[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




                      RAIL COMPETITION AND SERVICE

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

                                (110-70)

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                           SEPTEMBER 25, 2007

                               ----------                              

                       Printed for the use of the
             Committee on Transportation and Infrastructure

                      RAIL COMPETITION AND SERVICE

                      RAIL COMPETITION AND SERVICE

                      RAIL COMPETITION AND SERVICE

                      RAIL COMPETITION AND SERVICE

                      RAIL COMPETITION AND SERVICE

                      RAIL COMPETITION AND SERVICE

 
                      RAIL COMPETITION AND SERVICE

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

                                (110-70)

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 25, 2007

                               __________


                       Printed for the use of the
             Committee on Transportation and Infrastructure

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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                 JAMES L. OBERSTAR, Minnesota, Chairman

NICK J. RAHALL, II, West Virginia,   JOHN L. MICA, Florida
Vice Chair                           DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon             THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois          HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of   JOHN J. DUNCAN, Jr., Tennessee
Columbia                             WAYNE T. GILCHREST, Maryland
JERROLD NADLER, New York             VERNON J. EHLERS, Michigan
CORRINE BROWN, Florida               STEVEN C. LaTOURETTE, Ohio
BOB FILNER, California               RICHARD H. BAKER, Louisiana
EDDIE BERNICE JOHNSON, Texas         FRANK A. LoBIONDO, New Jersey
GENE TAYLOR, Mississippi             JERRY MORAN, Kansas
ELIJAH E. CUMMINGS, Maryland         GARY G. MILLER, California
ELLEN O. TAUSCHER, California        ROBIN HAYES, North Carolina
LEONARD L. BOSWELL, Iowa             HENRY E. BROWN, Jr., South 
TIM HOLDEN, Pennsylvania             Carolina
BRIAN BAIRD, Washington              TIMOTHY V. JOHNSON, Illinois
RICK LARSEN, Washington              TODD RUSSELL PLATTS, Pennsylvania
MICHAEL E. CAPUANO, Massachusetts    SAM GRAVES, Missouri
JULIA CARSON, Indiana                BILL SHUSTER, Pennsylvania
TIMOTHY H. BISHOP, New York          JOHN BOOZMAN, Arkansas
MICHAEL H. MICHAUD, Maine            SHELLEY MOORE CAPITO, West 
BRIAN HIGGINS, New York              Virginia
RUSS CARNAHAN, Missouri              JIM GERLACH, Pennsylvania
JOHN T. SALAZAR, Colorado            MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California      CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois            TED POE, Texas
DORIS O. MATSUI, California          DAVID G. REICHERT, Washington
NICK LAMPSON, Texas                  CONNIE MACK, Florida
ZACHARY T. SPACE, Ohio               JOHN R. `RANDY' KUHL, Jr., New 
MAZIE K. HIRONO, Hawaii              York
BRUCE L. BRALEY, Iowa                LYNN A WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          CHARLES W. BOUSTANY, Jr., 
TIMOTHY J. WALZ, Minnesota           Louisiana
HEATH SHULER, North Carolina         JEAN SCHMIDT, Ohio
MICHAEL A. ACURI, New York           CANDICE S. MILLER, Michigan
HARRY E. MITCHELL, Arizona           THELMA D. DRAKE, Virginia
CHRISTOPHER P. CARNEY, Pennsylvania  MARY FALLIN, Oklahoma
JOHN J. HALL, New York               VERN BUCHANAN, Florida
STEVE KAGEN, Wisconsin
STEVE COHEN, Tennessee
JERRY McNERNEY, California
LAURA A. RICHARDSON, California

                                  (ii)

                                CONTENTS

                                                                   Page

Summary of Subject Matter........................................     v

                               TESTIMONY

Buttrey, W. Douglas, Vice Chairman, Surface Transportation Board.    21
Clayton, Kenneth C., Associate Administrator, Agricultural 
  Marketing Science, U.S. Department of Agriculture..............    21
Diehl, Susan M., Senior Vice President, Logistics and Supply 
  Chain Management, Holcim, Inc..................................    70
English, Glenn, Chief Executive Officer, National Rural Electric 
  Cooperative Association........................................    70
Harper, Ronald R., Chief Executive Officer and General Manager, 
  Basin Electric Power Cooperative...............................    70
Hecker, Jayetta Z., Director, Physical Infrastructure Issues, 
  Government Accountability Office...............................    21
Hurst, Wayne, Vice President, Idaho Grain Producers Association, 
  on behalf of the National Association of Wheat Growers.........    70
Huval, Terry, Director, Lafayette Utilities Service..............    70
Marshall, Charlie, Vice President of Development, Farm Rail 
  System, Inc....................................................    97
Mulvey, Francis P., Board Member, Surface Transportation Board...    21
Nottingham, Charles D., Chairman, Surface Transportation Board...    21
Rennicke, William, Director, Oliver Wyman, Inc...................    97
Spitzer, Gary, Vice President and General Manager, Chemical 
  Solutions Enterprise, DuPont...................................    70
Young, Jim, Chairman, President, Chief Executive Officer, Union 
  Pacific........................................................    97

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Baker, Hon. Richard H., of Louisiana.............................   119
Brown, Hon. Corrine, of Florida..................................   121
Carnahan, Hon. Russ, of Missouri.................................   392
Cohen, Hon. Steve, of Tennessee..................................   393
Cummings, Hon. Elijah E., of Maryland............................   394
Lampson, Hon. Nick, of Texas.....................................   403
Mitchell, Hon. Harry E., of Arizona..............................   404
Rahall, Hon. Nick J., of West Virginia...........................   406
Salazar, Hon. John T., of Colorado...............................   410
Smith, Hon. Adrian, of Nebraska..................................   418
Walz, Hon. Timothy J., of Minnesota..............................   419

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

Buttrey, W. Douglas..............................................   420
Clayton, Kenneth C...............................................   425
Diehl, Susan M...................................................   434
English, Glenn...................................................   443
Harper, Ron......................................................   450
Hecher, JayEtta Z................................................   455
Hurst, Wayne.....................................................   487
Huval, Terry.....................................................   502
Marshall, Charles N..............................................   518
Mulvey, Francis P................................................   529
Nottingham, Charles D............................................   541
Rennicke, William J..............................................   608
Spitzer, Gary W..................................................   645
Young, James R...................................................   658

                       SUBMISSIONS FOR THE RECORD

Brown, Hon. Corrine, a Representative in Congress from the State 
  of Florida, a sample of 2,000 letters sent to Members of the 
  House and Senate in opposition to H.R. 2125 and S. 953.........   126
A sample of letters sent to the Committee in support of H.R. 2125   295
Kagen, Hon. Steve, a Representative in Congress from the State of 
  Wisconsin:

  Letter to the Congressman from Badger-CURE, Wisconsin Consumers 
    United for Rail Equity.......................................   400
  Letter to the Congressman from Wayne Toltzman, Mayor of the 
    City of New London, Wisconsin................................   402
Salazar, Hon. John T., a Representative in Congress from the 
  State of Colorado:

  Letter to the Congressman from Timothy J. Larsen, Senior 
    International Marketing Specialist, Colorado Department of 
    Agriculture, Markets Division................................   413
  Letter to the Congressman......................................   417
Surface Transportation Board, W. Douglas Buttrey, Charles D. 
  Nottingham, Francis P. Mulvey, responses to questions from the 
  Committee......................................................   421
Nottingham, Charles D., Chairman, Surface Transportation Board, 
  responses to questions from the Committee......................   563
Young, Jim, Chairman, President, Chief Executive Officer, Union 
  Pacific, responses to questions from the Committee.............   684

                        ADDITIONS TO THE RECORD

Air Liquide, L. Richard Pedersen, Director, National Distribution 
  and Logistics, written statement...............................   686
Alliance for Rail Competition, American Soybean Association, 
  American Sugarbeet Growers Association, National Associations 
  of Wheat Growers, National Barley Growers Association, National 
  Farmers Union, United States Beet Sugar Association, USA Dry 
  Pea & Lentil Council, US Dry Bean Council, USA Rice Federation, 
  written statement..............................................   693
Association of American Railroads, written statement.............   695
BASF Corporation, NAFTA Logistics, David McGregor, Senior Vice 
  President, written statement...................................   718
Minnesota Municipal Utilities Association, written statement.....   728
National Corn Growers Association, written statement.............   732
Rhodia Inc., James Harton, President, written statement..........   741
Steel Manufacturers Association, written statement...............   744
Total PetroChemicals USA, Inc., Richard L. Charter, Senior Vice 
  President, written statement...................................   747
U.S. Department of Transportation, Tyler D. Duvall, Assistant 
  Secretary for Transportation Policy, written statement.........   751
UPM Blandin Paper, Joseph C. Maher, General Manager, written 
  statement......................................................   753
Washington State Potato Commission, Chris Voigt, Executive 
  Director, Paul Vander Stoep, Consultant, written statement.....   755
Waterfront Coalition, Ezra Finkin, Legislative Director, written 
  statement......................................................   759
Wisconsin Agri-Service Association, Inc., John Petty, Executive 
  Director, written statement....................................   761

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                HEARING ON RAIL COMPETITION AND SERVICE

                              ----------                              


                      Tuesday, September 25, 2007

                  House of Representatives,
    Committee on Transportation and Infrastructure,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:10 a.m., in Room 
2167, Rayburn House Office Building, the Honorable James L. 
Oberstar [Chairman of the Committee] presiding.
    Mr. Oberstar. The Committee on Transportation and 
Infrastructure will come to order, with apologies from the 
Chair for not being on railroad time. Unfortunately, I had more 
meetings this morning to attend to than I could fit in the 
requisite time in order to start this hearing on order.
    October 14 marks the anniversary of the passage of the 
Staggers Rail Deregulation Act. I remember so well in the days 
leading up to that vote and on the day of the vote itself being 
in some indecision about whether this was a good policy for the 
Country or whether it would, in the end, turn around to be 
harmful to us.
    I could understand we had already passed trucking 
deregulation, intercity bus deregulation. We had enacted 
aviation deregulation. It made an awful lot of sense that 
trucks could move and enter markets and compete with each 
other. Intercity buses could do the same. Airlines could 
compete with one another through different airports.
    But I found it difficult how you would be able to pick up a 
set of rail tracks, move them around to different cities and 
actually compete. We had 60 Class I railroads. The argument was 
we would have an awful lot of competition if we just took the 
Government out of deciding market entry and pricing. In the 
end, I voted for it.
    Well, today, we have seven Class I railroads. The freight 
rail network in 1980 was 178,000 miles. Today, we have 140,810 
route miles. Abandonments, spinoffs to short lines, all have 
caused a deterioration in the miles and in the market 
opportunities.
    Railroad fortunes also had a dramatic turnaround. Many 
railroads were on the brink of bankruptcy in those years just 
prior to the Staggers Act, and that stands in stark contrast to 
their financial today. In the last 10 years alone, the combined 
income of the Class I railroads, seven Class I railroads, has 
increased over 104 percent, $3.7 billion to $7.6 billion.
    I think we have a slide on that to put up. It shows how 
revenues are going up. It also shows a rather paltry investment 
in capital expenditures, and that has antecedents in the 
marketplace. When railroads were not doing as well, the 
shareholders were insisting on withholding on capital 
investments.
    You can see a little tilt upward now in 2006, a pretty 
substantial investment in that year, but it does not by any 
means compensate for the years of low investment, somewhat 
reflective of what the Federal Government has done with the 
rest of our transportation infrastructure.
    On paper, we have seven Class I railroads, but in reality 
the railroad industry has consolidated, has evolved into two 
regional duopolies, essentially east of the Mississippi, CSX 
and Norfolk Southern, and one in the West, Union Pacific and 
BNSF.
    In that market setting, shippers with access to two rail 
carriers offer counter rail rates closer to those of a captive 
shipper. A shipper operating in a duopoly market is like a 
captive ship. A railroad enjoys greater opportunity to assign 
costs to a shipper who has little to do with the actual cost of 
service.
    A report in 2006 by the GAO found that railroads 
increasingly are transferring costs onto shippers, costs that 
are not reflected in their rates. Since 1985, rail car 
ownership has shifted nearly 20 percent to shippers, so that 
today shippers own a majority of rail cars in use.
    GAO found that shippers are paying other costs such as 
infrastructure upgrades, fuel surcharges, congestion fees. 
Unfortunately, the Surface Transportation Board does not track 
these charges, and that led GAO to conclude that shippers in 
those markets may be paying excessive rates for rail service.
    The railroads contend that the system works, and they say 
that any shortfalls in the system will lead to unacceptable 
reductions in their revenue and a decrease in capital 
investment. They contend vigorously that despite the benefits 
of the Staggers Act, they are struggling to arrive at financial 
health, reflected by the Surface Transportation Board's 
analysis that the industry as a whole is revenue-inadequate.
    Since the Staggers Act, the rail industry as a whole has 
never been found to be revenue-adequate. The Association of 
Railroads reports that the Staggers Act and the years since its 
enactment, the difference between the industry's return on 
investment and cost of capital has not substantially narrowed. 
What should follow from such a record would be significant 
capital shortages and disinvestment in the rail sector.
    The ICC's 1981 decision implementing the current Revenue 
Adequacy Test calls ``Any firm that earns less than its cost of 
capital will be unable to compete in the market for funds. Its 
owners will neither wish nor be able to keep the enterprise's 
capital intact. They will withdraw their capital as quickly and 
as expeditiously as they can.''
    However, the railroads continue to get capital from Wall 
Street, from the marketplace. They earn substantial profits. 
They invest billions of dollars in their systems despite the 
constant shortfall of meeting the regulatory standard for 
revenue adequacy.
    That discrepancy between the railroad reports of revenue 
shortfall and the continued availability of investment capital 
is understandable if you examine the regulatory method used to 
determine the railroads' revenue adequacy. There are many 
methods to determine, but the model implemented in 1981 fell 
out of favor with Wall Street some time ago. The marketplace 
views it as overly pessimistic in the railroads' cost of 
capital and their financial health.
    In 1995 and again 1999, Standard and Poor's industry 
surveys reported that the rail industry ``is actually fit as a 
fiddle''; ``explain that the ICC's definition of cost of 
capital is not particularly meaningful, given the many flaws in 
the design of the financial test.''
    When Wall Street measures revenue adequacy of an 
investment, it uses a newer and more accurate tool to measure 
revenue adequacy, the Capital Asset Pricing model. You have to 
spend a little time and get close up to this and put your arms 
around it and spend a little time reading late at night and 
early into the morning. But it is also the system that the 
Canadian counterpart to the STB uses.
    According to that analysis, the railroads are financially 
healthier than reported by the Surface Transportation Board. In 
fact, the Board recently announced it is updating its revenue 
adequacy methodology to reflect the marketplace.
    Any economist will tell you that for the regulatory 
purposes, it is better for the railroads' profits to remain 
revenue-inadequate. This gives them a favorable regulatory 
environment from the Surface Transportation Board. That then 
allows them to charge higher rates to their captive customers 
without coming under the threat of an adverse rate decision.
    While the railroads' financial health continues to improve 
and their pricing power increases, the current regulatory 
environment still reflects an industry closer to its position 
that existed prior to passage of the Staggers Act, and that 
works to the detriment of shippers seeking rate relief.
    Now when Congress passed the Staggers Act, it did not wash 
its hands of oversight by the Executive Branch or the 
Legislative Branch of rail operations. It created the successor 
entity, the Surface Transportation Board, much more limited 
authority but still allowed market pricing and market entry to 
be determined by the railroads themselves in the context of the 
marketplace, but it retained, the Staggers Act retained 
authority in the Surf Board to protect captive shippers from 
unreasonable rates. It granted broad authority to monitor the 
performance of the railroad industry.
    Shippers tell me, however, over many years now that the 
Board is not effectively exercising their responsibility to 
protect or at least give voice to the concerns of captive 
shippers. The GAO report of 2006 reinforces the shippers' 
claims. GAO found ``There is little effective relief for 
captive shippers because the Surface Transportation Board's 
standard rate relief process is largely inaccessible.''
    Contesting a case now is so expensive, is so time-
consuming, so loaded with paperwork that only the egregious 
cases have a chance to come to the Board's attention. Since 
2001, shippers filed 11 cases with the Board. All but one of 
these 11 is a coal rate dispute case. Of that 11, the Board 
settled and dismissed 3, 1 was withdrawn and 1 is still 
pending. Of the remaining six, the Board issued decisions in 
favor of the railroads.
    The Surface Board reports that these cases, on average, 
took nearly three years to decide. Shippers report that they 
spent upwards of $5 million contesting rate cases, only to 
lose.
    GAO then reports that traffic traveling at rates 
substantially over the threshold have not had rate relief. That 
is why Mr. Baker of Louisiana and I introduced H.R. 2125, the 
Rail Competition and Service Improvement Act.
    The railroads claim it to be re-regulation. That is a cute 
bumper sticker phrase. It is not.
    It is using the existing authority to give shippers the 
opportunity of access to the Board under reasonable terms 
without excessive cost to file a rate case, without excessive 
time to pursue it--even if you won, you have already been out 
of pocket a huge amount of money--and to use the residual 
authority to give shippers a fair hearing.
    The Board is not meeting its responsibilities. This 
legislation will ensure that the Board does a better job of 
carrying out its rate relief responsibility.
    Now there is also another historical context that I think 
we want to keep in mind as we begin this hearing. The railroads 
received enormous grants of land in the 19th Century in the 
public interest to develop rail service for the public use, 
convenience and necessity. They received some 278,000 square 
miles of public land. That is about 8 percent of the total land 
surface of the United States.
    That map shows those land grants. They were given the 
surface timber rights, surface mineral rights, subsurface 
mineral rights, coal, oil in some cases, gas in others that 
they could use for themselves or to sell off, worth billions of 
dollars.
    I think it is important to keep this public interest in 
mind and the claim that the public still has on the railroads 
to serve the broad public interest.
    Mr. Mica. Well, thank you and good morning and I would like 
to welcome all of our Members and witnesses to this hearing 
this morning on rail competition.
    I have got a couple of comments, some that may agree with 
some of the comments of the Chairman and others that disagree, 
but this is indeed an important topic.
    Thirty years ago, our Nation's rail system was literally 
falling apart. Twenty-five percent of the system had to be 
operated at reduced speeds due to dangerous track conditions 
and more rail lines were bankrupt than in any time since the 
Great Depression of the 1930s. In fact, the Nixon 
Administration seriously considered at that time nationalizing 
both freight and passenger rail service. In fact, they did 
nationalize passenger service by creating a company called 
Amtrak, and we all know what a success that has been.
    Now today, the United States freight rails are one of the 
least subsidized and best operated and actually profitable 
systems in the world. Most countries still have very high 
subsidies of their freight rail systems.
    I know none of us would like to revert to an all government 
or some type of Soviet style system and total re-regulation. I 
know that is not the question before us.
    Luckily, however, instead of nationalizing our freights, 
Congress decided back then to attack the root of the problem 
which was, in fact, excessive government regulation that 
brought down our rail service. We passed the Staggers Act which 
allowed the railroads to respond to the free market and rebuild 
the system without big government subsidies in any of the 
operations that we see today. In fact, it is almost zero 
according to the information that my staff has compiled.
    Our Nation's rail system is now running well, but our 
regulatory system still creeps along like it is in the 1890s. 
Over the last decade, STB regulations have denied small 
shippers an effective forum to challenge excessive rates, and 
that is one of the reasons for this hearing here today. STB 
proceedings have been so complex that, in fact, it has cost 
millions in legal and consulting fees just to bring a case, and 
the Chair cited some of the problems that we have in trying to 
get some resolution.
    The STB, as we know, has recently taken some steps to 
simplify their proceedings and also to reduce litigation 
expenses. We have also seen a speedup of some of the processes, 
but there are still difficulties for some people to access what 
they consider fair rates. We do need to have some time to see 
how the STB new protocols work and give them the opportunity to 
succeed.
    I am looking forward to learning more about the new STB 
procedures that we will hear about at this hearing.
    While I recognize the difficulty of some captive shippers 
and some current flaws in our system and the inability to 
sometimes seek the lower costs that some feel are fair, we must 
be very careful in looking at what options we adopt. Also, I 
think this will be a good opportunity to look at reasonable 
options to improve the system that has already seen some 
improvement with STB's recent action.
    As you can tell, I am clearly against re-regulation of our 
national railroads. Government rail regulation has proven, 
without a doubt, not to work. Unfortunately, too, some 
government re-regulation can reverse some of the great 
successes our rail system has enjoyed. Actually, I think it can 
also result in further reducing shippers' choices and also the 
long term effect may be increasing rates again in the longer 
period of time for everyone including those we are trying to 
help.
    I come from a business background. You look at investment 
in any type of industry or business activity, but railroads 
have one of the highest capital costs and lowest returns of 
equity, and that is not my finding. We have got a little chart 
here we will pass out: Capital Intensive, Low Returns. So that 
does create some difficulties for them.
    But if we want a strong efficient, financially viable rail 
system, I believe the answers lie in working with the rail 
industry to create some additional competition, that Congress 
adopt a tax policy that insists that we encourage better 
planning and that we also support even more private investment 
in an industry that is very capital intensive.
    I look forward to a full airing of the issues today, and I 
thank you for bringing this important subject before the 
Committee.
    Mr. Oberstar. I appreciate the gentleman's comments and his 
perspective and well thought out remarks, and that is why we 
have hearings. We have differences of view, but they are 
matters that we can resolve in the course of the hearing.
    Other Members of the Committee will have opening comments, 
but in respect for Senator Dorgan's schedule, I know he is 
already overdue back in the other body. We welcome you back to 
this house where you started your service in Congress. Thank 
you for coming, making the long journey across the way from the 
other body.
    Thank you for coming. You are the sponsor of comparable 
legislation in the Senate, and we thank you very much, Senator.
    Senator Dorgan. Mr. Chairman, thank you very much. I will 
be mercifully brief this morning and then depart.
    As I was sitting here, I was thinking about the description 
of a journalist who couldn't distinguish between a bicycle 
accident and the end of civilization. I was thinking in some 
ways the politics of this railroad issue are that. Some would 
suggest there is just a minor flaw or two here, and other would 
suggest that this is a catastrophe. It is, of course, somewhere 
in between.
    Let me describe to you where that somewhere is for me. 
Because I assume there are people in this room, representing 
the railroads, let me be quick to say that I like railroads. I 
like trains, in fact. I grew up in a town of 300 people. When 
you grow up in a very small town, we actually named the train 
that came through our town, the Galloping Goose.
    Every time the Galloping Goose would come in twice a week, 
we would go down where they stopped and pick up the cream cans, 
and I just thought it was wonderful to have a train coming 
through our town, bringing new people. So I have a long history 
with trains including the Galloping Goose.
    I understand that railroads are very important to this 
Country. This Country runs in a significant way on rails, and 
we want a railroad industry that works.
    I also believe at the same time that we are off-track in 
some significant ways. This is an industry, I think, that would 
be better with competition and is, in some ways, devastating to 
captive shippers without competition. We have ended up now a 
couple of decades past the 4R Act with the worst of all 
possible worlds: near monopolies and no regulation.
    I know there are people here that have an epileptic seizure 
when you mention regulation. Well, the fact is you either have 
competition, which is the way the marketplace is supposed to 
work in a free market, or you must have some sort of sensible 
regulatory authority, one or the other.
    The fact is, as the Chairman indicated, we have fewer and 
fewer Class I railroads. We have now four Class I railroads 
that handle 90 percent of the freight rail in this Country. 
Rural areas, especially, are frequently left with one carrier 
who decides here is what I want to charge you. If you don't 
like it, tough luck.
    Well, that is defined as a lack of competition. It is 
clogging the arteries of the free marketplace, and it begs for 
the Congress to take a look at it and decide to do something to 
deal with it.
    Now I think the lack of competition not only affects and 
victimizes, in many cases, rural areas. It affects the 
profitability of other industries. It also affects the 
pocketbooks of the consumers in this Country.
    It seems to me that we have created something called the 
Surface Transportation Board which was I guess the divine 
interpretation of what Congress felt should succeed the 
Interstate Commerce Commission. Again, without offending anyone 
I hope, I think the Surface Transportation Board has been 
largely an irrelevant Federal agency. It consistently does 
nothing and yet seems unaffected, perhaps even satisfied, by 
this paralysis.
    I think it is safe to say there are a whole lot of 
Americans that are not satisfied by the paralysis of an agency 
that is supposed to be looking after the public interest. I 
have often said the STB is dead from the neck up, but I 
probably should stop saying that because there is clearly life 
there but precious little effective capability to intervene on 
behalf of consumers and on behalf of competition.
    Let me just mention to you quickly the experience of a 
resident of Dickinson, North Dakota, a farmer from Dickinson, 
North Dakota. He said to me, you know, I am told by the 
railroad that I must truck my grain 200 miles east to put on 
the railroad in order to move it west, and they move it right 
back through my farmyard and, in fact, with a terminal in the 
community next to me, but I have to truck my trail 200 miles 
east to get the lowest rate from this carrier.
    When he said, I asked the carrier why that was the case, 
the carrier said it is strategic planning. I said, I am from a 
small town. I don't understand strategy or strategic, but I 
understand what doesn't make any sense, and there is simply no 
common sense in this.
    When you talk to people, it is hard to describe to them why 
all of this happens the way it happens.
    I will give you one more example, and I don't know whether 
these numbers are accurate. They used to be.
    You put a carload of wheat on the railroad in Bismarck, 
North Dakota, move it to Minneapolis, and you will pay about 
$2,300. The same carload of wheat from Minneapolis to Chicago, 
about the same distance, you will pay $1,000.
    Why would we be more than double charged for the same 
distance? Because on one segment, there is one carrier; on the 
other segment, there is competition, huge difference. Where 
there is no competition, the consumers are victimized in my 
judgment.
    Let me just mention briefly that I have passed a piece of 
legislation in our Appropriations Committee that changes the 
cost of challenging the railroads with respect to rates. As I 
think the Chairman mentioned, it is currently now $178,000 for 
a significant shipper to challenge the rates. I have passed an 
amendment through the Senate Appropriations Committee, reducing 
to $350. That is the cost of filing an action in Federal Court 
were you able to do such action.
    Finally, the fuel surcharge issue gives, I think, evidence 
of substantial concentration in this industry. There is, by 
most evidence, about a $6 billion overcharge for fuel on the 
fuel surcharges. The regulatory authorities have said stop it, 
you can't do it anymore, but the railroads are allowed to keep 
the overcharge. I don't understand that, but that is where we 
are.
    I want a healthy railroad system. I want competition, 
either competition or regulation, but I want a healthy rail 
system that serves this Country, and I also want fairness to 
this Country's consumers. Regrettably, at this point, we don't 
have fairness to consumers.
    So my hope is that we will be able to advance legislation 
that you have offered here in the House of Representatives, and 
in the Senate we have introduced and are moving similar 
legislation. I serve on the Commerce Committee. We are going to 
be holding a hearing on our legislation and hopefully moving 
it.
    We just passed legislation out of the Judiciary Committee, 
introduced by Senator Kohl on which I was a co-sponsor, dealing 
with the antitrust issues. That bill will allow the review of 
railroad mergers and acquisitions to remain with the STB, but 
it allows the Department of Justice to enjoin the merger in 
Federal District Court if the merger as approved would violate 
the Nation's antitrust laws.
    So I think we are working on a number of issues that I 
think are very, very important. Some very significant groups of 
industries and businesses representing the shippers have formed 
to say, look, all we want is we want fair opportunity. I think 
they want, as well, a healthy railroad industry, but they fair 
rates, and that is a reasonable thing to do.
    Finally, I would just say at the end of a long period of 
time, let us decide what we are going to do. We are either 
going to have some competition or regulation. You can't have 
near monopolies and no regulation. If we change those near 
monopolies to a competitive environment, this Country would be 
a whole lot better off. If not, we should have a series or 
steps of regulation that affect and safeguard the consumers in 
this Country.
    Mr. Chairman, thank you for allowing me to come by. You 
have a long hearing today, and you have a lot of Members, but I 
did want to tell you that we are working on similar issues in 
the Senate and wish you well in the House as you address these 
important issues.
    Mr. Oberstar. Thank you very much for your statement, your 
comments. I look forward to meeting you in conference on this 
legislation.
    Your example of the farmer who trucked his grain east to 
have it shipped west, I have a similar situation in the 
southern end of my Congressional district, the Peterson Mill. 
Because the railroad doesn't serve it any longer, because they 
wouldn't meet an ever increasing threshold for quantity to be 
shipped, now grain is hauled by truck.
    I stood there with Jerry Peterson as the trucker handed the 
farmer 86 cents. That was all that was left from his shipload 
of grain trucked 100 miles with no back haul. That is not 
acceptable. That is not service in the public interest.
    You have given us good fodder for the future.
    Does anyone have a question of Senator Dorgan?
    It looks like you scared them all off.
    [Laughter.]
    Mr. Oberstar. Thank you.
    Now we will go to Members. Mr. Rahall.
    Mr. Rahall. Thank you, Mr. Chairman for recognition and for 
holding today's hearing.
    This particular gentleman from West Virginia has a long and 
intimate relationship with the Staggers Rail Act of 1980, 
primarily over the issue of captive shipper protections. The 
Staggers Rail Act, of course, being named after the senior 
Member of Congress from West Virginia from the House side at 
that time, Harley Staggers from West Virginia, then Chairman of 
the Interstate and Foreign Commerce Committee.
    There are many in this room, pushing this legislation, who 
were pushing similar efforts back in those days. I guess they 
sent their kids to college on this issue back then, and now it 
is time to send their grandkids to college. We are revisiting 
this issue again.
    The publication of Traffic World once described me in my 
sophomore as coming ``within a coal lump's distance of 
derailing the Staggers Rail Act.''
    Indeed, when the legislation that was to become the 
Staggers Rail Act was being considered by the House back in 
1980, our former colleague, Bob Eckhardt, of Texas, and myself 
teamed up with a captive shipper amendment. It was so 
successful--indeed, it passed the Floor--that the bill's Floor 
manager at that time, Jim Florio from what was then called the 
Committee on Interstate and Foreign Commerce, pulled the bill 
from further consideration.
    Mr. Chairman, I recall returning to my office on that 
fateful day and seeing a railroad lobbyist in the front foyer, 
literally crying like a baby. I guess those were the days when 
lobbyists were perhaps more in touch with their inner selves 
and allowed to display emotion.
    Subsequently, however--and it was not due to the tears of 
the railroad lobbyist, I might add--a compromise was reached on 
the captive shipper issue in the form of the Staggers-Rahall-
Lee-Loeffler Amendment which paved the way, as you will recall, 
Mr. Chairman, for the House passage and ultimately the 
enactment of the Staggers Rail Act.
    It was no secret that post-enactment, I became extremely 
dissatisfied with the way the Interstate Commerce Commission 
was implementing the law. Every railroad, regardless of 
profitability, was deemed revenue-inadequate. I recall a time 
when Norfolk Southern was the darling of Wall Street, but the 
ICC described N-S in those days as being revenue-inadequate.
    The means for devising revenue to variable cost was 
corrupted. Determining what was market dominance was a joke. 
According to the ICC, there was always, always product and 
geographic competition. For example, a coal-fired power plant 
conceivably could convert to oil--yeah, right--and a power 
plant in Colorado could conceivably ship coal in from West 
Virginia instead of its neighboring Wyoming.
    During the decade of the eighties and into the nineties, I 
was the flagbearer for re-regulating the railroads, offering 
bill after bill, amendment after amendment, only to be 
stonewalled by the now Energy and Commerce Committee, much to 
the consternation of my truly captive shippers of coal.
    Let me say one thing, Mr. Chairman. By golly, if the 
Republicans did one thing right when they ran this place, it 
was transferring the jurisdiction over the railroads from the 
Energy and Commerce Committee to this Committee under your 
leadership, if they did anything right.
    [Laughter.]
    Mr. Rahall. As we got well into the 1990s, however, 
something happened. My shippers stopped complaining. 
Appalachian coal producers and those in West Virginia stopped 
being the subject of railroad predatory pricing practices, and 
with that reality I became a recovering re-regulator.
    I will conclude with this note: Cross subsidization in the 
parlance of the railroad regulatory scheme known as 
differential pricing is part and parcel of maintaining a 
healthy and viable railroad network which is in the national 
interest.
    I accepted that concept back in the 1980s and throughout my 
efforts to re-regulate the railroads. I always accepted that 
concept. During the course of this hearing, I hope the issues 
involving the matter are clarified.
    Again, Mr. Chairman, I thank you for having the hearing. I 
yield back.
    Mr. Oberstar. Thank you for those eye-opening remarks. We 
appreciate your candor.
    The gentleman from Pennsylvania, Mr. Shuster.
    Mr. Shuster. I thank the Chairman.
    I would wish that we go in order of seniority, so I would 
defer to Mr. Baker to go first before me in the order of 
seniority.
    But, first, I want to just mention that Ranking Member Mica 
had to depart to go to a ceremony to honor some American 
soldiers that served in Iraq.
    With that, if it is all right with the Chairman, go to Mr. 
Baker first.
    Mr. Oberstar. The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. I thank the Chairman and the Ranking Member for 
the courtesy. I certainly want to express appreciation to the 
Chairman for his keen interest in the subject and his 
sponsorship of the legislation which addresses many of the 
concerns which I am sure will be discussed in the course of the 
hearing today.
    For the purpose of balancing the record and those who have 
been critical of the legislation pending, I would quickly 
establish that I am not a pro-regulatory kind of guy. I am very 
much a free market, believe in competition, let the best guy 
with the best product sell it at whatever price he deems 
appropriate and let consumers make educated choices.
    I am not a proponent of re-regulation the rails. I am for 
expressing the best market operation that will enable more 
competitors to provide more consumer choices to those who, 
under the current system, have none today.
    I do believe that competition, where competition exists in 
the rail industry, has in fact brought rates down, but were you 
to establish two charts, one of the rates paid by captive 
shippers over the last decade and hold it up next to a chart of 
rates paid by those in the competitive marketplace, you would 
find two very divergent trend lines.
    Captive shippers are what the name says. They are captive. 
They have no market choice.
    Whether one be Republican or Democrat, the consequences of 
being a captive shipper in a marketplace which is 
internationally competitive has real world consequences. Where 
you can no longer manufacture your product, put it into a rail 
car and sell it in the United States, people will vote by 
moving their plants elsewhere.
    It was, at best, a modest inconvenience in years past, but 
with fuel charges where they are today, which legitimizes the 
rate underlying assessment for the rails, it is becoming a 
factor in making decisional locations which are of extreme 
importance to all of us who want to keep as many people 
employed in this Country as is practical.
    I don't know that there will be arguments made that the 
current STB methodology is fair in its handling of these 
difficult decisions, but regardless of whether one takes that 
position or not, it is certainly justifiable to conduct a 
thorough examination of how it works and the consequences of 
the pricing regulatory methodologies. It is important to note 
that in the current environment that the STB is now in a period 
of receipt of public comment over making a significant change 
in the way they determine cost of capital.
    For Members who haven't spent a lot of time looking at 
capital assessment formulas--I know that people were probably 
doing that over the weekend, getting ready for this hearing--
this is a significant component in establishing the rate base.
    The capital asset model methodology is now subject to 
public comment which will close in mid-October by the STB to 
move away from the discounted cash flow methodology. The manner 
in which that new structure is constructed will have 
considerable affect on rate-making as we go forward.
    Having said that, there are many other elements of this 
problem that the legislation the Chairman has offered, that are 
outside simply the cost of capital, the bottleneck problem. 
Yes, you have the right to move freight and to get quotes from 
competitive rail carriers, but if you happen to hit a 
bottleneck where there is only one provider of service through 
that short distance between where you are located and where 
your ultimate goal is located, you have a significant problem. 
You can't even force a rate quote unless you meet certain 
contractual obligations to that provider.
    We do not have an open market in rail service in the United 
States. It is a significant economic concern, but then there is 
one other important matter. As consolidation has occurred in 
the financial services sector, consolidation has occurred in 
the rail industry. Despite that consolidation and the 
efficiencies that has brought about, fewer miles to maintain 
with fewer competitors, the rails are in fact undervalued in 
the market, and that is the reason why significant hedge fund 
operators have begun to target acquisition of stock in rails 
because of that analyst view that these are assets that the 
market has ignored and underpriced.
    That has led the rails to reacquire their own stock, which 
I do not have a problem with, but it has diverted their 
investment practices from putting it into infrastructure and 
hoping to forestay the takeover of those in the hedge fund 
world who see them as undervalued assets.
    All of that is to point out that smart people on Wall 
Street say the rails are in extraordinarily good condition. In 
fact, they are in such good financial condition, it is the kind 
of industry those smart investors are wanting to get a 
significant piece of.
    The rail industry is sound. We need them to continue to 
succeed, but there are significant sectors of our economy who 
are now subject to predatory pricing. The remedy is not to re-
regulate the industry but merely to carefully evaluate the 
process the STB engages in and ensuring, as a regulated 
utility, that the rates they charge are in fact representative 
of a competitive marketplace.
    I sincerely appreciate, Mr. Chairman, the courtesies 
extended and your leadership in this matter. I yield back.
    Mr. Oberstar. I thank the gentleman for his very thoughtful 
and well conceived statement and elaboration of the intricacies 
of this legislation and of the rail marketplace.
    The gentlewoman from California, Mrs. Tauscher.
    Mrs. Tauscher. Thank you, Mr. Chairman.
    I find myself as somebody who spent 14 years on Wall Street 
as a very small child looking at the arcane valuations for this 
industry and scratching my head and, at the same time, 
understanding that in California, where 60 percent of the goods 
that are shipped into ports of Oakland and Long Beach and L.A. 
are moved out of state, how desperately we need a robust rail 
network and infrastructure that is have to have, not a nice to 
have.
    I think that what is very clear to me is that, on the one 
hand, we need to assure that private investment has some 
predictability in their ability to look forward for their rates 
of return and to look at regulatory scheme that isn't obsessing 
so much that it prevents them from getting that rate of return 
and feeling as if they can do the kinds of investments that are 
going to keep their own people happy. But, at the same time, 
when you have a squeeze on the credit capital and capital 
formation, you find yourself without the ability to make these 
investments.
    So I think we need to look at lot more at public-private 
partnerships, innovative financing, the kinds of things that 
are a little out of the box and different from the traditional 
kinds of financing that we have looked at in the past.
    In the Bay Area, we tax ourselves. Almost every one of our 
counties, we tax ourselves for highway infrastructure.
    Many of the companies that are in the Bay Area are 
companies that are high tech companies, just in time 
inventories. They are not only companies that have short rail 
but long rail for finished products. They need things delivered 
on time, so they can put them together and then ship them out.
    A lot of our products, obviously, some of our sourcing 
comes from overseas too. So we need things to come out of the 
ports quickly.
    This is a very, very vexing, complicated issue. I think I 
stand very similar to Mr. Baker in a place where I want to 
solve for the issues of having competitive railroad companies 
that are good investments for Americans, not only for their 
investment portfolios but for good jobs so that we can have a 
21st Century railroad network. At the same time, I want to help 
the people that are captive shippers who find themselves unable 
to be competitive because they don't have enough competition to 
get better pricing to ship.
    That is the sweet spot, I think, that we have to find. We 
have to find some place in there. I am not for more regulation, 
but I certainly am for competition, and I am certainly for 
helping the people that need to ship goods to markets that are 
not only my constituents but the consumers of my district too.
    So I look forward to this hearing. Once again, I think that 
it is always better to amplify these things and have as much as 
we possibly can in front of us.
    I appreciate all of the folks that are going to be 
testifying in the hearing today, and I look forward to working 
with everybody to find that place, that tension between too 
much regulation but the ability at the same time to help the 
captive shippers so that we can have the kind of robust market 
that we need.
    I yield back.
    Mr. Oberstar. I thank the gentlewoman for her statement, 
and that is the purpose of this legislation, to try to find 
that proper balance.
    The gentleman from Wisconsin, Mr. Petri.
    Mr. Petri. Thank you very much, Mr. Chairman, for holding 
this important hearing.
    I also want, if I could, I don't know if I need unanimous 
consent or not but to submit for the record a statement by the 
Wisconsin Agri Service Association on the subject of this 
hearing.
    Mr. Oberstar. Without objection, so ordered.
    Mr. Petri. Thank you.
    I would also like to make just a point of thanking the 
chairman of the Surface Transportation Board who is on the 
first panel, Mr. Nottingham, for taking a day and a half of his 
time to come out to Wisconsin to meet with and listen to the 
representatives of a number of shipping associations in our 
region and a number of concerned people affected by the things 
that have happened in the transportation industry.
    I would like to also associate myself with the spirit of 
the remarks of our colleagues, Mrs. Tauscher and Mr. Baker.
    No one is really or few are looking for a return to strict 
top-down regulation of the rail industry, but everyone is 
looking for an improvement in service in the rail industry so 
that actually it can be used more to do higher value added 
shipments and provide service to the just in time economy in 
addition to bulk shipments.
    Everyone is looking for fairness in pricing. Of course, 
fairness is always in the eye of the beholder, and there are a 
number of different ways in looking at costs and how this 
should be assessed.
    I appreciate Chairman Nottingham making a number of changes 
in the procedures of the Surface Transportation Board so as to 
enable smaller and medium size shippers to not only have 
theoretical but to have practical access to the Board's 
processes, so that they can have their situations looked at in 
a timely and cost-effective fashion and either get some 
understanding of the process or some satisfaction and sense 
that they actually are being dealt with fairly.
    I would urge that if there is anything that can be done to 
help rail management through I don't know if it is a regulatory 
process or what kind of process to improve the quality of 
service and of information in the rail industry, so that people 
are not confronted with the trains stopping on Friday at 5:00 
and not knowing that the scheduled shipment is not going to 
come. No one even being told for two or three days.
    You just can't operate a modern economy without a lot of 
unnecessary costs if a modern ability to communicate is not 
shared by the employees and the railroad industry. This is an 
area where we really could get good efficiency or improvement 
in our whole situation.
    Beyond that, I appreciate your looking at the investment in 
the rail industry to make sure that, in fact, everyone involved 
is trying to make sure we have first-rate rail industry, and I 
thank you, Mr. Chairman.
    Mr. Oberstar. I thank the gentleman.
    Ms. Brown, the Chair of our Rail Subcommittee, the 
gentlewoman from Florida.
    Ms. Brown. Thank you, Mr. Chairman, and I want to thank you 
for your leadership as Chair of this Committee. I think this 
Committee has been one of the most productive Committees in 
Congress, and I am proud to serve as Chair of the Rail.
    Today's hearing is important because we always need to 
consider ways to improve competition in every business sector, 
and there is room for some improvement in the railroad 
business. But I am concerned that many of the rail sector fixes 
being discussed by shippers would be devastating to the 
industry, and there are lots of shippers that support the 
railroads.
    In fact, I have over 2,000 letters from shippers who oppose 
any new regulations for the rail industry, and I ask unanimous 
consent to have them submitted to the record.
    Mr. Oberstar. Without objection, so ordered.
    Ms. Brown. Our Nation's railroads were in the red for a 
very long time and have only recently started to make a 
reasonable profit and should be given time in the black before 
making major changes to their business model.
    I feel that the loss or railroad earnings that is expected 
with the decline in rates will have many negative consequences. 
Less money being spent on capacity will slow growth and put 
many more trucks on the highways, compounding safety issues and 
harming the environment. We will soon have an additional 3,000 
trucks a day leaving the Jacksonville port.
    If we can't find a rail solution, which I am working on, it 
will jeopardize our entire community. Decline in profits will 
also prevent the industry from hiring more employees for good 
paying jobs that we know can't be shipped overseas.
    I also believe that the Surface Transportation Board which, 
for a long time was not operating to full capacity and in fact 
had only member, is starting to address many of the issues that 
are priorities for shippers. In talking with the members and 
visiting with the Board, I know that they are planning to 
continue to look at ways to protect shippers from unreasonable 
rates.
    Mr. Chairman, at the proper time, this is the first time 
they have had an opportunity to testify before the Congress. 
The fact that so many of us have mentioned them, I am hoping 
that we can give them additional time when it is time for them 
to address the Committee.
    A significant increase in capacity would also help 
eliminate many of the problems facing customers and the 
industry, and we all need to work together to find ways to 
provide serious reasons for capacity expansion.
    I look forward to hearing from today's panelists on ways 
that we can improve competition in a way that is fair to both 
shippers and the railroad and ensures a sound national rail 
transportation system.
    As I yield back my time, let me say in visiting with many 
countries all over the world, our railroad freight is the envy 
of many of those countries, and I want us to keep that in mind.
    Thank you and I yield back the balance of my time.
    Mr. Oberstar. Mr. Shuster.
    Mr. Shuster. Thank you, Mr. Chairman, and thank you for 
holding this hearing this morning.
    I want to welcome everybody to this hearing on rail 
competition. I want to point out to my colleagues, for those 
that have been deeply immersed in rail issues in the past, this 
is an extremely complicated issue. I would encourage and I am 
glad to see many of you here, asking questions and 
understanding.
    You are going to hear terms that were Latin to me before I 
started to talk to many of the people in the industry, things 
like revenue to variable cost, differential pricing, the 
revenue shortfall allocation method. When you start talking 
about these things, as I said, at first they don't make sense. 
Quite frankly, I have an MBA and still to me they are difficult 
to comprehend and understand in this complicated system that we 
have in this Country for railroad freight.
    I believe in free markets. When we look at the rail 
industry, I would love to have a rail industry that was based 
on free markets, but because of the way it has developed over 
the years, it is very difficult for us to have a completely 
free market system because to build railroads, new lines in 
this Country, having two and three railroads serve different 
areas, it is just not possible because of the difficulty in 
getting the rights to build them, getting through the 
government regulatory or our legal system. For us to move to 
what would be a completely free market system, as I said, just 
isn't in the realm of possibility.
    What we have, we have to work with, and we have to make it 
work as best we can. Having competition, having government 
regulation work efficiently, and hopefully we can decrease 
that, but today our railroad system is the most efficient in 
the world.
    As the Chairwoman mentioned in her travels around the 
Country, it is the envy of the world. Our shipping rates are 
lower than any other developed country. Our freight railroads 
require virtually zero Federal Government capital, no taxpayer 
dollars. Our railroads are so efficient that we can move a ton 
of freight 423 miles on a single gallon of fuel.
    But it hasn't always been like this. The Chairman, as he 
always does, gave us a very comprehensive history lesson of 
what has happened since the Staggers Act. As I said, as always, 
very comprehensive and informative, but I think we need to also 
focus on what happened before the Staggers Act.
    On June 21st, 1970, one of the largest companies in the 
world, the Penn Central Railroad went bankrupt. At the time, it 
was the largest bankruptcy in the history of the world. Penn 
Central which was headquartered in my home State of 
Pennsylvania had thousands of employees. They owned over 4,000 
locomotives, 200,000 freight cars and 5,000 passengers car. The 
Penn Central bankruptcy was, to say the least, a financial 
disaster.
    It also dragged down other companies: The Buckeye Pipeline 
had 7,000 miles of pipeline; the Arvida Corporation which was 
developing 35,000 acres in Florida; the Great Southwest 
Corporation which had realty ventures across the Nation and, of 
course, had numerous property holdings in New York City.
    Congress and the Nixon Administration spent years, thinking 
about ways to save the rail system. They drafted legislation to 
come up with loan programs, but in the end it didn't go 
forward.
    Meanwhile, things continued to get worse. In 1972, five 
Class I railroads went bankrupt. In 1976, 25 percent of our 
Nation's tracks were under slow orders. In my home State, 
conditions became so bad that parked rail cars literally fell 
off the tracks.
    In the 1960s, in Blair County, Pennsylvania, we had 2,500 
folks that worked for Penn Central, later to become Conrail. 
Today or after the Penn Central bankruptcy and with Conrail 
being absorbed into a few other railroads, we have about 1,000 
people employed there today.
    The root cause of the Penn Central bankruptcy and the 
decline of the entire rail industry was government regulation. 
The government set the shipping rates. The railroads could not 
respond to the free market and could not recover their costs. 
Every day, the railroads lost more business to trucking 
companies.
    Finally, in 1980, Congress deregulated railroads or I 
should say partially deregulated the railroads under the 
Staggers Act, and since then the turnaround has been amazing. 
It has been done mostly with private capital. I think that is 
extremely important for us all to realize. By and large, 
private capital is what turned this around, not Federal funds, 
not a huge injection from our Federal Government.
    Our rail system now earns a profit. It is gaining business, 
and I believe it has a very bright future, but government 
regulation is still a problem.
    We have to admit that over the years the STB has acted like 
we were still in the steam engine era. Challenging a rate has 
cost shippers millions of dollars and, in fact, because it was 
so expensive, they didn't challenge some of the rates. The STB 
regulations effectively denied smaller shippers any relief from 
excess rail rates or poor service.
    Thankfully, the STB has finally taken steps to bring the 
Agency into the 21st Century. The new STB small rate case 
procedures will shorten and simplify the regulatory process, 
and we will be watching very closely as that moves down the 
road. Also proposed is a new way of calculating the cost of 
capital which has promised to make rates more reasonable. We 
need to give these procedures a year or so to see how they 
work.
    I am against re-regulating the railroads because the 
private sector always can run things better than the 
government, and I think we have seen that since 1980. A great 
concern of mine is that re-regulation would return us to the 
days of low or no profits of our railroads, and no profits mean 
no private investment.
    Our railroads are already one of the Nation's most capital 
intensive industries. In 2006, they spent $10.6 billion on 
capital projects and right of way maintenance.
    The Chairman also pointed out that revenues are going up. 
His statement was that it is a paltry reinvestment, but as a 
number, if you look at other industries, it is probably a 
smaller number. What you have to look at is the percentage. I 
think the percentage is the real measure.
    The rail reinvests 18 percent of every revenue dollar while 
other industries such as chemical and auto manufacturers are 
between 5 and 7 percent. So a significant amount of their 
revenue is going back into their system.
    If we move towards re-regulation, I am very concerned that 
these private investments in railroads will disappear, and then 
we have to ask ourselves some really big questions. If that 
private money disappears, are we willing to ask the government 
to replace the spending with taxpayer dollars?
    If we pass re-regulation now, in five or ten years, if we 
don't have the kind of private investment in our railroads, are 
we going to be looking to the government for a bailout plan as 
we did in the seventies?
    These are huge questions, and this hearing is extremely 
important to talk about these issues and understand that what 
we do today is going to affect us down the road.
    While I am against re-regulation, I want to make it clear 
that I am not against fixing a broken STB. If the STB's new 
procedures and guidelines don't work, we need to revisit this 
issue and we need to work to make sure that the system, the 
STB, works to the betterment of all our industries in this 
Country.
    I want to thank the Chair for indulging me to go over my 
time. Thank you.
    Mr. Oberstar. I thank the gentleman for his comments. The 
history pre-Staggers Act to which I devoted just a few 
sentences, the gentleman elaborated on and is quite right. The 
purpose of this hearing is to explore all these issues and to 
fix the Surface Board so that we don't have calls for re-
regulation.
    The Chair will acknowledge the gentleman from Florida, Mr. 
Mica, our Ranking Member, for a personal statement.
    Mr. Mica. Thank you. First of all, I want to apologize for 
leaving right after my opening statement, but I had the 
opportunity. I wanted to meet a young man from my district, 
also from Ms. Brown's district. He is from DeLand, Florida.
    Every once in a while, you get to meet heroes, and we have 
got one of them with us today. He is from our district, Ms. 
Brown's and mine. His name is Jonathan Chad McCoy. He is a 
Staff Sergeant.
    Listen to this. He is one of 12 Outstanding Airmen of the 
Year. Staff Sergeant McCoy was named the Air Force Special 
Operations Command Non-Commissioned Officer of the Year, 
awarded the Bronze Star Medal with valor and a second Bronze 
Star Medal.
    Sergeant McCoy demonstrated courage and leadership during 
Operations Enduring Freedom and Iraqi Freedom. The point man in 
a high risk compound assault, he fiercely fought hand to hand, 
defeating an enemy guard and enabling the capture of a high 
value target. Twice, he deliberately risked his life, braving 
deadly small arms fire to treat and evacuate severely injured 
teammates.
    Part of a sniper element, Sergeant McCoy established 
climbing routes over a 15 foot compound wall, allowing access 
of the assault force. Commanding a 17 man joint combat search 
and rescue team, he led a daring complex mission to recover the 
crew of a downed helicopter submerged in an Iraqi lake.
    These are just a few of his accomplishments.
    Sergeant McCoy and his wife are here. I would like him to 
stand and be recognized.
    [Applause.]
    Mr. Mica. I yield back. Thank you, Mr. Chairman.
    Mr. Oberstar. I join our Ranking Member and congratulate 
our guest for his great service.
    The bell has rung, but we have plenty of time before the 
vote. There is a motion to suspend rules.
    We will go to Mr. Salazar of Colorado.
    Mr. Salazar. I want to thank you, Mr. Chairman.
    I ask unanimous consent to submit my full statement for the 
record and a couple of letters that I have from the Colorado 
Department of Agriculture.
    Mr. Oberstar. Without objection, so ordered.
    Mr. Salazar. I want to thank you, Mr. Chairman, once again.
    I understand the issue. It is a very difficult issue. I 
hear from both sides. I hear from railroad, and I hear from my 
grain shippers.
    The Colorado Governor, last month, issued an executive 
order in order to be able to comply with the transportation 
needs of Eastern Colorado where we had over 10 million bushels 
of wheat on the ground.
    In looking at the chart that the Chairman put up on the 
board, I see the profitability doesn't seem to coincide with 
the added needed infrastructure, I think, that the railroads or 
the money they are putting into infrastructure.
    I am very pleased to have the Surface Transportation Board 
here. The Senator actually made pretty strong remarks against 
the STB. I really am looking forward to hearing your comments.
    I am a strong proponent of free enterprise. I know it has 
been only in the last few years that the rail industry has 
become profitable again, and I would really also like to see 
those profits put back into the infrastructure. As the Senator 
said, rural areas are especially affected by the lack of rail 
capacity.
    With that, Mr. Chairman, I look forward to today's hearing 
and I want to thank you.
    Mr. Oberstar. I thank the gentleman.
    Members on the Republican side, Mr. Diaz-Balart, welcome.
    Mr. Diaz-Balart. Thank you very much, Mr. Chairman. Again, 
thank you for your leadership.
    Really, a comment, Mr. Chairman: Obviously, the need for 
further investment in our rail infrastructure has become a 
front page, front burner issue in recent months particularly. 
Part of this discussion is, obviously, who should make the 
investment in the rail infrastructure. Should it be the private 
sector as it is now or should it be the taxpayer?
    The rail industry is the one industry in our Country that 
does not rely on public investment--Mr. Shuster already talked 
about that--but rather builds, operates and maintains its own 
infrastructure, very expensive infrastructure, spending as much 
as 18 percent of its revenues on capital expenditures. That is 
a serious investment.
    This is an industry that again, until very recently, was 
not making a profit, and yet they are reinvesting up to 18 
percent into infrastructure. But it is obviously clear that we 
need more investment in the rail infrastructure--we talked 
about that--to meet the growing needs of our economy.
    So I guess this is the question: Where should we look for 
that investment?
    If we are going to continue to rely primarily on the 
private sector, on their investment to increase our Nation's 
freight rail capacity, it is obviously essential--this is not 
rocket science--that we provide further incentives for 
businesses to make these huge investments.
    I am assuming that any bill that deals with rail would go 
through the Subcommittee that I sit on, chaired by the 
Honorable Congresswoman Corrine Brown from Florida, who is 
extremely knowledgeable on rail issues.
    Mr. Chairman, I look forward to working on this very, very 
important, and I thank you for your allowing me this time.
    Mr. Oberstar. Thank you for your comments, your 
observations.
    Before I go to Mr. Kagen, I do want to acknowledge and 
introduce to the Committee, our newest Member, Laura Richardson 
of California, the 37th District. She holds the seat that was 
once held by our colleague on the Committee and recently 
deceased, Juanita Millender-McDonald, who was a great asset to 
this Committee and delightful Member of Congress, a treasured 
friend.
    We welcome Congresswoman Richardson who had the opportunity 
at one point to work for Juanita Millender-McDonald, considers 
her a mentor. She served in the California State assembly and 
was appointed Assistant Speaker Pro Tem.
    We welcome you to the Committee.
    Now, Mr. Kagen.
    Mr. Kagen. Thank you, Chairman Oberstar and Ranking Member 
Mica for holding this critically important hearing today.
    I would also like to thank the Members of the panels that 
will be appearing here, and I look forward to hearing and 
reading your testimonies. It is my sincere hope that the 
witnesses will enlighten us, everyone on the Committee, about 
how important it is to deliver rail services at prices everyone 
can afford to pay.
    I have two particular concerns that I will share with you 
now. The first concern is the impact that the high rates for 
delivering products by freight and the declining standards of 
service are having on doing business in Wisconsin.
    I am also very concerned about how the railroads are using 
what appears to be their monopoly power to effectively tell 
customers what will be shipped, when it will be shipped and 
what rates with very little negotiation being offered.
    These are not just my concerns. These are concerns of 
companies that do business in Wisconsin, companies like 
Georgia-Pacific, Green Bay Area Chamber of Commerce, Green Bay 
Packaging, Neenah Foundry, Procter and Gamble, Sadoff Metals, 
Stora Enso, the Wisconsin Farm Bureau, Wisconsin Farm Union, 
Wisconsin Manufacturers and Commerce, Wisconsin Paper Council 
and also the Wolf River Lumber Company which I will address 
now.
    In the State of Wisconsin, we received a grant in our 
district in the City of New London, $350,000 to extend a rail 
line to the City of New London. In my several conversations and 
meetings with our mayor there, Mayor Wayne Toltzman, he 
indicates that the Wolf River line is imperiled, that they only 
were able to ship three carloads of their product to Chicago 
because the excessive cost in the last year. That occurred 
after Canadian National took ownership of the line.
    Sturm Foods, which is located 12 miles west of New London 
in the City of Manawa, is currently finishing a major expansion 
on their facility, and they are going to add 200 very important 
jobs to our region. A lack of adequate rail service would 
significantly impede this progress that they are making.
    Additionally, the Bemis Corporation has two plants, two 
manufacturing plants in my area. New London is this home. They 
have had 250 carloads of plastic resin delivered to them last 
year, and the State of Wisconsin granted $200,000 to add a spur 
to their plants several years ago. They are interested in 
enhancing their transport of their product over the rail 
service.
    As such, I share the concern of Mayor Toltzman and other 
manufacturers in Wisconsin, that the railroad may soon request 
in the very near future that this line, this single access 
line, may be abandoned due to continuing losses of revenue on 
the part of the railroad company.
    This would be a crippling blow to the economy of my 
district and the people living in the region, not just the 
agriculture industry but our manufacturing base as well. It 
would displace another industry and many, many jobs. 
Unfortunately, many areas of Wisconsin are held captive by a 
single larger railroad that will provide limited services.
    I believe in improving our railroad competition. I believe 
railroads are necessarily not just for improving the health of 
our local economy, the State and our Nation but also to help 
combat global warming and reduce traffic by trucking.
    To this end, I am very proud to be a co-sponsor of H.R. 
1650, the Railroad Antitrust Enforcement Act which was 
introduced by my colleague, Congresswoman Tammy Baldwin, and 
H.R. 2125, the Railroad Service and Improvement Act which is 
sponsored by our Chairman.
    I look forward to working with my colleagues on this 
Committee and across party lines to guarantee that these 
measures are advanced and succeed, and I look forward to 
listening and reading your testimonies.
    I yield back my time. Thank you.
    Mr. Oberstar. I thank the gentleman for his comments.
    We have a series of four votes pending on the House Floor. 
We will recess until the conclusion of those votes. I suspect 
that will take the better part of an hour.
    I say to the witnesses, be refreshed, be ready for a long 
sitting.
    [Recess.]
    Mr. Oberstar. The Committee on Transportation and 
Infrastructure will resume its sitting.
    There are still some two Members of our first panel who are 
missing, but they will arrive in due course, I am quite sure.
    Mr. Nottingham, the Chair of the Surface Transportation 
Board, thank you for being with us. We look forward to your 
testimony. You may present it in full or summarize it as you 
wish. The entire statement will be included in the record.

     TESTIMONY OF CHARLES D. NOTTINGHAM, CHAIRMAN, SURFACE 
   TRANSPORTATION BOARD; W. DOUGLAS BUTTREY, VICE CHAIRMAN, 
SURFACE TRANSPORTATION BOARD; FRANCIS P. MULVEY, BOARD MEMBER, 
  SURFACE TRANSPORTATION BOARD; KENNETH C. CLAYTON, ASSOCIATE 
ADMINISTRATOR, AGRICULTURAL MARKETING SCIENCE, U.S. DEPARTMENT 
     OF AGRICULTURE; JAYETTA Z. HECKER, DIRECTOR, PHYSICAL 
    INFRASTRUCTURE ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Nottingham. Good afternoon, Chairman Oberstar, Ranking 
Member Mica and Members of the Committee. My name is Charles 
Nottingham, and I am Chairman of the Surface Transportation 
Board. This is my first appearance before this Committee since 
becoming Chairman of the STB in August, 2006, and I appreciate 
the opportunity to appear before you today to address the 
important issues of rail competition and service, the 
relationship between railroads and shippers, the state of the 
railroad industry and the role of the STB in resolving disputes 
between railroads and their customers.
    I will briefly summarize my written testimony.
    Ensuring effective competition is one of the central goals 
of the Nation's rail transportation policy. Yet, throughout 
railroad history, there have been some rail customers who do 
not enjoy the full benefits of a competitive market.
    What do we mean when we refer to captive traffic that falls 
under the jurisdiction of the STB's regulation of rates?
    Our most recent data indicates over 71 percent of the 
Nation's rail traffic moves at rates deemed by statute to have 
been a product of a competitive market.
    Of the remaining 29 percent, some is traffic that is 
exempted from regulation because the particular commodities and 
services involved, such as intermodal traffic, have competitive 
transportation alternatives available, and some is traffic that 
moves under private contract and is therefore outside the 
Board's jurisdiction.
    Less than 10 percent of the Nation's freight rail traffic 
is recognized as captive and eligible for STB rate regulation. 
As we focus on this important but relatively small portion of 
rail traffic at the STB, we strive to assess and anticipate how 
our regulatory and policy decisions might impact the broader 
universe of rail customers as well as national transportation 
policies such as the development of an efficient system of 
interstate commerce.
    As is the case in many markets, some freight rail customers 
pay higher rates than others. Under the principle of 
differential pricing, railroads with high sunk costs and with 
fierce competition for most traffic are expected to charge 
more, even substantially more from their captive traffic than 
from their competitive traffic if they are to achieve enough 
revenues to cover their costs and invest in necessary 
facilities. Although differential pricing is practiced in many 
other industries as well, it is understandable that shippers on 
the captive end of this differential pricing scale would not be 
satisfied with the status quo.
    As policymakers examine alternatives to this longstanding 
differential pricing system, several important questions merit 
consideration including: If the railroads' ability to 
differentially price their services based on the market forces 
of supply and demand is significantly constrained, who will 
make up the difference?
    Who will end up paying more?
    How will the railroads in this highly capital intensive 
industry maintain their existing infrastructure, not to mention 
attract additional private investment needed to expand their 
capacity to meet projected dramatic growth and future demand 
for access to the rail network?
    The Board recently commissioned the economic consulting 
firm, Christensen Associates, to conduct an extensive study on 
the extent of competition in the railroad industry. The study 
will also assess various policy issues including current and 
near future capacity constraints in the industry, how 
competition and regulation impact capacity investment, how 
capacity constraints impact competition and how competition, 
capacity constraints and other factors affect the quality of 
service provided by railroads.
    The study team will have the full benefit of all of the 
STB's powers to inquire into and gather information from the 
freight rail industry. I look forward to briefing this 
Committee on the results of this study next year.
    Examples of ways that the STB promotes competition can be 
found in our major merger rules in cases where we impose 
competition-protecting conditions such as in previous merger 
cases, in other cases where the board has prevented larger 
carriers from interfering with the ability of smaller carrier 
to meet their obligation to provide service, in our management 
of the Federal Environmental Review Process required for the 
proposed construction of new rail lines and in decisions 
authorizing the construction of those new rail lines.
    With regard to the financial condition of the Nation's rail 
system, I can report that our data reinforce what others will 
report today. The rail industry has gradually recovered from 
its pre-Staggers Act state of ruin, and the industry is 
currently in good health.
    The Board is currently awaiting final comments on an 
important rulemaking that proposes to change a key measure of 
the financial health of the railroads, the annual cost of 
capital determination. That calculation ties into our entire 
annual determination of the railroads' revenue adequacy and is 
also a significant factor in rate cases and other Board 
proceedings.
    I believe that the Board must continue to examine all of 
our procedures and to constantly explore improvements, no 
matter how controversial the issue may be to stakeholders.
    The Board's procedures for handling rate disputes are 
particularly important, and I will now turn to that issue.
    Under our statute, the Board must ensure that rates are 
reasonable while, at the same time, not preclude railroads from 
obtaining adequate revenues, but balancing these potentially 
conflicting objectives is not an easy task. Rates that are too 
high can harm rail-dependent businesses while rates that are 
too low will deprive railroads of revenues sufficient to pay 
for the infrastructure investments needed.
    The Board has recently improved its procedures for handling 
rate cases. In the fall of 2006, we made some significant 
changes in how we apply the stand-alone cost test and calculate 
the amount of relief in large rate cases in an effort to reduce 
litigation costs, create incentives for private settlement of 
disputes and shorten the time to litigate large rate cases.
    Also, in the small rate case resolution process, our new 
rules allow smaller cases to proceed on one of two tracks. 
First, freight rail customers may seek up to $1 million in 
relief, using a revised version of the three benchmark test 
with more predictability built into it. Under a second 
approach, customers can seek up to $5 million in relief.
    Another important issue that the Board is keeping a close 
eye on relates to fuel surcharges imposed by railroads. In 
January of this year, we issued a decision declaring it an 
industry-wide unlawful practice for carriers to use a fuel 
surcharge to recover more than the increased fuel cost 
attributable to the particular movement to which the surcharge 
supplied.
    Mr. Chairman, I will wrap up. I realize the time is 
running.
    This action ended an industry practice of charging fuel 
surcharges as a percentage of the shipper's base rate 
regardless of the actual fuel cost associated with the 
transportation of the shipper's goods. The Board will 
aggressively use the authority granted to us by statute to stop 
unreasonable practices, thereby protecting shippers and 
advancing the public interest.
    It is worth noting that the Board investigated and acted on 
the fuel surcharge problem on our own initiative and without 
any formal complaint. This Board has not received a single 
formal complaint about fuel surcharges. We will remain vigilant 
on this issue and will expeditiously review any formal 
complaints related to fuel surcharges or other unreasonable 
practices or unreasonable rates.
    Moreover, in addition to our process for adjudicating 
formal disputes, we also have an effective informal dispute 
resolution process which we encourage stakeholders to take 
advantage of.
    In sum, the STB is actively engaged in the pursuit of 
enhanced competition, the implementation of accessible and 
affordable dispute resolution procedures and continuous process 
improvement aimed at making our Agency a more effective 
economic regulator of the freight rail industry.
    Our initiation of a major national study of the state of 
rail competition and related policy alternatives along with our 
recently improved dispute resolution procedures, our pending 
rule on how the railroads' cost of capital should be measured 
and the other proactive steps outlined in my full statement all 
combine to demonstrate this Board's strong commitment to 
providing robust regulatory oversight of the freight rail 
industry.
    I look forward to the opportunity today to discuss our 
record of reform in more detail and to returning to this 
Committee in the future to report on our progress.
    Thank you.
    Mr. Oberstar. Thank you, Mr. Nottingham. We look forward to 
those initiatives and the report on your several reviews that 
were enumerated in your testimony. You can rest assured, we 
will invite you back.
    Vice Chairman of the STB, Mr. Buttrey.
    Mr. Buttrey. Good afternoon, Mr. Chairman. Thank you very 
much for this opportunity to be here today before the 
Committee. I commend you for holding the hearing.
    I think to have a conversation about this issue from time 
to time is probably very useful to everybody, the Congress and 
the shippers and railroads and other people who are interested 
in the railroad industry, including investors and potential 
investors and shareholders.
    I do not have a separate statement. In the interest of 
time, I will dispense with any kind of formal statement. I have 
associated myself with the remarks of the Chairman who is the 
normal spokesman for the Agency, and I will be very happy to 
answer any questions you might have.
    Thank you very much.
    Mr. Oberstar. Thank you. We will certainly have questions 
for you.
    Mr. Mulvey, welcome back to the Committee where you once 
served and served with great distinction, preceded by a very 
long and distinguished career with the General Accounting 
Office, now the Government Accountability Office, and the 
Inspector General's Office and our own Committee on 
Transportation and Infrastructure.
    We welcome you back here. It is good to have you on the 
other side of the table now.
    Mr. Mulvey. It feels a little different being on the other 
side of the table, but thank you very much for having me.
    Good afternoon, Chairman Oberstar, Chairwoman Brown, 
Ranking Member Shuster and other Members of the Committee.
    In 1995, the Surface Transportation Board was created to 
balance the needs of shippers, who must rely on railroads for 
reasonable rates, with the need for the railroads to earn 
adequate revenues.
    The overall questions we face today are: How well has the 
Board met its charge to balance those interests and what is the 
state of competition in the transportation of those bulk 
commodities that are largely captive to the railroads?
    I don't think I am understating it when I say that many 
people believe the Board could do more to promote competition, 
ensure reasonable rates for captive shippers and improve the 
reliability and quality of railroad services.
    For a long time following the Stagger's Act, the ICC and 
the Board, after 1995, focused on ensuring that the railroads 
recovered their financial health. It has been well documented, 
the state of the industry before Staggers in the seventies and 
eighties.
    In October, 2005, the STB held a hearing on the state of 
the railroad industry, and that testimony revealed there was 
nearly unanimity that the industry had largely recovered from 
the financial malaise that plagued it during the sixties and 
seventies.
    As Chairman Nottingham has mentioned, the Board has taken a 
number of initiatives at balancing the scales between railroads 
and shippers, and there are a few areas where I believe some 
real progress has been made.
    It was already mentioned, fuel surcharges and that the 
railroads were charging the shippers fuel surcharges based upon 
a percentage of their rates. This meant that the captive 
shippers who already paid high rates had to pay higher fuel 
surcharges as well despite the fact that their shipments did 
not necessarily engender greater fuel use. The Board found this 
to be an unfair practice and directed the railroads to compute 
surcharges to more closely reflect actual fuel consumption.
    Secondly, with regard to access to rate relief, the cost to 
bring a case before the Board and using its stand-alone cost 
guidelines can cost a shipper several million dollars. It is 
not the filing cost. It is the cost of the lawyers and the cost 
of all the consultants necessary for the shipper to undertake a 
stand-alone cost procedure. Shippers, whose traffic does not 
warrant the expense of bringing cases under the stand-alone 
cost guidelines, believe they have no access at all to the 
Board for relief.
    For 20 years, the Board and its predecessor, the ICC, 
studied how to make the Board's procedures available to small 
shippers. Finally, the Board has now acted to address both the 
cost and timeliness issues for the large rate cases as well as 
finally establishing new procedures for small rate cases.
    In October, 2006, the STB issued new large rate case 
guidelines that were designed to reduce the cost of bringing a 
case significantly and to speed up the process. Just last 
month, we issued new procedures. In fact, earlier this month, 
we issued for bringing small rate cases before the Board.
    These rules give the shipper the option of selecting how 
they want to proceed to challenge their rates but, as the 
Chairman pointed out, they do set limits on recovery depending 
upon which process is selected.
    I am committed, Mr. Chairman, to monitoring the results of 
these initiatives to make sure they work as intended and to 
make changes if necessary.
    Thirdly, the cost of capital, the Board has consistently 
found that the Nation's railroads are revenue-inadequate 
despite the fact that Wall Street has found the railroads to be 
profitable. The reason for this disparity lies in the way the 
Board has taken to determine the cost of capital, especially 
equity capital.
    The discounted cash flow approach that was used has long 
lost favor with the financial community. The Board staff 
reviewed the academic literature. We held hearings on this 
issue, and we have come up with the decision, proposed 
rulemaking rather, to adopt the capital assets pricing model. 
If this change is adopted, it could reconcile the Board's 
estimation of revenue adequacy of the railroads with that which 
prevails on Wall Street.
    However, there are still a number of areas that still 
concern me, first of all, paper barriers. Paper barriers are 
contract provisions that arise when a Class I railroad sells or 
leases some of its light density track to a short line. Often, 
the short line must agree to interchange traffic only with the 
Class I carrier that leased or sold them the track. 
Interchanging with any other railroad would result in severe 
penalties. The restrictions generally continue on into 
perpetuity.
    I have found this practice to be anti-competitive and I 
have dissented from the majority of the Board in several cases 
where paper barriers were contained in sales or lease 
agreements.
    With respect to the status of competition, I believe the 
GAO study on railroad competition was a very worthwhile and 
well done effort. However, I do feel that it inaccurately 
claimed that the extent of captivity was declining. Even if 
relative captivity--which is what I think they mean--the 
percentage of traffic that is captive has declined, there is no 
evidence that competitive options have increased for captive 
shippers.
    The GAO also suggested the Board undertake a study of 
competition in railroad industry, and the Board has recently, 
as the Chairman pointed out, contracted with a private firm to 
have such a study done.
    I personally regret that those resources were not committed 
to a study that was authorized in the SAFETEA-LU legislation 
which would have focused on how well the Board has handled its 
mission rather than the larger issue of competition in the 
industry. How well has the Board acted on its mission, and that 
study would have been undertaken by the Transportation Research 
Board of the National Academy of Sciences.
    I have a few suggestions for improving rail service and 
competition. If we as a Nation are serious about shifting 
traffic off our highways and onto rail, we need to devote more 
resources into improving our rail infrastructure. The railroads 
favor an investment tax credit for this purpose, but I 
personally believe the amounts that will be needed would be far 
greater than what a tax credit could realistically produce.
    I believe that a railroad trust fund of the type 
recommended by former Representative and T&I Committee Member, 
Bill Lipinski, could generate the monies. A railroad trust fund 
could generate the monies needed to upgrade and build our 
Nation's rail transportation infrastructure.
    Also the Board currently exercises regulatory oversight 
only over about a third of the traffic. Much traffic is exempt 
from our regulations because it is presumed to be competitive 
with other modes of transportation. But as times change, so 
does the competitive landscape. I believe we need to examine 
the class exemptions periodically to determine whether those 
premised on the availability of intermodal competition remain 
warranted in the 21st Century.
    Finally, the Board may begin an investigation of a 
potential violation of the rail portions of its statute only on 
complaint. If the Congress wants the Board to continue to 
actively seek out and stop problems, it might be appropriate to 
revise this language by striking the word ``only'' and adding 
``on its own initiative.''
    I thank you for the opportunity to testify today. I look 
forward to answering any questions you may have.
    Mr. Oberstar. Thank you very much, very crisp and 
thoughtful set forth testimony. I appreciate that.
    From the U.S. Department of Agriculture, Associate 
Administrator in the Agricultural Marketing Service, Mr. 
Kenneth C. Clayton, welcome and thank you very much for being 
with us.
    Mr. Clayton. Thank you, Mr. Chairman, and Members of the 
Committee, thank you too for the opportunity to appear before 
you today to share USDA's views regarding rail competition and 
service.
    As Associate Administrator of USDA's Agricultural Marketing 
Service, I oversee a variety of domestic and international 
marketing programs for American food and fiber including our 
work on agricultural transportation issues.
    There are many reasons for the productive and competitive 
strength that the U.S. agricultural sector has enjoyed over the 
year. Three factors, I think, stand out as particularly 
important.
    First, we have been blessed with an extremely productive 
natural resource endowment. Second, we have an impressive 
record of technological development in the production, 
harvesting and processing of agricultural products. Third, we 
have benefitted from a transportation system that has 
facilitated the efficient and effective movement of 
agricultural products from farms to destinations both at home 
and abroad.
    Clearly, rail is a critical component of our overall 
transportation system. In fact, the agricultural industry in 
the United States is highly dependent on a viable rail network, 
particularly producers in more remote locations with long 
distance transportation needs.
    USDA shares the view of many that the deregulation of the 
rail industry under the Staggers Act and related legislation 
was of positive effect in preserving the industry. At the same 
time, in regaining their economic standing, the railroads have 
taken steps that have reduced service levels and shifted costs 
to the users of their service.
    Consequently, as important as rail rate measures may be for 
judging the exercise of market power, changes in rail rate are 
not fully reflective of either the costs associated with 
movement of products from origin to destination or the impact 
on the international competitive position of industries like 
agriculture.
    USDA has heard and continues to hear from many in the 
agricultural industry regarding their concerns about rail 
competition and service. For many grain producers, rail is 
virtually the only cost-effective bulk shipping alternative, 
and agricultural shippers continue to express concern about 
decreased rail to rail competition, increased rail rates, poor 
rail service, rail capacity constraints and the fair allocation 
of rail capacity.
    Compounding this concern, of course, is the fact that 
agricultural producers have little influence over prices that 
they receive for their commodities and typically must absorb 
cost increases. Thus, increasing transportation costs translate 
into lower producer incomes which can have important 
implications for the production of food and fiber as well as 
the vitality of rural and regional economies.
    One of the key assumptions underlining deregulation of the 
rail industry in 1980 was that there would be sufficient 
competition, at least in most markets, to promote reasonable 
rates and discourage the abandonment of branch rail lines vital 
to agricultural producers. However, rail competition has 
declined over the past quarter century due to rail 
consolidation.
    The implications of this decline are somewhat difficult to 
assess, given incomplete and inconsistent data. To provide a 
clearer perspective on the state of competition in the rail 
industry, USDA notes and supports the GAO recommendation and 
subsequent STB action to take onboard a study of national rail 
competitiveness.
    Let me conclude, Mr. Chairman, by thanking you and the 
Committee for holding this hearing today. An efficient and 
effective transportation system is clearly important to the 
U.S. economy, particularly for our agricultural producers and 
shippers.
    Thank you.
    Mr. Oberstar. Thank you very much. Your complete statement 
will, of course, be included in the record. Your summary was 
very well presented.
    Mr. Clayton. Thank you.
    Mr. Oberstar. Ms. JayEtta Hecker has been in front of our 
Committee on many occasions and on many subjects, and we 
greatly appreciate your learned analysis of the transportation 
issues. Thank you for being with us again.
    Ms. Hecker. Thank you, Mr. Chairman. I am very pleased to 
be here to speak before you and the other Members of the 
Committee.
    The topic is, of course, as we heard, an extremely 
important one, and we are pleased that we can speak on the 
basis of two very recent and very comprehensive reports. We 
were most recently asked to look at 25 year retrospective on 
the impact of the Staggers Act and what kind of overall effects 
there have been. So I am basing a lot of my comments on that 
report as well as a more recent update looking at an additional 
year of rate changes.
    The three topics I will cover are, first, the major changes 
in place post-Staggers with this very broad perspective; 
second, I will talk about the protections, the balance that was 
always envisioned for the protection of captive shippers; and 
then, finally, I will briefly address the actions that the 
Board has taken.
    I will try to go through those very quickly because I think 
you are familiar with our report, and I am sure questions will 
be more useful as an exchange.
    If you look at page two, I do have a slide. It is 
unequivocal and all have recognized that the financial 
condition of the railroads was grievous before 1980. It was 
very important to our overall economy and our performance, and 
in many senses Staggers had a remarkably positive impact over a 
long period of time of allowing the industry to return to 
financial health through a number of the measures that are 
indicated there.
    The next slide, and again many people recognize this. One 
of the extraordinary things with the nature of the competition, 
the kind of measures that the railroads took, rates went down, 
went down for over 15 years, almost steadily every year, every 
commodity. We developed an index to try to make that a pure 
basket of goods, so it didn't deal with changes in geography or 
changes in the product, but rates consistently went down and 
went down even more if you look at it, as this chart does, 
relative to GDP price index.
    It has gone up. There is no doubt, and I am sure you have 
heard this from many shippers, that rates have started to turn 
up slowly in 2000 and rather significantly, the most 
significant single year rise between 2004 and 2005. But in real 
terms, railroad rates, the cost to move shipments by rail are 
still below 1985 levels.
    I might say that one of the views maybe that this 
deregulation and the competition and the measures the railroads 
were enabled to undertake to streamline their operations wasn't 
just in their performance, but these increases in the 
efficiency of the industry have actually been a macroeconomic 
factor in overall economic growth.
    The improvements in the performance of the logistics 
sector, several Members talked about the fact that we are one 
of the countries that is the cheapest in the world to move 
goods, and that was part of the benefits, not just the rate 
issue but the kind of efficiencies that we saw the railroads 
undertake and put in place with the flexibilities they were 
given.
    Slide four, again as you know, while all rates went down, 
they went down at different rates for different commodities, 
and this slide basically showed that the least decline has been 
in the grain area. The next one that started moving up more 
recently is miscellaneous mixed shipments which is largely 
containers. The bottom one where the rates were the lowest, 
coal has ticked up. You have got a number of increases 
occurring differentially in different commodities.
    Now some of our analysis is you can't immediately infer 
this to monopoly power or whatever. There are lots of real 
factors in the industry. As many of us are well aware, capacity 
constraints have really become a reality in railroads, and that 
obviously turns into rate increases.
    The railroads made new investments, as was discussed. They 
expanded employment. They changed some of the mix to focus on 
different traffic, and there was a demand growth that was 
consistently occurring. So there are lot of reasons, and you 
can't necessarily have a nefarious concern when you see the 
rates ticking up. It is a difference in a competitive and 
economic environment.
    Now, in looking at the overall picture, we also wanted to 
try to look behind the rates because you, Mr. Chairman, noted 
there had been a transfer of a number of costs to shippers. One 
of the areas we looked at, because we thought it would be 
useful to understand a rarely examined factor, is this 
miscellaneous revenue.
    As you see from this chart, slide five, miscellaneous 
revenue has skyrocketed. It has gone up 10-fold in just 5 
years. Now a big factor in there is fuel surcharges, but one of 
the concerns that we had that related to one of our 
recommendations is this very inconsistent reporting by 
railroads. This isn't good data, and so we recommended that the 
Board take some action to improve the consistency of data and 
the transparency of this information.
    On slide six, I quickly go into some of the information on 
captive shippers. You yourself have noted that while slide six 
uses this proxy for an indicator of captivity and uses the 
statutory definition which just opens access to rate relief. 
With this global factor, the share, whether it is in tonnage in 
revenue of potentially captive shippers, has gone down.
    But then to try to probe a little further, we looked in a 
more isolated subset at traffic which was traveling at 
substantially above the statutory threshold, and that was a 
ratio of 300 percent of revenue to variable cost. We found that 
has been rather significantly increasing.
    And, we looked at it on a geographic basis. You see 
differences in where those very high revenue to variable cost 
ratios occur, and it is in States like Montana, New Mexico, 
North Dakota and West Virginia.
    The key question that we had was, I think as several people 
said, we really did not believe that effective relief had been 
provided for shippers. In the 25 year history, in the balancing 
that was envisioned and while there was always the concern 
about the revenue adequacy, there really was very little 
effective relief provided.
    It is true that the Board very recently has started to take 
some actions. You have heard those, and I don't need to recount 
them. I will say that some of them, particularly this change in 
the calculation of revenue adequacy, could be very substantial. 
Really, it is too soon to tell what kind of impact some of 
these changes would have.
    What we did do in our report was recognize that in our view 
there were a number of alternatives that have been proposed and 
that I know you and others are aware of that could promote 
competition. That is the really the interest in these 
alternatives. They are not giving up on the marketplace 
working. They are trying to efficiently intervene to promote 
competition.
    Although each of these have been argued as opportunities to 
do that, each has real costs and benefits. We did not feel we 
had the information to recommend any particular action by the 
Board. That combined with our concern with the absence of 
relief and the continued presence of some captive shippers led 
us to recommend that the Board more comprehensively, using its 
full authority, evaluate this situation.
    The conclusions then on slide 10, the Staggers Act has had 
far-ranging benefits not only to railroads but to our economy 
and to consumers and to many shippers. We did conclude that 
widespread changes in the relationship between the railroads 
and their customers are not needed.
    We did observe and do believe that there are pockets of 
potentially captive shippers that remain and that more 
examination is needed to determine whether some of those rates 
were really justified by market conditions or reflected in 
abuse of market power. As I said, that led to our 
recommendation for a more comprehensive study by the Board and 
some specific improvements in data as well.
    That concludes my statement, and I apologize for going 
over.
    Mr. Oberstar. Oh, no, not at all. It is an excellent 
statement. We expect that thorough review from the GAO. Thank 
you very much.
    Chairman Nottingham, you referred in your statement that 
earlier this month the Board issued new guidelines for small 
and medium size rate disputes. Shippers are saying, well, the 
new guidelines, they welcome some action. There hasn't been 
much over many years on this issue.
    But they do not reflect any of their recommendations. What 
recommendations were made that you think were useful and what 
recommendations were not?
    Mr. Nottingham. Thank you, Mr. Chairman, and I will say 
that issue stands out.
    That rulemaking where we endeavored to, with a lot of 
effort and time put into this by the career staff at the STB 
and hearings and a period of years of observing a system that 
really did not work, endeavored to put together a set of new 
procedures so that the Board can be more accessible to smaller 
and medium size rate cases, and that is what the recent 
rulemaking was all about.
    I will say that a number of shipper groups have already 
asked and we have given them some more time to decide whether 
they want to begin the process of appealing that decision. I 
believe some of the railroads have already filed some legal 
paperwork indicating intent to appeal. Somehow we have managed 
to attract concerns on all sides of the issue.
    But we think we have, by setting up two new channels to 
bring smaller cases, putting the shipper in the driver's seat--
the shipper can choose which one to take advantage of--and 
allowing a shipper to receive up to $5 million in damages under 
what we call the mid-level review or up to $1 million under the 
most simplified, we have greatly improved a situation that 
really wasn't working.
    We had no cases resolved under the preexisting special 
procedures for simplified rates, and that was over a period of 
many years. Clearly, that is not because there are no shippers 
who believe they have cases. It was because of some problems 
with the dispute resolution process that existed.
    It will be interesting to see as time goes by whether 
shippers take advantage of this opportunity, how it works. We 
do have one significant shipper. I believe it is the DuPont 
Company that has already filed several complaints, and I know 
they are before you later today. I will let them speak for 
themselves.
    Time and experience will tell whether we are on the right 
track, but I do believe we have made a big improvement.
    Mr. Oberstar. It is an ongoing process is what you are 
saying.
    Mr. Nottingham. Yes, sir. Until we see a case play out, 
that is when we really know whether it works.
    Mr. Oberstar. You made reference to hedge funds and other 
large investors that are in your words, showing extraordinary 
interest in railroads. I met with the AAR Board earlier this 
year. That issue was brought up. Two major railroads, two of 
the Class Is have suddenly found themselves the target of 
investment.
    I would have concerns about hedge funds investing 
significant amounts at least up to the ability to have control 
over the railroad from the experience that I have had with a 
paper company in my Congressional district, the one that 
acquired Boise Cascade.
    Then what this hedge funds do with some regularity is spin 
off assets, cut down workforce, trim the company, increase its 
apparent profitability and then sell it off at that higher 
value. But, in this case, they sold off the woodlands that have 
been for 100 years in company ownership.
    If you are in the pulp and paper business, your asset is 
wood. It is trees. You sell your asset off, then you deprive 
the company of the ability to counterbalance forces in the 
marketplace. Those hedge fund guys didn't care a hoot about 
that.
    Now I can envision hedge fund operators coming in. 
Everybody welcomes increased capital investment, but when that 
capital investment comes in and strips the asset, its 
viability, then you have a serious situation. In this case, the 
serious situation is the future ability of the railroad to 
serve the public.
    Have you at the Board given thought to reviewing the 
potential effects of hedge fund investments in the railroads?
    Mr. Nottingham. We have, Mr. Chairman. It is an issue and 
an area we are looking at closely, and it represents really an 
example, probably one of the most glaring examples of how fast 
changing this industry and this marketplace really is.
    We are living through incredibly dynamic times where after 
many years of disinterest by large segments of the financial 
community in the rail sector as an attractive place to invest 
money, we are seeing huge amounts of resources pouring into the 
railroads from large investors.
    Some of them go by the general name, hedge fund. Some of 
them don't. Some of them are prominent individuals like Warren 
Buffett who have earned a lot of respect generally over the 
years for being a wise investor, and others are people like 
Bill Gates, and people who just seem to have significant 
capital and they want to invest it.
    We want to be sure, though, that anyone who does get 
involved in the railroad business, and we will ensure that 
anyone who does get involved in the business of railroading, 
has the public interest at heart and is not interested in just 
cashing out tomorrow and leaving shippers stranded.
    Mr. Oberstar. I think that is a very good perspective, but 
the question that I would like the Board to be asking is: Do 
these investors bring an increase in capital to the railroad 
for investment in its capital needs or are they just playing 
around with the shares, taking hold and getting a controlling 
interest in the railroad to further their own pocket, not to 
advance the cause of the railroad itself? That is what I would 
like the Board to be asking.
    Mr. Mulvey, your statement, I think, makes a profound 
observation. The Staggers Act greatly reduced economic 
regulation of the industry. It didn't take away economic 
regulation.
    Mr. Mulvey. It did not. It greatly reduced by allowing, 
especially allowing the railroads to enter into contracts with 
shippers. Historically, before Staggers, all railroad rates 
were the tariff. With contracts, the deal was the rich could be 
more competitive. They could make agreements, et cetera, and 
the railroads could become more competitive.
    But you know you always have to be careful what you wish 
for because some of those contracts the railroads entered into 
back in the days when they were still financially in distress, 
were very, very lucrative for the shippers. They went on 10, 
15, 20 years and, over time, these contracts became a real 
burden on the railroads.
    Now, of course, as these contracts are coming due, the 
railroads turning that around and raising rates 50, 60, 100 
percent in order to make up for the years when these contracts 
were bad.
    Staggers also allowed the railroads to abandon lines much 
more easily. It sped up the abandonment process. So they were 
able to reduce their costs, reduce the size of their 
infrastructure, continue to cut back on the labor force until 
they are a fraction of what they were 30 years ago.
    There is good with that--they are more efficient--but there 
is bad with that because today we have a railroad system that 
is not well positioned to meet the demands in the future.
    Mr. Oberstar. Thank you.
    The conclusion we could draw from that is attempts for the 
Board to exercise its inherent authority, more authority or 
encourage the Board to vigorously use its authority is not re-
regulation. Regulation remains but at a diminished level, 
right?
    Mr. Mulvey. Yes, and there is a new question as to what the 
Board's authority is. We have a general counsel. They have 
views of what our authority is. We don't want to overstep the 
authority that Congress has given us, but there have been some 
cases where we have been questioned as to whether or not we had 
the authority to do what we did.
    Fuel surcharges, for example. A lot of people believe the 
Board did the right thing in fuel surcharges, that the 
railroads action was unreasonable, but some of the railroads' 
claim that the Board had overstepped its authority in the fuel 
surcharges. We didn't have authority to do what we did.
    I recommend that the Board be able to initiate 
investigations on its own. Right now, we don't have the 
authority to initiate investigations on our own. We have to 
wait until a complaint is filed. That, again, would strengthen 
us.
    Mr. Oberstar. I definitely think that is an initiative we 
should take and should be an outcome of this legislation.
    Mr. Nottingham, do you disagree with subsequent witnesses 
who will come before the Committee, who have already many times 
said, filing fees are excessive, cost of proceedings are 
excessive, time consumed in proceeding on a rate case is 
excessive?
    Do you disagree with that?
    Mr. Nottingham. I sympathize with those concerns because 
looking back at the record over the years, in some cases over a 
hundred years, in some cases more recently, what I have had to 
do as a new chairman, 13 months into my appointment here, I 
will say I have been distressed to see that it has gotten to 
this point.
    But I am pleased to say that my colleagues, well before I 
came onto the board, initiated a number of very sweeping, 
important reforms that I was pleased to join with, and almost 
all of our major actions have been unanimous and bipartisan in 
those reform areas. We are changing fast for a regulatory 
agency, and I just ask the Committee's forgiveness to judge us 
on what this Board, these three members and the staff, actually 
accomplish and have accomplished.
    Mr. Oberstar. You are moving in the right direction. I 
appreciate that.
    I would say that on those issues, even railroads that 
disagree with other provisions of my legislation will say those 
filing fees are too high, the barriers are unreasonable, the 
time consumed is unreasonable. That ought to be adjusted.
    I have one question that I want to ask, and then we will go 
on with other Members.
    Is there or could there be a rate that is so high a percent 
of variable cost that it would be appropriate for the Surface 
Transportation Board to use its powers to declare the rate 
unreasonable?
    Mr. Nottingham. Mr. Chairman, I assume you would like me to 
take a first stab at that. Yes, sir, we get that question a 
lot. It seems pretty straightforward that if a rate got to a 
certain level percentage-wise that common sense would say the 
Board would de facto deem it to be unreasonable.
    I will say, though, we don't do that, and I have to be 
careful how I speak here because we do expect this kind of 
issues to come before us in an active litigation context.
    How high is too high is the question we often get. What is 
the big magic number? Should it be 300 percent, 189, 450, 600?
    Really, it is important that we look at the facts and 
circumstances of each case and apply the modeling and the tests 
that have withstood Federal Court approval to make sure there 
is not a width of randomness or arbitrariness in the way we do 
that because these are multimillion dollar disputes and we 
prefer not to see them dragged out in appeals unnecessarily.
    Mr. Oberstar. Thank you.
    Mr. Mulvey, do you have a comment on that?
    Mr. Mulvey. I would agree that we have a process, and any 
particular number would be somewhat arbitrary. So we do have a 
process, and we do look at the stand-alone costs. If the rate 
is higher than that which would be necessary for the railroad 
to continue operations and reinvest in itself for its 
investment, then that rate is too high and we will roll the 
rate back.
    In some of the cases that came before us, some of the large 
rate cases, it is true that I don't think we have ever given a 
shipper a complete win, but we have rolled back the rate 
somewhat in some of these cases. But I am not sure there is a 
magic number.
    Mr. Oberstar. Ms. Hecker, have you had GAO consider that 
issue?
    Ms. Hecker. No, we haven't explicitly, but I have to say in 
our discussion of the problem with the revenue to variable cost 
ratio, we point out and discuss explicitly in the report that 
the nature of a ratio can have perverse effects. You can have a 
rate decrease where the entire decrease is passed on to 
individual shippers, but the ratio will change and the revenue 
to variable cost ratio will go up.
    So it is very dangerous to not have it be case specific.
    If I may, I wanted to add a point, though, about authority 
which I think is a very important one and clearly a legislative 
issue. In our report, we basically observed and we put a lot of 
our lawyers on this issue, that we though the Board's authority 
did reach to its ability to inquire into and report on railroad 
practices and to study and to monitor and take action to 
promote and enhance competition.
    One of the statutory objectives of Staggers and the 
formation of the STB is about ensuring effective competition. 
While some of the measures that are being explored are the 
subject of prior rulemakings where they decided one thing, 
there is the potential where circumstances have changed where 
we think the Board has the authority.
    In early discussions of our recommendation, there were some 
issues about whether the Board could even undertake the study 
that we were recommending. At the end of the day, they finally 
agreed that they could do that.
    We would be happy to have our lawyers talk with you at the 
same time with the STB lawyers. We think there is a lot of 
authority there, and it has been a question of the balance that 
we really haven't seen in the past.
    Mr. Oberstar. Thank you. That would be very useful. We 
could do that.
    Ranking Member Shuster.
    Mr. Shuster. Thank you.
    Chairman Nottingham talked a lot about the new procedures 
and processes he just put in place to handle rate cases. It is 
my understanding you attempted the Board attempted to do that 
in the 1990s and it failed.
    What is in these new procedures that is going to assure us 
that they will succeed and can you talk about a few of the 
changes you have made to those procedures that you think are 
going to come out with positive world changes where we will see 
success as we move forward?
    Mr. Nottingham. Yes, sir, I would be happy to. Under our 
recently adopted rulemaking in the area of creating a 
simplified process for small and medium size rate case dispute 
resolution, what is of, I think, most interest to me and should 
be of high interest to shippers is that for a $150 filing fee, 
which is a pretty routine filing fee you see in a lot of 
courts, you can bring a $1 million complaint. You can choose to 
do that or you can choose to pay a higher fee and bring a $5 
million complaint.
    Under the three benchmark approach, which is the smaller $1 
million and less approach, we basically set up almost a small 
claims court type model, that you don't have to bring in four 
law firms and five consulting firms and spend millions of 
dollars arguing over 99 different assumptions.
    We make a lot of the assumptions for you. It is laid out in 
the rule. You just bring your case, and within eight months you 
are guaranteed an answer.
    Now that is assuming that the parties don't prevail upon 
the STB to extend which we hope that we don't see requests for 
extension, but that is the reality that you may want to ask 
future panels about today because you will hear a lot about the 
lengthiness of procedures. Very often, it is borne out by the 
repeated requests for extensions by both shippers and 
railroads.
    Mr. Shuster. What is the time frame?
    Mr. Nottingham. So it is eight months gets you a decision 
under that. Under the slightly more complicated $5 million 
simplified stand-alone cost procedure, you get an answer in 17 
months, which for complex civil litigation with $5 million on 
the table is a great improvement. We are going to do our best 
to stick to that.
    Today is probably a good opportunity with the audience we 
have through the internet and here for me to say that we will 
be looking at extensions very tightly and we will not, if I 
have anything to do with it, just be granting them as quickly 
as we may have in past years.
    Mr. Shuster. As the Chairman said, I am sure we will be 
calling you back because we will be watching, watching closely. 
I think it is extremely important that we do streamline it and 
get it down to where small shippers can get in there and get 
relief if it is necessary.
    The fuel surcharge situation, I have seen some 
advertisements on the Hill. You commented it on it briefly, and 
I think Dr. Mulvey, you had commented on it. Can you explain 
that again to me?
    Did shippers come in and file cases or not? I am not quite 
sure I understood that.
    Mr. Nottingham. A lot of this transpired before I was on 
the job, but I am told by our staff, who searched the records 
very carefully, that we have to this date never received, this 
Board in the last period of years when this issue has been 
playing out, a formal complaint from any shipper about a 
specific case of fuel surcharge, misconduct or abuse or 
unreasonableness.
    Now the Board, under its own authority--and I would be 
happy to let my colleagues address this because they should get 
the credit for this--actually heard about this issue because we 
are constantly meeting with shippers and stakeholders and 
others, that this was a problem. Under our own authority, we 
actually initiated a sweeping industry-wide investigation and 
hearings and put an end to the practice.
    It was an outrageous practice, personally, if I might say, 
where railroads were actually asking shippers to pay something 
called a fuel surcharge that had no relation necessarily to the 
use of fuel by those shippers. How it lasted and played out as 
long as it did is a mystery to me, but I am pleased to be part 
of the group that actually put an end to it. If we ever do see 
a formal case brought to us, we will take a good look at it.
    Mr. Shuster. Dr. Mulvey.
    Mr. Mulvey. The advertisement that you saw in Roll Call, I 
guess the other day, didn't refer to the STB's finding that the 
fuel surcharge was an unreasonable practice which we did find. 
It complained that we didn't make it retroactive, that the 
shippers had already paid all these fuel surcharges and they 
did a calculation which said that the railroads made $6.4 
billion above and beyond what was justified with these fuel 
surcharges.
    Now you will be hearing from the railroads later, and they 
very much dispute the calculation. Clearly, to the extent that 
these fuel surcharges were unreasonable, while they were in 
place they were unjust, but we decided to go forward with the 
fuel surcharges rather than try to rebate those that were 
already paid. But that is what the complaint in that ad was.
    Mr. Shuster. Dr. Mulvey, I wonder if you could shed some 
light on the 180 percent of revenue to variable cost rates. We 
keep hearing that talked about, and it is my understanding it 
wasn't developed very scientifically as many things on Capitol 
Hill aren't developed very scientifically. So can you talk a 
little bit about that?
    I think a lot of people and I don't know about other 
Members of the Committee's understanding of it, but I think it 
is important as to where did the 180 percent, what does it 
mean, is it a scientific number.
    Mr. Mulvey. Well, the actual number itself, 180 percent of 
variable cost, it is my understanding that it was decided on by 
one of the staff people on the Hill many years ago late at 
night.
    Mr. Shuster. You are pointing to John.
    Mr. Mulvey. It wasn't John, but it was a staff person 
apparently, but there was a lot of evidence it had to be 
somewhere near that number.
    Revenue had to be greater than variable cost obviously 
because it has to cover fixed costs. The presumption is how 
large are those fixed costs and how much more then the fixed 
costs must revenues be to make sure they are covering all the 
out of pocket or variable costs as well as making a return on 
investment and having enough money to replace capital.
    The actual number, people talked about different numbers, 
and then finally it was set at 180 percent. It is not based on 
any kind of scientific knowledge that I know, but basically it 
is somebody's best guess.
    Mr. Shuster. Mr. Chairman, I wonder if I may ask one more 
question. My time has expired.
    Mr. Oberstar. Sure.
    Mr. Shuster. Ms. Hecker, you had mentioned that there has 
been no effective relief to the shippers. At the same time, you 
said the rates are actually below what they are 1985 rates. 
When I hear that, I think, well, rates have been reasonable. So 
is there relief necessary?
    At the same time, my understanding is there have been very 
few, especially small shippers, relatively few cases. Can you 
explain that to me?
    No relief has occurred. Is that because there have been no 
cases brought because it is too expensive or is there no relief 
because the rates have been relatively low?
    Ms. Hecker. I think if you are able to stay for the next 
panel, I am sure people will tell you far more eloquently than 
I can the specific concerns.
    Mr. Shuster. I intend to.
    Ms. Hecker. Basically, as I mentioned, while we report 
aggregate data, that when you go deeper into it, there are 
these pockets where there appear to be captive shippers, and it 
is indicative. It is illustrative. The kind of work that we 
were able to do, given our data that we had access to, but 
there appear to be some captive shippers who are paying 
substantially more, so even though overall on an aggregate 
basis, rates might be going down
    Don't forget there are these costs transferred. I am sure 
you will hear more about that too.
    So you have to look at a complete picture. There are these 
pockets where there could be shippers who are totally captive 
and while there is the rationale for differential pricing, 
there is the process that is supposed to be there to protect 
from unreasonable or excessive prices. Basically, as you have 
heard, nothing has ever gotten through the process.
    Mr. Shuster. That is obviously a big, big concern of ours 
here.
    You mentioned out West, I believe it was, 300 percent of 
revenue to variable cost. Does that include large fixed or 
large capital investments?
    I know out west they have double and triple tracked out 
there to try to move coal.
    Ms. Hecker. I don't believe it is just the western areas. I 
remember that West Virginia was one of the States, and there 
are pockets. Those were just States that there were some 
pockets of it. So it is not just one area.
    Again, that was just an illustrative piece of data, and 
that is why we are pleased that the Board is commissioning a 
far more comprehensive and rigorous study.
    Mr. Shuster. Thank you.
    Thank you, Mr. Chairman.
    Mr. Oberstar. The Chair of the Rail Subcommittee, Ms. 
Brown.
    Ms. Brown. Thank you, Mr. Chairman.
    I guess what still stands out most in my mind is that the 
rail industry is operating in the black and that is exactly 
what we want. I have been reading these 2,000 letters that I 
received, and it is surprising that it is comprehensive where I 
have gotten them from, particularly the number of letters I 
have gotten from people in agriculture, grain, coal.
    One of the statements is that this bill is a one size fits 
all type of remedy that will not achieve the desired goal. What 
is the desired goal?
    I guess I want to go to the Board and ask, in the instance 
that you have enacted some additional relief for the shippers, 
can you expand on that? Does that address most of the pricing 
that the small shippers have expressed their concern?
    Mr. Nottingham. Madam Chairman, if I could, first of all, 
your reference to the thousands of letters that you reference, 
it is a good reminder. I know here at the Board, we, of course, 
spend most of our time working with folks who are not happy 
with the current system of regulation, and that is 
understandable. People who are not satisfied are the first ones 
to come to Washington and petition for change, and that is the 
way it should be.
    Our system of rail transportation, though, is so big and 
enormous and so important to our economy. It is always 
important to not forget that there are thousands, hundred of 
thousands of other shippers busy moving product by rail in a 
system that overwhelmingly works well and is a model in the 
world for an effective freight rail system.
    Yes, we have got challenges and problems. Yes, this Agency, 
STB, has its work cut out for us, and we embarked on an 
extensive series of reforms. That gets to your question.
    I believe that our new simplified procedures for resolving 
small and medium size rate disputes will give shippers a 
significant new avenue to come to the Board and actually bring 
cases and get results.
    I believe that our pending--and we are waiting for comments 
to get finalized this week--rule on the cost of capital 
decision, and we are keeping an open mind, of course, as the 
Administrative Procedures Act requires until we see all the 
comments and responses. We will come in during October and by 
the end of this year we hope to have something to say in final 
form on that.
    These actions and others will make a real difference for 
shippers. Now I am not going to sit here and say that when you 
have this hearing in six months or a year or one month, that 
you are going to have a room full of 100 percent happy 
witnesses. Looking at the history, going back to the 1800s of 
this Agency and our predecessor, that would probably be 
unreasonable for me to say that to you.
    Ms. Brown. I would like to hear from the other board 
members. Also, it is still going to take about eight months. Is 
there anything that you can do to cut that time down?
    The cost is a factor, but how long it takes these things to 
be resolved is another factor.
    Mr. Nottingham. I know. We are sympathetic. Eight months is 
a long time. We put the challenge to our staff and tested them 
over and over again. Give us the fastest process that, 
remember, allows for discovery.
    This is still complex civil litigation with discovery back 
and forth, and the parties tell us that they do need some time 
to make their case, and to bring it. The railroads do get the 
procedural opportunity, obviously, to provide information and 
make their case. And so, that literally was the shortest 
feasible time period.
    We wish it could have been a lot less, but that was the 
quickest amount of time we felt we could have a reasonable 
process that would survive, frankly, survive the kind of 
appeals that we expect are coming. Anytime you try to change 
something in Washington, in a number of ways, we are getting 
challenged every step of the way in the courts of appeals from 
all sides.
    It is kind of interesting. Somehow, you are making all 
sides unhappy. You are either doing something right perhaps or 
maybe not, but we think we are on the right track.
    Ms. Brown. Dr. Mulvey.
    Mr. Mulvey. Yes, I agree that we do get a lot of complaints 
though not only about rates. On rates, we do hear from the 
captive shippers. But other shippers, who aren't captive or 
have alternatives but rely heavily on rail, also complain about 
cost of availability, how long should things take, delays, et 
cetera.
    We don't have formal procedures for all of these. We do 
have informal procedures. We have a grain car council that we 
meet with a couple of times a year to make sure that the grain 
cars are going to be available to meet shipper needs, so they 
have an understanding of what the crops are going to look like 
and what the needs are going to be, where they are going to be.
    We have a group called the Rail Shipper Transportation 
Advisory Council or RSTAC that discusses some of the upcoming 
shipper needs and how shippers are viewing the quality of 
service, and they meet quarterly.
    We just established a new Committee called the Rail Energy 
Transportation Advisory Committee which will focus very much on 
the availability of rail cars and equipment to meet the energy 
transportation needs, not only coal but also biofuels and other 
materials.
    We try to work with the railroads and the shippers to 
resolve some of those complaints and some of those issues in an 
informal manner.
    Ms. Brown. Did you want to respond to that, Ms. Hecker?
    Ms. Hecker. No, I have nothing to add.
    Ms. Brown. My last question, the Board is currently dealing 
with some competition barriers. What additional issues with 
competition does the Board plan to do to address these 
additional issues?
    Mr. Nottingham. Thank you, Madam Chairman.
    We do continue to see competition problems and challenges 
across the Country. It is one of the reasons we commissioned 
this million dollar study, and we expect our consultants out of 
Madison, Wisconsin to go out and spend quality time with many 
stakeholders, GAO, others, shippers and railroads to really 
help us come up with some more recommendations in those areas.
    I don't have the complete menu of solutions in my mind yet, 
but we have our work cut out for us.
    Of course, in our work as we see mergers, which in recent 
years have mostly been coming out of the short line sector, we 
do make sure that shippers are protected.
    We have a big merger heading our way. The paperwork hasn't 
been filed yet, but it has been in the press involving the 
Canadian Pacific and the Dakota, Minnesota and Eastern 
railroads. That could have some important consequences for 
competition, particularly the possibility of getting a third 
major railroad into the Powder River Basin.
    Our Agency has already done much of the environmental work 
which has taken years to develop, and we survived huge lawsuits 
from communities and individuals who don't want to see 
additional railroad track put through their towns.
    And so, that brings me back full circle to what we really 
need to see here which is some serious construction of new 
railroad track across our Country. We are so far past the day 
when our top problem is too much track in too many communities 
that needs to be abandoned. I look forward to the day when we 
don't have any abandonments in our docket, and we have got 
nothing but applications for new line construction.
    That is what we need both in your port community of 
Jacksonville which you were kind enough to show me the real 
opportunity you had there to get some of that traffic off of 
the trucks and the highways and really develop the rail system. 
Unlike some other systems out there, there is really room for 
the rail system to grow in many important places.
    Ms. Brown. Thank you.
    Mr. Chairman, are we going to have another round?
    Mr. Oberstar. Oh, yes, we will.
    Ms. Brown. All right, thank you.
    Mr. Oberstar. Mr. LaTourette.
    Mr. LaTourette. Thank you very much, Mr. Chairman, and 
thank you all for you testimony.
    When Ms. Hecker was speaking, I wrote down a couple of 
things, and one was I wrote down at one point she said small 
pockets of captive shippers and another time, pockets of 
captive shippers. That leads me, I think, to my first line of 
inquiry with you, Chairman Nottingham.
    She also indicated it is difficult to get around what is a 
captive shipper and what isn't a captive shipper.
    But from your perspective, you know there is a number of 
pieces of legislation floating around here, one by the 
Chairman, that attempt to address the issue of captive 
shippers. When you, as the Board, look at rail shipments as a 
whole, what percentage of those shipments do you consider to be 
captive?
    Mr. Nottingham. When you actually look at everything that 
is moving under contract that is outside of our review, 
everything that is moving under an exemption because it is 
intermodal, for example, and has the benefit of competitive 
options, and you peel it all away as I outlined in my 
statement, Mr. LaTourette, we are really talking about less 
than 10 percent of all the Nation's rail traffic that is viewed 
by us from a technical perspective as captive.
    Now are there others who feel captive sometimes? Probably 
yes. Are all those captive on every day of the week all year 
long, feeling completely mistreated? Probably not.
    That is where it might be a pocket to some but, of course, 
if you are that captive and it is your family farm or your 
family business, you are not in a pocket. You are in a huge 
hole, and it is understandable why those folks feel the way 
they do.
    Mr. LaTourette. Then that gets to my next question. When 
you used the word, intermodal, some members of this coalition 
that are behind Mr. Oberstar's bill, the C.U.R.E. Coalition, I 
think they are called. I know I speak at my peril because Mr. 
Baker is to my left as I ask this question.
    There was a box company from my district. I said, well, if 
you are complaining about the rates that the railroads are 
charging, why don't you put it on a truck?
    They said, well, because the truck is more expensive.
    My question to you is do you consider someone who defines 
himself in that circumstance, that has an intermodal option to 
meet the definition of a captive shipper?
    Mr. Nottingham. Well, one of the important considerations 
we look at, of course, is does the shipper have a meaningful 
alternative. I am not an expert on the box industry, but 
typically if it is just boxes and they are not made out of 
heavy steel or something, trucking probably could be an option.
    We look at each market, though, in each specific case to 
make that determination, to see whether a shipper really does 
have a meaningful option.
    If you are a coal mine, though, in the Powder River Basin 
of Wyoming or Montana, trucking is just not a reasonable option 
to move your coal a thousand miles. So we have seen most of the 
big cases in recent years have been right there in the Powder 
River Basin and dealing with coal and utilities unhappy with 
the rates they are paying. You will hear much more about that 
this afternoon. I know from having seen some of the statements.
    Mr. LaTourette. Okay, thank you.
    Commissioner Mulvey, my question to you is that in light of 
the fact that the STB has come up with recent decisions on the 
cost of capital and the small shipper rate relief that has been 
discussed by Chairman Nottingham in response to other 
questions, would you say that most of the issues, at least that 
I get into my office, the complaints by the shipper groups, 
have been addressed by the actions that the Board has already 
taken?
    Mr. Mulvey. I guess in a word, no. We hope that will be the 
case. I mean it was meant to do that. My suspicion, of course, 
is that while these will go partway in meeting some of their 
needs, I think there will be still be complaints about the 
Board processes.
    Some of the shippers feel that, for example, our relief 
numbers, $1 million under the three benchmark approach, $5 
million under simplified guidelines, are too low. That is a 
five year figure. It is only $200,000 a year under the first 
and a million a year for the second. So I think there will 
still be complaints. It goes part of the way, but I would be 
very, very surprised to see our phones stop ringing.
    With regard to one thing the Chairman said, I want to make 
it clear about captive traffic. Some of the traffic that is 
captive is under contract, and we do not regulate that. It may 
still be captive, but it doesn't come into our purview until 
the contract expires and it comes down to a common carrier 
rate.
    Then there is also traffic that is captive to railroads, 
that is to railroads by traffic, but it is not really feasible 
for that traffic to move by barge or by truck.
    Mr. LaTourette. Okay, thank you for that clarification.
    Ms. Hecker, to you, towards the end of your testimony, you 
indicated that the STB has taken some actions, and I assume 
that you are talking about the two improvements that I just 
asked Mr. Mulvey about. You also indicated that it may be too 
soon to pass judgment on how those changes affect the issues 
that are under study by your organization and also the issue 
that is before this Committee today.
    How long do you think we would need to wait to determine 
whether or not those changes are actually working and if Mr. 
Mulvey's answer in a word, no, might be in a word, yes, after 
it has had some time to work?
    Ms. Hecker. Well, let me preface by saying that we haven't 
even had the opportunity, given our work was completed a number 
of months ago, to systematically review the major actions. So I 
answer with only a broadest brush of what the measures are and 
therefore what kind of time frame might be necessary to assess 
them.
    The main one that we had recommended was the study, and 
that is not done for a year. Surely, I think, there could be 
very meaningful results. I was encouraged that the study group 
would have the same authority and access that the Board had. 
That was one of the concerns we had in the study being 
contracted out.
    So that time frame is one that I think the Congress would 
be in a position to have very high expectations from the Board 
to not only forward you a copy of the study but to comment 
themselves what their strategy is, what they read in it, what 
they see, whether there is consensus or whether there is a mix 
of views about proceeding. I think that is a very important 
window.
    These measures, I think there are still some legal disputes 
on the way. Obviously, one often has to wait to see whether 
even new processes are upheld. So I think it is certainly at 
least a year to look at the potential impact of new procedures.
    The one not yet done, as I mentioned I think could be the 
most important of all, and that is changing the way revenue 
adequacy is defined.
    Mr. LaTourette. I thank you.
    Mr. Chairman, I am still smarting over the theft of my 
chief of staff by the Surface Transportation Board, but I tried 
to be tried to be polite to them notwithstanding.
    Mr. Oberstar. Cross-fertilization is important, though, in 
this town.
    [Laughter.]
    Mr. Oberstar. Mr. DeFazio, since the gentleman was called 
to other duties during the opening remarks, if the gentleman 
wishes to make an opening statement.
    Mr. DeFazio. Well, thank you, Mr. Chairman. At this point, 
I would just proceed to questions if I could. I appreciate the 
offer. I had to run to the Homeland Security Committee for 
their minor portion of the Coast Guard Reauthorization. They 
are building on our good work over here.
    I just want to further pursue this definition of captive. I 
am a bit puzzled to tell the truth.
    Rail is much more fuel efficient generally than truck. I 
don't know how it compares. I mean basically if we are looking 
at lumber, it is two and a half truckloads on one rail car. I 
think it is about three times as fuel efficient, as I 
understand, over a longer distance. I have a lot of lumber 
producers in my district.
    So the question is if they have access to trucking but 
trucking, because of the laws of physics, is going to be much 
more expensive than the rail, we still consider because someone 
could theoretically put it on a truck, they are not captive. Is 
that the way it works?
    Mr. Mulvey. Well, theoretically, almost anything can be 
carried by truck.
    Mr. DeFazio. Right.
    Mr. Mulvey. If you go to the Powder River Basin, for 
example, you will see that when the coal comes out of the 
ground, the first thing it goes on is a truck with eight foot 
wheels. Theoretically, they could go on the highways. The 
highways wouldn't last very long, but theoretically that could 
happen.
    But the reality is there are some commodities for which 
truck or other modes of transportation just aren't feasible. 
Coal, for example, virtually has to travel by rail.
    The cost, we have a process called exemptions, class 
commodity exemptions. We decided that a number of commodities 
are modally competitive and therefore we do not regulate them. 
Now, we made those decisions back in the eighties and the 
nineties. One of the things I had in my statement was that we 
need to look at those commodity exemptions. Over time, 
circumstances change and with rising fuel rates, with the 
shortage of truck drivers, et cetera, it may very well be true 
that some things that we have said historically are modally 
competitive may not be.
    I think we need to review those exemptions periodically to 
decide whether or not things are captive or whether or not they 
are modally competitive.
    Mr. DeFazio. Right, but if there is a contractual 
obligation because it spun off a short line, there is no way to 
void that contractual obligation and/or can you regulate in 
that area if you determined that they are captive but they are 
only captive by virtue of a short line which is under contract 
to deliver to one Class I?
    Can you do anything in that case?
    Mr. Mulvey. If they are under a contract to a short line 
which is under a contract to a Class I, once they are into 
contracts, we cannot do anything until the contracts expire. We 
did talk about the short line being under contract, the paper 
barrier issue. Again, too, it is one of those things.
    Mr. DeFazio. Some of those are perpetual.
    Mr. Mulvey. Some of those are preventable. As I said, I 
have been very critical of paper barriers. I have dissented on 
several cases when paper barriers have been involved. Right 
now, they are accepted and, no, we can't do anything about that 
then.
    Mr. Nottingham. Mr. DeFazio, the so-called paper barrier or 
interline agreement issue is very much with us from a 
regulatory perspective. We hope to have something to say 
publicly soon. Hearings were held last summer in 2006, and it 
is a very important issue. We are going to have something to 
say about that.
    Mr. DeFazio. Does that apply only to future agreements or 
is there any way? I mean there is contract law and all that. I 
don't know whether there is any way to deal with existing 
agreements.
    Mr. Nottingham. As much as I would like to have a full 
discussion on this today, I really have to be careful or my 
lawyers will worry.
    Mr. DeFazio. You are in the rulemaking process.
    Mr. Nottingham. We are in the rulemaking process, but let 
me say something to answer your question.
    Hypothetically, a shipper who only has a rail option and 
that rail option is tied up, for lack of a better word or 
phase, in an agreement with a Class I, that could, 
hypothetically, be a captive scenario, so depending on the 
facts and everything. We could see a case like that in the 
future.
    Mr. DeFazio. When will we see a rule? When do you think 
there will be a rule on the paper barrier issue?
    Mr. Nottingham. I think within a month. I always need a 
second vote. I am always careful to point that out. It is a 
three person board as you see here. We should have something 
out very soon.
    Mr. DeFazio. Okay. I am trying to drill down to what is 
real and what is theoretical.
    We want to become more fuel efficient as a Nation and, in 
many cases, being more fuel efficient is also going to be more 
cost efficient because of the cost of fuel. In many cases for a 
lot of heavier products, that means movement by rail, but if 
there are other impediments to better utilizing the rail system 
which relate to contractual agreements between Class IIs and 
Class Is or other things.
    I mean the reality is in my district. I have a lot of 
people who are on a contracted short line. Burlington Northern 
comes to the north of Eugene, but they can't get to Burlington 
Northern. So they can only go to UP because they are not 
allowed to get to BN unless they want to truck to north of 
Eugene which becomes pretty inefficient with the unloading.
    That is one side.
    The other side we have to consider is how do you provide 
for an industry that is stable and can generate the revenues it 
needs to make investment. But, in a deregulated environment, of 
course, we aren't guaranteed that the profits that might come 
from captive shippers or access charges are going to 
necessarily flow to investment because you can't direct them to 
make investments, right? That is beyond the role of the STB at 
this point and time.
    Mr. Nottingham. Correct.
    Mr. DeFazio. In the old days, of course, it was a whole 
different system.
    I guess the question, in listening to Mrs. Tauscher and 
some of the other remarks here, is how we can be creative and 
balance these interests, both helping the shippers and assuring 
the Country that we are going to best utilize this resource 
which is more fuel efficient, which is the interest of our 
businesses and our national economy.
    Yes, I guess that probably gets beyond your rulemaking, but 
I would be interested in any ideas you have along those lines 
outside of your normal day to day activities.
    Mr. Nottingham. We would be happy, sir, to come brief you 
as soon as we get this rule out. That should be a little better 
time procedurally. We can have a good, full, open discussion 
about it and explain to you what is in there.
    Mr. DeFazio. Sure.
    Mr. Mulvey. We also talked about the investment tax credit 
that the railroads are looking for, and I also mentioned former 
Congressman Lipinski's suggestion for a railroad trust fund, 
whereby you would fund it similarly to the way the highways and 
airplanes and roadways trust funds are financed and use those 
monies to invest in the infrastructure to expand the capacity 
to meet the projected growth needs.
    There are a lot of difficulties in how you would actually 
do it, but nonetheless there needs to be more money put in the 
infrastructure than the railroads can afford to do out of 
retained earnings.
    Mr. DeFazio. Right, that would get to the unique 
partnerships that Mrs. Tauscher was referring to.
    My State is doing that with something called ConnectOregon 
where they are partnering with a freight railroad to build more 
sidings, to mitigate congestion in the hope of avoiding more 
trucks on the highway and other costs that flow through to the 
rest of society and also hopefully to more efficiently move the 
passenger trains through that same congested area.
    Partnerships like that, I think, could be very valuable. I 
am open to ideas along those lines. So thank you.
    Thank you, Mr. Chairman, for the time.
    Mr. Oberstar. I thank the gentleman.
    That is an interesting observation that the gentleman from 
Oregon made. The State is engaged in building sidings and other 
capital facilities for railroads. Is that a subsidy to 
railroads?
    Is that a kind of government intervention that the 
railroads would not welcome?
    Mr. DeFazio. Well, I think these days, there is a new 
generation of management that is more interested in creative 
partnerships like that with the State of Oregon or at least in 
our part of the Country they are interested in it.
    Mr. Oberstar. Let us hope that is the case. I thank the 
gentleman.
    The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    Ms. Hecker, I was recently provided a copy of an executive 
summary by the American Chemistry Council of a study engaged by 
them with Snavely King, which looked at fuel surcharges over 
the period of 2003 through the first quarter of 2007. The 
simplified conclusion of this lengthy report was that over the 
period, it appears that there was about $6.4 billion in rail 
overcharges coming from fuel assessments.
    Have you had opportunity to become familiar with it as far 
as the GAO look at the fuel surcharge issue previously?
    Ms. Hecker. No, I have not looked at that. I think you 
heard quite explicitly, though, from the board members about 
their concern about this, their action, and I think Dr. Mulvey 
made clear that one of the issues here whether there is a 
retroactivity in some of the actions of the Board.
    I think there is a recognition that there was a very 
inequitable application of the way the surcharges were levied 
and that it was to the serious detriment of the more captive 
shippers because it was percent-based on the revenue.
    Mr. Baker. I just really wanted to establish as to whether 
the GAO had opportunity to examine it.
    If not, Mr. Chairman, at the appropriate time, I am sure 
you have this data, but I would provide you with this 
information and perhaps request could be made of the GAO to 
examine this issue because I think it goes toward the overall 
governance question about how matters of this import should be 
addressed. I will discuss that with the Chairman at the 
appropriate time.
    Mr. Oberstar. I would suggest the gentleman submit the data 
to GAO, and we will direct them to respond to the Committee.
    Mr. Baker. I thank the Chairman for that assistance.
    Mr. Nottingham, there is some question as to how frequently 
the STB has found significantly in a shipper's favor. For the 
record, I note that there has been representations made that 
the findings are relatively balanced.
    In looking at the record from my perspective, in 2001, in 
the case of Wisconsin Power and Light, the STB is generally 
viewed in that instance as having made a measurable decision in 
favor of the shippers. Since the 2001 decision to date, is 
there another decision of similar scope and consequence to 
Wisconsin Power that you could make us aware of?
    Mr. Nottingham. Congressman Baker, most of the attention we 
see in this area--we have had some comments and I know you will 
hear much more from later panels--does focus on this one type 
of major, major case. These are multimillion dollar, sometimes 
tens of millions. Sometimes the amount in dispute can be 
upwards of over $100 million, and you think about the 
possibility of the Board being asked to put a 10 or 20 year 
rate prescription in place.
    In my look at the record, having come to the Board just 13 
months ago, there seems to have been a period of years in the 
nineties where there were a number of shipper wins, so to 
speak, followed by a period of years more recently, since 2001, 
where there have been some shipper defeats.
    I was told before I came to the Board, don't fall victim to 
the appeal of trying to decide one case one way and another the 
next just so you can say that there is sort of some kind of 50-
50 ratio. We have to look at these cases, obviously, in a very 
exhaustive manner. They are fact-specific.
    I will say, though, while those cases get a lot of 
notoriety because they are big and because law firms and 
consultants convince their clients to part with millions of 
dollars to pursue the cases in a way, frankly, we never require 
or ask anybody to spend millions, but the process has somehow 
developed out there to become that which is a problem that we 
continue to work on.
    Remember, we have about 1,300 cases and proceedings and 
actions we do in an average year. I would say hundreds of those 
are to the benefit, if not most, of shippers. You may never 
hear about them because they might be small from a national 
perspective.
    But if you are a shipper in Defiance, Ohio, and you 
petition the Board, which is a case we decided against a major 
Class I this past year about a Class I cutting off a short 
line's access, hurting shippers potentially. We forced that 
Class I to put that connection back in place at a significant 
cost and immediately. That is just one example. I could give 
you a list of 1,300 cases.
    But, yes, in the very large, hard-fought major cases, we 
have seen a string of railroad wins in recent years.
    Mr. Baker. That brings to the forefront the question of 
conditions to file with regard to fees that are necessary. Can 
you give the Board's apparent thinking with regard to the 
relatively high rates for filing as contrasted with, say, an 
action in district court where it may be protracted litigation?
    There may be a series of expert witnesses, but generally 
the court does not require filing fees that prepay all future 
anticipated administrative costs.
    I know you are working toward an imposition of a new system 
which has only been recently deployed for small filers, but I 
am really asking the question from the big filers' side. What 
rate relief could be given there on facilitating access to the 
Board in a more financially painless way?
    Mr. Nottingham. Thank you for that question because we do 
see a lot of misinformation out in the popular media about 
fees.
    Let me be the first to say, we take no pleasure in imposing 
fees. Personally, I wish we didn't have to charge a fee to 
anybody. It is aggravating, and it just creates, frankly, some 
ill will that we prefer not to engender.
    We do this because there is a statute that requires Federal 
agencies that are charged with resolving private sector 
disputes, such as our Agency, the Independent Agencies Act, 
that requires that we seek to recover our costs. Because these 
cases require enormous STB time and money, we have had a policy 
consistent with statute to charge fees.
    Sometimes they are as low as a dollar a page for some small 
proceedings, $35 fees and now in the small cases for up to a 
million dollars, it is $150. Then it goes as high as merger 
fees for railroads merging which are very high. In major cases 
that you probably have heard most about from your chemical 
industry constituents and others, it is a high fee.
    I would say we have written to the Congress on this issue, 
that if we get some type of statutory relief or some type of 
appropriations relief that relieves us from that obligation, we 
would be happy to get out of the fee business, but until it 
happens, we feel like it is our obligation to follow the law.
    Mr. Baker. Well, the bill now pending would reduce that fee 
to the common district court filing rate which you would not 
necessarily find an objectionable modification.
    Mr. Nottingham. Sir, with one key proviso because I know 
your constituents and our stakeholders want prompt action by 
the STB and have complained about how long it has taken. Be 
sure we have the resources coming through the appropriations 
process to counterbalance that because if we can't hire up the 
staff to pursue and resolve those cases, you will just be 
creating another problem.
    Mr. Baker. You raise an extremely good point. I am 
concerned about the current three year period to get a decision 
out typically, which I think is an unreasonable regulatory 
constraint on an applicant. Whether the fees are high or not, 
the time to get a yes or no, you at least ought to be able to 
get a friendly no in a few months.
    Mr. Oberstar. Would the gentleman yield?
    Mr. Baker. I would be happy to yield.
    Mr. Oberstar. Just supplementing the question, a very, very 
appropriate question and a very thoughtful comparison with U.S. 
District Court filing fees, what relationship is there between 
these fees and documented real costs to the Board of processing 
a case? I have never seen anything on that.
    Mr. Nottingham. We would be happy to follow up in writing 
on that, sir, because it is a question we have fielded before.
    We did a very extensive and exhaustive hour by hour 
workload assessment study. We have updated it recently, and I 
checked it out because I was astounded when I first heard about 
these fees, to be honest. It is unusual. I can tell you there 
is solid data and documentation to back it up. The fees are 
directly proportionate to the amount of time required by these 
cases.
    Remember, these are taxpayer hours, your Federal employees 
at work, and it is to resolve a private sector dispute often 
between Fortune 100 or 500 companies who do have a lot of 
resources. It is a policy question. Who should bear the cost of 
those cases, the taxpayer completely or litigants through the 
fee?
    We will implement whatever the law tells us to do. Right 
now, it tells us to collect a fee.
    Mr. Baker. I thank the gentleman.
    I would merely point out that the application of the fee is 
not objectionable as long as it is related to services 
rendered, but it is the up-front collection before we have gone 
through the process. Even some staged fee assessment would be 
helpful to people. At least they know what they are getting 
into.
    It is like sitting down with a lawyer to get advice. You 
want to know when his clock starts, and you want to know what 
it costs per hour. You may have a 10 minute conversation or it 
might be 10 days, but at least you know going into it where you 
are.
    In this case, somehow the Board is predicting the overall 
resolution cost at the time of filing, which seems a bit out of 
step with the likely consequences of all the complications that 
the Board is engaged in, in making these judgments.
    A bigger question, what is your view, Mr. Chairman, of the 
STB's jurisdictional reach in relation to all operating rails?
    Is every rail in the Country subject to your review?
    Do you see yourself only as a responsive entity where 
differing parties come before you?
    How do you define the jurisdictional scope of the STB?
    Mr. Nottingham. If I could just real quickly say and commit 
that I will look at the staged fee suggestion. Frankly, it is 
the first time I have heard that proposal. I think it makes 
good sense. We do waivers of fees for local governments and 
public entities and other extraordinary cases, and staged fee 
collection is something we can take a look at.
    Mr. Baker. You can do it in relation to credit risk. If it 
is Fortune 500, you have got a pretty shot you are going to 
find. They are not going to want to make you mad.
    Mr. Nottingham. Obviously, we don't spend all of our hours 
in the first week. So it makes good sense. Thank you.
    On your actual question,--I appreciate your patience--I 
believe the Board has broad scope to look at especially 
practices, as Ms. Hecker mentioned, looking into the records 
and gathering information from the freight rail sector in its 
entirety to look at practices in a very sweeping way.
    We have broad, broad powers. Of course, we have a hugely 
important power which is to review mergers, and that is where 
we actually have the ability to put in conditions that really 
can provide meaningful reforms in the area of access or shared 
right of way and other arrangements that we have seen play out 
in different merger approvals.
    In our more discrete area of rate disputes, there, the 
Congress has limited our jurisdiction, and so we are mindful of 
those limits. But I am not one to say that the Board can't 
address or take on the big issues of the day because there is 
some technicality that says we can't.
    Generally speaking, I am the kind of leader and manager 
that wants to take on the challenges, fix the problems and sort 
of don't ask permission. If we have got a responsibility 
consistent with the spirit of the law and statute, we will move 
forward.
    Mr. Baker. A reason for asking that is to make sure I 
understood the implications in your September 5th STB release 
talking about simplification of rail rate dispute mechanisms.
    In the fact sheet that accompanies that release, there is a 
statement that this new mechanism--I am paraphrasing that from 
the earlier page--provides access to rate reasonableness 
process for all sizes of rail rate disputes, in particular to 
the estimated 73 percent of challengeable rail traffic for 
which the large rate case process would be financially 
impractical.
    That struck me that if your jurisdiction is national in 
scope and the finding in this release is that 73 percent of 
rail traffic which would not be able to normally utilize the 
large rate resolution process, I am trying to create an 
understanding with the Board.
    There is a reason why people feel frustrated and call 
themselves captive for whatever reason. If they are physically 
captive and there is only one rail in and out or if they are 
financially captive and don't have the resources to come to you 
with an application for relief because there is price gouging 
involved, they are still trapped.
    I think this speaks to the urgency of why, at least I know 
I am and I believe Chairman Oberstar is proposing the 
legislation that is being remedied, it is more than casual 
discomfort. There is a business consequence.
    I have four plant managers who were in an internationally 
competitive market and when assets are depreciated in the 
current site because of the cost of rail traffic in for raw 
material and finished product out, which is the lifeline of the 
industry, they are considering, strongly, relocating outside 
the United States. Now there are other contributing factors, of 
course, but the rail issue is at the top of the list.
    We need to have some way of expanding the scope of 
reasonableness in examining these rate applications. Certainly, 
we have to get past the stand-alone construction idea where you 
are going to build your own rail system and prove to the STB 
that that is more economical than what your current provider is 
giving you.
    Some of those machinations that we require people to go 
through don't yield logical results because they are not 
capturing the current state of economic factors, and I think 
that is the frustration, but that 73 percent figure really 
jumps.
    I know I am out of time. I have one last thing. Well, 
actually, I have much more, but I have got one thing I really 
need to get to.
    In the bill before us today, H.R. 2125, it makes some 
really simplistic changes. It doesn't re-regulate anybody. It 
doesn't diminish the STB's review right or process. It doesn't 
even tell you that you need to go to a different capital asset 
model. It doesn't do any of that.
    What is it in the bill, in your opinion, that creates any 
problem for the administration of STB business?
    Mr. Nottingham. Thank you for the question. If I could 
quickly just address the 73 percent issue, if that is okay, 
because I felt personally that was important that we put that 
in our press release.
    Mr. Baker. I was surprised.
    Mr. Nottingham. People would often tell me, often Members, 
when I was a staff rep in this body, and some of my happiest 
professional memories are from working in this body. People 
tell me all the time: Try to simplify what the STB is doing. 
Make it understandable and make it work.
    That is what I have been focused on the last 13 months. We 
looked at this issue of how to come up with a simpler and 
streamlined and cheaper procedure to resolve rail rate 
disputes. Nothing stood out more to me than the fact that the 
major rate case dispute process had gotten so expensive, three 
to four or more million dollars per side, railroad and shipper.
    When you look at the average shipments around the Country, 
the amounts that were being disputed in a case, basically 73 
percent of all the shipments out there in the Country are lower 
than that three or four million dollar threshold, meaning why 
would they ever bring a case if they couldn't get at least some 
money back out of it. And so, that underscores to me the 
importance of this new forum that we have created, two options 
and a shipper gets to choose and one only costs $150 and you 
get an answer in eight months.
    Now, H.R. 2125, we have not as a Board, as far as I know, 
been asked for any formal views on that. We are not on record. 
I won't speak for my colleagues. I know we probably have 
different views on it.
    I will say just personally as one board member, I do have 
some concerns with some of the provisions in the bill. At a 
time of great change, when we are moving forward with several 
critical regulatory initiatives, not the least of which is our 
pending cost of capital measurement, to see the Congress moving 
forward, sort of changing the rules. Now, we will earnestly and 
in good faith implement any set of rules the congress puts in 
place, and so we respect that completely.
    But you asked the question. I need to say, and it is really 
in the area of access to private property and how we ask the 
railroads or tell the railroads that they have to allow 
competitors access to private property.
    Mr. Baker. Well, I will follow this opportunity up with 
correspondence to ask in the manner that is best appropriate, 
whether the Board chooses to do it as a Board. Whether you as 
an individual choose to give us your personal observations, I 
would just like to have the view of the experts about the 
mechanisms in the bill that will create in your view any 
operational problem on either side of the fence.
    What we are trying to accomplish is an appellate process to 
give people options and to facilitate lower cost access to 
regulatory relief. Nothing in the bill, and I have thought 
about this for some time, would affect the capital asset model 
nor any decision the Board might make about the cost of 
capital. So I would hope that we can follow this up with 
correspondence quickly and that we could get some indication 
from you as to how we could work together on the remedy.
    Thank you very much, sir. I yield back.
    Mr. Oberstar. I thank you, Mr. Baker, for a very thoughtful 
line of questioning. I would observe that if the Congress and 
the Board are working on the same issues toward the same 
objective, then legislation should not preclude Board action.
    Mr. Larsen, you have been very patient.
    Mr. Larsen. Thank you, Mr. Chairman.
    Ms. Hecker, first off, between all the questions that have 
been asked and the issues currently before the Board that we 
can't talk about, I have run out of a lot of questions to ask, 
but I do have some that haven't been asked yet.
    For Ms. Hecker, you had a statement in your report 
regarding a divergence, so I would like you to explain it for 
me. How do you explain the divergence of a decrease of 
potentially captive traffic while traffic traveling at rates 
above the threshold for rate relief have increased?
    It seems to me that those are divergent statements. How can 
those two exist? Can you explain to me?
    Ms. Hecker. Well, first of all, I want to go back to Dr. 
Mulvey's criticism that the information, the data on the amount 
of traffic traveling over 180 is an illustrative piece of data, 
but it is a factual piece of data. It is the amount of traffic 
paying a certain rate in that ratio.
    A subset of that is actually paying more. It is that 
simple. The universe is actually going, but there is a smaller 
group that is paying more. So you have captivity potentially 
going down, but for the ones who are captive they potentially 
may be paying far more, significant rates over that ratio.
    Mr. Larsen. A smaller subset is paying more while there is 
an overall number going down?
    Ms. Hecker. Potentially.
    Mr. Larsen. Potentially?
    Ms. Hecker. It is an illustrative piece of data. It is a 
rough proxy for captivity.
    Mr. Larsen. Mr. Mulvey, does that then get at your 
statement to say no evidence that competitive options have 
increased for these so-called captive shippers?
    Mr. Mulvey. I think what JayEtta is referring to is 
relative captivity. In other words, the relative amount of 
traffic that is captive as to the expansion in traffic for the 
railroads is recent years has largely been intermodal traffic. 
That is where the real growth has occurred. That is not 
captive. So, therefore, captivity as a percent of total traffic 
would be going down.
    But it would be difficult to infer from that that the 
number of captive shippers, the absolute number of captive 
shippers has gone down. That probably isn't the case because 
that would have required more firms entering the industry or 
existing firms going into those other markets, and we haven't 
really seen that happening.
    So the number of captive shippers has probably stayed the 
same, but the relative importance of them compared to the 
overall market has gone down. In that sense, we don't disagree. 
I was concerned more about how it could be taken and how it was 
represented, that maybe things are getting better for captive 
shippers when I don't think that is the case.
    Mr. Larsen. I appreciate that. It is important for at least 
me to understand that as we discuss this concept of captive 
shippers.
    I will also just note that every time I read captive in 
GAO's report, there are quotes around it. So I am assuming that 
the term, captive, is term of art. It is not really a 
legislative or regulatory term, is that correct?
    Mr. Mulvey. That is correct.
    Mr. Larsen. Mr. Mulvey, you make an argument for a general 
power to investigation. Now are there other models and other 
independent administrative or legal boards in the Federal 
Government that you can point to that would be a model of 
language for a general power to investigate?
    Mr. Mulvey. I am not a lawyer, so I would not want to posit 
an answer to that. I can come back to you with some examples, 
but I am sure there are other agencies that do have 
investigative powers.
    We had them, but they were taken. The ICC had them, but in 
1995, in the ICC Termination Act, we lost those powers. Now if 
you look, for example, in our fuel surcharge action, we pretty 
much behaved as if we had that because it was on our own 
initiative.
    Mr. Larsen. Right.
    Mr. Mulvey. But we could have been challenged on that, and 
we were not, but it could have been challenged. We think the 
Congress should clarify what our investigatory powers are.
    Mr. Larsen. Mr. Nottingham, when does the STB project 
completion of this independent analysis that we have been 
discussing?
    Mr. Nottingham. In one year. We launched it a couple weeks 
ago, and they have been given a year. I believe the actual 
might be 13 months to be specific. I wanted to give them time 
to get around the Country, to get their hands around this 
issue.
    It is a daunting enough issue that GAO, with all its skill 
and staff and having done an excellent job with their report 
for many, many months, even today says they couldn't actually 
get their arms completely around it, and they actually came 
forward with the idea to us, the recommendation to do this 
study.
    It does take time, but we look forward to seeing the 
results.
    Mr. Larsen. Let me get my last question.
    Ms. Hecker, with this study, have you examined the 
parameters of the study and is the methodology adequate and you 
believe it will get to some of these answers about an analysis 
of competitive markets that GAO requires to take a look at?
    Ms. Hecker. We have not been given an opportunity to review 
it, and I have no information other than the press release 
announcing it, what the scope of the study is and the 
representations made by the Chairman today that the group would 
have the same authority and access to data, which was our 
concern when we made the recommendation.
    Mr. Larsen. Is that of concern or importance to you to be 
able to look at the parameters of the study as they move 
forward?
    Ms. Hecker. Well, I would imagine it is kind of moot if the 
contract has been let. It would be what scope it is. I would 
imagine that we may be asked after the fact to review.
    Mr. Larsen. It might be moot if you say it is. It may not 
be moot if we say it isn't.
    Ms. Hecker. I have no information to speak to the scope of 
the work.
    Mr. Larsen. Do you want to see the scope of the work?
    Ms. Hecker. If you would like us to review it, we would be 
happy to review it.
    Mr. Nottingham. Mr. Larsen, if I could just interject, we 
have tasked our consultant team as one of their first orders of 
priority to spend some quality time with GAO. They obviously 
haven't called Ms. Hecker yet--they will be--and your staff, so 
that the consultant team can fully understand the report and 
vice versa to give an opportunity to brief GAO on anything GAO 
would like to know about the report.
    Any recommendations or advice we get formally or informally 
from GAO, we will take a good look at. My general attitude is 
if the GAO gives some good thought to something, makes a 
recommendation, we are going to go ahead and implement it.
    Mr. Larsen. We want to be very encouraging in that.
    Thank you, Mr. Chairman.
    Mr. Oberstar. Thank you.
    Mr. Moran, thank you for your patience.
    Mr. Moran. Mr. Chairman, thank you very much.
    Generally, I know we are talking about captive supply here 
at this hearing, and clearly Kansas is not immune from those 
concerns with coal and grain shipments and chemical shipments, 
but let me ask about a broader topic.
    It seems to me that rail capacity in this Country is less 
than it needs to be. My impression is that is a given, although 
I assume the markets ultimately determine what that capacity 
will be. But the demand for services exceeds the ability of the 
railroads to meet that demand.
    Is there any measure that says that we are moving in the 
right direction or that demand for services and capacity will 
intersect in the near future? I guess this would be for the 
Chairman.
    Mr. Nottingham. Thank you, Congressman Moran.
    We held a major hearing on this issue in April, looking at 
traffic forecasts nationwide, short term and long term, the 
state of capacity. We actually asked a very diverse group of 
stakeholders. The hearing went, I think, 14 hours just as an 
example of the level of interest in this issue. It probably 
could have gone on longer. Just people got worn out finally.
    What we heard from railroad CEOs, and you will have one of 
them before you shortly, and also leading shipper groups was 
complete--this is amazing actually--agreement on at least one 
issue, which is that we are not on pace as a Country to meet 
our rail infrastructure needs especially in the mid and the 
longer term, out 10 and 20 years.
    While the railroads are spending, and you will hear more 
about this today from the railroad themselves, we are spending 
more than we ever have before. You have got to really dig into 
those numbers because the need is so much bigger than before. 
It is not just enough, in my personal view, to say great, we 
are on track because more is being spent than last year.
    We have really got to look at these choke points in the 
system, the Chicagos, the Houstons, the Port of L.A., Long 
Beach and others, not to mention in agricultural country, to 
hold the railroads accountable for what they are really 
delivering in the way of meaningful infrastructure and 
investments.
    But I would say that is the number one top rail policy 
challenge before us as a Country_how will we step up and 
actually build enough track in this Country to keep our economy 
moving because we pretty well know, I know from having labored 
in the highway sector for eight plus years at the State and 
Federal level, the highway system and the best planners there 
are assuming that the rail system will continue to carry its 
share of the load. If that assumption starts to not hold valid, 
we have just an incredible problem in this Country.
    Mr. Moran. Mr. Clayton, one way that Congress attempted to 
address infrastructure needs in the rail industry is on the 
short line side. This Congress, three years ago, passed a tax 
credit for short lines and/or their shippers to utilize in 
improving the road bed, the rail line, bridges and try to move 
the short lines up to the capacity to carry 286,000 pound cars.
    Any evidence at USDA that we are better meeting the needs 
in regard to agriculture, utilizing short lines, capacity 
increasing? Are things improving or continued problems into the 
future?
    Mr. Clayton. Thank you, Mr. Moran.
    I think the evidence is positive in terms of progress that 
has been made with short lines filling in, and certainly that 
plays a role.
    I think also the evidence is fairly clear that overall 
capacity in our transportation network is really being 
strained. It doesn't apparently take much, a good hurricane, 
for example, where the barge lines have to shut down and we 
look to the rail system to pick up the slack and it is not able 
to do so. That, to me at least, suggests that we are running on 
kind of a razor's edge here in terms of margin of error and in 
terms of the state of capacity that is out there.
    So, certainly, to your question, the short line piece is 
important. There has been progress there, but I think one still 
needs to look at the larger issue of capacity particularly as 
it interacts between the modes of transportation.
    Mr. Moran. That short line tax credit is set to expire in 
the near future, and there is legislation that I would 
encourage my colleagues to act on that would renew that tax 
credit. It is my impression it has made at least some 
difference in our ability to invest.
    Mr. Mulvey, you are shaking your head. I am looking for an 
ally. I am happy to hear you saying something positive.
    Mr. Mulvey. When I was working for Mr. Oberstar, I worked 
very hard on that bill, and I am very proud of the success we 
achieved with it. The short line railroads, for the most part, 
have taken advantage of it, and the legislation does need to be 
reauthorized this year.
    Mr. Moran. The reason I think this is so important is in 
part what Mr. Baker said. We often decry the fact that we are 
losing jobs to other countries, that we are outsourcing 
employment. Factories, plants and facilities are moving abroad, 
and our infrastructure is a significant component in the 
business decision that will be made as to whether or not a 
business remains in the United States.
    Let me go down one other line of questioning before my time 
is totally gone.
    I do care a lot about biofuels, and the rail infrastructure 
is critical to that industry. In addition to hearing concerns 
about a captive shipper, I often hear concerns and complaints 
about the quality of service.
    So my question is two-prong. What role does the Surface 
Transportation Board have? Mr. Mulvey mentioned this perhaps 
more than just in passing but the role that you have in 
addressing lack of rail cars, the timeliness, the shipment.
    I know that in Kansas we produce a lot of flour, wheat 
flour, and the timeliness of those shipments and bottleneck is 
often described to me as the cars sat outside of Los Angeles 
waiting for their turn to be unloaded at the ports. So what 
role does the Surface Transportation Board play in trying to 
improve the quality and timeliness of the service?
    Secondly, in regard to the biofuels issue, explain to me 
the role that this phrase, common carrier, has in requiring or 
determining that service must be provided to a new ethanol 
plant, for example.
    Mr. Mulvey. Well, the common carrier obligation for a 
railroad goes to any commodities that are regulated. If a 
commodity is not regulated as it stands right now, the railroad 
does not have a common carrier obligation. Ethanol would be 
regulated by us and therefore a common carrier obligation would 
apply. Anybody who offered cars for shipment, the railroad 
would have to serve them.
    Now in terms of the quality of the service, that is 
basically between the railroad and the shipper. If the service 
quality declined, the Board could open an investigation.
    The Board also has its group offices. We have group which 
focuses on railroad and shipper issues. They would call the 
railroad up and try to work with the railroad in order to get 
the problem resolved.
    The railroads will tell you later on that it is in their 
interest and they want to be cooperative with shippers. We try 
to facilitate that cooperation through our Office of Compliance 
and Enforcement.
    Mr. Nottingham. I would just like to add, Congressman 
Moran, that this is the work that we focus on probably more 
than anything else, the day to day, week to week service 
complaints that we field. We have an office of Consumer 
Assistance. Calls come also directly into commissioners' 
offices. We send people out around the Country on occasion, and 
each of us gets around and looks at service situations.
    We have a number of tools available to us. I will just give 
you a couple of examples. One, you touched on the common 
carrier obligation. That is the touchstone in freight 
transportation as to really what the shipper can expect and 
should expect, which is reasonable service upon reasonable 
request.
    Now there are some general words in there, and people can 
have pretty serious arguments about what those words all mean 
in a specific case. But we take those cases very seriously, so 
seriously, in fact, that in an agricultural-oriented situation 
down in Texas recently, we actually ordered a railroad that was 
not providing adequate service to get out of the rail business 
and we forced them to sell their business. It is now with us. 
Two interested railroads are considering buying that railroad 
now.
    That is an example of how far we are willing to go as a 
board. We are literally in the process of putting a non-
performing railroad out of the rail business, and we are 
replacing it with someone who is willing to serve the shippers.
    But we have other means at our disposal too, and these 
issues get particularly complex and interesting when you look 
at materials and commodities that the railroads, on occasion, 
would prefer not to have to carry like hazardous materials and 
materials that sometimes trigger large insurance premiums for 
the railroads.
    Mr. Moran. Thank you for responding to my questions.
    Thank you, Mr. Chairman.
    Mr. Oberstar. Thank you for your very thoughtful line of 
questioning.
    The gentleman from Tennessee, Mr. Cohen.
    Mr. Cohen. Thank you, Mr. Chairman.
    I have tried to understand a bit about this issue just 
reading some of the statements, including getting ahead of 
myself and reading Mr. Spitzer's statement, and I kind of get 
the picture of this being the railroads on one hand and the 
shippers on the other.
    But all politics are local. In my situation, local is 
Tennessee 9. Tennessee 9, though, is America's distribution 
center which makes it national. Our distinguished Vice Chairman 
has knowledge of Tennessee 9, and I would like to ask the 
Honorable Mr. Buttrey what his advice would be for me and the 
Country on how these different bills. Particularly, 2125 would 
affect Tennessee 9 and therefore the entire Country.
    Mr. Buttrey. Thank you, Congressman, and thank you, Mr. 
Chairman. It is an honor to be here and to answer or try to 
answer the Congressman's question, my good friend from 
Tennessee.
    I think I would start by saying that etched in concrete on 
a building not too far from here, there are the words--and I am 
paraphrasing here--that the right of the citizens to petition 
their government for redress of their grievances shall not be 
abridged. One of my strong points at the Board has been to make 
sure that people have access to the regulatory process.
    I think we have gone a long way during my short tenure at 
the Board, which will come to an end before too long because 
appointees don't stay around forever and that is probably good. 
We have tried very hard to create a regulatory process that is 
accessible to everyone and to keep the fee levels, Congressman 
Baker, down to levels that aren't egregious while trying to 
understand the prescriptions that are placed on us by the GAO 
in determining what our fees shall be.
    We will be getting back to you, Mr. Chairman, on that as we 
said earlier.
    Your district in Tennessee is a huge crossroads for the 
railroads of this Country, and you don't have to live there to 
know that. I mean people who are in this business, people who 
are shippers know that if the weather is bad in Memphis for 
some reason, which it usually isn't by the way. It is usually 
great. That is why another company is located there that I have 
some knowledge of.
    The infrastructure that is there is very important to the 
way the commerce in this Country works, and Chicago and other 
places are the same way. Long Beach, California and others are 
out there.
    I think a lot of the complaints that I have heard even 
before coming to the Board and certainly after arriving at the 
Board. I think what we have tried to do in the recent past 
anyway, certainly since the three of us have been members of 
the board, has been to work very hard and to keep that phrase 
on that building very uppermost in our minds and to work very 
hard to try to come up with improved access, along with the 
expert advice of our staff which is very expert and I take my 
hat off to them.
    They are very hardworking, talented, knowledgeable 
professionals, if you will. I think we would all agree. We may 
disagree on other things, but I think we certainly agree on 
that.
    Taking their advice and counsel and doing our very best job 
in coming up with new rules and procedures that will facilitate 
reasonable access to this regulatory process.
    As Senator Dorgan said this morning, I think his statement 
was eloquent. As he said this morning, earlier today, where 
there is a lack of competition, there must be regulation.
    In the situation that we have today with the railroads the 
way they are structured in this Country, which is a product of 
many, many years of development and metamorphosis, if you will, 
evolution--choose your word--we have come to a point now where 
competition is not as great as it once was, and so we have to 
have a system of regulation that works. We are trying very hard 
to do that.
    The bill has some ideas about that. I think we have gone a 
long way in the very recent past to implement a lot of the 
things that the Congress is concerned about and that shippers 
are concerned about.
    Are we going to make everybody happy? No, we are not. We 
are not. The way this economy of ours continues to develop and 
to evolve and to restructure itself and re-engineer itself, 
there are going to be pockets out there where the system is not 
going to serve those pockets as well as we would all like for 
it to happen.
    There are going to be organizations, companies, small and 
large, that are going to suffer some severe disruptions, if you 
will, from time to time in the way they operate their business.
    Someone earlier today said is a truck a better way to carry 
cardboard? I don't know. I am not in the cardboard business. I 
have never been in the cardboard business, but I suspect that 
people who are in that business keep a pretty close eye on how 
they operate their system and how they structure their supply 
chain.
    Today's supply chain is very rapid, very fast, very time-
sensitive. If one mode of transportation doesn't meet my 
objective in terms of time sensitivity, I am going to find one 
that does or I am going to move my business or I am going to do 
whatever I need to do so that my supply chain is not disrupted.
    The Board, on the other hand, has a responsibility to try 
to look into those situations. When someone comes to us with a 
complaint, to look into those situations to see if there is not 
some regulatory response to what is going on. Sometimes there 
is and sometimes there isn't.
    All I can say is, as I said in the recent past, we have 
tried to develop rules and procedures that makes the regulatory 
process accessible to them so that shippers, not only in 
Memphis but all around the entire Country and all around the 
entire globe as a matter of fact because our trade is so global 
now, get the service that they need.
    That is a long way around to try to answer your question, 
but those are just some thoughts that I had, and I hope in some 
way they may be responsive.
    Mr. Cohen. It is a long way to Capleville.
    Mr. Buttrey. Yes. Nobody knows where that is but us.
    Mr. Cohen. It is where all the rails are.
    Chairman Nottingham, Mr. Spitzer says in his testimony that 
evidence suggests the STB process is skewed in the railroads' 
favor. He also quotes a report from a coal and energy price 
report that says that people realize they can't win with the 
current STB, so they have to take it back Congress.
    Do you think Mr. Spitzer's comments are accurate?
    Mr. Nottingham. Well, I prefer not to argue with individual 
witnesses today. He will have his opportunity to speak.
    I would just like to say that it does occur to me that too 
often, whether it is in some of these advertisements we see 
floating around the town, in the press or in some of the 
advocacy pieces that come across our desks, this Committee see 
plenty of them, it occurs to me that a lot of stakeholders 
wrote their talking points a couple years ago probably and 
haven't actually spent quality time looking at the actual work 
and performance of this three person Board in the last 13 
months and the number of sweeping reforms and changes we have 
initiated.
    I can understand why they don't want to do that because if 
they actually look at our reforms and our proposals and give 
them the credit, I think with all due respect, that they are 
due, it does call into question some of the talking points that 
you have heard already earlier today and you will hear again 
about the history of the Board and what some past Board did or 
didn't do.
    It is frustrating for those of us who are actually in the 
arena day to day, wrestling with real cases and real disputes 
and moving forward real reforms over the objections, in many 
cases, of the railroads who are dragging us into the courts as 
we speak, trying to appeal many of these, and on occasion some 
shipper groups who have concerns.
    I just encourage everybody to take a fresh look at what is 
actually going on. I know this Committee will. Because I think 
there is a real story to be told about meaningful reform and an 
Agency that is committed to improving the way we do the 
people's business.
    Mr. Cohen. Thank you.
    Thank you, Mr. Chairman.
    Mr. Oberstar. We certainly will watch very closely what the 
Board is doing and follow it. I must say that the Board is 
moving in ways that it has not done since its inception.
    The gentlewoman from California, Mrs. Napolitano.
    Mrs. Napolitano. Thank you, Mr. Chair, and thank you for 
holding this very important hearing on railroads.
    My district has a lot of small business, a lot of 
manufacturing, small manufacturing. The companies there in my 
district rely on moving their goods for fair rates and adequate 
service. In the past, I have had businesses complain about the 
issue of demurrage. I haven't heard that recently for a number 
of reasons. I guess because I will pick up a phone and I will 
call a railroad, very simple.
    But given the fact that in my district, the whole Alameda 
Corridor East traverses and the increase in traffic and the 
already burdened rail traffic going through my district kind of 
sets back some of the small businesses' needs to move their 
goods. So how do we do that?
    Another question I would pose to the three gentlemen from 
the Board is how do I tell my businesses, here is a number, if 
you have an issue that you feel is hurting your business to use 
to call?
    I don't know that they know. I didn't know. Some of those 
things that are important to my district, to the continuing 
economy in my district, that it is not going to be overshadowed 
by the increase in traffic of imported goods to the rest of the 
United States is a big concern. That is one question.
    Mr. Nottingham. Thank you. I will take a stab. I know my 
colleagues probably have plenty to say on this and more 
experience than I do working on these issues.
    Demurrage, you mentioned, is still a very active area of 
concern. We hear concerns all the time about demurrage charges 
or charges for storing, basically, cars on property. An 
effective and efficient rail system depends on empty cars 
getting put back into commerce quickly, and we see it on both 
sides. Sometimes we hear from shippers, saying, hey, I unloaded 
a car three days ago. I want to get rid of it, and now I get a 
demurrage fee sent to me.
    We actively work these out. We do have a phone number. We 
will make sure we get that to you right away. Board 
commissioner offices handle calls regularly. We actually have a 
very active consumer assistance program.
    You are right, Congresswoman Napolitano, describing your 
district. You are really in that kind of proverbial ground zero 
of international commerce. You know that, and you don't need me 
to tell you that. I know, having been out in that area, the 
challenges that that evokes for neighbors, residents, 
businesses. You have got the whole world, in some ways, coming 
through in freight cars and intermodal containers.
    It is so important that we keep that system moving, and at 
the same time, that we don't treat any community as just a 
crossroads, but that the community knows it can have access to 
the system of interstate commerce as well and get that service 
provided.
    So if you ever get concerns from shippers or complaints 
about any of those issues, please put them in touch with us. 
Call any of us. Call my office. We will get on it right away.
    Mrs. Napolitano. Thank you.
    Anybody else?
    Mr. Mulvey. This has become a problem, especially with 
railroad capacity and getting more and more constrained. The 
railroads have been changing their rules on demurrage and 
tightening the rules on demurrage as well as raising charges.
    Sometimes you have bunching problems where the shipper 
needs five cars a day and all of a sudden gets no cars for four 
days and then 25 cars show up at one. He can't handle them all 
or they come at times when they can't be unloaded because the 
shipper has problems with his workers and when they can work. 
This is an ongoing problem.
    As the Chairman said, we do have a number which shippers 
can call. We will get that number to you. We often are able to 
work with the railroads and work out these problems, but they 
are ongoing.
    Mrs. Napolitano. Anybody else?
    Mr. Chair, we recently did a Congressional delegation visit 
to three countries on high speed rail, London and Paris and 
Spain. One of the interesting things, and I heard the Chairman 
address this in his comments, was that all those high speed 
rail groups specifically spoke to the fact that they own the 
property. The government owns the property. So for them, mass 
transit is a priority for people to move.
    The United States leads in being able to move product, but 
we fall desperately short in moving people. And so, how do we 
come to a balanced approach?
    Not to say back to the railroads, we are going to take our 
land back and utilize it for the benefit of the people who pay 
the taxes but rather be able to say how do we address without 
being heavy-handed and ensuring that we look at not losing the 
economy that is created by the transportation of goods.
    Mr. Nottingham. I am glad to hear about your trip. I had a 
chance in my past job at the Federal Highway Administration to 
manage several offices, one which was the International 
Programs Office, and I had a chance to occasionally get 
overseas and see what other countries are doing in the area of 
both highways and transit and rail, including China and riding 
the Maglev Train with Secretary Peters and exploring how those 
projects and systems get paid for and what the tradeoffs are.
    In our Country, you are right, we have put a premium on 
using our rail system to move freight, and we have a world-
class model that nobody outperforms in productivity and 
efficiency of moving freight rail, large amounts of tonnage 
across large distances. So we can take a lot of pride in that 
as a Country.
    As we talked earlier today, it is threatened by capacity 
constraints and some under-investment that needs to be 
addressed over the years, but it sets up a real challenge in 
how we then try to transpose onto that system, as many people 
often suggest, a world-class passenger rail and a high speed 
passenger rail system onto the freight system as opposed to 
building up a separate system or a side by side system.
    I do think that it is not just a question of our current 
freight system not serving people. The freight, of course, is 
going to people. It is going to the shelves of the stores we 
all shop at, and it is employing people, creating jobs. More 
importantly, from a transportation perspective, it is getting 
trucks off the highways.
    So if we aren't extremely careful how we encourage the 
expansion of passenger rail, which I am personally a strong 
believer in and live two blocks from an Amtrak station in 
Fredericksburg, Virginia. I would love nothing more than to see 
higher speed, better passenger rail.
    We have to be very careful that we don't just drop a big 
unfunded band-aid or a burden onto the railroads with the 
result that they can't manage their freight business. That 
traffic then goes back onto the highways, and then we actually 
have a worse problem. We have a less efficient railroad system, 
we still have a marginal passenger rail system, and we have an 
even worse highway system.
    The issues and the stakes are extraordinarily complex and 
high, but it needs to be addressed.
    Mrs. Napolitano. Any suggestions?
    Mr. Nottingham. The Board, I just would say we don't hold 
ourselves out as experts in passenger rail and transit. Each of 
us brings experience. I will let my colleagues speak to that.
    I just would say it gets back to my major point earlier 
about the need to build more infrastructure. We are not going 
to be able to have a world-class passenger rail system if we 
don't build some new track because if we just ask the freight 
railroads to make it happen, we are going to see all kinds of 
unintended consequences that will hurt everybody: highway 
users, consumers, freight railroads, railroad passengers.
    We have got to set up some programs and procedures and 
polices that actually result in getting some new track built.
    Mr. Mulvey. As something of an expert on passenger rail, I 
did my Ph.D. thesis on Amtrak when it was first getting 
started. So I had been in this business for a while when I 
worked with Mr. Oberstar on the high speed rail bills, et 
cetera.
    But I think it is fairly clear that if you are going to 
have high speed rail systems like you have in France and 
Germany and Italy, you are going to have to have dedicated 
right of way. It can be in the same right of way as freights, 
but it has to be on dedicated track.
    It is going to take an enormous investment. Many of the 
proposals to expand higher speed services in the Country bring 
the speeds up from 40,50 miles an hour to 70, 80 miles an hour. 
That is an improvement, but it doesn't give you the kind of 
service that you are seeing over in Europe. To get that, you 
need an enormous amount of investment in rail transportation 
infrastructure.
    I would hope that you could make investments in rights of 
way that would benefit both the freight and the passenger 
services simultaneously so that the freight railroads see the 
high speed passenger stuff as something that benefits them as 
well. By doing that, you can get the freight railroads and the 
passenger railroads to work together and make that investment.
    But to try to put high speed passenger trains on today's 
freight railroads would only bring the problems that Chairman 
Nottingham talked about, and you would have no winners.
    Mrs. Napolitano. Thank you.
    Mr. Chair, I have a whole bunch of other questions, but I 
would like to submit them in writing if I may.
    Mr. Oberstar. Thank you. We all have a lot more questions 
than we have time with which to engage the Board.
    Mrs. Capito?
    Mrs. Capito defers at the moment.
    I just want to pick up on Dr. Mulvey's observation about 
passenger rail. While this is not a hearing on that subject, 
that is always an issue before this Committee and one to which 
we will devote time at later hearings in the Rail Subcommittee.
    It was the railroads, which in the 19th Century in a period 
of roughly 20 years, we see nearly 8 percent of the land 
surface of the United States. It held onto that land. It kept 
that right of way instead of selling it off. For whatever money 
they made or wherever that money went, we have those rail 
corridor rights of way.
    Mr. Mulvey. A lot of it was sold off and a lot of it was 
developed. A lot of the monies that went to made the railroad 
captains of industry, or the robber barons as they were called, 
rich but did not necessarily help the railroads. As you said, a 
lot of those rights of way are gone now.
    Mr. Oberstar. Mr. Clayton, we have hardly laid a glove on 
your today.
    Mr. Clayton. That is okay.
    [Laughter.]
    Mr. Oberstar. You made some very pertinent observations in 
your testimony. The average freight revenue per carload for 
major trains has increased 39 percent while the average freight 
revenue for all commodities increased only 24 percent. Now if 
we had excluded grain from that number, it would been even 
less, right?
    Rates on corn, sorghum, soybeans, wheat have gone up 41, 
38, 53, 31 percent, respectively, you say. Grain shippers bear 
a greater responsibility for car supply and other functions 
that railroads formerly provided. Senator Dorgan made an 
observation of those.
    Is it appropriate for a company like, say, Cargill to have 
to be the owner of 19,600 rail cars and store them on its 
property?
    Mr. Clayton. I am not sure exactly how I want to answer 
that question. I do think, Mr. Chairman.
    Mr. Oberstar. Well, our job is to make you uncomfortable.
    Mr. Clayton. You will get me there. I am sure.
    I will make a couple of observations, though, if I could. 
One, I think there may be good business reasons why a grain 
company, in fact, might want to invest in cars.
    Mr. Oberstar. None of them willing, though.
    Mr. Clayton. Well, there may good business decisions along 
with that.
    The more important point, I think, that I tried to raise 
earlier on in the hearing is that from agriculture's point of 
view, what is important is the total cost of moving the 
commodity. In part, rail rates play a role in that, but to the 
extent that certain functions have been rolled off to others to 
incur the costs, those don't get reflected in rail rates. Those 
are additional costs.
    Ultimately, in terms of the competitive position of 
agriculture in this Country, it is the total cost of moving a 
product that matters.
    I would just hope as we look at some of these issues that, 
while I can appreciate the interest, the need to focus first 
specifically on a given mode of transportation as you are 
doing, from the standpoint of the transportation user 
community, it is the total cost of moving a product that 
ultimately matters and the components matter as well, but one 
needs to be holistic, I think, in looking at that kind of a 
question.
    Mr. Oberstar. Yes, that is true.
    But you go on to say rail emphasis on unit trains causes 
shippers to make more significant capital investments in 
sidings, grain inventory, storage capacity, and loading 
facilities--shippers to make those investments--and that USDA 
is concerned about the percentage of grain tonnage and revenues 
moving at rates exceeding revenue to variable cost.
    Now we know that grain, in some cases, moves in 
international markets on as little as an eighth a cent a 
bushel, right?
    Probably the world's most significant grain export facility 
is New Orleans.
    Mr. Clayton. Yes, sir.
    Mr. Oberstar. If you look at a map of the two hemispheres, 
North and South America, and you look at Recife, Brazil, the 
point of Brazil that sticks out into the South Atlantic Ocean, 
it is 2,500 miles closer to markets than New Orleans. That is a 
five-day sailing advantage at least.
    Now if rail rates in the United States are so high as to 
impose costs on grain shippers, they are that much less 
competitive in those markets that Brazil serves competitively 
with U.S. shippers.
    Soybeans, for example, in that delta region of Brazil, the 
Brazilian Government and the States of Brazil accelerated their 
exploitation of the soil and of the development of soybeans, a 
major competitor for the United States. If soybean rates have 
gone up 53 percent, according to your testimony, we have been 
that much less competitive in the international marketplace 
with East Africa, West Africa and the Pacific Rim, if shippers 
from Brazil have that kind of a shipping advantage.
    That has got to be a concern to the U.S. Department of 
Agriculture. It has got to be a concern to the Board. It is 
certainly not a concern to the railroads. They are shoving the 
rates up ever higher as they can.
    For the record, it will be noted that Mr. Clayton is 
nodding.
    Mr. Clayton. I was searching for the question, Mr. 
Chairman, but I did agree with what you said.
    Mr. Oberstar. I expected you to draw your own conclusion.
    Dr. Mulvey and Mr. Nottingham, one of the requirements in a 
rate case for an appellant is to create a virtual railroad. In 
the days when they were losing lots of money, I wonder why in 
God's name you would ask them to do that and ask them to lose 
that amount of money in creating a virtual railroad.
    But in the days that they are making a lot of money, how do 
you expect a shipper, a chemical company, a power company, an 
REA to create a virtual railroad in order to pursue their case?
    Isn't that an unreasonably high, steep hill to climb to 
make your case or do you think this is a justifiable 
responsibility of an appellant in a rate case?
    Mr. Nottingham. Let me take a stab, Mr. Chairman, at an 
answer, and then I will also ask Commissioner Mulvey to help. 
He has more years experience on the Board and expertise on 
this.
    It is. It is a tall order. It is a high mountain to climb, 
I must say, and there are reasons for that. Some of these major 
disputes get up into the tens and I mentioned even eclipse a 
hundred plus million dollars when you look at the Board's power 
to prescribe a rate for 10 or 20 years in support of shippers 
in the past, unfortunately for them not real recently.
    Most days, I think it would be a lot easier to come up here 
and say we have an exact 50 percent ratio. On any day of the 
week we have 50 percent shipper wins, 50 percent railroad wins, 
but it is never that simple with complex cases that get brought 
forward.
    We have to have a test. We have to be basically the 
opposite of arbitrary and capricious. We have to show, before 
we are forcing a private sector business, a railroad, to 
actually change their rates and pay millions of dollars to a 
customer, that we have actually done an extremely quantitative 
economically-based analysis. That is how this so-called stand-
alone cost model has developed, and it has been endorsed by the 
courts under appeal a number of times.
    I would welcome suggestions for a better model if people 
want to come forward. It has got to meet that test, though, of 
not being arbitrary and capricious. It is the model that I 
walked in and inherited. It seems to be very economically 
sound, but we are always open to new ideas as well just as we 
are with the very major and controversial issue of our 
measurement of cost of capital.
    Dr. Mulvey, anything?
    Mr. Mulvey. The reality, of course, is whether or not 
somebody could come into the industry, have a railroad, operate 
a railroad for less and charge the shipper less than the 
railroad is asking to charge.
    What you are asking the shipper in building this virtual 
railroad is say: Look, if you put together a railroad with 
certain kinds of traffic and certain kinds of routes that carry 
traffic, other traffic as well as your own traffic, and if you 
meet all the expenses that the railroad needs to make to pay 
its crews, to pay for the materials, to keep the railroad 
operating and to replenish capital, if you took all of those 
costs, what rate would you charge yourself in order to cover 
your costs and is the rate the railroad asking for on those 
bases, unreasonable?
    That results in rates that are many times or a couple of 
times higher than 180, the 100 percent revenue to variable cost 
ratio because we say that railroads are allowed to 
differentially price and to take captive traffic and extract 
from them a premium to cover in those markets where the ratio 
is less than 180.
    Is it a good model? It is the model that the courts pretty 
much approved. It is not necessarily what the Board wanted to 
do, but it is what the court in the McCarty Farms case said is 
a model that comports with current economic bearing.
    I agree with Chairman Nottingham. We would if there was a 
simpler less costly model that would pass muster with the 
courts. Our hope is that our simplified standards and our three 
benchmark approach will be one the courts will accept and not 
say that that is arbitrary and that the new approaches do 
comport with economic bearing.
    Mr. Oberstar. There is a great deal of work for the Board 
to do yet on this subject matter. At least in the last year, 
the Board has begun to address this issue and to think it 
through and reassess, but the 180 percent factor seems to me 
needs to be adjusted.
    Mr. Mulvey. As I said before, it is not something that we 
can ever find out where it came from or what the science was. I 
think you can best call it the best guess at the time. But I 
think that you are right, that it is something we ought to look 
at and see whether or not that is the correct standard.
    Mr. Oberstar. Maybe it should be removed from law.
    Mr. Mulvey. That is certainly an option.
    Mr. Oberstar. In the Civil Aeronautics Board cases, where 
airlines were competing for market entry and rates and where 
rates were challenged, I don't think the CAB required the 
challenger to go through such hoops. My recollection is that 
was not the case.
    Mr. Mulvey. No, it was not. They didn't have the same kind 
of standard as we do. It was different. Of course, David 
Heymsfeld on your staff would be very expert on that issue.
    Mr. Oberstar. Mr. Shuster, no further questions?
    Mr. Baker?
    Mr. Baker. I will be real brief.
    Mr. Chairman, just by way of an authority question, does 
the STB have any control over ownership issues or an ability to 
affect ownership issues, for example, the hedge fund 
acquisition of controlling interest of rail stock?
    The reason for bringing the question is that we do have 
Federal prohibitions on ownership control with the airlines for 
evident reasons. I worry about the same consequences to much 
less consumer volatility but from the standpoint of delivery of 
vital services and goods.
    What could you do if an Iranian investment group wanted to 
buy out five of the big railroads?
    Mr. Nottingham. The best way to answer that is to say we 
have broad authority in cases not like the one you are 
proposing, in cases where a railroad seeks to merge or buy 
another railroad. We have extremely broad powers there to 
approve, disapprove, approve with conditions, force line-
sharing arrangements in certain areas for certain reasons, just 
very broad power.
    The discussions we are seeing out in the business press and 
elsewhere talk about hypothetical cases that we have not yet 
seen yet, but we have seen the real development of something 
exciting from a level of investment perspective, that major 
firms with access to private capital, not taxpayer dollars, are 
actually putting those monies into the freight railroads to 
help pay expenses and expand the system, we hope.
    Now if some of those entities were to then actually decide 
they want to get actively involved in the railroad business and 
start managing a railroad, seek control of a board of 
directors, for example, making a play as they call it in the 
industry at control of a railroad, we would not have, if they 
are non-railroad, we don't have much to say about that.
    Mr. Baker. There is a concerted effort because the rails 
have a relatively low debt to asset basis compared to 
traditional leverage in the marketplace. They are significantly 
under-leveraged, and that is why Buffett and others are 
aggressively seeking rail ownership, to try to leverage 
themselves up, spin up the value of those shares and reap the 
profit and leave them to deal with it later. We can see that 
repetitively through other areas.
    So it is a two-pronged concern: Structurally as a board, 
being logically constrained by due process, whether it is 
advisable for us to consider granting authority paralleling 
that granted to the airlines regulatory process to specifically 
prohibit foreign ownership, given these terrorism concerns.
    Then, secondly, as a business matter, to worry about the 
long term as the Board properly does, is it advisable to allow 
an investment takeover group to come in and drive the debt 
ratios up and then leave town?
    I worry about that from a generational perspective of safe 
and sound operations. If you don't have the authority for 
prudent financial governance or if there is a question, that is 
something I think we should seriously investigate.
    With that, I yield back, Mr. Chairman.
    Mr. Nottingham. Mr. Chairman, could I just try to respond 
briefly to that?
    Mr. Oberstar. Briefly.
    Mr. Nottingham. Thank you, Mr. Chairman.
    I just want to clarify because this is a very important 
area and an emerging area. As soon as a non-railroad actually 
enters the business, though, and takes control under your 
hypothetical, then of course that railroad will be completely 
under the existing regulatory oversight of the STB. You don't 
get some kind of carte blanche because you came in as an 
outsider.
    But you are right. You touched on an interesting gap in the 
statute. It is an apparent gap that basically we don't have 
broad approval of a transaction. It could happen overnight 
before we would necessarily even know about it.
    I would just urge the Committee to proceed with great 
caution on doing anything that would discourage non-U.S. funds 
from coming into our infrastructure, our rail infrastructure. 
The Canadians, for example, are heavily involved currently in 
moving freight and running railroads in the U.S.
    From the perspective of looking at a situation that needs 
investment, if we say that non-U.S. investment is not welcome 
here, I think we want to be very careful and understand how it 
is going to impact our ability to meet the challenge of 
building out our system.
    Mr. Baker. No. I don't deny that. We love people's money. 
We just don't necessarily want voting control. In the same form 
and fashion that we considered the airlines constraint, it may 
be warranted in light of the essential necessity of the rail 
service to the economic function.
    It is just a question for review and, if appropriate, 
comment at a later time. Thank you.
    Mr. Oberstar. I thank the gentleman for raising those 
issues, as usual, in a thoughtful questing manner.
    The matter of rail is an under-leveraged sector attractive 
to hedge funds, as you pointed out, something I raised earlier, 
we saw the devastating consequences in aviation when Northwest 
Airlines was the subject of a takeover. At the time, the two 
investors put together with $25 million a piece. For $50 
million, they acquired an airline.
    I was asked about this, and I said, well, why would you 
spend $150 million for a 747 when you could buy a whole fleet 
of them for $50 million?
    That is what these two investors did, Checchi and Wilson. 
They took an airline that had two billion dollars in equity and 
a billion dollars in debt and turned it into one that had two 
and a half to three billion dollars in debt and less than a 
billion dollars in equity, and it went precipitously downhill 
from there.
    You wouldn't want to see that happen to the rail sector. 
There are comparisons. One aircraft engine is equal in cost to 
at least that of a locomotive in the railroad sector.
    Let me return, Dr. Mulvey, to the question I posed earlier. 
Public utility commissions in all of our States regulate the 
power entities, and they set reasonable rates, and they do so 
without forcing rate payers to establish what it would cost. If 
a new utility were to come into this area and build a facility 
to compete with the existing one, does that model apply here?
    Mr. Mulvey. It is traditional utility regulation, and it 
differs from what we do. It is basically cost-based. What is 
the cost of providing the service. There is a markup to give a 
return to investors, and that is what the rate is. It is much 
simpler. It is more straightforward, but that is not what the 
law.
    Nobody presumes at all that there is any competition in the 
utility industry. Pretty much, for the most part, it is a 
monopoly where as the argument is that much of railroading is 
not a monopoly and only part of it was monopolistic areas. So 
we are trying to regulate industry that is a part of an 
industry rather than regulating the entire industry as you do 
with utilities.
    You don't have the same kind of cross subsidization issues 
with utilities as you do with the railroads also. In some ways, 
the railroads are more complex and more difficult to deal with. 
Yes, the utility form of regulation is one in which you could 
put back on the railroads, but that indeed would be re-
regulation.
    Mr. Oberstar. Thank you.
    That is just the start of the vote, and I have one question 
for Ms. Hecker.
    Are you aware of other Federal Government agencies that 
self-initiate cases similar to those of the Board rate cases?
    Ms. Hecker. I am also responsible for conducting studies of 
Federal communications regulations, and just last year we 
completed a review that, interesting, had very parallel 
findings to what we observed in the review of rail rates and 
the STB role.
    Basically, we had concern that there had been such a 
commitment to deregulate local markets, that there was no focus 
on the effect on competition. We demonstrated that there was a 
severe lack of competition. We then talked about the 
commission's obligation that in our view the commission had an 
obligation, in fact, to be affirmatively examining competition 
and couldn't write itself out of the picture by having a 
rulemaking that basically declared markets competitive that 
weren't.
    So it is interesting because it is another network 
industry. It is like STB in some senses, largely deregulated 
but some remnant regulation and it is that careful balancing. 
But like our observation about the STB, we felt the Congress 
had built a structure that left a remnant responsibility to 
monitor the state of competition and, in fact, much as has 
happened here, we have actually the commission focusing on 
these issues. These are local competition rates or rates for 
very large businesses.
    If or you staff is interested, we could share it. Because I 
also do airlines and telecom and railroads, it is very 
interesting to look at some of the differences of the remnant 
regulatory structures that were established, the different 
authorities. But the presumption that this competition in our 
view, in summary, is one that merits continuing oversight 
whether there really is.
    Mr. Oberstar. I think there is a strong appeal for self-
initiation authority with the Board. GAO has that authority. 
You don't have to wait for Congress or a Committee or a Member 
of Congress to ask you to inquire into something. You have 
authority to look over the entire scope of Government agency 
activities and see whether they are living up to their mandate 
under the law.
    Ms. Hecker. That is quite right. While we don't use it 
lightly, I think the Controller General has used it in a very 
strategic sense to raise major issues about the fiscal 
condition of the Country, and it is one that no single 
Committee was raising those issues for us.
    Mr. Oberstar. There could be a question then in extending 
the authority of the Board that we might have runaway Board or 
they might exceed their authority. Perhaps it would be useful 
if you meditated on that matter and gave us some thoughts about 
limits to such authority.
    Ms. Hecker. We would be glad to reflect because open-ending 
that somehow there is a new regulator and that there is 
regulation potential would have a chilling effect on the 
performance of the industry. So it can't be done lightly, but 
we think the statute already has an investigatory initiating 
authority that is in place.
    Mr. Oberstar. I concur with that, but I think we need to 
approach it with further thought.
    With that, I will call the second panel and thank our first 
panel for very long endurance at the witness table and for your 
very constructive responses to Members' questions and hold you 
excused.
    Our next panel consists of Glenn English from the NRECA; 
Ron Harper for Basin Electric Power; Gary Spitzer for Chemical 
Solutions Enterprise, DuPont; Terry Huval for Lafayette Utility 
Service; Susan Diehl for Holcim; Wayne Hurst for the 
Association of Wheat Growers.
    We will stand in recess for a period of time. It could well 
be an hour. I will say to all we will pursue the hearing until 
whatever time it takes in the day to conclude hearing from all 
the witnesses. Whatever refreshment you need right now, take 
care of it.
    [Recess.]
    Mr. Oberstar. The Committee on Transportation and 
Infrastructure will resume its sitting.
    The Chair has already called the panel, panel two, but the 
Chair at this time will recognize the gentleman from Louisiana, 
Dr. Boustany, to introduce a constituent.
    Mr. Boustany. Thank you, Mr. Chairman.
    It is my privilege to introduce a constituent of mine, Mr. 
Terry Huval, who is a panelist today. Mr. Huval is the Director 
of the Lafayette Utility System in Lafayette, Louisiana, which 
is also my hometown. LUS, Lafayette Utility System, is the 
largest public power provider in Louisiana, serving 60,000 
electric, water and wastewater customers.
    He also serves as this year's Chair of the American Public 
Power Association, the industry trade organization representing 
the Nation's 2,000 plus publicly-owned electric utility 
systems.
    Since the beginning of his service to LUS as Director in 
1994, LUS has propelled itself to be recognized as one of the 
leading electric utility companies in the Country, setting 
benchmarks for customer responsiveness and competitively priced 
services. He was awarded the APPA James Donovan Award in 2007 
for his innovative leadership on Lafayette's Fiber to the Home 
Initiative.
    Terry has previously testified on rail issues affecting our 
community in Lafayette, Louisiana, in the Senate Commerce 
Committee, the House Transportation and Infrastructure 
Committee as recently as 2004. He has served as a member of the 
Executive Committee of Consumers United for Rail Equity in 2005 
and 2006.
    I would like to formally welcome Mr. Terry Huval to the 
Committee. Thank you.
    Thank you, Mr. Chairman.
    Mr. Oberstar. Mr. Huval, with that splendid introduction, 
big things will be expected of you.
    [Laughter.]
    Mr. Oberstar. We will begin with our former colleague, Mr. 
English, my classmate of 1974 and the 94th Congress. It is good 
to see you back here in the halls of the House. Although we 
didn't serve on the same Committee together, we certainly 
served together with great affection and friendship and great 
admiration for the gentleman from Oklahoma.
    Please proceed.

 TESTIMONY OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL 
RURAL ELECTRIC COOPERATIVE ASSOCIATION; RONALD R. HARPER, CHIEF 
  EXECUTIVE OFFICER AND GENERAL MANAGER, BASIN ELECTRIC POWER 
COOPERATIVE; GARY SPITZER, VICE PRESIDENT AND GENERAL MANAGER, 
 CHEMICAL SOLUTIONS ENTERPRISE, DUPONT; TERRY HUVAL, DIRECTOR, 
   LAFAYETTE UTILITIES SERVICE; SUSAN M. DIEHL, SENIOR VICE 
PRESIDENT, LOGISTICS AND SUPPLY CHAIN MANAGEMENT, HOLCIM, INC.; 
WAYNE HURST, VICE PRESIDENT, IDAHO GRAIN PRODUCERS ASSOCIATION, 
     ON BEHALF OF THE NATIONAL ASSOCIATION OF WHEAT GROWERS

    Mr. English. Thank you very much, Mr. Chairman. I 
appreciate that, and it is certainly a pleasure to be here and 
to see that you have ascended to such a powerful position here 
within the House of Representatives, a classmate of mine.
    Mr. Oberstar. Well, elevation, yes.
    Mr. English. It is always good to see classmates.
    Mr. Oberstar. You just wait around long enough, good things 
can happen.
    Mr. English. I appreciate that, Mr. Chairman, and I 
appreciate the opportunity to testify before the Committee.
    I think most Members of the Committee know that I am the 
Chief Executive Officer of the National Rural Electric 
Cooperative Association. I also have the honor of being the 
Chairman of the Consumers United for Rail Equity. I am wearing 
two hats today, Mr. Chairman.
    Some of that, though, I think it is worthwhile to think 
back just a little bit about 1980. We were both here. Most of 
the Members of the House were here, but there is something to 
be said, I think, for understanding what the intent was of the 
law and what was promised, and that is really where I think so 
much of this should come from.
    I noticed the time that I was in Congress, one of the 
things I became very frustrated about and anybody who has been 
very active, I think, in the legislative process understands 
the frustration I am talking about. When you see a piece of 
legislation pass, it goes over to the Administration or some 
regulatory body and you see a group of people interpreting it 
differently than what you intended whenever you passed it. That 
is a very frustrating thing to take place.
    If you recall back in the late 1970s, when we had a little 
effort on a legislative veto, you remember that, in which you 
would have one house veto and you would have these rules and 
regulations come back and you could bring them to the Floor of 
the House. If, in fact, the Congress found they were not in 
keeping with the intent of the law, what the Members passed, 
they could veto it.
    Unfortunately, the Supreme Court said that was 
unconstitutional, but that does not, I think, set aside the 
importance of Members of Congress being able to see their 
legislation carried out in the manner intended. I would suggest 
to you that is the real issue that we have before us today.
    Now everyone has talked about the Staggers Rail Act and the 
success it had in bringing back vitality to the rail industry. 
I think there is a lot of truth to that. I really do.
    But there is that little piece, that little provision with 
regard to captive shippers, and that one little piece has not 
been in keeping with what Harley Staggers intended, and I don't 
think anyone can disagree with that. I don't care what side you 
are on. I don't think anyone can say that this thing has been 
carried out in the manner in which it was intended.
    If you remember back at that time, we had the Interstate 
Commerce Commission, and they were a very active and powerful 
commission at that time. They were really aggressively 
enforcing what they saw as the requirements of the law as it 
was passed.
    Now the Interstate Commerce Commission is gone. We have got 
the Surface Transportation Board, and in all honesty I don't 
think it has the same kind of attention that we saw with the 
Interstate Commerce Commission, nor do I think they have been 
as active, nor do I think they have been as aggressive.
    That brings us back to the problem that we are facing and 
the reason that your legislation, Mr. Chairman, is so 
important, and that is the fact that we deserve, those people 
who are subjected to this law, those who are captive shippers, 
we deserve to have the Staggers Rail Act carried out as 
intended by the author.
    That means that we deserve to have those protections that 
Harley Staggers wrote into this legislation. We deserve to have 
that enforced, and that is not taking place today and that is 
what the problem is. That is the bottom line.
    Now if you recall at that time, we had, as you pointed out 
earlier today, Mr. Chairman, about 60 railroads. We were going 
to bring competition in, and we were going to see all these 
improvements take place. Well, 60 railroads competing, now that 
is real competition. I think we would all agree that is a lot 
of competition. You have got 60 Class I railroads competing.
    But over the years, we have seen this thing shrink down. 
Now, we don't have 60 Class I railroads. We don't have 40. We 
don't have 20. We don't have 10. We don't even have five. We 
have got four that have about 90 percent of the business in 
this Country. That is what this thing has come down to, only 
about four are left.
    Anybody that is not served on a rail line on which you have 
got two of those railroads operating, there is no competition, 
and that is what is known as monopoly. You have got monopoly 
power in those areas. Whenever you have got a monopoly power, 
then you have opportunities for abuse and whenever you have a 
regulator that refuses to regulate.
    Mr. Chairman, I would like on page three to amend my 
statement. I think there is an error in there. It says the rail 
industry continues to be protected by the Surface 
Transportation Board that is either unable or unwilling to 
provide adequate oversight.
    I think we ought to strike that unable. I think they are 
just unwilling. I think that is where we are right now. That 
has been the history of the Surface Transportation Board for 20 
years. They have been unwilling.
    Now, as I understand it, the reason that they say they have 
been unwilling is because of the fact, well, we have got to 
take care of the rail industry. The rail industry will go 
broke. The rail industry is vital to the economy of the 
Country.
    That has been the case all along. We suffered this for 
about 20 years.
    Now, all of a sudden, the rail industry is not going broke. 
They are in the black. They are the darlings of Wall Street. 
Everybody wants to buy into them, take advantage of them. So, 
obviously, they have done very well financially.
    We have waited 20 years, Mr. Chairman, 20 years to see the 
Surface Transportation Board--it started out as the ICC, but 
the Surface Transportation Board--carry out promises that were 
made in the Staggers legislation. That is what we deserve to 
see happen today.
    Now the GAO concluded that the rate relief process under 
the Surface Transportation Board is largely inaccessible and 
rarely used. Rarely used, now why would it be rarely used? 
Well, I would suggest the reason it is rarely used is because 
those who are stranded shippers see little hope in the Surface 
Transportation Board taking care of the needs of the stranded 
shippers.
    Mr. Chairman, we have got record profits, record share 
prices, and we have got enough revenue in the rail industry to 
buy back billions of dollars worth of their stock, and we are 
seeing that happen today. That is where we are today.
    We have a situation in which the bulk of that money is 
coming from stranded shippers. It didn't come from those 
shippers where you have got competition.
    You saw the GAO's graph up here where it showed in real 
money how the rates were going down. You see the railroads will 
produce a chart similar to that showing the rates are going 
down.
    What we should see is a chart that shows the difference 
between those shippers where there is competition and those 
where there is no competition. The rates are going down steeply 
for those where there is competition. Where there is no 
competition, what we see is the rates are going up.
    That chart shows four different industries. That is just 
the first quarter of this year. Look at the difference in those 
rates. Now tell me that is what Harley Staggers intended. Just 
tell me if that is what Harley Staggers intended.
    I would suggest to you there is no way that this is meeting 
the intent of the law. There is no way that the promise that 
was made 27 years ago is being carried out here, and that is 
what I think this Committee needs to address.
    We have got a little issue here, Mr. Chairman, of the 
integrity of the Congress--the integrity of the Congress. The 
question that we have here is: Is the Congress simply going to 
allow any group, I don't care who they are or what part of this 
government, to ignore what Congress writes into the law, to 
interpret it in their own way and to go merrily down the road? 
Is Congress going to turn their back on that?
    Now I would suggest to you if you disagree with that 
provision in the Staggers Rail Act, the honest thing to do is 
to offer an amendment to the Staggers Rail Act to repeal that 
provision. Either Congress insists on its will being carried 
out, the law that it passed being carried out, or repeal it, 
get rid of it. But don't get into the sham that we have been in 
for 20 years to pretend like there is some kind of protection 
for stranded shippers, some little fig leaf out there.
    We keep hearing the promise, next year, next year, next 
year. We even heard it again today, Mr. Chairman. We heard 
people promise, oh, we are going to change. Oh, we have got a 
new approach. Oh, we have got a study underway.
    Well, it is 20 years. My goodness, how many years do we 
have to go before the Congress says enough is enough?
    I would also suggest to you, Mr. Chairman, what we need to 
have done here is look for results. What is the bottom line?
    You heard members of the Surface Transportation Board say, 
oh, we got some wins for the shippers and we got some wins for 
the railroads, and I don't know when. It has been 2001 since we 
had a win for the shippers. Before that, well, we had some wins 
for the railroads--all this kind of stuff.
    What it really comes down to, bottom line, the bottom line 
it comes down to is what kind of relief has been provided to 
those shippers? How much?
    What they classify as being a win, most people classify as 
being a loss. If you shave off 5 percent of a proposed rate 
that is going to be increasing by 50 percent, I wouldn't call 
that a win, but the Surface Transportation Board does, and that 
is not right. It is not right.
    The 180 percent of variable cost is an issue that was 
raised today. Where did that 180 percent come from? Well, what 
we heard was it was pulled out of thin air or some staff 
thought it up during the conference.
    Mr. Chairman, I will tell you this. I will tell you this. 
Anytime we go through the legislative process, what we are 
looking for is fairness. We are trying to do the right thing, 
and I would suggest to you that is where the 180 percent came 
from.
    Now you think about it in terms of where Harley Staggers 
was and what the legislation. Remember when you put that 
together. You were on this Committee when they were talking 
about coming up with this.
    What they were trying to find was a place in which we knew 
that it was abusive. You were getting up in the range that it 
was just hard to see why it wasn't abusive and somebody needed 
to take a look at it. One hundred and eighty percent sounds 
pretty darn abusive to me, if you are looking at 180 percent of 
variable cost.
    I would suggest to you that Harley Staggers, Members of 
Congress back in those days would look at that and say, well, 
that 180 percent, somebody ought to take a look at it if it is 
in excess of 180 percent. They were, in effect, saying well, we 
will give you 180 percent. Anything above 180 percent ought to 
be looked at by somebody because the chances are pretty good 
that that is abusive.
    What we are finding today is that this whole concept has 
been turned on its head, Mr. Chairman. The Surface 
Transportation Board comes back and says, you can't charge less 
than 180 percent.
    Anybody ever heard the Surface Transportation Board come 
back and saying, golly gee, you have got too much? No. In fact, 
now the question is: Is it too little? That is contrary to what 
Harley Staggers had in mind.
    The question is Congressional intent. The question is: Is 
Harley Staggers' provision going to be carried out as it was 
intended?
    The real question that we come down to is not re-
regulation. The question is are you going to enforce the darn 
law as you wrote it?
    If you are not going to enforce it, then repeal it. Repeal 
it, Mr. Chairman.
    I have heard a lot of discussion, a lot of talking take 
place here today. I am against regulation. Oh, I am against 
regulation. I am for a free market.
    I haven't heard anyone profess that they are opposed to 
monopolies. I haven't heard anyone who has professed I am 
opposed to abusing consumers.
    I represent a consumer-owned organization. We have got 40 
million consumers that own electric cooperatives. We are being 
abused by each and every day by the actions of the railroads, 
and the Surface Transportation Board could care less. That is a 
fact.
    Mr. Chairman, I want to commend you for your legislation. I 
hope that you will continue to press forward. We want to work 
with you and do everything that we can. We want to make sure 
that the intent of the law as passed under the Staggers Rail 
Act is fully carried out, every provision, and the Surface 
Transportation Board be made to follow that intent.
    Thank you very much.
    Mr. Oberstar. If this were a tent revival, we would all be 
saved.
    [Laughter.]
    Mr. Oberstar. I thank the gentleman.
    Mr. English. You can be saved, Mr. Chairman, and I will be 
happy to lay hands on if it does any good. I have got some 
folks over here will be happy to lay hands on.
    Mr. Oberstar. Thank you very much for that compelling 
presentation.
    Mr. Harper.
    Mr. Harper. Yes, thank you, Mr. Chairman.
    To start with, I am the CEO and General Manager of Basin 
Electric Power Cooperative. I stand before you today, 
representing the Missouri Basin Power Project which otherwise 
is known as the Laramie River Station in Wheatland, Wyoming.
    I want to put a couple stakes in the ground. When we got 
into this process, and I will go through that here in a minute, 
we took a position that we all recognize that we must have a 
financially viable and strong rail system in this Country. That 
is not the issue. We have been consistent in that message.
    The second thing is I would like to applaud the STB for 
recognizing that they need to be doing something to change the 
processes. Unfortunately, some of their changes prejudiced our 
case, and I will talk a little bit more about that in a minute.
    A little information about the Laramie River Station, it is 
approximately 175 miles south of the Powder River Basin in 
Wyoming. We are exclusively captive to the Burlington Northern-
Santa Fe Railroad.
    We had a 20 year contract that was due to expire in October 
of 2004. Our negotiation process, if you will, started at a 
reception that I was in attendance at in November, 2003, when 
then an executive from Burlington Northern walked up to me and 
said, Ron, I just want to let you know that you have enjoyed a 
below market 20 year contract. Now it is our turn to get it all 
back.
    I found it interesting that you would start negotiations 
for rail service under those terms. So needless to say, through 
the process of close to a year, we were unsuccessful in 
negotiating and that is why we then filed a complaint before 
the STB on October the 19th, 2004.
    Since that time, it has been quite an adventure to say the 
least. We learned things about the rate-making process that 
continues to make me scratch my head. I have spent 22 years in 
Wyoming under rate regulation, and I understand how to make 
cost-based rates and so on, but to create a fictitious and 
mysterious rail system to justify rates, I find quite amusing.
    But having said that, I would like to recognize that we 
went through this process. It started again on October 19th, 
2004, and lasted until February of this year. February 26th, I 
believe it was. We spent $5.1 million on this case.
    At that time, the February date, is when the STB decided to 
suspend our case along with three others and propose to go 
through rulemaking. The outcome of that rulemaking cost us 
another $870,000, and again our case was prejudiced because of 
that, because they changed the rules in the process. So, again, 
we are quite concerned about that outcome and what it did to 
our case.
    We, obviously, on September the 10th did get a ruling, and 
it was not good in our favor. It was ruled that we were unable 
to prove that Burlington Northern's rates were unreasonable and 
actually even questioned why we filed the case, that the rates 
were very attractive and we should have basically accepted 
those. So, again, it was bothersome from that standpoint.
    We have been involved in this process. It has been 
grueling. It has been frustrating, and it has been expensive, 
again right at $6 million that we have had to go through.
    Now, I don't know whether you consider this a small or 
medium or large case. I am trying to define that in all the 
discussion that took place earlier, but I consider it a large 
case because I represent, along with the other five owners on 
the Missouri Basin Power Project, the people at the end of the 
line, and $6 million to file a rate case in their minds is 
pretty excessive.
    Here is one volume of the opening remarks. Over there is 
just a sampling of the documents that we had to produce in this 
case because once they went through the rulemaking we had to go 
back and redo our case and refile it because, again, the 
rulemaking process. That was that $870,000.
    Now where we are at today is that the ruling that they gave 
us, we have 30 days in which to decide whether or not we want 
to refile because they recognize in their ruling that we were 
prejudiced as a result of their rulemaking. So they are giving 
us this 30 days to decide whether or not we want to spend 
another half a million to a million dollars in this process. 
Hopefully, through that we could get a positive outcome.
    So, Mr. Chairman, I would submit to you that something 
needs to be done for the fairness because I understand in 
talking with Mr. English here for quite some time that the 
purpose of the STB is to find a balance between the rail 
industry and the shippers. I would hope through this process 
that you are going through--and I very much applaud your 
efforts along with all the other Members--that we can reach 
that positive outcome.
    Mr. Chairman, I would close by simply thanking you on 
behalf of the Missouri Basin Power Project, the consumers that 
exist in the nine States that we represent and thank you again 
for your efforts.
    Mr. Oberstar. Thank you very much, Mr. Harper. That file of 
documents is very compelling, silent but powerful testimony to 
the concerns the shippers have.
    Mr. Harper. Thank you.
    Mr. Oberstar. Mr. Spitzer.
    Mr. Spitzer. Chairman Oberstar and distinguished Members of 
the Committee and the panels, I am Gary Spitzer, Vice President 
and General Manager for a global segment of the DuPont Company. 
A competitive and efficient rail distribution system is vital 
to DuPont's business and future. I want to thank you for 
allowing me to discuss our railroad experiences and the reforms 
that we believe are necessary.
    DuPont is a global corporation founded in 1802 with 
revenues of over $27 billion and operations in 70 countries. In 
the U.S., we employ 36,000 people in 33 States. We market over 
70,000 products and services for many markets including 
agriculture, energy, national defense, housing and 
transportation.
    When Congress passed the Staggers Act in 1980, there were 
over 40 Class I railroads. Today, the four largest account for 
over 90 percent of U.S. freight rail revenues. Competition 
between them has essentially been eliminated, resulting in 
issues with pricing and service.
    At 80 percent of our U.S. ship points, DuPont is captive, 
served by just one railroad. In many cases due to volume, 
distance traveled or material characteristics, alternative 
transportation modes are not viable. Our recent experience as a 
captive shipper shows that these railroads are fully determined 
to exercise their monopoly pricing power even if it means 
driving us and our customers out of certain businesses.
    In an effort to combat excessive and unreasonable rate 
increases, some exceeding 176 percent, DuPont has filed three 
small rate cases with the STB.
    Costs go beyond simple rail rates. A recent study 
commissioned by the American Chemistry Council found that 
between 2005 and the first quarter of 2007, the five major U.S. 
railroads overcharged on fuel surcharges by $6.5 billion.
    On service, we cannot reliably predict product transit 
times or arrival times. Some of our plants have come 
dangerously close to shutdown because of late deliveries. As a 
result, we have added rail cars, raised inventory, all further 
increasing our costs.
    When Staggers was passed in 1980, Congress could not have 
envisioned that 50 mergers and consolidations would lead to the 
current lack of competition or that the STB would fail to 
restrain railroad monopoly power. One such example is the 
bottleneck issue. The STB has ruled that carriers are not 
required to facilitate competition to or from captive locations 
by offering a reasonable rate to the nearest interchange with 
another carrier.
    We suffer the effects of this at our Niagara Falls plant in 
New York. In a competitive scenario, CSX, the only carrier 
serving our plant would be required to provide a reasonable 
rate for the 26 miles from our plant to the Norfolk Southern 
interchange in Buffalo, New York. Instead, we are forced to use 
CSX, all the way from our plant to Chicago at much higher 
rates. In effect, the anti-competitive decision of the STB has 
helped DuPont remain a captive shipper.
    DuPont believes the time has come for reform which must 
begin with a broken and ineffective STB. Passage of H.R. 2125, 
the Railroad Competition and Service Improvement Act, would 
remove many barriers to competition between railroads and 
require the STB to fulfill its Congressional intent, promote 
effective competition, prevent excessive and unreasonable 
rates, and ensure efficient and reliable service.
    DuPont also supports passage of House Bill 1650, the 
Railroad Antitrust Enforcement Act. The Justice Department and 
the FTC should be permitted to review railroad mergers under 
antitrust law as they can in other industries. Railroads should 
be subject to the same antitrust laws and consequences as other 
industries. Unnecessary protections for the railroads must end 
before their monopoly power harms U.S. competitiveness and our 
economy.
    In closing, Chairman Oberstar, I want to thank you and 
Members of the Committee for allowing me to share DuPont's 
views on this important issue. It is time for the railroad 
industry to join with Congress and its customers to achieve a 
balanced, market-based system serving the common interests of 
carriers, shippers and our Nation. DuPont has participated in 
such efforts before and stands ready to participate again.
    Thank you.
    Mr. Oberstar. Thank you, Mr. Spitzer, for your testimony.
    Mr. Huval.
    Mr. Huval. [Phrase in foreign language]--and thank you to 
Congressman Baker for his help and support through the years.
    I am Terry Huval from the heart of Cajun Country in 
Lafayette, Louisiana, and I am representing today the American 
Public Power Association for which I serve as Chair at this 
particular time and LUS, the Lafayette Utility System, which is 
a municipal-owned utility system in Lafayette, Louisiana.
    I want to take the issue to talk about our customers. I 
want to talk about my senior class high school English teacher, 
Mrs. Moss, 84 years old, lives in Lafayette. She is a widow. 
She called me the other night to thank me for what I am trying 
to do to make life better in Lafayette, but she doesn't know 
that $300 of her annual utility bill goes to pay for the cost 
of rail captivity as it affects the delivery of coal to 
Lafayette's Rodemacher power plant.
    Then to my friend, Matt Stellar, who is an entrepreneur and 
decided to build his own jewelry manufacturing business which 
is amongst one of the largest in the world and has multiple 
locations. He hired 1,700 people in Lafayette. Matt doesn't 
realize that last year he paid an extra $120,000 more in his 
electric bill because of the cost of rail captivity.
    Then our education system in Lafayette, the university, the 
schools, the elementary schools, the high schools paid 1.3 
million more last year because of the cost of rail captivity.
    Cost alone is not the only issue that affects our customers 
and affects the customers of other entities that are served by 
coal power. Seventy percent of our power in Lafayette comes 
from our coal plant. The reliability of service has suffered so 
much in the last several years, that we have had to take 
extraordinary measures in order to ensure that that plant was 
capable of operating to serve our customers.
    We had barge-delivered Venezuelan coal that we had to bring 
to Louisiana to help us. We had to truck-deliver Northwest 
Louisiana lignite. Now we have to make the decision to move 
forward with spending 19 million on aluminum rail cars so that 
each rail shipment that we have of coal can bring us more coal 
in the event that there is a disruption in rail traffic that it 
doesn't impede our ability to operate our plant.
    We are one of those entities, like Mr. Spitzer, that is 
suffering from the bottleneck. We have a 1,500 mile trek from 
Wyoming to our power plant of which 20 miles is the only 
section that is captive. But because of the rules that the STB 
has in place, all 1,500 miles are subject to a captive rate. We 
don't think that is fair.
    We can't get competing offers from the other rail provider 
because there is no need to do that. They don't poach each 
other's rates.
    The STB rules, in my opinion, don't make sense. As a 
regulated utility, we have rules that we have to follow that 
require our rates to be approved ahead of time. In the case 
with STB, that is not how it works. The customer has all the 
burden of having to test out what the rates are. We believe 
that is senseless.
    Public service commissions in this Country regulate captive 
arrangements, captive monopolies in a different way, and we 
believe the same thing should happen here.
    What has happened also as we have seen it evolve, I have 
been testifying on this and this is my third time. Five years 
ago I testified before the Senate Commerce Committee. At that 
time, captive customers were dealt with differently, completely 
differently than competitive customers.
    Now we have what I call the small town, two gas station 
analogy where the two gas stations owners collude with each 
other as to what the price of the gasoline is going to be at 
their station. As soon as one puts his price up a little bit 
higher, the guy across the street does the same thing. What is 
happening is almost all the coal providers and many others, all 
coal shippers who have power plants are now in a position that 
they are paying substantially higher.
    When I hear some of the testimony raised earlier today 
about that it takes these captive customers to help to cover 
the cost of expansion. It makes me wonder if anyone really 
realizes that it is people like Mrs. Moss and Stellar Settings 
and our school systems that are paying the tab for that. They 
are paying an involuntary tax to be able to support the costs 
of the railroads' daily operations.
    We don't understand why the rates go up. It just turns out 
that way. We wonder where is the money really going. Is it 
going to help out competitive routes and at the same time all 
we are going to do is end up paying the bill for increased 
costs of running the railroad companies?
    We don't know, but we do believe that it is up to the 
Surface Transportation Board to do their job, to be able to 
look at non-competitive markets in a way that ensures that the 
customers at the tail end are properly served, both from a 
reliability perspective and a pricing perspective.
    I thank you for your attention. This is a major issue for 
our community and for many utility companies around this 
Country. I look forward to your further comments. [Phrase in 
foreign language.]
    Mr. Oberstar. Thank you very much, Mr. Huval.
    [Phrase in foreign language.]
    Mr. Huval. [Phrase in foreign language.]
    Mr. Oberstar. [Phrase in foreign language.]
    Mr. Huval. [Phrase in foreign language.]
    Mr. Oberstar. [Phrase in foreign language.]
    Ms. Diehl.
    Ms. Diehl. All the French speaking, I don't know. I need to 
go take French now, I think.
    Good afternoon, Chairman Oberstar, Ranking Member Shuster 
and Members of the Committee.
    My name is Susan Diehl, and I am the Senior Vice President 
of Logistics and Supply Chain at Holcim, U.S. Inc. I am here to 
speak to the Committee about Holcim's experience as a captive 
shipper of a strategic building material, mainly cement.
    Cement is the critical component of concrete, an 
environmentally responsible building product used to build and 
repair our Country's vital infrastructure. Concrete is the 
second most consumed product in the world after water.
    Although it is not the subject of today's hearing, Mr. 
Chairman, we pledge to work with you and your Committee as you 
take on the very serious challenge of rebuilding our Nation's 
infrastructure.
    Holcim is one of the largest producers of cement in the 
United States with operations across the Country. Reliable and 
cost-effective transportation options are critical to our 
industry. Truck transportation increases our carbon footprint, 
clogs our already crowded highways and is not economical much 
beyond 150 miles. Simply put, we are reliant on railroads to 
deliver our products.
    Today, as a captive shipper at over 95 percent of our 
origin destination carriers, we are forced to deal with near 
monopolistic railroads that impose arbitrary and excessive 
fees. We daily face uncertainty in rail service reliability, 
and the prospect of new entrants to create competition is grim.
    To remain competitive, we consistently make significant 
capital investments in our company and our own infrastructure 
to meet the demands of our customers. In the last decade, 
Holcim has invested over $1 billion to upgrade its capacity and 
better service customers while improving its environmental 
performance.
    Holcim is investing $1 billion additionally in Sainte 
Genevieve, Missouri, on what will be the largest cement plant 
in the United States. A major reason for this investment in the 
location that it is, is on the Mississippi River which will 
allow us to ensure cost-effective, environmentally-friendly and 
reliable transport of our inbound raw materials and finished 
cement by barge.
    Because we must locate at or near our primary raw material 
source, we count on and pick sites with rural rail service. 
True to our experience, we will be captive to one railroad at 
Sainte Genevieve.
    Like its customers, we believe that the railroads must also 
reinvest to serve customer needs in the years to come. However, 
that investment cannot be conditioned on a continuation of 
current monopolistic practices.
    Throughout the rail competition debate, we have long sought 
to be part of the solution and have taken action. In 2003, we 
created HolRail for the purpose of constructing and operating a 
2.3 mile common carrier rail line to establish competition at 
our cement facility in Holly Hill, South Carolina, which was 
captive to a single rail line with CSX.
    Interestingly, our two cement competitors, operating with 
in five miles of our facility, are both dual served. This 
captivity has allowed CSX to provide poor and unresponsive 
service while charging unreasonably high rates to Holcim. 
Holcim determined that it could obtain competitive rail service 
at Holly Hill by constructing its own railroad over that 
distance to connect with Norfolk Southern railroads.
    As we petitioned the STB to build that railroad, CSX has 
attempted to stop our railroad by blocking the only 
environmentally acceptable route. The STB has done little to 
protect shippers or restrain the increasingly consolidated rail 
industry. Given the track record of the STB, serving as a 
virtual rubber stamp for the Class I railroads, it was not 
surprising that after well more than two years and hundreds of 
thousands of dollars of legal and consulting fees, our petition 
was denied.
    We cannot always pick sites with dual rail service. True to 
our experience, we will be captive to one railroad at Saint 
Genevieve.
    Like its customers, we believe that the railroads must also 
reinvest to serve customer needs in the years to come. However, 
that investment cannot be conditioned on a continuation of 
current monopolistic type practices.
    Throughout the rail competition debate, we have long sought 
to be part of the solution and have taken action. In 2003, we 
created Whole Rail for the purpose of constructing and 
operating a 2.3 mile common carrier rail line to establish 
competition at our cement facility in Holly Hill, South 
Carolina, which is captive to a single railroad, the CSX. 
Interestingly, our two cement competitors, operating within 
five miles of our facility, are both dual served. This 
captivity has allowed CSX to provide poor and unresponsive 
service while charging unreasonably high rates to Holcim.
    Holcim determined that it could obtain competitive rail 
service at Holly Hill by constructing its own railroad over 
that distance to connect with the Norfolk Southern Railroad. We 
petitioned the STB to build that rail line. CSX has attempted 
to stop our railroad by blocking the most environmentally 
acceptable route.
    The STB has done little to protect shippers or restrain the 
increasingly consolidated rail industry. Given the track record 
of the STB serving as a virtual rubber stamp for the Class I 
railroads, it was not surprising that, after well more than two 
years and hundreds of thousands of dollars of legal and 
consulting fees, our petition was denied.
    While our company has the resources to take on this 
challenge, many companies do not. It should not fall to 
shippers to engage in litigation to become modern day trust-
busters. If competition is to be restored, we believe the 
Congress must change the system to create a more level playing 
field.
    What is currently being proposed in H.R. 2125, under your 
leadership, Mr. Chairman, and that of your Committee, has many 
key proposals that help strike the balance between rail growth 
and oversight. The re-regulation argument made by the rail 
industry presents a false choice. Indeed, we would not advocate 
for reform that would deter growth of our critical rail 
infrastructure. We believe that Congress must especially 
consider provisions that promote rate competition and expand 
the STB's authority over service-related issues.
    Thank you, Mr. Chairman, Ranking Member Shuster, and 
Members of the Committee. We deeply appreciate this opportunity 
to speak about issues that are not only vital to our industry, 
but to our national infrastructure and future growth as well.
    Chairman Oberstar. Thank you very much for your testimony. 
I observe that the Latin origin of the word cement, camentum, 
means to link together. And the product into which it is made, 
concrete, ceconcraetum in the Latin, is to connect together. 
Let us hope that you can connect some things together here with 
your testimony. Thank you.
    Mr. Hurst. Mr. Chairman and Members of this Committee, my 
name is Wayne Hurst. I farm in southern Idaho and produce 
wheat, sugar beets, potatoes, feed barley, alfalfa, silage 
corn, and dry edible beans. I am the past president of the 
Idaho Grain Producers Association and a member of the National 
Association of Wheat Growers Budget Committee.
    I am honored and pleased to be here today on behalf of the 
Alliance for Rail Competition and the agricultural community. 
The members of the Alliance for Rail Competition include 
utility, chemical, manufacturing, and agricultural companies, 
and agricultural organizations all working together. Producers 
of the commodities as wide ranging as soybeans, dry beans, 
lentils, rice, barley, peas, and sugar beets all have expressed 
concerns similar to those I will share with you today. Together 
these organizations represent growers of farm products in more 
than 30 States.
    I have submitted for the record a full statement and I 
would like to summarize that statement for you in the five 
minutes allotted to me. I would ask that the statement be 
accepted into the record. Also, recently a letter was sent to 
the Committee in support of H.R. 2125, and I would ask that the 
letter be accepted into the record as well. The letter was 
written by the Alliance for Rail Competition, American Soybean 
Association, American Sugar Beet growers Association, the 
National Association of Wheat Growers, the National Barley 
Growers Association, the National Farmers Union, United States 
Beet Sugar Association, USA Dry Pea and Lentil Council, U.S. 
Dry Bean Council, and the USA Rice Federation.
    First, the importance of rail to agricultural producers. 
Wheat growers know that an effective railroad system is 
necessary for the success of the wheat industry. As captivity 
levels have risen, a larger and larger share of the cost of 
transportation has been shifted to rail customers and State and 
local governments. Here is the bottom line. We have between us 
and our markets a railroad with the economic power to take away 
our profits any time it wants. We captive shippers are tired of 
subsidizing commodity movements that have rail-to-rail 
competition and an STB that rules in favor of railroads and 
against captive rail shippers.
    Second, effects of growing rail captivity. Since the 
passage of the Staggers Rail Act of 1980, the degree of 
captivity in many wheat growing regions has increased 
dramatically and today whole States, whole regions, and whole 
industries have become completely captive to single railroads 
as a result of many railroad mergers. What is clear is that the 
areas of the country served by single railroads are 
experiencing drastic increases in rate levels that are not 
found in areas that have some rail-to-rail competition. The 
farm producer bears the cost of transportation and cannot pass 
it along to anyone else. So when we say agriculture is captive, 
we are truly captive.
    Third, the transportation cost shift. We have reports of 
railroads raising their rates just to drive off unwanted rail 
traffic, thereby abandoning common carriage. We also have 
reports of the railroads refusing to service locations that the 
railroads deem operationally unacceptable. The result appears 
to be that railroad market power is being exerted to create 
haves and have-nots in the shipping community. Every one of the 
crops I produce is having trouble with the level of rail rates 
and service. Let us look at just the crops I raise on my farm 
and some of the transportation issues associated with each 
crop, because what we find is a pattern that exists in all 
facets.
    Wheat. Following the wheat harvest in July of this year, 
there were more than 10 million bushels of Colorado wheat 
stored on the ground, primarily in areas where there was a lack 
of adequate rail service--captive branch line areas. Such wheat 
lying on the ground, exposed to the elements sustains an 
economical loss or poses a food safety risk and threatens its 
marketability. The elevator I sell to has told me that delays 
in service are threatening its existence because railroad 
delays cause cash flow problems. This company is one of the 
pioneers in identity preserved wheat marketing, which matches 
wheat varieties and characteristics to individual customer-
specific needs. Shipments in smaller lots like identity 
preserved wheat are not what the railroads demand in their 
business model. Yet the identity preserved business practice 
holds one of the future keys for American agriculture to 
maintain market position in the world.
    Sugar. I am a member of a grower-owned co-op, the Snake 
River Sugar Company which supplies about 10 percent of our 
nation's sugar. When the railroad decided it did not want to 
haul sugar beets about 10 years ago, it just quit hauling. Now, 
with one exception, all the beets in Idaho have been forced to 
truck.
    Potatoes. In the potato industry, we supplied potatoes to 
the G.R. Simplot plant in Heyburn, Idaho for many years until 
the plant was shut down several years ago and moved to Canada, 
resulting in the loss of hundreds of local jobs. Mr. Simplot 
told us the reason was high freight costs. And indeed, most of 
the shipment of frozen and fresh potatoes in my area today has 
been forced to trucks.
    Barley. Idaho feed barley used to easily capture 50 to 60 
percent of the California dairy feed and grain market, 
amounting to between 60 and 70 million bushels annually, but 
today amounts to less than 200,000 bushels. What happened? The 
railroad serving Idaho chose not to allow barley movements into 
the traditional market over moving corn. It is no secret today 
that the monopoly railroads have no desire to move barley and 
will price these movements as high as needed to eliminate what 
would otherwise be competitive barley markets.
    Loss of malting barley markets. Rail rates and service 
failures have also closed off access to traditional U.S. 
malting markets to U.S. barley producers. They have been 
replaced by Canadian supplies with lower freight rates. This 
has resulted in a 20 to 30 percent cut in contracted acreage in 
2006. Why? The U.S. market dominate railroads focused their 
resources on shuttle trains and were not willing to participate 
in shipments that did not conform to the shuttle 
configurations.
    In conclusion, agricultural growers together with members 
of the Alliance for Rail Competition truly believe that a 
healthy and competitive railroad industry is essential for 
their continued viability. However, increased captivity levels 
with poor service, a lack of available cars, increased rail 
rates, and a regulatory agency that does not meet the needs of 
shippers has made it increasingly difficult for 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 
industry. We believe the railroad industry can survive and 
prosper in a competitive environment. Indeed, we know from 
history, that competition breeds innovation and efficiency.
    Wheat growers and other producers along with the members of 
ARC believe that both railroads and shippers would be better 
off with more competition in the marketplace. They support 
provisions in H.R. 2125, a bill that calls for increasing 
competition without increasing regulation. We fervently believe 
that the final offer arbitration, as outlined in H.R. 2125, 
will produce a host of benefits where competition cannot 
physically be created.
    Providing for final offer arbitration and the removal of 
paper barriers will restore balance to the commercial 
relationship between the railroads and their customers. Both of 
these remove the STB from the process, an organization that 
seems only interested in the welfare of the railroads and not 
the shippers, and, furthermore, provides a commercial solution 
between the railroad and the shippers. We in agriculture and 
the members of ARC believe this legislation will improve rail 
transportation by providing fairness and openness to the 
negotiations between railroads and their customers over rates 
and service. Thank you.
    Chairman Oberstar. Thank you very much for a very 
comprehensive statement and very detailed. Your full statement 
of course will appear in the record. Thank all the members of 
the panel for their presentations.
    Mr. English, are there members of the NRECA who own their 
own rail cars to haul coal?
    Mr. English. Indeed. Mr. Harper here is a member of NRECA 
and certainly Basin Electric has to own their own cars. Many of 
our members do. Obviously, we have seen a substantial reduction 
in the amount of rail equipment, talking about percentage-wise, 
of rail cars that are available through the railroad. If I 
recall correctly, about a 20 percent reduction. Back in 1980, 
if I remember correctly, Mr. Chairman, we had about 60 percent 
of the rail cars owned by the railroads. Today, it is about 40 
percent. Certainly that has been the case for a lot of our 
members.
    Chairman Oberstar. That is a cost shifted to a consumer, on 
the one hand, and to a shipper, on another. When you went out 
to acquire your cars, Mr. Harper, did the railroads offer you a 
reduction in rates?
    Mr. Harper. Actually, the 20-year contract that I spoke of 
earlier did have incentives in there for us to make investments 
in the assets, of which we did with cars and our rates got 
lower. Today, they require us to purchase the cars with no 
incentives, no lowering of rates. In fact, we just spent a 
little over $10 million for a fourth train sent to the Laramie 
River Station in order to get our coal supply out.
    Chairman Oberstar. Over $10 million to acquire cars?
    Mr. Harper. Yes, Mr. Chairman.
    Chairman Oberstar. But no compensation on the other side in 
the form of a rate reduction?
    Mr. Harper. No, Mr. Chairman.
    Chairman Oberstar. That is cost-shifting.
    Mr. Harper. Pretty much.
    Chairman Oberstar. Mr. English, you discussed the high cost 
of bringing a rate case to the board. What recommendations do 
you have on lowering these costs and improving the fairness of 
the rate proceeding at the board?
    Mr. English. Obviously, Senator Dorgan spoke to that this 
morning and he is addressing this issue. I think there is no 
question that this is exorbitant. There is no reason for cost 
of this magnitude. Now we got into some discussion here about, 
well, they have to pick up the cost of the Surface 
Transportation Board. If I recall correctly, that is an entity 
of the Federal Government that is here to provide a service. 
And if you go back again to the original intent of the 
legislation, they are supposed to be here to hear these kind of 
disputes and to deal with the injustices in accordance with the 
intent of the law. I think it has to raise questions, Mr. 
Chairman, given the exorbitant amount, if this is here not to 
pick up the costs of the proceedings but instead to discourage 
people from bringing proceedings.
    Again, this goes back to the issue, what is the Surface 
Transportation Board here for? If they are not here to address 
these issues and to hear from those who have grievances and, in 
effect, find the proper solution in accordance with the law, 
then I do not know why they are here. This again raises the 
issue and goes to the heart of your legislation. I want to 
commend you and Mr. Baker both for working on this. You had 
some very nice questions, Congressman Baker. Great job. Thank 
you.
    Chairman Oberstar. As Dr. Mulvey said in his testimony, the 
Staggers Act greatly reduced the economic regulation of the 
industry. It did not eliminate it. It did not totally take the 
Government out, but provided a safety valve for the shippers 
and consumers. Just a further question. You own the cars. Who 
maintains them?
    Mr. Harper. We do. We have to pay for the full maintenance, 
whether it is the wheels, the cars themselves, or whatever. The 
cost for maintaining those train sets is the responsibility of 
the owner.
    Chairman Oberstar. That is a sweet deal.
    Mr. Harper. Depends on which side you are on.
    Chairman Oberstar. For the railroads, a sweet deal.
    Mr. Spitzer, you described a number of situations that were 
painful for your industry and for your company. But I recall 
that period of time when the Union Pacific acquired the 
Southern Pacific, whose rail infrastructure was in very bad 
shape; the roadbed was in bad condition, the rolling stock had 
deteriorated. As one person at a meeting I presided over in 
Beaumont, Texas said, one of the customers, it was held 
together with chewing gum and baling wire and then it all fell 
apart when the UP acquired it because the SP management somehow 
knew how to keep it going even though they were losing money 
and it was not a very profitable operation. And then when the 
UP acquired it, the average transit time on coal shipments was 
seven miles an hour. There was a meltdown on chemical shipments 
from the West Coast to the Gulf. Chemicals were being off-
loaded from large vessels onto smaller vessels and shipped 
through the Panama Canal and up the Gulf of Mexico and into the 
Gulf Coast. Were you affected by that period of time?
    Mr. Spitzer. I do not have the specific details on that, 
Mr. Chairman. I would be happy to get back to you in writing 
with how that specifically impacted us. If I may say, while 
over time there have been benefits of the Staggers Act and 
perhaps improvements in infrastructure in some cases, today we 
are seeing a number of service issues.
    [Subsequent to the hearing, Mr. Spitzer added the 
following: DuPont experienced major rail service disruptions 
and delays from the Union Pacific-Southern Pacific merger. It 
took years to recover from the merger and some geographic areas 
continue to have lingering service issues.]
    As with Mr. Harper on the panel here, we too have seen a 
shift in costs to us for rail cars, a large fleet that we own 
and maintain in our company as well, and a number of service 
issues, as I detailed in my testimony, into and out of our 
sites.
    Chairman Oberstar. You recently filed three rate cases with 
the board. What has been the outcome and your experience in 
that?
    Mr. Spitzer. I think our experience before, as has been 
discussed today, is the large and medium rate cases have 
largely been prohibitive. Way too long and too expensive. Since 
this is ongoing litigation there is not a lot I can say. The 
rate cases are on the STB website. I heard a lot of discussion 
earlier about 180 revenue to variable cost. In these cases we 
have 300, 400 percent revenue to variable cost. And on an 
overall basis, both with CSX and what we have recently 
experienced, we have seen increases from on average 30 percent 
up to 176 percent.
    Chairman Oberstar. The American Chemistry Council issued a 
report which I have claiming that fuel surcharge by the five 
Class I carriers overcharge shippers by more than $6.5 billion 
dollars. The Association of American Railroads takes issue with 
the study, with the premise on which it was founded. What is 
your response to that issue?
    Mr. Spitzer. In addition to that report by the American 
Chemistry Council, it has been discussed here today that the 
GAO also took a look at it and validated a significant increase 
in miscellaneous charges. We are now paying fuel surcharges. In 
the past in some agreements it was imputed as part of the 
overall underlying rate. Now, as contracts expire, we are 
seeing the fuel surcharges come in. And they are just part of a 
number of miscellaneous charges that are coming up. If I may, 
Mr. Chairman, add one more point. One of the reasons for 
concern and I believe the timeliness of action is that many 
contracts are expiring. When you read some of the Wall Street 
analysts talk about legacy contracts and the great profit 
opportunities for the railroads due to triple digit increases, 
that is currently what we are experiencing today, those triple 
digit increases.
    Chairman Oberstar. Thank you. Ms. Diehl, do you have any 
data that would reflect percentage of the cost of a ton of 
cement represented by the transportation cost of that cement?
    Ms. Diehl. Yes, Chairman Oberstar. Before I proceed with my 
answer, I just want to correct something on the record. I 
inadvertently said that we have invested over a million 
dollars. It has been over a billion dollars in the last decade. 
So my colleagues have informed me that there is a big 
difference between the two and I just want to make sure it is 
right on the record.
    Chairman Oberstar. As Ev Dirksen was fond of saying.
    Ms. Diehl. In terms of our overall transportation costs, 
not just rail, they used to be one-quarter of our overall 
costs. We are looking at rates that are almost double that as a 
component of our overall cost of cement. So it is something 
that is of great concern to our company. What we are looking 
for is really to level the playing field so we have 
opportunities. And we have tried to be part of the solution. We 
tried to create our own competition using our own investment 
dollars and we were denied that opportunity.
    Chairman Oberstar. Thank you. I will withhold further 
questions.
    I now recognize the gentleman from Pennsylvania, Mr. 
Shuster.
    Mr. Shuster. Thank you very much. And all of you can feel 
very comfortable I will not ask any questions in French. I do 
not speak French.
    [Laughter.]
    Mr. Shuster. I certainly do believe that we need to make 
some changes at the STB and I think they have started down that 
road, at least this board that we had in front of us today has 
put some things in place. Also, as I said in my opening 
comments and I think all of us have to be cognizant of, if we 
pass something we may get some unintended consequences and one 
of those may be going back to the way the rail system was 
before 1980. I do not think anybody sitting on this panel or 
anybody in this room or this country wants to see us go back 
there. So with that being said, a couple of specific questions 
and then a general question that I want to ask you, because I 
am trying to figure out how we move forward without potentially 
going back to 1980 or before the Staggers Act was put in that, 
from my standpoint, saved the railroad industry in this 
country.
    The first thing is on the fuel surcharges. Again, I think I 
know the answer but I am not quite sure because I get 
conflicting information when I read things. It is $6.5 billion 
in surcharges. Nobody filed, from my understanding, with the 
STB to get a remedy there. The question I guess is, is that 
accurate? And why did not anybody file? Was it the cost was too 
much and you did not think it was worth it. Anybody can take a 
stab at it or everybody can take a stab at it if you wish. Yes, 
Mr. English?
    Mr. English. I think it is an indication of the lack of 
confidence that people have in the Surface Transportation 
Board. That is the whole point. And I think we have seen that 
throughout the history of the board. We have waited for 20 
years and you have not finished implementing the legislation 
that was passed in 1980. That is what this is all about. The 
Surface Transportation Board is not cutting it. There is no 
other way around it. So the question is whether the Congress is 
going to fix, whether in fact you are going to complete the 
1980 legislation and make certain that it does the job, or 
whether in fact you just scrap the whole thing and forget it, 
because I do not think it is going to make a whole lot of 
difference.
    Mr. Shuster. Did not the STB come forward and say the 
railroads did not account for it properly and thus everybody is 
getting some remedy?
    Mr. English. That is correct. Now what would you expect out 
of that? I would think you would expect----
    Mr. Shuster. Well, $6.5 billion is a lot of money.
    Mr. English. That is correct. Would you not also expect 
that if any body, respected body in this town who has this kind 
of responsibility and obligation made such finding, would you 
not expect that they would insist that money be turned back to 
the shippers? But they took no such action. The second thing, 
would you not also expect that they would suspend that kind of 
abuse immediately? They did not suspend it immediately.
    So the question is--that is correct, they found it--but the 
question is, what did they do about it? How did they deal with 
it?
    Mr. Shuster. From what I understand from the testimony 
today, you got some of that money back and some they said they 
just moved forward. Which is not a very good answer for your 
industry.
    Mr. English. I am not aware that they put any back. They 
said they were going to stop it going forward. But that is $6.5 
billion. That is a lot of money.
    Mr. Shuster. Anybody else want a crack at that?
    Mr. Huval. What I heard of the testimony today is that 
actually some shippers approached the STB to let them know this 
was taking place. I think it is good that the STB did take a 
look at it themselves. But they did not come up with it on 
their own. There were some shippers that pointed out that this 
was becoming an issue because these prices continued to go up. 
So I commend them for looking at it. But I think it is the sort 
of thing the STB should have been doing all along. And, again, 
it does raise a lot of questions when an industry is allowed 
$6.5 billion, or whatever the number is, anything over-
collected is over-collected and it is improperly done, it 
should be refunded back to the shippers that were harmed by 
that.
    Mr. Shuster. Absolutely. I agree with that. Again, my 
question, I would have thought somebody would have said hey, 
let us file a case, let us all band together and do something 
to get this stopped. So that is really the question I had. 
Because I agree with you that if something was done improperly 
it should have been addressed. It was. It was not maybe going 
through the proper channels, but something was addressed.
    The second thing on car ownership. When did the shift occur 
on car ownership? I am not quite sure I know that some 
industries today are buying more, some I think in the past 
have. Your industries, have you always owned your own cars, 
have you recently, are you buying more, are you buying less?
    Mr. Huval. In our particular case, we always owned our own 
cars. We had some steel cars in place that still probably had 
another 10 years of useful life left to them, but because of 
the reliability of getting coal, the reduced reliability, we 
felt that we needed to move forward to replace those cars with 
aluminum cars so that every shipment brings us in more coal. 
And that is just because of lack of maintenance of the rail 
lines. But we always took the position of wanting to own our 
own cars. We are just now in the position of having to 
prematurely replace those cars with aluminum cars.
    Mr. Shuster. Right. What about DuPont, have you always 
owned your own cars?
    Mr. Spitzer. For us it began in the mid-1980s. At this 
point, we feel it is necessary to have them to ensure 
availability and timeliness.
    Mr. Shuster. What about liability?
    Mr. Spitzer. Reliability?
    Mr. Shuster. The concern that you wanted cars, you wanted 
to make sure that they were your cars, and that if something 
happened you knew and were responsible. I am talking about 
legal responsibility. Liability.
    Mr. Spitzer. I would say the Department of Transportation, 
the FRA have clear regulations and guidelines relative to car 
design that we think industry on an overall basis is held 
accountable to meeting. In our case, it has grown since the 
mid-1980s to approximately 5,000 today.
    Mr. Shuster. Yes, sir?
    Mr. Harper. Yes. I believe our ownership can track back to 
the mid-1980s as well. As I said a minute ago, there was 
recognition of incentives in the contract that we had at the 
Laramie River Station. But since that time, we have also had to 
buy, because we own the Dakota gasification synthetic fuels 
plant in North Dakota, we have had to buy ammonia cars, so on 
and so forth, we have had to buy many cars. So we have a lot of 
ownership in cars that we do not really want to be in, but we 
are there.
    Mr. Shuster. Portland Cement industry, has that industry 
always owned its own cars?
    Ms. Diehl. I know that we have owned our own cars for at 
least the last decade. We currently own about 2,000 cars. And 
there have been some times in the past where we have not been 
able to use those cars. Certainly our concern is, as we divert 
our own investment dollars towards rail cars, we are not 
investing in our own capacity and infrastructure, and that if 
the capacity turns, and now the railroads have extra rail cars, 
we may be stuck because they are utilizing their capacity and 
we are not utilizing ours.
    Mr. Shuster. Right. Mr. Hurst?
    Mr. Hurst. Well, I do know that some agriculture companies 
do own their own cars and service is tough to get. Just last 
week I was unloading a load of beans at a local warehouse and 
they said, you know, from the time we order cars, it is often 
21 days to sometimes 30 days before we get the cars, and often 
we have to fix them when they show up, and then it is 3 days 
from the time we have them loaded until that order arrives at 
our customer. So, 60 days usually.
    Mr. Shuster. I guess the last question I have, it is a 
pretty broad question and it is why we are here today. And I 
understand each of you is here representing your own companies, 
your own industries. I was in business before and I certainly 
wanted the best deal. But we are looking at a system which is a 
national system. A couple of people I think mentioned today 
about the days when there were 60 railroads out there. I do not 
know that any of them really provided national service that we 
can get today. And I do not know if anyone really wants to go 
back, as I mentioned early, back to pre-1980. We do have seven 
Class I railroads in this country. It has been reduced, 
consolidations have occurred, and now we have a profitable 
industry that is spending 18 percent of its revenues to build 
the infrastructure, reinvest.
    If we are going to start the change--and differential 
pricing is something that I am trying to get my head around. I 
understand how the airline industry does it. That is what is 
happening in the rail industry and some people feel they are 
paying unfairly. But we have a railroad system that is the envy 
of the world. It is the most efficient system in the world. 
Overall, the prices that you pay are lower than in the rest of 
the world. And as the Chairman mentioned earlier, it is to 
serve broad public interest. And in my view, the taxpayers are 
not paying money to support the system. So how do we move 
forward without disrupting that and go back to 1980? Mr. 
English? And Mr. English, please be brief because the Chairman 
is going to start to whack the gavel on me and I want to make 
sure I get your response.
    Mr. English. I will put in a good word for you.
    Mr. Shuster. I know, it is a tough, big question.
    Mr. English. Very quickly, the point is just this. The 
problem is with the Surface Transportation Board. The problem 
is with the attitude. And certainly I think what you can do is 
this Congress can send a very strong message that you expect 
that the Surface Transportation Board carry out their 
responsibilities. Now you go strictly to the issue of fairness. 
Why is it that 20 percent, and I am using that 20 percent 
figure that Professor Grimm from the University of Maryland 
testified here in 2004 and said it was 20 percent, unlike the 
10 percent you heard here today, probably more today, but why 
should that 20 percent pay for everything? That is who this 
thing is resting on. We are already at 180 percent of the value 
that was laid out earlier under the Staggers Act. That is the 
threshold before the Surface Transportation Board even gets 
involved. Now why should it be 300 percent, 400 percent, 500 
percent, 700 percent? Why is there no limit?
    Mr. Shuster. I think the answer to that question is, 
somebody said earlier who is much smarter than I am, you have 
to look case to case, what were the capital investments. And I 
understand that.
    Mr. English. But only the captive shippers get stuck.
    Mr. Shuster. Mr. English, if I did not know it, I would 
think you were a former Member of Congress.
    [Laughter.]
    Mr. English. Thank you very much.
    Mr. Shuster. And if you were a Member of the House, you 
would be in a filibuster now.
    Mr. English. And your father was a great man.
    Mr. Shuster. I appreciate that greatly. Could everyone just 
take a quick crack at that.
    Chairman Oberstar. Very briefly, because we are going to 
have votes in just a few minutes and I want to get to other 
Members.
    Mr. Harper. Mr. Shuster, as I said a while ago, I think 
what the STB has to do is find that balance. I do not think 
there is any one of us sitting here who is not willing to pay 
for good service. We all recognize that, period.
    Mr. Shuster. Okay. Thank you.
    Mr. Spitzer. I come back, Congressman, to what Chairman 
Oberstar said, that if the railroads are there to serve in our 
national interest, it is hard for our industries and businesses 
to be globally competitive when there is a monopoly power in 
the middle of our supply chains. It is remarkable to me that 
with the bottleneck issue, competitive switching, and paper 
barriers, the STB has over many years made decision after 
decision that has served to reduce competition. I believe it 
needs to be addressed if we are going to turn it around. In the 
chemical industry alone, there has been a $30 billion change in 
imports and exports in the trade balance. It still remains a 
very vital industry in this country.
    Mr. Huval. As Senator Russell Long would say, ``Don't tax 
me, tax the man behind the tree.'' Well, the man behind the 
tree in our industry is the customer. The customers are paying 
the cost, a substantial cost for these investments that 
railroad companies are getting. That is an important thing we 
cannot forget. It is not just coming from just free market 
operations. The customers are forced to pay for that because 
they are only being served by one utility. So we need to make 
sure we consider all of that in the big scheme of this.
    Mr. Shuster. Ms. Diehl?
    Ms. Diehl. From our perspective, we certainly believe that 
we need the railroad going forward and it is a key decision 
point when we decide whether or not we are going to continue to 
reinvest in capacity. The STB, as ineffective as it stands 
today, and given our recent experience which has happened in 
the last 13 months, we do feel like we are not getting the 
attention of the STB to create competition when they 
opportunity has been provided to them. And so from that 
perspective, all we want is to level the playing field. We have 
monopolistic railroads who are not regulated and, as I heard 
this morning, we cannot have the worst of both worlds, which is 
monopoly and no regulation. And that is all we are looking for 
is just to level the playing field so that the railroads are 
playing under the same sets of rules and whatever oversight 
body is striking that balance to make sure that we can promote 
the growth but also to make sure that things stay fair.
    Mr. Hurst. From agriculture's perspective, we need and have 
to have a strong railroad. The Staggers Act basically had two 
things. One was to improve the financial state of the railroad, 
and they have done that very well through the STB. Secondly, it 
was to protect captive shippers that would come from 
deregulation. That has failed to happen in the last 27 years.
    From our perspective, the answer to the STB problem is to 
give us final offer arbitration. That is a mechanism whereas we 
have the tool to solve our own problems with the railroad 
outside of regulation, outside of Washington even. We can take 
care of it on a commercial level. And so that is why we feel so 
strongly about final offer arbitration.
    Mr. Shuster. Thank you all very much. Thank you, Mr. 
Chairman.
    Chairman Oberstar. Ms. Brown.
    Ms. Brown. Thank you, Mr. Chairman. Mr. Spitzer, I have got 
a couple of quick questions for you. DuPont recently announced 
it would have a buy back of $1.1 billion in stock. Since you 
are doing it, what is wrong with share buy backs by freight 
railroad if DuPont is doing the same thing?
    Mr. Spitzer. We do not have an objection to that. On the 
other hand, we are not out there, as some railroad companies 
are, talking about difficulties in investing in capital and in 
infrastructure while at the same time doing multibillion dollar 
buy backs. There seems to be somewhat of an incongruity in 
those two statements.
    Ms. Brown. I do not know. The hedge funds are moving in and 
they are buying up some railroads. One of the things they want 
to do is for them to raise the price of the shippers, which is 
just the opposite of what you are saying here today.
    Mr. Spitzer. We are currently----
    Ms. Brown. I mean the market is part of our discussion 
here.
    Mr. Spitzer. Yes. I would just say, Madam Chairwoman, that 
we are, both in the rate cases that we brought--I mean, I will 
just say that in the negotiations that took place with CSX, as 
an example, I just want to share what it is like dealing with 
being a captive shipper. We shared the impact that these rate 
increases would have on our customers, on our business, and 
they were ignored.
    Ms. Brown. What percentage of your pricing is established 
by a third party? Arbitration, what percentage?
    Mr. Spitzer. To my knowledge, and I will get back to you 
with anything different, I am not aware of prices that have 
been established through arbitration in our particular case.
    [Subsequent to the hearing, Mr Spitzer added the following: 
Prices within DuPont are generally set by competitive market 
conditions or through negotiations with our more significant 
customers. Alternative Dispute methodology, including 
arbitration, is generally used to resolve disputes. The rail 
industry that we face is distinguished from our market-based 
rate setting in that no competition exists that would otherwise 
curtail or limit monopoly-based pricing practices. In the 
absence of true competition, mediation, under the supervision 
of a government sponsored agency, is one method by which 
reasonable pricing that satisfies the needs of both parties and 
the public good might be achieved.]
    Ms. Brown. In your particular case. Anyone else on that 
issue? Okay, the other question. Good or bad, lower rates are 
not going to deal with the significant capacity problem that we 
have in the United States. What suggestion do you have for 
funding rail expansion?
    Mr. Spitzer. I would say in one word, it is competition. I 
believe that we need the infrastructure----
    Ms. Brown. Do you think competition is going to help expand 
the system?
    Mr. Spitzer. Yes, I do.
    Ms. Brown. It surely did not do it with the telephone 
industry.
    Mr. Spitzer. I would just say that in the----
    Ms. Brown. A lot of people made money and you do not know 
who to call.
    Mr. Spitzer. Well, yes, there are those rare exceptions. 
But I would say that my experience in the industry that I am in 
and dealing with customers that span everything from 
electronics to food to a whole variety of industries, our 
Nation is based upon competition. We would see, I believe, 
innovation, we would see new technology, we would see 
competition between railroads. If I may also add, the whole 
idea of having infrastructure and expanded capacity, we also 
want to be sure that we have U.S. produced goods to put on 
those expanded railroads that have occurred.
    Ms. Brown. Absolutely, and jobs. And this is something that 
we cannot send overseas. Thank goodness. But, for example, you 
talk about what you ship. You have the capacity to use trucks, 
which I am not encouraging it, as an alternative to rail. Let 
us say as with plastic, for example. Certain goods, like coal, 
coal needs to go rail. But you have the capacity with, as you 
just said, your diversity to use other kinds of alternatives.
    Mr. Spitzer. Well, yes, we do use a variety of means of 
transportation. However, (1) rail is one of the safest means to 
transport material; and (2) based upon the long distances that 
may be involved or the volume, in many cases truck is simply 
not a viable option for many of the products that we move. And 
I believe that is why when we are in these negotiations it is 
very clear to the carrier that we do not have a viable 
alternative and therein comes the take it or leave it offers or 
the triple digit types of price increases.
    Ms. Brown. Mr. Hurst, you mentioned beans and corn. I am no 
expert on any of that. But my question is why would it matter 
to the railroads what you are shipping? I am just curious. You 
said that they did not want you to ship barley, they wanted you 
to ship corn. Why would they care?
    Mr. Hurst. Because I understand they load, say, Nebraska 
corn in large shuttle trains and they deal in 100 car shuttle 
trains instead of dealing with 25 cars at a time with barley. 
They prefer corn. They are set up for corn and that fits their 
model, so they just basically said to Idaho barley, forget it, 
we do not want to mess with you.
    Ms. Brown. I thought you said you have your own cars.
    Mr. Hurst. Some companies do. But producers, we do not own 
our own cars. We sell to an elevator or a grain buyer and some 
of them do.
    Ms. Brown. Would someone else like to address the expansion 
capacity? You know, we do have a problem. I want to see more 
passenger rail. We have an explosion, which is exciting, but we 
do have an explosion as far as products, goods and services. We 
need to be competitive with China and other places. But no 
matter who I talk to, whether it is the Russians or the 
Europeans, they think we have the number one rail in the world. 
But I am listening and I hear you saying that there are some 
problems. But this industry has just started operating in the 
black. I see a couple of hands and I guess I have got a couple 
of minutes. So, yes, sir.
    Mr. Harper. Very quickly. I think what we want are fair and 
reasonable rates and have and understand that there is 
someplace to go to air our concerns. I am in the electric 
utility business. I am not in the rail business. I want to have 
a supplier that has my best interest at heart. And if he has 
that, then he is out there building the infrastructure that is 
necessary to get our products to market and get coal to my 
power plants. That is my biggest concern.
    Ms. Brown. He is investing 18 percent of his product back 
into the industry. DuPont is not doing that. Nobody is putting 
that amount back into the industry.
    Mr. Harper. Well, if I may. Right now, we have a workplan 
of $5.2 billion in front of us over the next 10 years. Yes, 
ma'am, I do think we are investing in our system, with all due 
respect.
    Ms. Brown. Mr. English?
    Mr. English. Thank you very much, Chairwoman Brown. I think 
there are a couple of issues here. One, you should not just 
have a small segment of the population in this country or a 
small segment of the shippers who pay the entire freight. If we 
are going to take this on as a national policy, everyone should 
be involved in paying for it. It is too big for one thing, and 
the second thing is it is not fair.
    The second issue, I have heard that 18 percent, and I hope 
you will challenge that a little bit and found out if that 
includes the maintenance and upkeep as well. If that is 
maintenance and upkeep, that is not what I think you are 
alluding to as far as investment in infrastructure. Thank you.
    Chairman Oberstar. The Chairwoman's time has expired.
    Ms. Brown. Yes, sir.
    Chairman Oberstar. Mr. LaTourette. We have seven minutes 
remaining on a vote but only a handful have voted so far. So we 
have plenty of time.
    Mr. LaTourette. I thank the Chairman and I will try to be 
brief. I learned from my very brief tenure as the Chairman of 
the Rail Subcommittee not to mess with Congressman English, so 
I will not be asking you any questions today, sir.
    [Laughter.]
    Mr. LaTourette. Mr. Spitzer, following up on where the 
gentlelady from Florida led off. One of the arguments that is 
made by the advocates of re-regulation, and you sort of I 
thought in your testimony took a whack at the railroads for 
buying back stock and I was prepared to talk to you about 
DuPont's stock buy backs. But in answer to Ms. Brown's 
question, I think she asked the right question. And Congressman 
English, I will challenge it. I do not think it is 18 percent. 
I think it is 17 percent that railroads invest in capital 
expenditures, and that comes from the Surface Transportation 
Board. But you did in response to Ms. Brown's question, Mr. 
Spitzer, indicate that you do not have any problem with stock 
buy backs as long as they make investments. Do you know how 
much DuPont makes in capital expenditures based upon a function 
of revenue per year?
    Mr. Spitzer. Well, I mean, this year it will be over 5 to 6 
percent, in that range. But it is a different type of industry 
and I am concerned that perhaps we are getting a little bit off 
of the point. I am not an expert in national policy or how to 
go ahead and deal with the railroad funding issue. I am here 
saying that as a captive shipper I think there are some very 
serious imbalances, a very uneven playing field, and 
unreasonable and excessive rates. And to add on to Mr. English, 
the whole idea that the captive shipper ought to be the place 
through differential pricing where you fund railroad capital I 
do not agree with.
    Mr. LaTourette. Let me be clear. I want to agree with Mr. 
Harper's observation. I think that people that feel aggrieved, 
whether it is the railroads or the people that ship on the 
railroads, should have a place to go where they get treated 
fairly. And if that is what you are all here telling us, I 
could not agree with any of you more. And of the Surface 
Transportation Board, I was impressed by Chairman Nottingham. I 
think some of the changes they have made in small shipper and 
cost of capital are steps forward. But like anything else, you 
should be able to have a forum where you are treated fairly. So 
if that is what you are telling me, that is fine. I will tell 
you I cannot agree always on how you are getting there.
    That brings me back to you, Mr. Spitzer. One of the 
observations the railroads make, and it goes to the Chairman's 
opening statement when he set up and talked about that big map 
of all the land that was given to the railroad and everything 
else, is that they have some kind of national responsibility. I 
agree with that too. But they have a common carrier 
responsibility and they come to me on a pretty regular basis 
and say you know what, if we do not have to carry your 
chlorine, we are not going to have the exorbitant insurance, we 
are not going to do this. And so I do not think that your 
company or any other chemical company in this country would say 
you would trade a beefed up STB and lower rates if they were 
relieved of their common carrier obligation. Right? That is 
part of this mix that we are in, which is why people need to be 
treated fairly.
    And the last question, because the vote is pending. When 
the World Bank took a look at this in 1998, and it has actually 
be updated, their observation at the World Bank, from a guy 
named Lou Thompson, is ``Because of the 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 give the world's most cost-effective 
freight rail system. Unsubsidized U.S. frail rates are not only 
the lowest of any market economy, they have been falling every 
year since 1980 even though U.S. labor costs are high.'' And I 
would refer you to Figure 2 in Ms. Hecker's presentation from 
the GAO earlier today. Figure 2 shows that really the only 
sector that has seen an increase in rates since 1985 is the guy 
at the end, the guy in the ag business. Everybody else has been 
seeing rates go down.
    So I think that maybe I am going to leave this hearing with 
the view that rates are going down except for the ag guy who is 
having a problem with some of his stuff. But maybe the coming 
together thing here is having an organization like the STB that 
when you leave there you feel you have been treated fairly. Mr. 
Spitzer, do you want to say something about that?
    Mr. Spitzer. If I can, Mr. Congressman. I would not want 
you to leave with let us say a misimpression. We have not had 
our rates going down over the past 20 years. Our rates have 
been going up and that does not even account for all of the 
other so-called accessorial charges, rail cars that add on to 
it.
    Mr. LaTourette. I do not want to beat up on you, but my 
view is fairness. My steelworkers come to me and say that 
DuPont has cornered the market on something that is called 
neoprene, which I do not even know what neoprene is, but they 
need it to make rubber and that your company stands in the way 
of bringing in neoprene from Canada, Japan, and other places.
    So again, I leave this hearing, Mr. Chairman, with the 
belief that re-regulation of the railroads is wrong. However, 
if we can develop a system at the Surface Transportation Board 
or someplace else so that these folks feel that their 
grievances are at least being fairly dealt with, then that is 
something I can get behind. I thank you and yield back the 
balance of my time.
    Chairman Oberstar. Thank the gentleman. We do have two 
minutes remaining. I would say that if the purpose of this 
legislation were to impose rates, that would be re-regulation. 
But as Mr. Mulvey said, the Staggers Act reduced, and greatly 
reduced, economic regulation. What we are working on here is a 
process by which we can determine fairness in rate setting.
    Mr. Baker?
    Mr. Baker. I shall be brief and just make a statement, Mr. 
Chairman. There will be adequate time for our witnesses to 
respond in writing if they so choose.
    I just wish to observe that the bill that we have under 
consideration does address bottleneck reciprocal switching and 
the paper barriers, which have been mentioned by the various 
witnesses as important elements. If we are to assume that we 
may move forward with at least those essential elements, there 
is apparently one open door which the STB has provided us with 
the comment period on the capital asset pricing model. That 
being integral to rate decisions and a lot of other assessments 
the STB must make.
    They have held out earlier today that if you do not like 
the CAP M approach, what are the alternatives. There are some 
alternatives, arbitrage trading practice, for example, and 
there may be others. And Mr. Spitzer or any of the 
representatives at the table who have access to financial 
guidance could advise the Committee or, more importantly, the 
STB. Now their comment period closed September 13 but it does 
not foreclose or forestall what this Committee might do in 
moving forward.
    If there is a better way to bring about responsible pricing 
which blends the ability to make a profit with a regulated 
utility in this case, that is what we are looking for. Because 
from what I understand, the pricing models used to date was 
discounted cash flow, and for years past while the rest of the 
world moved on. They have said give us a better way to do this 
and we will consider it. Well, I do not want to let that 
opportunity pass by. We have never had this opportunity since 
Staggers passed. We may not get it for another 25 years. So 
among all the people who are the rail concerned stakeholders, 
this is a window for this Committee to act and for us to 
deliver to the STB a product that might make a great deal more 
market sense. With that, Mr. Chairman, I yield back.
    Chairman Oberstar. Thank you very much, Mr. Baker. Well 
said and thoughtfully said.
    We will excuse this panel and call the final panel for the 
day, panel III. We have three votes which could take as much as 
a half an hour. So we will resume sitting as soon as votes are 
concluded.
    [Recess.]
    [After 6:00 P.M.]
    Chairman Oberstar. The Committee on Transportation and 
Infrastructure will come to order and resume its sitting.
    We welcome our final panel, Panel III, including Mr. Jim 
Young, chairman, president, and chief executive officer of 
Union Pacific; Charlie Marshall, vice president of development, 
Farm Rail System; and William Rennicke, director, Oliver Wyman, 
Inc. The piece de resistance, as they say in French.
    Mr. Shuster. What does it mean?
    Chairman Oberstar. It means the main course.
    [Laughter.]
    Chairman Oberstar. That has many implications. Mr. Young, 
welcome. You have waited a long time today, you have been very 
patient, sat through all the previous testimony, and now is 
your turn.

 TESTIMONY OF JIM YOUNG, CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE 
  OFFICER, UNION PACIFIC; CHARLIE MARSHALL, VICE PRESIDENT OF 
  DEVELOPMENT, FARM RAIL SYSTEM, INC.; AND WILLIAM RENNICKE, 
                  DIRECTOR, OLIVER WYMAN, INC.

    Mr. Young. I feel like I have been working on the railroad 
today. Chairman Oberstar, Ranking Member Shuster, Members of 
the Committee, my name is Jim Young and as of January of this 
year I became chairman of Union Pacific Corporation. I 
appreciate the opportunity to testify today on behalf of the 
rail industry. I have attached the testimony of Wick Moorman, 
the CEO of Norfolk-Southern, to my written remarks. He had 
submitted testimony on behalf of the entire freight rail 
industry.
    Mr. Chairman, as you know, our Nation is facing an 
infrastructure crisis. Every mode is being stretched beyond its 
limits. You and your Committee are at the very heart of this 
debate and will play a critical role in solving this great 
challenge. My message today is a simple one. The results of 
your deliberations will determine how much investment is made 
in the private rail system and how much traffic gets shifted to 
the over-burdened highway system. Let me explain why.
    As the only transportation mode that pays for its own 
infrastructure, the rail industry must generate enough revenue 
to build new capacity while replacing existing infrastructure 
as it approaches the end of its useful life. Union Pacific is 
investing for growth. Our capital budget for this year is $3.2 
billion, the largest amount in history. We are making 
substantial investments in growth capital because we believe 
our financial returns will continue to improve to justify these 
high levels of investment.
    If we are going to continue to prudently invest in the 
capacity that our customers want and our Nation needs, we need 
some assurance that we can earn revenues sufficient to justify 
making those investments. Unfortunately, the current 
legislative and regulatory climate threatens those returns and 
makes future investment in additional capacity uncertain.
    Some of our customers will tell you they are paying too 
much for rail service and their prices should be lowered. They 
are advocating proposals that would in essence cap the rates we 
charge and shift railroads to a cost-plus rate regime that 
ignores the market, impairs service, and penalizes efficiency. 
There is an interesting dichotomy between what we are hearing 
in Washington and what I hear when I meet with the CEOs of many 
of those shippers, as I do regularly. I can tell you that for 
the vast majority of the CEOs their primary concern is whether 
we are investing to handle their future growth. What I tell 
them is that as our financial returns improve they will see the 
benefits in the forms of better service and more capacity.
    We are concerned about the Surface Transportation Board's 
recent proposal on the calculation of the industry's cost of 
capital. And while we have always supported the STB finding a 
way to streamline rate cases for small shippers, we are 
concerned about the board's new regime for bringing those rate 
cases. The board's new rate case regime will undoubtedly lead 
to lower rates for some customers and will adversely affect our 
revenues. This will be compounded by the board's new 
calculation of the cost of capital. The new calculation 
establishes a cost of equity level below similar calculations 
by economic experts in other agencies for network industries 
such as electric utilities. This also increases the amount of 
traffic subject to rate regulation and will force a reduction 
in our rates as calculated under the board's rate review 
processes.
    We have concerns with the approaches that the board is 
taking in these two cases and will continue to participate in 
the process. At the end of the day, it is clear the regulatory 
landscape has shifted and that our revenues will be effected.
    As a publicly owned company, we have a fiduciary duty to 
our owners to operate the company in a profitable manner and 
make prudent decisions regarding capital investment. The 
shareholders of Union Pacific will not allow management to 
invest capital in projects that have an unreasonably low rate 
of return. Since the inception of the rail industry, many of 
the challenges we have faced have changed. But one constant 
remains the same. We can only build and maintain the size rail 
network that our customers are willing to pay for. The 
decisions you and the STB make about our regulatory structure 
will control how much investment we will be allowed to make. If 
you believe, as we do, that there is a transportation 
infrastructure crisis, then we should be doing everything we 
can to accelerate investment.
    Our company and this industry have demonstrated that we 
will invest when the market demands it and when the returns 
justify it. Our country's freight railroads are finally 
approaching a point where the financial returns justify new 
investment. It would be tragic indeed if Government policy 
changes would step in now to stop the growth potential for a 
significant component of our country's vital infrastructure.
    That concludes my testimony. Thank you again for giving me 
the opportunity to represent the railroad industry. I would be 
happy to take any questions.
    Chairman Oberstar. If there is anything else you wish to 
add, all witnesses are cautioned to keep their remarks to five 
minutes, but you are certainly welcome to extend.
    Mr. Young. Thank you. I am sure I will have the opportunity 
with the questions. Thank you, sir.
    Chairman Oberstar. Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman. My name is Charlie 
Marshall. I am senior vice president of Farm Rail. Farm Rail is 
a 350-mile railroad in western Oklahoma. But I am here today 
representing the American Short Line and Regional Railroad 
Association, which is composed of about 500 small railroads all 
across the country. The short lines together operate about 
50,000 miles of track, we have 23,000 employees, and we blanket 
the Nation.
    I would like you to think about two characteristics of 
small railroads. One is that we do not go from A to B. We got 
to A and then we count on the big railroads to handle the 
freight the rest of the way to B. So we are intimately tied to 
the fortunes of the large railroads. The second characteristic 
is that a large part of the freight we carry is merchandise, 
things like lumber, and paper, and waste, and food products, 
and things that can, and do, regularly travel by truck. Indeed, 
we handle some 42 percent of U.S. merchandise carloads for at 
least some part of the haul, according to a study that a fellow 
from MIT made earlier this year.
    Now as you look at this merchandise business that we 
handle, one of the things that worries us is that it is one of 
the less profitable pieces of business that the big railroads 
handle. And when the big railroads run into a capacity crunch, 
as they have several times in the past several years, what they 
do is favor the most profitable business, like any rational 
operator would do, and they squeeze out the lesser profitable 
business. Well, we are the less profitable business. We are the 
merchandise. And if that happens, when that happens, the 
traffic that we handle will not move by us, it will move by 
truck.
    And that is our point here today. We urge this panel to 
think very carefully before adopting measures that would take 
revenue that could supply capacity away from the large 
railroads and thereby as an unintended consequence divert the 
small railroad traffic onto our crowded highways. Thank you 
very much.
    Chairman Oberstar. Thank you, Mr. Marshall. Mr. Rennicke.
    Mr. Rennicke. Thank you, Chairman Oberstar and Ranking 
Member Shuster. I am William Rennicke, the director at Oliver 
Wyman. Since I started my transportation career over 40 years 
ago as a brakeman on the bankrupt New Haven Railroad, I have 
been an active participant in both carrier operations and 
management as well as an advisor to the transportation 
industry, government, financial institutions, and users of 
transportation worldwide.
    In the late 1970s I was fortunate to be an active 
participant in the public and legislative process that led to 
the Staggers Act. I believe that Congress, shippers, the 
carriers, labor, and all other industry participants should be 
quite proud of the results of the Staggers Act and the 
subsequent restructuring of the U.S. rail industry. From the 
late 1960s to the mid-1970s, over half of the U.S. rail system 
was in bankruptcy or in financial distress. The Staggers Act 
turned the rail industry into a self-sustaining freight network 
and the U.S. regulatory and carrier model is now seen as a 
standard and benchmark for the freight systems worldwide.
    In the last 20 years, Oliver Wyman and our North American 
consulting competitors have actually made an industry out of 
exporting this success story to most foreign countries. In 
every country where we have worked, the objectives of 
restructuring have been to create a self-sustaining railway 
network that supports the domestic economy, facilitates 
international trade, and is funded as much as possible by the 
private sector. However, despite decades of efforts in other 
parts of the world, with the exception of the United States, 
Canada, and to some extent Mexico, no rail system anywhere in 
the world survives without direct or indirect support from the 
government and taxpayer. The billions spent by the U.S. 
Government to correct Conrail's situation was the last 
significant investment in the U.S. railroads.
    I believe proposed provisions of H.R. 2125 raise the issue 
of whether the United States wants a freight rail system to 
continue to be funded and developed by the private sector or 
will there be a need to shift some part of the funding 
responsibility to tax-based subsidies. The principles and 
policies of differential pricing are generally recognized as 
the most effective path to railroad pricing. There are, 
however, some unavoidable realities that are embedded in the 
characteristics of any large transportation network that is 
both complex and where market-based pricing is used to maximize 
contribution and avoid the need for taxpayer support.
    First, on pricing. For any mode or sector where pricing 
policy permits differential pricing there will always be some 
users who pay more and some users who pay less. Human and 
economic nature being what it is, no one in the United States 
or any other economy likes to be in the differential pricing 
bucket that is at the highest or higher than others. No one 
celebrates paying higher prices. No traffic manager or shipping 
executive receives a bonus or is compensated for being the 
highest revenue to variable cost ratio.
    It is to be expected that there will be a continuous and 
natural tendency of those parties paying the higher ratios to 
try and modify the pricing structure to restrict the workings 
of differential pricing. It has been my experience over the 
last 25 years however that the differential pricing does not 
work when regulation cuts off one end of the range and tries to 
move as much as possible artificially to the lower levels.
    Service. Overall service in the U.S. freight rail system is 
the envy of the world and many U.S. network planning and 
business practices have become global benchmarks. For example, 
in the United States there are over 2 million origin-
destination combinations, and in 2006, 1.31 million rail cars 
moved 32.1 million carloads carrying almost 2 trillion tons. 
Even in a situation where some are unhappy about being on the 
high end of the rate curve or have experienced the frustration 
of even one service failure, it is important to recognize that 
the U.S. freight rail system is still the best in the world and 
I believe has the opportunity to be even better.
    Here are several facts.
    As I think it has been pointed out a couple of times here 
this morning, by a wide measure, if you measure just the 
freight rates, the U.S. freight rates are the lowest in the 
world, and to some extent Canadian freight rates. No taxpayer 
contribution is required for either of the freight service 
infrastructure.
    The graphic I have up on the board shows the variable costs 
or the out of pocket costs the governments must pay in the 
countries that are listed on that chart for infrastructure. And 
as you can see, in some case, on the lower end of that chart, 
the users are paying only 10 to 15 to 20 percent of the cost of 
the infrastructure. There is no mention of capital on that 
because 100 percent of the capital cost in those countries is 
funded by the government. So as you looked at the prior chart I 
had where the freight rates are the lowest, not only are the 
freight rates the lowest in the United States, but when you 
compare them against foreign countries, that measures the 
freight rates that the customer is paying but then also the 
taxpayer, as I presented in this chart, is paying primarily for 
the infrastructure and some other kinds of subsidies.
    The U.S. system is the most productive in the world. The 
U.S. railroads reinvest more capital in infrastructure and 
equipment than almost any other sector in the economy. And I 
think the graphic on the left shows, whether you think it is 17 
percent or 18 percent, that is a phenomenal amount of the 
individual dollar revenue that comes into a railroad to be put 
back into the property.
    The chart on the right is even more interesting. It shows 
the return on equity or the returns the different industries in 
the United States earn. And while the railroads are putting the 
largest percentage of their revenue into investment, they 
basically have the lowest return of the large industries.
    The other important point to take from this chart, and this 
gets into the realm of maybe unintended consequences, is that 
every one of the shipper groups, with the possible exception of 
agriculture, who spoke to you today are in an industry that has 
a far larger or far greater return on equity than the 
railroads. In the financial markets, when the railroads go to 
attract funds, they are not just competing against other 
railroads, they compete against all industries. So every effort 
that is made, for example, to move freight rates is basically 
going to take any of those bars in chemical or petroleum or 
utilities or automotive and push it farther to the right and it 
will take that small bar on the left and push it to the left. 
So, in essence, the legislation also may have the possibility 
of being a redistribution of where returns are. Thank you.
    Chairman Oberstar. All right. Thank you for those very 
interesting and instructive charts and for your testimony.
    Mr. Marshall, you set the record for testimony today for 
brevity and to the point, and made your point most effectively.
    Mr. Young, on behalf of the industry, do you agree with or 
disagree with Dr. Mulvey's observation that the Staggers Act 
greatly reduced economic regulation of the industry?
    Mr. Young. I agree it reduced economic regulation of our 
industry. If you look at it in total, I also agree it was a 
tremendous success. It saved this industry. There is no 
question in terms of where we were heading in the 1980s and 
where we are today.
    Chairman Oberstar. I certainly concur. And I say that, in 
furtherance of my opening remarks, as a Member of the House at 
the time, rubbing worry beads about was this the right vote to 
make. It was a good vote to make. It was an era of deregulation 
that the Congress engaged in at that time.
    The railroad sector has such an evocative force with the 
American public. Hardly a county in my district, and there are 
hundreds, maybe thousands of towns across the Nation, hardly a 
town that does not have a railroad and thousands that do have a 
memory of the railroad era, either a caboose, or a locomotive, 
or a freight car, or in the iron ore mining country iron ore 
carrying cars. And time and again when the economy flounders, 
people will say well isn't it time that we make a big 
investment in railroads and have the Government put some money 
in and build more rail track and create thousands of jobs. And 
I explain to them that we do not do it that way. But I say that 
because there is such a powerful appeal. There was a very 
effective ad that the Association of American Railroads ran in 
the 1970s and into the 1980s of a former astronaut whose 
concluding statement was, ``America's railroads, who needs 
them. We all do.'' And we do.
    But in the deregulation language, we reduced but did not 
eliminate Government oversight of rail rates and service. In 
1930, the freight rail network counted 249,000-plus miles. By 
1957 that diminished to 220,000. By 1970, it was 202,000. By 
the Staggers Act, it was 176,000 miles. Today it is just 
slightly less than the mileage of the National Highway System, 
which is 156,000 miles, and 140,000 miles of rail network 
including short line and regional railroads. Clearly, in this 
era of resurgence, it is not enough. We need more miles of 
track. We need more double and triple tracking, as many of your 
association members and Union Pacific have been doing. But in 
this process there are concerns, as you heard voiced all 
throughout the day, of service and of rate increases to captive 
shippers, and a very cumbersome, complex process by which the 
Surface Transportation Board, remnant of the ICC, remnant of 
the regulatory era, with very limited, focused authority can 
deal with.
    And so I ask the question of you that I asked of the STB 
panel. Can you envision a rate that is so high a percentage of 
variable cost that the board should use its power to declare 
the rate unreasonable?
    Mr. Young. I cannot envision a rate that high. Although one 
of the things that we need to think about is what rate should I 
charge for chlorine moving on the railroad. And I will give you 
an example. In terms of the small shipper process that they 
have in play today, they are going to treat a load of lumber 
the same as they will treat a load of chlorine. And we know the 
risk profile on chlorine. At Union Pacific we handle 36,000 
carloads of toxic inhalants a year. That is chlorine and 
anhydrous ammonia. And again the question there is I am not 
certain you could set any rate that would justify hauling that 
business.
    Chairman Oberstar. When setting rates, and you make a very 
good comparison of a toxic substance and one that, logs, for 
example, that would not be toxic. It would be damaging if it 
fell on people but not toxic. And rate setting there is a 
challenge for your industry. And the purpose of this hearing is 
not to inquire how you do that. But when you do, you do not 
have to have approval of the Surface Transportation Board, do 
you, to set a rate.
    Mr. Young. We have to work within the regulations that we 
operate under.
    Chairman Oberstar. But the setting of a rate by a railroad 
does not require approval by the Surface Transportation Board.
    Mr. Young. That is correct. Yes.
    Chairman Oberstar. That rate comes into question only if a 
shipper or consumer contests it; is that correct?
    Mr. Young. That is correct.
    Chairman Oberstar. So if there is a process in place for 
challenge of rates, then should not that process be equitable 
both for the railroad and for the challenger?
    Mr. Young. I think the changes that are proposed by the STB 
will help address some of the concerns you have heard from 
small shippers.
    Chairman Oberstar. But we have discussed today, and you 
have heard the discussion, of the filing fee just to get in the 
door to file a complaint. Do you find the filing fee system 
that is currently in place equitable? Burdensome?
    Mr. Young. I think the changes that the STB made, including 
when they looked at their filing fees here--again, the 
discussion was one on the costs at the STB. I do not think they 
are unreasonable. We talk about small shippers. I find that 
DuPont has three rate cases at the Board. I quite honestly do 
not see them as small shippers and they certainly have the 
capability to cover the costs of that fee.
    Chairman Oberstar. And the timeframe for pursuing a case, 
many of these go three years, some at least four years. Do you 
think that is a reasonable period of time in which to resolve a 
case?
    Mr. Young. No, I do not. I think whatever you can do to 
accelerate the resolution is fine. It would be a positive.
    Chairman Oberstar. Good for the railroad, good for the 
shipper, good for the consumer. And in your judgement or in 
your review of the world and economic sector in which you 
operate, should there at all be a rate reasonableness appeal 
process?
    Mr. Young. Well, the question becomes one on what are the 
options for a customer. When we look at Union Pacific, I take 
our pricing very seriously. We try to understand what does it 
mean to the customer, what does it mean in terms of their 
competitive position, what are the alternatives. It does us no 
good in our industry to make a customer non-competitive. I need 
to have growth long term. The question becomes what is 
reasonable overall in terms of what will the market bear. And 
many of my customers, I heard today off in discussions that 
there is no competition. I have lost hundreds of millions of 
dollars in revenue in the last year alone to other railroads, 
to the highway truckers, to business moving through Mexico, 
business coming over Canada, container business moving all 
water around the Canal to the East Coast and to the rivers. 
There is a substantial amount of competition when you look at 
the industry today.
    Chairman Oberstar. My question goes to the fundamental 
issue of whether there should be in the view of the railroads, 
your brothers and sisters in the rail business, or should there 
be a process as exists in aviation where airlines just charge a 
fee and enter a market without any review by the Department of 
Transportation?
    Mr. Young. I am not quite certain what your question is.
    Chairman Oberstar. I am asking whether you disagree with 
the fundamentals of the existing system or whether you are 
prepared to continue to live within it.
    Mr. Young. Well, we will live within it. The question 
within the system at the end of day here is what type of 
investment, how much investment do we want in the railroad. If 
you look at the system as we are defined today, and it is not 
clear to me if you are talking about what you are proposing in 
the new bill, the fundamental question will be what return will 
be set and how much investment we want in the business.
    Chairman Oberstar. Where in the introduced legislation does 
the proposed bill set rates for the railroad?
    Mr. Young. Well, if you look at I believe it is----
    Chairman Oberstar. Where does it set rates?
    Mr. Young. Page 15, Section 302, it talks about improvement 
of rate reasonableness standard.
    Chairman Oberstar. It does not set rates. It deals with the 
process.
    Mr. Young. What it has is a formula that is a cost-based 
formula that considers variable and fixed cost and an adequate 
return. Maybe the term rates is not the appropriate term. It is 
fixing the investment, the margin, the profitability of the 
business. But either way it may not necessarily reflect the 
market.
    Chairman Oberstar. It does not fix. It deals with the 
process. That is the difference that we have over the way your 
association reads the legislation and the way the legislation 
reads. In your report to your workforce, you say a Federal 
bureaucracy would determine who could use which tracks 
regardless of who owns them, and it would also set the rates 
that the owner of the track could charge. We are dealing with a 
process, not setting rates in this legislation.
    Mr. Young. Mr. Chairman, the way I look at what is 
potentially out there is expanded, let us not call it re-
regulation, expanded perspective or process on the rates that 
can be charged in a particular area. It will be a cost-plus 
formula. We have within the bill a proposal that the Government 
will determine areas that lack competition. That brings into 
account reciprocal switching, trackage rights, which the 
Government again will determine how are those rates set when 
you look at it. Let us forget we are talking about setting 
rates. What we are talking here about is setting the returns on 
the business.
    Chairman Oberstar. The bill does not deal with trackage 
rights.
    Mr. Young. I think in the area where you talk about the 
areas of inadequate competition it talks about terminal 
trackage rights or some type of access in terms of the network.
    Chairman Oberstar. But does not set them.
    Mr. Young. Well, somebody will determine the----
    Chairman Oberstar. But there is a process in which 
railroads will have a voice, in which shippers will have a 
voice, and consumers will have a voice.
    Mr. Young. Mr. Chairman, I think the question becomes one 
of are we confident of the process--again, ultimately the 
challenge you and your Committee have is to decide how much 
investment do we want in the rail network. And the question 
becomes one of how will we peg whatever that return is, how 
will we peg the margins in the business, how do you incent 
productivity and investment will flow. There is no question in 
my mind today. My first year as president of Union Pacific I 
went into my board three times and asked for an increase in 
capital. My board supported me 100 percent. They supported me 
under the perspective that we were starting to see the 
financial returns in this business move up. We had a debate 
about should we do it now or should we wait. We said we need to 
do it now under the context that we can continue to improve 
these returns. My concern again is simply we are introducing a 
lot of uncertainty. I am making decisions on the Sunset 
corridor, you know that corridor, it runs from L.A. to El Paso, 
an old Southern Pacific railroad, it should have been double 
tracked years ago. We are making a $1.5 billion bet that the 
future financial returns can support that investment.
    Chairman Oberstar. One factual question. In your statement 
of capital investment for the railroad and generally for your 
association, how much of that figure is maintenance and how 
much is new track and new locomotive and new rail car? What 
percentage?
    Mr. Young. The 18 percent, 17-18 percent, UP is actually 
investing 20 percent this year but we will use those numbers, 
it is all either brand new expansion or replacement of assets. 
If you want to put maintenance in, it is 40 percent of the 
revenue dollar.
    Chairman Oberstar. Thank you. Mr. Shuster.
    Mr. Shuster. Thank you, Mr. Chairman. First I wanted to 
make a comment reflecting back on your decision in 1980. As we 
have moved through this process, I have got my worry beads out 
and I hope that we are going to do the right thing and do not 
do something that has unintended consequences. Because as I 
look back and study what has happened over the 27 years, I 
think it has been a great success.
    So I am very concerned about how we move forward and making 
sure that we do not overstep and cause great harm to an 
industry that, as Mr. Young said, is just now beginning to have 
the returns to make these bets. And they are bets, because you 
have uncertainty everyday in the economy; is the economy going 
to continue to grow, is it going to go into recession, what is 
going to happen. But now you also have to deal with a 
regulatory process that is uncertain at best and certainly can 
use some improvement.
    But I turn to Mr. Rennicke. If you would, I see your 
company Oliver Wyman deals with shippers, it deals with the 
transportation companies. You yourself, and we have had a 
discussion, you have dealt with shippers and rail companies. 
Can you talk about some of the shippers that you have dealt 
with. Is half of your business shippers? Is 10 percent of your 
business shippers? I am trying to establish your credentials 
here before the Committee.
    Mr. Rennicke. If you look at our overall firm, 
transportation is about 10 percent and the other 90 percent 
basically works for auto companies, chemical companies, 
utilities, et cetera. So, in general, the company is oriented 
that way. I spend most of my time now working primarily for 
financial institutions that are looking to learn more about how 
the railroad industry works. I would say that is about 70 
percent of my time. Probably 20 percent of the time is working 
for some shippers who are interested in is there a different 
way that we can approach, other than through litigation or 
regulation, our position in the industry. Most of that has been 
in coal and utilities and food products, consumer products. The 
other 10 percent is time where I actually work for carriers, 
both trucking companies and railroads.
    Mr. Shuster. You deal across the gamut. Are you familiar 
with Mr. Spitzer's testimony? On page 9 there is a table 
dealing with captive shippers, page 9 I believe it is, and how 
they define captive. Are you familiar with that?
    Mr. Rennicke. I have looked at that a number of times 
because it has actually been on a number of websites. As best I 
can determine from that, how they define captive I believe is 
the average of rates above 180, and non-captive are the rates 
below 180. So what this is to some extent is a little bit of a 
self-fulfilling prophecy. Are farm products captive? That is 
basically an average rate, median or something that is above. 
We actually talked to the company that did this several years 
ago when they first came out to see did they do a survey, did 
they actually try to go customer to customer and find out if 
they were really captive or not captive. And as best we could 
determine from what they said, it is a pure mathematical 
exercise using the spread of rates that are in the----
    Mr. Shuster. Right. In your experience, are there customers 
that only have one railroad serving them that are paying less?
    Mr. Rennicke. Absolutely. I think the comments today, there 
is a whole series of competition that people do not think of--
product, source competition, moving into Mexico, Mr. Young 
mentioned all water. They are starting to build 12,000 TEU 
ships. And part of the reason why the liner companies are doing 
that is maybe to avoid land movement of containers. So you may 
find many shippers who basically are paying rates that are far 
lower, have competitive options in that regard that are not 
rail.
    Mr. Shuster. Right. In your view, H.R. 2125, the bill in 
question here, do you believe that it will in the end reduce 
the rate to returns and the costs that can be recouped, the 
prices that are going to be charged over the railroads?
    Mr. Rennicke. I think the biggest concern that I have, in 
all due respect with the process that you are going through in 
legislation, is that when you have an undefined process the 
financial community looks at that as being risk because they 
cannot get their arms around it.
    As I said, in the last couple of years we have worked 
extensively for many of these. You know, 24 months ago an 
equity investment in the railroads may not have been an 
interesting thing. Now pension funds, not all just hedge funds, 
that name was mentioned a lot today, but these are pension 
funds, teachers' pension funds, retirement funds, as well as 
hedge funds and private equity firms, they are asking us to 
look at the carriers. Their first question when this bill came 
out earlier was what does all this mean. Do we have to start 
dealing now discounting for uncertainty? Because there is a 
whole bunch of undefined things here. There is trackage rights, 
there is haulage, there is the definition of what is really in 
the non-competitive area versus what is in the competitive 
area. All of those things create risk and the grand daddy of 
them all is final offer arbitration, which is Monte Carlo, 
almost baseball arbitration. It is almost a roll of the dice to 
figure out how those kinds of decisions are made.
    So all of that creates risk and I believe will reduce their 
interest or it will increase the cost of capital because they 
will risk adjust the funds that they are lending to the 
railroads.
    Mr. Shuster. All right. I see my time is up. I am going to 
ask one question if Mr. Young if that is okay.
    Chairman Oberstar. Okay. Go ahead.
    Mr. Shuster. Okay. Thank you. Mr. Young, I continue to hear 
people saying the railroads are buying back stock. I have some 
idea of that, but I wonder if you might be able to explain 
this. And you need to use the KISS principle here--keep it 
simple. Why are you buying back stock? And I think today 
somebody was saying that railroads are buying back stock and 
that is somehow a bad thing. I do not believe it is. But if you 
could explain it so I understand it better and we can get it on 
the record.
    Mr. Young. Well, buying back stock is very common. In fact, 
in the S&P 500, last year 300 companies bought back stock. In 
fact, of the 23 members of the American Chemistry Council that 
are in the S&P 500, 21 bought back stock. In fact, I think the 
total I read was almost $17 billion. In fact, one of the 
customers represented up here accelerated their program. It is 
a very common measure to provide improved returns to 
shareholders.
    Union Pacific this year announced our share purchase 
program, the first time we have had one in many, many years, 
and it was based on this kind of logic here. The first thing we 
looked at is investment in the business. Where are those 
returns. And $3.2 billion was the test. What do we need to do 
with customers, how to think long term. The next thing we did 
is start to think about how do we accelerate returns for Union 
Pacific shareholders. And that comes from a combination of 
share repurchase. What it does, it takes shares out of the 
market, increases average earnings per share, stock prices go 
up, shareholders see a return. It is actually pretty simple 
logic that is out here.
    I will tell you, Congressman, no matter how you cut the 
returns in the railroad industry, they are still below the mean 
in the S&P 500. Dividend yields, return on assets, the dividend 
payout ratios that they have, return on equity. The ACC today, 
when you look at it, the average return in equity of those 
companies was around 20, 22 percent. UP this year was 11 
percent.
    Mr. Shuster. So in essence, what I understand, when you are 
buying back stock it makes it more attractive for people to 
invest in your company, which gives you more capital to do the 
things you need to do.
    Mr. Young. What it does is it boosts earnings per share.
    Mr. Shuster. Final question. The cost of capital, the STB 
has come up with a new way to view that. My understanding is 
that they are taking their lead from Wall Street and Wall 
Street calculates the cost of capital differently from the 
railroad industry. Can you give me a little bit of background 
on that and your view. Or is that not accurate and you view 
cost of capital the same as folks on Wall Street, the analysts.
    Mr. Young. Well, there is not a Wall Street analyst out 
there that says I am earning my cost of capital. What they look 
at in the industry, there are a lot of different methods, 
discounted cash flow is one, the CAP M model. In theory the CAP 
M model and the discounted cash flow model should move the 
same. But there are a lot of assumptions that can be made in 
that CAP M model that can really cause a pretty major 
fluctuation in the results. Any model that takes the cost of 
equity and literally cuts it in half I have a concern with in 
terms of long term. I internally look at the cost of capital 
for the Union Pacific long term as 10-plus percent. We have a 
long ways to go.
    Mr. Shuster. And so again, what Wall Street is doing, they 
are using a different formula. You mentioned they are cutting, 
I do not quite understand, they are cutting it in half?
    Mr. Young. No, no. The new methodology. Again, CAP M and 
discounted cash flow should move together at some point. The 
variables are the assumptions that go into the equation, like 
the risk premium on equity. My point is when the STB results 
came out and you looked at the cost of equity compared to the 
discounted cash flow and CAP M, you cut the costs almost in 
half. That is a significant change that concerns me. Because 
ultimately what will happen is you are going to set the returns 
that you want for the industry. That will drive investment. The 
math is very straight in terms of as returns go up or go down, 
capital investment follows.
    Mr. Shuster. Okay. Thank you very much.
    Chairman Oberstar. Ms. Napolitano.
    Mrs. Napolitano. Thank you, Mr. Chair. That is a little 
confusing because I do not understand a lot of the terminology 
in the dialogue that was just going on. But I would refer to 
the recent comments that you made to STB where you state the 
board's new calculation of cost of capital is mistaken both 
technically and from a public policy perspective. Of course the 
STB announced that it intends to adopt the cost of capital 
calculation method closer to what is used in Wall Street. Why 
do you feel this is not fair or that the board should not do 
this?
    Mr. Young. Well, again, Congresswoman, the assumptions you 
make in these methodologies, and they can be fairly 
complicated, can have a wide range of results.
    Mrs. Napolitano. Based on?
    Mr. Young. Based on assumptions on what the risk premium is 
for equity, what is an investor willing to accept by investing 
in railroad equities. My point with all of this is if you look 
at ultimately what the two methodologies show on cost of 
capital for the industry, there is a huge difference. If you 
look at what was being used before by the STB and the CAP M 
model today, it is almost 200 to 300 basis points, that is 
percentage points difference. That is a 20, 25 percent 
difference, and it is lower. Ultimately, if the cost of capital 
is where this industry moves or where regulation moves, it will 
control how much investment is made in the business.
    Mrs. Napolitano. Anybody have a comment on that?
    Mr. Marshall. May I add something on that. I have a sort of 
layman's view of revenue adequacy and cost of capital. That is 
if you see people buying railroads and then see them taking 
money out of railroads, that says that the railroads are not 
earning enough money. If you see Warren Buffet buying 
Burlington Northern and then Burlington Northern says next year 
we are going to build more track because we are going to earn 
money on the track, that is saying that they are earning their 
cost of capital and are revenue adequate.
    If you have some money and you are trying to decide whether 
to give it to Jim Young to put in his railroad or give it to 
one of the other industries that was up there on the chart that 
earns more on its investment, you might want to do a little 
further analysis, but presumptively you would go with the big 
numbers rather than with Jim. And when we get our business up 
so that we are earning as much money as other people do, then 
you would be more likely to send money our way. So that is sort 
of the gut check that I would use on whether what is going on 
at the STB is the right thing to do.
    Mr. Rennicke. Thank you. Just to echo what Mr. Marshall 
said. And I think that chart had a good deal of meaning, which 
is why I put it up there. I think the railroads are lagging the 
other industries right now. So in a competitive marketplace 
where, again with the dealings I had with those funds, this 
week they are interested in railroads, the last 20 or 24 months 
they have been interested in railroads. But the fact that they 
came in, they could also leave very quickly if they have a 
sense that basically the risk profile and the returns are going 
to get out of whack.
    They represent billions of dollars of pension money, a lot 
of it is pension money, and they have an obligation they see. 
They make their money on making money for the people who have 
invested in pensions. And if you show them a high risk 
situation or if there is a lot of uncertainty in a particular 
path, they are going to walk away from it and they are going to 
put it into those other industries that traditionally have had 
rates of return that are much higher. Look at petroleum on 
there, it was three times the rate of return of the railroads. 
So they would be much safer putting it in petroleum or 
petrochemical companies or chemical companies than they would 
in putting it in the railroads.
    Mrs. Napolitano. I would beg to differ with you on a 
personal basis.
    Mr. Young, the recent GAO report found that railroads were 
transferring many costs traditionally born by the railroads 
onto the customers. Maybe that is one of the reasons why you 
had banner years. But let me tell you, I have heard from some 
of your customers. Can you discuss some of these costs and why 
UP has decided to shift them onto the customers.
    Mr. Young. Well, let us take freight car ownership. That is 
one that has been talked about quite a bit today. First of all, 
there is a different rate for a customer that owns their own 
cars versus the railroad. There is a lower rate if you own your 
own cars.
    Mrs. Napolitano. Roughly, sir, what percentage are we 
talking about?
    Mr. Young. It will compensate them for the cars in terms of 
their capital investment. In fact, in many cases, some of the 
customers, their credit rating was higher. They could actually 
borrow at a little bit lower rate to finance those cars. But 
that was not the reason why what has happened here. If you look 
at the capital needs in the industry, and the issue is 
replacing assets, in terms of what we are faced with, the first 
priority where we put capital is in the ground--building our 
own highways, maintaining those highways; the second place is 
locomotives; and the third would be freight cars. In fact, if 
you get that order wrong, your railroad is not as efficient, it 
is slower, and you end up needing more cars. So the first place 
is in the infrastructure. It is a simple prioritization.
    The capital requests that we look at every year in the 
railroad far exceed what we spend. And in a priority order, we 
said we have got to get it in the highway first, locomotive 
second, and in many cases our customers are willing to work and 
assume some of that investment risk as long as I reduce their 
rates. A great example of that risk right now. I have 20,000 
freight cars sitting idle. I heard some discussion today about 
grain sitting on the ground. It has nothing to do with the 
railroads. It has everything to do with the markets. But that 
is the kind of risk that some of our customers were willing to 
invest in.
    Mrs. Napolitano. And I got into rail cars because my 
concern is that most of them, I do not know if it has changed, 
are not built in the United States. We have lost that 
manufacturing capability. The other question that comes to mind 
has to do with the demarge. Like I said, I had two customers in 
my area, your customers, that had complained. In fact, they 
were in litigation if I remember correctly. Do you feel that 
shippers unfairly incur those demarge charges on rail cars that 
are left in the railroad yards due to delays or early 
deliveries or are just left sitting on their private property 
because the railroad cannot pick them up and then the shippers 
end up paying for that demarge.
    Mr. Young. Congresswoman, I would agree with you demarge 
was the number one complaint that I had from customers if you 
go back two, three years ago. We worked hard to simplify it to 
take a lot of the complexities out. But the fact is the 
railroads were the lowest cost of warehousing for many 
customers for years. When you had excess capacity, having a 
freight car loaded with lumber that sat on a track for four 
days was a pretty low cost for many customers. With capacity 
now being very tight, the whole logistics chain must get more 
efficient. I will give you an example. If I show up on a Friday 
afternoon with one customer, they have chosen not to unload on 
the weekend, so those cars will sit until Monday. I have other 
customers that invested in turning those assets. Demarge is a 
piece of that that says I am willing at the end of the day to 
be a temporary warehouse but there is a cost for that. And it 
really should be reflected in terms of the logistics chain.
    Mrs. Napolitano. Back in the 1980s when I was on local 
council, I can remember having to call the railroad because 
they were storing those cars behind people's homes for many 
days at a time. That was back then and I have not heard that 
complaint here, so I am assuming that has been one of the 
things that you have addressed in dealing with some of the 
issues that you have faced.
    Mr. Young. That is correct.
    Mrs. Napolitano. The other area is, I am assuming part of 
your cost is new technology for communications in order to be 
able to move your cars more efficiently.
    Mr. Young. That is correct. We invest in--really, a lot of 
this is about safety in terms of wayside detectors. You have 
the traditional hot box detectors that would read a wheel if 
you had a problem. We are looking at acoustic detectors today, 
very advanced in terms of reducing accidents. It is a 
technology investment but, quite honestly, it more than pays 
for itself in terms of improved safety.
    Mrs. Napolitano. Is there new technology being utilized to 
be able to determine whether or not you have any problems, say 
faced with some kind of a terrorist attempt?
    Mr. Young. Well, the closest we could look at would be 
maybe GPS in terms of some of the tankers. But I will tell you, 
when you operate a 33,000 mile factory out in the open, it is 
pretty tough in terms of ensuring complete security for the 
product moves. We have cameras in key locations, we are doing 
much more visual inspections, advanced notice in terms of cars 
moving. But I haul, as you know, a significant amount of toxic 
inhalants in our system and we are doing everything we can to 
keep them as secure as we can.
    Mrs. Napolitano. Certainly. I would like to submit other 
questions for the record, Mr. Chair. And with that, I thank you 
very much and it is good to see you again Mr. Young.
    Mr. Young. Thank you.
    Chairman Oberstar. The gentlewoman's questions will be 
received and submitted to witnesses for a response to the 
Committee.
    The Chair recognizes the gentleman from Ohio, Mr. 
LaTourette.
    Mr. LaTourette. I thank the Chairman very much. And I want 
to thank you, Chairman Oberstar, for having this hearing. It 
has been a great opportunity for me to reacquaint myself with a 
number of the railroad issues. As the Chairman knows, because 
of my work with the Chairman on Amtrak and with the railroad 
industry in the last Congress, I have been promoted to the 
Coast Guard Subcommittee now and so I do not get the chance now 
to involve myself in these issues. But one of the things that I 
enjoy very much about the Chairman is not only is he bilingual, 
but he has a great sense of history, institutional history but 
also history, and he also asks great questions.
    Mr. Young, I want to go back to a question that the 
Chairman asked just to make sure that I am clear in your 
answer. When former Congressman English was here--and I said 
last year when he appeared before the Subcommittee that if I 
was running an association in Washington I would hire him 
because he is like a firecracker in representing his members--
but he intimated that we should make sure we inquired of you on 
that 17 percent figure, I think Ms. Brown used 18 percent, you 
mentioned 20 percent, whether somehow, he did not say you 
padded it, but somehow that it not only included new build-
outs, but it also somehow had a maintenance figure. And just to 
be clear, if you put maintenance together with your capital 
investment in infrastructure, what is your railroad spending?
    Mr. Young. At UP, $3.2 billion this year for capital. Of 
that $3.2 billion, $2.2 billion would be replacing assets that 
have worn out. The other billion would fall into the category 
of absolute new, going from single track to double track, 
double track to triple track, or locomotives. The percent that 
we had talked about, unfortunately, in a lot of cases the term 
is maintenance capital, but that includes taking a 30 year old 
piece of railroad or a 35 year old tie and replacing it. That 
is not maintenance. We have to make a decision to put those in. 
Now if you talk about another piece which is ordinary 
maintenance in terms of ensuring that the are bolts tight, it 
is like changing oil in your car, those numbers add up to about 
40 percent of every revenue dollar that we spend. It covers 
both replacing existing assets, expanding new assets, and 
maintenance.
    Mr. LaTourette. Okay. I thought that is what you said. And 
I want to talk a little bit about, I got into it with the 
DuPont fellow, but this common carrier obligation. I think the 
Chairman is right, that given the history of the railroad 
industry in this country, there is sort of a public 
responsibility. Which is why I think we still have this common 
carrier obligation on behalf of the rails. Is carrying toxic 
inhalants a money-maker for your railroad?
    Mr. Young. You cannot make enough money. It is such a high 
risk. And you know the safety record in the railroad industry 
is very good. It is what is called six sigma, or greater. But 
the problem is one accident in the wrong location, and forget 
about the financial consequence, you talk about the lives that 
would be lost. You cannot charge enough.
    Mr. LaTourette. Let me, when we had hearings on this we 
talked about positive train control, which is where a lot of 
the railroads, I think BNSF calls it something else just 
because they are difficult in that regard. But have you done an 
evaluation as to what it would cost to install positive train 
control on your railroad?
    Mr. Young. The latest numbers we are looking at, it could 
be close to $800 to $1 billion.
    Mr. LaTourette. And one of the purposes, it is not the only 
purpose, but one of the purposes is to make sure that we do not 
have disasters or accidents like Granitville and Minot, North 
Dakota, dealing with toxic inhalants. When the last panel was 
here, and I have not heard anybody dispute it, Ms. Hecker was 
here on behalf of GAO and she took a look and she has as Figure 
2 what has happened to railroad rates in this country since 
1985. And except for the lentil guy, and I suggest maybe you 
ought to get together with the lentil guy and the ag guys, 
everybody has gone down. Rates on our Nation's railroads for 
motor vehicles, miscellaneous mixed shipments, and coal have 
all decreased.
    And so that I think brings me to the question, the crux of 
this hearing. And we had a hearing in the Coast Guard 
Subcommittee and I am very sensitive to this issue. The 
merchant mariners in this country were making the allegation 
that because they were losing a lot of cases they felt that the 
administrative law judge system within the Coast Guard was 
rigged in their favor. And to me the crux of this hearing, and 
it is not the Chairman's intent, but the complaint that some 
shippers are making is because there are only seven Class I 
railroads in this country, that somehow those seven Class I 
railroads are taking advantage of people that have no rail 
opportunity, no rail option. And we had testimony about 
intermodal water, trucks, things like that. But I am sensitive 
to the guy that is in North Dakota someplace that cannot ship 
stuff by truck reasonably to Ohio. But that somehow your 
industry is taking advantage of those people that have no other 
choice. And really on behalf of the industry, I would invite 
all three of you, but start with Mr. Young first, is that what 
you are doing?
    Mr. Young. Absolutely not, Congressman. I said earlier I 
take our pricing very seriously in terms of understanding what 
does it mean ultimately to the customer. Unfortunately, if you 
look at the past 20 years, the pricing that we saw, 95 percent 
of it went back to the customer in terms of productivity. As 
you saw the one chart earlier, you have a 100 percent increase 
in volume with little capital investment is not sustainable 
going forward.
    The discussion about taking advantage of a customer, we 
have had some 100 percent price increases. I know every one of 
them that we have at that kind of level. If you look at it, I 
will tell you the example usually of what you see. You have got 
a long term contract, no price escalator, fuel was 70 cents a 
gallon. In many cases we try to work with our customers to help 
them understand that that is not what is out there today. 
Yesterday we paid $2.40 a gallon for fuel.
    So what you have is a contract that really had no pricing 
over a long time and now it comes up, it is due. At a minimum, 
fuel recovery in many cases can be a 40, 50, 60 percent price 
increase. And no customer, I have not had a customer thank me 
for a price increase. And for many of my customers, what they 
want is to know where I am putting investment and what we are 
doing for the service. Again, I cannot sit here and explain to 
you why a 100 percent price increase makes sense. But if you 
step back and look at the reality in terms of where we have 
been and where we are going, it is very, very real.
    Mr. LaTourette. And before I turn to the other gentlemen on 
that question, with the Chairman's indulgence because I am a 
couple minutes over. I recently saw an ad in one of the 
political newspapers here on Capitol Hill, Mr. Young, and the 
quote was that the railroads walked off with over $6 billion in 
customer fuels charge money. Can you tell me what your 
perspective is from your industry since you are representing 
your industry on that question.
    Mr. Young. Well, thank you for asking that question, 
Congressman. When I read that ad, I have to tell you, I really 
had to contain myself. I take it personally. That was a 
personal attack on 53,000 hard working men and women of Union 
Pacific. If I practiced that kind of creative accounting in my 
sector, somebody would go to jail. I am probably the only one 
in this room that was involved with fuel surcharges back to day 
one. Back in 2003 when fuels started to move away from $25 a 
barrel, we sat down with our customers and we said we have to 
have some mechanism to recover fuel. Our customers told us keep 
it simple. They actually liked the truck sector which had had 
fuel surcharges for years which was a percent of revenue. And 
again, no one wanted to pay higher rates. But what they wanted 
was assurance that when fuel goes back down they get a rate 
reduction. That is what a fuels surcharge does.
    No one at that time predicted $80 a barrel fuel when we put 
fuel surcharges in place. No question about it. What the STB 
did, and there is no perfect methodology, the STB came back in 
and said instead of using a percent of freight, a more accurate 
model would be a mileage basis. I will tell you that when we 
made that change I did a customer survey; half of them liked 
it, half of them did not. The key though is when fuel goes back 
down the customers will see the benefit of that immediately in 
terms of lower costs.
    Mr. LaTourette. Thank you. Mr. Chairman, with your 
indulgence, I did invite the other witnesses to talk about 
whether or not it is a good business model for the railroad 
industry to take advantage of people who have no choice.
    Chairman Oberstar. Please continue.
    Mr. LaTourette. Thank you. If you have an observation, 
great. If you do not have an observation, then I can be done. 
Mr. Marshall, do you have an observation?
    Mr. Marshall. That is a difficult question until you step 
back and look at the alternatives. I think, if I understand 
your question, what you are asking and what I heard here today 
from the shippers is I have a one railroad power plant and I 
pay a lot, and he has got a two railroad power plant and he 
pays less. In other words, competition lowers rates. And that 
leads one to say well, what we need to do is artificially 
create a two railroad situation at all points. Unfortunately, 
we have tried that.
    In 1975 there were seven railroads in the Northeast. 
Virtually every town of any consequence offered shippers a 
choice of one or more railroads, Altoona being a notable 
exception.
    Mr. LaTourette. That is because the Shusters represent it.
    [Laughter.]
    Mr. Marshall. In fact, there were five ways to get from New 
York to Chicago. All seven railroads went bankrupt. What that 
lesson is is that the level of competitive rates, the two 
railroad rate level does not provide enough money to keep the 
railroads going. It may pay the engineer and buy the gas for 
the train but it is not going to keep the track fixed. And so 
sooner or later the railroads will collapse, as they did. And 
the result was Conrail which provided one railroad service to 
everyone.
    In the Staggers Act, the compromise that we made, we being 
everyone here, being everyone who lived in the Northeast, was 
that some places could have the benefit of competitive pricing, 
and North America is the only place in the world where anybody 
gets the benefit of competitive pricing, and others would have 
regulated pricing. And the regulation, unfortunately, is 
complicated. It has gotten more complicated than any of us had 
imagined. But this system of differential pricing, taking 
advantage of competition where it exists but making sure that 
others do not pay more than the total cost of the railroad that 
serves them, is something that I think has served everyone very 
well since 1980. But it is not an easy issue to explain, 
unfortunately.
    Mr. LaTourette. And with the Chairman's indulgence, Mr. 
Rennicke, do you have something to add?
    Mr. Rennicke. I think just one comment to add, and this 
goes back to some earlier comments that were made by Mr. 
English. I think there is a sense that it is only people that 
are over 180 that are carrying the load. Differential pricing, 
if you go down to 100, the very first shipper that is just to 
bed of 100, let us say they pay 1.00.01. Every one of those 
dollar amounts above 100, as the whole spectrum of rates work 
up, they are all making a contribution into the fixed cost of 
the railroad. That is what differential pricing is about. You 
want to capture as many of those contributions as possible. 
Two-thirds of the rates are less than 180. All of those 
customers are in various parts of the competitive spectrum but 
almost all of them are making a contribution to the process. 
Certainly, some at 181, 200, 250, 300, 350 are making a bigger 
contribution but they are not carrying the load for the whole 
system. You are maximizing the contribution across the whole 
spectrum of rates. So I do not think that it is good policy to 
just tag one group. But I do not think that is what is 
happening.
    Mr. LaTourette. I thank you for your answers. And I thank 
you, Chairman Oberstar, for your courtesy.
    Chairman Oberstar. Thank the gentleman for sharing with us 
his wisdom, his years of experience as Chair of the Rail 
Subcommittee and his great work on behalf of Amtrak. We all owe 
you a debt of gratitude.
    I want to come back to the question that I propounded to 
Mr. Young at the outset. Do you, does your association accept 
the status quo; that is, the existence of the Surface 
Transportation Board and the authorities that it has?
    Mr. Young. Yes.
    Chairman Oberstar. Then within that context, you can accept 
some adjustments or adaptations, or at least we can discuss 
some.
    Mr. Young. As I said earlier, I think some of the proposals 
that they made will address some of the issues that have been 
raised.
    Chairman Oberstar. Mr. Marshall, when Class I over time has 
spun off certain segments of its operations in a way that they 
can continue to operate they negotiate a deal with the 
surviving entity. That typically is a contractual agreement 
that prevents short line or regional rail from providing 
customers access to competitive service on one or more of the 
other competing systems. Correct?
    Mr. Marshall. That is often the case, Mr. Chairman. It is 
not universally the case.
    Chairman Oberstar. Not universally, but it is generally the 
case. Those agreements typically require a short line to 
deliver all or most of its traffic to the major carrier that 
originally owned that short line. What is inappropriate or 
wrong or objectionable to a finding by the STSB that this would 
be inconsistent with the public interest, that it would 
interfere with competition?
    Mr. Marshall. I think there would be two objections. The 
first one may be a parochial interest that I have in seeing a 
growing short line business because I think short lines serve 
their customers well, often better than the Class Is, and the 
customers benefit from that. The instant that the STB declares 
paper barriers, as they are often called, to be against public 
policy, there will be no more short lines formed. I am 
convinced.
    Chairman Oberstar. Why?
    Mr. Marshall. Because it will, one the one hand, cause big 
railroads to fear that they will lose traffic at lower rates to 
their competitors. Now I will come back to that in a moment.
    Chairman Oberstar. They do not like competition, do they.
    Mr. Marshall. Well, they do not like to reduce a flow of 
revenue at a time when they need. On the other hand, they might 
be willing to sell the short lines on terms that would 
compensate them for the loss of revenue. But that would 
increase the cost to the buyer to the point that I think there 
would be very few lines purchased. There have been some in the 
past. They have tended to be ones near the point of abandonment 
anyway.
    I think the other reason that I would be concerned, apart 
from the no new short lines fear, is that it would by giving 
multiple railroads access to points that previously had access 
to only one railroad, it would pull down the rates. I know that 
is what everyone who ships wants. When I go to a restaurant I 
want to pay less for the meal than I am billed. Everybody wants 
to pay less. But taking revenue flow away from Class I 
railroads is not good for short lines.
    Chairman Oberstar. There is another side to that coin. The 
other side of that coin is the shipper or the consumer. Now let 
us pose another situation, not necessarily hypothetical, 
although it could be hypothetical, but it is a real situation 
in a part of my district where the Class I discontinued service 
and a successor short line railroad is there. They are capable 
of providing a service. But they are not going to interconnect 
with another rail. They just want to use a switch. They want to 
cross a line. They want to use maybe a mile of track. And the 
Class I said no. If we do not carry it, you do not carry it 
either.
    Mr. Marshall. That sounds unfair to me. But let me tell you 
what----
    Chairman Oberstar. It is unfair. It is unfair to the 
farmers, it is unfair to the grain elevators, it is unfair to 
the consumers. I mean from a Class I standpoint, they want to 
protect their turf, protect their rates. And I understand that. 
That is the competitive marketplace.
    Mr. Marshall. The short lines and the large railroads have 
gotten together and formed a process to negotiate just those 
circumstances so that service to shippers is not ended. If big 
railroad number one does not want it, big railroad number two 
can get a crack at it. And that process seems to be working. I 
am told there are over 100 cases where----
    Chairman Oberstar. That is interesting to hear. And I do 
not take the part of those who say, well, as a short line we 
want to cross Class I track in order to provide service to a 
competing Class I railroad. The Class I owning that track has a 
legitimate argument against doing that. But not where the short 
line wants to serve the customer who has been literally cut off 
because the line was discontinued by the Class I and turned 
over to a short line. There is the public interest to be served 
here. And there has to be a process by which that public 
interest can be served.
    Mr. Young. Mr. Chairman, can I provide some perspective?
    Chairman Oberstar. Yes, of course.
    Mr. Young. Remember the advent of short lines was really a 
function that said they were not economically viable under the 
Class I railroad labor requirements, flexibility. It was either 
abandon or do a short line. The short lines in many cases could 
operate more efficiently. They did not have the same kind of 
labor conditions that were employed. The requirement in terms 
of the business is a function of efficiency.
    I will just give you an example. Railroads are efficient as 
they handle more volume. You drive unit costs down. You are 
obviously more efficient running a 100 car train than a 50 car 
train. In many cases what you looked at or you look at today is 
if you want to say all right, let us split the business up, let 
another railroad take half of it, what you are going to do is 
end up with higher costs overall. Because what will happen, as 
we make the interchange we will have less traffic. That drives 
unit costs up. It is less efficient long term.
    So I think we need to be real careful in terms of 
ultimately the discussion about allowing the short line to go 
ahead and send its business to another connecting railroad 
because it will disrupt efficiency in that process. Also, in 
many cases the Class Is have provided the short lines with no 
rental in terms of locomotive, no car hire in terms of 
equipment. We have kept that in our account. So again, to me it 
is going back to the fundamental driver between why short lines 
really evolved.
    Chairman Oberstar. I said a moment ago, in fact postulated 
that I think you have a legitimate argument in the case where a 
short line railroad would take business, use Union Pacific line 
in order to deliver that commodity to a competitor Class I 
railroad. You have got a legitimate argument about access in 
that case. But where the short line is going to serve that 
customer but needs to use a mile of track but can do so only at 
an outrageous sum or is prohibited from doing it at all, I 
think the public interest has to be served there.
    Well, there are other matters but I think we have covered 
these largely.
    Mr. Shuster. One question, Mr. Chairman.
    Chairman Oberstar. Of course.
    Mr. Shuster. When we are talking about competition, there 
is barges, trucks, other railroads. One of the questions I have 
is how much does this come into play as companies decide to 
build new facilities. A coal mine, coal is where the coal is so 
they have to mine it there and they have to deal with what they 
have to deal with transportation-wise. How many companies do 
you see today that are looking to locate where they can be 
served by two railroads or two different forms of 
transportation. I would guess if I were a railroad, I would be 
trying to convince customers to locate on the main line, I want 
to service you. Because that has got to be in the competitive 
mix where you are looking to keep people on your line and they 
are looking to find two railroads or other transportation 
modes.
    Mr. Young. Congressman, in all six of my business groups--
agricultural, the industrial products, chemicals--we have seen 
customers pick UP only to build new facilities. Twenty-three 
ethanol plants were built last year on UP only lines. Chemical 
industry has expanded and built new facilities where they had a 
choice to go on a dual serve line. They picked UP. Rock 
customers in Texas have several announcements, new mines that 
are single served UP. What they see is the value. They do see 
some protection in terms of the maximum rates. But what they 
see is value in the proposition. So I have seen that really 
across all the business groups.
    Mr. Shuster. That makes a pretty large statement if they 
are picking you only.
    Mr. Marshall, what have you seen in your experience?
    Mr. Marshall. Well, one of the things we sell is on short 
lines that do connect with more than one Class I, we try to get 
people to locate there. But I think what Mr. Young is saying is 
true, that there are plants that sometimes choose a single 
railroad. That is not probably in a majority of the cases, but 
it does happen.
    Mr. Shuster. Mr. Rennicke?
    Mr. Rennicke. I think a lot of it depends on several 
factors. It depends on what the company's perspective is in 
their dealing with the railroads. We did a big project for a 
very large utility to help them figure out where to site 
plants. I was absolutely amazed. They had a number of places 
where they could site at a junction where they could get two 
railroads. That particular utility said we want the service 
here, that is a main line, carrier X is investing in that main 
line, and I am more worried about whether the main line is up 
or down than whether I have two carriers there.
    So that is one group. You get other groups where first 
thing in the door they say I do not care where you look but 
there better be two railroads or locate me on a terminal 
company. So it is a mix. But there are a large number of 
companies including power plants that are willing to cut a long 
term agreement with the railroad and locate at a single service 
point.
    Mr. Shuster. Thank you very much. And I would point out to 
you, Mr. Rennicke, there is a number of places in my district 
that I can locate companies that are served by two railroads. 
So in the future if you need to talk to me, we can talk. 
Thanks.
    Chairman Oberstar. I thank the panel for participating, for 
waiting so late in the day, interrupted by votes and by 
extensive questioning of the earlier panels. I invite the 
Association of Railroads through you, Mr. Young, to submit your 
specifically written observations about provisions of our bill.
    Mr. Young. We plan to do that, sir.
    Chairman Oberstar. We will welcome those comments.
    The hearing is adjourned.
    [Whereupon, at 7:18 p.m., the Committee was adjourned.]

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