenbaas Company...........................................    55
    Prepared statement...........................................    58

                                Appendix

Burlington Northern Santa Fe Railway (BNSF), prepared statement..   111
Buttrey, W. Douglas:
    Letter, dated June 26, 2006, to Hon. Trent Lott..............   109
    Response to written questions submitted by Hon. Conrad Burns.   116
Capon, Ross B., Executive Director, National Association of 
  Railroad Passengers, prepared statement........................   109
Portland Cement Association (PCA), prepared statement............   111


   ECONOMICS, SERVICE, AND CAPACITY IN THE FREIGHT RAILROAD INDUSTRY

                              ----------                              


                        WEDNESDAY, JUNE 21, 2006

                               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 10:05 a.m. in 
room SD-562, Dirksen Senate Office Building, Hon. Trent Lott, 
Chairman of the Subcommittee, presiding.

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

    Senator Lott. The Committee will come to order.
    Welcome. Looks like we've got a great deal of interest in 
our hearing today. And we have two outstanding panels that 
we're going to hear from. So, I'm pleased that we are going to 
have an opportunity to get the results from a study of freight 
railroad issues conducted by the Government Accountability 
Office. These are preliminary results, but it is our first 
opportunity to hear some details and be able to ask some 
questions.
    There were three major questions that we asked the GAO to 
examine: What changes have occurred in freight railroad 
industry since the passage of the Staggers Act, including rail 
rates and competition in the industry? Two, what do these 
changes suggest about different approaches to regulating 
freight railroads? And, three, what are the projections of 
freight traffic demand over the next 15 to 25 years, the 
freight railroad industry's projected ability to meet that 
demand and the potential for federal policy responses?
    I strongly believe in the need for a sturdy, dynamic, and 
economically viable freight rail industry. It's absolutely 
essential for the future. I've said that privately and 
publicly, and I'm working on some ideas to contribute 
positively in that direction. I've started to ask the 
questions, how many lanes and how many planes can we put on the 
roads and in the air? The answer to what our needs are is 
clearly in the freight railroad industry, and we need to 
encourage that. We need to have a viable industry. And we need 
to make sure that we don't do anything that's going to slow 
down or undermine that.
    On the other hand, we often hear from rail shippers that 
are very frustrated about the cost of rail service. They 
complain about poor service. They deserve to have a recourse 
that is fair and accessible. And I've met with the Chairman of 
the Surface Transportation Board, Doug Buttrey, to discuss 
these problems. He has a number of initiatives underway I hope 
he'll be aggressive about in that area, and, you know, that he 
perhaps will have some recommendations to us in the future.
    But there has to be a proper balance here. I talk to 
shippers. I also talk to the railroad industry. I continue to 
urge both sides to look for common sense answers. However, I've 
also made it very clear, if some of the problems are not 
realistically addressed, we will do whatever is necessary to 
make sure it happens. For instance, if I find any evidence that 
railroads are using fuel surcharge as a way to make a little 
extra money, there's going to be a real problem. And I've made 
that clear, privately; and I'm making it clear publicly now, 
because that just cannot be what happens on fuel surcharges. 
We've got enough of a problem in this country now with 
ridiculous fuel costs and charges, and we can't have people 
taking advantage of the opportunity to make even more money 
under difficult circumstances.
    So, I don't want to prejudice anything that's going to be 
said in the hearing, but I wanted to get that marker down 
early. And I'd be glad to yield to my good friend, the Senator 
from Montana, Conrad Burns, who has been pursuing this hearing 
and has been very careful in laying the necessary groundwork. 
And I'm delighted to see him here.
    I would be glad to hear from you, Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you very much, Mr. Chairman. And thank 
you for this hearing today. I appreciate that very much, as 
we've been kicking this thing around for the last 2 or 3 years. 
And so, I thank you for this hearing. This is the first time 
that this Committee has taken a step, and what I think is a 
very positive step, in just having this hearing.
    I don't have much of an opening statement this morning, but 
I want to--there are a couple of items that I want entered into 
the record. The Alliance for Rail Competition, they have--I 
want their full statement entered into the record, because we 
want to get to the questions. We're kind of dealing with a 
little bit of time limit here, and I don't like that.
    Senator Lott. Senator Burns, let me just say that for you 
and others that might come in, your entire statement will be 
made a part of the record, and any additional statements that 
you'd like entered at this point, we'll put them right in 
behind your statement.
    Senator Burns. Thank you very much. Appreciate that. And 
there's a statement by the National Barley Growers Association, 
and the Montana Wheat & Barley Committee, up in my state, where 
we have a particular situation that I think needs remedying.
    [The information previously referred to follows:]

     Prepared Statement of the Alliance for Rail Competition (ARC)
    Mr. Chairman and members of the Committee, this statement is 
submitted for the record on behalf of the members of the Alliance for 
Rail Competition.
    The Alliance for Rail Competition was founded in 1997 by shippers 
who believe that the shipper community must present a unified front 
made up of diverse industries across the country in order to garner 
support for policy reform and balanced solutions to America's freight 
rail challenges. In ARC, the leaders of the largest chemical companies, 
the largest carload electric utilities and largest railroad shippers of 
an incredible variety of goods, have united with the largest group of 
agricultural interests in the search for responsible solutions.
    Of the testimony you will hear today ARC endorses in particular the 
testimony of Mr. Dale Schuler, President of the National Association of 
Wheat Growers. Mr. Schuler well represents the agriculture members of 
ARC in his testimony today.
    Freight rail shippers today would face daunting enough challenges 
in their quest to compete in the global marketplace even if they did 
not also find themselves captive to a ravenous monopoly. Yes, in many 
parts of the country whole industrial and agriculture sectors are in 
the clutches of a monopoly which has been either created or tolerated 
by misguided Federal policy for decades.
    Shippers do not believe that this monopoly is made up of evil 
people bent on evil purposes. This situation is driven instead by pure, 
cold economics which has produced a set of incentives counter to both 
the interests of shippers, the long-term interests of consumers and the 
country as a whole.
    Let's take the issue of capacity.
    Today we are told that the system is straining at the seams to move 
freight. At the same time the railroads are enjoying record profits and 
are all rated by Wall Street as ``buy'' items. Well, let's think about 
that.
    It seems that there is financial incentive for railroads to keep 
capacity down therefore keeping prices high . . . and rising. It's like 
the hot new toy at Christmas. Everyone knows there won't be enough to 
go around, so they clamor for the available supply and bid up prices. 
This is really simple economics. And we just wonder how anyone could 
expect any business to expand its product . . . or service . . . 
knowing that the incremental price of that service would immediately 
fall.
    Seeing this force at work every day, shippers have banded together 
for years now and asked for help from elected policymakers in 
Washington. For several years shippers have been united in support of 
S. 919, the proposed Rail Competition Act, sponsored by Senators Burns, 
Rockefeller and Dorgan on this Committee as well as eight additional 
Senators. Shippers have rallied behind this bill not because we believe 
it to be perfect, but because we believe it is a positive starting 
place for finding solutions to the country's freight rail 
transportation problems.
    Yes, this is the country's problem.
    Yet, shippers have felt that their interests and their efforts to 
seek positive policy changes have been ignored by our leaders in 
Washington. Why? Is it because it's too hard? Is it because there isn't 
a real problem?
    This is a time of turmoil in Washington and, in all candor, 
shippers are discouraged when they see lavish parties provided by the 
railroads at each of the major political conventions. Shippers are 
discouraged when they see on internet sites that railroads are very 
high on the list of providers of privately funded trips. Shippers are 
discouraged when they do not find any relief at the Surface 
Transportation Board for years running, yet they watch STB 
commissioners fly off into the sunset joining law firms representing 
and lobbying for the same railroads they formerly regulated. Shippers 
are discouraged when they watch staff members of the same STB go to 
work directly for the railroads and subsequently show up at STB 
regulatory hearings representing Class I railroads. We suppose this is 
all legal . . . all within the rules . . . but it surely is 
discouraging.
    Shippers believe that the intent of Congress in enacting the 
Staggers Act in 1980 was good. But we also believe that a series of 
unfortunate decisions made by appointed government functionaries has 
usurped the intent of elected officials like those who serve on this 
Committee. We are only asking our elected officials to correct these 
inequities and assert their primacy as the people's representatives. We 
are asking you to work with us, and the railroads, to find solutions 
which will propel competitive U.S. commerce through this new century. 
But it is imperative that you act.
    This problem will not solve itself. The financial incentives are 
working in favor of a status quo that cannot be maintained. Sooner or 
later this will wind up at your doorstep. The only question is how much 
it will cost to solve. This is a burgeoning crisis that grows larger 
each day. So we ask you to act now, even incrementally, to avert crisis 
and improve the future.
    ARC members continue to look to this Congress to provide the 
leadership and impetus for needed change.
    It has become clear to Dow Chemical (Dow) Worldwide that domestic 
competitiveness is being hindered by the lack of competitiveness in the 
North American rail market. Dow Chemical, according to Brad Gray, 
Director of Global Purchasing, . . . ``views the world as a single 
market, rather than an aggregation of regions and blocs. In a single 
world market, companies from every corner of the world are competing 
with one another. The current state of the rail market, with 
unreasonable fuel surcharge practices, unreliable service and limited 
capacity will continue to hinder Dow's competitiveness in the world 
market. Railcar transit time has increased significantly. On the U.S. 
Gulf coast where Dow is the most captive chemical company, a rail 
executive has indicated to Dow that improvements won't occur until 2010 
or beyond. The current service problems, in Dow's opinion, have been 
magnified by lack of competitive alternatives.''
    A large Midwestern utility member echoes the captive rail customer 
concern when it states, ``Scarcity increases the price of a commodity 
and rail transportation is no exception to this. It is preposterous for 
an industry to act in a monopolistic manner while the regulator, whose 
job it is to protect the rail customer from monopolistic behavior 
stands by and does nothing. A regulated monopoly should always face 
standards of performance that are not abusive to customers in order for 
that regulated entity to be allowed the ``privilege'' of being able to 
receive a regulated rate of return.''
    Rail shippers are the canary in the coal mine. Seeing us in 
distress should send an alarm throughout the economy. The only 
question, it seems, is when you will respond to the alarm. We know that 
the problem is difficult, but the consequences of inaction are dire 
indeed.
    The members of the Alliance for Rail Competition will meet with any 
parties, at any venue if it will further this debate and move in a 
positive direction. But we understand that railroads will continue to 
vociferously defend the ``now'' . . . even if it means eating their own 
future. Our elected policymakers must intervene for the good of the 
country . . . for the good of us all.
    Come let us reason together.
                                         Michael E. Grisso,
                                                Executive Director.
                                 ______
                                 
Joint Prepared Statement of the National Barley Growers Association and 
                  American Malting Barley Association
    Mr. Chairman and members of the Committee, the National Barley 
Growers Association (NBGA) and American Malting Barley Association 
(AMBA) are pleased to submit this written testimony on behalf of their 
barley producer and processing members concerning impacts of rail rates 
and service on the U.S. barley industry.
    We estimate more than half of the U.S. barley crop moves to 
marketing positions by rail. The majority of our barley production 
region is now captive to one railroad and we pay freight rates well 
above those rates paid by other grain suppliers who have competitive 
transportation options. For example, rail rates in North Dakota 
(largest barley producer) and Montana (third largest producer) are 
between 250 to 450 percent of the railroad's variable cost--far in 
excess of the Surface Transportation Board's threshold of 
unreasonableness of 180 percent. Because of these higher rates and 
often unreliable service, it is very difficult for barley from our 
traditional production areas to compete with other suppliers in both 
domestic and foreign markets.
    We pride ourselves on producing some of the highest quality barley 
in the world, but if we cannot get our product to market competitively 
then our quality advantages won't matter. U.S. negotiators are trying 
to help us be more competitive in world markets through the WTO trade 
negotiations, but again it won't matter if we get the best trade deals 
if we can't ship our products competitively.
    The following are specific rail issues that have directly impacted 
U.S. barley competitiveness.
    Ten years ago, barley comprised about 20 percent of the grain fed 
to dairy cattle in the large California and western U.S. dairy shed. 
However, we have lost these once large barley markets to corn because 
of deliberate decisions by the two dominant western railroads to price 
unit trains of Midwestern corn into these western feed markets at rail 
profit levels well below the 180 percent threshold of variable cost.
    Captive rates and service have prevented the movement of western 
U.S. malting barley east to malt processing plants, forcing these 
plants to source a portion of their needs from Canada. These processing 
plants need specific varieties of malting barley that are only grown in 
the western states and Canadian provinces due to agronomic factors. 
Furthermore, Canadian barley currently moves to West Coast export 
points at about two-thirds the cost of similar westbound movements in 
the U.S.
    Loss of short lines has become a significant factor in Washington 
barley competitiveness.
    We believe that the unrestrained monopoly power that exists in the 
U.S. rail industry today has led to inferior service and excessive 
freight rates, particularly in captive areas. This lack of competition 
has allowed monopoly railroads to short-change both feed and malting 
barley, which typically move in smaller volumes to multiple 
destinations, in favor of large movements of a single grade crop (like 
corn) from a single origin to a single destination.
    Without a doubt, the U.S. economy relies on a healthy and 
competitive rail industry. However, we believe that both shippers and 
railroads will directly benefit from competition in the marketplace. 
Therefore, we support provisions in Senate Bill 919 that address 
current abuses of monopoly power in the rail industry and promote a 
competitive balance between shippers and railroads without increasing 
regulation.
    Thank you for your consideration of our concerns with rail service 
in the U.S. barley industry.
                                 ______
                                 
       Prepared Statement of the Montana Wheat & Barley Committee
    Thank you for the opportunity to present this testimony for the 
record of this hearing.
    The Montana Wheat & Barley Committee wishes to thank Senator Lott 
for holding this important hearing and the Montana Wheat & Barley 
Committee appreciates his valued leadership in seeking solutions to 
these important issues affecting rail transportation and the rail 
shippers all over the Nation.
    We also want to especially thank Senator Conrad Burns for his 
tireless leadership on efforts to solve the captive rail customer's 
problems on the Nation's railroad system. His unceasing and consistent 
work coupled with an unrelenting push to find solutions to the 
``railroad problems'' has earned Senator Burns a great deal of respect 
among the Nation's rail shipping communities in agriculture, chemicals, 
utilities, glass, manufacturing and production plus the consumers that 
rely on rail for commerce.
    You are going to hear from rail customers (shippers) about 
continuing capacity and service issues. Some will testify about the 
economics of railroading. The railroads will come to you espousing the 
virtues of spending more money on infrastructure and that they are 
doing the best they can. The Surface Transportation Board, after 
Congress passed the Staggers Rail Act in 1980, allowed and oversaw the 
most massive concentration of rail power to amass in this country since 
its formation in 1867. Now is the time for Congress to revisit the 
Staggers Rail Act after 25 years. We have had more or less continuing 
railroad capacity and service issues without interruption for almost 
two decades--ever since the railroads started their march to gobble up 
all of their competitors.
    The rail captive areas of this country see service and capacity 
issues as symptomatic of the more basic problem--over-concentration of 
the railroad industry. When four of the five Class I railroads control 
over 94 percent of the freight revenue generated in this country--
Congress should not only be interested, they should be alarmed.
    It has never been in the public interest to allow the growth of 
monopoly industrial base without some form of economic oversight.
I. Introduction
    The Montana Wheat & Barley Committee (MWBC) represents the wheat 
and barley producers of the state of Montana. Montana is a natural 
resources state with the main economies built upon products of mines, 
lumber and agriculture, as well as tourism. In order for our bulk 
products of the mine, lumber and agriculture to have value, they 
require bulk transportation (rail) to points outside Montana and, in 
many cases, outside the U.S.
    Therefore, the State's economic survival depends on having access 
to good, affordable, and adequate rail transportation and attendant 
facilities, with reasonable published notice of rates and rules, so 
that its shippers can deliver a competitively priced product outside 
the state boundaries.
    Montana wheat and barley producers do not have economic 
alternatives to rail transportation. They are held captive and tied to 
rail with no viable alternatives to movement by rail. The Montana wheat 
and barley producers are unique because they are the bearers of the 
freight and cannot pass on increased transportation costs. The farmer 
must absorb all freight costs. Virtually all other industries have some 
capability of passing on some or all of its increased costs to their 
consumers or customers. The farm producers are unique because they 
operate in an environment where they do not have any control over the 
price they receive for their crop and they must bear every increase, in 
all costs, including transportation costs, without any possibility to 
pass those higher costs on to anyone else. The farm producers who are 
captive are thus truly without alternative.
II. Montana's Primary Transportation Is a Single Railroad
    Montana is a base industry state. In the 1800s, its chief 
industries were mining, lumber and agriculture. Today, and in the 
future, Montana's chief industries will be the same three industries: 
mining, lumber and agriculture, with the addition of tourism. Today, 
we, in Montana, have one major railroad, the BNSF Railroad, operating 
as a monopoly in the transportation of bulk commodities from the farm 
to market.
Outline of Industry in Montana

        1. The wheat industry in Montana is characterized by an export-
        dominant rail movement.

        2. The barley industry in Montana is characterized by both an 
        export and domestic market dominated by rail.

        3. The lumber industry in Montana is characterized by both an 
        export and domestic market dominated by rail.

        4. The coal industry in Montana is characterized by domestic 
        rail movement.

        5. The vast majority of these commodities must be shipped out 
        of state.

III. Montana Is an Export State
    Montana's top four industrial activities are agriculture, tourism, 
mining and lumber. Montana's economy and wealth is thus highly 
dependent upon the production and shipment of commodities. In order for 
these commodities to have value to Montanans, they must be shipped to 
points outside the state or country to market. It is this absolute 
reliance upon good, affordable, and efficient transportation that 
brings me to this hearing today. We hope for a better day, where 
fairness in regulatory oversight and more rail competition will rule 
the land. Meanwhile, we struggle every day trying to survive under 
monopoly domination. Montana grain producers are being required to pay 
more for this BNSF merger than their counterparts in the grain 
producing industry where effective rail-to-rail competition exists. 
That payment has come in the form of increased transit times, increased 
rail rates and low car supplies.
    Montana ranks third among the states in all wheat production. More 
specifically, it ranks 3rd in spring wheat production and 2nd in durum 
production. Montana also ranks 3rd in barley production, 3rd in lentils 
production, 3rd in dry edible peas production, 2nd in Austrian pea 
production, and 2nd in flax production. Montana originates over 37 
million tons of rail traffic, which ranks it 17th in the Nation. At the 
same time Montana bridged over 78,000,000 tons of rail traffic.
    For the farm producer, the cost of transporting grain can represent 
as much as one-third (1/3) the overall price received for the grain. 
Basically the Montana farmer works for BNSF every 3rd year.
IV. Montana Rail Transportation Is Predominated by One Carrier
    Montana is dominated by a single railroad, the BNSF, which controls 
94 percent of the Montana rail system. This makes Montana the #1 rail-
dominated state in country. After Montana at 94 percent is Delaware at 
83 percent, followed by Idaho at 80 percent, North Dakota at 66 
percent, and South Dakota at 54 percent. The BNSF controls over 91 
percent of the actual tonnage hauled out of Montana and 92 percent of 
the rail revenue generated in the state. Since 1975, Montana has seen 
over 1,900 miles of rail line abandoned (over 37 percent of the rail 
miles) because there is no rail-to-rail competition. And the distances 
are large--very, very large. To put this vastness in perspective, if 
one were to place one corner of Montana over Washington, D.C., the 
other corner would cover Chicago, IL.


    Annually, the Montana producers move about 150 million+ bushel 
production that is handled by rail from Montana and bear about $200+ 
million in freight transportation charges per year.
    Our Montana concerns are founded on four points:

        1. Rail transportation is vitally important to Montana's raw 
        commodity-based economy.

        2. Montana's rail system increasingly serves simply as a bridge 
        for long-distance traffic.

        3. Increasing numbers of short lines and abandonments have 
        reduced Montana shipper access to Class I rail service.

        4. Dominance of one Class I railroad continues as the #1 
        freight issue in Montana.

V. Service and Capacity
    Many have stated that Congress ``deregulated'' the railroads in the 
Staggers Rail Act of 1980. Let there be no mistake--Congress DID NOT 
``deregulate'' the railroads, but rather relaxed many of the economic 
regulations, because Congress feared that many railroads were going 
bankrupt! Today, however, the landscape has changed. Railroads aren't 
going bankrupt, rather they have combined into a few, large, 
monopolistic carriers controlling large areas of the economic vitality 
of this country, and forcing captive shippers to pay for this 
``relaxed'' regulatory environment. This ``relaxed'' regulatory 
environment allows railroads to insulate themselves from 
accountability.
    When the Staggers Rail Act became law in 1980, Congress recognized 
the need to give more pricing freedoms to the railroads to stem the 
tide of rail bankruptcies occurring in the U.S. Congress also 
recognized, that with the newly found pricing freedoms the railroads 
would enjoy, some shippers would potentially be subject to dominant 
activities by carriers with less regulatory oversight protection from 
abuse. Simply put, less economic regulatory oversight would result in 
less protection for those shippers who were captive and had no economic 
alternative to move their goods except by rail. The result would be 
that some shippers would become ``captive'' to ``market dominant'' 
railroads. The Staggers Rail Act also instructed the Interstate 
Commerce Commission (ICC) to set up rate guideline procedures to 
adjudicate the rate issues that would come before it. Congress even set 
up, under Section 229, procedures whereby shippers who felt they were 
captive could request adjudication of their rate levels, on a one time 
basis.
    The Montana Wheat & Barley Committee's experience with the ICC/STB 
in litigation has been less than stellar. Shippers used to take cases 
to the Surface Transportation Board expecting to get fair and balanced 
treatment, but shippers haven't found any relief at the STB for a long, 
long time. They have instead become so discouraged by the precedents of 
the past few years that only a very few have the funds, or the 
confidence, to bring a case. Faced with the effects of a railroad 
monopoly that was withering away a key element of the state's economy, 
Montana in 1980 filed a class-action and formal complaint (under 
Section 229 of the Staggers Rail Act). We pursued the McCarty Farms 
case for 17 years. In this case the ICC on December 14, 1984 found that 
the BN had market dominance and that its rates were unreasonable. The 
Administrative Law Judge (ALJ) further found that the rates were higher 
than 300 percent of variable cost! The State of Montana spent $3.2 
million, yet the STB in 1997 found that these rates were not excessive! 
The Board ruled against the farm producers of Montana after changing 
the regulatory standards twice.
    As we stated earlier and it bears repeating, the truly rail captive 
areas of this country see service and capacity issues as symptomatic of 
the more basic problem--over-concentration of the railroad industry.
    It has never been in the public interest to allow the growth of 
monopoly industrial base without some form of economic oversight.
    In 1980, when Congress passed the Staggers Act, the last major 
piece of railroad legislation, we had 42 Class I railroads in the U.S. 
Today, after mergers and acquisitions, we are down to about 5. This has 
led to more and more businesses being served by only one railroad, 
exercising virtual monopoly power to price according to its needs, not 
according to market value and competition. Along with this massive 
concentration there has been a serious degradation of service and 
quality. And it has led to rate escalations that threatens American 
productivity and jobs. Freight rail is the only industry in the country 
that operates with this lack of competition . . . and exemption from 
most anti-trust law.
    The strength and vitality of America's freight railroads is of 
vital importance to the Montana wheat and barley producers and to the 
Nation and its business' ability to remain competitive in the world. We 
want more railroads . . . not fewer.
    But we believe that marketplace conditions would improve both 
shippers and railroads alike with more competition in the railroad 
industry. Indeed the current scheme of things where railroads rely on 
their ability to differential price solely on the basis of captivity is 
a one-legged stool approach that is doomed to fail. This country can 
ill-afford the failure of this vital industry. Railroads are not a 
luxury. Railroads are essential to the American marketplace and our 
national security. Therefore, it is necessary that public policymakers 
address this problem and work with all parties toward solutions before 
a larger crisis presents itself to us all. Left on our present course, 
we are sure to see a final round of mergers proposed to leave the 
entire country with only two Class I railroads.
    This is an issue that is vital to American competitiveness and 
productivity and to the retention and creation of American jobs as well 
as the health of our economy. This lack of competition is like an 
invisible tax, tolerated if not sanctioned by Federal policy, that 
works its way into the costs of goods and services across the country. 
All because the arcane nature of the arguments have baffled and 
frightened elected officials into inaction.
    Oh, there are a lot of confusing arguments being made by opponents 
of balance. But we in Montana are from the country and we have a simple 
way of looking at it. The farm producers of Montana and the Members of 
Congress have been bamboozled. The railroad cry is similar to that of 
Chicken Little that the sky will fall if ANY changes are made by 
Congress to their monopoly rail system. No legislator wants to take 
action that might cause the failure of one of our railroads. Neither do 
Montanans. No one has a greater interest in sound railroads than 
shippers, not even the railroads themselves. We do not believe for a 
moment that proposals to increase competition would cause harm. Indeed, 
we believe quite the opposite to be true. We don't believe that this 
mighty 100 year old industry cannot survive in a world where 
competition is the driver of innovation and progress like every other 
industry in America. In testimony before the House Transportation 
Committee in 2005, Dr. Curtis Grimm of the University of Maryland 
delivered compelling testimony to that effect.
VI. Congress Needs To Look At More Than Just Capacity and Service 
        Issues To Address The Public Interest
    The Montana Wheat & Barley Committee is calling upon Members of 
Congress to address this unhealthy imbalance in the freight rail 
marketplace. To look at just capacity and service issues without 
addressing the real problem does little to help the public interest. 
Capacity and Service issues while severe are only the symptoms and 
results of a problem of too much concentration in the railroad industry 
and too little competition.
    This Surface Transportation Subcommittee is charged with finding 
solutions and has many members that have dedicated themselves to 
seeking real solutions to the massive concentrations issue in American 
railroading.
    This Subcommittee does not have to reregulate the railroad industry 
nor mandate trackage rights for one railroad over another nor cap rates 
in order to develop solutions, but it must address that massive 
concentration that affects over 1/3 of this Nation's rail shippers.
    Congress must address a bill which would finish the job of 
deregulation and take off armor that now protects freight railroads 
from the real world marketplace that all of us compete in every day.
    Indeed, what we in Montana now have is a federally protected 
monopoly. And it has been our experience that monopolists do not 
voluntarily embrace change and competition.
VII. The Problems Rail Shippers Face Are Getting Worse Every Year
    We know this has been a problem for years . . . but it is getting 
worse as freight rail consolidation and contraction continue. You only 
have to look at the car shortage reports on grain shipments the past 
three harvest seasons that made the front page of the Wall Street 
Journal, or this new change back to tariff-like rates on coal with 
prices increases up to 100 percent, or the incredible fact that one of 
our major railroads is paying customers to ship by truck because they 
can't get their act together and honor standing contracts. The 
railroads are citing as ``force majeure'' reasons for their capacity 
shortfalls thereby barring rail shippers from enforcing legal contract 
and penalties for late delivery.
    With the STB in a state of irrelevance and the railroad industry as 
seemingly the only party not engaged in the search for constructive 
solutions, the choices for Congress are clear. DO SOMETHING to prevent 
a railroad monopoly from further harming the American farm producer, 
miner, lumber worker and consumers.
    The something that is available right now is for Congress to 
consider and move legislation and changes in public policy. The cost of 
trying is trivial compared to the astronomical cost of doing nothing 
and accepting an ever worsening status quo.
    The Montana Wheat & Barley Committee believes and trusts that 
Congress can restore balance to this marketplace.
VIII. Congressional Action is Required
    We in Montana didn't ask to become captive shippers! We in Montana 
didn't want to suffer economically under the highest freight rates in 
the Nation!
    The ICC created this monopoly environment mess in Montana and has 
ignored their responsibility in creating the economic nightmare. There 
is an urgent need for Congress to come to grips with the ever-
increasing monopolistic power of the national railroads and its effects 
on the agricultural economy. Today Class I railroads control the 
agricultural economy.
    The Surface Transportation Board is charged with protecting 
``captive shippers'' under current law emanating out of the Staggers 
Rail Act. The record indicates that the STB and its predecessor, the 
ICC. have not protected the captive shipper from discriminatory 
pricing. Indeed, the STB has gone so far afield, that they have renamed 
the pricing mechanism utilized by the railroads. They call it 
``differential'' pricing! It is simply a rename for ``what the traffic 
will bear.'' Discriminatory pricing is both unfair to the captive 
shipper and immoral. Since the merger of the BNSF and the UP/SP, we 
have NOT seen increased competition in the state reflecting the 
proportional rate agreements agreed to in the UP/SP merger. Indeed, we 
have not been able to find one single shipper, grain or otherwise in 
Montana, that have experienced a single new solicitation by the UP/SP 
anywhere in Montana. The cycle times on UP and BNSF in Montana are 
inching up, not what the BNSF nor the UP predicted. The captive 
shippers are continuing to pay more than their fair share for these 
mergers.
    Any major Class I can, today, control development of any ``value-
added'' grain industry development, simply by not allowing (with 
monopolistic pricing) any construction of ``in-land'' value added 
processing, choosing instead, to move the raw grain to ports. Do they 
have to reduce the price of moving the grain to the ports in order to 
keep a ``value added'' plant from being built? No, they simply, over-
price monopolistically the value added plant. That is a true monopoly 
power that is being sanctioned by the current regulatory system. It 
must be changed.
IX. Solutions
    The solution is very simple. Either control the monopoly pricing or 
introduce competition. If the national agricultural policy is effective 
in increasing exports of grain, what is to stop the railroads from 
``taking'' their monopolistic share of these gains? A National 
Transportation Policy should be developed that requires the STB to 
consider for comparison, when reasonable rates are prescribed for 
shippers for whom effective competition does not exist, similar rates 
produced by rail-to-rail competition for shipment of the same or 
similar commodities. Our preference at the Montana Wheat & Barley 
Committee is for more competition among the monopoly railroads, but 
secured with adequate protection for the truly captive shippers of this 
country. After all, that is simply good, sound government policy.

    Senator Burns. And I've--we've been working on this for 
quite a while, so I appreciate you allowing those statements to 
be made. And thank you for holding this hearing. And I think we 
should get to the questions.
    Senator Lott. All right. Let's have our first panel come 
forward, Ms. Hecker and Mr. Buttrey. Thank you very much.
    Ms. Hecker is the director of the Physical Infrastructure 
Team, Government Accountability Office, Washington, D.C. And 
Mr. Buttrey is Chairman, Surface Transportation Board.
    And so, if we could, we'll go to you first, Ms. Hecker.

           STATEMENT OF JayEtta Z. HECKER, DIRECTOR,

                PHYSICAL INFRASTRUCTURE ISSUES,

             U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Hecker. Thank you very much, Mr. Chairman. It's a great 
honor to be here.
    This is, indeed, a critical juncture for this industry and 
these issues. They really represent issues that are of national 
economic significance, and not only to the railroads, but to 
producers, to users and the general population. And I, too, 
applaud the Committee both for holding this hearing and giving 
us the opportunity and the honor of having an opportunity to 
really examine in-depth these really critical issues.
    As you said, I'll be presenting very preliminary 
observations today. I do have a small slide presentation, with 
a number of charts, and I think a copy was given to each of 
you. So, hopefully that will assist in my being able to cover 
the enormous breadth of the issues before us.
    As you outlined, there are three topics that you asked us 
to address, and we will give you some preliminary observations 
on all three today. The first was the changes since the 
Staggers Act--industry performance, rates, and competition 
issues; the second is what those changes suggest for 
regulation, and what kind of alternative approaches have been 
posed to deal with open competition and captivity issues; and, 
finally, what some potential responses are to future freight 
demand and capacity issues.
    Now, the first chart I have--and I also have a visual 
that's a little easier to look at--really captures the economic 
performance of the industry and the changes both before the 
Act--that middle point in everything is geared to 1980--and 
after the Act. And, basically, these lines are productivity, 
price, revenue, and volume. And it is so profoundly telling how 
the--this industry stagnated under the regulatory environment. 
You did not have innovation. You did not really have any growth 
in volume. And mostly you didn't have productivity and 
efficiencies and improvement. And that's really the hallmark of 
the failure of regulation. It has a perverse effect on that 
kind of innovation that's so important.


    If you look at the explosion after 1980, the most important 
one is really that first line, going way up top, and that's 
productivity. That's the costs being cut, investments being 
made, new technology, new markets. The second one is volume; 
you have an enormous increase in volume. And what's good news 
for the economy and consumers is--prices was the red line--
prices are going down.
    A little bit more on that, though, the second chart is 
overall review of industry rate changes. As you know, we've 
taken a 20-year view. And this basically starts in 1985, goes 
to 2004, when the most comprehensive data is still available. 
And the yellow line is basically the changes in rates, using 
a--an industry price package so that it standardizes and 
controls for the type of commodity. So, the type can change, 
and the size of movements can change. And we have developed an 
index, so you get a more reliable view of changes. So, what we, 
here, have is that yellow line showing industry rate changes 
consistently going down.


    Now, what I've broken out in the yellow and red line is 
that it's quite different for different commodities. The 
yellow--the blue line is--these are reversed--coal is actually 
the blue--the yellow line on this one. So, that's below the 
industry average. The red line is grain, and that is clearly 
above the industry average. But the key thing is that the green 
line is what's happening to prices overall in the economy. So, 
you have either relatively steady or declining nominal prices, 
while you have a 60-percent overall increase in prices in the 
economy.


    The next one is a map trying to give you a capture of a--an 
overview of competition. This one basically uses the BEA 
economic areas. And those yellow areas basically are the 
number--27 BEA economic areas that are served by only one 
railroad.


    Now, that doesn't give you a complete view of captivity, so 
we turned to another thing, and that's chart number 7. And, as 
you remember, the Staggers Act defined a threshold of captivity 
as paying rates 180--where there was a ratio of 180 of revenue 
over variable cost. And the concern we have here is, while 
there has been, actually, a reduction of traffic traveling 
under a 300-percent mark, there has been a 50-percent increase 
in the amount of traffic that travels over 300 percent of that 
ratio. So, while captivity overall by this indicator, is 
decreasing, those who are captive are paying even more 
significantly higher rates than they were 20 years ago. So, 
that's why those average figures are really important to get a 
way to, to examine the central issue.


    I see my time is up, but the bottom line, I know you want 
to hear. I will----
    Senator Lott. Feel free to keep going.
    Ms. Hecker. Oh, thank you very much.
    Senator Lott. Your statements----
    Ms. Hecker. I'll still try to be----
    Senator Lott.--are very important.
    Ms. Hecker.--brief, because I know you want a dialogue 
here.
    Slide 8 is then, so what do you do about it? That balance 
was in the Act. It was carefully crafted and called for. And 
basically it provided two major things, in our view, for STB--
or ICC, originally. It was very broad authority, in our view, 
for the agency to prevent concentration, to ensure competition. 
And we have some comments about how that's been addressed. And 
then, there was the--all the authority to set up an effective 
relief process for those who were captive.


    Now, in our view, neither of those protections in the Act 
have been effectively implemented. So, the original balance, in 
our view, has not really come into its own.
    The first one is an area that is rarely discussed. And, 
basically, in our view, as I said, the agency really has broad 
authority to assess the performance of the market, not just in 
response to a merger request, not just in response to a 
complaint or a specific filed complaint, but really to be--one 
of the original acts is promoting competition, and, in our 
view, and, frankly, in response to many recommendations we've 
made in the past, the STB largely says that they're 
adjudicatory. And I think your own statement, Mr. Buttrey, 
makes clear that there's a primary role in reviewing cases and 
adjudicating or mediating disputes. The second area, everyone, 
I think, largely agrees that the relief process has turned out 
to be largely inaccessible. The alternatives that are under 
discussion are really along these two areas, either to 
streamline the relief process--and there are a number of 
proposals--and to promote competition and reduce captivity. 
These really are more trying to prevent the problem, rather 
than--the procedural ones are trying to improve the relief 
after you've presumably been made captive and not been able to 
have the benefits of competition. The other one is really 
getting to the root case and trying to promote competition.
    Now, the concern that we have is, because there isn't this 
rigorous analysis of the whole market and the failures of 
competition and where there really may be an abuse of market 
power, as opposed to a real response to very tight conditions 
in this industry, we believe more analysis is needed of the 
root problem here to be able to fully evaluate the costs and 
benefits of alternative approaches. And an enormous shift 
that's occurred is that we're on the cusp of most railroads 
becoming revenue-adequate, which is a very good thing, but that 
is a central component of the evaluation and the process and 
the regulatory approach. And so, that we're at a turning point 
of how that may change the regulatory approach.
    The freight demand issue, on slide 9, most projections are 
for significant increases. Railroads are making significant 
investments. And there is a recognition that there are probably 
public benefits from rail investments, beyond what rail will 
invest on their own.


    We've done a lot of work on these issues. I've studied 
public/private partnerships in many sectors. And we have two 
overriding concerns. One is that the policy response should 
preserve the central role of the market in the rail sector, and 
not unduly distort the benefits we have from a--an industry 
driven by a competitive environment. And the other concern is 
that we have a grave fiscal crisis. There is no money. And you 
all know that very well. New assistance is borrowing to provide 
new assistance. So, there's a very high standard to really try 
to identify new assistance or support programs.
    And then, we have three bullets, that it clearly has to be 
in a broader intermodal context of national freight policy. 
There have to be demonstrable public benefits, and at a 
national level. There are local benefits, and a Federal role to 
capture local benefits may not be justified. And then, in 
public partnerships, the critical thing is getting an effective 
allocation of costs between the public and private sector, and 
between national, State, and local interests.
    That concludes this preliminary report. As you've noted, 
our final report will be out in September, and we hope to more 
fully explore all of these issues.
    But I'd be pleased to take any questions that I can address 
today.
    [The prepared statement of Ms. Hecker follows:]

          Prepared Statement of JayEtta Z. Hecker, Director, 
 Physical Infrastructure Issues, U.S. Government Accountability Office
    Mr. Chairman and members of the Committee:
    We appreciate the opportunity to testify on our preliminary 
observations on the impact of deregulation of the freight railroad 
industry. As you know, over 25 years ago, Congress, with the leadership 
of this Committee, transformed Federal transportation policy. After 
almost 100 years of economic regulation, the railroad industry was in 
serious economic trouble in the 1970s, with rising costs, losses, and 
bankruptcies. In response, Congress passed the Railroad Revitalization 
and Regulatory Reform Act in 1976 and the Staggers Rail Act in 1980 
that substantially deregulated the railroad industry. The 1980 Act 
encouraged greater reliance on competition to set rates and gave 
railroads increased freedom to price their services according to market 
conditions, including using differential pricing--that is, recovering a 
greater proportion of their costs from rates charged to shippers with a 
greater dependency on rail transportation. Furthermore, the Act 
anticipated that some shippers might not have competitive alternatives, 
and gave the Interstate Commerce Commission (ICC), and later the 
Surface Transportation Board (STB), the authority to establish a rate 
relief process so that shippers could obtain relief from unreasonably 
high rates.
    At the request of several Members of this Committee, we have 
ongoing work providing a retrospective on the performance of the rail 
industry since the Staggers Rail Act. My comments today focus on (1) 
the changes that have occurred in the freight railroad industry since 
the enactment of the Staggers Rail Act, including changes in rail rates 
and competition in the industry, (2) what alternative approaches have 
been proposed and could be considered to address remaining competition 
and captivity concerns, and (3) the projections for freight traffic 
demand over the next 15 to 25 years, the freight railroad industry's 
projected ability to meet that demand, and potential Federal policy 
responses.
    To fulfill our objectives, we examined STB's Carload Waybill Sample 
from 1985-2004 (the latest data available at the time of our review). 
This document includes data on rail rates, tonnage, Federal regulation, 
and other statistics but disguises some revenues to avoid disclosing 
confidential business information to the public. We obtained a version 
of the Carload Waybill Sample that did not disguise revenues. We also 
interviewed, and reviewed information from representatives of each 
Class I railroad in North America, \1\ shipper groups, economists, and 
experts in the rail industry, and held an expert panel consisting of 
individuals with expertise in the freight railroad industry and the 
economics of transportation deregulation, interviewed shipper groups, 
railroads, and economists, and reviewed pending legislation and 
literature. We also reviewed forecasts of future freight rail demand 
and capacity, including synthesizing forecasting, and transportation 
planning literature, and interviewed Federal and state transportation 
officials, financial market analysts, national association 
representatives, and transportation experts. While we are aware that 
service issues such as on time performance and the supply of railcars 
by the railroads are of concern to many people here today, service 
issues are not included in the preliminary observations I will present 
today. Instead, we will leave comments about service to other 
individuals testifying. My comments today are based on our past body of 
work on the freight rail industry as well as our ongoing work, which we 
are conducting in accordance with generally accepted government 
auditing standards (see Appendix I for a list of our past reports on 
the freight railroad industry).
---------------------------------------------------------------------------
    \1\ As of 2004, a Class I railroad is any railroad with an 
operating revenue above $277.7 million.
---------------------------------------------------------------------------
    In summary:

   The changes that have occurred in the railroad industry 
        since the enactment of the Staggers Rail Act are widely viewed 
        as positive, as the financial health of the industry has 
        improved and most rates have declined since 1985, although 
        concerns about competition and captivity in the industry 
        remain. The freight railroad industry's financial health 
        improved substantially as railroads cut costs through 
        productivity improvements, streamlined and ``right-sized'' 
        their rail networks, implemented new technologies, and expanded 
        business into new markets such as the intermodal market, which 
        consists of containers and trailers that can be carried on 
        ships, trucks, or rail. Between 1985 and 2000, rates generally 
        declined, but have increased slightly from 2001 through 2004. 
        \2\ Several factors could have contributed to recent rate 
        increases, including continuing consolidation in the industry 
        and broad changes in the domestic and world economy and 
        emergence of a capacity constrained environment, where demand 
        exceeds supply. Concerns about competition and captivity in the 
        industry remain because traffic is concentrated in fewer 
        railroads and, although rates have declined for most shippers 
        since the enactment of the Staggers Rail Act, rates have not 
        declined uniformly and some shippers are paying significantly 
        higher rates than others. It is difficult to precisely 
        determine the number of shippers who are ``captive'' to one 
        railroad because proxy measures that provide the best 
        indication can overstate or understate captivity. However, our 
        preliminary analysis indicates that while the extent of 
        potential captivity may be dropping, the share of potentially 
        captive shippers who are paying the highest rates--those 
        substantially above the threshold for rate relief--has 
        increased. Whether this increase reflects an exercise or 
        possible abuse of market power or is simply a reflection of 
        rational economic practices by the railroads in an environment 
        of excess demand remains uncertain.
---------------------------------------------------------------------------
    \2\ While rate data are not available for 2005 and 2006, shippers, 
railroads, and financial analysts we spoke with told us that rates have 
generally increased during those years.

   A number of alternative approaches have been suggested by 
        shipper groups, economists, and other experts in the rail 
        industry to address remaining concerns about competition and 
        captivity--however, any alternative approaches should be 
        carefully considered. While a number of approaches have been 
        suggested, I would, based on our preliminary work, like to 
        focus on two areas that are particularly integral to further 
        improvement. First, while STB has broad legislative authority 
        to investigate industry practices and has assessed competition 
        practices--generally in reviewing railroad merger cases--there 
        has been little assessment of competition nationally by any 
        Federal agency of the state of competition nationally and where 
        specific areas of inadequate competition and the inappropriate 
        exercise of market power might exist. Given widespread 
        disagreement about the adequacy of competition in the industry 
        and the fact that proxy measures can understate or overstate 
        captivity, such an assessment would allow decisionmakers to 
        identify areas where competition is lacking and to assess the 
        need for and merits of targeted approaches to address it. These 
        approaches include requiring reciprocal switching arrangements, 
        which allow one railroad to switch railcars of another 
        railroad, and/or terminal access agreements, which permits one 
        railroad to use another's terminals. Second, although the 
        Staggers Rail Act recognized that some shippers might not have 
        access to competitive alternatives and might be subject to 
        unreasonably high rates, there is widespread agreement that the 
        rate relief process does not provide expeditious handling and 
        resolution of complaints, is expensive, time-consuming, and 
        complex, and that, as a result, it is largely inaccessible to 
        most shippers. A number of different approaches have been 
        suggested by shipper organizations and others that could make 
        the process less expensive and more expeditious, and thus more 
        accessible, such as arbitration and increased use of simplified 
        guidelines. Each of the proposed approaches has both advantages 
        and drawbacks. Any alternative approaches to address 
        competition and captivity should be carefully considered to 
        ensure that the approach will achieve the important balance set 
        out in the Staggers Rail Act of allowing the railroads to earn 
        adequate revenues and invest in its infrastructure while 
        assuring protection for captive shippers from unreasonable 
---------------------------------------------------------------------------
        rates.

   Significant increases in freight traffic over the next 15 to 
        25 years are forecasted, although many factors can affect the 
        accuracy of these forecasts, and the railroad industry's 
        ability to meet future demand is largely uncertain. Although 
        railroads have reported significant increased investment and 
        have told us that they plan to continue making infrastructure 
        investments, they also expressed uncertainty as to their 
        ability to keep pace with some of the higher projections of 
        future freight rail demand. Besides securing benefits for 
        private rail networks, investments in rail projects can produce 
        benefits for the public--for example, shifting truck freight 
        traffic to railroads can reduce highway congestion. As a 
        result, the Federal and state governments have been 
        increasingly participating in freight rail improvement 
        projects--for example, a number of states are involved in joint 
        projects with the railroads and, in 1997, the U.S. Department 
        of Transportation provided a $400 million loan to the Alameda 
        Corridor Transportation Authority for the Alameda Corridor 
        project to consolidate rail and other freight traveling to and 
        from the ports of Los Angeles and Long Beach. In addition, in 
        2005, Congress authorized $100 million for the Chicago CREATE 
        project to improve the rail network in Chicago. Congress is 
        likely to face additional decisions in the years ahead 
        regarding Federal policy toward the Nation's freight railroad 
        system. While our work continues, we would note, based on our 
        past work, that Federal involvement should only occur where 
        demonstrable public benefits exist, and where a mechanism is in 
        place to appropriately allocate the cost of financing these 
        benefits between the public and private sectors, and between 
        national, state, and local interests.
Background
    Freight rail is an important component of our Nation's economy. 
Approximately 42 percent of all inter-city freight in the United 
States, measured in ton miles, moves on rail lines. Freight rail is 
particularly important to producers and users of certain commodities. 
For example, about 70 percent of automobiles manufactured domestically, 
about 70 percent of coal delivered to power plants, and about 32 
percent of grain moves on freight rail.
    Beginning in 1887, the Interstate Commerce Commission (ICC) 
regulated almost all of the rates that railroads charged shippers. 
Congress passed the Railroad Revitalization and Regulatory Reform Act 
in 1976 and the Staggers Rail Act in 1980, and these acts greatly 
increased the reliance on competition in the railroad industry. 
Specifically, these acts allowed railroads and shippers to enter into 
confidential contracts which set rates and prohibited the ICC from 
regulating rates where railroads had effective competition or if the 
rates had been negotiated between the railroad and the shipper. The ICC 
Termination Act of 1995 abolished the ICC and transferred its 
regulatory functions to STB. Taken together, these acts anchor the 
Federal Government's role in the freight rail industry and have 
established numerous goals for regulating the industry, including the 
following:

   to allow, to the maximum extent possible, competition and 
        demand for services to establish reasonable rates for 
        transportation by rail.

   to minimize the need for Federal regulatory control over the 
        rail transportation system and to require fair and expeditious 
        regulatory decisions when regulation is required.

   to promote a safe and efficient rail transportation system 
        by allowing rail carriers to earn adequate revenues, as 
        determined by STB.

   to ensure effective competition among rail carriers and with 
        other modes to meet the needs of the public.

   to maintain reasonable rates where there is an absence of 
        effective competition and where rail rates provide revenues 
        which exceed the amount necessary to maintain the rail system 
        and to attract capital.

   to prohibit predatory pricing and practices, to avoid undue 
        concentrations of market power; and:

   to provide for the expeditious handling and resolution of 
        all proceedings.

    Two important components of the current regulatory structure are 
the concepts of revenue adequacy and demand-based differential pricing. 
Congress established the concept of revenue adequacy as an indicator of 
the financial health of the industry. STB determines the revenue 
adequacy of a railroad by comparing the railroad's return on investment 
with the industrywide cost of capital. If a railroad's return on 
investment is greater than the industry-wide cost of capital, STB 
determines that railroad to be revenue adequate. Historically, the ICC 
and STB have rarely found railroads to be revenue adequate, which many 
observers relate to characteristics of the industry's cost structure. 
Railroads incur large fixed costs to build and operate networks that 
jointly serve many different shippers. While some fixed costs can be 
attributed to serving particular shippers, and some costs vary with 
particular movements, other costs are not attributable to particular 
shippers or movements. Nonetheless, a railroad must recover these costs 
if the railroad is to continue to provide service over the long run, 
and, to the extent that railroads have not been revenue adequate, this 
may indicate that they are not fully recovering these costs.
    Consequently, the Staggers Rail Act recognized the need for 
railroads to use demand-based differential pricing in the deregulated 
environment. Demand-based differential pricing in theory permits a 
railroad to recover their joint and common costs across its entire 
traffic base by setting higher rates for traffic with fewer 
transportation alternatives than for traffic with more alternatives. 
This means that a railroad might incur similar incremental costs in 
providing service to two different shippers that ship similar tonnages 
in similar car types traveling over similar distances, but that the 
railroad may charge quite different rates. In this way, the railroad 
recovers a greater portion of its joint and common costs from the 
shipper that is more dependent on railroad transportation, but, to the 
extent that the railroad is able to offer lower rates to the shipper 
with more transportation alternatives, the other shipper makes a 
contribution toward those costs.
    The Staggers Rail Act further required that the railroads' need to 
differentially price its services be balanced with the rights of 
shippers to be free from, and to seek redress from unreasonable rates. 
Railroads incur variable costs--that is the costs of moving particular 
shipments--in providing service. The Staggers Rail Act stated that any 
rate that was found to be above 180 percent of a railroad's variable 
cost for a particular shipment was potentially an unreasonable rate and 
granted the ICC, and later the STB, the authority to establish a rate 
relief process. In response, the ICC established two criteria for 
allowing a rail rate case. First, as stated in law, the rate had to be 
above 180 percent of the revenue-to-variable-cost (R/VC) ratio. Second, 
the shipper had to demonstrate that it had no other reasonable 
transportation alternative. Such a shipper is referred to as a 
``captive shipper.''
Railroad Industry Increasingly Healthy and Rates Down Since Enactment 
        of the Staggers Rail Act, but Competition and Captivity 
        Concerns 
        Remain
    The changes that have occurred in the railroad industry since the 
enactment of the Staggers Rail Act are widely viewed as positive. The 
railroad industry's financial health improved substantially as it cut 
costs, boosted productivity, and ``right-sized'' its networks. Rates 
generally declined between 1985 and 2000 but increased slightly from 
2001 through 2004. Concerns about competition and captivity in the 
industry remain because traffic is concentrated in fewer railroads and, 
although rates have declined for most shippers, some shippers are 
paying significantly higher rates than others. While it is difficult to 
precisely determine the number of shippers who are ``captive'' to one 
railroad, our preliminary analysis indicates that while the extent of 
potential captivity may be dropping, the share of potentially captive 
shippers who are paying the highest rates--those substantially above 
the threshold for rate relief--has increased.
Railroad Industry Financial Health Improved Substantially
    There is widespread consensus that the freight rail industry has 
benefited from the Staggers Rail Act. Specifically, various measures 
indicate an increasingly strong freight railroad industry. Freight 
railroads' improved financial health is illustrated by increases in 
productivity, volume of shipments, and stock prices. Freight railroads 
have also cut costs by streamlining their work force and ``right-
sizing'' their rail network, through which the railroads have reduced 
track, equipment, and facilities to more closely match demand. These 
measures are shown in Figure 1.


    Freight railroads have also expanded their business into new 
markets--such as the intermodal market--and implemented new 
technologies, including larger cars, and are currently developing new 
scheduling and train control systems. Some observers believe that the 
competition faced by railroads from other modes of transportation has 
created incentives for innovative practices, and that the ability to 
enter into confidential contracts with shippers has permitted railroads 
to make specific investments and to develop service arrangements 
tailored to the requirements of different shippers.
Rates Declined From 1985 through 2000 and Rose Slightly from 2001 
        through 2004
    Rail rates across the industry have generally declined since 
enactment of the Staggers Rail Act. Because changes in traffic patterns 
over time (for example, hauls over longer distance) can result in 
increases in lower priced traffic and a decrease in average revenue per 
ton mile, it can present misleading rate trends. Therefore, we 
developed a rail rate index \3\ to examine trends in rail rates over 
the 1985-2004 period. These indexes account for changes in traffic 
patterns over time which could affect revenue statistics but do not 
account for inflation. As a result, we have also included the price 
index for the gross domestic product.
---------------------------------------------------------------------------
    \3\ We constructed rate indexes to examine trends in rail rates 
over the 1985 to 2004 period. These indexes define traffic patterns for 
a given commodity in terms of census region to census region flows of 
that commodity, and we calculate the average revenue per ton mile for 
each of these traffic flows. The index is calculated as the weighted 
average of these traffic flows in each year, expressed as a percentage 
of the value for 1985, where the weights reflect the traffic patterns 
in 2004. By fixing the weights as of one period of time, we attempt to 
measure pure price changes rather than calculating the average revenue 
per ton mile in each year. Over time, changes in traffic patterns could 
result in a substitution of lower priced traffic for higher priced 
traffic, or vice versa, so that a decrease in average revenue per ton 
mile might partly reflect this change in traffic patterns. The rate 
index for the overall industry was defined similarly, except that the 
traffic pattern bundle was defined in terms broad commodity, census 
region of origin, and mileage block categories. For comparison 
purposes, we also present the price index for gross domestic product 
over this period.
---------------------------------------------------------------------------
    Although there has been a slight upturn in rates from 2001 through 
2004, the industry continues to experience rates that are generally 
lower than they were in 1985. During this time some costs have also 
been passed on to shippers, such as having shippers provide equipment. 
There was a steep decline in rates from 1985 to 1987 when rates dropped 
by 10 percent. Rates continued to decline, although not as steeply, 
through 1998. Rates increased in 1999, then dropped again in 2000. In 
2001 and 2002 rates rose again. Rates were nearly flat in 2003 and 
2004, finishing approximately 3 percent above rates in 2000, but 20 
percent below 1985 rates. This is shown in Figure 2.


    These data include rates through 2004. According to freight 
railroad officials, shippers, and financial analysts, since 2004 rates 
have continued to increase as the demand for freight rail service has 
increased, rail capacity has become more limited, and as a result, 
freight railroad companies have gained increased pricing power.
    A number of factors may have contributed to recent rate increases. 
Ongoing industry and economic changes have influenced how railroads 
have set their rates. Since the Staggers Rail Act was enacted, the 
railroad industry and the economic environment in which it operates 
have changed considerably. Not only has the rail industry continued to 
consolidate, potentially increasing market power by the largest 
railroads, but after years of reducing the number of its employees and 
shedding track capacity, the industry is increasingly operating in a 
capacity-constrained environment where demand for their services 
exceeds their capacity. In addition, the industry has more recently 
increased employment and invested in increased capacity in key traffic 
corridors. Additionally, changes in broader domestic and world economic 
conditions have led to changes in the mix and profitability of traffic 
carried by railroads.
Competition and Captivity Concerns Remain
    Concerns about competition and captivity in the railroad industry 
remain because traffic is concentrated in fewer railroads and even 
though rates have declined for most shippers since the enactment of the 
Staggers Rail Act, some shippers are paying significantly higher rates 
than other shippers--a reflection of differential pricing. There is 
significant disagreement on the state of competition in the rail 
industry. In 1976, there were 63 Class I railroads operating in the 
United States compared with 7 Class I railroads in 2004. \4\ As Figure 
3 shows, 4 of these Class I railroads accounted for over 89 percent of 
the industry's revenues in 2004. While some experts view this 
concentration as a sign that the industry has become less competitive 
over time, others believe that the railroad mergers and acquisitions 
actually increased competition in the rail industry because STB placed 
conditions on the mergers intended to maintain competition. These 
experts also point to the hundreds of short line railroads \5\ that 
have come into being since the enactment of the Staggers Rail Act, as 
well as other increased competitive options for shippers from other 
modes such as trucks and barges.
---------------------------------------------------------------------------
    \4\ In addition to consolidation, which is the main reason for the 
reduction in the number of Class I railroads, other reasons were 
carrier bankruptcies and a 1992 ICC change in the threshold for 
qualifying as a Class I railroad (from $5 million in annual revenue in 
1976 to $250 million in 1992).
    \5\ A short line railroad is an independent railroad company that 
operates over a short distance.


    According to our preliminary analysis, some commodities and 
shippers are paying significantly higher rates than other shippers. 
This can be seen in rates charged to commodities and at specific 
routes. Figure 4 compares commodity rates for coal and grain prices 
from 1985 through 2004 using our rail rate index. As Figure 4 shows, 
all rate changes were below the rate of inflation and thus all rates 
declined in real terms. However during that period, coal rates dropped 
even more sharply than industrywide rates, declining 35 percent. Grain 
rates initially declined from 1985 to 1987, but then diverged from 
industry trends and increased, resulting in a net 9 percent nominal 
increase by 2004.


    It is difficult to precisely determine the number of shippers who 
are ``captive'' to one railroad because proxy measures that provide the 
best indication can overstate or understate captivity. One way of 
determining potential captivity in our preliminary analysis was to 
identify which Bureau of Economic Analysis (BEA) economic areas were 
served by only one Class I railroad. \6\ In 2004, 27 of the 177 BEA 
economic areas were served by only one Class I railroad. As shown in 
Figure 5, these areas include parts of Montana, North Dakota, New 
Mexico, Maine, and other states. We also examined specific origin and 
destination pairs and found that in 2004, origin and destination routes 
with access to only one Class I railroad carried 12 percent of industry 
revenue. This represents a decline from 1994, when 22 percent of 
industry revenue moved on routes served by one Class I railroad. This 
decline suggests that more railroad traffic is traveling on routes with 
access to more than one Class I railroad.
---------------------------------------------------------------------------
    \6\ Economic areas are those areas defined by the Bureau of 
Economic Analysis which define the relevant regional economic markets 
in the U.S.


    While examining BEA areas provides a proxy measure for captivity, a 
number of factors may understate or overstate whether shippers are 
actually captive. The first two of these factors may work to understate 
the extent of captivity among shippers. First, routes originating 
within economic areas served by multiple Class I railroads may still be 
captive if only one Class I railroad serves their destination, meaning 
the shipper can use only that one railroad for that particular route. 
Second, some BEA areas are quite large, so a shipper within the area 
may have access to only one railroad even though there are two or more 
railroads within the broader area. Two additional limitations may work 
to overstate the number of locations captive to one railroad. First, 
this analysis accounts for Class I railroads only and does not account 
for competitive rail options that might be offered by Class II or III 
railroads such as the Guilford Rail System, which operates in northern 
New England. Second, this analysis considers only competition among 
rail carriers and does not examine competition between rail and other 
transportation modes such as trucks and barges.
    To determine potential captivity during our preliminary analysis, 
we applied another proxy measure--the definition of potentially captive 
traffic used in the Staggers Rail Act. The Act defines potentially 
captive traffic as any that pays over 180 percent of the revenue-to-
variable cost (R/VC) ratio. As a percentage of all rail traffic, the 
amount of potentially captive traffic traveling over 180 percent R/VC 
and the revenue generated from that traffic have both declined since 
1985.
    However, our preliminary analysis indicates the share of 
potentially captive shippers who are paying the highest rates--those 
substantially above the threshold for rate relief--has increased. While 
total tons have increased significantly (from about 1.37 billion in 
1985 to about 2.14 billion in 2004), Figure 6 shows that tons traveling 
between 180 and 300 percent R/VC but have remained fairly constant--an 
increase from about 497 million tons in 1985 to about 527 million tons 
in 2004. However tons traveling above 300 percent R/VC have more than 
doubled--from about 53 million tons in 1985 to over 130 million tons in 
2004.


    This pattern can also be seen in the share of traffic traveling 
above and below 180 percent R/VC between 1985 and 2004. As Figure 7 
illustrates, the percent of all traffic traveling between 180 and 300 
percent R/VC decreased from 36 percent in 1985 to 25 percent in 2004. 
In contrast, the percent of all traffic traveling above 300 percent R/
VC increased from 4 percent in 1985 to 6 percent in 2004.


    Our preliminary analysis indicates that this overall change in 
traffic traveling over 300 percent R/VC can be seen in certain states 
and commodities. For example, 39 percent of grain originating in 
Montana and 20 percent of coal in West Virginia traveled over 300 
percent R/VC in 2004. As shown in Figure 8, this represents a 
significant increase from 1985, when 14 percent of grain in Montana and 
4 percent of coal in West Virginia traveled over 300 percent R/VC.


    As with BEA areas, examining R/VC levels as a proxy measure for 
captivity can also understate or overstate captivity. For example, it 
is possible for the R/VC ratio to increase while the rate paid by a 
shipper is declining. Assume that in Year 1, a shipper is paying a rate 
of $20 and the railroad's variable cost is $12. The R/VC ratio--a 
division of the rate and the variable cost--would be 167 percent. If in 
Year 2 the variable costs decline by $2.00 from $12 to $10, and the 
railroad passes this cost savings directly on the shipper in the form 
of a reduced rate, the shipper would pay $18 instead of $20. However, 
as shown in Table 1, because both revenue and variable cost decline, 
the R/VC ratio increases to 180 percent.

                Table 1: Possible Changes in R/VC Ratios
------------------------------------------------------------------------
                                  Revenue
            Year                 collected     Variable costs     R/VC
------------------------------------------------------------------------
Year 1                                 $20.00          $12.00       167%
Year 2                                 $18.00          $10.00       180%
------------------------------------------------------------------------
Source: GAO.

    Although proxy measures have inherent limitations, they can serve 
as useful indicators of trends in railroad pricing, how the railroads 
may be exercising their market power to set rates, and where 
competition and captivity concerns remain. Whether these trends reflect 
an exercise or possible abuse of market power or is simply a reflection 
of rational economic practices by the railroads in an environment of 
excess demand remains uncertain.
Proposed Alternative Approaches to Address Remaining Competition and 
        Captivity Concerns Should Be Carefully Considered
    A number of alternative approaches have been suggested by shipper 
groups, economists, and other experts in the rail industry to address 
remaining concerns about competition and captivity--however, any 
alternative approaches should be carefully considered. Two areas--an 
assessment of competition and addressing problems with the rate relief 
process--are particularly integral to further improvement. Any 
alternative approaches to address competition and captivity should be 
carefully considered to ensure that the approach achieves the important 
balance set out in the Staggers Act of allowing the railroads to earn 
adequate revenues and invest in its infrastructure while assuring 
protection for captive shippers from unreasonable rates.
Assessment of Competition Has Been Limited
    Our preliminary work shows there has been little assessment by the 
Federal Government of where areas of inadequate competition might exist 
or how changes in industry concentration might be resulting in the 
inappropriate exercise of market power. Although the STB has broad 
legislative authority to investigate industry practices, it has 
generally limited its reviews of competition to merger cases. STB is 
responsible for reviewing railroad merger proposals, approving those 
that it finds consistent with the public interest, and ensuring that 
any potential merger-related harm to competition is mitigated. STB's 
mitigation efforts have focused on preserving competition, such as 
granting the authority for one railroad to operate over the tracks of 
another railroad (called trackage rights). As we reported in 2001, STB 
found little competition-related harm during its oversight of recent 
mergers. However, rail mergers can have different effects on rail 
rates. For example, using an econometric approach that isolated the 
specific effects of the Union Pacific/Southern Pacific merger on rail 
rates for certain commodities in two geographic areas--Reno, Nevada, 
and Salt Lake City, Utah--we found that the merger reduced rates for 
four of six commodities, placed upward pressure on rates for one 
commodity, and left rates relatively unchanged for one commodity. In 
analyzing rail rates as part of merger oversight, STB examines the 
merger oversight record, which generally focuses on the overall 
direction and magnitude of rate changes, rather than specific 
commodities or geographic areas. According to STB officials, in 
general, the records have not permitted STB to reliably and precisely 
isolate the effects of mergers on rates from the effects of other 
factors (such as the price of diesel fuel).
    STB is not unaware of concerns about competition. In addition to 
reviewing competition in terms of mergers, STB has also instituted 
proceedings to review rail access and competition issues. For example, 
in April 1998, STB commenced a review at the request of Congress to 
review access and competition issues in the rail industry. In an April 
1998 decision on these issues, STB agreed to consider revising its 
competitive access rules. However, in its December 1998 report to 
Congress, STB declined to take further action on this issue because it 
had adopted new rules allowing shippers temporary access to alternative 
routing options during periods of poor service. In addition, STB 
observed that the competitive access issue raises basic policy 
questions that are more appropriately resolved by Congress. 
Furthermore, in a December 1998 ruling on a Houston/Gulf Coast 
oversight proceeding, STB recognized the possibility that opening up 
access could fundamentally change the Nation's rail system, possibly 
benefiting some shippers with high-volume traffic while reducing 
investment elsewhere in the system and ultimately reducing or 
eliminating service for small, lower-volume shippers in rural areas. 
Finally, STB adopted new regulations for rail mergers in 2001. These 
new regulations require the applicant to demonstrate that the merger 
would enhance, not just preserve, competition.
    Given the disagreement about the adequacy of competition in the 
industry and the fact that proxy measures can understate or overstate 
captivity, an assessment of competition and how changes in industry 
concentration might be resulting in the inappropriate exercise of 
market power would allow decisionmakers to identify areas where 
competition is lacking and to assess the need for and merits of 
targeted approaches to address it. The targeted approaches most 
frequently proposed by shipper groups and others include reciprocal 
switching arrangements, which allow one railroad to switch railcars of 
another railroad, and terminal access agreements, which permits one 
railroad to use another's terminals. We will discuss the potential 
costs and benefits of these approaches further in our final report. Use 
of these approaches should be carefully considered to ensure that the 
approach achieves the important goals set out in the Staggers Rail Act. 
For example, if these approaches expand competitive options and 
decrease the number of captive shippers, which could decrease the need 
for Federal regulation and the need for a rate relief process. On the 
other hand these approaches could also reduce rail rates and thus 
railroad revenues and affect the ability of the railroads to earn 
adequate revenues and invest in its infrastructure.
Rate Relief Process Is Largely Inaccessible, but Different Approaches 
        Should Be Carefully Considered
    The principal vehicle through which shippers seek relief from 
unreasonable rates is the rate relief process. The Staggers Rail Act 
recognized that some shippers may not have access to competitive 
alternatives and may therefore be subject to unreasonably high rates. 
For these shippers, the Act gave ICC, and later STB, the authority to 
establish a rate relief process so that shippers could obtain relief 
from unreasonably high rates, as well as more general powers to monitor 
the railroad industry. Under the standard rate relief process, the 
Board requires a shipper to demonstrate how much an optimally efficient 
railroad would need to charge that shipper. Therefore, the shipper must 
construct a hypothetical, perfectly efficient railroad that would 
replace its current carrier.
    There is widespread agreement the rate relief process is 
inaccessible to most shippers and does not provide expeditious handling 
and resolution of complaints. The process is expensive, time consuming 
and complex, and, as a result, several shipper's organizations told us 
that it is unlikely they would ever file a rate case. Since 2001, only 
10 cases have been filed, and these cases took between 2.6 and 3.6 
years--an average of 3.3 years per case--to complete. In addition, 
while STB does not keep records of the cost of a rate case, shippers we 
interviewed agreed that the process can cost approximately $3 million 
per litigant. As a result, shippers told us that, for them to bring a 
case, the case would need to involve several million dollars so that it 
was worthwhile to spend $3 million on a case that they could possibly 
lose. The process is complex because the legal procedures requires that 
(1) the shipper construct a model of a hypothetical, perfectly 
efficient railroad and (2) the railroad and shipper have opportunities 
to present their facts and viewpoints as well to present new evidence.
    Congress and STB have recognized the problems with the rate relief 
process and taken actions to address them. First, Congress required STB 
to develop simplified guidelines. STB developed guidelines to 
streamline the process when the value of traffic at stake did not make 
it feasible to incur the costs of conducting a full rate case. Under 
these simplified guidelines, shippers do not have to construct a 
hypothetical railroad and can instead rely on industry averages to try 
to prove that their rate is unreasonable. Although these simplified 
guidelines have been in place since 1997, the process set out by the 
guidelines has not been used. Second, STB worked to improve the 
standard rate relief process. Specifically, STB now holds oral 
arguments to begin cases and, according to STB officials, these oral 
arguments help to clarify disagreements without adding any time to the 
process. In addition, STB has added staff to process cases.
    According to shippers and railroad officials we spoke with, the 
simplified guidelines are confusing regarding who is eligible to use 
the process and how it would work. In addition, several shippers' 
organizations told us that shippers are concerned about using the 
simplified guidelines because since they have never been used, they 
believe it will be challenged in court and result in lengthy 
litigation. STB officials told us that they--not the shippers--would be 
responsible for defending the guidelines in court. STB officials also 
said that, if a shipper won a small rate case, STB could order 
reparations to the shipper before the case was appealed to the courts.
    During our preliminary work we identified a number of different 
approaches that have been suggested by shipper organizations and others 
that could make the rate relief process less expensive and more 
expeditious, and therefore potentially more accessible. Each of the 
proposed approaches has both advantages and drawbacks. These approaches 
included the following:

   Increased use of arbitration: Under arbitration, the two 
        parties would present their case before an arbitrator, who 
        would then determine the rate. This approach would replace the 
        shipper's requirement to create a hypothetical railroad. 
        Proponents of this system argue that it provides both the 
        railroads and the shippers with an incentive to suggest a 
        reasonable rate (because otherwise the arbitrator could select 
        the other's offer) and that the threat of arbitration can 
        induce the parties to resolve their own problems and limit the 
        need for Federal regulation. However, critics of this approach 
        suggest that arbitration decisions may not be based on economic 
        principles such as the revenue and cost structure of the 
        railroad and that arbitrators may not be knowledgeable about 
        the railroad industry.

   Increased use of simplified guidelines: The simplified 
        guidelines use standard industry average figures for revenue 
        data instead of requiring the shipper to create a hypothetical 
        railroad. This approach would reduce the time and complexity of 
        the process; however, it may not provide as accurate and 
        precise a measure as the current process. However, as noted 
        above, the use of STB's simplified guidelines has not been 
        fully reviewed by the courts, and many railroad industry 
        experts believe the first use of the guidelines will result in 
        lengthy litigation.

   Increased use of alternative cost approaches: For example, 
        STB could use the long-run incremental cost approach to 
        evaluate and decide rate cases. This process, which is used for 
        regulating pipelines, bases rates on the actual incremental 
        cost of moving a particular shipment, plus a reasonable rate of 
        return. This approach allows for a quick, standard method for 
        setting prices, but does not take into account the need for 
        differential pricing or the railroad's need to charge higher 
        rates in order to become revenue adequate. Structuring rate 
        regulation around actual costs can also create potential 
        disincentives for the regulated entity to control its costs.

    Again, these alternative approaches should be carefully considered 
to ensure that the approach achieves the important balance set out in 
the Staggers Act. A significant factor in evaluating each of these 
alternatives is the revenue adequacy of the railroads. The Staggers 
Rail Act established revenue adequacy as a goal for the industry and 
allowed the railroads to use differential pricing to increase their 
revenues. The act further gave the ICC (and later STB) the authority to 
determine the revenue adequacy of the railroads each year. While the 
specific method for determining revenue adequacy has been 
controversial, the overall trend in revenue adequacy may be more 
important. In its last report in 2004, STB determined that one railroad 
is revenue adequate and that others are approaching revenue adequacy. 
While it is too early to determine that the industry as a whole is 
achieving revenue adequacy, this is a significant shift in the rail 
industry because for decades after enactment of the Staggers Rail Act, 
the railroads were all considered revenue inadequate.
    Different approaches to addressing remaining competition and 
captivity concerns will likely recognize to some degree the railroads' 
continued need to more consistently recover their cost of capital and 
become revenue adequate. The railroads need additional revenue for 
infrastructure investment to keep pace with increased demand. On the 
other hand, different approaches also raise the question as to what 
degree the railroads should continue to rely on obtaining significantly 
higher prices from those with greater reliance on rail transportation 
in a revenue adequate environment where total railroad revenues are 
increasingly sufficient to meet the railroad's investment needs.
Significant Growth in Freight Rail Traffic Demand Is Forecast But 
        Continued Capacity Building Is Uncertain
    The demand for freight and freight rail is forecast to increase 
significantly in the future, although many factors can affect the 
accuracy of these forecasts. Freight markets are volatile and 
unpredictable and thus freight demand forecasts may prove to be off the 
mark. For example, much freight demand is determined by trade that 
originates outside the United States. Many of the data used to develop 
these freight demand forecasts are proprietary and a result, we could 
not assess the validity or reasonableness of the assumptions used to 
develop the predictions. However, forecasts of freight and freight rail 
demand are useful as one possible scenario of the future. As the 
Congressional Budget Office (CBO) observed in a January 2006 report, 
forecasts of future demand can be viewed as more illustrative than 
quantitatively accurate. \7\
---------------------------------------------------------------------------
    \7\ Congressional Budget Office Freight Rail Transportation: Long 
Term Issues January 2006.
---------------------------------------------------------------------------
    Major freight railroads have reported that they expect to invest 
about $8 billion in infrastructure during 2006--a 21 percent increase 
over 2005--and have told us that they plan to continue making 
infrastructure investments. \8\ Although railroads are sufficiently 
profitable to be investing at record levels today, it is not certain 
whether in the future investments will keep pace with the projected 
demand. Railroads secure private benefits by investing in their 
infrastructure and have many considerations in making new 
infrastructure investments such as the need to obtain the highest 
return on their investment, optimize the performance of their network, 
and respond to other significant capital needs of rail operations. The 
railroads we interviewed were generally unwilling to discuss their 
future investment plans with us as this is business proprietary 
information. We are therefore unable to comment on how companies are 
likely to choose among their competing investment priorities for the 
future.
---------------------------------------------------------------------------
    \8\ According to STB, some portion of this $8 billion investment is 
focused on maintenance as opposed to capacity expansion.
---------------------------------------------------------------------------
    In addition to securing private benefits for railroad networks, 
investments in rail projects can produce benefits for the public--some 
of these public benefits are, as CBO's report pointed out, large in 
comparison to anticipated private railroad benefits. For example, 
shifting truck freight traffic to railroads can reduce highway 
congestion and reduce or avoid public expenditures that otherwise would 
be needed to build additional highway capacity or provide additional 
maintenance to accommodate growth in truck traffic. These and other 
public benefits can be realized at the national, state, and local 
levels. For example, rail investment may generate benefits to the 
national economy by lowering the costs of producing and distributing 
goods. Since rail uses less fuel than trucks, energy use and emissions 
may be reduced. In contrast, a rail project that eliminates or improves 
a highway-rail crossing could deliver primarily local public safety 
benefits by reducing accidents, time lost waiting for trains to pass, 
and pollution and noise from idling trains and lessening the risk of 
delays for emergency vehicles at crossings.
    In pursuit of these public gains, the Federal and state governments 
have been increasingly participating in freight rail improvement 
projects. For example, the State of Delaware spent about $14 million to 
rehabilitate a bridge in exchange for receiving a fee for each railroad 
car that crosses the bridge. The Federal Government has also become 
more involved in freight rail partnerships. Specifically, in 1997 the 
U.S. Department of Transportation provided a $400 million loan to the 
Alameda Corridor Transportation Authority for the Alameda Corridor 
project, which included a number of rail and road improvements to 
consolidate freight traveling to and from the ports of Los Angeles and 
Long Beach. These ports are a significant gateway for freight that is 
imported from Asia and distributed throughout the U.S. In addition, in 
2005, Congress provided $100 million to the Chicago CREATE project to 
improve the rail infrastructure and ease congestion in and around 
Chicago--the busiest freight rail center in the U.S.
    In the years ahead Congress is likely to face additional decisions 
regarding potential Federal policy responses and the Federal role in 
the Nation's freight railroad infrastructure. Based on our ongoing and 
past work, I would like to make three observations. First, any 
potential Federal policy response should recognize that subsidies can 
potentially distort the performance of markets and that the Federal 
fiscal environment is highly constrained. Second, any such response 
should occur in the context of a comprehensive National Freight Policy 
that reflects system performance based goals and a framework for 
intergovernmental and public-private cooperation. DOT initiated this 
effort by publishing a draft Framework for a National Freight Policy 
this year for comment. Third, Federal involvement should only occur 
where demonstrable wide-ranging public benefits and a mechanism to 
appropriately allocate the cost of financing these benefits between the 
public and private sectors exists and, to the extent possible, focuses 
on benefits that are more national than local in scope. Although new 
freight rail investment tax credits have been suggested, our past work 
has pointed out that it is difficult to target this approach to desired 
activities and outcomes and ensure that it generates the desired new 
investments as opposed to subsidizing investment that would have been 
undertaken at some point anyway. This approach can also have 
problematic fiscal impacts because it either lowers tax revenues or 
leads to higher overall tax rates to offset revenue losses. We will be 
discussing these areas in greater detail when we issue our report.
    Mr. Chairman, this concludes my prepared statement. I would be 
happy to respond to any questions you or other members of the Committee 
may have at this time.
                    Appendix I--Related GAO Products
    Regulation: Changes in Freight Railroad Rates from 1997 through 
2000. GAO-02-524. Washington, D.C.: June 7, 2002.
    Freight Railroad Regulation: Surface Transportation Board's 
Oversight Could Benefit From Evidence Better Identifying How Mergers 
Affect Rates. GAO-01-689. Washington, D.C.: July 5, 2001.
    Railroad Regulation: Current Issues Associated With the Rate Relief 
Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999.
    Railroad Regulation: Changes in Railroad Rates and Service Quality 
Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999.
    Railroad Competitiveness: Federal Laws and Policies Affect Railroad 
Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991.
    Railroad Regulation: Economic and Financial Impacts of the Staggers 
Rail Act of 1980. GAO/RCED-90-80. Washington, D.C.: May 16, 1990.
    Railroad Regulation: Shipper Experiences and Current Issues in ICC 
Regulation of Rail Rates. GAO/RCED-87-119. Washington, D.C.: September 
9, 1987.
    Railroad Regulation: Competitive Access and Its Effects on Selected 
Railroads and Shippers. GAO/RCED-87-109. Washington, D.C.: June 18, 
1987.
    Railroad Revenues: Analysis of Alternative Methods To Measure 
Revenue Adequacy. GAO/RCED-87-15BR. Washington, D.C.: October 2, 1986.
    Shipper Rail Rates: Interstate Commerce Commission's Handling of 
Complaints. GAO/RCED-86-54FS. Washington, D.C.: January 30, 1986.

    Senator Lott. Let's go ahead and hear from Mr. Buttrey, and 
then we'll ask questions of the both of you.
    So, Mr. Doug Buttrey, Surface Transportation Board 
chairman, thank you for your service, and we'll be glad to hear 
from you.

          STATEMENT OF W. DOUGLAS BUTTREY, CHAIRMAN, 
                  SURFACE TRANSPORTATION BOARD

    Mr. Buttrey. Good morning, Mr. Chairman, Ranking Member, 
members of the Subcommittee.
    My name is Douglas Buttrey. I'm Chairman of the Surface 
Transportation Board. I appreciate the opportunity to appear 
before this Subcommittee today to discuss the economics of the 
freight railroad industry as it relates to current service and 
capacity issues.
    This is my first appearance before this Committee since I 
became Chairman of the Surface Transportation Board on January 
5. I'm glad to report that the Board has undertaken several 
important new initiatives since January in an effort to be 
proactive and responsive to concerns that have been raised. I 
will outline these initiatives for you in a moment, but first 
I'd like to comment briefly on rail capacity and service 
issues.
    At least some of today's issues differ from those that 
prevailed when the Board last appeared before this 
Subcommittee. Historically, railroads had excess capacity. 
However, the U.S. economy has expanded, and the railroad 
industry, like other transportation sectors, has become 
capacity-constrained in some areas. The Board has a process in 
place to help railroads and their customers resolve service 
and/or rate disputes informally before availing themselves of 
the Board's formal processes. The Board favors private-sector 
solutions, but when informal processes cannot produce a 
solution, the Board is available to provide an adjudicatory 
forum.
    Turning now to the new initiatives since January 1, I would 
first like to emphasize that the Board has begun a rulemaking 
to reform the large rate case process in an effort to make it 
as fair, efficient, and user-friendly as possible. Preparing 
the evidence that is required in a large rate case and 
presenting it to the Board can be very time-consuming and 
expensive for the parties. The Board's staff reviewed the 
formal rate proceedings that have come before the agency over 
the past few years, and, in February, the Board issued a Notice 
of Proposed Rulemaking in an attempt to improve how we handle 
certain difficult substantive issues that have come in large 
rate cases. Comments and replies have been filed, and rebuttals 
are due very shortly.
    Because of the scope of these proposed rule changes, the 
Board has put its pending large rate cases in abeyance. Things 
are not standing still, however. Recently, the Board issued 
compliance orders in two of the pending cases to obtain 
additional evidence that will be needed to resolve those cases 
regardless of whatever rules are ultimately adopted.
    The Board is also committed to improvements in the small 
rate case area. The Board's staff is continuing to develop new 
ideas to improve the existing small rate case procedures where 
we can. I cannot today give you a particular date on which a 
rulemaking on small rate case issues will be initiated, but I 
assure you that we're making every effort to come up with 
better guidance in this area. I expect the proposal to be 
issued later this summer.
    Another matter that has been a serious concern to shippers 
in recent months is railroad fuel surcharges. Recently, 
unpredictability, volatility, and spikes in fuel costs are well 
known. To give parties on both sides an opportunity to address 
these matters, the Board held a public hearing--an all-day 
public hearing--on May 11. The hearing was very well attended, 
but I personally found the shippers and railroads to be worlds 
apart in their testimony, even as to factual matters. The Board 
is presently considering what action would be appropriate and 
helpful in this area.
    The Board has also scheduled a public hearing to hear views 
on the issue of paper barriers. This hearing, on July 27, will 
explore the pros and cons of these limitations on interchanges 
that have been imposed in connection with some railroad line 
sales and leases. After the hearing, the Board will consider 
claims that such limitations are anticompetitive and what, if 
any, action is appropriate.
    The Board has also instituted a rulemaking proceeding 
proposing to change the timing for class exemptions that 
provide an expedited process for obtaining authority for some 
rail-line acquisitions, leases, and similar transactions.
    The Board proposed these changes in order to ensure that 
the public is given adequate notice of a proposed transaction 
before the exemption can become effective. Comments and replies 
have just recently been filed.
    Finally, the Board has issued an advance notice of proposed 
rulemaking and sought comments on a proposed filed by the 
shortline and regional railroads. They seek a new expedited 
process for abandonment of rail lines owned by the smaller 
railroads. Comments and replies have been filed, and the Board 
will now consider what action, if any, is appropriate.
    I hope it is clear from this summary that the Board is 
listening and sensitive to concerns raised by stakeholders, and 
has taken several important steps since January that are 
intended to explore how best to address those concerns within 
the bounds of our statutory authority. Reforms such as these 
are, in my view, the best way to address these concerns while 
maintaining a healthy freight rail network.
    I'm glad to be participating on this panel today with Ms. 
Hecker of GAO, who has presented certain preliminary results of 
GAO's ongoing railroad study. The Board has been assisting GAO 
with this study and will continue to work with GAO as it moves 
forward to complete the study.
    I look forward to any questions that you might have. Thank 
you, Mr. Chairman.
    [The prepared statement of Mr. Buttrey follows:]

          Prepared Statement of W. Douglas Buttrey, Chairman, 
                      Surface Transportation Board
    Good morning Chairman Lott, Ranking Member Inouye, and members of 
the Subcommittee. My name is Douglas Buttrey, and I am Chairman of the 
Surface Transportation Board (Board or STB). I appreciate the 
opportunity to appear before this Subcommittee today to discuss the 
economics of the freight railroad industry as it relates to current 
service and capacity issues.
    This is my first appearance before this Subcommittee since I became 
Chairman of the STB on January 5, 2006. The issues that are the subject 
of this hearing are vitally important to the freight railroads, their 
customers and employees, and the Nation's freight transportation system 
as a whole. I commend the Subcommittee for holding this hearing to look 
into these important matters.
    I understand that a representative of the Government Accountability 
Office (GAO) is also scheduled to testify at this hearing, to present 
preliminary findings from GAO's study of recent rate changes in the 
freight rail industry. The Board has been cooperating with GAO on this 
study, and several meetings have been held between GAO and Board staff 
on this subject, to discuss the background and exchange information. 
Board staff has shared with me the contents of a preliminary draft 
statement of facts from GAO's study. Board staff is currently analyzing 
that preliminary draft. Once they have completed their analysis they 
will share it with GAO.
    First, I will provide an overview of the Board and its 
responsibilities, and then I will discuss steps the Board is taking to 
address the issues that are the focus of this hearing.
Overview of the STB
    The STB was created over 10 years ago by legislation initiated by 
this Committee. The ICC Termination Act of 1995 (ICCTA) established a 
three-member Board and charged it with the fundamental missions of 
resolving railroad rate and service disputes and reviewing railroad 
restructuring transactions (mergers, line sales, line construction, and 
line abandonments). In addition, the Board was given limited 
jurisdiction over certain trucking, bus, household goods, ocean 
shipping company (non-contiguous domestic trade), and pipeline matters. 
It is important to note that the substantial deregulation effected in 
the Staggers Rail Act of 1980 was continued under ICCTA. ICCTA empowers 
the Board, through its exemption authority, to promote deregulation 
through administrative action. The Board's staff is limited to no more 
than 150 employees by appropriation.
    Two of the Board's main functions are to provide a regulatory forum 
to address rate disputes between railroads and captive shippers, and to 
assist shippers with service issues. The Board has created a number of 
mechanisms to help railroads and their customers resolve disputes 
before availing themselves of the Board's formal processes. For 
example, the Office of Compliance and Enforcement operates the Rail 
Consumer Assistance Program. That program is intended to provide 
assistance to rail consumers in addressing those issues that have not 
been resolved through private negotiations. When informal processes 
cannot produce a solution, however, the Board is available to provide 
an adjudicatory forum.
    Although rates throughout the rail industry have generally declined 
significantly since the Staggers Act, many shippers believe the Board 
has not done enough to address shipper concerns in the areas of rate 
and service disputes. I understand those concerns, and I will next 
relate the steps the Board is taking to address them.
Shipper Issues
1. Undercapacity
    Before I discuss rate and service issues in more detail, I would 
like to express my view of what it is that makes at least some of 
today's problems somewhat different from the issues that prevailed when 
the Board last appeared before this Subcommittee. Historically, 
railroads were burdened with excess capacity, which made it difficult 
for them to operate efficiently and earn a profit. In recent years, 
railroads have become more efficient by rationalizing their systems. At 
the same time, however, the U.S. economy has expanded, and the railroad 
industry, like other transportation sectors, has become capacity-
constrained in some areas. Unlike some other sectors, however--trucking 
companies, for example, which can buy new equipment or hire more 
drivers--railroads cannot as readily respond to capacity constraints by 
quickly building new track and other facilities. Not only are rail 
construction projects expensive and time-consuming, but--as I will 
discuss later--these projects often are extremely controversial and can 
be the subject of court challenges on environmental issues in 
particular.
    For those reasons, and others that may be beyond their control, 
railroads have experienced intermittent service problems throughout 
their systems. To mitigate the effects of their undercapacity, they 
have reportedly begun rationing service occasionally. According to some 
shippers, they do this by either embargoing large classes of traffic or 
by raising rates selectively. Neither of these alleged practices has 
been brought formally before the Board, and whether the Board could 
afford relief would depend on the circumstances of any formal complaint 
that might be brought. If a particular shipper has access to truck 
service--even if that service might be more expensive or less 
convenient--it might be unable to meet the market dominance requirement 
that is a statutory prerequisite to rate relief. And although the 
statute requires railroads to provide service on ``reasonable 
request,'' what is reasonable is a case-specific inquiry. Railroads 
must prioritize competing requests for service, and I cannot say in 
advance how the Board would rule on any particular complaint alleging 
that a particular railroad's prioritization was so unreasonable as to 
be unlawful.
    In any event, these concerns might be mitigated if railroads were 
able to expand their capacity. Such capital planning decisions depend 
on a variety of factors, such as the cost of new facilities, the likely 
returns on investment in new facilities, the availability of Federal 
and state programs to support and/or incentivize infrastructure 
capacity expansion by freight railroads, and so forth.
2. Rate Disputes
    Under the statute, the Board has exclusive jurisdiction to resolve 
rate disputes in those instances when a railroad has market dominance--
in other words, when the railroad is charging a rate higher than the 
regulatory floor and the shipper has no effective transportation 
alternative. Under the Interstate Commerce Act, the Board must balance 
the often conflicting objectives of assisting railroads in attaining 
revenue adequacy, on the one hand, and ensuring that the rates that 
individual shippers pay are reasonable, on the other. The balance, as 
we all know, is not an easy one. Rates that are too high can harm rail-
dependent businesses, while rates that are held down too low will 
deprive railroads of revenues to pay for the infrastructure investments 
needed to give shippers the level and quality of service that they 
require. The Board has one set of procedures for handling ``large'' 
rate cases and another for ``small'' cases.
a. Large Rate Cases
    The first step in a rate case is a two-part inquiry to determine 
whether the railroad has ``market dominance'' over the transportation 
to which the rate applies. The first part of the inquiry is to 
determine the ``variable costs'' of providing the service. The statute 
establishes a conclusive presumption that a railroad does not have 
market dominance over transportation if the rate that it charges 
produces revenues below 180 percent of the variable costs of providing 
the service, which means that this 180 percent revenue-to-variable cost 
(R/VC) percentage is the floor for regulatory scrutiny.
    If the rate the railroad charges exceeds the 180 percent R/VC 
threshold, the second part of a market dominance inquiry involves a 
qualitative assessment in which the Board must determine whether there 
are any feasible transportation alternatives that could be used for the 
traffic involved. The Board considers whether there is actual or 
potential direct competition--that is, competition either from other 
railroads (intramodal competition) or from other modes of 
transportation such as trucks, pipelines, or barges (intermodal 
competition) for transporting the same traffic moving between the same 
points. If there are effective competitive alternatives for the 
transportation, then the Board does not have jurisdiction to regulate 
the rate, even if the rate charged yields an R/VC ratio greater than 
180 percent.
    If the shipper can show that the railroad is market dominant, then 
the Board applies its court-approved methodology for rate review known 
as constrained market pricing (CMP) to assess whether the rate being 
charged that shipper is in fact unreasonable. CMP provides a framework 
for the Board to regulate rates while affording railroads the 
opportunity to cover their costs. CMP is premised on differential 
pricing, that is, pricing based on the demand for the service provided. 
CMP principles recognize that, in order for railroads to earn adequate 
revenues, they need the flexibility to charge different customers 
different prices based on each customer's demand for rail service. But 
CMP principles also impose constraints on a railroad's ability to 
price. Despite the complexity of CMP, the courts have held that it is 
the most desirable available approach to railroad rate review and that 
the Board must use it whenever it is feasible.
    The most commonly used CMP constraint is the stand-alone cost (SAC) 
test. Under SAC, a railroad may not charge a shipper more than what a 
hypothetical new, optimally efficient carrier would need to charge the 
complaining shipper if such a carrier were to design, build, and 
operate--with no legal or financial barriers to entry into or exit from 
the industry--a system to serve only that shipper and whatever group of 
traffic that shipper selects to be included in the traffic base. The 
ultimate objective of the SAC test is to ensure that the complaining 
shipper is not charged for carrier inefficiencies or for facilities or 
services from which the shipper derives no benefit. As with CMP in 
general, this assures the complaining shipper that it is not required 
to pay for inefficiencies or to unfairly subsidize other customers of 
the railroad.
    I am aware that some shippers believe that the deck is stacked 
against them in rate cases brought under SAC. Yet, the Board's rate 
decisions historically have divided about evenly in terms of shipper 
wins versus carrier wins. I have attached a table setting forth this 
information as Exhibit A. Furthermore, nearly all of the Board's rate 
decisions that have been challenged in court--whether challenged by 
railroads or by shippers--have been affirmed.
    Nevertheless, the Board is working very hard to reform the large 
rate case process, in an effort to make it as fair, efficient and user-
friendly as possible, given the somewhat competing statutory 
objectives. It is undeniable that deciding large rate cases is time 
consuming and costly for both the parties involved and the Board. The 
Board by statute has 9 months after the close of the record to decide a 
large rate case, and it can take more than twice that long after the 
shipper files its complaint for the parties to file all their evidence 
with the Board. Preparing that evidence and presenting it to the Board 
can be very time-consuming and expensive for the parties, and the Board 
devotes a significant amount of staff time and resources to these cases 
as well.
    In recent years, the Board has developed new ways to simplify and 
speed up the rate review process. It has provided for: non-binding 
mediation at the beginning of the case, under the Board's auspices, 
between the shipper and the railroad; expedited procedures to resolve 
disputes, using Board staff, over what information the parties can be 
required to give to each other during discovery; technical conferences 
to resolve, before the actual evidence is filed, certain factual 
disputes between the parties using the expertise of Board staff; and 
public versions of all filings with the Board that can protect 
confidential information but still be read and understood by all 
parties and the public. These new procedures have for the most part 
improved the process by helping to move large rate cases forward.
    Since I became Chairman, our staff has reviewed the rate 
proceedings the agency has processed over the past few years, and the 
Board has issued a Notice of Proposed Rulemaking (NPR) in an attempt to 
improve how we handle certain difficult substantive issues that have 
come up. In particular, we are seeking comments on six proposed changes 
to large rate case procedures. Those changes would focus on how the SAC 
process ought to arrive at the maximum reasonable rate once it is 
determined that an existing rate is too high; how the SAC process can 
better reflect economies of density; how the SAC process can better 
reflect carrier productivity gains when forecasting future carrier 
costs; how to simplify the costing process; how to improve the 
``discounted cash-flow'' analysis used to calculate the need for rate 
relief; and better procedures for reopening or vacating a prior Board 
decision in SAC cases.
    Comments and replies have already been filed, and rebuttals are due 
shortly. Because of the scope of these proposed rule changes, the Board 
has put its pending large rate cases in abeyance. Things are not 
standing still, however. Recently, the Board issued compliance orders 
in two of the pending SAC cases, to obtain additional evidence that 
will be needed to resolve those cases regardless of whatever rules are 
ultimately adopted.
    In sum, while major litigation of the type involved in large rate 
cases is expensive and may appear to be slow, the Board has made 
progress in helping to ensure that the rate cases before it can proceed 
faster, cheaper and better. I will make it a priority to continue to 
make more improvements in this area. I expect significant progress when 
the pending rulemaking is completed.
b. Small Rate Cases
    In 1996, in response to a Congressional directive, the Board 
adopted simplified guidelines for assessing the reasonableness of 
challenged rail rates in cases in which a full SAC presentation is too 
costly. Under these guidelines, the reasonableness of a challenged rate 
is determined by examining the carrier's overall revenue needs, how the 
railroad prices its other captive traffic, and how railroads in general 
price comparable traffic.
    Shippers have expressed various concerns over how these procedures 
would play out in a particular case. They say that the ambiguity of who 
would qualify to use the small rate case procedures is a serious hurdle 
that has kept them from bringing cases. They have expressed concerns 
about how railroads might use the discovery process to unreasonably 
draw out a case. And shippers (and railroads) have urged the Board to 
adopt a more precise and predictable rate standard for small cases.
    The agency held public hearings on this matter, and its staff met 
with staff from other economic regulatory agencies to gather 
information on how they handle smaller disputes. When a small rate 
complaint was filed last year--the ``BP/Amoco'' case--we modified some 
of our processes to make the case move more smoothly. We also provided 
for agency mediation. We were pleased to see that, largely as a result 
of these measures, the parties were able to settle the BP/Amoco case at 
an early stage.
    But I know that more needs to be done in the small rate case area, 
and our staff is continuing to work hard to improve the existing 
procedures where we can. I cannot give you a particular date on which 
an NPR will be issued, but I assure you that we are trying to come up 
with better procedures in this area. I have directed staff to work up a 
recommendation and would expect a proposal to be issued later this 
summer.
3. Fuel Surcharges
    One matter that has concerned shippers in recent months relates to 
railroad fuel surcharges. Recent unpredictability, volatility, and 
spikes in fuel costs are well known. As fuel is a substantial component 
of railroad costs, carriers have sought to recover their increased fuel 
costs through surcharges. Many in the shipper community, however, have 
expressed concern with the way in which these fuel surcharges have been 
implemented. To give parties on both sides an opportunity to address 
these matters, on May 11, 2006, the Board held a public hearing. The 
hearing was well attended, and I found the testimony to be very 
thoughtful and enlightening. The Board is presently considering what 
action would be appropriate and helpful in this area.
4. Competitive New Services
    Many shippers would like to obtain service from a second, competing 
railroad. Sometimes rail customers may work with a second railroad to 
apply for authority to construct a new rail line. The Board's 
experience over the past several years has shown that new line 
construction--and there have been several new line constructions over 
the past few years--can bring competition while maintaining the 
private-sector characteristics of our rail system. But it can also be 
costly, and rail constructions, more than almost any other rail 
activity, generate community concerns that can delay and complicate the 
process.
    The Board must take two regulatory steps before the construction of 
a new rail line can occur. First, the Board's environmental staff must 
conduct the necessary environmental review of the project. Second, the 
Board must consider and balance environmental concerns and the 
transportation-related merits of the proposed addition to the rail 
network. The Board has worked hard to expedite consideration of 
requests to construct rail lines whenever possible, and to approve them 
when appropriate.
    Three of the most controversial projects that the Board has 
recently addressed are the ``DM&E,'' ``Bayport Loop,'' and ``Tongue 
River'' cases. In DM&E, the Board, after an extensive environmental 
review, approved the construction by the Dakota, Minnesota and Eastern 
Railroad of a line into the Powder River Basin in Wyoming, which, if 
constructed, will provide enhanced rail transportation options for coal 
shippers, particularly in the Midwest. The United States Court of 
Appeals for the Eighth Circuit found on judicial review that the Board 
had done ``a highly commendable and professional job,'' but it 
nonetheless remanded the matter to the agency for limited additional 
consideration of four environmental issues. In a decision issued a few 
months ago, the Board addressed the issues remanded by the court. The 
Board's most recent decision has again been challenged in court by 
environmental and local groups, and construction of the line has not 
yet begun.
    In Bayport Loop, the Board approved the construction of a line to 
provide BNSF Railway Company access into the Bayport industrial area 
near Houston, to bring competition to the service provided by Union 
Pacific Railroad Company (UP) to the large concentration of chemical 
companies located there. After the project was approved, it was tied up 
in Texas state courts by zoning and other land use objections raised by 
the city of Houston. Ultimately, the construction became unnecessary 
when UP and BNSF announced that they had reached agreement to provide 
these shippers with access to both railroads over the existing UP line.
    In Tongue River, the Board is now considering the latest version of 
a longstanding construction case designed to provide a more efficient 
route for coal from the Powder River Basin to electric utilities. Two 
portions of the Tongue River Railroad's project to construct and 
operate a new railroad line in Montana were approved several years ago 
by the Board's predecessor agency, the Interstate Commerce Commission, 
and then the Board. However, the project did not go forward as 
originally proposed, and the carrier presented the Board with an 
amended proposal for part of the construction. The Board's 
environmental staff is currently completing its final environmental 
document. The agency will then determine whether it should approve the 
redesigned project.
    While build-ins can increase competition and provide many benefits, 
we have seen that at times the construction of new rail lines can be 
controversial in the communities where the construction would take 
place. Indeed, both DM&E and Bayport Loop generated extensive local 
opposition and spawned court challenges by various citizen and other 
groups, and environmental issues have also been raised in Tongue River.
5. Service Issues
    As with other industries, railroads and shippers sometimes have 
disputes over service. The Board has a very active consumer assistance 
program that handled a total of 121 disputes during 2005. We cannot 
always resolve the issues, but we are often successful at bringing the 
parties closer together and getting them to talk to each other.
    The Board has rules that allow us to temporarily substitute a new 
carrier for an existing carrier that is unable to provide adequate 
service. We have used those rules several times in the past few years, 
and we will use them again when appropriate. But I must point out that 
those rules are not a viable remedy for many of the service issues we 
see today, because if a line is already clogged up with too much 
traffic, putting another railroad on the line will not fix the problem 
and may even present problems of its own. Therefore, while our 
substituted carrier rules may be very helpful in certain circumstances, 
probably the best way to address service problems long-term is for new 
infrastructure to be added to the rail system.
6. Preemption
    As you all know, in ICCTA, Congress strengthened the statutory 
preemption provision that protects railroads from most state and local 
regulation. Although it may not be the subject of this hearing, I know 
that preemption is an issue that has concerned many Members of Congress 
in recent months. I will not go into the preemption issue in much 
detail here, but I would like to emphasize a few important points.
    First, concerned parties always have avenues of recourse if they 
think Federal preemption is being improperly asserted. They can raise 
their concerns before the Board in a proceeding that requires a 
license, or through the Board's declaratory order process where no 
license is required; or they can choose to go directly to a court. 
Emergency relief can be, and has been, sought and obtained promptly in 
each forum.
    Second, Federal preemption applies only to rail activities that are 
conducted by a railroad or its agent, and that are part of ``railroad 
transportation'' as defined in the statute. The Board has demonstrated 
its vigilance in making these fact-specific determinations in the 
individual cases that have been brought before it, to ensure that only 
those operations that qualify for the Federal preemption will benefit 
from it.
    Third, even where Federal preemption applies, Federal environmental 
laws remain applicable, including those that are implemented in part by 
the states such as the Clean Air Act, the Clean Water Act, and the 
Solid Waste Disposal Act. In addition, states and local entities 
clearly retain their reserved police powers.
7. Paper Barriers
    The Board has also scheduled a public hearing to hear views on the 
issue of ``paper barriers.'' This hearing, on July 27, 2006, will 
explore the pros and cons of these limitations on interchange that have 
been imposed in connection with some railroad line sales. After the 
hearing the Board will consider what, if any, action should be taken.
8. Initiatives Concerning Abandonments and Exemptions
    Lastly, I want to briefly inform the Subcommittee about some other 
initiatives that the Board is pursuing that may improve the regulatory 
process.
    The Board instituted a rulemaking proceeding proposing to change 
the timing for ``class exemptions'' that provide an expedited process 
for obtaining authority for some rail lines acquisitions, leases, and 
similar transactions. The Board proposed the changes to extend the 
opportunity for the public to raise concerns before the Board in these 
types of cases. Comments and replies have just recently been filed.
    Additionally, the Board issued an Advance Notice of Proposed 
Rulemaking and sought comments on a proposal filed by a group of short 
line and regional railroads. They seek a new, expedited process for 
abandonment of rail lines owned by Class II and Class III railroads. 
Comments and replies have been filed, and the Board will now consider 
what action, if any, is appropriate.
    Neither of these proposals, if adopted, would dramatically change 
the fabric of transportation regulation, but both proceedings have been 
initiated to address areas of concern. The abandonment proceeding was 
instituted after small carriers raised concerns that the current 
procedures impose undue hardships on them, while the timing changes to 
the exemption process were proposed to ensure that the public is given 
notice of a proposed transaction before the exemption can become 
effective.
Conclusion
    The Board is striving to address the concerns raised by captive 
shippers, and has several important initiatives underway that are 
intended to do just that. Reforms such as these are, in my view, the 
best way to address the concerns raised by captive shippers while 
maintaining a healthy freight rail network. It is a difficult balance, 
but one that can be achieved.
    I appreciate the opportunity to discuss these issues today, and 
look forward to any questions you might have.
                          Exhibit A--June 2006
STB Rail Rate Case Results
   Shipper showed rate unreasonable (Board ordered reparations 
        for shipments moved while case pending & prescribed rate for 
        future shipments):

        1. Arizona Pub. Serv. Co. et al. v. Atchison, T.&S.F.R.R., 2 
        S.T.B. 367 (1997), modified, 3 S.T.B. 70 (1998)--reparations 
        (approx. $23 million) & rate prescription (approx. 40 percent 
        reduction); rate prescription lifted in 2004 due to changed 
        circumstances (earlier-than-expected depletion of coal reserves 
        at mine).

        2. West Texas Util. Co. v. Burlington N. R.R., 1 S.T.B. 638 
        (1996), reparations calculated, 2 S.T.B. 683 (1997), aff'd sub 
        nom. Burlington N.R.R. v. STB, 114 F.3d 206 (D.C. Cir. 1997)--
        reparations (approx. $11.4 million) & rate prescription; 
        prescription revised in 2003 to correct for error.

        3. FMC Wyo. Corp. et al. v. Union Pac. R.R., 4 S.T.B. 699 
        (2000)--reparations & rate prescription (approx. 15 percent 
        reduction) (minerals).

        4. Wisconsin Power & Light v. UP, 5 S.T.B. 955 (2001), 
        modified, STB Docket No. 42051 (May 14, 2002), aff'd, Union 
        Pacific R.R. v. STB, No. 02-1198 (D.C. Cir. Apr. 30, 2003)--
        reparations & rate prescription (approx. 11 percent reduction).

        5. Texas Municipal Power Agency v. Burlington N.&S.F.Ry., STB 
        Docket No. 42056 (STB Mar. 24, 2003), modified (STB Sept. 27, 
        2004)--reparations & rate prescription (approx. 1-3 percent 
        reduction).

        6. Public Serv. Co. of Colo. d/b/a Xcel v. BNSF, STB Docket No. 
        42057 (STB June 8, 2004), modified (STB Jan. 19, 2005), aff'd 
        sub nom. BNSF Ry. v. STB, No. 05-1030 (D.C. Cir. June 16, 
        2006)--reparations (approx. $14 million) & rate prescription 
        (approx. 16 percent reduction).

   Shipper failed to show rate unreasonable:

        1. McCarty Farms, Inc. et al. v. Burlington N., Inc., 2 S.T.B. 
        460 (1997), modified, 3 S.T.B. 102 (1998), aff'd, McCarty 
        Farms, Inc. v. STB, 158 F.3d 1294 (D. C. Cir. 1998) (grain).

        2. PPL Montana, LLC v. Burlington N.&S.F.Ry., STB Docket No. 
        42054 (STB Aug. 20, 2002), reaffirmed after reviewing 
        supplemental evidence (STB Aug. 31, 2004), aff'd, PPL Montana, 
        LLC v. STB, No. 04-1369 (D.C. Cir. Feb. 17, 2006).

        3. Duke Energy Corp. v. Norfolk Southern Ry., STB Docket No. 
        42069 (STB Nov. 6, 2003), modified (STB Oct. 20, 2004), 
        dismissed based upon voluntary settlement (STB July 8, 2005).

        4. Carolina Power & Light Co. v. Norfolk Southern Ry., STB 
        Docket No. 42072 (STB Dec. 23, 2003), modified (STB Oct. 20, 
        2004), dismissed based upon voluntary settlement (STB July 8, 
        2005).

        5. Duke Energy Corp. v. CSX Transp. Inc., STB Docket No. 42070 
        (STB Feb. 4, 2004), modified (STB Oct. 20, 2004), dismissed 
        based upon voluntary settlement (STB July 8, 2005).

        6. Arizona Elec. Power Coop., Inc. v. Burlington N.& S.F. Ry., 
        STB Docket No. 42058 (STB Mar. 15, 2005), pet. for judicial 
        review pending, Arizona Elec. Power Coop., Inc. v. STB, No. 05-
        1136 (D.C. Cir. filed Apr. 22, 2005).

        7. Otter Tail Power Co. v. BNSF Ry., STB Docket No. 42071 (STB 
        Jan. 27, 2006), modified (STB May 26, 2006), pets. for judicial 
        review pending sub nom. Otter Tail Power Co. v. STB, No. 06-
        1962 et al. (8th Cir. filed Apr. 10, 2006).

    Senator Lott. Thank you very much. Just a couple of 
questions.
    First, Ms. Hecker, your testimony indicates that the rate 
relief process at STB is slow and expensive. And I don't see 
how there can be any debate about that. Mr. Buttrey here has 
outlined a number of initiatives that they're working on at the 
Board. Do you have any reaction to those initiatives? And do 
you have any suggestions of what more could be done to deal 
with these obvious problems?
    Ms. Hecker. I do observe that most of the areas that have 
been proposed are issues that are being studied. The few that 
we highlight are the simplified guidelines, looking at 
alternative cost approaches, streamlining the process. So, I 
think they are generally being examined. We have not really 
reviewed those proposals, though, and perhaps we'll continue to 
work together to be able to share what we've learned so that 
that can be a component of their review.
    Senator Lott. Well, I hope you would review them and have 
some input into what they should consider doing.
    Now, Mr. Buttrey, GAO has pointed out, and others have 
pointed out, that small shippers can't use the process used by 
the larger shippers to challenge a rate because of the cost and 
the difficulties of the process. What is your position on 
creating a process that would make it more accessible to the 
smaller shippers?
    Mr. Buttrey. Well, Senator, the simplified guidelines for 
small rate cases came out of a request from Congress to 
actually do that. And so, the Board put its hand to that task 
and, frankly, thought we had done a pretty good job of that. 
And so, we were pretty proud of those rules. But, as it turns 
out, those rules have only been used once since going into 
effect.
    Senator Lott. Well, what does that mean? Does that mean 
that they are not effective, or does that mean that maybe there 
wasn't as much need to have that access as maybe had been 
indicated?
    Mr. Buttrey. It probably means that we didn't do quite as 
good a job as we could have or should have perhaps in designing 
them to make them more accessible. The filing fee is very low. 
There are expedited procedures in place. But they have been 
used only once. When that case actually came before the Board, 
we required the parties to go into mediation prior to the case 
being prosecuted, and that case was settled between the two 
parties within about 3 days. And so, we really don't have any 
example, of a case going forward. So, what we have concluded is 
that we need to sit down and go over this whole process again 
and come up with more simplified rules and better processes, 
and make the system even simpler to use than we had earlier 
done. And we are in the process of doing that right now.
    Senator Lott. If a shipper wins a case before the STB, and 
the losing railroad appeals the decision of the courts, who's 
responsible for defending the position of the STB? Would the 
shipper bear any of the cost of that appeal?
    Mr. Buttrey. Senator, when the case is decided at the STB, 
and a party sues, the STB becomes the defendant in that case, 
and we have to defend that case on appeal.
    Senator Lott. Then the shipper doesn't have to incur cost 
as a result.
    Mr. Buttrey. No, we do that.
    Senator Lott. Right.
    Mr. Buttrey. We defend our decision.
    Senator Lott. I just have a feeling that there are some 
entities, perhaps, that are taking advantage of this fuel 
surcharge issue. And you had a hearing. Based on that hearing, 
you said that there was a huge divide between, you know, what 
the shippers are saying of the fuel surcharges and what the 
railroad's saying. It's kind of like people trying to give you 
a lecture on supply and demand; I've heard all that before. But 
usually there's a pretty easy, common sense answer. Either you 
are or you aren't. Now, I realize you've got to deal with 
fluctuations, but there's a way to do that. The line is like 
that. The lines don't go like that. [Indicating.] You know, is 
this a real problem? And what are you going to do about it?
    Mr. Buttrey. The word I use to describe the testimony that 
I heard was a total disconnect between what the parties were 
saying.
    Senator Lott. Basically your job's to try to discern the 
truth between the two.
    Mr. Buttrey. Pardon me?
    Senator Lott. Your job should be to try to discern the 
truth between the two disconnects.
    Mr. Buttrey. We need to separate the wheat from the chaff, 
yes, sir.
    Senator Lott. Yes.
    Mr. Buttrey. And that's what we intend to do. The concern, 
of course, as you stated in your opening statement, is that--
the claim is that the carriers may be using fuel surcharges as 
a profit center. And it's up to the regulatory process to 
determine whether that's, in fact, the case or not, and that's 
exactly what we plan to do. It could be that the methodology 
used by the shipping public and by the railroads to arrive at 
these numbers is not uniform. And it could be that there may be 
some need for uniformity in how these charges are calculated 
over time. And so, that's one of the things we're going to be 
looking at. We're going to pursue this very aggressively.
    Senator Lott. I hope you will. I don't want to accuse 
anybody, but, if anybody is finding a way to make money off 
this, I consider that to be cheating, flat out, and would be 
highly offended that that would occur. So, I hope that your 
effort and my comments and those of others will influence 
conduct to make sure that's not the case.
    Senator Burns?
    Senator Burns. Thank you very much, Mr. Chairman.
    I'm really troubled, Mr. Buttrey, by, ``Well, that's what 
we're going to do,'' and, ``That's what we're pursuing,'' and 
we've had a year of this, and nothing has been done. I don't 
know whether you're working 5 days a week down there, and give 
the full 8 hours, but this is serious. And I--and I'm troubled 
by that kind of testimony here today. There's no excuse why 
this hasn't been handled already. There is no excuse 
whatsoever, in my mind, in watching all this. And I'm going to 
get very cranky about that.
    A statement of future--on your--Ms. Hecker, on your display 
this morning, ``Railroads reporting significant increased 
investment for future is uncertain. Enhancing captive-shipper 
protection can affect resources for investment.'' Would you 
explain that statement to me?
    Ms. Hecker. Well, the first half of it is that there has 
been a substantial increase by railroads in capital investment, 
reportedly over $8 billion. There are issues about where that's 
going and the percent of that that's really just maintenance, 
as opposed to capacity expansion. So, part of the question that 
you all asked was--is, ``Capacity needs are growing. What are 
the railroads doing?'' So, the first answer was, yes, they are 
increasing their capital investment. How much of it is going to 
capacity expansion is an open issue.
    The second half of it was to recognize the nexus that 
clearly exists between any changes in shipper protection. Most 
of these policy reforms, whether it's reciprocal switching or 
terminal access, and potentially even a simplified process that 
has a more expedited settlement that may not be economic-based, 
but just an arbitrator, for example, those are likely to all 
increase cost to the railroads. We're not saying they're not 
justified. Part of our analysis is that what we need is a more 
fine-tuned assessment of the nature of the captivity, the 
problem, and what the appropriate remedies are to potentially 
impose increased costs on railroads, but to recognize that 
those increased costs will reduce their capacity to invest for 
the future.
    Senator Burns. Well, I thank you for explaining that to me. 
In your testimony, you noted the Staggers Act was generally 
designed to create a healthy revenue-adequate railroad, as well 
as to provide for competition and shipper protections. You also 
note that the Staggers Act has been very positive for the 
railroads. And railroad revenue adequacy is becoming more of a 
reality--you've already stated that--which I think we all agree 
is a good thing. But you also note that the shipper complaints 
about lack of competition are on the rise. And that situation 
for captive shippers is getting worse in many areas. Now, is it 
fair to say, then, that the Staggers Act has not achieved the 
right balance between railroads and shippers, that perhaps the 
focus on revenue adequacy has overshadowed the need for 
competition and for shipper protection when there is no 
competition? Do you think that the Staggers Act has met its 
goals?
    Ms. Hecker. I think you rightly point out that there were a 
mix of goals. And there's no doubt that it's met its goals in 
improving the stability and revenue adequacy of the railroads, 
and, in fact, their growth and dynamic importance for our 
economy. I've been doing work on railroads, and traveling the 
world, and the U.S. freight rail system is the envy of the 
world. There is no other system that is as efficient and that 
contributes to our economic growth because of its contribution 
to efficiency in our logistics system.
    On the other hand, I think there is some real concern about 
whether the goals regarding the protection of truly captive 
shippers has been achieved. It is very, very costly. It is not 
an accessible system. The data is mixed. And that's our 
concern, why more analysis is needed, of where the captivity 
is, because there is not one bit of evidence. We see some 
evidence, and some of it I shared today, that the amount of 
traffic traveling under 300 percent of that ratio is 
substantially increased. So, a lot more shippers are paying 
relatively less than they were, and that's borne out by the 
overall rate-decline data.
    Our concern is with a very small portion of shippers, who 
appear to be increasing--it's a small number, but it's 
increasing--who are paying very substantially above what may be 
their fair and justified share of railroad costs.
    Senator Burns. So that you and I can discuss this in 
another venue, how do you define--how would you define 
``captive shipper''?
    Ms. Hecker. Well, it's really--the law says the threshold 
trigger is the--rate--is over the 180-percent degree, and then 
it's no available options, either by rail or by other mode, so 
you're just stuck. You have that one railroad, and that's your 
only option. The difficulty is in really measuring that and 
then also coming up with what the right response is. And then, 
I think--that's why I tried to say that some of the responses 
that really will promote competition and really increase 
competition between railroads, and provide more viable options, 
may justify as much examination as fixing the process after the 
fact, really trying to focus more on achieving the goals of 
Staggers that were about ensuring there was more competition.
    Senator Burns. Well, I wish you'd--and my time is up, and 
I'll move on, but I wish you'd just give me a simple, everyday, 
man-on-the-street definition of ``captive shipper,'' so you and 
I can discuss some of these problems, because we hear all this 
legalese and all this other stuff that runs out, and then you 
want to add numbers and graphs and all of this. That doesn't 
make any difference to a farmer in Montana when he thinks he's 
getting hammered, or people that are shipping coal to 
powerplants around the country. Let's define what a ``captive 
shipper'' is, and then we can address the problems.
    Thank you very much, Mr. Chairman.
    Senator Lott. Senator Dorgan?

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

    Senator Dorgan. Mr. Chairman, thank you very much.
    I'm familiar with cranky Montanans, by the way.
    [Laughter.]
    Senator Dorgan. We're neighbors. But we're cranky, as well. 
I mean, we're damn mad about what's going on with rail rates in 
North Dakota.
    Let me give you an example. And I don't know whether these 
numbers are current, but they were accurate not very long ago. 
If you were to put a carload of wheat on the tracks in Bismarck 
and run it over to Minneapolis, you'd pay about $1,000, put it 
on a--excuse me, you'd pay $2,400--put it on in Minneapolis, 
run it to Chicago, about the same distance, you'd pay $1,000. 
And North Dakota farmers wonder, ``Why do we pay twice as 
much--two and a half times as much?'' What's the justification 
for that?
    Ms. Hecker, you indicated there's a question of whether 
we've truly protected captive shippers. There's no question 
about that. We truly have not protected captive shippers. I 
think you were just musing a rhetorical question. And we have 
not done that. And I would say, with respect to what my 
colleague from Montana just said, if there's ever an Olympic 
event for studying, clearly the Surface Transportation Board is 
a Gold Medal winner here. They have studied and studied and--
they've been studying this since I showed up in Congress over 
two decades go. We've had ten rail rate cases filed since 2001. 
Before then, it was even more dismal. Ten rail rate cases since 
2001, average $3 million apiece to do them, three and a third 
years apiece. I mean, clearly there's a failure here. Clearly, 
a failure.
    And when you talk about captive shippers, it may be hard 
for academics to define, but it's not hard for a shipper that's 
held captive to define, I'll tell you that. I've got people in 
Dickinson, North Dakota, that are trucking wheat with an 18-
wheel truck almost 200 miles east in order to put it on a 
railcar to run it right back through the farmstead on the track 
going to the West Coast. And they think that's stupid, that 
they're required to do that because of the way the system is 
set up.
    But, having said all that, you know, they remixed an Elvis 
Presley tune 25 years after he was dead. They remixed it and 
put it out, and it hit the chart--hit number one in the charts 
25 years after he died. And it was, ``A little less 
conversation, a little more action, please.'' He probably 
wasn't talking about the Surface Transportation Board, but that 
sure applies. A little less conversation, a little more action, 
please.
    Now, a quick question. Ms. Hecker, you said that the 
Surface Transportation Board has, quote, ``broad legislative 
authority to investigate rail industry practices,'' unquote. 
And yet, I believe you say they have limited their reviews to 
merger cases, by and large--competition and merger cases.
    Ms. Hecker. And rate cases.
    Senator Dorgan. Yes. Mr. Buttrey, do you agree with that 
statement? And, if so, why has the Surface Transportation Board 
been so reluctant to take action on almost any of the issues 
that are the thorn under the saddle of folks out there that are 
held captive?
    Mr. Buttrey. Well, Senator, our charge, as we understand it 
under the Staggers Act, is to be an adjudicatory body and to 
hear cases that are brought to us by captive shippers or in 
large rate cases or service issue cases, or in small rate 
cases. And we do not believe that we have the authority to go 
out and set rates on our own.
    Senator Dorgan. So, you disagree----
    Mr. Buttrey.--A case is brought to us, evidence is adduced, 
and you try these matters in the crucible of an adversary 
proceeding.
    Senator Dorgan. So, you disagree with Ms. Hecker that you, 
``have broad legislative authority to investigate rail industry 
practices''? You disagree with that?
    Mr. Buttrey. We can have hearings to look into practices 
that are going on in the industry, and we are doing that.
    Senator Dorgan. But my--but the point I was making, and I 
think the point my colleagues were making, is, cases aren't 
coming to you, because the system is broken. The small shippers 
don't feel like they get a fair shake. First of all, it costs 
way too much, takes too much time, and, when it gets there, 
they don't think they're going to get a fair result. So, if 
cases aren't coming to you, and we're hiring an STB--and I--you 
know, I know I've said the STB is dead from the neck up. I know 
that's not true. It's just a--your evidence--your being here in 
person today is evidence that's not true.
    [Laughter.]
    Senator Dorgan. But the fact is--but the fact is, I've said 
that because I am so enormously frustrated by this--a 
regulatory agency that says, ``You know what? We're going to 
sit here. When somebody comes to us, then we're going to wake 
up and deal with it. But, until then, we're sorry, tough 
luck.'' Ms. Hecker says you have broad legislative authority to 
investigate rail industry practices. My feeling is, if that's 
the case, if that's her interpretation of the law, and that is 
the law, then why would you not be aggressively evaluating this 
issue of competition and taking action, rather than just 
sitting and waiting until someone brings a case to you?
    Mr. Buttrey. We have rulemaking authority. We only have 
authority that's given to us by the Congress. And we are trying 
to administer that, as we understand it to be. And that's the 
reason we're going through the rulemaking proceedings that 
we've instituted since January. Many of these regulatory 
rulemakings that we're pursuing right now, which are, by the 
way, on a very aggressive schedule, are to address the issues 
that all of you have raised this morning.
    Senator Dorgan. But, do you know what? I heard that 10 
years ago, and I heard that 20 years ago. Nothing's changed. 
It's like Groundhog's Day; we wake up, same day again. And I 
just--I think what Senator Burns and others are saying, you 
know, it's time, really, to get serious. This is not a 
rhetorical question, ``Have we truly protected captive 
shippers?'' The answer is, no. No, of course we haven't. And we 
need to get about the business of doing that. And I'm telling 
you, Ms. Hecker, the captive shippers in my state would not--
whether it's coal or wheat--would not take a look at that rail 
line and say that, ``Yes, we're the beneficiaries of lower 
rates.'' That is simply not the case in our area. In fact, they 
feel they're paying rates that are outrageous, far above that 
which is justifiable. And so does our state regulatory agency, 
the Public Service Commission of North Dakota.
    Mr. Chairman, I have an Indian Affairs hearing that I'm co-
chairing with Senator McCain. I have to leave, but I want to 
thank you for holding this hearing.
    And thank both of you for testifying. I hope you 
understand, we really--at least I really want action. Those of 
us that have introduced the legislation in our Committee--
Senator Burns, Rockefeller, myself, and others--we really want 
to see something done here that fixes the problem, not have 
another decade go by and then we have another hearing, and we 
say, ``You know what? We're studying this.''
    Senator Lott. Thank you, Senator Dorgan.
    Senator Pryor was next to arrive, but he has agreed to 
yield to Senator Lautenberg, because he has a conflict also.
    Senator Lautenberg, we'd be glad to hear from you.

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

    Senator Lautenberg.--I thank my friend from Arkansas for 
allowing me this statement. Since I was reelected, there are 
not many people I am senior to in rank, so I----
    [Laughter.]
    Senator Lautenberg.--have to pick on Senator Pryor. And I 
thank you, Mr. Chairman.
    I ask unanimous consent that my full statement be included 
in the record.
    Senator Lott. It certainly will be included at this point.
    [The prepared statement of Senator Lautenberg follows:]

            Prepared Statement of Hon. Frank R. Lautenberg, 
                      U.S. Senator from New Jersey
    Good morning Mr. Chairman. Thank you for calling this hearing.
    Some people think of railroads as a mode of transportation that 
emerged in the 19th century, dominated the early part of the 20th 
century, and then slid toward irrelevance.
    But the reality is that rail service remains vital to our economy 
and our way of life in the 21st century.
    Freight rail lines handled 1.7 trillion ton-miles of goods in 
2005--a 19 percent increase from just 2 years before. And railroads 
posted record profits.
    The public benefited as well. Rail remains a cost-effective way to 
move goods, which means lower prices for consumers. And every container 
that is hauled by rail means one less truck on our crowded highways, 
less pollution in our air, and less oil consumed.
    Rail has remained relevant because it is seamlessly integrated into 
our transportation system. Last month the Senate adopted my resolution 
to commemorate the 50th anniversary of the intermodal shipping 
container, which first sailed from the U.S. from the Port of Newark.
    Today, shipping containers are the backbone of our transportation 
system. More than 8.7 million containers moved by rail in the United 
States last year.
    It is projected that by the year 2020, freight moved by rail will 
increase 44 percent, while freight moved by truck is projected to 
increase more than 60 percent. With highways operating at capacity in 
many regions, some transportation officials are asking if it would make 
sense to direct more traffic from the roads to the rails.
    But railroads are operating at capacity as well, so this won't be 
possible without greater investment in the rail infrastructure.
    Although this infrastructure is privately owned, the railroads 
continue to ask Congress for help in maintaining and improving their 
tracks and yards.
    If we can justify these expenditures, there is no reason why we 
shouldn't also make similar investments in passenger rail 
infrastructure. Senator Lott and I have a bill that will begin to 
create a passenger rail system for the 21st Century, and I hope we are 
able to bring it to the floor soon.
    I want to mention that there is one aspect of our current freight 
rail regulator system that troubles me--the failure of the Surface 
Transportation Board to actively enforce environmental standards.
    Congress never intended for solid waste processors to get a ``free 
pass: on environmental standards by claiming to be ``railroads.''
    The Surface Transportation Board should act to correct this 
misinterpretation, before Congress is forced to act.
    Thank you Mr. Chairman.

    Senator Lautenberg. The one part that I'm, kind of, focused 
on this morning--and we all are aware of the fact that rail is 
continuing to pick up its obligations to carry freight and so 
forth, and we're not discussing the details, but it's--we can't 
fit another truck or--out there on the highways without 
noticing that things are jammed up. And rail is also, in my 
view, or I think in the view of many experienced people, that 
there isn't enough capacity in rail to carry what is 
anticipated to be a great jump in freight traffic. So, we--that 
investment has got to come along. But Senator Lott and I have 
also made a recommendation that we invest in passenger rail 
service. It has the same beneficial result, and that is getting 
cars off the highway, reducing pollution, reducing dependency 
on imported oil. So, we're working hard to get that up front in 
the--in our agenda.
    And I--but I do want to mention one aspect of the current 
freight rail regulator system that troubles me, and that is the 
failure of the Surface Transportation Board to actively enforce 
environmental standards. Now, Congress never intended, for 
instance, for solid waste processors to get a free pass on 
environmental standards by claiming to be railroads. And I 
think that the Surface Transportation Board should act to 
correct this misinterpretation before Congress is forced to 
act.
    So, Mr. Buttrey, I ask, is the Surface Transportation Board 
doing anything about companies that are essentially focused on 
solid-waste handling, as it is in New Jersey, who are 
pretending to be railroads--and I use that comment, kind of, 
cynically--in order to avoid state environmental laws? Are you 
familiar with that kind of a condition?
    Mr. Buttrey. Yes, Senator, I am familiar with that 
situation. It's been brought to our attention, not only 
informally, but formally at the Board. Just a few days ago, I 
testified in the House on this very issue of entities of one 
kind or another trying to hide behind the pre-emption 
provisions of the Act. I assured the Transportation and 
Infrastructure Committee at that time--and, by the way, I 
happen to have a copy of my testimony with me today, and if 
it's permissible, I could submit that for the record, if that's 
OK with the chairman, and get that in the record, since you 
asked a specific question about it.
    [The information referred to follows:]

                    Testimony of W. Douglas Buttrey,
              Chairman of the Surface Transportation Board
          House Committee on Transportation and Infrastructure
                       Subcommittee on Railroads
         Hearing on Impacts of Railroad-Owned Waste Facilities
                          10 a.m. May 23, 2006
    Good morning, Mr. Chairman. My name is Douglas Buttrey, and I am 
the Chairman of the Surface Transportation Board. I appreciate the 
opportunity to testify before you today about Federal preemption for 
rail-related facilities. I would first like to provide the Subcommittee 
with an overview of the Board's role, and the role of state and local 
authorities with regard to such facilities. Next, I will discuss the 
state of the law on this complex issue which is still being fleshed out 
by the Board and the courts in individual cases that arise. Finally, 
because there has been a lot of concern lately about the potential for 
misuse of Federal preemption in cases involving facilities on rail 
lines, I will outline how interested parties can raise concerns before 
the Board and in the courts regarding individual proposals that arise. 
I will not focus today on the individual cases that have addressed 
Federal preemption for rail-related facilities, but I have included as 
part of my written testimony a summary of the relevant case law.
1. The Scope of the Federal Preemption
    As all of you are aware, the Surface Transportation Board was 
created in the ICC Termination Act of 1995 (ICCTA). The express Federal 
preemption contained in the Board's governing statute at 49 U.S.C. 
10501(b) gives the Board exclusive jurisdiction over ``transportation 
by rail carriers.'' Congress has defined the term ``transportation'' 
broadly, at 49 U.S.C. 10102(9), to include all of the related 
facilities and activities that are part of rail transportation. The 
purpose of preemption is to prevent a patchwork of otherwise well 
intentioned local regulation from interfering with the operation of the 
rail network to serve interstate commerce.
    Both the Board and the courts have made clear, however, that, 
although the scope of the section 10501(b) preemption is broad, there 
are limits. While a literal reading of section 10501(b) would suggest 
that it preempts all other law, neither the Board nor the courts have 
interpreted the statute in that manner. Rather, where there are 
overlapping Federal statutes, they are to be harmonized, with each 
statute given effect to the extent possible. This is true even for 
Federal statutory schemes that are implemented in part by the states, 
such as the Clean Air Act, the Clean Water Act, and the Solid Waste 
Disposal Act.
    When states or localities are acting on their own, certain types of 
actions are categorically preempted, regardless of the context or basis 
of the action. This includes any form of permitting or preclearance 
requirement-such as building, zoning, and environmental and land use 
permitting-which could be used to deny or defeat a railroad's ability 
to conduct its rail operations or to proceed with activities that the 
Board has authorized. Also, states or localities cannot regulate 
matters directly regulated by the Board, such as railroad rates or 
service or the construction, operation, and abandonment of rail lines.
    Otherwise, whether the preemption applies depends on whether the 
particular action would have the effect of preventing or unreasonably 
interfering with rail transportation. Types of state and local measures 
that have been found to be permissible, even in cases that qualify for 
the Federal preemption, include requirements that railroads share their 
plans with the community when they are undertaking an activity for 
which a non-railroad entity would require a permit, or that railroads 
comply with local electrical, fire, and plumbing codes.
    In cases involving facilities that require a license from the Board 
and an environmental review under the National Environmental Policy Act 
(NEPA), the Board addresses both the transportation-related issues and 
any environmental issues that are raised. The environmental review is 
managed by the Board's Section of Environmental Analysis.
    Even where no license is needed from the Board, there are several 
avenues of recourse for interested parties, communities, or state and 
local authorities concerned that the section 10501(b) preemption is 
being wrongly claimed to shield activities that do not rightly qualify 
for the Federal preemption. Any interested party can ask the Board to 
issue a declaratory order addressing whether particular operations 
constitute ``rail transportation'' conducted by a ``rail carrier.'' 
Alternatively, parties are free to go directly to court to have that 
issue resolved. Some courts have chosen to refer that issue to the 
Board; others have decided the matter themselves. It is worth noting, 
however, that the Board and court cases on the boundaries of the 
section 10501(b) preemption have been remarkably consistent, and that 
the Board and the courts have never reached a different conclusion 
regarding the availability of the preemption for particular activities 
and operations.
    Finally, in some cases, environmental and safety concerns have been 
successfully resolved through consensual means, by the railroad and the 
community working together to address their respective interests.
2. Relevant Precedent on Facilities
    Given the strength and breadth of the section 10501(b) preemption, 
the potential for misuse is a definite concern. Thus, both the Board 
and the courts have made clear that an entity is not entitled to 
Federal preemption to the extent it is engaged in activities other than 
rail transportation. In some cases, solid waste and other businesses 
have located close to a railroad and claimed to be a rail facility 
exempted from state and local laws that would otherwise apply, but have 
been found by the Board or a court not to be entitled to the Federal 
preemption because the operation did not actually constitute ``rail 
transportation'' by a ``rail carrier.'' In other cases, activities and 
operations at facilities have been found to qualify for the Federal 
preemption, as part of the transportation conducted by a rail carrier.
    Cases involving solid waste transfer, storage and /or processing 
facilities proposed to be located along rail lines are especially 
controversial and often raise concerns that the operations could cause 
environmental harm. In every case, however, interested parties, 
communities, and state and local authorities concerned about a proposal 
have recourse to the Board or the courts.
    Rail carriers need approval to construct a new rail line under 49 
U.S.C. 10901. During the Board's licensing proceedings, parties 
concerned that all or part of the project is not entitled to preemption 
have the opportunity to present their views to the Board for 
consideration in the proceeding. In rail construction cases, the Board 
also routinely conducts a detailed NEPA review, allowing all interested 
parties the opportunity to raise any environmental concerns. The Board 
then takes the entire environmental record into account in deciding 
whether to grant the license. The Board can, and often does, impose 
appropriate environmental conditions to address the environmental 
concerns that are raised. Thus, the Board's existing process has proven 
to be sufficient to allow the agency to address any issues related to 
proposed solid waste or other facilities along the line.
    If the project involves the acquisition and operation of an 
existing rail line, or the acquisition of a rail carrier by another 
carrier or carrier-affiliate, authority from the Board also is 
required, and NEPA is applicable. Normally, however, a proposal to 
change the owner or the operator of a line will not have any 
significant effects on the environment. Therefore, the Board does not 
always conduct a case-specific environmental analysis. But where there 
is a potential for significant impacts, and that is brought to the 
Board's attention, the Board may decide to undertake a full 
environmental review.
    Finally, some activities at facilities on or along rail lines may 
qualify for the preemption in section 10501(b) but not require Board 
approval and review, so that there is no occasion for the Board to 
conduct an environmental review. For example, under the statute, 
carriers may make improvements and add new facilities (including a 
solid waste facility) to an existing line without seeking Board 
approval. Even in these types of cases, however, parties concerned that 
section 10501(b) is being used to shield activities that do not qualify 
for the Federal preemption under section 10501(b) can ask the Board to 
issue a declaratory order, or a stay, or go directly to court to 
address the status of the facility.
    The inquiry into whether and to what extent the preemption applies 
in a particular situation is naturally a fact-bound question. There 
have been only a few cases that have come before the Board involving 
solid waste facilities. The Board and the courts will continue to 
explore where the boundary may lie between traditional solid waste 
activities and what is properly considered to be part of ``rail 
transportation,'' and what kinds of state and local actions are 
federally preempted, in the individual cases that arise.
Conclusion
    In conclusion, it is important to reiterate that, although both the 
Board and the courts have interpreted section 10501(b) preemption 
broadly, there are limits on the preemption, which is harmonized with 
other Federal laws. The question of what constitutes ``transportation 
by rail,'' according to the statute and precedent addressing the rights 
of railroads and of state and local authorities under section 10501(b), 
is still being fleshed out by the Board and the courts in the 
individual cases that arise. However, it is clear that not all 
activities are entitled to preemption simply because the activities 
take place at a facility located on rail-owned property. Of course, 
cases involving preemption for railroad facilities are likely to remain 
controversial. But even in cases that do not require review and 
approval by the Board, parties concerned that the section 10501(b) 
preemption is being misused in a case involving a facility have ways to 
raise their concerns at the Board or in the courts.
    I appreciate the opportunity to discuss these issues with you 
today, and would be happy to answer any questions you may have.
                                 ______
                                 
                               Attachment
Section 10501(b) Preemption
1. Section 10501(b)
   Gives Board exclusive jurisdiction over ``transportation by 
        rail carriers'' and expressly preempts any state law remedies 
        with respect to rail transportation; ICA defines 
        ``transportation'' broadly to include all of the related 
        facilities and activities that are part of rail transportation 
        (section 10102(9))

   Purpose of section 10501(b) is to prevent patchwork of local 
        regulation from unreasonably interfering with interstate 
        commerce
2. Reach of the Section 10501(b) Preemption

   Statute not limited to ``economic'' regulation (City of 
        Auburn v. United States, 154 F.3d 1025 (9th Cir. 1998))

   While most state and local laws are preempted, overlapping 
        Federal statutes (including environmental statutes) are to be 
        harmonized, with each statute given effect to the extent 
        possible (Tyrrell v. Norfolk Southern Ry., 248 F.3d 517 (6th 
        Cir. 2001) (there is no ``positive repugnancy'' between the 
        Interstate Commerce Act and the Federal Railway Safety Act); 
        Friends of the Aquifer et al., STB Finance Docket No. 33396 
        (STB served Aug. 15, 2001) (Congress did not intend to preempt 
        Federal environmental laws such as the Clean Air Act and the 
        Clean Water Act, even when those statutory schemes are 
        implemented in part by the states))

   Two types of state and local actions are categorically 
        preempted:

      (1) any form of state and local preclearance or permitting that, 
            by its nature, could be used to deny or defeat the 
            railroad's ability to conduct its operations (City of 
            Auburn v. United States, 154 F.3d 1025 (9th Cir. 1998) 
            (environmental and land use permitting categorically 
            preempted); Green Mountain R.R. v. State of Vermont, 404 
            F.3d 638 (2d Cir. 2005) (preconstruction permitting of 
            transload facility necessarily preempted by section 
            10501(b)) and

      (2) state or local regulation of matters directly regulated by 
            the Board (CSXT Transportation, Inc.--Pet. For Decl. Order, 
            STB Finance Docket No. 34662 (STB served March 14, 2005), 
            reconsideration denied (STB served May 3, 2005), petitions 
            for judicial review pending, District of Columbia v. STB, 
            No. 05-1220 et al., (D.C. Cir. filed June 22, 2005) (any 
            state or local attempt to determine how a railroad's 
            traffic should be routed is preempted); Friberg v. Kansas 
            City S. Ry., 267 F.3d 439 (5th Cir. 2001) (state statute 
            imposing limitations on a railroad expressly preempted); 
            Wisconsin Cent. Ltd. v. City of Marshfield, 160 F. Supp.2d 
            1009 (W.D. Wis. 2000) (attempt to use a state's general 
            eminent domain law to condemn an actively used railroad 
            passing track preempted))

   Otherwise, preemption analysis requires a factual assessment 
        of whether that action would have the effect of preventing or 
        unreasonably interfering with railroad transportation (Dakota, 
        Minn. & E.R.R. v. State of South Dakota, 236 F. Supp.2d 989 (D. 
        S.D. 2002), aff'd on other grounds, 362 F.3d 512 (8th Cir. 
        2004) (revisions to state's eminent domain law preempted where 
        revisions added new burdensome qualifying requirements to the 
        railroad's eminent domain power that would have the effect of 
        state ``regulation'' of railroads))

   Notwithstanding section 10501(b), it is permissible to apply 
        state and local requirements such as building, fire, and 
        electrical codes to railroad facilities so long as they are not 
        applied in a discriminatory manner; however, need to seek 
        building permit is preempted (Flynn v. Burlington N. Santa Fe. 
        Corp., 98 F. Supp.2d 1186 (E.D. Wash. 2000); Village of 
        Ridgefield Park v. New York, Susquehanna & W. Ry., 750 A.2d 57 
        (N.J. 2000); Borough of Riverdale--Pet. for Decl. Order--The 
        New York Susquehanna & Western Ry., STB Finance Docket No. 
        33466 (STB served Sept. 10, 1999, and Feb. 27, 2001)).

   Railroads are encouraged to work with localities to reach 
        reasonable accommodations (Township of Woodbridge v. 
        Consolidated Rail Corp., STB Docket No. 42053 (STB served Dec. 
        1, 2003) (carrier cannot invoke section 10501(b) preemption to 
        avoid obligations under an agreement it had entered into 
        voluntarily, where enforcement of the agreement would not 
        unreasonably interfere with interstate commerce))
3. Who Interprets Section 10501(b)?

   Board in cases that require a license & environmental review

   Either the Board in a declaratory order or a court (either 
        with or without referral to the Board) in other cases

   When class exemption was invoked to lease and operate 1,600 
        feet of track for use in transferring construction and 
        demolition waste between truck and rail, the Board stayed the 
        proceeding to obtain additional information (Northeast 
        Interchange Ry., LLC-Lease & Oper. Exem.-Line in Croton-on-
        Hudson, NY, STB Finance Docket No. 34734 et al., (STB served 
        August 5, 2005))

   Board has discretion to decide whether to institute a 
        declaratory order proceeding and denied request that it do so 
        to address solid waste operations on property owned by the New 
        York, Susquehanna and Western Ry. in North Bergen, NJ, and 
        other similarly situated solid waste operations, because the 
        North Bergen facility is permanently closed, petitioners failed 
        to point to an alternative site that would warrant continuing 
        with the proceeding, and the railroad and the New Jersey 
        Department of Environmental Protection are involved in ongoing 
        court litigation related to the facility (National Solid Wastes 
        Management Association, Et Al.--Petition for Declaratory Order, 
        STB Finance Docket No. 34776 (STB served March 10, 2006))
4. Case Law on Facilities

   Preemption applies to proposals to build or acquire 
        ancillary facilities that assist a railroad in providing its 
        existing service, even though the Board lacks licensing 
        authority over the projects

      i. Nicholson v. ICC, 711 F.2d 364 (D.C. Cir. 1983)

      ii. Borough of Riverdale--Pet. for Decl. Order--The New York 
            Susquehanna & Western Ry., STB Finance Docket No. 33466 
            (STB served Sept. 10, 1999, and Feb. 27, 2001)

      iii. Flynn v. Burlington N. Santa Fe. Corp., 98 F. Supp.2d 1186 
            (E.D. Wash. 2000)

      iv. Friends of the Aquifer et al., STB Finance Docket No. 33396 
            (STB served Aug. 15, 2001)

   No preemption where the operation does not constitute 
        transportation by a rail carrier

      i. High Tech Trans, LLV v. New Jersey, 382 F.3d 295 (3d Cir. 
            2004); High Tech Trans, LLC--Pet. For Decl. Order--Hudson 
            County NJ, STB Finance Docket No. 34192 (STB served Nov. 
            20, 2002) (both agreeing with New Jersey Dept. of Environ. 
            Protection that there is no preemption for truck 
            transportation of construction and demolition waste en 
            route to transloading facility, even though a railroad 
            ultimately uses rail cars to transport the debris)

      ii. Grafton and Upton R.R. v. Town of Milford, Civ. No. 03-40291 
            (D. Mass. Feb. 14, 2006); Town of Milford, MA--Pet. For 
            Decl. Order, STB Finance Docket No. 34444 (STB served Aug. 
            12, 2004) (no preemption for planned steel fabrication 
            facilities that are not part of ``transportation'')

      iii. Florida East Coast Ry. v. City of West Palm Beach, 266 F.3d 
            1324 (11th Cir. 2001) (no preemption for aggregate 
            distribution plant because the plant, although located on 
            railroad property, was not railroad-owned or operated and 
            thus was not part of rail transportation)

   Activities That Do Qualify for Federal Preemption as 
        Transportation Conducted by a Rail Carrier

      i. Green Mountain R.R. v. State of Vermont, 404 F.3d 638 (2d Cir. 
            2005) (preemption for cement transloading facility in 
            Vermont)

      ii. Joint Pet. For Decl. Order--Boston & Maine Corp. v. Town of 
            Ayer, MA, STB Finance Docket No. 33971 (STB served May 1, 
            2001), aff'd, Boston & Maine Corp. v. Town of Ayer, 206 
            F.Supp.2d 128 (D. Mass. 2002), rev'd solely on attys fee 
            issue, 330 F.3d 12 (1st Cir. 2003) (preemption for 
            automobile loading facility in Massachusetts)

      iii. Norfolk S. Ry. v. City of Austell, No. 1:97-cv-1018-RLV, 
            1997 WL 1113647 (N.D. Ga. 1997) (local zoning and land use 
            permitting regulation for railroad facility preempted)

      iv. Canadian National Ry. v. City of Rockwood, No. 04-40323, 2005 
            WL 1349077 (E.D. Mich. 2005) (county zoning laws and 
            permitting and preclearance requirements preempted for a 
            railroad's transload facility in Michigan)

    I assured the Committee at that time that if entities think 
they're going to be able to escape environmental review by 
trying to hide behind the pre-emption provisions of the Act, 
they have a real surprise in store.
    Senator Lautenberg. Good. Well, then----
    Mr. Buttrey. I can assure you of that.
    Senator Lautenberg. Well, I'm here--happy to hear that the 
STB is examining its position--legal position, that it has the 
sole jurisdiction to regulate the processing of solid-waste 
action. So--and that pre-empt states--so, if you would submit--
or make that available to my staff, I'd appreciate that.
    Senator Lautenberg. And, with that, I return the next 
position to my friend from Arkansas and thank him for very much 
for permitting me to intervene at this point.
    Senator Pryor. Thank you.
    Senator Lott. Senator Pryor?

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman.
    Ms. Hecker, let me ask you, to start. As part of your 
report here, you mentioned capacity problems in the future in 
our rail system. Given your investigation and your time that 
you've spent looking at this, do you have any thoughts on what 
we can do to address the capacity problems in the future, or is 
that something that you tend to stay out of?
    Ms. Hecker. No, sir. It's actually a part of our review. 
It's an enormous question, on its own. So, in addition to 
trying to do 25 years of post-industry performance and all of 
the relief options, we are addressing that issue. In my opening 
remarks, what I said is, we are concerned about sweeping 
proposals. We think that they won't be targeted enough. So, I 
think a lot of our work in advising the Congress on a potential 
role to enhance and facilitate and promote increased investment 
that will generate public benefits is that they be very 
carefully tailored so that they, in fact, do generate those 
public benefits and don't just substitute for investments that 
either the railroads or states would have made anyway.
    Senator Pryor. So, the--if you take an idea like investment 
tax credits, is that too sweeping, or is that----
    Ms. Hecker. In my statement, I do raise concerns about 
that. I do believe it has the significant potential to just 
substitute for investments that railroads would have made, and 
not target it to----
    Senator Pryor. OK.
    Ms. Hecker.--where we would generate public benefits.
    Senator Pryor. Great. Well, I'd like to continue that 
dialogue with you at some point.
    Let me ask about your finished report. The report today is 
a draft report. Is that right?
    Ms. Hecker. We don't publicly release draft reports.
    Senator Pryor. OK.
    Ms. Hecker. These are preliminary results on a report 
that's not completed. So, we have more analysis ongoing, but we 
stand by everything we're saying today.
    Senator Pryor. Do you anticipate that your final report 
will specify ways in which the STB can improve its procedures 
and maybe even include recommended legislative changes? Will 
your final report do that?
    Ms. Hecker. The questions that you and others have posed 
certainly ask us to come up with recommendations. GAO, of 
course, doesn't make them unless we feel there's enough 
evidence to really support them. At this point in time, we 
believe the absence of real understanding and analysis of the 
captive shipper and the prices they're paying and other factors 
that may be affecting those really require more evaluation 
before we're comfortable settling on one solution or another. 
The point is, we want to make sure a solution targets and 
solves a problem so that it justifies the costs and 
inefficiencies that that solution may impose.
    Senator Pryor. OK. Let me ask this. In your review, and 
given your experience, have you seen any evidence that 
railroads are not investing in infrastructure in order to limit 
capacity and, thereby, drive up rates on their customers? Have 
you seen that?
    Ms. Hecker. We've seen no evidence of that.
    Senator Pryor. OK. Let me ask this. As I understand at 
least part of your report, if I can distill it down, not to put 
words in your mouth, but it seems to me there is a maxim here 
that less competition may lead to higher prices. Is that fair 
to say?
    Ms. Hecker. That nails it.
    Senator Pryor. OK. That's--if--I thought I was tracking 
what you were saying earlier, and I think that's pretty much 
it. And did you spend a lot of time in the shortline railroad 
industry? Did you look at that, or did you primarily look at 
the large rail?
    Ms. Hecker. No, unfortunately, given the broad scope of 
this, we have not spent a lot of time on that issue. And it may 
be that the issue of their role is part of a fundamental long-
term vision of how to improve the competitive state of this 
industry overall.
    Senator Pryor. Yes. And we--I hear stories about the 
contracts with the bigger railroads and the short lines and 
getting from point A to point B, sometimes the way those 
contracts are structured can move prices up, where, otherwise, 
they may not. But, again, I think----
    Ms. Hecker. And that's an area Mr. Buttrey says----
    Senator Pryor. Yes.
    Ms. Hecker.--has been open for review.
    Senator Pryor. Mr. Buttrey, let me--I just have a few 
seconds left--let me ask, just in general, Do you think your 
agency needs more statutory authority?
    Mr. Buttrey. Senator, we do not believe that's the case. We 
believe that we have the statutory authority to do the job. 
It's just a matter of fine-tuning our rules and our procedures 
and policies so that they become more user-friendly, so they 
become simpler, less time-consuming, less expensive. And we're 
in the process of trying to do that right now.
    Senator Pryor. That's interesting, because, you know, based 
on what you said earlier, and some of the other questions, 
maybe I misunderstood, but my impression was that you felt like 
that there were lots of room for improvement, and that might 
include more statutory authority, and even more clarity and 
direction from the Congress. Is that not the case?
    Mr. Buttrey. We don't believe it's the case, at the moment, 
no, sir.
    Senator Pryor. OK.
    Thank you, Mr. Chairman.
    Senator Lott. Thank you very much.
    I'd like to ask some more questions. Maybe I'll have a 
chance to do that privately, but we do have another panel. We 
really want to hear from them. So, we----
    Senator Burns. I--could I----
    Senator Lott. Did you want to do a followup?
    Senator Burns. I want to--I want--yes, I do.
    [Laughter.]
    Senator Burns. I sure do.
    Senator Lott. Sorry about that.
    [Laughter.]
    Senator Burns. That's all right. And I appreciate the--I've 
got a couple of questions for Mr. Buttrey, and it's just to 
kind of clear up and lay the groundwork on what our problem is.
    The scope of the STB jurisdiction--and I see right now 
where we've got a couple of differing opinions. First, if a 
railroad and a shipper negotiate a contract, movement of 
freight, is that contract under your jurisdiction?
    Mr. Buttrey. No, it's not, Senator.
    Senator Burns. Does the answer change if the shipper is 
captive, and, thus, can't truly negotiate at arm's length with 
a single provider of that service?
    Mr. Buttrey. If it's a contract between a shipper and a 
railroad, whether it's captive or not, it's not subject to our 
jurisdiction.
    Senator Burns. It doesn't make any difference.
    Mr. Buttrey. We do not have the authority to go in and undo 
a contractual relationship between contracting parties.
    Senator Burns. How much freight is moved under contract in 
this country, percentagewise? Do you have any idea?
    Mr. Buttrey. I have some staff with me. I could just see if 
I could get you an answer right now, possibly, from the staff.
    Senator Burns. Well----
    Mr. Buttrey. We could provide that for the record.
    Senator Burns. OK. Well, I'd like--respond to me and the 
Committee, both.
    If you don't have jurisdiction over rail-service issue, 
what Federal agency or department would have that jurisdiction?
    Senator Burns. Damn good question, huh?
    [Laughter.]
    Mr. Buttrey. It is a good question. The short answer to 
that question is that if there are problems with that contract, 
those matters would be litigated at the state or federal court 
level, not the STB level.
    Senator Burns. OK. And I am--and I hear a lot of concern 
from rail customers about two rulings of the STB that are 
perceived as preventing competition, in--and in direct conflict 
with what Congress directed the STB to do, which was to work 
toward competitive markets, and, of course, protect those 
shippers. One concern is the bottleneck decision. It 
essentially says that a railroad does not have to provide the 
customer a rate to a point where a movement may move onto a 
competing railroad. Second, both the STB, and the ICC before 
it, have approved what I believe are anticompetitive contracts 
known as ``paper barriers'' in track lease arrangements between 
major railroads and short lines, meaning that the short lines 
may only do business with the railroad leasing the track. Even 
the short line might connect to another major carrier. Your 
agency has the authority to take the administrative action to 
promote competition, yet these decisions just do the opposite. 
Can the STB act on its own initiative to change these rulings, 
or must someone bring a request to the STB that it change the 
rulings of these issues? Do they have to be resubmitted or 
rechallenged?
    Senator Burns. If they don't have to, why can't you do 
something about it?
    Mr. Buttrey. The bottleneck decision to which you refer 
was--and you stated the facts absolutely correctly about how 
that works--was a case that was affirmed by the U.S. Court of 
Appeals (Cert, denied). That's the law of the land until 
someone changes the law of the land. And so, we abide by that.
    Senator Burns. All that was a decision by nine lawyers.
    Mr. Buttrey. That was a decision by nine lawyers, yes sir.
    [Laughter.]
    Mr. Buttrey. The second question you asked, about possibly 
anticompetitive effects as a result of line sales or leases or 
possibly a merger, and the so-called paper-barriers issue is a 
concern of ours as well, and that's the reason we scheduled a 
hearing for July 27, to look into that issue, the prevalence of 
those agreements, and the possibly anticompetitive effects of 
those matters.
    Senator Burns. Well, see, my legislation in my bill is 
addressed to three different areas. If it were not for 
antitrust exemption given to the railroads, I think this would 
be a--there would be an entirely different landscape and an 
entirely different approach to what you can do and what 
Congress has to do.
    And I'd--and I will ask you another question. Does the STB 
take its duty, to provide for competition and protect shippers, 
seriously, or does it simply sit back and wait for the shippers 
to jump in? What does it cost--I'm a small shipper--let's say 
I'm an elevator in Montana. How much does it cost me to file a 
case with the STB?
    Mr. Buttrey. Well, Senator, in a small rate case, the 
filing fee is $150, but that does not represent the cost of 
prosecuting the case, of course. The cost of prosecuting the 
case is considerable.
    Senator Burns. Do I bear that cost?
    Mr. Buttrey. Pardon me?
    Senator Burns. Do I bear that cost?
    Mr. Buttrey. The plaintiff bears that cost. But if you win 
that case, you get reparations back over the period of that 
rate that's being challenged. You get reparations from the 
railroad, directly from the railroad if you win that case, 
which could be in the hundreds--maybe not hundreds of millions, 
but certainly in the millions of dollars for a small shipper, 
and a lot more for a large shipper.
    Senator Burns. I know you're just racing along with some of 
these things. It only took, what, 17 or 18 years to clear the 
McCarty Farms case. And, of course, that was under a new 
regime. I'd hope we could get more efficient than that. But----
    And I've got a couple of other questions. In the essence of 
time, Mr. Chairman--but I think there are areas that we have to 
change. And I think it--whenever we define ``captive shipper,'' 
in other areas where there's competition, the STB, in my 
notion, doesn't have any jurisdiction at all under those cases. 
But where we're captive, I think you do. And I think we have to 
deal with those particular areas.
    And I thank the Chairman. And I've got a couple more 
questions, but we'll get them to him.
    The STB hasn't taken action to address the captive-shipper 
issues on rates, service, and capacity, but it has routinely 
protected the railroads with regard to the exclusive revenue 
adequacy. What's the difference?
    Mr. Buttrey. Senator, I'm not sure I understand your 
question. I'm sorry.
    Senator Burns. Well, you haven't taken any action, as far 
as--with captive shippers, anyway--on rates, on service, or on 
capacity. But you've routinely protected railroads on revenue 
adequacy. I mean, we've heard this from both of you. And I want 
to know what the difference is. I think this is a double-bit--I 
think it's a double-bitted ax, and it cuts both ways. So, we've 
got a little discussion to do about that.
    Thank you, Mr. Chairman.
    Senator Lott. Thank you very much to this panel. We 
appreciate your time and your service.
    Now let's go to the second panel. We will have before us 
Mr. Dale Schuler, president, National Association of Wheat 
Growers, from Carter, Montana; The Honorable Glenn English, my 
former colleague from the House of Representatives, corporate 
executive officer, National Rural Electric Cooperative 
Association, Arlington, Virginia; Mr. John McIntosh, president 
of products of Olin Corporation, from Clayton, Missouri--you 
know about that, don't you, Conrad?; Mr. John Ficker, president 
of The National Industrial Transportation League, from 
Arlington; and Mr. Ed Hamberger, president and CEO, Association 
of American Railroads, Washington, D.C.
    If you all would--we'll get you set up here.
    [Pause.]
    Senator Lott. Gentlemen, while you're taking your seats, 
we'll be glad to include in the record your complete 
statements, if you'd like to sum them up. We do have a vote 
beginning at 11:15. That's why I was trying to move to the 
second panel. But if you could all stay within 5 minutes or 
less, we can hear from all of you before we would have to leave 
to go vote. I'd like to have an opportunity to ask some 
questions, but we particularly want to be able to get your 
testimony on record.
    So, if you would, let's begin with Mr. Schuler. Please 
proceed.

        STATEMENT OF DALE SCHULER, PRESIDENT, NATIONAL 
  ASSOCIATION OF WHEAT GROWERS (NAWG); ON BEHALF OF NAWG, THE 
 NATIONAL BARLEY GROWERS ASSOCIATION (NBGA), THE USA DRY PEA & 
         LENTIL COUNCIL (USDP&LC) AND ELENBAAS COMPANY

    Mr. Schuler. Thank you, Mr. Chairman. Can you hear me fine?
    Senator Lott. I don't think it's on.
    Mr. Schuler. OK.
    Thank you, Mr. Chairman, Members of this Committee. My name 
is Dale Schuler. I'm a wheat farmer from Montana, and I'm 
currently serving as president of the National Association of 
Wheat Growers. Today, I'm also honored to be representing NAWG 
and the National Barley Growers Association, the National--or 
the U.S. Dry Pea & Lentil Council, and Elenbaas Company.
    One of agriculture's top priorities continues to be working 
with Congress to find solutions to the problems caused by the 
massive concentration of the railroad industry, and 
specifically finding relief for our members who are captive 
shippers. I'm very pleased to be here today to participate in 
this hearing on capacity, economics, and service.
    The agriculture industry believes that a viable railroad 
industry is necessary for our continued success. Since the 
passage of the Staggers Act in 1980, however, the degree of 
captivity in many agriculture regions and industry areas has 
increased dramatically, and America's farmers continue to 
experience both unreliable service and higher rates.
    We have had more or less continuing rail equipment 
shortages since the railroads started aggressively 
consolidating and merging in the early 1990's. Twenty years 
ago, there were multiple transcontinental railroads servicing 
the farming regions of the country. Today, however, whole 
states, whole regions, and now whole industries have become 
completely captive to single railroads as a result of many 
railroad mergers.
    In the wheat industry alone, there are substantial pockets 
of captivity in Texas, Oklahoma, Arizona, Colorado, Kansas, 
Nebraska, Wyoming, Idaho, South Dakota, Minnesota, North 
Dakota, Washington, and Montana. These states make up a 
majority of the wheat, barley, and pulse-crop growing/producing 
land in this country. Also, as ethanol production continues to 
increase, corn producers are seeing continuing service and 
capacity problems with rail movements of dried distillage 
grains and ethanol. The barley, dry pea, lentil, and chickpea 
industries continue to see the railroad industry's efforts to 
minimize less-than-trainload shipments. In Idaho, pulse crops 
and barley markets--or marketers--continue to see greater 
equipment shortages at less-than-shuttle-loading facilities, 
even when their facilities are adjacent to these shuttle 
loading facilities.
    Farm producers know that increasing the breadth of crop 
production on their farms can lead to greater efficiency and 
productivity and higher income, but the Nation's railroad 
industry does not have the same goal. Instead, its view of 
efficient movement is moving larger and larger movements of a 
single-grade crop from a single origin to a single destination. 
Rail investment in grain movement has been shifted to the grain 
merchandiser and farm producer, while the service level for 
less-than-trainload movements continues to deteriorate.
    We see value-added agriculture having to invest in rail 
rolling stock to ensure adequate equipment supply, yet when 
railroad service levels do not meet railroad-supplied 
schedules, agriculture is being called upon to continually 
increase investment in railroad rolling stock.
    Because of these pockets of captivity, the cost of 
transporting grain can represent as much as one-third of the 
overall price a producer receives for his grain. The cost comes 
directly from a producer's bottom line. Producers, unlike most 
other businesses, cannot pass these costs on. Grain producers 
are price-takers. The market sets the price, and we have no way 
to influence that price. We're price-takers, not price-makers. 
Producers bear all of the transportation costs, both to and 
from the farm, and from the local country elevator to the 
processor or to the export terminal.
    The effect of this rail captivity is that rail rates in the 
northern plains have increased 40 percent faster than the rail 
cost adjustment factor, including productivity unadjusted. 
Where I farm, rail rates as a percentage of the price of wheat 
have risen from 16 percent in 1980 to more than 30 percent 
today. Rail rates in Montana and North Dakota are between 250 
and 450 percent of variable cost, far above the Surface 
Transportation Board's rate of unreasonableness, which is 
currently at 180 percent. These are among the highest freight 
rates in the Nation, though agriculture rates in excess of 250 
percent more than variable cost can be found in virtually all 
of the states that have captivity issues.
    Throughout the Corn Belt and pulse crop areas, rail rates 
have hit all-time highs as the service continues to be sub-par. 
In addition to the high cost of rates, rail service has 
continued to deteriorate. Captive shippers continue to suffer 
car and service disruptions. Shippers that order railcars well 
in advance are still experiencing delays of 3 or 4 weeks from 
the promised delivery dates. This can, and does, cause major 
problems during and after harvest.
    The high rates and lack of service I have just described 
continue to be especially frustrating for producers in my 
region who need only to look across the northern border and see 
where rates for Canadian grain moving westbound, right across 
the border, are only two-thirds the rates that we pay in 
Montana. We grow some of the highest-quality grain in the 
world, yet we're rendered residual suppliers against our 
Canadian counterparts, and find ourselves at a significant 
competitive disadvantage in both domestic and foreign markets 
because of these shipping issues.
    Agricultural producers all over the country, however, are 
concerned that there is currently no regulatory body to address 
our frustration and complaints. The Surface Transportation 
Board does not balance these needs of shippers and railroads. 
The STB has--in the opinion of those I represent here today, 
have abandoned their lawfully designated role as a regulator of 
the railroads. The STB continues to allow the railroads to set 
rates and service practices for captive shippers, and, 
therefore--for captive shippers that force them to subsidize 
all other rail shippers. In 2004, car shortages on the BN 
Northern--the Burlington Northern Santa Fe, by BNSF's own 
numbers, were more than 70 percent of all of its past-due cars, 
where in North Dakota, Minnesota, South Dakota, and Montana, 
which accounts for only about a quarter of their system--the 
STB, after repeated complaints from grain shippers in Montana 
and North Dakota, sided with BNSF, allowing them to continue to 
single out areas of their system that are most captive.
    Our members believe that a healthy and competitive rail 
industry is essential for our continued viability; however, 
poor service, lack of available cars, increased rail rates, and 
a regulatory agency that does not meet our needs of shippers 
are making it difficult for our agricultural producers to 
remain competitive in a world marketplace.
    We believe that the government needs to be the facilitator 
and the catalyst for increasing competition in this 
historically strong 100-year-old industry. We believe the 
railroad industry can survive and prosper in a competitive 
environment. And, indeed, we know from history that competition 
breeds innovation and efficiency.
    In light of the horrific situation that U.S. grain 
producers are facing, with major railroads unable to meet 
common-carrier obligations all over the Nation, it is time for 
public policy in this area to be re-examined. Agriculture 
producers believe that both railroads and shippers would be 
better off with more competition in the marketplace, and many 
of them, including those organizations I am representing today, 
support revision--or provisions in Senate 919, which calls for 
increasing competition without increasing regulation. If 
enacted into law, we believe this legislation will improve rail 
transportation by providing fairness and openness in 
negotiation between railroads and our customers.
    I'd like, again, to thank you for this opportunity to be 
here before this Committee.
    [The prepared statement of Mr. Schuler follows:]

Prepared Statement of Dale Schuler, President, National Association of 
     Wheat Growers (NAWG); on Behalf of NAWG, the National Barley 
Growers Association (NBGA), the USA Dry Pea & Lentil Council (USDP&LC) 
                          and Elenbaas Company
    Mr. Chairman and members of the Committee, my name is Dale Schuler. 
I am a wheat farmer from Montana and am currently serving as President 
of the National Association of Wheat Growers. I am honored to be here 
representing the National Association of Wheat Growers (NAWG) and 
testifying on behalf of NAWG, the National Barley Growers Association 
(NBGA), the USA Dry Pea & Lentil Council (USDP&LC) and Elenbaas 
Company.
    One of agriculture's top priorities continues to be working with 
Congress to find solutions to the problems caused by the massive 
concentration of the railroad industry, and specifically finding relief 
for our members who are captive shippers. I am very pleased to be here 
today to participate in this hearing on capacity, economics and 
service.
    The agriculture industry believes that a viable railroad industry 
is necessary for its continued success. Since the passage of the 
Staggers Rail Act of 1980, however, the degree of captivity in many 
agriculture regions and industry areas has increased dramatically, and 
America's farmers continue to experience both unreliable service and 
higher rates. We have had, more-or-less, continuing rail equipment 
shortages since the railroads started aggressively consolidating and 
merging in the early 1990s.
    Twenty years ago, there were multiple transcontinental railroads 
servicing the farming regions of the country. Today, however, whole 
states, whole regions and now whole industries have become completely 
captive to single railroads as a result of many railroad mergers. In 
the wheat industry alone there are substantial pockets of captivity in 
Texas, Oklahoma, Arizona, Colorado, Kansas, Nebraska, Wyoming, Idaho, 
South Dakota, Minnesota, North Dakota, Washington and Montana. These 
states make up the majority of the wheat, barley and pulse crop 
producing land in this country. As ethanol production continues to 
increase, corn producers are seeing continuing service and capacity 
problems with rail movements of dried distillers' grains and ethanol. 
The barley, dry peas, lentils and chickpea industries continue to see 
the railroad industry's efforts to minimize less than trainload 
shipments. In Idaho, pulse crop and barley marketers continue to see 
greater equipment shortages at less-than-shuttle loading facilities 
even when they are adjacent to shuttle loading facilities.
    Farm producers know that increasing the breadth of crop production 
on farms can lead to greater efficiency and higher income, but this 
Nation's railroad industry does not have the same goal; instead, it 
views efficient movement as moving larger and larger movements of a 
single grade crop from a single origin to a single destination. Rail 
investment in grain movement has been shifted to the grain merchandiser 
and farm producers while the service level for less-than-trainload 
movements continues to deteriorate. We see value added agriculture 
having to invest in rail rolling stock to ensure adequate equipment 
supply, yet when railroad service levels do not meet railroad supplied 
schedules, agriculture is being called upon to continually increasing 
investment in railroad rolling stock.
    Because of these pockets of captivity, the cost of transporting 
grain can represent as much as \1/3\ of the overall price a producer 
receives for his or her grain. This cost comes directly from a 
producer's bottom line. Producers, unlike other businesses, cannot pass 
their costs on; as price takers and not price makers, producers bear 
all transportation costs both to and from the farm and from the 
elevator to the processor or export terminal.
    The effect of this rail captivity is that rail rates in the 
Northern plains have increased 40 percent faster than the Rail Cost 
Adjustment Factor including productivity unadjusted. Where I farm, rail 
rates as a percentage of the price of wheat have risen from 16 percent 
in 1980 to more than 30 percent today.
    Rail rates in Montana and North Dakota are between 250-450 percent 
of variable cost--far above the Surface Transportation Board's ``rate 
of unreasonableness,'' which is currently 180 percent. These are among 
the highest freight rates in the Nation though agriculture rail rates 
in excess of 250 percent more than variable cost can be found in 
virtually all of the states that have captivity issues. Throughout the 
Corn Belt and pulse crop areas, rail rates have hit all time highs as 
the service continues to be sub par.
    In addition to the high cost of rates, rail service has continued 
to deteriorate. Captive shippers continue to suffer car and service 
disruption. Shippers that order rail cars well in advance are still 
experiencing delays of three to 4 weeks after promised delivery dates. 
This can and does cause major problems during and after harvest.
    The high rates and lack of service I have just described continue 
to be especially frustrating for producers in my region who need only 
look across the Northern border to see a much more effective system. 
Canadian freight rates on wheat westbound--right across the border--are 
only \2/3\ of the rail rates we pay in Montana. We grow some the 
highest quality wheat in world, yet we are rendered residual suppliers 
against our Canadian counterparts and find ourselves at a significant 
competitive disadvantage in both domestic and foreign markets because 
of these shipping issues.
    Agricultural producers all over the country, however, are concerned 
that there is currently no regulatory body to address our frustrations 
and complaints. The Surface Transportation Board does not balance the 
needs of shippers and the railroads. The STB has, in the opinion of 
those I represent here today, abandoned its lawfully designated role as 
a regulator of railroads.
    The STB continues to allow the railroads to set rates and service 
practices for captive shippers that force them to subsidize all other 
rail shippers. In the 2004 car shortage on the Burlington Northern 
Santa Fe, by BNSF's own numbers, more than 70 percent of all its past 
due cars were in North Dakota, Minnesota, South Dakota and Montana, 
which accounts for less than a quarter of the BNSF system. The STB, 
after repeated complaints from grain shippers in Montana and North 
Dakota, sided with BNSF, allowing them to continue to single out the 
areas of their system that are the most captive.
    NAWG members believe that a healthy and competitive railroad 
industry is essential for our continued viability, however, poor 
service, a lack of available cars, increased rail rates and a 
regulatory agency that does not meet the needs of shippers are making 
it difficult for agriculture producers to remain competitive in a world 
marketplace.
    We believe that the government needs to be the facilitator and the 
catalyst for increasing competition in this historically strong, 100-
year-old industry. We believe the railroad industry can survive and 
prosper in a competitive environment and, indeed, we know from history 
that competition breeds innovation and efficiency. In light of the 
horrific situation U.S. grain producers are facing with major railroads 
unable to meet common carrier obligations all over the nation, it is 
time that public policy in this area needs to be reexamined.
    Agricultural producers believe that both railroads and shippers 
would be better off with more competition in the marketplace and many 
of them, including those organizations I am representing today, support 
provisions in S. 919 which calls for increasing competition without 
increasing regulation.
    If enacted into law, we believe this legislation will improve rail 
transportation by providing fairness and openness in the negotiations 
between railroads and their customers over rates and service. By simply 
requiring railroads to provide rates to their customers between any two 
points on their system, many additional rail customers will gain access 
to rail transportation competition. In addition, providing for ``final 
offer'' arbitration and the removal of ``paper barriers'' will restore 
balance to the commercial relationship between the railroads and their 
customers.
    I would like to thank you again for this opportunity. I am ready to 
answer any questions you may have.

    Senator Lott. Thank you very much, Mr. Schuler.
    Mr. English? Old House member, you know about the 5-minute 
rule, or less.
    [Laughter.]
    Mr. English. I seem to recall the 5-minute rule, Mr. 
Chairman, thank you very much. Appreciate that.
    [Laughter.]

             STATEMENT OF HON. GLENN ENGLISH, CEO, 
        NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

    Mr. English. Mr. Chairman, I'm here today, not as head of 
the electric cooperatives, but as Chairman of the Consumer's 
United for Rail Equity, which is a number of different 
organizations that have ``joined'' or ``banded'' together; 
namely, known as ``captive shippers.'' We're 20 percent of the 
rail freight market.
    Mr. Chairman, as you've heard from the members of the 
Committee itself, they're very familiar with the fact that in 
recent years we're finding that railroad service is becoming 
less reliable and more expensive, particularly for those who 
are known as captive shippers. Those of us in the electric 
utility industry are extremely aware of this. We have seen, in 
the last 2 years, our coal stockpiles deplenished to a point 
that was dangerously low. Normally we like to keep a 30-day 
supply of coal on hand for the utilities. Those utilities, 
however, that fall in the category of being captive shippers, 
many of those have found their stockpiles depleted down to a 
position of less than 10 days. This has improved somewhat in 
the last few months; mainly because of a mild winter and 
because of the normal spring maintenance that takes place as 
far as generators are concerned. I might also say, Mr. 
Chairman, I think it's partly due to the fact that the Congress 
is showing increasing attention with regard to this issue and 
this difficulty.
    As far as the problem itself, it is a problem today, but 
may be a much larger problem for the future. As I think you're 
aware, Mr. Chairman, the electric utility industry is going to 
have to build a huge amount of new capacity in the coming 
years. It has been estimated, over the next 10 to 20 years the 
capacity for the electric utility industry is going to have to 
increase over a third. That's a massive amount of construction. 
And much of that needs to be coal-fired if, in fact, we're 
going to use the resources we have here at home and to use 
those resources that are best suited for the generation of 
electric power. And certainly that is coal. But we're finding a 
question as to whether it makes sense to build those coal-fired 
generating plants if we cannot rely on America's railroads to 
deliver that coal in a timely manner. If they can't do it 
today, Mr. Chairman, there's a real question whether they're 
going to be able to do it in the future.
    The railroad industry, when we bring these issues to their 
attention, when issues are asked by the Congress and by the 
Federal Energy Regulatory Commission, who's also looked into 
this matter last week, we find the railroads blame the 
customers, ``It's your fault.'' It's the customer's fault. With 
regard to the utilities, say, ``Well, we're using more natural 
gas.'' However, at the same time, the rail industry points out 
that they're in constant communication with the customers of 
coal, and they're ensuring adequate supplies are available. And 
it's hard for me to understand, if they're in constant contact, 
why they wouldn't know there's increasing use of coal in this 
country. And if they didn't know it from talking to the 
customers, then they need to talk to Department of Energy, 
which makes this information regularly available. As you can 
see, here is the DOE. Energy Information Administration's use 
of coal. [Chart] You can see the bottom line, Mr. Chairman, the 
steady growth. And it takes it on out to the year 2030. So, if 
there's any doubt in anybody's mind, here it is, provided by 
the Department of Energy, for all to see.
    [The information referred to follows:]

      Energy Information Administration/Annual Energy Outlook 2006

                          Table 25. Comparison of coal forecasts, 2015, 2025, and 2030
                                    (million short tons, except where noted)
----------------------------------------------------------------------------------------------------------------
                                                                  AEO2006                   Other forecasts
                                                    ------------------------------------------------------------
                 Projection                   2004                  Low        High
                                                      Reference   economic   economic    PIRA     EVA      GII
                                                                   growth     growth
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------


                                                                        2015
                                   -----------------------------------------------------------------------------
Production                 1,125          1,272       1,251        1,318       1,250        1,234        1,149
Consumption by sector
  Electric power           1,015          1,161       1,145        1,199       1,171        1,140        1,071
  Coke plants                 24             22          21           23          NA           29           19
  Coal-to-liquids              0             22          19           27          NA           NA           NA
  Industrial/other            65             71          69           72        88 a           65           66
    Total                  1,104          1,276       1,254        1,321       1,259        1,234        1,156
Net coal exports            20.7           -4.8        -4.8         -4.8        -8.0        -17.3         -7.7
  Exports                   48.0           22.0        22.0         22.0          NA         28.0         28.6
  Imports                   27.3           26.7        26.7         26.8          NA         45.3         36.3
Minemouth price
  (2004 dollars per        20.07          20.39       20.04        20.67          NA      19.69 b      17.82 d
   short ton)
  (2004 dollars per         0.98           1.01        0.99         1.02          NA       0.99 c       0.86 d
   million Btu)
Average delivered
 price
to electricity
 generators
  (2004 dollars per        27.43          28.12       27.74        28.50          NA      29.45 b      28.17 e
   short ton)
  (2004 dollars per         1.36           1.40        1.39         1.42          NA       1.48 b         1.36
   million Btu)
                                                                        2025
                                   -----------------------------------------------------------------------------
Production                 1,125          1,530       1,394        1,710          NA        1,404        1,296
Consumption by sector
  Electric power           1,015          1,354       1,248        1,486          NA        1,329        1,226
  Coke plants                 24             21          19           23          NA           26           16
  Coal-to-liquids              0            146         115          192          NA           NA           NA
  Industrial/other            65             71          68           73          NA           60           67
    Total                  1,104          1,592       1,450        1,774          NA        1,415        1,309
Net coal exports            20.7          -62.8       -57.9        -65.5          NA        -29.2        -15.1
  Exports                   48.0           19.6        19.6         18.4          NA         30.1         23.4
  Imports                   27.3           82.4        77.4         84.0          NA         59.3         38.5
Minemouth price
  (2004 dollars per        20.07          20.63       19.40        21.73          NA      20.15 b      16.12 d
   short ton)
  (2004 dollars per         0.98           1.03        0.98         1.09          NA       1.02 c       0.78 d
   million Btu)
Average delivered
 price
to electricity
 generators
  (2004 dollars per        27.43          29.02       27.48        30.87          NA      30.12 b      25.84 e
   short ton)
  (2004 dollars per         1.36           1.44        1.37         1.52          NA       1.53 b         1.25
   million Btu)
                                                                        2030
                                   -----------------------------------------------------------------------------
Production                 1,125          1,703       1,497        1,936          NA           NA        1,395
Consumption by sector
  Electric power           1,015          1,502       1,331        1,680          NA           NA        1,330
  Coke plants                 24             21          19           23          NA           NA           14
  Coal-to-liquids              0            190         153          247          NA           NA           NA
  Industrial/other            65             72          68           75          NA           NA           67
    Total                  1,104          1,784       1,571        2,025          NA           NA        1,411
Net coal exports            20.7          -82.7       -69.3        -89.0          NA           NA        -18.7
  Exports                   48.0           16.7        16.4         16.8          NA           NA         22.3
  Imports                   27.3           99.4        85.7        105.8          NA           NA         41.0
----------------------------------------------------------------------------------------------------------------


                     Table 25. Comparison of coal forecasts, 2015, 2025, and 2030--Continued
                                    (million short tons, except where noted)
----------------------------------------------------------------------------------------------------------------
                                                                  AEO2006                   Other forecasts
                                                    ------------------------------------------------------------
                 Projection                   2004                  Low        High
                                                      Reference   economic   economic    PIRA     EVA      GII
                                                                   growth     growth
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------


Minemouth price
  (2004 dollars per        20.07          21.73       19.91        23.05          NA           NA      15.65 d
   short ton)
  (2004 dollars per         0.98           1.09        1.00         1.15          NA           NA       0.76 d
   million Btu)
Average delivered
 price
to electricity
 generators
  (2004 dollars per        27.43          30.58       28.28        32.79          NA           NA      25.23 e
   short ton)
  (2004 dollars per         1.36           1.51        1.41         1.61          NA           NA         1.22
   million Btu)
----------------------------------------------------------------------------------------------------------------
Btu = British thermal unit. NA = Not available.
a Includes coal consumed at coke plants.
b The average coal price is a weighted average of the projected spot market price for the electric power sector
  only and was converted from 2005 dollars to 2004 dollars to be consistent with AEO2006.
c Estimated by dividing the minemouth price in dollars per short ton by the average heat content of coal
  delivered to the electric power sector.
d The minemouth prices are average prices for the electric power sector only and are calculated as a weighted
  average from Census regionprices.
e Calculated by multiplying the delivered price of coal to the electric power sector in dollars per million Btu
  by the average heat content of coal delivered to the electric power sector.
Sources: 2004 and AEO2006: AEO2006 National Energy Modeling System, runs AEO2006.D111905A (reference case),
  LM2006. D113005A (low economic growth case), and HM2006.D112505B (high economic growth case). PIRA: PIRA
  Energy Group (October 2005). EVA: Energy Ventures Analysis, Inc., FUELCAST: Long-Term Outlook (August 2005).
  GII: Global Insight, Inc., U.S. Energy Outlook (Summer 2005).


    I would suggest, Mr. Chairman, that the real reason that 
we're running into these kinds of difficulties has to do with a 
remark that was made by the chairman of Union Pacific, back 
before the Surface Transportation Board a few years ago. He 
states to the Surface Transportation Board, ``Year after year, 
the railroads have been increasing their traffic volumes 
without adding commensurately to their physical capacity.'' In 
other words, they're following the same strategy that the 
airlines have been following for some time, Mr. Chairman, and 
that is to limit the capacity. With the airlines, it may be 
some folks can't get a ticket, or they may get bumped off their 
flight. To them, it's an inconvenience. When it happens as far 
as our Nation's railroads are concerned with regard to 
providing supplies for the generation of electric power, what 
it's going to mean, Mr. Chairman, is that the lights are either 
going to dim, or they may go out altogether. The impact that 
that has on this Nation's economy obviously is very severe.
    Now, we also have the interesting situation where the 
railroads are coming before the Congress asking for additional 
assistance. They'd like a tax credit to help them deal with 
some of the capacity problems, problems that they say they want 
to limit in the first place. And that, too, raises some very 
serious questions for us, Mr. Chairman, particularly when we--
in light of the fact that the reported profits for this last 
year, 2005 over 2004, are very significant, a 30-percent 
increase in one year for the industry itself. And particular 
railroads, some railroads that are serving those of us who are 
captive shippers, I would point out, the Burlington Northern 
Santa Fe, had, 2005 over 2004, a 93-percent increase in the 
profits. CSX is reporting a 237-percent increase over the year. 
And, Mr. Chairman, according to the Wall Street Journal, 
they're saying the ride isn't over yet.
    Now, Mr. Chairman, stranded shippers, our cost in the 
recent time, we're seeing an increase of 350 to 450 percent, in 
the form of profits. Now, who is paying for this increase, 
these huge profits that are being made by the railroads? 
Obviously it's the captive shippers. It's coming out of our 
hide. But, since it is a monopoly, we obviously aren't 
receiving the service for what we're paying an excess for.
    In the electric utility industry, Mr. Chairman, we have 
what's known as an obligation to serve. We're obligated to 
serve the people of this country and provide them with electric 
power. I would ask you, Mr. Chairman, don't the railroads have 
an obligation to deliver for the electric utility industry and 
for the rest of America and our economy?
    Thank you very much.
    [The prepared statement of Mr. English follows:]

            Prepared Statement of Hon. Glenn English, CEO, 
            National Rural Electric Cooperative Association
    Mr. Chairman and members of the Committee:
    My name is Glenn English, and I am the Chief Executive Officer of 
the National Rural Electric Cooperative Association (NRECA). I also 
serve as Chairman of Consumers United for Rail Equity (CURE), a captive 
rail customer advocacy group representing a broad array of vital 
industries--chemical manufacturers and processors; paper, pulp and 
forest products companies; agricultural commodities producers and 
processors; cement and building materials suppliers; and many more.
    I appreciate this opportunity to appear today to discuss railroad 
issues that have rapidly risen to the top of the policy agenda for 
members of NRECA, a trade association consisting of 930 cooperatives 
providing electricity to more than 39 million consumers living in 47 
states. As member-owned, not-for-profit organizations, the obligation 
of cooperatives is to provide a reliable supply of electricity to all 
consumers in our service areas at the lowest possible price. We take 
our obligation to serve very seriously--the wellbeing, safety, and 
economic health of our members, our communities and our Nation depends 
on it. Electric cooperatives serve primarily the more sparsely 
populated parts of our nation, but cover roughly 75 percent of the land 
mass of the Nation.
    Today I want to emphasize for the Subcommittee the very critical 
issues currently facing rail freight shippers throughout the country, 
especially those shippers who are ``captive'' because they are only 
served by one rail carrier and have limited or no access to 
competition.
    Since the enactment of the Staggers Rail Act in 1980, the railroad 
industry has dramatically changed. Despite their claims to the 
contrary, the structure and the practices of the railroads under 
current law are detrimental to the economic survival of many domestic 
U.S. businesses and industries. Left unchecked, the status quo 
jeopardizes our national economy and even our national security 
capabilities. Consider the following:

   In 1980 there were 41 Class I railroads, but today six 
        remain with four of them--two in the east and two in the west--
        carrying about 94 percent of all rail freight.

   More than 20 percent of all rail freight shipments are 
        ``captive'' to the monopoly market power of only one rail 
        carrier.

   The four major carriers have been allowed under current law 
        to artificially tighten their monopolistic stranglehold over 
        ``captive'' shippers through practices that restrain 
        competition and deny shippers the ability to freely seek access 
        at points where competition might otherwise be available.

   ``Captive'' rail shippers are forced in an arbitrary ``take-
        it-or-leave-it'' fashion to face enormously higher rail 
        transportation costs than those shippers that have access to 
        competition.

   In areas where competition is minimal or does not exist, the 
        Federal regulatory watchdog established under the Staggers Act 
        to protect ``captive'' rail shippers--the Surface 
        Transportation Board (STB)--has failed to fulfill its 
        responsibility to ensure that rail rates and practices are fair 
        and equitable and in the overall national best interest.

   Similar to the availability and reliability of adequate 
        electric power, a robust and efficient rail transportation 
        system is critically important to the Nation's economy and 
        security, and requires a common carrier obligation to 
        adequately serve the broader public interest.

    I want to recognize the efforts of Senators Burns, Rockefeller, 
Dorgan--and others who have gone on record--for their keen interest in 
resolving two major issues facing the rail industry and its customers: 
the need to mandate regulatory reforms in the industry; and the 
shortfall in U.S. railway capacity. Any legislation moving forward must 
address both problems.
    We commend Senator Burns for introducing S. 919, the Railroad 
Competition Act of 2005, along with Senators Rockefeller and Dorgan. 
The legislation would reform many of the anti-competitive practices 
that the railroads currently exert over captive shippers. S. 919 also 
recognizes the need to provide some mechanism or incentive to stimulate 
the capital investment needed to address the current capacity 
shortfall.
The Captive Shipper/Railroad Monopoly Problem
    Mr. Chairman, about 50 percent of the Nation's electricity is 
generated from coal. In the electric cooperative community, about 80 
percent of the electricity generated by our plants is from coal. Very 
few of our generating facilities are located at coal mine sites, so 
most of the coal consumed by our plants is delivered by rail.
    Under most circumstances, co-ops buy the coal at the mine site and 
arrange for its transportation, so the shipping agreements are between 
the railroad companies and the cooperative. Generally, our co-ops 
provide and maintain the ``train sets''--the unit trains that today 
normally number from 120 to 130 cars. We also provide unloading 
facilities and make other capital investments related to rail 
transportation of coal to our plants. Most of these costs were 
previously borne by the carrier and factored into rates. Today, in the 
movement of coal to our plants, the railroads basically provide only 
the locomotives, tracks, crews, and the diesel fuel.
    Increasingly, our members must deal with substandard service and 
higher costs for their coal transportation than ever before. 
Consolidation of the rail industry has resulted in many of our 
generators being held ``captive'' to one single railroad for coal 
transportation. As a result, these electric generators are subject to 
railroad monopoly power over price and service with no access to 
competition. The railroads have extensive exemptions from the Nation's 
antitrust laws. Under the Staggers Rail Act, the Interstate Commerce 
Commission (now Surface Transportation Board) mission was to deregulate 
competitive rail traffic, while also protecting against monopoly abuse 
of ``single served'' or ``captive'' traffic. That protection is not 
being provided.
    Application of the Antitrust Laws. Railroad spokespersons have 
recently represented in hearings before the House Transportation & 
Infrastructure Committee and the Senate Energy & Natural Resources 
Committee that the railroads are subject to ``most'' antitrust laws. 
Two quick examples rebut this claim. First, section 16 of the Clayton 
Act, 15 U.S.C. Sec. 26, prohibits private parties from seeking 
antitrust law-based injunctions against ``any common carrier subject to 
the jurisdiction of the Surface Transportation Board.'' Second, the 
Supreme Court's decision in Keogh v. Chicago & Northwestern Ry., 260 
U.S. 156 (1922), generally prevents shippers from obtaining treble 
damages in matters involving railroad freight rates that might be found 
discriminatory. Following enactment of Staggers, the Keogh decision 
continues to preclude most shipper actions for treble damages against 
the railroads. Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 
476 U.S. 409, 422 (1986).
    Given the general unavailability for private injunctive actions and 
treble damages, the recent claims by the railroads that they are fully 
subject to the antitrust laws is misleading at best.
    Compounding the problem, the STB has interpreted Staggers in a 
manner that allows railroads to deny shippers access to competing 
railroads, has allowed other anticompetitive practices, and has a rate 
challenge process so complex, costly and time consuming as to provide 
virtually no protection to rail customers. For example, freight rates 
nearly doubled this year for Dairyland Generation and Transmission Co-
op in Wisconsin. Unfortunately, given the complexity, the cost, and the 
history of futile challenges before the STB, Dairyland had no realistic 
option other than to accede to the ``take-it-or-leave-it'' demands of 
the railroad.
Railroads Claim ``Rates'' Are Down--Shippers Find ``Costs'' Are Up
    In addition to the rail capacity concerns and monopolistic rail 
business practices being examined by the Subcommittee, Congress should 
also be concerned about the cost of coal transportation to electric 
generating facilities that must depend on a single railroad for coal 
delivery. Coal transportation costs flow straight through to 
electricity consumers, many of whom--farmers, chemical producers and 
processors, manufacturers, providers of forest products, paper and 
pulp, and many more--are already being forced to pay high rail 
transport costs on the movement of their products because they are also 
``captive'' to a single provider. When co-ops must rely on a single 
railroad to move coal to our plants, and there is no recourse for a 
fair rate review, we are in no position to negotiate a mutually 
acceptable price. Rather, the railroad carrier dictates both price and 
service. With the railroads largely exempt from the Nation's antitrust 
laws, the only option available to customers served by a single 
railroad is to petition the Surface Transportation Board for relief.
    Members can refer to the following chart showing a close 
approximation of the rail rates that apply to ``captive'' shippers of 
products versus shippers of those products who are not held hostage to 
just one Class I rail carrier.

On a Per Ton Basis, Difference Between Captive and Competitive Rates  by
                       Commodity & Major Railroad
The following information was calculated by Escalation Consultants, Inc.
  of Gaithersburg, Maryland. This ``per ton'' information is calculated
  from the 2003 STB ``Revenue Shortfall Allocation Methodology'' (RSAM)
            study, the latest study available from the Board.
------------------------------------------------------------------------
                                         NS      CSX       BN       UP
------------------------------------------------------------------------
Farm Products Captive Rate             $21.37   $36.74   $45.28   $37.99
Farm Products Non-Captive Rate         $11.88   $20.83   $26.09   $21.29
------------------------------------------------------------------------
Coal Captive Rate                      $17.56   $17.22   $16.77   $17.00
Coal Non-Captive Rate                   $9.76    $9.76    $9.66    $9.53
------------------------------------------------------------------------
Chemicals Captive Rate                 $36.98   $34.33   $42.57   $38.94
Chemicals Non-Captive Rate             $20.56   $19.46   $24.52   $21.82
------------------------------------------------------------------------
Lumber or Wood Captive Rate            $29.43   $36.13   $59.19   $59.49
Lumber or Wood Non-Captive Rate        $16.36   $20.48   $34.10   $33.34
------------------------------------------------------------------------
Pulp, Paper Captive Rate               $39.48   $40.82   $62.14   $55.40
Pulp, Paper Non-Captive Rate           $21.95   $23.14   $35.80   $31.05
------------------------------------------------------------------------

    The railroads have all but perfected the art of using ``global'' 
data and statistics to obscure the true impact of their ``rates'' and 
their practices in different regions of the country and especially as 
applied to ``captive'' rail customers. They will tout graphs 
demonstrating how ``rates'' have steadily declined for shippers . . . 
what they don't tell you is that much of the ``cost'' of rail 
transportation that was previously built into the ``rate'' (the costs 
of trainsets, maintenance, loading and other trackside facilities) has 
been shifted over the period onto the backs of the shippers. While 
``rates'' have indeed come down, the ``cost'' to shippers in many cases 
has dramatically increased.
    Although the railroads suggested they are subject to regulation and 
that shippers have a right to file complaints, it is important to 
understand the very limited extent to which railroad rates are subject 
to review at the STB. Contracts are outside of the STB's jurisdiction 
altogether (49 U.S.C. Sec. 10709), and the STB has exempted much other 
traffic (including intermodal traffic) from its rate regulation.
    For the small remaining category of traffic that is subject to 
regulation, the railroads have the initial flexibility to establish any 
rate they want (49 U.S.C. Sec. 10701(c)). Shippers may challenge a 
rate, but bear the burden of showing that the carrier has market 
dominance in both qualitative (an absence of effective competition) and 
quantitative (the rate exceeds the jurisdictional threshold of 180 
percent of variable costs) terms (49 U.S.C. Sec. 10707). The shipper 
must also prove that the rate exceeds a reasonable maximum under 
``Constrained Market Pricing,'' which largely means stand-alone cost (a 
variant of replacement cost). In recent years, it has been impossible 
for shippers to get meaningful relief at the STB. In addition, the 
cases take a long time (at least 2 years to get the first decision on 
the merits) and are very expensive ($3-5 million at a minimum).
    At the end of a twenty-year contract with Laramie River Station, 
BNSF more than doubled the coal-hauling rate for the plant. On October 
19, 2004, a complaint was filed with the STB to review BNSF's rate 
increases. Rate complaints at the STB are costly, lengthy, complex, and 
rarely result in any relief for the rail customer. The cost simply to 
file the LRS/Western Fuels complaint was $102,000, but that filing fee 
since has been increased to $140,600. By contrast, the cost of filing a 
similar case in the Federal district court is $150.
    In contrast to most other regulatory systems in the nation, the 
customer must prove first that it is subject to a railroad monopoly, 
and then must carry the burden of proving that the rate is unreasonably 
high. In a normal regulatory process, the burden of justifying a rate 
falls on the monopoly that is being regulated. The rate reasonableness 
standard under the STB is not the normal ``cost plus a reasonable rate 
of return'' test.
    The rate reasonableness standard employed by the Surface 
Transportation Board requires the customer to prove that it can build 
and maintain its own railroad to move its product at a price less than 
the rate that is being challenged. This requires the rail customer to 
employ economists to construct a highly efficient ``virtual'' railroad 
that roughly follows the route and bears the same costs at the 
incumbent railroad. Not surprisingly, this proof is complicated and 
expensive. To date, LRS and its co-owners have spent nearly $5 million 
on the prosecution of the rate case, which has been pending almost 2 
years. A final judgment is not expected in this case for at least 
another year.
    The situation facing us today goes far beyond just the very high 
prices being charged captive shippers--both directly and indirectly--by 
the railroads. Currently, the Nation faces a situation wherein the 
railroads are either unable or unwilling to deliver reliable supplies 
of coal to our generators in a timely fashion. So, in a very real 
sense, our members are paying much more and receiving far less when it 
comes to rail transportation. Policies must be changed to address a 
rapidly worsening situation that is harming critical industries. The 
fact is that electric generation is now threatened by the railroads' 
poor performance and their lack of reliability.
Current Coal Delivery Problems Adversely Impact Electricity
    In a world suffering from shortages of energy supplies, our Nation 
is blessed with enormous reserves of coal that can provide for 
electricity and other uses for many decades in the future. Our coal 
resources are sufficient to meet our energy needs for more than 250 
years. Some have referred to the United States as the Saudi Arabia of 
coal. In a 2001 speech, Vice President Dick Cheney pointed out that the 
overall demand for electric power is expected to rise by 43 percent 
over the next 20 years, and that just meeting the demand would require 
between 1,300 and 1,900 new power plants. That averages to more than 
one new power plant per week, every week, for the next 20 years. ``We 
all speak of the new economy and its marvels,'' he said, ``sometimes 
forgetting that it all runs on electric power.''
    What the Vice President might not have recognized at the time of 
his speech was that the railroads responsible for moving this 
strategically important fuel supply were already in the process of 
making America's most abundant and affordable energy supply scarce and 
expensive. Electric co-ops are forced to look to South America, 
Indonesia, and other foreign coal sources because the railroads cannot 
make timely domestic deliveries.
    The delivery system for half the Nation's electricity consists of 
coal mines, rail transportation, generators, and transmission and 
distribution systems. Due to rail delivery problems, many of the 
electric cooperative generators have been concerned as they prepared 
for this year's summer cooling season. Some generating facilities were 
dangerously close to a point where continued operation could not be 
sustained.
    Let me focus on the coal delivery problem confronting just one very 
large coal-fired electric generator in Wyoming--the Laramie River 
Station (the same plant embroiled in a rate case at the STB). In the 
spring of 2005, there were two derailments on tracks coming from the 
Powder River Basin (PRB), reducing rail coal deliveries to 80 percent 
of previous levels. Deliveries have not yet fully recovered. A BNSF 
spokesman was recently quoted in CQ Weekly saying that it is just ``not 
feasible'' to rebuild the LRS stockpile with current demand for coal so 
high. It is unclear whether those reductions have been imposed across-
the-board, or whether the reductions and related matters, including 
``parking'' of trainsets, have been imposed selectively or 
accidentally, but the result is the same. It enables the railroads to 
pick ``winners and losers'' among generating utilities, and to 
potentially punish and retaliate against those who seek to invoke 
whatever protections may be ostensibly available.
    The three unit (1650 MW) Laramie River Station is located only 170 
miles from the coal source and was down to a 3 to 4 day supply of coal 
in January. This plant is operated by Basin Electric Power Cooperative 
for 6 not-for-profit utilities. Loss of this major block of generation 
could create severe reliability problems for its regional grid. Basin 
provides electricity to its members in 9 states serving over 1.8 
million consumers. Because of reliability concerns, Basin notified DOE 
and the North American Electric Reliability Council of the stockpile 
situation when coal reserves dropped below 50 percent of normal levels 
and developed a generation curtailment plan to conserve coal.
    Fortunately, the winter was relatively mild, coal deliveries 
improved during the last few months, and Unit 1 entered a 7-week 
maintenance outage, which reduced consumption of coal. Since the outage 
began on April 15, Basin's stockpile has increased to almost 700,000 
tons--a 30 day reserve. However, if the plant had been operating at 
full load during this period, the stockpile would have gained only 
100,000 tons to a total of 276,000 tons; a 10 day supply of coal. Now 
that the plant is once more in full operation, Basin is concerned about 
coal deliveries for the summer months.
    Other co-ops have experienced similar problems and have cut 
production at those coal plants that are normally the least costly to 
operate. Electricity generators have resorted to burning more expensive 
natural gas, purchasing higher cost electricity from the grid, or 
purchasing more expensive foreign coal and higher sulfur local coal. 
Arkansas Electric Cooperative estimated that its coal conservation 
program, using alternate-fuel power generation, cost its customers over 
$100 million because of the shortage of coal deliveries over the past 
12 months to its power plants.
    The shortfall in rail coal deliveries has many far-reaching 
consequences. It is widely acknowledged that there will be at least a 
20 million ton shortfall in PRB coal deliveries in 2006. Making up for 
this shortfall will require the use of about 340-billion cubic feet of 
natural gas costing about $2.6 billion more than the coal it replaces. 
The additional use of natural gas instead of coal to generate 
electricity has also significantly driven up the price of gas across 
the country, and has increased the costs to those using natural gas as 
a feedstock for manufacture of their products. Over the past year, 
restriction in the supply of PRB coal has also resulted in a tripling 
of the coal spot market price, increasing those prices from roughly $6 
per ton to more than $20 per ton.
    So, in addition to the market power and rate-setting problems not 
being addressed, neither does the Surface Transportation Board assert 
jurisdiction over railroad customer service issues. The STB has been 
completely passive during the current coal delivery problems. For 
example, when the CEO of Arkansas Electric Cooperative sent a letter on 
this subject to the STB last August, not only did he never receive a 
response from the STB, his letter was answered by a Vice President of 
the Burlington Northern Railroad--the railroad about whom he was 
complaining!
Railroad Obligation to Serve--Wall Street vs. Main Street
    We believe that an overriding national public interest applies to 
the railroad industry as it does with our electric utility industry. No 
electric utility--whether a rural electric cooperative, a municipal 
power system or an investor owned utility--is free to conduct business 
in any manner it likes, including ``maximizing'' profits. city 
officials overseeing municipal utilities are subject to the vote of the 
people; rural electric co-op boards must earn election by their member-
owners; and investor owned utilities are subject to the oversight of 
both state public service commissions and the Federal Energy Regulatory 
Commission.
    Railroad companies tell only one side of the story, emphasizing 
freight railroad traffic ``constraints''--the ``capacity crunch''--
while alleging a need for financial incentives to lure the additional 
capital necessary to modernize and expand America's rail infrastructure 
and capacity.
    We know the infrastructure and the capacity of our railroads need 
significant expansion and improvement. Railroad constraints--coupled 
with their exercise of monopoly power over captive customers--have led 
to ever growing profit levels for the major rail corporations. The 
railroads and Wall Street have been focused on making large profits 
while Main Street Americans are focused on the ``big picture'' of 
growing and expanding our overall economy--not just one sector.
    Morgan Stanley Equity Research N.A. recently released a periodic 
analysis of railroad financial performance. This analysis was produced 
for its intended audience, the investor community. The report noted 
that the major railroads are enjoying robust financial health based on 
``pricing freedom'' and lack of railroad capacity. According to the 
report, ``the six major North American railroads (Kansas City Southern 
is not included) will see their stocks appreciate 50 percent-100 
percent over the next 4 years.'' (``Air Freight and Surface 
Transportation,'' Morgan Stanley Equity Research North America, January 
23, 2006, James Valentine).
    Since rising stock prices are an indicator of financial health that 
will attract and retain capital, this analysis clearly suggests that, 
according to Wall Street the railroads will be ``revenue adequate'' 
over the next 4 years. Furthermore, the analyst said that there is 
little or no regulatory risk in the current Washington environment--an 
indication that he believes the current STB, Congress and 
Administration are unconcerned about the ``secular pricing'' power and 
other actions of the railroads. ``Secular pricing'' is the code for the 
ability of a monopoly to exercise market power in exacting cash from 
those dependent on the monopoly's goods or services.
    We contend that the railroad industry also has--like electric 
utilities--an obligation to serve the national public interest. This 
obligation may sometimes be called a ``common carrier'' obligation, but 
in the end it means the duty to provide reliable transportation service 
to all customers at fair and reasonable prices. Without mandating an 
obligation to serve by the railroads, the economy of this Nation cannot 
move forward. Adequate, dependable, and reasonably priced rail service 
is almost as critical to our national and economic security interests 
as electricity, and the public interest cries out for the imposition of 
a formal ``obligation to serve'' mandate in order to correct the 
current arrogant and abusive tendencies of the railroads.
    Some tell us that the economic self-interest of the railroads will 
solve the railroad service and capacity problems over time. That 
certainly was the premise of the Staggers Rail Act--deregulate the 
railroads and they will become healthy and provide the rail service 
needed by the Nation at fair and reasonable prices. Railroad customers 
have good reason to doubt that assertion.
    In the absence of strong signals from the government about service 
and capacity to meet the needs of ``Main Street'' America, the 
railroads will take their signals only from ``Wall Street.'' Financial 
analysts today rate railroad stocks high because the railroads possess 
``pricing power'' based on the fact that demand for rail transportation 
exceeds capacity. Moreover, Wall Street tends to grade railroad stocks 
down when the railroads make heavy investments in their systems. So, 
Mr. Chairman, there is significant concern among the rail customer 
community that actually providing sufficient capacity and reliable 
service for them will be perceived by Wall Street as adverse to the 
economic interests of the rail industry.
    Questions about future reliable rail service at fair prices are a 
significant concern to the electricity industry as it attempts to 
provide the additional coal-fired power plants the Nation will need in 
the future. Can we depend on reliable rail transportation of coal in 
the future at a fair and reasonable price?
Assistance to Help Ensure Rail Profits Requires an Obligation to Serve
    Finally, Mr. Chairman, we understand the railroads are now seeking 
legislation to provide a 25 percent investment tax credit and 
``expensing'' provisions for investments in railroad infrastructure. We 
might very well support such a Federal incentive, but only so long as 
it includes a package of legislation that also addresses the concerns 
of rail customers that are subject to railroad monopoly power, and only 
so long as the tax credit and other benefits are also available to rail 
customers when they make similar investments in infrastructure to 
improve overall rail capacity.
    Moreover, we recommend that certain conditions should be imposed on 
the investments that would be eligible for the tax credits and 
expensing benefits. For example, the investments that qualify should be 
limited to first prioritize improving the infrastructure that currently 
provides insufficient service to captive or single-served rail 
customers. Eligible investments should be focused first on 
infrastructure improvements that benefit the movement of domestic 
products and commodities as opposed to infrastructure that benefits 
imports. Finally, any infrastructure that benefits from the tax credit 
should be deployed in a pro-competitive manner as suggested in S. 919, 
rather than further expanding the monopoly market power of the 
railroads.
    The rationale for providing any level of assistance to the 
railroads is because of the important role they play in our Nation's 
overall economy. Electric utilities are viewed as absolutely critical 
not only to the economy, but also indispensable in helping to ensure 
our homeland security. Railroads obviously occupy a similar role. All 
reasonable assistance should be provided to ensure the rail 
transportation system is robust and efficient. However, benefits to 
help ensure the profitability of the rail industry should come with a 
clear ``obligation to serve'' the best interests of Main Street 
America--not just Wall Street.
NRECA Supports S. 919--The Right Direction for Reform
    I mentioned earlier the legislation that Senators Burns, 
Rockefeller, and Dorgan have introduced that will begin to address many 
of the current problems facing rail shippers--especially captive rail 
shippers--as they try to deal with the railroads. S. 919 is a good 
starting point for discussions among those who truly want to improve 
the current rail transportation system in this country. We strongly 
urge this Subcommittee to give a high priority to legislation this 
year.
Conclusion
    Mr. Chairman, thank you for conducting this hearing today. We 
support a strong and viable rail industry that will provide reliable 
service to its customers at fair and reasonable prices. The status quo 
will not result in this type of rail system for the Nation. The kinds 
of reforms suggested in S. 919 must be adopted as Federal policy, and 
the public benefits that result from competition in the marketplace 
must be applied to the rail transportation system by removing the rail 
industry's exemptions from the Nation's antitrust laws.
    I can assure the Subcommittee that the 39 million consumer-owners 
of the NRECA electric cooperative family look forward to working with 
you, and with all of the other stakeholders involved, in resolving 
these critical rail transportation issues in an objective and 
constructive manner.

    Senator Lott. Thank you, Congressman English.
    Mr. McIntosh?

        STATEMENT OF JOHN L. McINTOSH, PRESIDENT, CHLOR-
   ALKALI PRODUCTS, OLIN CORPORATION, ON BEHALF OF THE OLIN 
      CORPORATION AND THE AMERICAN CHEMISTRY COUNCIL (ACC)

    Mr. McIntosh. Chairman Lott, Senator, I'm pleased to be 
here today on behalf of Olin Corporation and the American 
Chemistry Council.
    With 5,800 U.S. employees, Olin is a leading producer of 
copper alloys, ammunition, chlorine, and caustic soda. We ship 
two and a half million tons of products by rail each year. ACC 
represents the Nation's leading chemical manufacturers.
    Today, I want to deliver three essential messages about 
American competitiveness:
    First, my company, my industry, other rail shippers, and 
the millions of customers we serve, need reliable rail service. 
Sadly, when it comes to reliability, that train has stalled.
    Second, the captive rail customer--that is, the customer 
with service from a single monopoly railroad, is completely at 
the mercy of the carrier. Free and fair market forces no longer 
ride the American rail.
    And, third, the Federal oversight process centered on the 
STB is not working, and, in fact, has harmed rail competition. 
The system is broken, and Congress needs to fix it by 
producing--by providing a clear signal to the STB, passing S. 
919 and switching the rail industry back onto the antitrust 
main line.
    Let me make this clear. What we are talking about today is 
our survival and the industry's ability to provide and create 
jobs.
    The chemical industry's customers require a constant flow 
of high quality products produced and delivered on time at 
competitive prices. Railroad reliability and service are 
critical to our economic success; however, that is not what the 
Nation's railroads are providing, especially to captive 
shippers. And we see no light at the end of the tunnel.
    For a captive customer, the efficient movement of traffic--
of its traffic, in some cases, is--in some cases, even the very 
survival of its business depends upon the rates and services 
provided by that single railroad. Yet by virtue of being 
captive, we have no way to negotiate, beg, or buy reliability.
    Railroads are experiencing capacity constraints, and tell 
us that demand exceeds their ability to provide reliable 
service in key chemical traffic corridors. Yet the U.S. rail 
industry is financially healthy. In the 1970s, the rail 
industry was on its last legs when Congress wisely passed the 
Staggers Rail Act. That legislation led to the success of the 
U.S. rail industry today. Staggers was intended to protect 
captive shippers and promote competition. Congress wanted to 
avoid the captive-shipper penalty that exists today, but the 
STB has not lived up to that responsibility. Its regulatory 
interpretations have skewed the Act's intent to bring free 
market forces to bear on shippers and railroads. And Staggers 
has left no forum, other than the STB, to address these issues.
    Most ACC member facilities have no alternatives to using 
rail--no alternative to using rail transportation. Sixty-three 
percent of those facilities have access to only one rail 
carrier, making them captive.
    How did this come about? Rail competition has changed 
dramatically since 1977, when there were 63 Class I railroads 
in America. Today, there are just seven, and 90 percent of the 
Nation's rail traffic is handled by only five. In conjunction 
with other ICC/STB policies that curtail competition between 
railroads, mergers have generally harmed the captive shipper. 
As the inevitable result, entire states, regions, and 
industries are now captive to a single railroad. You can 
imagine the difficulty in negotiating a rail contract or a rail 
rate for a captive facility.
    This explains why captive rail rates have reached or 
exceeded twice the amount of competitive rates. Captive 
shippers also pay higher fuel surcharges based on those freight 
rates. For captive chemical shippers, the iron horse has, in 
fact, become the greedy cash cow. Regrettably, the freight rail 
marketplace doesn't behave like a free market. A long line of 
STB policy determinations is harming the competitiveness of the 
U.S. chemical industry. Staggers did not mandate 
anticompetitive policies, and the agency has acknowledged that 
it has the authority to reverse its interpretations, but almost 
invariably declines to exercise its discretion in favor of pro-
competition solutions.
    It's time to tear down the barriers to competition, and ACC 
supports Senate 919, the Rail Competition Act of 2005, a 
bipartisan bill whose provisions would promote competition and 
lead to reliable service. I urge you to carefully consider S. 
919. And ACC recognizes and thanks Senators Burns, Dorgan, and 
Rockefeller for their leadership.
    Congress should also consider putting the rail industry 
fully under the Nation's antitrust laws. In our free-market 
economy, monopolies and the poor service and high prices they 
foster belong in a museum. Unfortunately, rail impedes our 
Nation's global competitiveness. We are interested in the 
financial and operational health of Americans' railroads, but 
captive customers are--might be forced to close U.S. plants or 
forego expansion. In the future, where will new chemical jobs 
be created?
    For Olin and our ACC colleagues, railroad monopolies are 
driving a golden spike through the heart of American 
competitiveness. That's why Congress must intervene.
    Thank you for the----
    Senator Lott. Thank you----
    Mr. McIntosh.--opportunity----
    Senator Lott.--Mr. McIntosh.
    [The prepared statement of Mr. McIntosh follows:]

    Prepared Statement of John L. McIntosh, President, Chlor-Alkali 
 Products, Olin Corporation; on Behalf of the Olin Corporation and the 
                    American Chemistry Council (ACC)
    Chairman Lott, Senators, I'm pleased to be here today on behalf of 
the Olin Corporation and the American Chemistry Council (ACC). Olin, 
headquartered in Clayton, Missouri, is one of the world's best basic 
materials companies and a leading North American producer of copper 
alloys, ammunition and chlorine and caustic soda. In 2005, Olin posted 
sales of approximately $2.4 billion. The company has approximately 
5,800 employees working in the United States. Olin consists of three 
businesses:

        Olin Brass--the world's leading developer of high performance 
        copper alloys and the U.S. market share leader in copper and 
        copper alloy strip.

        Winchester--North America's leading small caliber ammunition 
        producer with powerful global brand name recognition.

        Chlor-Alkali Products--the largest producer of chlorine and 
        caustic soda in the eastern United States and the fourth 
        largest nationwide.

    I am here today on behalf of Olin's Chlor-Alkali Products business, 
which is the leading producer of chlorine and caustic soda in the 
eastern U.S. and one of the largest in North America. Besides chlorine 
and caustic soda, Olin produces Reductone' and 
Hydrolin' sodium hydrosulfite and hydrochloric acid.
    As one of the Nation's leading producers of chlorine, the company 
produces an essential chemical that has played a key role in 
dramatically reducing infant mortality rates and eliminating waterborne 
diseases around the world. Our chlorine is also used in the manufacture 
of swimming pool and spa sanitizers. The biggest end use for chlorine, 
however, is as an ingredient in polyvinyl chloride (PVC) plastics, 
including everything from vinyl siding and PVC blood bags to vinyl 
plumbing pipes.
    Another work-horse industrial chemical, our caustic soda is used in 
household and institutional cleaning products, the pulp and paper 
industry, and the fabric industry. An agent that aids the dyeing of 
denim and other fabrics, Olin's Reductone' ``helps put the 
blue in blue jeans.'' Our Hydrolin' sodium hydrosulfite is 
principally used in treating kaolin clays, which provide filler 
material for white paper and other paper products. Our hydrochloric 
acid is used in the process of making aspartame which sweetens products 
from diet Coke to snack foods and other consumer products.
    Chlor-Alkali Products is headquartered in Cleveland, Tennessee and 
includes manufacturing sites in New York, Georgia, Tennessee and 
Alabama. Each of these plants offers a low cost base, highly skilled 
workers and convenient delivery.
    Olin and ACC appreciate the Committee's invitation to participate 
in this hearing on economics, service, and capacity in the freight 
railroad industry. ACC represents the companies that make the products 
that make modern life possible, while working to protect the 
environment, public health, and the security of our Nation. The member 
companies of ACC depend on the U.S. rail industry for the safe, secure 
and efficient transportation of approximately 170 million tons of 
chemical products to customers each year, accounting for more than $5 
billion in annual railroad industry revenues.
    For a substantial proportion of the shipments from chemical 
manufacturing facilities operated by ACC members, there is no 
alternative to using the rail mode. For 63 percent of those facilities, 
the shipper has access to only one rail carrier. Those shipments are 
subject to what the Staggers Act refers to as ``market dominance,'' 
which is often described as being ``captive'' to a single railroad. 
(Additional monopoly conditions exist when even a non-captive shipper 
wishes to supply a customer location that is captive to a single 
railroad.) For a captive shipper, regardless of its size or location, 
the efficient movement of its traffic--in some cases even the very 
survival of its businesses--depends on the rates and service provided 
by that single railroad.
    The chemical industry's customers require a constant flow of high-
quality products--produced on time--delivered on time--where they want 
them--at competitive prices. Railroad reliability and service are 
critical to our economic success. However, that is not what the 
Nation's railroads are providing, especially to captive shippers.
    Railroads are experiencing capacity constraints. They're telling us 
that demand exceeds their ability to provide reliable service in key 
chemical traffic corridors. We believe them because chemical shippers 
have seen increases in transit time for our shipments. Slower train 
speeds and increased dwell times for cars in terminals have led 
companies to add cars to their fleets at considerable cost to hedge 
against shipment delays.
    It's remarkable that this situation exists in the context of a 
financially healthy U.S. rail industry. In the 1970s, the rail industry 
was on its last legs. Regulation had hobbled its ability to respond to 
competitive forces and cover costs. Railroads lacked the capital to 
properly maintain their tracks. Eight large railroads went bankrupt 
during that decade. Many more faced extinction. Policymakers gave 
serious thought to nationalizing the rail freight system.
    But cooler heads prevailed. Instead of nationalization, which would 
have involved a continuing cost of untold billions, Congress wisely 
chose deregulation. It passed the Staggers Rail Act of 1980. The 
legislation, in good measure, led to the success of the U.S. rail 
industry today.
    Yet the competitive landscape in the rail industry has changed 
dramatically since 1980. As a result, shippers have paid a very high 
price for U.S. rail industry gains. That's because competition--the 
hoped-for result sparked by Staggers--has largely fizzled out. Under 
the Interstate Commerce Commission and later its successor, the Surface 
Transportation Board (STB), the regulatory agency that has authority to 
address these issues has not done the job.
    One reason is that consolidation in the rail industry has reduced 
the number of Class I railroads (those meeting the STB definition of 
having operating income exceeding $277.7 million). To be competitive, 
railroads require competitors. In 1977, there were 63 Class I railroads 
in America. In 1980, there were about 40. Today, because of massive 
consolidation, there are just seven Class I railroads serving all of 
North America. And 90 percent of the Nation's rail traffic is handled 
by only five major railroads.
    Although STB has not been presented with another transaction 
involving two or more Class I carriers since revising its merger 
guidelines in 2001, railroad mergers inevitably reduce shipper options, 
regardless of the conditions that are applied by the agency. 
Bottlenecks are extended when lines serving captive shippers are 
acquired by connecting carriers. Efficient service from independent 
``bridge'' carriers disappears. Competition for service to new 
industrial sites is reduced or eliminated. In conjunction with other 
ICC-STB policies that curtail competition between railroads, mergers 
have generally harmed captive shippers.
    As the inevitable result, whole states, regions, and industries are 
now captive to a single railroad.
    You can imagine the difficulty we face when it comes time to 
negotiate a rail contract or a rail rate for a captive facility. 
Lacking the negotiation flexibility and bargaining power that 
competition provides, freight rates from the monopolistic railroads 
continue to rise unchecked.
    That explains why captive rail rates may reach or exceed twice the 
amount of a competitive rate. In 2003, Escalation Consultants, Inc., 
which provides consulting services to the energy and rail shipper 
industries, studied captive versus non-captive rail rates for several 
commodity groups. For chemical companies the average non-captive rate 
for each railroad was about $16 to $20 per ton. In comparison, captive 
chemical rail shipments averaged $33 to $48 per ton--more than twice as 
much.
    Heightening ACC's concern is that there is no forum other than STB 
in which to address issues involving railroads and captive shippers. In 
Staggers, Congress left those issues in the jurisdiction of the 
regulatory agency and did not de-regulate rail service in non-
competitive situations. But STB has not lived up to that 
responsibility.
    Captive shippers are at a disadvantage in a variety of ways. For 
example, when basic freight rates are established, fuel surcharges are 
often calculated and applied as a percentage of those rates. As a 
result, captive shippers pay more in fuel surcharges because there was 
no competition when the basic freight rates were established. On May 
11, STB held a public hearing on railroad fuel surcharges. ACC's 
analyst found that those surcharges greatly exceed actual fuel costs 
due to flaws in the methodologies used in calculating the surcharges. 
Railroad fuel surcharge practices are unreasonable because of five 
crucial factors:

   Fuel surcharges often are not based on actual fuel 
        consumption: Surcharges should be related to the amount of fuel 
        consumed to provide a specific service to a shipper. Instead, 
        they are based on other, often unrelated factors.

   Fuel surcharges are inappropriately linked to freight rates: 
        Rates are based on a wide range of competitive factors, and 
        their differences are not relevant to the amount of fuel 
        consumed for a particular trip.

   Higher fuel costs are often covered by other means: Railroad 
        fuel costs are captured through several mechanisms, such as the 
        Rail Cost Adjustment Factor. Adding a fuel surcharge often 
        means fuels costs are recovered more than once by the railroad. 
        Such double jeopardy is unfair.

   Some shippers are overcharged because others are not subject 
        to fuel surcharges: Due to certain contracts or other 
        circumstances, some railroads can not impose a surcharge on 
        some customers. But it is unfair and unreasonable to ``make up 
        the difference'' by unduly raising the charge for customers 
        that do pay surcharges.

   The reasonability of fuel surcharges can only be determined 
        if there is complete data transparency: Railroads should report 
        their actual fuels costs in a consistent, comprehensive and 
        uniform manner so that the STB, shippers and Congress can 
        accurately and readily determine the revenue obtained from 
        surcharges.

    The flaws in rail fuel surcharge practices are significant. 
According to the analysis prepared at the request of ACC by the 
economic and management consulting firm of Snavely King Majoros 
O'Connor and Lee, Inc., the manner in which fuel surcharges have been 
calculated and applied by the railroads to all customer traffic has 
resulted in an ``over recovery in the range of $1 billion for 2005. 
This is the amount by which Class I fuel surcharge revenues collected 
by U.S. railroads exceed the increased fuel costs incurred by the 
railroads.''
    While we believe the issue of railroad fuel surcharges requires 
prompt action, STB has set no date for a decision.
    The irony is that Staggers was intended to protect captive shippers 
and promote competition. Congress wisely wanted to avoid the captive 
shipper conditions that exist today. That Act directed ICC (now STB) to 
``maintain reasonable rates where there is an absence of effective 
competition.'' Again, the STB has not lived up to its responsibility, 
and its regulatory interpretations have skewed the Act's intent to 
bring free market forces to bear on shippers and railroads.
    Regrettably, the freight rail marketplace of today doesn't behave 
like a marketplace at all. Instead, it's dominated by five powerful 
monopolies. It's time to tear down the barriers to competition. 
Accordingly, ACC supports legislation that would reform railroad 
regulation: S. 919, the Railroad Competition Act of 2005, is a 
bipartisan bill whose provisions would promote competition leading to 
better service at competitive prices.

   S. 919 would eliminate ``bottlenecks'' that allow monopoly 
        carriers to take advantage of their pricing power to prevent 
        competition over a short, competitive portion of a route.

   S. 919 would overturn STB's anti-competitive ``Midtec'' 
        decision. Staggers allows captive shippers with facilities 
        located in terminal areas to seek STB's approval for 
        competitive access to another carrier that also serves that 
        same terminal area. But ICC's regulatory action in Midtec has 
        effectively prevented shippers from even requesting, let alone 
        obtaining, such relief.

   S. 919 would eliminate so-called ``paper barriers'' to 
        competition. These are contractual agreements that require a 
        short-line railroad to deliver all or most of its traffic to 
        the major carrier that originally owned the short-line 
        facilities. Such agreements prevent shippers from obtaining 
        competitive service from other Class I carriers that connect to 
        the same short-line.

    I urge you to carefully consider these and the other provisions of 
S. 919.
    We also believe Congress should consider putting the rail industry 
fully under the Nation's antitrust laws. The railroads assert that such 
legislation is unnecessary, given the ``extensive economic regulation'' 
of their industry by STB. But the same railroads claim that S. 919 
would be ``re-regulation.'' They can't have it both ways.
    In our free market economy, monopolies--and the poor service and 
high prices they foster--belong in the museums of past history. Major 
rail customers like Olin see no reason why the rail freight industry 
can't thrive in a competitive American marketplace. The shelter from 
competition the freight rail industry now enjoys is unfair to rail 
customers and to consumers who ultimately pay the bills. It's time for 
Congress to end unfair and uncompetitive market practices. It's time to 
return to the original intent of the Staggers Act.
    A long line of STB policy determinations is harming the 
competitiveness of the U.S. chemical industry and other key sectors of 
the American economy. Unless reversed, those policies will ultimately 
impair the ability of the U.S rail industry to serve all of its 
customers.
    Congress wrote Staggers to clearly and carefully de-regulate those 
rail rate and service matters that take place in circumstances where 
shippers really do have competitive transportation alternatives. 
Because the marketplace works for such rail customers, Congress 
appropriately removed unnecessary regulatory involvement. ACC believes 
that Staggers has been successful in that regard.
    But Congress also wisely recognized that railroads have what the 
law calls ``market dominance'' over certain shippers. In fact, were it 
not for those situations, there would have been no need for a Federal 
regulatory agency with exclusive jurisdiction over rail industry rates 
and commercial practices, the construction and abandonment of rail 
lines, railroad mergers, etc. Staggers was clearly meant to de-regulate 
only those aspects of shipper-carrier commercial relationships that 
take place in competitive markets. ICC was retained in 1980--and STB 
exists today--to deal with the non-competitive situations.
    The anti-competitive policies implemented by ICC and STB are not 
included in statutory language. Staggers did not mandate such policies, 
and the agency has acknowledged that it has the statutory authority to 
reverse its interpretations. But STB almost invariably declines to 
exercise its discretion in favor of pro-competitive solutions to 
railroad issues, unless so directed by Congress.
    We are at a critical point. Unless Congress acts to reverse STB's 
policies, they will ultimately weaken the U.S rail industry, to the 
detriment of rail-dependent domestic industries and the Nation as a 
whole.
    As businesses dependent on the railroad industry, we are vitally 
interested in the financial health of America's railroads. We simply 
cannot operate successfully in this country without a financially 
viable railroad industry and a secure railroad infrastructure. Indeed, 
I believe that the ability of American manufacturers and producers to 
compete in today's global market is highly dependent on the rail 
freight industry. Today, unfortunately, the rail freight industry 
impedes--rather than enables--our Nation's global competitiveness. 
American manufacturers and producers find it more and more difficult to 
remain competitive against manufacturers and producers outside the 
United States.
    After many years of discussion with representatives of the Class I 
railroads, ACC is convinced that the carriers will not budge from the 
status quo in which they have complete market dominance over their 
captive customers--unless Congress acts. We believe the current 
business model being followed by the railroads will inevitably lead to 
their financial brink, costing not only railroad shareholders, but also 
taxpayers and rail-dependent American enterprise. Even the railroads 
agree that the gap between their annual income needs and their annual 
income is expanding, not shrinking. This is despite the fact that they 
have been allowed to consolidate to achieve cost synergies. These 
synergies should have allowed them to operate more efficiently and in a 
fashion that permits them to recover their cost of capital. They've 
also had the opportunity to transfer less profitable track to short 
line railroads and they have been able to increase the burden on 
captive rail customers. The result is simply that those customers with 
no alternative pay the most.
    Pursuing a strategy of continually loading more costs on captive 
rail customers is not a business model that will result in healthy 
American railroads in the long run. Captive rail customers will try to 
escape and the universe of captive rail customers is likely to be 
reduced over time. Some captive customers will construct rail line 
``build-outs.'' Some captive customers will shift their manufacturing 
activities to facilities that have transportation competition. Some 
captives will shift their manufacturing to foreign countries, exporting 
American jobs overseas. Some companies might be forced to close a U.S. 
plant or to forego an expansion without even having an offshore 
alternative. Under this business model, the rail industry will be 
required to load up even more costs on the remaining captives, thus 
accelerating the cycle.
    When considering railroad service, it is important to recognize the 
``common carrier obligation,'' under which railroads are required to 
transport commodities for their customers. The Interstate Commerce 
Clause of the Constitution grants power to the Congress to write the 
laws that govern our Nation's commerce. Congress recognized the common 
carrier obligation as the framework on which the entire national 
railroad transportation system was founded [49 U.S. Code, Subsection 
11101(a)]. And it remains crucial today. Railroads are chartered to 
operate in the public interest because the public depends on safe and 
reliable service in the delivery of a wide range of products on which 
we all depend. The common carrier obligation underlines the role of 
railroads as a service industry that supports so many critical sectors 
of the U.S. economy.
    Let me be very clear: we do not seek a return to the ``bad old 
days'' of the 1970s, when several of the major railroads were in 
bankruptcy and the industry lacked the capital necessary to maintain 
their systems. Unfortunately, more than a quarter of a century after 
passage of the Staggers Act, the rail industry apparently continues to 
fall short of the revenue needed to provide a first class rail system 
for the Nation.
    In fact, the railroads are proposing a 25 percent investment tax 
credit and first year expensing for infrastructure investments. While 
some level of investment tax credit for infrastructure may be 
appropriate, it must be part of a comprehensive solution to rail 
reliability problems.
    There must be a better way for the railroad industry to achieve 
long-term financial viability while providing efficient, reliable 
service at prices that will allow American business to compete 
successfully in the global market. We believe that balanced, fair 
legislation is needed to bring about a positive relationship between 
the railroads and the captive customers.
    ACC would not ask Congress to resolve issues that could be resolved 
by railroads and their customers working together to benefit their own 
industries. But railroad monopoly, supported by STB decisions, is the 
basic impediment. This dilemma can only be resolved with the 
intervention of Congress.
    Thank you for allowing the American Chemistry Council to present 
its views, and I would be glad to respond to any questions.

    Senator Lott. Mr. Ficker?

            STATEMENT OF JOHN B. FICKER, PRESIDENT, 
         THE NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE

    Mr. Ficker. Thank you, Mr. Chairman. It's a pleasure to be 
here this morning and to talk about this important issue that's 
not only essential to our membership, but also essential to the 
economy as a whole.
    The National Industrial Transportation League is America's 
oldest and largest association of companies engaged in freight 
transportation. Our 600-plus members are some of the largest 
companies in the United States, as well as some of the smallest 
enterprises, and represent over $50 billion in transportation 
spending annually.
    The League has actively participated with GAO during their 
analysis, and we've met with their staff and provided 
information to them in the study. And, actually, several of the 
members of the League actually participated in the panel of 
experts that the GAO convened earlier this year. We looked at 
the GAO testimony this morning, before the hearing, and found 
it to be right on mark, and we commend their efforts to date.
    First, the GAO noted that, while the STB has broad 
legislative authority to investigate industry practices, there 
has been little assessment of competition nationally, including 
areas of inadequate competition. The League agrees that the 
study of competition and areas of inadequate competition would 
be very useful to you, as policymakers, and we urge the 
Committee to consider such a study.
    Second, the GAO, as clearly indicated, said that the relief 
process--the current rate relief process is expensive, time-
consuming, complex, and largely inaccessible to most of our 
members. I have often said that if I was still working in the 
shipping industry, which I spent 20 years doing, if I had ever 
decided to bring a rate case before the STB, and I brought that 
to the management of my company, I ought to be fired. It 
doesn't work. It's not accessible. And it's not effective. The 
League strongly agrees with this.
    The League presented to the STB, along with 26 other 
industry associations, numerous suggestions for improving the 
agency's small-shipment rate complaint process. To date, 
however, they have not acted on that, although Chairman 
Buttrey, this morning, indicated there should be something 
forthcoming later this year. And, to that, we are excited.
    In addition, the League concurs that the GAO--with the GAO 
assessment that there should be alternative approaches 
considered to mediating disputes, and including and especially 
emphasize the importance of an expedited, mandatory arbitration 
process for rate relief and rail--and service disputes. The 
League believes such a process would offer great potential for 
resolving disputes between rail users and carriers, both to 
expediting the dispute process and encouraging settlements. I 
might point out also that the National Feed and Grain--Grain 
and Feed Association has such a process, and it has worked 
quite effectively for the last 7 or 8 years.
    As we all know, the rail industry is laboring under 
significant capacity constraints for the first time in over 50 
years. It's caused congestions across the system. And if you 
look at the AAR figures, the average train speed has decreased 
by--from 23 miles an hour in 1993 to 20 miles an hour in 2003. 
And meaningful service provisions in a contract are virtually 
impossible to obtain today.
    Some service-sensitive rail users, such as UPS, who so 
stated in a recent GAO panel discussion, has shifted their 
traffic back to truck, in order to meet the needs of their 
customers, further exacerbating the congestion we already face 
on our highways. And this capacity constraint has also 
substantially increased the pricing leverage of the carriers, 
which is evident in substantial rate increases across all 
commodities in the demarketing of less-than-profitable traffic. 
Most rail users have faced, or are facing, double-digit rate 
increases along with reduced and deteriorating service. Rate 
negotiations, as others have mentioned, have become a ``take it 
or leave it'' proposition.
    Just on Monday of this week, the Council of Supply Chain 
Management Professionals released its 17th annual State of 
Logistics Report. That report stated that, between 2004 and 
2005, transportation costs jumped by 14.1 percent, a staggering 
figure and a record, according to the Council. Rail users 
understand the dynamics of a supply and-demand market 
environment. They live in it every day. The concern is that 
they are paying more and getting less.
    The inability of the rail industry to meet the demands 
caused by this is even greater concern for the future. Any 
projection put out by any organization, whether it's a 
Government agency, such as DOT, or the association--American 
Association of State Highway and Transportation Professionals, 
known as AASHTO, indicates that growth between now and 2025 
could be as much as 60 to 70 percent of freight volumes in that 
period of time. And according to the AASHTO Bottom Line Rail 
Report, which is often quoted by my associate and friend over 
here, Mr. Hamberger, rail tonnage is expected to grow by 44 
percent, which is, unfortunately, significantly less than what 
the growth of the economy and freight movement will be. That 
needs to be addressed.
    In order to meet current and future demand, the rail 
industry must expand its existing capacity. The critical need 
for infrastructure is clear, yet it is not the only way to 
improve capacity. The application of technology, such as 
positive train control, is estimated to add as much as 10 to 15 
percent to the current structure. Processes for working with 
shippers and carriers together will also improve that.
    With the financial health of the rail industry no longer an 
immediate issue, and with enhanced leverage, the railroads 
have--in a capacity-constrained market--it is a time for 
deteriorating service--emphasis must shift toward creating 
value for the shipping public. The creation of value will occur 
only if railroads and rail users, spurred by incentives in the 
marketplace, work together to identify sources of productivity 
gains, cost reductions, in order to provide a consistent level 
of service and fully utilize existing capacity.
    The League believes that the solutions to these problems 
must come from the private sector and that the League has, over 
the past years, initiated several efforts. The chairman 
indicated, earlier, his concern over fuel surcharges. Over the 
past 9 months, the National Grain and Feed Association, along 
with the National Industrial Transportation League, has met 
privately with each of the Class I carriers in North America to 
present a fuel surcharge study, which I would be happy to make 
available for the record. And in that effort, we have reached--
we are pleased to say that the BNSF and the Canadian National 
and Canadian Pacific have responded positively, while the 
eastern carriers have refused.
    Additionally, the League, in 2005, chose to remain neutral 
on Senate bill 919, and, instead, has entered into discussions 
with the AAR to identify ways that rail users and carriers can 
work together to find value through the productivity gains and 
cost reductions that could address the concerns. The League and 
the AAR have formed a number of tasks for us to examine and 
address issues concerned with local rail service, capacity, 
infrastructure, and office administration.
    Senator Lott. Mr. Ficker, I apologize, but we are getting 
under a real time constraint here. We want to----
    Mr. Ficker. I--let me----
    Senator Lott.--hear from Mr. Hamberger.
    Mr. Ficker. If I can make one----
    Senator Lott. He deserves a chance to respond to the four-
to-one odds here.
    Mr. Ficker. If I can make one more comment.
    Mr. Hamberger. Does that mean I get 20 minutes, Mr. 
Chairman?
    Senator Lott. Yes.
    [Laughter.]
    Mr. Ficker. If I can make one final comment, Mr. Chairman, 
I appreciate it.
    We want to work--continue to work with the AAR and the 
railroads to resolve these problems. We've often heard from you 
and Congress, ``Bring us a solution. Work together. Come--bring 
the parties together.'' We intend to do that. And we'd urge the 
Committee to look at the work that we're doing with the AAR and 
help us and guide us in that direction so that those efforts 
can provide the kind of value and direction that this country 
needs.
    Thank you.
    [The prepared statement of Mr. Ficker follows:]

           Prepared Statement of John B. Ficker, President, 
             The National Industrial Transportation League
    The National Industrial Transportation League is pleased to have 
been invited to present testimony on economic, service, and capacity 
issues in the freight railroad industry. The League is the Nation's 
oldest and largest association of companies interested in 
transportation. Its 600-plus members range from some of the largest 
companies in the Nation to much smaller enterprises. Many members of 
the League ship via rail, and are vitally interested in the capacity, 
service, and competitiveness of the Nation's rail industry. But League 
members also substantially ship via other modes, both domestically and 
internationally, and the problems of capacity must also be looked at in 
this broader context, as many modes are facing capacity constraints.
    The League actively participated in the General Accountability 
Office (GAO) study which is in part the subject of this hearing. League 
staff and the incoming League Chairman met for several hours with GAO 
staff to discuss rail issues, and provided information developed by the 
League to assist GAO in its study. Much of the League's discussion with 
GAO centered on the problem of the rail industry's capacity 
constraints. Also, the League referred GAO staff to League members for 
additional information. Finally, in March 2006, the League and several 
of its members appeared before a panel organized by the GAO to consider 
the current state of the rail industry and to advise GAO on its study.
    As requested by the Committee, the League has reviewed the draft 
testimony of the GAO, which describes that Office's ongoing work on the 
performance of the rail industry since the Staggers Act. The League 
compliments the GAO on its work to date, and concurs with a number of 
the tentative conclusions set forth in GAO's testimony. The GAO 
testimony discusses two areas that are particularly integral to further 
improvement for rail industry policymakers, both of which deserve 
comment.
    First, GAO notes that, while the STB has broad legislative 
authority to investigate industry practices, there has been little 
assessment of competition nationally, including areas of inadequate 
competition. GAO notes that such an assessment of competition would 
allow decisionmakers to identify areas where competition is lacking and 
to assess the need for and merits of approaches to address it. The 
League agrees that a study of competition and areas of inadequate 
competition would be useful to policymakers, and urges the Committee to 
consider such a study. In that connection, the League notes that, in 
its experience, rail competition, in order to be effective, must be 
present at both the origin and the destination of a rail movement. For 
example, if an agricultural shipper at origin is served by a single 
rail carrier, the fact that the export grain elevator at destination 
might be served by more than one railroad does not create rail-to-rail 
competition under current law, since the shipper at origin cannot 
require its sole-served origin carrier to interchange with a competing 
rail carrier for the movement to destination.
    Second, GAO indicates that the current rate relief process is 
expensive, time-consuming, complex, and largely inaccessible to most 
shippers. The League strongly agrees. The League has presented to the 
STB, along with 26 other industry organizations, numerous suggestions 
for improving the agency's small shipment rate complaint process. To 
date, however, the STB has not acted on these suggestions. In addition, 
the League concurs with GAO that alternative approaches should be 
investigated, including (and especially) the use of expedited, 
mandatory arbitration for rail rate and service disputes. The League 
believes that such an arbitration process has great potential for 
effectively resolving disputes between shippers and carriers, both 
through expediting the dispute process and in encouraging settlements.
    The rail industry is laboring under significant capacity 
constraints for the first time in over 50 years. Since 1980, demand for 
rail transportation has steadily increased while rail capacity has 
declined. We have reached a point where demand has exceeded the 
industry's capacity to haul all of this traffic. This has caused 
congestion over significant parts of the national rail system, 
resulting in a substantial deterioration in service levels. The AAR's 
own figures show that average train speed declined between 1993 and 
2003, from about 23 miles per hour to a little over 20 miles per hour. 
\1\ Monthly service statistics published by the AAR show that average 
train speed for the total U.S. shows a decline from 23 miles per hour 
in 2000 to less than 22 miles per hour in the twelve-month period 
ending in September 2005. Meaningful service provisions in contracts 
are virtually impossible to obtain. Some service-sensitive shippers 
such as UPS, who so stated in the recent GAO panel discussion, have 
shifted their traffic to truck, further exacerbating the congestion and 
wear on the Nation's highways.
---------------------------------------------------------------------------
    \1\ AAR, ``Railroad Ten-Year Trends 1993-2002,'' p. 132; and 
``Railroad Ten Year Trends, 1994-2003,'' p. 132.
---------------------------------------------------------------------------
    These capacity constrains have also substantially enhanced the 
pricing leverage of the rail industry, which is evident in substantial 
rate increases across all commodities and the de-marketing of less 
profitable traffic. As stated by GAO in its testimony, four large Class 
I carriers control almost 90 percent of the industry's revenue. Many 
shippers are facing double digit rate increases along with reduced or 
deteriorating service. Rate negotiations have become a ``take it, or 
leave it'' proposition for many shippers. We believe that the effects 
of these capacity constraints in the rail industry on prices is felt 
across modes. Just 2 days ago, the Council of Supply Chain Management 
Professionals released the 17th annual ``State of Logistics Report.'' 
That report stated that, between 2004 and 2005, transportation costs 
jumped 14.1 percent--a staggering figure, and a ``record high,'' 
according to the Council. \2\
---------------------------------------------------------------------------
    \2\ ``17th Annual State of Logistics Report,'' sponsored by the 
Council of Supply Chain Management Professionals, June 19, 2006, p. 4.
---------------------------------------------------------------------------
    The inability of the rail industry to meet current demand causes 
even greater concern for the future. Any projection of future economic 
growth indicates that the need for transportation will grow 
dramatically in the next 15 years. For example:

   The American Association of State Highway and Transportation 
        Officials [AASHTO Report] projects that, with moderate economic 
        growth, U.S. domestic and international freight tonnage will 
        grow by 67 percent between 2000 and 2020. \3\
---------------------------------------------------------------------------
    \3\ AASHTO Report, p. 50.

   According to the AASHTO Report, rail tonnage is expected to 
        grow by 44 percent, which is significantly less than the 
---------------------------------------------------------------------------
        overall growth in freight tonnage.

   The Port of Los Angeles/Long Beach estimates that 
        containerized imports through that port will grow by 44 percent 
        from 2005 to 2010, by another 34 percent in 2015; and by 
        another 34 percent in 2020--in total more than doubling the 
        traffic through this key facility in just 15 hours. \4\
---------------------------------------------------------------------------
    \4\ See, http://www.polb.com and http://www.portoflosangeles.org

    In order to meet current and future demand, the rail industry must 
expand existing capacity. This will require both the industry and the 
policymakers to shift radically from a mind-set of cost control and 
downsizing, to one of growth and expansion.
    Rail users are vitally dependent upon a financially healthy rail 
system, as there is no way for many of them to efficiently transport 
their goods to market except via rail. Fortunately, the railroad 
industry is thriving financially for the first time since the Staggers 
Act, and well before.
    The financial markets have been ``bullish'' on the rail industry 
for several years. In a recent Morgan Stanley report, \5\ respected 
analyst James Valentine expressed:
---------------------------------------------------------------------------
    \5\ James Valentine and Michael Manelli, Morgan Stanley Equity 
Research, ``All Aboard! Reiterating Bulling Vies Toward Freight 
Railroads,'' Sept. 20, 2005, p. 1 (Valentine Report).

        even greater conviction that the industry will consistently 
        earn its cost of capital over the next few years (a feat not 
        achieved in decades), led by secular upward pricing initiatives 
---------------------------------------------------------------------------
        that should continue into 2006 and beyond.

    This is strong evidence that the financial strength exhibited by 
railroads is not a temporary phenomenon, but a paradigm shift in rail 
transportation markets brought about in large part by capacity 
constraints.
    Such statements also suggest that the STB's measure of revenue 
adequacy significantly overstates the financial returns needed for 
``real-world'' revenue adequacy. For example, despite the financial 
success of the rail industry over the past several years and reflected 
in the previously quoted Wall Street assessment of the industry, the 
STB determined that only one Class I railroad (Norfolk Southern) was 
revenue adequate in 2004, and that is expected to be the case for 2005 
as well. The balance intended in the Staggers Act between allowing 
competition to establish reasonable rates ``to the maximum extent 
possible'' and the policy of fostering a financially healthy rail 
industry, has been upset by the agency's over-reliance on a 
questionable methodology of calculating revenue adequacy.
    Competition is at the heart of our Nation's economic system. It 
creates a sense of urgency that enables companies to thrive. It spurs 
efficiency. It allocates resources in the most efficient manner. 
Competition, therefore, is essential to encourage the most efficient 
use of today's capacity constrained rail infrastructure and to spur 
investment in additional infrastructure. Competition encourages the 
most efficient use of limited capacity by ensuring that goods are moved 
over the most efficient route available. Competition also ensures that 
the capital for capacity expansion flows to the most economically 
beneficial projects for the rail transportation system. Indeed, 
increasing capacity would likely lead to increased competition, as rail 
carriers sought to attract valuable traffic to their system.
    With the financial health of the rail industry no longer an 
immediate issue, and with the enhanced leverage of railroads in a 
capacity-constrained market at a time of deteriorating service levels, 
it is time for a more balanced approach. Direct government regulation 
seldom has been as effective as the marketplace at increasing 
efficiency. Emphasis must shift toward the creation of value to the 
shipping public. The creation of value will occur if railroads and 
shippers, spurred by the incentives of the market place, work together 
to identify sources of productivity gains and cost reductions in order 
to provide a consistent level of service that fully utilizes existing 
capacity to the maximum extent possible and encourages the addition of 
more capacity.
    The League believes that solutions to these problems must come from 
the private sector, and the League has over the past year has initiated 
several efforts at private-sector solutions to various problems.
    One set of discussions concerned rail fuel surcharges. This issue 
has become extremely important to our members, who believe that many of 
the carriers' fuel surcharge programs have significantly over-recovered 
the increased cost of fuel as applied to individual movements. Over the 
past 9 months, the League met, along with the National Grain and Feed 
Association (NGFA), with representatives of each of the major Class I 
carriers, to present the results of a Fuel Surcharge Study which the 
League, NGFA and other groups sponsored, and to discuss areas where 
individual carriers might consider improving their fuel surcharge 
programs. Some carriers, specifically the BNSF, the Canadian National, 
and the Canadian Pacific, responded positively to these discussions 
with changes in their individual fuel surcharge programs. Other 
carriers, especially the Eastern carriers, declined to respond.
    Additionally, in 2005, the League chose to remain neutral on S. 
919, and instead entered into discussions with the AAR to identify ways 
that shippers and carriers can work together to find value through 
productivity gains and cost reductions that could address the issues 
and concerns between them. The League and the AAR have formed a number 
of task forces to examine and address issues connected with local rail 
service, capacity and infrastructure, and office administration. For 
about a year now, these task forces have met several times to identify 
issues and plan improvements. The League continues to pursue these 
discussions diligently, and remains hopeful that they will yield 
positive results. However, the League remains mindful that the status 
quo--a trifecta of deteriorating service, double-digit rate increases, 
and serious questions as to whether there are sufficient means and 
incentives to meet future demand--is unacceptable.
    These are matters of significant importance to rail users and it is 
essential that solutions are found and that resolutions are reached 
between rail users and carriers. We believe that League membership will 
need to see some concrete results flowing from the League's discussions 
with the AAR within a reasonable timeframe. If that does not occur, it 
is likely that the League's membership would insist that the League 
review its current position. We urge the Committee to insure that rail 
carriers and users are moving forward in a serious, focused and 
positive effort in the development of effective mutual solutions. We 
would urge the Committee to provide oversight to this process. We would 
be very pleased to report back to the Committee on the progress of the 
League's discussions with the AAR and its carriers.

    Senator Lott. Thank you very much.
    Mr. Hamberger?

STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT/CEO, ASSOCIATION OF 
                       AMERICAN RAILROADS

    Mr. Hamberger. Thank you, Mr. Chairman. I will try to be 
brief.
    On behalf of the members of the AAR, thank you for the 
opportunity to discuss freight railroad capacity and others 
issues here this morning.
    Over the years, comprehensive, reliable, and cost-effective 
freight rail service has been critical to our Nation's economic 
prosperity. Looking ahead, the United States cannot prosper in 
an increasingly competitive global marketplace if our freight 
railroads are unable to meet our growing transportation needs. 
Railroads must be able to both maintain their extensive 
existing infrastructure and equipment and build the substantial 
new capacity that will be required to transport a substantial 
portion of the predicted 70-percent increase in freight 
traffic.
    Unlike many utilities, which have peak demand capacity 
built into their asset base for ratemaking purposes, railroads 
cannot afford to have spare capacity on hand ``just in case.'' 
Before they invest in new capacity, they must be confident that 
traffic and revenue will remain high enough to support the 
capacity in the long term.
    Profits, therefore, are critical to meeting capacity 
demand, as the Congressional Budget Office has observed. 
According to the CBO, quote, ``As demand increases, the 
railroad's ability to generate profits from which to finance 
new investments will be critical. Profits are key to increasing 
capacity, because they provide both the incentive and the means 
to make new investments,'' end quote.
    Today, I'm pleased to say that after--25 years after the 
Staggers Act, freight railroads are finally beginning to show 
tangible signs of financial stability might be within reach. 
Rail earnings over the past year, while still below the average 
and median for all companies within the United States, are 
significantly higher than they have been in the past. This 
welcome development means that railroads can justify and afford 
the massive investments and capacity enhancements that will be 
required to meet future demand. In fact, this year the industry 
is investing $8.3 billion in infrastructure and investment, up 
from $5.7 billion just 4 years ago.
    Looking ahead, I respectfully suggest that Members of this 
Committee and your colleagues in Congress do have a critical 
role to play:
    First, heed the findings of the CBO and allow railroads to 
make the profit necessary to sustain investment in necessary 
capacity. And as CBO--GAO testified here this morning, all rate 
changes over the last 15 years were below the rate of 
inflation, and, thus, all rates have declined, in real terms. 
Reject any policy that unreasonably restricts future rail 
earnings and capital cost recovery.
    Second, an infrastructure tax incentive would help bridge 
the gap between what the railroads can afford to invest in 
infrastructure from a business standpoint and what might bring 
more benefit to our society. As AASHTO has declared, shipping 
more freight by rail yields public benefits of clean air, 
congestion mitigation, and energy conservation, which the 
public should, therefore, be willing to pay for. This is not a 
subsidy.
    In light of the role that we have played in the development 
of the economy, Mr. Chairman, I was very disappointed in some 
of the testimony I heard here earlier this morning on this 
panel.
    For example, in the chemical industry you will see that, 
over the past 10 years, railroad rates have stayed the same. 
They haven't gone up in 10 years. What has gone up overall for 
chemical companies? A 30-percent increase in the producer price 
index. Everything has gone up 30 percent, led by natural gas 
and chemical feedstocks. And yet, the gentleman to my right has 
the temerity and the gall to say that his companies are moving 
overseas because of rail rates. That's not what his president 
says. Jack Gerard, President of ACC, says Dow Chemical had a 
facility that they were going to build in Texas. That facility 
is now being moved to Oman, in the Middle East. ``Why?'' Jack 
asks. Because of natural gas prices, almost solely because of 
natural gas prices. Jack went on to say, ``The high price of 
natural gas is driving the global chemical industry''--it's a 
global chemical industry--``out of the U.S.'' The high price is 
driving it out of the U.S. I'll accept his apology later.
    Moving on to coal. Let's take a look at electricity rates, 
up 38 percent. GAO says our rates were down 35 percent. We have 
them down to 32 percent since 1981. I'll take 32 or 38 percent. 
Our rates are down. Electricity rates are up. We are a 
retardant on increased electricity rates, not a driver of those 
rates. And notwithstanding what Mr. English says, according to 
the Coalcast Stockpile data from energy ventures analysts, 
dated May 2006, the rail powers stock increase, ``the inventory 
crisis,'' in parenthesis, in quotation marks, is over. And the 
report goes on to say that this is not because of a shutdown in 
the burning. Coal burn recovered in May was 3.7 percent over 
normal, and stock share--not stock prices--coal stockpiles are 
still up.
    Finally, with respect to agriculture, the input for 
agriculture prices paid by farmers, 4 percent decline in 
railroad rates--4 percent decline. The GAO says it was a 9 
percent--nominal 9 percent increase since 1985. We have a 4 
percent decline since--again, in nominal rates--since 1994, 
while every other price paid by them to produce their farm 
outputs has gone up. And I find it very interesting that, just 
last week, dated June 6, 2006, the National Association of 
Wheat Growers recommended--represented by my friend down at the 
other end of the table--put out a white paper addressing the 
crisis in wheat. And you've talked about--it talks about six or 
seven different issues, government programs, wheat diseases, 
the need for new biotechnology. Doesn't mention railroads, 
doesn't mention transportation costs. Talks about the fact that 
bread can last longer on the shelf in supermarkets, and, 
therefore, demand is down. At the end, they announce that a 
wheat summit has been called for the fall for members of all 
parts of the wheat chain to come together to develop ideas and 
policies to address this concern. And I offer our participation 
in that wheat summit. We are part of your chain, Mr. McIntosh. 
We want to be part of your economy. It does us no good when 
chemical plants go to Oman. We don't run railroads in Oman. 
Jack goes on to say that, of the 120 new chemical plants being 
planned around the world, 50 are being built in China. We don't 
run trains in China either, Mr. Chairman.
    And I commend Mr. Ficker and the leadership that he has 
exerted at NIT League, to recognize that working together we 
can address issues of service. Working together. We have tried 
to do that with representatives of EEI. We have done it with 
the short lines. We have done it with the National Grain and 
Feed Association. We are pleased and honored to do it with NIT 
League. And we suggest that is the way to address any service 
issues, working together.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hamberger follows:]

       Prepared Statement of Edward R. Hamberger, President/CEO, 
                   Association of American Railroads
Introduction
    On behalf of the members of the Association of American Railroads 
(AAR), thank you for the opportunity to discuss freight railroad 
economics, service, and capacity. AAR members account for the vast 
majority of freight railroad mileage, employees, and traffic in Canada, 
Mexico, and the United States.
    Comprehensive, reliable, and cost-effective freight railroad 
service is critical to our Nation. Today, freight railroads serve 
nearly every industrial, wholesale, retail, agricultural, and mineral-
based sector of our economy. And in the words of the former World Bank 
Railways Adviser, ``Because of a market-based approach involving 
minimal government intervention, today's U.S. freight railroads add up 
to a network that, comparing the total cost to shippers and taxpayers, 
gives the world's most cost-effective rail freight service.''
    Looking ahead, the United States cannot prosper in an increasingly 
competitive global marketplace if our freight railroads are unable to 
meet our growing transportation needs, and having adequate railroad 
capacity is critical to meeting those needs. Railroads must be able to 
both maintain their extensive existing infrastructure and equipment and 
build the substantial new capacity that will be required to transport 
the significant additional traffic our economy will generate.
    Although I'm sure that most rail customers agree with this 
sentiment, not all of them seem to recognize that if they want added 
rail capacity, they must be willing to pay for it. Unlike utilities, 
which have peak-demand capacity built into their asset base for 
ratemaking purposes, \1\ railroads cannot afford to have spare capacity 
on hand ``just in case.'' Consequently, before they invest in new 
capacity, railroads must be confident that traffic and revenue will 
remain high enough to support the capacity in the long term, and that 
the investment will produce benefits greater than the scores of 
alternative uses of the funds.
---------------------------------------------------------------------------
    \1\ Some utilities, in fact, receive regulatory permission to begin 
recouping the costs of new generation assets years before those assets 
actually come on line.
---------------------------------------------------------------------------
    Profits, therefore, are crucial, as the Congressional Budget Office 
(CBO) recently noted. According to the CBO, ``As demand increases, the 
railroads' ability to generate profits from which to finance new 
investments will be critical. Profits are key to increasing capacity 
because they provide both the incentives and the means to make new 
investments.'' \2\
---------------------------------------------------------------------------
    \2\ Congressional Budget Office, Freight Rail Transportation: Long-
Term Issues (January 2006), p. 11.
---------------------------------------------------------------------------
    Today, some 25 years after the Staggers Act was passed, freight 
railroads are finally beginning to show tangible signs that financial 
sustainability might be within reach. Rail earnings over the past year, 
while still below average within the universe of all industries, have 
been significantly higher than their historical norm. This welcome 
development means that railroads can more easily justify and afford the 
massive investments and capacity enhancements that will be required if 
railroads are to continue to play their proper role in meeting our 
freight transportation needs.
    I respectfully suggest that Members of this Committee, your 
colleagues in Congress, and other policymakers also have critical roles 
to play. Indeed, a primary obligation of policymakers is to take steps 
that assist--and, just as importantly, not take steps that hinder--
railroads in making the investments needed to provide the current and 
future freight transportation capacity our Nation requires.
    Any policy that unreasonably restricts future rail earnings and 
capital cost recovery--and especially a swing in the regulatory or 
legislative environment back to heavy-handed government interference in 
rail operations--would take railroads away from the sustainability they 
need. Such an outcome would be harmful at any time, but it would be 
especially harmful today, given that as a nation we are in dire need of 
more railroad investments and more railroad capacity, not less.
Capacity is a Challenge Everywhere in Transportation Today
    ``Every aspect of the supply chain is stretched. It's not a 
question of whether [a congestion crisis] is going to happen. It's a 
question of when,'' notes a West Coast port terminal operator.'' \3\ 
``In 23 years, I have never seen a situation where the supply chain is 
at capacity. It's busting at the seams,'' an executive with a major 
chemicals firm notes. \4\ ``Our highways, waterways, railroads and 
aviation networks are simply not keeping up with ordinary demands,'' 
says the head of UPS. \5\
---------------------------------------------------------------------------
    \3\ Doug Tilden, CEO, Marine Terminals, quoted in The Financial 
Times, March 14, 2006.
    \4\ Randy Schaeffer, Manager of Rail Fleet Procurement, Air 
Products and Chemicals, quoted in Traffic World, May 16, 2005.
    \5\ Michael L. Eskew, Chairman and CEO, UPS, in a speech to the 
World Affairs Council of Philadelphia, April 6, 2006.
---------------------------------------------------------------------------
    To be sure, freight is still being delivered, and there is a 
tremendous amount of strength and flexibility in our Nation's 
transportation systems. But as these statements make clear, all freight 
modes in the United States are facing capacity challenges today.
    For U.S. freight railroads, year-over-year quarterly carload 
traffic has risen in nine of the past ten full quarters, and intermodal 
traffic has increased in each of the past 16 full quarters, year-over-
year. As a result, U.S. railroads today are hauling more freight than 
ever before. These traffic increases have resulted in capacity 
constraints and service issues at certain junctions and corridors 
within the rail network. In fact, excess capacity has disappeared from 
many critical segments of the national rail system.


    The reality that rail assets are being used more intensively is 
reflected in rail traffic density figures. From 1990 to 2005, traffic 
density for Class I railroads--defined as ton-miles per route-mile 
owned--more than doubled. (Other measures of traffic density, such as 
car-miles per mile of track, have also shown substantial increases.) Of 
course, different rail corridors differ in their traffic density and 
their change in density over time, and individual railroads differ in 
the degree to which their capacity is constrained overall. Still, there 
is no question that there is significantly less room to spare on the 
U.S. rail network today than there was even a couple of years ago.


    Railroads work closely with their customers on a regular basis to 
determine expected traffic levels well in advance in order to help 
ensure that the railroads have appropriate assets in place. Sometimes, 
though--as occurred in 2005--actual demand for rail service exceeds 
expectations.
    When this has happened, some shippers and others have 
inappropriately blamed railroads for not having enough infrastructure, 
workers, or equipment in place to handle the surge in traffic. But to 
contend that railroads can afford to have significant amounts of spare 
capacity on hand ``just in case''--or that shippers would be willing to 
pay for it, or capital providers willing to finance it--is completely 
unrealistic. Like other companies, railroads try to build and staff for 
the business at hand or expected to soon be at hand. ``Build it and 
they will come'' has rarely been a winning strategy for freight 
railroads.
    Over the past couple of decades, Class I railroads have shed tens 
of thousands of miles of marginal trackage. They had no choice, because 
they could not afford to keep it, and it freed resources for use on 
higher priority core routes. Most of the miles that were shed were 
transferred to short-line operators, and most of these remain part of 
our rail network. Even if railroads could have afforded to retain this 
mileage--and again, they could not--most of it was in locations that 
would not be useful in ameliorating today's capacity constraints.
    In part, this is because long-lived rail infrastructure installed 
many decades ago was often designed for types and quantities of 
traffic, and origin and destination locations, that are dramatically 
different than those that exist today. For example, only within the 
last two decades has Powder River Basin coal taken on the enormous 
importance it currently enjoys. Similarly, the explosive growth of 
intermodal traffic is mainly a phenomenon of the past 20 years.
    When business is unexpectedly strong, railroads are unable to 
expand capacity as quickly as they might like. Locomotives, for 
example, can take a year or more to be delivered following their order; 
new entry-level employees take 6 months or more to become hired, 
trained, and qualified; and it can take a year or more to plan and 
build, say, a new siding. \6\ And, of course, before investments in 
these types of capacity enhancements are made, railroads must be 
confident that traffic and revenue levels will remain sufficiently high 
to justify the enhancements for the long term. Again, in this regard 
railroads are no different than the vast majority of their customers.
---------------------------------------------------------------------------
    \6\ This may seem like a long period of time, but it compares 
favorably with the decade (or more) it can take to build a typical 
stretch of highway.
---------------------------------------------------------------------------
Freight Transportation Demand Will Increase Sharply in the Years Ahead
    No matter the mode, capacity constraints exert a substantial 
economic toll. As Secretary of Transportation Norman Mineta has noted, 
``Congestion and inefficiency in transportation are, in effect, hidden 
taxes that burden every business and every individual, and we must find 
ways to lighten that load.'' That ``load'' could become much worse over 
the next 15 years if demand for freight transportation grows as quickly 
as expected.
    The U.S. Department of Transportation (DOT) has projected that 
overall demand for freight rail service (measured in tons) will 
increase 55 percent (1.3 billion tons) by 2020 from 1998 levels, equal 
to 2.0 percent per year. The DOT projects a 69 percent increase (10.6 
billion tons) in total freight transportation demand. \7\
---------------------------------------------------------------------------
    \7\ U.S. Department of Transportation, Freight Analysis Framework, 
October 2002.


    In a 2005 forecast, economic consultants Global Insight predicted 
that rail carload and intermodal tonnage will increase by 29 percent 
(650 million tons) from 2004 to 2016, or 2.1 percent per year. Global 
Insight expects total freight transportation demand to rise 31 percent 
by 2016. \8\
---------------------------------------------------------------------------
    \8\ U.S. Freight Transportation Forecast to 2016, produced for the 
American Trucking Associations.
---------------------------------------------------------------------------
    If Class I ton-mile growth from 2005 through 2020 does nothing more 
than match the rate of growth from 1990 through 2005, rail ton-miles in 
2020 will total 2.35 trillion, up 38 percent (or 2.2 percent per year, 
on average) from the 1.70 trillion in 2005.
    These projections for increases in freight transportation demand 
should give all of us pause. At full or near-full capacity, transport 
systems become more fragile. With inadequate redundancy, there are 
fewer alternative routes and facilities, breakdowns and back-ups 
proliferate faster and further, and recovery from disruptions takes 
longer. Ameliorating capacity constraints across modes will entail 
significant costs, but in the long run the cost is likely to be far 
less than if we do not adequately address the issue now.


Railroads Are Working Hard on a Variety of Fronts to Increase Capacity
    For their part, U.S. freight railroads are well aware that capacity 
constraints have led to service-related problems on parts of their 
networks, and they are committed to solving these problems by 
addressing the host of factors that influence the fluidity and 
resiliency of freight rail operations.
Spending on Infrastructure and Equipment
    Of the many different factors that affect how well a rail network 
functions, the basic amount and quality of infrastructure and equipment 
is probably the most important. That is why U.S. freight railroads have 
been expending, and will continue to expend, enormous resources to 
improve their asset base. As traffic grows, railroads will have to 
concentrate increasingly on building new capacity to accommodate that 
growth--while continuing to maintain existing capacity. But if a 
railroad is not financially sustainable over the long term, it will not 
be able to attract the capital necessary to maintain its existing 
network in top condition, or make additional investments in the 
replacement or expansion of infrastructure required by growing demand.
    This point is especially relevant for railroads relative to other 
modes. In contrast to the extensive government funding for truck, 
barge, and airline infrastructure over the past 25 years, freight 
railroads have historically received little government financial 
assistance for infrastructure construction or maintenance. Instead, 
freight railroads have financed infrastructure improvements (and 
equipment investments, such as locomotives) almost exclusively through 
their own earnings and by borrowing. \9\
---------------------------------------------------------------------------
    \9\ As discussed beginning on page 26, [89 of this document] 
railroads favor more pronounced use of public-private partnerships for 
rail infrastructure improvement projects where the fundamental purpose 
of the project is to provide public benefits or meet public needs, and 
support tax incentives for rail investments that enhance capacity.
---------------------------------------------------------------------------
    From 1980 through 2005, Class I freight railroads alone invested 
some $174 billion in capital and maintenance expenses related to 
infrastructure, and another $183 billion in capital and maintenance 
expenses related to equipment. (Non-Class I railroads have invested 
additional billions of dollars.) \10\ Class I railroads typically 
devote approximately 45 percent of their operating revenue, or $15 
billion to $17 billion per year, toward these purposes, which have been 
trending higher since 1990 on a per-mile basis.
---------------------------------------------------------------------------
    \10\ For non-Class I railroads, improving infrastructure to handle 
286,000 pound cars is a major issue. The AAR urges Congress to extend 
the three-year short line infrastructure tax credit, which expires in 
2007.


    Moreover, rail spending, which is already substantial, is expected 
to rise sharply. Based on an analysis of recent railroad financial 
presentations, press releases, and other sources, it appears that Class 
I capital expenditures on infrastructure and equipment are set to rise 
in 2006 to around $8.3 billion, up sharply from around $5.7 billion 
just 4 years earlier. This huge increase demonstrates the diligence 
with which railroads are responding to the capacity issue.


    The following is just a sampling of the diverse types of capacity-
enhancing investments individual railroads have recently made or will 
soon make:

   BNSF Railway double-tracked 76 miles of main line between 
        Chicago and Los Angeles in 2005, and another 56 miles will be 
        double- or triple-tracked this year. Within a couple of years, 
        the entire 2,200-mile route will be double-tracked. In 2005, 
        BNSF also took delivery of some 400 centerbeam cars (for 
        hauling lumber); 3,700 high-capacity covered hoppers for 
        carrying grain and other commodities; 1,300 rapid-discharge 
        coal cars; and 650 intermodal flatcars with capacity to carry 
        6,500 intermodal double-stack containers. BNSF also took 
        delivery of 288 new locomotives in 2005 and will add more than 
        300 more in 2006.

   In 2006, Canadian National will spend $1.2 billion to $1.3 
        billion on capital programs in the United States and Canada. 
        Included are the reconfiguration of the key Johnston Yard in 
        Memphis, a gateway for CN's rail operations in the Gulf of 
        Mexico region; siding extensions in Western Canada; and 
        investments in CN's Prince Rupert, British Columbia, corridor 
        to capitalize on the Port of Prince Rupert's potential as an 
        important traffic gateway between Asia and the North American 
        heartland.

   In 2005, Canadian Pacific finished its biggest capacity 
        enhancement project in more than 20 years by expanding its 
        network from Canada's Prairie region to the Port of Vancouver. 
        The project increased the capacity of CP's western network by 
        12 percent and improved the route structure from Canada's 
        Pacific coast to the United States. Like other carriers, CP has 
        added new sidings on congested corridors; taken delivery of 
        dozens of new locomotives and newer, higher-capacity freight 
        cars; and hired and trained hundreds of new employees, many of 
        whom will be in the United States.

   CSX recently announced plans to spend $1.3 billion to $1.4 
        billion per year on capital expenditures in 2006 and 2007, up 
        from approximately $1 billion over the previous few years. In 
        addition to improvements elsewhere, installation of sidings, 
        signals, and other infrastructure on lines between Chicago and 
        Florida and between New York City and Albany will expand 
        capacity and improve service reliability. CSX will also add 
        several hundred new locomotives over the next few years.

   Kansas City Southern is busy integrating its Kansas City 
        Southern de Mexico subsidiary fully into the railroad's other 
        operations. KCS plans to spend some $120 million in the United 
        States and another $96 million in Mexico in 2006. Particular 
        attention will be given to the construction of new tracks and 
        other improvements at the railroad's Shreveport, Louisiana hub; 
        improvements on the ``Meridian Speedway'' between Shreveport 
        and Meridian, Mississippi to augment the new rails, new 
        sidings, and new drainage system installed in 2005; and the 
        expansion of rail yards, track upgrades, and new sidings on its 
        ``Tex-Mex'' subsidiary.

   Norfolk Southern (NS) will purchase more than 220 new 
        locomotives from late 2005 through mid-2006 to augment the 
        hundreds purchased over the past few years. NS is also in the 
        midst of its largest-ever locomotive rehabilitation program--in 
        2005, 491 locomotives were overhauled and 29 were rebuilt; 
        another 420 will be overhauled and 52 rebuilt in 2006. NS is 
        also beginning its ``Heartland Corridor'' project, which, among 
        other things, will entail raising clearances at 28 tunnels in 
        Virginia, West Virginia, and Kentucky to allow double-stack 
        intermodal service over the entire route from the Port of 
        Norfolk to Columbus, Ohio and Chicago.

   In 2006 alone, Union Pacific will spend some $1.5 billion to 
        replace track and hundreds of millions more to increase 
        fluidity and capacity. Much of UP's current and recent spending 
        is coal-related, including adding a third mainline from Reno to 
        West Nacco on the PRB Joint Line; constructing a third run-
        through mainline to speed coal trains through North Platte; and 
        a $35 million Marysville, Kansas bypass to expedite PRB coal 
        trains. Another focus of UP's capacity expansion programs for 
        2006 is its 760-mile Sunset Route between Los Angeles and El 
        Paso. Today, more than 42 percent of the Sunset Route is double 
        tracked, including 69 miles that were completed in 2005 at a 
        cost of some $100 million. UP plans to double track another 50 
        miles this year and most of the remainder within a few years. 
        Since 2004, Union Pacific has purchased 713 new locomotives and 
        will purchase an additional 200 in 2006.

    The massive investments railroads must make in their systems are a 
reflection of the extreme capital intensity of railroads. By any of a 
variety of measures, railroads are at or near the top among all U.S. 
industries in terms of capital intensity.
    For example, from 1995 to 2004, the average U.S. manufacturer spent 
3.5 percent of revenue on capital expenditures. The comparable figure 
for U.S. freight railroads was 17.8 percent, or more than five times 
higher. Likewise, in 2004 railroad net investment in plant and 
equipment per employee was $667,000--more than eight times the average 
for all U.S. manufacturing ($78,000).


    The bottom line is that railroading is extraordinarily expensive, 
and simply cannot be done ``on the cheap.'' And because when they make 
major investments, railroads are committing capital to assets that can 
have a life span of 30 years or more, adding rail capacity can be 
accompanied by substantial financial risk. That's why railroads, as 
noted earlier, need to be sure that the market will support additions 
to capacity over the long-term. As a former NS official remarked in 
comments to the Transportation Research Board, ``Any capacity enhancing 
project (be it fixed plant or locomotives or cars) has to be compared 
to all of the other demands on corporate capital and the returns must 
be attractive. Further, all investments must be consistent with a 
company's ability to raise capital. However `worthy' a capacity project 
might be, it must, in the end, lead to improved financial returns.'' 
\11\
---------------------------------------------------------------------------
    \11\ James McClellan, ``Railroad Capacity Issues,'' background 
paper for Research to Enhance Rail Network Performance: A Workshop, 
Transportation Research Board, April 5-6, 2006.
---------------------------------------------------------------------------
Aggressive Hiring
    Rail capacity is a function of personnel in addition to 
infrastructure, and railroads have been aggressively hiring and 
training crews to expand capacity. After decades of steady decline, 
rail employment has been on the increase since 2004. According to STB 
data, overall Class I employment in April 2006 (the most recent month 
for which data are available) was 3 percent higher than in April 2005 
and 7 percent higher than in April 2004.


Infusion of Technology
    Technology has always played a key role in expanding rail capacity. 
Control systems have become more sophisticated; trains have become 
longer and heavier; locomotives have become more powerful and more 
reliable; and track structures have become more robust and thus less 
prone to outages for maintenance or because of failure.
    Many of the dramatic technological advancements that have increased 
railroad efficiency (and safety) by helping to protect freight cars, 
locomotives, track, and cargo before damage, costly repairs, traffic 
holdups, and derailments occur have been developed and/or refined at 
the Transportation Technology Center Inc. (TTCI) in Pueblo, Colorado, a 
wholly-owned subsidiary of the AAR that is generally considered to be 
the finest rail research facility in the world. Just a few of these 
technological advancements include:

   Wayside detectors that identify defects on passing rail 
        cars--including overheated bearings and wheels, dragging hoses, 
        deteriorating bearings, cracked axles and wheels, and 
        excessively high and wide loads--before structural failure or 
        other damage occurs. Some of the newest wayside detectors being 
        developed use machine vision to perform higher-accuracy 
        inspections through the use of digitized images, which are then 
        analyzed using computer algorithms.

   Trackside acoustic detector systems use ``acoustic 
        signatures'' to evaluate the sound of internal bearings to 
        identify those likely to fail in the near term. These systems 
        supplement or replace existing systems that identify bearings 
        already in the process of failing by measuring the heat they 
        generate.

   Advanced track geometry cars use sophisticated electronic 
        and optical instruments to inspect track conditions, including 
        alignment, gauge, and curvature. TTCI is developing an on-board 
        computer system that provides an even more sophisticated 
        analysis capability of track geometry, predicting the response 
        of freight cars to track geometry deviations. This information 
        will better enable railroads to determine track maintenance 
        needs and help improve the safety of day-to-day rail 
        operations.

   One of the most straightforward ways to add capacity to a 
        rail network is to pack more freight on each train, and 
        railroads have been doing that ever more aggressively. In 1995, 
        for example, the average coal car carried on a Class I railroad 
        held just under 103 tons of coal. By 2005 that figure had risen 
        to nearly 112 tons, a 9 percent increase. But heavier loads are 
        far more damaging to track structures than lighter loads. 
        Researchers at TTCI and elsewhere are engaged in efforts 
        related to this heavy-axle load (HAL) service. HAL-related work 
        is underway on rail steels, insulated joints, bridges, welding, 
        maintenance practices, and more.

    Freight railroads have always been at the forefront in the use of 
computers and information technology, and today railroads are rapidly 
expanding their use of these technologies to improve overall efficiency 
and the fluidity of their operations, thereby adding capacity without 
adding infrastructure.
    For example, advanced computer modeling software is used in a wide 
variety of rail applications, from automating rail grinding schedules 
\12\ and improving customer demand forecasting to optimizing yard 
operations. CN, for example, is implementing what it calls 
``SmartYard,'' complex computer software that identifies and analyzes 
every possible combination and outcome for sequencing cars in a large 
classification yard and simultaneously updates and communicates the car 
processing plan. The result is more efficient, faster yard operations. 
Other railroads are engaged in similar efforts.
---------------------------------------------------------------------------
    \12\ Rail grinding is a maintenance procedure for removing rail 
corrugations and surface defects, and for restoring the shape of rail 
to improve wheel and rail interaction and extend rail life.
---------------------------------------------------------------------------
    Recognizing that another way to add capacity is to move more trains 
faster over the same length of track, railroads are also working with 
their suppliers to design, implement, and improve innovative 
computerized ``trip planning'' systems. These highly-complex systems 
automatically incorporate and analyze a mix of ever-changing variables 
(e.g., crew and locomotive availability, terminal congestion, the 
different priority status of loads of freight, track conditions, 
maintenance plans, weather, etc.) to optimize how and when cars are 
assembled to form trains and when those trains depart.
    Trip-planning systems are just one way that railroads are trying to 
improve equipment ``cycle time''--i.e., the total time it takes for a 
freight car to be loaded, hauled to destination, unloaded, returned to 
the same or a different shipper, and loaded again.
    The benefits of increased efficiency explain rail efforts to 
``supersize,'' automate, and increase the velocity of traffic flows 
where practical. For example, railroads and their grain customers 
collaborate to consolidate grain loading at high-speed ``shuttle 
loader'' elevators. Railroads gain by improving the efficiency of their 
operations; shippers gain because the efficiencies produce railroad 
cost savings that are passed through in the form of lower rates. The 
efficiencies of shuttle operations can be striking. At BNSF, for 
example, a typical grain car in shuttle service hauls approximately 
three times more grain over the course of a year than a typical grain 
car in non-shuttle service.
    Expanded over a network, operational efficiency can free up 
substantial capacity for other uses. At one major railroad, for 
example, a one mile-per-hour increase in system-wide velocity could 
mean that 250 locomotives, 5,000 freight cars, and 180 train and engine 
employees would be freed up to move additional traffic.
Cooperative Alliances and Collaborations
    Railroads are also entering into operational alliances with each 
other which often rely on non-standard techniques to achieve desired 
results. These innovative collaborations lead to improved capacity 
utilization, lower costs, and better service. For example:

   A recent BNSF and CN track-sharing agreement will improve 
        network fluidity and infrastructure capacity, principally in 
        Vancouver, Chicago, and between Memphis and southern Illinois. 
        Under the agreement, the railroads will exchange track and rail 
        infrastructure, and CN will grant trackage, haulage, and other 
        access rights to BNSF.

   CSX and UP are now operating their ``Express Lane'' service 
        to haul fruits and vegetables by refrigerated rail car from 
        California and the Pacific Northwest to population centers on 
        the East Coast. UP and CSX also offer a similar ``Wine 
        Connection'' service for wine movements. These joint ventures 
        improve the utilization of rail assets and enhance the 
        efficiency of coast-to-coast transportation.

   A KCS-NS joint venture will increase capacity and improve 
        service on the ``Meridian Speedway,'' a rail line between 
        Meridian, Mississippi and Shreveport, Louisiana, that is 
        crucial for transporting freight between the Southeast and the 
        Southwest. KCS will contribute a 320-mile rail line between the 
        cities, while NS will invest $300 million in cash, 
        substantially all of which will be used for capital 
        improvements to increase capacity over a four-year period. The 
        capital improvements will include signal systems, extended 
        sidings and stretches of double track.

   UP and CN have reached a routing protocol agreement to 
        streamline their exchange of rail traffic at major gateways and 
        reduce rail congestion in the Chicago area. Under the protocol, 
        CN and UP are directing rail traffic flows through the most 
        efficient interchange locations, thereby improving transit 
        times and asset utilization.

   NS and CP recently began a partnership under which NS runs 
        trains on CP trackage in New York state and then hands off the 
        trains to CP, which hauls them across the border for further 
        interchange or final delivery in Canada. The agreement allows 
        NS to replace the inefficient and circuitous route it 
        previously had to use for trans-border operations. In addition, 
        NS hauls CP trains between other points in New York, thereby 
        allowing CP to improve the efficiency of its own operations.

   UP and CP recently strengthened their alliance at Eastport, 
        Idaho, where CP hands off grain trains to UP for delivery to 
        Pacific Coast ports. Working with customs authorities, the 
        railroads have improved the customs clearance process, 
        eliminating a major bottleneck that had been backing up trains 
        at the border. The result has been a significant decrease in 
        dwell time and a sharp increase in daily train count at the 
        interchange.

Railroad Rate Trends Since Staggers
    With passage of the Staggers Rail Act of 1980, U.S. freight 
railroads were generally freed to price their services in the open 
marketplace, with government price regulation (which had been pervasive 
prior to Staggers) remaining only where it was determined that 
railroads did not face effective competition. Staggers allowed 
railroads to enter into confidential rate and service contracts with 
shippers and gave railroads freedom to operate over routes they found 
to be most efficient. Railroads responded to their new pricing freedoms 
by sharply increasing productivity and competing more effectively.
    Most rail productivity gains have been passed on to shippers in the 
form of lower rates. In inflation-adjusted terms, rail revenue per ton-
mile (RPTM) was relatively flat prior to Staggers, but has fallen 57 
percent since then. Similarly large rate reductions have occurred over 
nearly all commodity types (including coal, agricultural products, and 
chemicals) and across geographical areas.


    RPTM is often used as a surrogate for rail rates because it 
measures both the actual payments made by rail customers and the bases 
for which the rates are assessed--weight and distance. Although RPTM 
can be affected by changes in length of haul, commodity mix, equipment 
ownership, and other shipment characteristics, studies that have 
controlled for such factors have confirmed that the decline in RPTM 
reflects a real drop in rail rates.
    Numerous studies confirm the sharp drop in freight rail rates. For 
example:

   In September 2004, the U.S. Department of Energy's Energy 
        Information Administration (EIA) released a report on rail 
        rates for coal delivered under contract from 1979 through 2001. 
        The report found that contract rail coal rates peaked in 1984 
        at $17.52 per ton, then declined by nearly 42 percent, to 
        $10.19 per ton, by 2001. On a revenue per ton-mile basis, the 
        EIA reported that rail rates declined 60 percent in real terms 
        from 1979-2001, compared with a decline in barge coal rates of 
        38 percent and an increase in truck coal rates of 73 percent 
        over the same period.

         The September 2004 EIA report was an update to a similar 
        October 2000 study covering 1988 to 1997. In that study, the 
        EIA found that ``Although the share of coal transported by 
        railroads increased, the average rate per ton to ship contract 
        coal by rail fell steadily (a 25.8 percent decline) during the 
        study period . . . The general finding of declining rates was 
        also substantiated when the rates were calculated as a rate per 
        ton-mile, a rate per million Btu, or rates between specific 
        supply and demand regions.'' According to the EIA, on a RPTM 
        basis, the average contract coal rate fell 41.4 percent from 
        1988 to 1997, and ``the decline . . . was a response to 
        competitive markets.''

   In a June 2002 report, the U.S. General Accounting Office 
        (now the Government Accountability Office) released a rail rate 
        analysis covering 1997 to 2000. The GAO found that ``From 1997 
        through 2000, rail rates generally decreased, both nationwide 
        and for many of the specific commodities and markets that we 
        examined.'' The June 2002 report was an update to a similar 
        April 1999 GAO report covering 1990 to 1996. In the June 2002 
        study, the GAO noted that ``[t]hese decreases followed the 
        general trend we previously reported on for the 1990-1996 
        period and, as before, tended to reflect cost reductions 
        brought about by continuing productivity gains in the railroad 
        industry that have allowed railroads to reduce rates in order 
        to be competitive.''

   In December 2000, the Surface Transportation Board (STB) 
        released the latest in a series of periodic reports entitled 
        ``Rail Rates Continue Multi-Year Decline.'' The STB found that 
        ``inflation-adjusted rail rates have fallen 45.3 percent'' from 
        1984 to 1999. The STB continued, ``[T]he very significant rate 
        reductions . . . imply that shippers would have paid an 
        additional $31.7 billion for rail service in 1999 if revenue 
        per ton-mile had remained equal to its 1984 inflation-adjusted 
        level. . . . It is important to note that all types of rail 
        customers, and not just those with competitive transportation 
        alternatives, must have received some portion of the rate 
        reductions we have measured here.'' The STB also found that 
        ``an increase in the average length of haul is not responsible 
        for the preponderance of the rate declines that we have 
        identified. We find that real railroad revenue per ton has 
        fallen 43.7 percent since 1984, nearly identical to the decline 
        of 45.3 percent obtained when using ton-miles.''

   A study published in September 2000 by scholars at the 
        University of Maryland and The Brookings Institution noted that 
        ``[D]eregulation was not just a boon for the rail industry. 
        Shippers benefited too. Based on the first decade of 
        deregulation, one study found that the annual benefits to 
        shippers from lower rates and improvements in service time and 
        reliability amounted to at least $12 billion (1999 dollars). 
        And, . . . shippers have generally continued to benefit from 
        lower rates.''

    Competitive rail rates help rail users control the prices of their 
goods.
    For example, from 1981 to 2004, average railroad coal rates (as 
measured by coal RPTM in nominal terms) fell 32 percent, while average 
electricity prices rose 38 percent.


    Over the same period, rail RPTM for chemicals rose less than 1 
percent. During this same period, prices paid by chemical companies for 
liquefied refinery gases, which are a major chemical industry 
feedstock, rose 147 percent, while the producer price for chemicals 
themselves (many chemicals are intermediates for other chemicals) rose 
33 percent.


    Likewise, from 1994 to 2004, the prices paid by farmers for most 
farm inputs rose: up 46 percent for seed, up 34 percent for fertilizer, 
and up 83 percent for fuel. During this same period, the average rail 
rate for grain (as measured by grain RPTM) fell 4 percent. Clearly, 
railroads have been doing their part to help keep U.S. agriculture 
competitive.
Railroads Must Be Financially Healthy to Expand Capacity
    Since Congress passed the Staggers Act, railroads have only slowly 
made progress toward the goal of long-term financial sustainability. 
Financial sustainability is essential if railroads are to have any hope 
of meeting future rail capacity needs.
    This slow progress is documented in the STB's annual revenue 
adequacy determinations. A railroad is ``revenue adequate''--i.e., it 
is earning enough to cover all costs of efficient operation, including 
a competitive return on invested capital--when its rate of return on 
net investment (ROI) equals or exceeds the industry's current cost of 
capital (COC). This standard is widely accepted, approved by the 
courts, and similar to that used by public utility regulators 
throughout the country. It is also consistent with the unassailable 
point that, in our economy, firms and industries must produce 
sufficient earnings over the long term or capital will not flow to 
them. As a prominent Wall Street rail analyst recently noted, ``Earning 
the cost of invested capital is not the end goal, but the entry ticket 
to the race . . . without which Wall Street will squeeze investment.'' 
\13\
---------------------------------------------------------------------------
    \13\ Anthony Hatch, ``Six for 06: Trends To Watch in Rail,'' The 
Journal of Commerce, January 2006.


    During the more than 25 years in which railroad revenue adequacy 
determinations have been made, railroads have significantly narrowed 
the COC vs. ROI gap, but a gap still remains.
    Rail customers certainly understand the importance of earning the 
cost of capital over the long term. A spokesman for a major Florida 
electric utility noted, ``If we can't make an attractive investment for 
the shareholder, then we are going to have a very difficult time going 
in the marketplace and competing for dollars.'' \14\ The CFO of a major 
U.S. chemical company stated, ``We want to create spread above the cost 
of capital through the cycle.'' \15\ And the CEO of a major U.S. forest 
products company recently stated ``Each of our businesses continues to 
assess the ability of their individual facilities and product lines to 
earn the cost of capital. Those that cannot make the grade do not 
belong in our portfolio.'' \16\
---------------------------------------------------------------------------
    \14\ Spokesman for Florida Power & Light, quoted in The Palm Beach 
Post, January 16, 2005.
    \15\ Rich Lorraine, SVP and CFO, Eastman Chemical Co., at the 
Morgan Stanley Basic Materials Conference, February 21, 2006.
    \16\ Steve Rogel, Chairman, President & CEO, Weyerhaeuser Co., Q4 
2005 Weyerhaeuser Co. Earnings Conference Call, February 3, 2006.
---------------------------------------------------------------------------
    Railroads agree with this sentiment, which is echoed by firms in 
every sector of the economy. Without the ability to cover total costs 
and earn adequate returns, railroads--like electric utilities, chemical 
companies, forest products firms, or any other firm--would be unable to 
maintain (much less increase investment in) their networks and could 
not sustain themselves over the long term.
    Last month, the Edison Electric Institute (EEI) released a document 
that defends the sometimes substantial price increases electricity 
consumers are facing in many parts of the country. EEI writes:

        ``Clearly, electricity is an indispensable commodity that is 
        crucial to our daily lives and to our Nation's continued 
        economic growth. And the costs needed to reinforce the Nation's 
        electric power system are worthy long-term investments. The 
        bottom line is that we are living in a rising cost environment, 
        and electricity prices have been a great deal for many years. 
        Even with expected rate increases, electricity prices are 
        projected to remain below the rate trends of other goods and 
        services. In fact, the national average price for electricity 
        today is significantly less than what it was in 1980, adjusted 
        for inflation. Of course that is small comfort to customers who 
        will be opening costlier electric bills in the coming months. 
        And no one--utility, regulator, or customer--is eager to see 
        electricity prices increase. The unavoidable reality, however, 
        is that we all must address the fact that in order to ensure 
        that electricity remains affordable and reliable, we must help 
        shoulder the expense of reinforcing and upgrading our 
        electricity infrastructure. It is the only way to be certain 
        that electricity will be there when we need it, and at a price 
        we can afford over the long term'' \17\
---------------------------------------------------------------------------
    \17\ EEI, Rising Electricity Costs: A Challenge For Consumers, 
Regulators, And Utilities, May 2006.

    Railroads wholeheartedly agree with this sentiment too. It is 
critical to our Nation's economy and standard of living that we upgrade 
and reinforce our electricity infrastructure.
    We also think that EEI's statement above is just as valid, if not 
more so, if the word ``electricity'' were changed to ``freight 
railroading.'' Looking ahead, the United States cannot prosper in an 
increasingly competitive global marketplace if our freight railroads 
are unable to meet our growing transportation needs, and having 
adequate railroad capacity is critical in meeting these needs. Like 
utilities, railroads must be able to both maintain their extensive 
existing infrastructure and equipment and build substantial new 
capacity. Railroads could not do this if their earnings were 
unreasonably restricted, any more than utilities could.
Even in 2005 Railroads Had Substandard Profitability
    Without question, 2005 was a good year for railroads financially--
revenue and net income were both up substantially. Frankly, it's about 
time the rail industry had a year like 2005, and they require them 
going forward. Improved rail earnings should be viewed as a welcome 
development because it means that railroads are better able to justify 
and afford the massive investments in new capacity and upkeep of their 
existing systems that need to be made.
    That said, no one should get carried away regarding railroads' 
relative profitability in 2005, because the fact is, in 2005--when 
railroads were hauling record levels of traffic and had sharply higher-
than-historical profitability--rail industry earnings were still 
substandard compared with other industries.
    Return on equity (ROE) is commonly used as an indicator of short-
term profitability. According to Business Week data covering the S&P 
500, in 2005 the average ROE for the four largest U.S. railroads was 
12.3 percent--a substantial improvement over the 7.8 percent recorded 
in 2004, but still well below the 16.1 percent average for all firms in 
the S&P 500 for 2005. The railroad ROE was well below the median for 
chemical companies in the S&P 500 (18.7 percent) and only moderately 
higher than the median for electric utilities (10.8 percent) in the S&P 
500.




    Data from the Fortune 500 tell a similar story. In 2005, the median 
ROE for the railroads in the Fortune 500 was 14.1 percent, less than 
the Fortune 500 median of 14.9 percent and well below the ROE of 
numerous major rail customer groups. \18\
---------------------------------------------------------------------------
    \18\ The median railroad ROE for Business Week and Fortune 500 
differs because different definitions were used. Business Week uses net 
income excluding discontinued operations; Fortune uses net income 
including discontinued operations. Business Week uses average 
shareholders' equity for a year; Fortune uses end-of-year shareholders' 
equity.

                   Fortune 500 Return on Equity: 2005
------------------------------------------------------------------------
                      Industry                         ROE (in percent)
------------------------------------------------------------------------
Household & Personal Prod.                                         41.5
Petroleum Refining                                                 25.8
Mining, Crude-Oil Prod.                                            23.6
Pharmaceuticals                                                    23.4
Food Consumer Products                                             21.8
Industrial & Farm Equip.                                           21.1
Computers, Office Equip.                                           19.7
Oil & Gas Equip., Services                                         18.9
Metals                                                             18.3
Chemicals                                                          18.1
Medical Products & Equip.                                          17.3
Beverages                                                          16.4
Aerospace and Defense                                              16.3
Fortune 500 Median                                                 14.9
Motor Vehicles & Parts                                             14.6
Railroads                                                          14.1
Pipelines                                                          13.5
Electronics, Electrical Equip.                                     12.1
Engineering, Construction                                          11.8
Utilities: Gas & Electric                                          10.4
Energy                                                              7.4
Food Production                                                     6.2
Packaging, Containers                                               4.6
Telecommunications                                                  4.2
------------------------------------------------------------------------
Source: Fortune 500

    In each of the 20 years from 1986 to 2005, the median ROE for Class 
I railroads was less than the median for all Fortune 500 companies, and 
in 15 of the 20 years, the median railroad ROE was in the lowest 
quartile among Fortune 500 industries.
    Thus, even the improved rail earnings in 2005 are generally no more 
than (and in most cases less than) what non-regulated companies and 
industries earn.
    In any case, whatever may be the minimum level of earnings, 
profitability, or solvency considered adequate to declare a railroad 
``healthy'' for short-term investment purposes, the primary point to 
remember is that only a return on investment in excess of the cost of 
capital over a sustained period can signify that railroads are 
financially healthy.
Reregulation is Not the Answer to Railroad Capacity and Service 
        Problems
    Unfortunately, rail critics have wrongly seized upon railroads' 
``record profits'' in 2005 to support their claims that railroads 
should be forced to reduce their rates to certain shippers. This 
viewpoint--that short-term increased railroad profitability to moderate 
levels justifies a reinstatement of onerous restrictions on rail 
earnings--is exceedingly shortsighted and should be rejected.
    Railroads have had to battle efforts to reregulate the industry 
since the Staggers Rail Act partially deregulated railroads in 1980. It 
is beyond the scope of this testimony to discuss in any detail the many 
ways in which reregulatory legislation (like S. 919, the ``Railroad 
Competition Act of 2005'') is misguided.
    It should be noted, though, that the primary objective of those who 
call for rail reregulation is lower rail rates, even though, as 
discussed above, railroads are not earning excessive profits. Lower 
rail rates would translate directly into lower rail earnings. But 
proponents of reregulation ignore the fact that rail investments in 
infrastructure and equipment, like most private investment decisions in 
our economy, are driven by expected returns. The hundreds of billions 
of dollars invested in U.S. freight railroads since Staggers would not 
have been provided if not for the investors' expectation that the 
opportunity for a competitive return promised by Staggers would remain.
    Under reregulation, rail managers could not commit, and rail 
stockholders would not supply, investment capital needed to improve 
service and expand capacity, because the railroads considering such 
investments would not have a reasonable opportunity to capture the 
benefits of those investments Disaster might not occur overnight, but 
there would be little or no capacity expansion--something that 
certainly would have a near-term and significant adverse effect.


    The financial community, on whom railroads depend for access to the 
capital they need to operate and expand, has consistently supported the 
view that, under reregulation, an era of capital starvation and 
disinvestment would return. They understand that no law or regulation 
can force investors to provide resources to an industry whose returns 
are lower than the investors can obtain in other markets with 
comparable risk.
    Proponents of reregulation cannot avoid the fundamental fact that 
shippers must be willing to pay for the rail service and rail capacity 
they say they need, and the market is far superior to the government in 
determining who should pay.
    Some in the electric power industry are among the most vocal 
proponents of restrictions on rail earnings. Their advocacy of 
restrictions on railroads are not consistent with their claims 
regarding the need for cost-recovery and regulatory certainty in 
electricity transmission--a sector of the electricity industry with 
some parallels to railroading.
    A representative of the Edison Electric Institute, for example, 
wrote ``I cannot overemphasize the need for FERC to establish and put 
into effect a durable regulatory framework that says if I prudently 
invest a dollar in transmission infrastructure, that I will be able to 
fully recover that dollar, along with my cost of capital, through 
electricity rates. Such a framework is essential to raising the 
substantial and nearly unprecedented amount of capital necessary to 
construct needed, cost-effective transmission facilities.'' \19\
---------------------------------------------------------------------------
    \19\ Statement on behalf of the Edison Electric Institute by Alan 
J. Fohrer, CEO, Southern California Edison, to FERC, April 22, 2005.
---------------------------------------------------------------------------
    Likewise, the National Rural Electric Cooperative Association has 
noted that it ``believes that the best way to attract capital to 
transmission at reasonable rates is to give investors greater certainty 
that they will receive a return on their investment.'' \20\ The rail 
industry can think of no better way to create uncertainty for their own 
capital providers ``that they will receive a return on their 
investment'' than proposals such as S. 919. Such legislation is bad 
economics and bad public policy and should be rejected. It would mean 
less rail capacity when we need more.
---------------------------------------------------------------------------
    \20\ Comments of the National Rural Electric Cooperative 
Association Proposed Rulemaking Promoting Transmission Investment 
Through Pricing Reform,'' FERC Docket No. RM06-4-000, January 11, 2006, 
p. 17.
---------------------------------------------------------------------------
Public Involvement in Freight Rail Infrastructure Investment
    Freight railroads will continue to spend massive amounts to improve 
and maintain their systems. But even with their improved financial 
performance, funding constraints will likely prevent railroads from 
meeting optimal future rail infrastructure investment needs entirely on 
their own. As AASHTO noted in its Freight Rail Bottom Line Report, 
``The rail industry today is stable, productive, and competitive, with 
enough business and profit to operate but not to replenish its 
infrastructure quickly or grow rapidly.'' \21\
---------------------------------------------------------------------------
    \21\ AASHTO, Freight Rail Bottom Line Report, p. 3.
---------------------------------------------------------------------------
    In its analysis, AASHTO estimated that railroads will need to carry 
an additional 888 million tons of freight annually by 2020 just to 
maintain their current market share. AASHTO also found that railroads 
will need $175 billion to $195 billion of infrastructure investment 
over this period to accommodate this traffic growth, and projected that 
railroads will be able to fund the majority of this investment--$142 
billion--from their own retained earnings and borrowing. Unfortunately, 
according to the AASHTO analysis, the $142 billion will be enough to 
enable railroads to handle only half of their expected increase in 
traffic.
    This funding shortfall means that many rail projects that would 
otherwise expand capacity and improve the ability of our Nation's 
farms, mines, and factories to move their goods to market; speed the 
flow of imports and exports; relieve highway congestion; reduce 
pollution; lower highway costs; save fuel; and enhance safety will be 
delayed--or never made at all.
    I respectfully suggest that it is in our Nation's best interest to 
ensure that optimal freight railroad capacity enhancements are made. 
Two ways that policymakers can help make this happen is by taking 
greater advantage of public-private partnerships for freight-railroad 
infrastructure projects and by introducing tax incentives for rail 
infrastructure projects that enhance capacity.
    Public participation in freight rail infrastructure projects is 
justified because the extensive benefits that would accrue to the 
general public by increasing the use of freight rail would far exceed 
the costs of public participation. For example:

   Highway congestion--Highway congestion costs the U.S. 
        economy more than $63 billion per year, but trying to eliminate 
        it by focusing solely on highways is not practical because 
        building more highways is becoming prohibitively expensive and 
        time-consuming. Given budget constraints, environmental 
        concerns, and other factors, we will be unable to simply build 
        our way out of highway gridlock. Freight railroads, though, 
        significantly reduce the costs of highway congestion and the 
        need to build costly new highways. A single intermodal train 
        takes up to 280 trucks (equivalent to more than 1,100 cars) off 
        our highways. Trains carrying other types of freight take up to 
        500 trucks (equal to around 2,000 cars) off our highways.

   Fuel efficiency--Railroads are three or more times more fuel 
        efficient than trucks. On average, in 2004 railroads moved a 
        ton of freight nearly 410 miles per gallon of fuel. If just 10 
        percent of the intercity freight that moves by highway moved by 
        rail instead, fuel savings would approach one billion gallons 
        per year.

   Pollution--The Environmental Protection Agency (EPA) 
        estimates that for every ton-mile of freight carried, a 
        locomotive emits substantially less nitrogen oxides, 
        particulates, and carbon dioxide than a typical truck.

   Safety--Fatality rates associated with intercity trucking 
        are four times those associated with freight rail 
        transportation. Railroads also have lower employee injury rates 
        than other modes of transportation. Railroads and trucks carry 
        roughly equal ton-miles of hazardous materials, but trucks have 
        16 times more hazmat releases than railroads.

    This point was also made by AASTHO, which that ``Relatively small 
public investments in the Nation's freight railroads can be leveraged 
into relatively large benefits for the Nation's highway infrastructure, 
highway users, and freight shippers.'' \22\ The Congressional Budget 
Office has also concluded that public investment in rail infrastructure 
should be considered: ``Another way of addressing the underpayment of 
infrastructure costs by railroads' competitors is to provide financial 
assistance to the railroads.'' Echoing AASHTO, CBO observed that, 
``[p]roviding Federal aid for a rail investment might be economically 
justified if the net social benefits were large but the net private 
benefits to railroads were insufficient to induce them to make such an 
investment.'' \23\ The Transportation Research Board has reached a 
similar conclusion, noting that ``Greater public investment to relieve 
bottlenecks may improve efficiency--perhaps even in facilities that 
formerly were exclusively private . . . '' \24\
---------------------------------------------------------------------------
    \22\ AASHTO, Freight Rail Bottom Line Report, p. 1.
    \23\ Congressional Budget Office, Freight Rail Transportation: 
Long-Term Issues (January 2006), p. 22.
    \24\ Transportation Research Board, Critical Issues in 
Transportation (January 2006), p. 3.
---------------------------------------------------------------------------
Public-Private Partnerships
    As Members of this Committee know, U.S. freight railroads are, with 
few exceptions, privately owned and operated, and have traditionally 
financed their infrastructure investments overwhelmingly through their 
own earnings and by borrowing from outside capital providers.
    Capital providers, however, insist that railroads focus their 
limited investment funds on projects that promise a direct financial 
benefit to the investing railroad. While these projects may well 
provide substantial public benefits--such as reduced highway 
congestion, cleaner air, improved safety, and enhanced mobility--from a 
railroad's and capital provider's point of view, these are secondary to 
the project's financial return. This kind of imposed discipline by the 
financial markets is necessary and appropriate in a market economy, but 
it discourages investments that would yield significant public benefits 
but only limited financial benefits to the railroad.
    A way to help states and localities improve rail networks that 
generate public benefits is through a more pronounced use of public-
private financing partnerships for rail infrastructure improvement 
projects. Partnerships are not ``subsidies'' to railroads. Rather, they 
are an acknowledgement that private entities should pay for private 
benefits and public entities should pay for public benefits.
    Partnerships reflect the fact that cooperation between interested 
entities is far more likely to result in timely, meaningful solutions 
to transportation problems than a go-it-alone approach. Without a 
partnership, projects that promise substantial public benefits in 
addition to private benefits are likely to be delayed or never started 
at all because it would be too difficult for either side to justify the 
full investment needed to complete them. In contrast, if a public 
entity shows it is willing to devote public dollars to a project 
equivalent to the public benefits that will accrue, the private entity 
is much more likely to provide the private dollars (commensurate with 
private gains) necessary for the project to proceed.
    Going forward, the best-known public-private partnership involving 
freight railroads is the Chicago Region Environmental and 
Transportation Efficiency Program, or CREATE. Conceived in June 2003, 
CREATE is a $1.5 billion program involving the State of Illinois, the 
city of Chicago, and the major freight and passenger railroads serving 
Chicago designed to modernize and improve Chicago's highway and rail 
transportation networks. Installing grade separations between tracks 
and highways will speed vehicle travel and reduce congestion and delays 
for motorists; updating track connections and expanding rail routes 
will reduce rail transit times; and adding separate, passenger-only 
tracks in key locations will remove numerous bottlenecks that have 
slowed passenger and freight movements in the region for decades.
Investment Tax Incentives
    Another way to bridge the funding gap between the level of 
investment that will bring the most benefit to our economy and what 
railroads are likely to be able to afford on their own is to implement 
an investment tax credit for rail capacity enhancement projects.
    Under an investment tax incentive program for rail infrastructure, 
projects to expand freight rail capacity--by increasing the volume, 
weight, or speed of freight that can be carried--would be eligible for 
a 25 percent tax credit. Examples of qualifying capacity-expanding 
investments include raising tunnel clearances to accommodate double-
stacked intermodal containers; upgrading single track lines to double 
or triple tracks; adding and lengthening sidings; strengthening bridges 
to carry heavier loads; and constructing intermodal terminals. In 
addition, new locomotives could also qualify for the credit if they met 
certain capacity-enhancement and other requirements.
    Eligibility for the credit would extend to any taxpayer that makes 
a qualifying expenditure, not just railroads. For example, a shipper 
that built a rail spur from a distribution center to a main line would 
be eligible, as would the builder of a rail intermodal terminal.
    Infrastructure capital expenditures that do not qualify for tax 
incentives would be expensed (the expensing option would not apply to 
locomotives). This would place capital cost recovery for rail 
infrastructure on the same basis as competing modes of freight 
transportation (i.e., highway and waterway), which ``expense'' their 
infrastructure costs.
    For a railroad considering whether to fund a new infrastructure 
project, the tax incentive would effectively reduce the cost of the 
project and thus lower the risk that the project will not generate the 
level of return needed to make it economically viable. Thus, the 
incentive would be enough to help worthwhile projects get built sooner, 
but would not be enough to cause economically unjustified projects to 
go forward.
Conclusion
    U.S. freight railroads do a remarkable job in meeting the needs of 
an extremely diverse set of shippers. Railroads move tens of thousands 
of railcars to and from thousands of origins and destinations every 
day. The vast majority of these shipments arrive in a timely manner, in 
good condition, and at rates that shippers elsewhere in the world would 
love to have.
    Still, it is clear that transportation capacity will have to 
increase as the economy expands. The railroads are committed to meeting 
these increased capacity needs primarily through private capital, but 
only if the regulatory structure gives the railroads an incentive to 
make the necessary investments. Policymakers can help ensure that rail 
capacity is adequate to meet our future freight transportation needs by 
ensuring that harmful economic reregulation is not instituted, engaging 
in more public-private partnerships for rail infrastructure projects, 
and instituting targeted tax incentives for projects that expand rail 
capacity.

    Senator Lott. Thank you, Mr. Hamberger.
    We'll have a cooling-off period now.
    [Laughter.]
    Senator Lott. The Committee will recess, so I can go vote. 
We do have two votes, back to back. But we'll be able to get 
those and come right back. Senator Burns may be able to get 
back before I do, and there will be an opportunity then for 
some questions.
    Thank you all very much.
    We'll be at recess for the next 15 minutes.
    [Recess.]
    Senator Burns. [presiding] We'll get--go back to the fire 
here--firing line. And I want to apologize. We can schedule 
everything in this body but votes, you know.
    And had you concluded--Mr. Hamberger, had you concluded 
your----
    Mr. Hamberger. I believe I more than----
    Senator Burns.--statement?
    Mr. Hamberger.--concluded, yes, sir.
    [Laughter.]
    Senator Burns. You more than concluded?
    Mr. Hamberger. Thank you.
    Senator Burns. And I would--I'd go into a little question-
and-answer, then. I think it--Trent is coming back. I hope he 
does, anyway. And we'll get this rounded up. But I just happen 
to believe that this happens to be a very, very important 
issue. It is important enough that to give it just a brush-by 
is just wrong. And I think there are some things that have to 
be brought out on the table and talked about it. And I like 
what Mr. Ficker said, that we have to work together.
    I am not interested in re-regulating the railroads. I'm not 
interested in that at all. I'm interested, however, in dealing 
with those areas where we only have one railroad. We weren't 
sent to this Congress to stand idly by and see what monopolies 
do in certain areas.
    Mr. Hamberger, your case of--rates have gone down, and your 
efficiency has increased a little, but not the greatest. But 
that is not the case in captive areas. And that's what we're 
talking about here, is where the STB could not, probably, deal 
with something where you have competition, but they do have the 
authority to deal when there's only one railroad or you have 
captive shippers. And they have not done that. And that's the 
reason for this hearing. That's the reason that we have S. 919, 
is to point out to America that we've got some very serious 
problems in some areas. We have the same thing when we start 
talking about telecommunications up here, in this same 
committee, of a--which--a committee that I used to chair and 
had quite a lot to do with writing the telecommunications 
policy and to force out new technologies and this type thing.
    Now, there are also new technologies, as far as running the 
railroad. I can't run a railroad. My dad wanted me to go to 
school to be an engineer, and I told him I didn't want to drive 
no train.
    [Laughter.]
    Senator Burns. But we've got serious problems in those 
areas. And I--to be right honest with you, the big railroads 
have failed to come to the table. And so, we're going to forge 
on with this piece of legislation, if we can. But we're going 
to deal with those areas that we think we can deal with.
    Now, I've got a question for this panel, and I want to hear 
some discussion on it. I've seen a dramatic increase, over the 
next year, of shipper concerns on rates and service. I will 
tell you, we're headed for--in this fall--and get ready for 
it--we are seeing more grain contracted for delivery from the 
combine this year than ever before. And there's a reason for 
that. Our stocks are about half what they've been. Mr. Schuler 
knows about this. And we're seeing a price increase, as far as 
the farm is concerned. What I want to do is get all that 
increase back to the farm, as much as we can. But we're going 
to run into a car shortage this fall, I think, because our crop 
looks fairly good. If the big white combine doesn't go down 
across our farm, I think we're going to do that.
    Congress seems unwilling to take action to address these 
legitimate and very serious complaints. And we've seen more of 
them. Everywhere I travel across this country, I hear these 
complaints. So, I know that where there's smoke, there's fire.
    I'd just like for anybody, in this question--can they tell 
this committee why--why now? Why is our competitiveness and job 
creation over the long term in question now? Why are we seeing 
these pockets of captive shippers? Why are we seeing them now? 
Have we exhausted all remedies outside of legislative action? 
And are there alternatives to Congressional answer--action--
that you, or we, should pursue? I think those are legitimate 
questions, and I think they're the questions this committee has 
to address.
    Who'd like to take the first shot? Congressman English?
    Mr. English. Thank you very much, Senator. I appreciate 
that.
    The--I think there are several reasons for it. And I can 
certainly speak to the electric utility side as it affects our 
members' electric cooperatives. I think a lot of this has to do 
with--there were long-term contracts that were agreed to some 
time ago, and those contracts are running out. And we've also 
seen the situation, no question about it, as I quoted earlier, 
there is an effort on the part of the railroads to get rid of 
their capacity. They testified before the Surface 
Transportation Board as to that's the objective, and they've 
managed to do that. So, the other part of it comes down to the 
question of reduced capacity. They've also reduced the number 
of employees on the railroads themselves. That started in 2000. 
And now we've got the old contracts running out, these new 
contracts coming on. And, as far as it applies to the stranded 
shippers, the people who find themselves hostage to monopolies, 
they're getting--they're the ones that are catching it in the 
shorts, and those are the people that you're hearing from.
    And you can take a look at that chart. Let's put that chart 
back up there, if we could. The one that deals with stranded 
shipper costs. The point that I would make here, Senator, is 
the fact that it's very obvious, when you look at these rates, 
that--what are being charged captive shippers today. New 
contracts that are being made. When you've got people that are 
paying 350 to 450 percent of what--in the way of profits, 
compared to 6 to 8 percent where there's competition, it's 
pretty obvious where the money's coming from. It's coming from 
those 20 percent of the shippers, and they're being taken 
advantage of. And I'll be very candid with you, my folks feel 
like they're being ripped off.
    Now, Senator, there's one other point, too. The Surface 
Transportation Board's supposed to take care of these problems. 
You made that point earlier. And you're absolutely right. But 
when my members--and I've got letters here from a member who 
wrote the chairman of the Surface Transportation Board, and the 
letter gets answered by the head of the railroad. There's a 
serious question in the minds of my members as to who in the 
world's running the Surface Transportation Board and who is it 
that they are supposed to go to for some kind of relief from 
abuse? And----
    Mr. Hamberger. You know, Senator, you asked a very 
thoughtful question. Maybe we should try to answer it.
    Mr. English. The Surface--the----
    Mr. Hamberger. And, in my opinion, you--the----
    Senator Burns. Hang on, now. Let's let--we'll let Mr. 
English finish, and then you can make your point, Mr. 
Hamberger.
    Mr. Hamberger. Thank you.
    Mr. English. So, I think you have a convergence of these 
kinds of issues, Senator, that's bringing about the kinds of 
complaints that you're hearing about, and certainly the kinds 
of concerns that I'm hearing about from our membership, if, in 
fact, we're going to be building all this generation to meet 
our members' needs for the future. So, I think all this is 
converging at this time.
    Senator Burns. Mr. Hamberger?
    Mr. Hamberger. You asked a very thoughtful question, 
Senator, about why is there a capacity constraint now. And I 
would suggest to you that it is not just a capacity constraint 
on freight railroads, it is a capacity constraint on the 
highways, it is a capacity strain on the pipelines, the inland 
barge and towing industry, the ports of our Nation. All are 
feeling the effect of increased economic activity, increased 
imports and exports. With respect to the freight rails 
themselves, we have seen a spike in demand for coal, dramatic 
increases. As I testified before the Senate Energy Committee--I 
believe you were there last week--in 2002, 2003, and 2004, 
demand for coal was less than in 2001. It's--it shot up 
dramatically in 2005. It's still up now, in 2006, because 
natural gas went to $16 a million-cubic-feet. It's now back 
down to about $6, and it'll be interesting to see whether or 
not that demand for coal is still there.
    At the same time, the trucking industry experienced a 136-
percent turnover in drivers. So everybody quit once, and then a 
third of them quit again--136-percent turnover, $3 a gallon for 
diesel fuel. Demand for freight rail went up there, as well.
    So, with the intermodal growth, the demand in coal, the 
booming economy, there was a demand--not just in railroads, but 
across all of the modes of transportation. That's why we're 
investing $8.3 billion this year, to try to expand our capacity 
to deal with that demand.
    Senator Burns. Mr. Ficker?
    Mr. Ficker. I could just add a couple of points. And I 
would, first of all, concur with my colleague, Mr. Hamberger, 
about the economy, as a whole, is--impacted transportation. Our 
organization represents companies that ship via all modes of 
transportation--rail, barge, ocean freight, and highway 
freight, as well--and virtually in every mode, there is 
capacity constraints. Whether it's driver shortages, whether 
it's railroad operating crew shortages, whether it's diesel 
fuel prices, whatever it is, all of these have impacted the 
movement of goods in this country. And the staggering--and I 
have to use the word ``staggering''--growth in imports, and the 
focus that's happened, especially when you look at the ports of 
L.A./Long Beach, the enormous amount of activity down there, 
and growing to almost 9,000--or 9 million TEUs a year--that's 
the containers a year--it's becoming difficult to take it away. 
And the rail industry has struggled to meet that need.
    And the pressure to meet that need comes from the 
retailers, which, in turn, comes from you and I, when we want 
to go to the store and buy whatever it is we want to buy. 
Unfortunately, there was not the capacity built into that 
infrastructure initially to make that happen. If you'd have 
told me 15 years ago that we would be importing stuff from 
China to the extent we are today, I'd a looked at you and 
suggested that maybe you were thinking something was a little 
weird.
    We have experienced a dramatic economic change in 
globalization that's impacted all of us. And what's happened, 
the way we see it, is that the railroads have focused on that 
and left some of the other carload freight, which--I represent 
primarily, the carload world--and some of the freight that's 
domestically--they focused on getting their act together on the 
international side, and--to deal with that capacity constraint, 
and probably left a little of the other information--or a 
little work on the other side of the capacity to a later date. 
This not means they're not going to address it, but they're 
focused on getting that intermodal demand met right now.
    And that's where the conflict comes. That's where the 
challenge comes in. There is just not enough capacity out there 
to move it. As the AASHTO report clearly points out, you're 
going to have growth in the 60- to 70-percent area over the 
next 20 years, and they projected that the railroads will only 
grow by 44 percent.
    I would assert to the Committee that the rail industry 
section of the pie must grow in percentagewise, not just grow 
as the pie grows. That's the critical nature of what's going on 
here. The answers are not easy. They're difficult. They're 
going to be--require the input of government, both at the local 
and Federal level. They're going to require the input of the 
users of transportation. And they're going to require the input 
of the users of--the providers of rail transportation.
    And I would encourage the railroads to sit down with all of 
us, as we've done already, and start trying to come up with 
solutions for these problems. They're not going to be easy. 
It's going to take leadership across the board. And without 
that sort of effort, we're going to find ourselves in a very 
difficult position.
    Mr. Hamberger. We concur.
    Senator Burns. Mr. McIntosh?
    Mr. McIntosh. Senator, I'd like to respond to your question 
about remedies that have been pursued outside of congressional 
action, because I think there's a telling story there.
    Industry--the chemical industry has tried to create a 
solution to this service reliability problem in the same way we 
would attempt to resolve other commercial issues with other 
suppliers, vendors, other people we deal with. Many years of 
work and attempts to change the environment and the 
accountability with STB have been unsuccessful, as has been 
alluded to several times.
    What's important to the industry--the chemical industry and 
to our customers are predictability and repeatability, both in 
our costs and our service level. Recognizing that we are 
captive shippers, we have approached the railroads directly, 
and acknowledged that we would be willing to pay higher freight 
for a level of service and reliability that would be 
guaranteed. We have been told no. No discussion, no interest. 
There are no contracts that I have been a party to where any 
kind of performance guarantee on service or reliability has 
been entertained by any railroad that I do business with. And 
so, consequently, having been unable to affect the environment 
in any other way, and without the benefit of competition as a 
captive shipper, our only recourse, at this point in time, we 
believe, is to turn to Congress.
    Senator Burns. Mr. Schuler?
    Mr. Schuler. Thank you, Senator Burns.
    In the GAO report, they've clearly stated that railroads 
have, over the years, attempted to shift their industry to what 
they're calling right-sizing, where they've reduced both--or 
all--they reduce track, equipment, and facilities. This has 
made them more efficient, this has made them more productive, 
without a doubt; but yet, they fail to pass those savings on to 
the shippers, especially those who are captive. And also, in 
that report it is said that rail rates are increasing in areas 
because of excess demand. Well, the railroads voluntarily 
created that excess demand by reducing their supply of cars and 
tracks and other facilities.
    And also, grain rates have increased across the country, 9 
percent nominally, and that's adjusted for gross domestic 
product. Other industries may have declined, but grain sees--
continues to see increasing rates, especially those captive 
shippers who are, more and more, paying even higher rates.
    Responding to claims that we aren't inviting the railroad 
to visit with us, we have sat down with the railroad, pleading 
for rate relief, especially for our captive shippers. We are 
holding a wheat summit this fall, in September, to address the 
crisis that we see in agriculture, where our costs are 
increasing above where our profits will--or our revenues will 
provide us a profit. One of the invitees is Burlington Northern 
Sante Fe Railroad to participate in that conference. They're 
also attending our board meeting this coming October in Denver 
to visit with us. So, we are having negotiations with the 
railroad to try to find relief.
    We've been trying to find relief for 25 years, with the 
McCarty Farms versus BN case that drug on for 17 years in the 
courts, with no relief for farmers. We have visited with the 
railroads, we've pleaded with the railroads to provide us 
better service and fairer rates, with no--to no avail. We've 
talked with the Surface Transportation Board, trying to get an 
effective mechanism that'll provide relief for these higher 
rates. And yet, no relief. We feel, and it's my personal 
opinion, that this--it's long overdue that we have some 
mechanism. And if it's legislation, that's what it needs to be, 
with this Senate 919 bill, to provide relief for our producers.
    Thank you.
    Senator Burns. Mr. English?
    Mr. English. I just want to make one other comment, too, 
Mr. Chairman. For many our members, stranded shippers, we're 
paying more now for the freight to move the coal to the 
generating plant than the coal itself costs. The difficulties 
in reliability our members have run into have become so bad 
that in some locations they're now importing coal from 
Indonesia, as opposed to buying coal in this country, simply 
because of the fact they can't rely on the railroads and some 
exorbitant issues that surround the cost of that shipment. This 
doesn't make any sense.
    And while we talk about, ``Well, we ought to sit down and 
talk together and work this stuff out,'' you know, that's what 
the Surface Transportation Board's supposed to do. And if the 
Surface Transportation Board isn't doing the job, it's broken. 
And I would argue, if there's no one that seems to be debating 
that issue, that they're seriously broken, then the Congress 
ought to fix it. That's the job of the Congress, is to fix 
that. And until we get that resolved, captive shippers are 
going to be abused. There's just no two ways about that. 
There's no logical way in which you can say that the railroads 
should be able to make 350-450 percent profit off of captive 
shippers and, at the same time, leave the captive shippers at 
the tail end of the bus. We get the last deliveries, because 
that's where the monopoly is.
    We heard about the investment the railroad's going to be 
making in the future. I'd like to know how much of that 
investment is going to be made on the coast, as opposed to the 
interior part of the United States. I'd like to know how much 
of that is going to be invested to delivering goods from China, 
as opposed to delivering goods internally here in the United 
States. I would suggest, and strongly suspect, that that's 
where the investment's going to be made. It's on the coast, 
delivering imported goods, not taking care of deliveries here 
in this country.
    Senator Lott. [presiding] Well, I might say that, 
representing a coastal state, it sounds good to me.
    [Laughter.]
    Senator Lott. They invest along the Mississippi Gulf Coast, 
that'd be fine.
    Thank you all for being here, again. Mr. Hamberger, since 
you have been outnumbered by a high percentage here, would you 
like to respond to anything that's----
    Mr. Hamberger. Mr. Chairman----
    Senator Lott.--been said about----
    Mr. Hamberger.--thank you. And let me just observe that, in 
the immediate parlance, I may have gotten a little hot earlier. 
I may have--frustration bubbled over, and I apologize to you--
--
    Senator Burns. I'm glad I wasn't here.
    Mr. Hamberger.--and to the Committee, and certainly no 
affront was intended either to the dignity of this Committee 
nor to the respect we owe to all of our customers. And so, I 
would just like to get that on the record.
    There are several issues I guess I would like to respond 
to. Let's start with grain. And Mr. McIntosh indicated that 
grain rates have gone up. That is correct. From 1985 to 2004, 
they've gone up 9 percent, in nominal terms; which means, 
adjusted for inflation, they have gone down. Meanwhile, the 
consumer price index, according to the GAO, has gone up 60 
percent. So, we are a good deal. We recognize that we need to 
keep our customers competitive in world markets.
    Let me address the issue of where the investments are going 
to be made. We are a private sector industry. And, in fact, the 
investments must be made where the returns warrant those 
investments. And, in some cases, that means that the revenue-
to-variable-cost ratio may have to be higher to warrant 
investment, to make sure that there is, indeed, a network 
there, that there is, indeed, service to all parts of the 
country. It is our intent, and from what I can tell, the Union 
Pacific and Burlington Northern Sante Fe just announced an 
additional hundred-million dollars to be spent triple-tracking 
the joint line coming out of Wyoming. So, the investments will 
be made exactly where the traffic warrants it and where the 
demand is. And that's the way it should be. We are a private 
sector industry.
    Senator Lott. Anything else, Conrad?
    Senator Burns. Well, I'm sure going to write out your 
statement, and then we're going to have a little visit about 
it.
    Mr. Hamberger. Yes, sir.
    Senator Burns. I have no other questions, but I just want 
to say that we've got a greater problem here. We may have 
identified where part of that problem is today, but I think 
we're in a position now where it's going to take some 
legislative fix. And I've got to be talked out of that, one way 
or the other. And right now, I'm not in that mode.
    Mr. Hamberger. We'll be in to see you.
    Senator Burns. OK. But I've just got to believe just this. 
I've picked up two or three reports in the last, oh, probably 6 
months that says, even though they look at their efficiency and 
their proficiency in the railroads--and darn if I can find any 
of them that goes above 65 percent. We know that the trains are 
running slower. We know we're down from around 24 miles an hour 
to around 20 miles an hour in some--in most cases. That tells 
me that we've got some bed problems. And--or whatever--but, 
nonetheless--and I see those coal trains roll out of Wyoming 
and Montana. You say you want to triple track in Wyoming, we'd 
take a little triple track in Montana, too. But you don't see 
that happening where there is no competition. That's the point 
we've got to make. You've got UP and Burlington running a 
common bed. And we know common beds, in some circumstances, 
work. But we don't see that kind of improvement in the 
infrastructure where there's only one railroad.
    So, I thank the witnesses today. And I thank them for their 
information. I thank them for being very frank, because I think 
it's going to take some very, very frank talk in order to fix 
this situation for these areas that were up there in yellow. 
I've got to get a color code on this guy's printer, because I 
have a hard time delineating all that.
    But I want to thank every one of you for coming. This has 
been a very important hearing.
    Thank you.
    Senator Lott. Thank you very much----
    Mr. Hamberger. Thank you, Mr. Chairman.
    Senator Lott.--to the panel and the previous panel. We 
appreciate it. We'll look forward to working with you in the 
future.
    The hearing is adjourned.
    [Whereupon, at 12:20 p.m., the hearing was adjourned.]
                            A P P E N D I X

                               Surface Transportation Board
                                      Washington, DC, June 26, 2006
Hon. Trent Lott,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Commerce, Science, and Transportation Committee,
Washington, DC.

Dear Mr. Chairman:

    Thank you for the opportunity to testify on June 21, 2006, before 
your Subcommittee on economics, service, and capacity issues in the 
freight railroad industry. This was a very important hearing and, 
because of its importance, I would like to correct, for the record, 
certain troubling statements made by two of the witnesses.
    First. Mr. Dale Schuler, testifying on behalf of the National 
Association of Wheat Growers, stated that the Board, ``after repeated 
complaints from grain shippers in Montana and North Dakota, sided with 
BNSF, allowing them to continue to single out the areas of their system 
that are the most captive.'' While I have personally heard complaints 
on my two trips to Montana, I am aware of no such complaints to the 
Board, either formally or informally.
    Second, the Honorable Glen English, testifying of behalf of the 
National Rural Electric Cooperative Association, stated that with 
regard to rates ``[i]n recent years, it has been impossible for 
shippers to get meaningful relief at the STB.'' I would point to 
Exhibit A of my written testimony, which illustrates that shippers over 
the last 10 years have prevailed in almost half of the rate cases, and 
each of these decisions has been upheld on judicial review. With 
respect to issues concerning coal shipping to power plants, I would 
note that the Board, which has exclusive jurisdiction over rail 
transportation, has not received even one complaint from any power 
company in recent months.
        Sincerely,
                                        W. Douglas Buttrey,
                                                          Chairman.
                                 ______
                                 
       Prepared Statement of Ross B. Capon, Executive Director, 
              National Association of Railroad Passengers
    Thank you for the opportunity to submit comments for the record in 
your June 21 hearing on ``Economics, Service and Capacity in the 
Freight Railroad Industry.'' Thank you also for holding a hearing on 
such an important topic.
    Beyond that, we appreciate your strong support for intercity 
passenger rail, particularly as reflected in S. 1516, and S.A. 1627.
    The National Association of Railroad Passengers has both a specific 
and a general interest in a healthy, reliable railroad network where 
average speeds are increasing, not decreasing, and where high profile 
customers like UPS are adding traffic to the network, not moving it 
from rails to trucks out of frustration over slow rail service.
    Our specific interest, of course, is to see that railroads do a 
good job of running Amtrak and commuter trains. Amtrak's current and 
recent experience is not good. In addressing our Association's board of 
directors on April 28, Amtrak Acting President and CEO David Hughes 
said that, where Amtrak uses freight railroads, on-time performance 
dropped over 50 percent from 1999 to 2005. It appears that things have 
gotten still worse this year.
    Capacity problems are a major factor. If an Amtrak train is delayed 
on a single-track railroad while a fleet of freight trains are allowed 
to run in the opposite direction, that likely is a reasonable decision 
by the dispatcher, though perhaps also an indication that the railroad 
should be double-tracked.
    Another major factor, however, is bad dispatching, for example, 
when a slow freight is dispatched just ahead of Amtrak, or when a 
freight train is switching on the mainline in front of Amtrak. On June 
10 at Terrell, Texas, Amtrak's northbound Texas Eagle (Train 22) was 
delayed over 30 minutes while a rock train switched on the mainline. 
Some of these sorts of delays appear to reflect contempt for Amtrak 
higher up in railroad management. We urge the Committee to take 
whatever action it can to improve Amtrak on-time performance in the 
near term. The rest of this statement is devoted to longer term track 
capacity issues.
    The Association's general interest in rail reflects our belief that 
greater reliance on freight and passenger rail would serve the national 
interest. This belief is widely shared by the general public, as 
reflected in a Harris poll conducted in December (before the more 
recent run-up in gasoline prices). Rail is widely recognized as 
maximizing energy and economic efficiency, minimizing environmental 
damage, and increasing the safety of our overall transportation system.
    Regarding energy, the recently-published Transportation Energy Data 
Book: Edition 25 (2003 data) again shows the extent to which railroads 
are more energy efficient than both domestic water carriers and trucks. 
Rail averaged 344 British Thermal Units (BTUs) per ton-mile compared 
with 417 for water carriers. ``Heavy single-unit and combination 
trucks'' consumed 23,461 BTUs per mile, while railroads' averaged 
15,016 BTUs per freight car mile.
    Unfortunately, the U.S. faces a huge challenge just for rail to 
maintain its existing market share. As Association of American 
Railroads (AAR) President and CEO Edward Hamberger explained at page 26 
of his prepared statement:

        ``AASHTO [in its Freight Rail Bottom Line Report released in 
        January, 2003] estimated that railroads will need to carry an 
        additional 888 million tons of freight annually by 2020 just to 
        maintain their current market share. AASHTO also found that 
        railroads will need $175 billion to $195 billion of 
        infrastructure investment over this period to accommodate this 
        traffic growth, and projected that the railroads will be able 
        to fund the majority of this investment--$142 billion--from 
        their own retained earnings and borrowing. Unfortunately, 
        according to the AASHTO analysis, the $142 billion will be 
        enough to enable railroads to handle only half of their 
        expected increase in traffic. This funding shortfall means that 
        many projects that would otherwise expand capacity and improve 
        the ability of our Nation's farms, mines, and factories to move 
        their goods to market; speed the flow of imports and exports; 
        relieve highway congestion; reduce pollution; lower highway 
        costs; save fuel; and enhance safety will be delayed--or never 
        made at all.''

    In other words, even if we can achieve the policy shifts needed to 
allow rail to maintain its market share, truck traffic would continue 
to increase in absolute terms as the economy grows. [The AASHTO report 
was issued by its Standing Committee on Rail Transportation, which at 
the time was chaired by Joseph Boardman, the current Federal Railroad 
Administrator.]
    AAR favors public-private partnerships and investment tax 
incentives. As an example of the former, he cites the $1.5 billion 
Chicago ``CREATE'' project (Chicago Region Environmental and 
Transportation Efficiency Program) ``involving the State of Illinois, 
the city of Chicago, and the major freight and passenger railroads 
serving Chicago.'' The difficulty CREATE has had getting adequate 
funding, especially the small share Federal contribution to date, 
reminds us how tough the needed ``policy shifts'' will be. If Chicago 
has this much trouble, what will come of a similar, badly needed 
project for New Orleans that is under development?
    The AASHTO figures Hamberger cites suggest public funding needs for 
freight rail are between $33 billion and $53 billion through 2020. Some 
of the legitimate, capacity-enhancing investments that will depend on 
public support may be not lend themselves so obviously to specific 
``publics'' for the ``public-private partnership'' to work. Indeed, 
there may not be enough ``CREATEs,'' that is, projects with benefits 
that draw in public partners, to yield public funding anywhere near 
$33-53 billion.
    Thus, there needs to be consideration of how to develop a Federal 
program that identifies and addresses other projects. Developing such a 
program potentially involves traversing a minefield of objections--from 
railroads that oppose any Federal action with the slightest impact on 
the competitive positions of different railroads, and from shippers 
that want Federal investment on railroads conditioned on provisions the 
railroads would consider unacceptable ``re-regulation.''
    The investment tax credit AAR supports presumably also would help 
close the big gap AASHTO identified, by stimulating more private sector 
investment than AASHTO projected. NARP's supports the investment tax 
credit, but believes that there should be an emphasis on capacity that 
also benefits intercity and commuter passenger trains or that improves 
the efficiency of publicly supported entities. Continued tax benefits 
should be tied to reliable operation of passenger trains--at least 90 
percent on-time performance. The magnitude of the benefits could be 
increased where the investment speeds up scheduled running times and/or 
permits more frequent passenger train operation.
    Obviously, we strongly support the on-time performance provisions 
in S. 1516.
    Finally, having cited AASHTO's freight report and its spending 
recommendations, I need to highlight two items related to rail 
passenger investments.

   AASHTO's other January 2003 report, Intercity Passenger Rail 
        Transportation, said about $17 billion needs to be invested in 
        intercity passenger rail corridors over the next 6 years, and 
        $43 billion over the next two decades.

   Amtrak's Fiscal 2007 Grant Request recommends, as a 
        ``strategic investment option,'' a $50 million capital matching 
        program aimed at ``chokepoints'' on the freight network, and 
        says the program could be administered by DOT, in cooperation 
        with Amtrak, the freight railroads and the states.

    Both of the above would benefit freight operations, just as many 
passenger-inspired investments already have benefited freight--notably, 
in California, capacity improvements for the Los Angeles Metrolink 
(commuter rail) system and on BNSF's San Joaquin Valley line, and 
restoration of double-track west of Sacramento on Union Pacific.
    Thank you, Mr. Chairman, for your yeoman efforts to create a 
funding mechanism that would let the Nation begin to address these 
needs.
    Thank you for considering our views.
                                 ______
                                 
 Prepared Statement of the Burlington Northern Santa Fe Railway (BNSF)
    BNSF believes that the GAO study finding with regard to grain rates 
in Montana to be overstated in at least two respects:

        1. The data relied upon by GAO in its study did not take into 
        account various discounts and other allowances from BNSF's 
        published grain rates that were being paid by BNSF in 2004. 
        There are three separate discounts paid on a regular basis on 
        each shuttle train movement of grain originating in Montana. 
        First, under its Origin Efficiency Program, BNSF pays the 
        shipper a discount of $100 per car provided that the shuttle 
        train is loaded within 15 hours. Second, under its Destination 
        Efficiency Program, BNSF pays the receiver of the shuttle train 
        $100 per car provided that the shuttle train is unloaded within 
        15 hours. Third, the holder of the shuttle train certificate is 
        paid $100 per car for each trip made pursuant to the holder's 
        volume commitment under the shuttle certificate. These 
        discounts amount to $300 per carload of grain moving in shuttle 
        trains originating in Montana and are paid on the vast majority 
        of shuttle train movements in Montana. Any accurate calculation 
        of the revenue/variable cost ratio must take account of these 
        discounts.

        2. Also, since 2004 BNSF has taken significant rate reductions 
        to its shuttle train rates for wheat originating in Montana. 
        For example, at the beginning of 2005, the per car rate on 
        wheat moving in a shuttle train from Collins and Macon, 
        Montana, was $2,811 and $3,629 for movement to the Pacific 
        Northwest. Through a series of rate decreases during 2005 and 
        2006, the current per car wheat rates in shuttle trains are 
        $2,481 for Collins and $3,175 for Macon. These reductions 
        amount to about 12 percent. Similar rate reductions have taken 
        place from other Montana origins. The GAO study, because it 
        used earlier data, does not reflect these very significant rate 
        reductions.

    The impact of the first point indicates that the GAO finding that 
39 percent of grain tonnage moving in Montana at a Revenue/Variable 
Cost (R/VC) ratio in excess of 300 in 2004 is substantially overstated. 
The second point shows that today the amount of tons moving in Montana 
producing a R/VC ratio in excess of 300 would be even smaller.
                                 ______
                                 
      Prepared Statement of the Portland Cement Association (PCA)
    The Portland Cement Association (PCA) appreciates the opportunity 
to submit testimony to the Subcommittee regarding economics, service 
and capacity issues in the freight railroad industry. The current 
national rail policy and lack of capacity impedes portland cement 
manufacturers from effectively and efficiently delivering an essential 
commodity needed to build our Nation's vital infrastructure and 
strengthen our Nation's economy. With more than 80 percent of portland 
cement manufacturing plants served by (or ``captive'' to) a single 
Class I railroad the current rail policy is unnecessarily contributing 
to higher construction costs.
What Is Portland Cement?
    The term ``portland'' cement is not a brand name--rather, it is a 
generic name for the type of cement used in concrete, just as stainless 
is a type of steel. Portland cement is a manufactured powder that acts 
as the glue or bonding agent that forms concrete. As an essential 
construction material and a basic component of our Nation's 
infrastructure, portland cement is utilized in numerous markets, 
including the construction of highways, streets, bridges, airports, 
mass transit systems, commercial and residential buildings, dams, and 
water resource systems and facilities. The low cost and universal 
availability of portland cement ensures that concrete remains one of 
our Nation's most essential and widely used construction materials.
Portland Cement Association
    PCA is a trade association representing cement companies in the 
United States and Canada. PCA's membership consists of 31 companies 
operating 102 manufacturing plants in 36 states. PCA members account 
for 98 percent of cement-making capacity in the United States. The 
cement industry is a crucial component of one of the largest segments 
of our Nation's economy--the more than one trillion dollar construction 
industry. Nearly every construction project requires portland cement. 
In 2005, 127 million metric tons of portland cement were consumed in 
the United States; in fact, cement is the second most consumed 
commodity on the planet, second only to water.
U.S. Cement Industry Demographics
    The cement industry operates manufacturing plants in 36 states, 
producing nearly 96 million metric tons of portland cement in 2005. 
Cement manufacture is a highly capital-intensive industry. Cement 
companies invest millions of dollars annually to upgrade manufacturing 
equipment and phaseout more costly and less energy efficient 
operations. Between 1994 and 2003 the cement industry invested $7.542 
billion in new capital investment. The construction and permitting 
costs of a new greenfield cement plant can easily exceed $250 million. 
Only two greenfield plants have been constructed within the past 10 
years.
    Cement is produced from various abundant raw materials including 
limestone, shale, clay and silica sand. These minerals are ground and 
heated in large rotary kilns to temperatures as high as 3,400 degrees 
Fahrenheit. The heat of the combustion fuses these materials into 
clumps of an intermediate material called clinker. When the clinker is 
discharged from the kiln, it is cooled and later ground with a small 
amount of gypsum to produce the gray powder known as portland cement. 
Different types of portland cement are manufactured to meet various 
physical and chemical requirements.
    Portland cement manufacturing facilities use an enormous amount of 
energy. In fact, energy is the largest cost component in the 
manufacture of portland cement. The U.S. cement industry is largely 
coal fired with 81.3 percent of all plants using coal, coke, or some 
combination of the two as primary kiln fuel in 2004. The domestic 
cement industry is the largest industrial consumer of coal. Much of the 
coal utilized to heat cement kilns on a 24/7 basis is delivered by 
rail.
    The cement industry is regional in nature. Most cement 
manufacturing plants are located in rural areas near large limestone 
deposits, the principal ingredient in producing cement. However, at the 
same time plants also must be located near markets because the cost of 
shipping cement quickly overtakes its value. As such, customers 
traditionally purchase cement from local sources. Texas, California, 
Florida and Pennsylvania, are the leading cement manufacturing states, 
respectively, producing nearly 36 million tons in 2005 or 37.4 percent 
of domestic cement production.
U.S. Cement Manufacturers Rely on Railroads
    Considering the regional nature of the cement industry, it is 
critical that there are reliable and cost-effective transportation 
options available. Average cement shipments range between 250 to 300 
miles. Truck transportation is not economical beyond 125 miles. As 
such, the cement industry is reliant on railroads to deliver our 
product beyond the economical range of trucks. Several cement plants 
have access to water transportation for domestic shipments. The 
railroads have sometimes argued that these cement facilities are not 
captive since there are alternative modes of transportation available. 
This simply is not the case. Domestic portland cement manufacturers 
rely on rail transportation to move 50 percent of all shipments between 
cement plants and distribution terminals, according to 2004 U.S. 
Geological Survey data, the most recent independent figures available. 
About 95 million tons of cement was produced domestically in the same 
year. Most bulk cement shipments are from the manufacturing plants to 
the more than 400 regional distribution terminals, where the cement is 
then delivered by truck to local contractors and ready mixed producers. 
It is vitally important to our industry that the railroads provide 
reliable, efficient and cost-effective service to meet the widespread 
demand for our product. As mentioned earlier, more than 80 percent of 
U.S. cement manufacturing plants are captive to a single railroad. Due 
to the absence of competition, these plants are charged substantially 
higher rates and usually receive poor service. On the other hand, dual 
rail-served facilities typically have lower rates and more reliable 
service.
    The railroads also transport millions of tons of inbound coal 
shipments to fuel cement manufacturing plants each year. There are 
examples within the industry in which cement plants that are served by 
two railroads receive coal from a supplier that is captive to a single 
railroad. There are also instances where both the cement plant and the 
coal supplier are captive to a single railroad. These situations result 
in unnecessarily high rail rates that add to the cost of cement and, 
ultimately, to construction costs. PCA members have also reported 
situations in which they were forced to transport coal to the cement 
plant by truck, at a substantial cost, due to delivery failures by the 
railroad. In these instances, the situation confronting the cement 
plants were desperate: they had only a day or two of coal supply on 
hand.
U.S. Cement Industry Largely ``Captive'' and Service Suffers
    The Staggers Act of 1980, which removed regulations of the railroad 
industry where transportation competition exists, has improved the 
industry's efficiency and financial stability. However, since 
deregulation, there has been a sharp decline from 63 Class I railroads 
in 1976 to just four major Class I railroads today handling 90 percent 
of the Nation's rail traffic. This consolidation has contributed to 
diminished competition as well as ineffective and inconsistent rail 
service for the cement industry and many others.
    Inconsistent and unreliable service from the Class I railroads is 
one of the most serious problems the portland cement industry confronts 
in our efforts to bring an affordable and essential product to market. 
Service encompasses many aspects of rail transportation, including 
picking up rail cars (typically covered hoppers), on-time delivery of 
rail cars, providing empty rail cars, handling issues, questions about 
the condition of the rail cars, and settling claims for service 
failures. The cars supplied by the railroads are typically old, poorly 
maintained and frequently a safety concern. Our members report that as 
many as 15 percent of the empty rail cars delivered to manufacturing 
plants in a given week are being rejected.
    In recent years, several cement companies have been forced to 
purchase private rail cars since the Class I railroads have refused to 
add cement rail cars to their fleets. This, in addition to the 
declining and inconsistent service, has increased the need for more 
rail cars to deliver the same tonnage. Meanwhile the railroads have 
added tariff provisions charging for the storage (demurrage) of private 
rail cars. This results in further increased costs to the cement 
shipper while providing no incentive to the rail carriers to improve 
their service.
    Further compounding the problem is the fact that at some locations, 
the railroad will only quote freight rates to the cement company if the 
cement company uses their (system) rail cars. In short, no product will 
move from that origin unless the railroad is collecting revenue for the 
use of their rail cars. In other instances, the railroads quote rates 
such that the difference in cost of a movement in a private rail car is 
so great that private rail car transports are not economical. Rail car 
supply is a classic Catch 22 situation that adds unnecessarily to the 
cost and inefficient shipment of our product and, ultimately, to 
construction costs.
    While service continues to decline, cement manufacturers are 
experiencing sharp rail freight rate increases. For example, some rates 
increased more than 23 percent in 2005, according to some cement 
companies. Indeed, transit times on empty return cars have increased by 
more than 13 percent in some instances, increasing fleet storage costs.
PCA Supports Service Provisions in Legislation
    The cement industry has no recourse regarding rates since cement 
(officially ``hydraulic cement'') is classified as an exempt product 
from rate regulation by the Surface Transportation Board (STB). Since 
the STB has done little to address service issues, we believe Congress 
should enact legislation expanding the STB's authority in this area. 
The STB should be required to post a description of each complaint from 
a customer about rail service. The legislation should also require the 
Board to submit an annual report to Congress regarding rail service 
complaints and describe the procedures the Board took to resolve them. 
Further, either party should be allowed to submit a dispute over rail 
service to the STB for ``final offer'' arbitration. These provisions 
are included in bipartisan legislation (S. 919), the Railroad 
Competition Act of 2005. These service provisions contained in S. 919 
do not constitute ``re-regulation,'' a term coined by the railroad 
industry to overstate the perceived negative impact of the legislation.
    We believe strongly that the lack of rail competition is the 
fundamental issue associated with these problems. PCA believes it is 
important to strike a balance between regulation of the railroad 
industry while also assuring rail competition. PCA believes that the 
intent of Congress in the Staggers Act was only to deregulate the 
railroads where competition exists. Unfortunately, the implementation 
of the Act has resulted, often, in deregulation even where there is no 
transportation competition--with predictable results such as those we 
are reporting.
    The following example further illustrates the unintended 
consequences of the Staggers Act, as implemented, on a captive shipper.
    PCA member Holcim (US) Inc. established HolRail, a limited 
liability corporation, to construct and operate a two-mile rail line 
that would provide competitive rail service to the Holcim cement 
manufacturing plant in Holly Hill, South Carolina. Presently, Holly 
Hill is served only by CSX Transportation, Inc. (CSX). The proposed 
line would connect to a rail line owned by the Norfolk Southern 
Railroad Company (NSR).
    Holcim is one of the largest suppliers of portland and blended 
cements and related mineral components in the United States. It ships 
more than 20 million tons of cement and related materials each year, of 
which 16 percent moves by railroad. Holcim has 14 manufacturing 
facilities and approximately 70 distribution terminals across the 
country and employs approximately 2,500 people in the United States.
    The Holly Hill production facility manufactures a variety of cement 
and masonry products and relies on rail transportation to receive 
inbound raw materials and to ship outbound products. In August 2003, 
Holcim completed a plant expansion project that increased the size of 
the facility and doubled output capacity to two million tons of cement 
per year. A substantial portion of Holly Hill's production is shipped 
by rail to Holcim distribution terminals to serve markets that are over 
100 miles from the facility. Because trucking cement over distances 
greater than 100 miles is uneconomic and impractical, Holly Hill 
requires reliable, economic, and efficient rail transportation to reach 
optimal plant utilization.
    When the Holly Hill plant operates at full capacity, the plant 
annually receives 3,500 inbound rail cars with fuel and raw materials 
and ships out 10,000 rail cars with cement. As the only rail carrier 
with direct access to the Holly Hill plant, CSX transports all inbound 
raw materials and outbound products that move by rail. CSX's service 
track record is weak. Its service is unreliable and inadequate, and CSX 
appears to be completely indifferent to Holcim's requirements and 
requests for service improvements. For example, CSX has refused to 
allow Holcim to use its private railcar fleet to transport Holly Hill's 
products even when CSX cannot provide its own cars to meet the needs of 
the plant! CSX recently eased its objection to this practice. The CSX 
equipment is in poor condition and is routinely rejected at the Holly 
Hill facility. By contrast, two other cement plants in the Holly Hill 
area that are not captive to a single railroad are freely allowed to 
ship product in private cars without the restrictions that CSX imposes 
on Holcim.
    In addition to CSX's inadequate railcar service and its 
restrictions on private cars, CSX charges Holcim rates that exceed 
those paid by the two nearby cement manufacturers that have competitive 
rail service. By obtaining rail competition, through its ``build out'' 
to NSR, Holcim will place Holly Hill on equal footing with other 
comparable cement facilities that have access to more than one 
railroad.
    CSX's consistently poor service, which has caused Holcim to lose 
business opportunities in the past, simply cannot meet the needs of 
Holly Hill's expanded production capacity. Holcim believes that 
competition between CSX and NSR at Holly Hill will produce more 
responsive, more reliable, and better rail service. Improved rail 
service will support the facility's increased production and allow 
Holcim to supply distant markets and to compete in new markets.
    Additionally, rail-to-rail competition will lead to a reduction in 
rail rates, making Holly Hill more competitive with non-captive 
producers. Accordingly, HolRail, the Holcim subsidiary, has filed a 
petition with the STB to construct a two-mile rail line, running south 
from the Holly Hill plant to the NSR line. The petition is currently 
pending before the STB.
    Another example of the unintended consequences of the Staggers Act 
involves a captive east coast cement company that must transport cement 
300 miles by rail to its distribution terminal to meet customer demand. 
The applicable rail rate is so outrageously high the cement company 
concluded that importing cement from China to the east coast is less 
expensive than shipping it 300 miles by rail.
Demand for Cement to Increase
    United States cement consumption reached a record high during 2005, 
peaking at 127 million metric tons and reflecting growth of 5.6 percent 
over strong 2004 levels. The near term outlook for the cement market 
remains strong. Growth in cement consumption is expected to materialize 
due to continued increases in construction activity as well as 
increases in the use of concrete and cement per construction dollar 
spent. Despite the likelihood that the growth boom in residential 
housing construction may be nearing an end, gains in nonresidential and 
public construction are emerging as new sources for growth in 
construction activity. Gains in these areas are expected to outweigh 
modest declines in residential construction--resulting in a 
continuation of growth in construction activity. Furthermore, various 
influences suggest that the increases in concrete and cement usage per 
dollar of construction activity will continue. The combination of 
sustained strength in construction activity and cement usage per dollar 
of construction activity is expected to result in new cement 
consumption records in 2006 through 2007 and beyond. From 2005's record 
levels, cement consumption is expected to grow 3.5 percent in 2006 and 
another 2.5 percent in 2007.
    Cement and concrete are literally one of the building blocks of our 
Nation's economic growth. Strong cement demand reflects the need for 
business to expand commerce by way of increasing its physical 
properties, whether it be retail shops, warehouses or office buildings. 
It also reflects the need for Federal, state and local governments to 
build new schools, improve its road systems and general infrastructure. 
It also reflects the need to build new housing to meet growth in 
population and household formation. Furthermore, according to the 
Bureau of Census, the United States population is expected to grow by 
68 million persons in the next 25 years. As a result, new demand for 
commercial, public and residential construction activity will increase. 
According to PCA's long term forecast, cement consumption is expected 
to grow from 127 million metric tons in 2005 to 200 million metric tons 
in 2030.
    To meet the future U.S. cement and concrete requirements, the 
United States cement industry currently is engaged in its most 
aggressive capacity expansion in the industry's history. Based on 
announced and permitted plans, by 2010 the industry will add 18.6 
million metric tons (20.6 million short tons) of clinker capacity--
representing a 19.8 percent increase over 2005 capacity levels and a 
$4.1 billion commitment. The capacity expansion reflects a mix of 
greenfield sites, plant modernizations, and expansions of existing 
facilities. In addition, the industry is committed to the expansion of 
its import facilities--amplifying the industry's commitment to expand 
all sources of supply to meet the national economy's rising need for 
cement and concrete. At least 63 percent of the new capacity expansion 
and modernizations underway at existing facilities are captive to a 
single railroad. Although three greenfield facilities are scheduled to 
start production during this period, the cement industry is largely 
limited to modernizing and expanding its capacity at existing 
facilities because of high construction and permitting costs to build a 
greenfield cement plant. Since cement industry capacity expansion must 
follow projected market demographics largely based on population 
growth, much of the expansion will occur in the southern and western 
regions of the United States where the vast majority of the cement 
facilities are captive to a single railroad. In short, the cement 
industry is forced to expand capacity where it is captive to a single 
railroad--despite our industry's concern about that captivity.
    While the industry has proven it commitment to providing reliable 
and adequate supplies of cement and concrete to meet U.S. needs, these 
efforts are partially offset by existing rail constraints. The existing 
lack of adequate rail capacity impedes portland cement manufacturers 
from effectively and efficiently delivering its product to the 
marketplace. The rail capacity shortfall relative to existing 
requirements of the economy is reflected in a rapid run-up in rail 
freight rates--rising by 11.7 percent in 2005 according to the Bureau 
of Labor Statistics. As the economy grows and more cement capacity is 
put in place, it is likely that existing rail constraints will be 
exaggerated, potentially leading to a repeat of the large rate hikes 
experienced in 2005. Furthermore, it is important to recognize that 
other essential building materials rely heavily on the railroads to 
move product to market--amplifying the adverse consequences of rail 
constraints on overall economic growth.
    Construction currently accounts for approximately 6.7 percent of 
total economic activity. One out of every 18 jobs in the U.S. is 
directly employed by the construction industry. Since 2000, growth in 
construction employment has accounted for 30 percent of the United 
States' total employment growth. Very little construction activity can 
materialize without utilizing concrete at some stage of the 
construction project. Impairment in the ability to deliver cement to 
market efficiently, impairs construction activity and represents an 
issue that could impede future growth in this important sector of our 
Nation's overall economic activity.
Freight Railroad Infrastructure Tax Credit
    The Class I railroads state that they are committed to expanding 
capacity and improving service, spending an estimated $6.6 billion for 
capital expenditures in 2005 and projecting to spend a record $8 
billion in 2006. To further enhance capital improvement and increase 
capacity, the Class I railroads are seeking a 25 percent Federal tax 
credit to leverage private investment in rail infrastructure 
improvements and other capital expenses. The proposal reportedly would 
also make the tax credit available to certain shipper funded rail 
projects.
    PCA supports increasing investment in the Nation's rail 
infrastructure to meet the current and future freight transportation 
needs. As the Class I railroads report profit increases, now is the 
time for the railroad industry to bolster investment to expand capacity 
and improve service, especially for captive shippers that typically pay 
much higher rates and experience poor to marginal service.
    PCA would be inclined to support a tax credit if Class I railroads 
are required to invest in rail capacity projects that would provide 
relief to captive shippers. This requirement would have the benefit of 
reducing highway congestion, creating a more efficient freight rail 
system for all shippers, including particularly domestic shippers who 
generally are the ones that are captive, and heavy truck traffic on our 
highways and local streets, thus reducing highway maintenance cost. 
Requiring that the tax credit for rail capacity enhancements be focused 
on the infrastructure needed to serve captive rail customers would be 
the most prudent and sound use of taxpayer dollars. The cement industry 
also believes that Congress should further study the concept and 
feasibility of a railroad trust fund, similar to the Highway Trust 
Fund, to finance rail capacity and capital projects. Finally, we want 
to see any tax benefit for the railroad industry coupled with 
legislation that addresses the concerns of railroad customers that the 
rail industry be more competitive.
    The higher rates and unreliable service often associated with 
captive cement plants often forces our industry to transport cement by 
bulk tank truck to distribution terminals and customers at a much 
higher cost. It is critical that cement manufacturers maintain adequate 
inventories of product to meet contractor demand. Contractors utilizing 
portland cement in large-scale concrete paving projects, for example, 
need a constant and reliable supply of cement to meet construction time 
tables and to plan for weather delays and other construction 
complications. Just as contractors expect timely shipments of cement 
from the cement company, it is the obligation of the railroad, we 
believe, to deliver shipments of cement in a timely manner.
Conclusion
    U.S. manufacturers need a vibrant and profitable rail industry to 
support our Nation's economic growth. The portland cement industry is a 
vital component of our Nation's construction industry, which supports 
the backbone of our Nation's growing economy. It is essential that the 
portland cement industry have access to a competitive rail 
transportation system to ensure that our product is delivered in a 
timely and efficient manner to our customers who build our Nation's 
critical infrastructure fostering economic expansion. With more than 80 
percent of the cement manufacturing plants and a similar ratio of the 
industry's 400 distribution terminals held captive to a single 
railroad, combined with the inadequate service at these facilities, 
only adds to our Nation's construction costs. Demand for cement is 
forecast to increase for the foreseeable future, only exacerbating this 
problem.
    PCA strongly urges the Subcommittee to further examine S. 919, the 
Railroad Competition Act of 2005, especially provisions that would 
expand STB's authority over service-related issues. This provision, 
among others, would help provide some relief for captive industries, 
such as the cement industry.
    Thank you for the opportunity to submit testimony to the 
Subcommittee on this important issue.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Conrad Burns to 
                           W. Douglas Buttrey
    Question 1. I hear a lot of concern from rail customers about two 
rulings of the STB that are perceived as preventing competition--in 
direct conflict with what Congress directed the STB to do, which was 
work toward competitive markets and protect shippers where there is no 
competition. One concern is the ``bottleneck'' decision that, 
essentially, says that a railroad does not have to provide a customer a 
rate to a point where a movement may move onto a competing railroad. 
Second, both the STB and the ICC before it have approved what I believe 
are anti-competitive contracts--known as ``paper barriers''--in track 
lease agreements between the major railroads and short lines meaning 
that short lines may only do business with the railroad leasing the 
track, even though the short line might connect to another major 
carrier.
    Your agency has the authority to take administrative action to 
promote competition, yet these decisions do just the opposite. Can the 
STB act on its on initiative to change these rulings or must someone 
bring a request to the STB that it change its ruling on these issues? 
If you can, then why don't you?
    Answer. The STB has the authority to initiate hearings and 
rulemaking proceedings to address issues like those described above. As 
an illustration, we are having a hearing on July 27 to examine the role 
of ``paper barriers'' in the rail industry. That hearing will explore 
questions such as whether the agreements are anticompetitive, whether 
they are harmful/beneficial, the extent of such agreements in the 
industry and the agency's remedial powers.
    The Board has not acted to modify the bottleneck decision, which 
was premised on pronouncements by the Supreme Court in Great N. Ry. v. 
Sullivan, 294 U.S. 548 (1935). Since the 1980 Staggers Act and the 1995 
ICCTA did not disturb any portion of the Court's ruling in the 1935 
decision, the Board has concluded that that decision is settled law.

    Question 2. To what extent can the STB initiate investigations of 
railroad practices in markets where it sees abuses of pricing power, or 
severe deficiencies in service?
    Answer. The STB has broad authority to issue emergency service 
orders for a total of up to 270 days to address clearly emergency 
situations in freight rail service. Under 49 U.S.C. 11123, our 
emergency powers can be used to address serious rail service 
disruptions whether they result from damage to rail tracks and 
facilities, from serious congestion of the rail network, or from the 
inability of a carrier to meet its transportation obligations for 
whatever reason. The STB can exercise these powers on its own 
initiative.
    In contrast, under 49 U.S.C. 11704, we cannot investigate the 
reasonableness of common carrier rates unless the shipper files a 
formal complaint with the Board.

    Question 3. Does the STB take its duty to provide for competition 
and protect shippers seriously, or does it simply sit back and wait for 
shippers to jump through all the hurdles and expense of filing an 
actual rate case?
    Answer. We take our duty to protect captive shippers very 
seriously. In the last 6 months, we have initiated a series of 
proceedings to investigate general complaints from the captive shipper 
community, addressing such issues as fuel surcharges, paper barriers, 
and the complexity and expense of our rate cases. But if a complainant 
wants rate relief, the statute requires that it first file a complaint 
with the Board. For a large rail rate dispute, a captive shipper would 
seek relief under our Constrained Market Pricing guidelines, which is 
an expensive process. If, however, the value of its case cannot justify 
the expense of a full stand-alone cost presentation, the captive 
shipper may use our simplified guidelines, and pay only a $150 filing 
fee.

                                  
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