[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
INVESTMENT IN THE RAIL INDUSTRY
=======================================================================
(110-104)
HEARING
BEFORE THE
SUBCOMMITTEE ON
RAILROADS, PIPELINES, AND HAZARDOUS MATERIALS
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MARCH 5, 2008
__________
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 FRANK A. LoBIONDO, New Jersey
EDDIE BERNICE JOHNSON, Texas JERRY MORAN, Kansas
GENE TAYLOR, Mississippi GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California HENRY E. BROWN, Jr., South
LEONARD L. BOSWELL, Iowa Carolina
TIM HOLDEN, Pennsylvania TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts 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 ROBERT E. LATTA, Ohio
STEVE COHEN, Tennessee
JERRY McNERNEY, California
LAURA A. RICHARDSON, California
VACANCY
(ii)
?
SUBCOMMITTEE ON RAILROADS, PIPELINES, AND HAZARDOUS MATERIALS
CORRINE BROWN, Florida Chairwoman
JERROLD NADLER, New York BILL SHUSTER, Pennylvania
LEONARD L. BOSWELL, Iowa THOMAS E. PETRI, Wisconsin
GRACE F. NAPOLITANO, California WAYNE T. GILCHREST, Maryland
NICK LAMPSON, Texas STEVEN C. LaTOURETTE, Ohio
ZACHARY T. SPACE, Ohio, Vice Chair JERRY MORAN, Kansas
BRUCE L. BRALEY, Iowa GARY G. MILLER, California
TIMOTHY J. WALZ, Minnesota HENRY E. BROWN, Jr., South
NICK J. RAHALL II, West Virginia Carolina
PETER A. DeFAZIO, Oregon TIMOTHY V. JOHNSON, Illinois
JERRY F. COSTELLO, Illinois TODD RUSSELL PLATTS, Pennsylvania
EDDIE BERNICE JOHNSON, Texas SAM GRAVES, Missouri
ELIJAH E. CUMMINGS, Maryland JIM GERLACH, Pennsylvania
MICHAEL H. MICHAUD, Maine MARIO DIAZ-BALART, Florida
DANIEL LIPINSKI, Illinois LYNN A. WESTMORELND, Georgia
VACANCY JOHN L. MICA, Florida
JAMES L. OBERSTAR, Minnesota (ex officio)
(ex officio)
(iii)
CONTENTS
Page
Summary of Subject Matter........................................ vii
TESTIMONY
Amin, Snehal, Partner, The Children's Investment Fund............ 37
Boardman, Joseph H., Administrator, Federal Railroad
Administration, U.S. Department of Transportation.............. 9
Buttrey, W. Douglas, Surface Transportation Board Member......... 9
Giles, John E., Chief Executive Officer, Rail America............ 37
Greenwood, Robin, Assistant Professor, Harvard Business School... 37
Mulvey, Vice Chairman Francis P., Surface Transportation Board... 9
Nottingham, Charles D., Chairman, Surface Transportation Board... 9
Ward, Michael, Chairman, President and CEO, CSX Corporation...... 37
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Costello, Hon. Jerry F., of Illinois............................. 82
Rahall, Hon. Nick J., of West Virginia........................... 84
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Amin, Snehal..................................................... 86
Boardman, Joseph H............................................... 132
Buttrey, W. Douglas.............................................. 138
Giles, John E.................................................... 139
Greenwood, Robin................................................. 144
Mulvey, Francis P................................................ 166
Nottingham, Charles D............................................ 180
Ward, Michael J.................................................. 188
SUBMISSIONS FOR THE RECORD
Amin, Snehal, Partner, The Children's Investment Fund, responses
to questions from the Subcommittee............................. 127
Nottingham, Charles D., Chairman, Surface Transportation Board,
response to request from the Subcommittee...................... 187
Ward, Michael, Chairman, President and CEO, CSX Corporation,
response to request from the Subcommittee...................... 207
ADDITIONS TO THE RECORD
Aventine Renewable Energy, Inc., Ronald H. Miller, President and
CEO, written statement......................................... 209
Big Bend Agri-Services, Inc., Monty C. Ferrell, President,
written statement.............................................. 211
CEMEX, Cliff Kirkmyer, Vice President, Aggregate Division,
written statement.............................................. 213
CONSOL Energy, Inc., Peter B. Lilly, President, Coal Group,
written statement.............................................. 215
The Detroit Edison Company, Robert J. Buckler, President and CEO,
written statement.............................................. 217
Eka Chemicals, Inc., Curt H. Warfel, Manager, Logistics and
Distribution, written statement................................ 219
GROWMARK, Inc., Dan Vest, Manager, Government Relations, written
statement...................................................... 221
International Chemical Company, Brad A. Thomas, President,
written statement.............................................. 222
Magnum Coal Company, Paul H. Vining, CEO, written statement...... 224
Mosaic, Richard Krakowski, Vice President-Supply Chain, written
statement...................................................... 226
Patriot Coal Corporation, Michael V. Altrudo, Senior Vice
President, CMO, written statement.............................. 228
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HEARING ON INVESTMENT IN THE RAIL INDUSTRY
----------
Wednesday, March 5, 2008
House of Representatives
Committee on Transportation and Infrastructure,
Subcommittee on Railroads, Pipelines, and Hazardous
Materials,
Washington, DC.
The Subcommittee met, pursuant to call, at 11:00 a.m., at
2167 Rayburn House Office Building, the Honorable Corrine Brown
of Florida [chairman of the Subcommittee] presiding.
Ms. Brown of Florida. The Subcommittee on Railroads,
Pipelines, and Hazardous Materials will come to order.
The Subcommittee is meeting today to hear testimony on the
railroad industry. I have traveled on numerous Transportation
Committee CoDels throughout the world to meet with
transportation officials and compare and discuss rail and
infrastructure systems. Regardless of where I go, whether it is
in Russia or other surrounding Eastern European countries,
France, Spain, England, or Asia, the transportation ministers
and local transportation officials always tell me that the
freight rail system in the United States is the best in the
world. We are number one.
Freight railroads play a critical role in our Nation's
economy, and their infrastructure provides vital commuter and
passenger rail service throughout the Country. They employ over
180,000 people and have spent over $10 billion over the last
eight years to expand tracks and precious rolling stock.
Freight railroads are also charged with transporting hazardous
material and carry valuable cargo for the U.S. military.
Further, they are key solutions to improving the
environment and dealing with the future growth expected
throughout our transportation system.
I am proud to say that CSX is headquartered in my home city
of Jacksonville, Florida. They employ over 5,000 people who
play a vital role in the local and state economy. The company
is also a community partner making numerous donations to local
charities and performing community service throughout the city.
Unfortunately, hedge funds and other short-term investors
do not often have the long-term interest of the railroad
interests in mind. Their demands for cuts in capital
expenditures and large rate increases will only serve to slow
capacity growth and hurt the industry and the economy in the
long run. Because they cannot relocate railroads to foreign
countries for cheap labor, short-term investments will squeeze
railroads for quick returns at the expense of the long-term
health and competition of the companies and its employees. A
short-sighted money grab like this recalls memories of the
action leading up to the crisis as we have today.
The Children's Investment Fund, TCI, who has testified that
they have been referred to as a locust by the German government
and have met serious resistance from the Japanese government
where they are trying to force higher energy prices on Japanese
citizens throughout their partnership with J-Power.
In the past, Congress has acted to prevent foreign
companies from managing U.S. ports operations and U.S. airlines
because they want to protect the critical infrastructure from
potential harm. The Nation's freight railroads are of critical
importance to keeping America's economy moving, and this
critical role can be crippled if unknown foreign ownership or
short-sighted investors take control of any of them.
I personally believe that unknown and unaccountable hedge
funds controlling a freight railroad is something that should
be scrutinized by Congress and the Federal agencies that have
jurisdiction over this type of transaction. I hope this hearing
will be the first step in taking a closer look at the long-term
effect on the railroad industry and the economy as a whole.
With this, I will welcome today's panelists, and thank you
for joining us. I look forward to the hearing and the
testimony. Before I get to Mr. Shuster, I ask that Members be
given 14 days to revise and extend their remarks and to be
permitted to submit an additional statement and material from
Members and witnesses. Without objection, so ordered.
I yield to Mr. Shuster for his opening statement.
Mr. Shuster. Thank you, Madam Chairman. Thank everybody for
being here today. It is, I think, an indication--we have a full
room and the national media is covering this hearing--of the
importance of this hearing today.
The last time we had I considered one of the most important
hearings we had was on how to fund our highway and
transportation needs in this Country, but everybody seemed to
be down the hall listening to Roger Clemens and the Baseball
League assessing steroids. So I am glad to see that the focus
of the attention of the media is on an issue like this that is
significant, and I am glad to have a full room here today
listening to the testimony.
I am, obviously, very interested in this hearing today.
Thee are some serious issues that we need to address to get
answers for, and I hope this hearing will go a long way to
doing that today. Our Nation's freight railroads are the envy
of the world. They are one of the very few that do not receive
Government subsidies and, in fact. have been built on private
capital. They provide cost-effective service, as I said,
without Government subsidies, which is extremely important; and
they have had a great safety record, and it continues to
improve.
Given the efficiencies of our railroads, it is no surprise
that they have attracted the attention of major investors from
in this Country and outside this Country. Recently, there have
been differences, some questions about the impact of hedge
funds on investments in our railroads. While not all hedge
funds, I think, can be all categorized as bad, there certainly
have been some players out there that have done some serious
damage to some industries, and they do raise concerns as to
their long-term investments, or are they long-term investments?
But at the end of the day, hedge funds are accountable to
their bottom line and to their investors, as are the railroads
accountable to their shareholders. The railroads also have an
important distinction, in that they have a common carrier
obligation and perform many vital services, including national
security interests. Some of these do not add positively to the
bottom line of a railroad, and they certainly need to be
considered, and we need to have the railroads continuing to
perform those services for our Nation.
Our Nation and the economy depends on the free flow of
capital, and I think we should encourage private capital to
continue to pour into our rail system and all transportation
entities in our Country. We do have many safeguards in place to
ensure that the public interest is served, the STB rail rates
and service quality; the FRA ensures that we have a safe rail
system; and the Congress has a duty to vigorously oversee and
have oversight to these many concerns.
While I come into this hearing with an open mind to hear
what everyone has to say, I still have great concerns and am
going to be very interested in hearing from our panelists. As I
said, I want to welcome everybody here today and, with that,
yield back to the Chairwoman.
Ms. Brown of Florida. I am going to yield to Mr. Mica, who
is the Ranking Member of the Full Committee for opening
remarks.
Mr. Mica. Well, thank you for yielding and also thank you
and Mr. Oberstar, Mr. Shuster, for agreeing to hold this
important hearing, and it is on a very critical topic.
Investment in our Nation's rail industry and how we go about it
is very critical to the future of the industry.
Unfortunately, right now a lot of our Nation's
infrastructure is up for grabs to the highest bidder, and with
weak dollar and cash-rich nations like China and some of the
other oil-producing countries, they have an incredible amount
of resources to purchase America's highways, rail, and other
key infrastructure, and they can be purchased at deeply
discounted prices if you just take a minute to look at the
exchange rates.
Currently, it is very difficult to assess how much foreign
capital has actually been invested in our railroads and our
infrastructure. We do not have a good mechanism of tracking all
of that. There are some restrictions on investment, as you
know, on aviation and ownership, but again I think with the
amount of money that is available and our Nation's
infrastructure up for sale, it raises a host of fundamental
national policy questions.
It is also very difficult for Government to actually assess
and evaluate the sincerity of investments, various investment
schemes, and whether or not investments are being made for
short term or long-term investment and many people are
differently motivated in investing and spending that cash on
our discounted infrastructure.
Today's hearing, I think, is a good exercise because it
will focus attention on some of the concerns that have been
raised about protecting public interests in our Nation's rail
and infrastructure projects. Currently, as I said, there are
little or no restrictions on investment and rail. We do live in
a global economy, and we need to secure and also to attract
international sources of financing in the future to assist in
building our Nation's infrastructure.
The need to sort out our policy and how that is allowed,
permitted, and the rules for the game, also, have to be
established. But rail, as you know by its nature, requires huge
capital investments. It does not have the same pattern of
competitiveness of other industries, and that is why I think,
again, this is a very important hearing.
While the STB may monitor rail rates and service quality,
investments in rail is still a major public policy
consideration. Congress needs to review what is taking place,
and Congress needs to decide what terms for investment should
be in place to protect pubic interest. But what we do not want
to do is stop vital private sector financial investment and
capitalization.
I am also pleased that in the second panel, I will not be
here, I have to leave shortly, we have Michael Ward, who is the
CEO for CSX which is headquartered in Ms. Brown's district and
runs through my district. He has acquired that railroad and
made some dramatic improvements, and is in the process of
making some dramatic improvements that the investors and
stockholders in that company have interest in. I have been
pleased to work with him in that effort to make his railroad
even more successful, even more safe, and operating in the
public interest through our district and State and Nation.
So I thank you again for allowing me a few minutes, and I
appreciate your work on this important subject.
Ms. Brown of Florida. Mr. Space?
Mr. Space. Thank you, Madam Chairwoman. Thank you as well
for calling this hearing. I would like to thank the Ranking
Member for his efforts as well.
I come from Southeastern Ohio, an exclusively rural
district that has been hit very hard by this transitioning
economy. We suffer from a lot of challenges in this part of
Ohio, most of which is encompassed within Appalachia. Lack of
access to adequate rail infrastructure is one of those
significant challenges.
This is negatively impacting our ability to bring jobs to
the region; it is negatively impacting our ability to maintain
many of the present jobs we have. The cost of the
transportation of goods, whether they be raw materials coming
in or finished product going out, is a very significant part of
the production process, whether you are a miner, a farmer, or
manufacturer. These mounting costs are making it more and more
difficult for us to compete.
I think that this body, and certainly the industry itself,
has an obligation to do more to improve the infrastructure of
rail in Ohio. I understand that CSX, which has a very large
presence in Ohio and in my district, is planning two new major
and much needed infrastructure improvements in Ohio, and
according to the Ohio Rail Development Commission, CSX's
infrastructure investment plan in Ohio is estimated to be about
$140 million. That is all good.
The problem is we have some very significant concerns over
statements registered by the Children's Investment Fund, a
significant shareholder in CSX, that would seem to indicate its
intent to undertake a corporate takeover as well as an intent
to freeze capital investments. It seems that the significant
rate of return that has been accelerating in recent years is
not enough. This causes grave concerns to me and many of the
manufacturers, miners, and farmers that I represent.
A note from an October 16th, 2007 letter that TCI sent to
the CSX board of directors and which was published on its
website indicated its advocation that CSX management make a
number of changes to its current operations and included among
those recommended changes, I find it interesting, were two in
particular. One was to freeze capital investment and another
was to improve its relationship with Government regulators,
including Congress. And I find those two terms mutually
exclusive, given the strong need to expand rail infrastructure
in Ohio, in particular rural Ohio.
The rail industry, as I mentioned, is critical to our
Nation's infrastructure and economic development and, by way of
extension, to our national security. As a Member of Congress, I
believe we have a responsibility to make sure that the rail
industry is able to function properly. Certainly, problems that
affect rail service do not simply affect the rail industry
itself but the profit margins of many other industries and the
livelihood of many people in Southeastern Ohio.
I think this Committee needs to make sure we are looking
out for the profit margins of everyone, not simply rail, and
with that I yield back.
Ms. Brown of Florida. Mr. Cummings?
Mr. Cummings. Thank you very much, Madam Chairlady. I
certainly thank you for calling this hearing to consider the
increasing investments being made by hedge funds in U.S.
railroads.
Our Nation's railroads have recently been enjoying stronger
financial help than they have experienced in decades. Growing
interest in the railroads shown by major Wall Street investors
is, in fact, a testament to that success. However, since
railroads are such a critical part of our Nation's
transportation infrastructure and because they carry a wide
variety of cargoes, including hazardous cargoes through our
Nation's communities, it is imperative that investments in
railroads be closely scrutinized to ensure that they are in the
best interests of the railroads, the safety of our communities,
and the transportation needs of our Nation.
Such scrutiny is exceedingly important when the investments
are being made by entities like hedge funds that are not
subject to the same strict regulatory oversight that other
types of investors face from the Federal Government. Of
particular concern to me, and I know to Chairwoman Brown, is
the apparent effort by the Children's Investment Fund, a hedge
fund registered in the Cayman Islands, to gain substantial
measurement control over CSX Railroad Corporation for the
purpose of making quick returns on stock transactions.
While I certainly have questions about some of CSX's
business practices, I am, like many of my colleagues, deeply
troubled by the possibility of foreign entities owning, or
owning significant stakes in, major pieces of United States
transportation infrastructure passing through the heart of our
Nation's communities.
In this case, the Children's Investment Fund is known for
employing aggressive tactics to maximize shareholder value even
to the detriment of the growth and success of the underlying
business concern. The Fund appears now to be attempting to
employ these tactics with CSX. For example, the Fund has
suggested that in order to yield short-term stock gains, CSX
should freeze capital investments or should conduct stock-
related transactions that can leave a company with a credit
rating at the junk bond status.
In 2001, my district lived through the terrible Howard
Street tunnel fire which was caused when a CSX train carrying
flammable hazardous material derailed in a tunnel and ignited.
The resulting fire burned for days in downtown Baltimore, and
the clean-up after the accident cost some $12 million.
More recently during this past fall, CSX experienced small
but disturbingly frequent train derailments in the Baltimore
area. Like any railroad, CSX Corporation must have as a top
priority ensuring the safety and security of the communities
through which its cargo travels. Decreased capital investments
and declines in corporate creditworthiness will not enable CSX
to fulfill this duty, and any entity and particularly a foreign
entity that proposes to increase stockholder value at the
potential risk of the safety and security of my constituents
will face my strong and vigorous opposition.
Similarly, I note that though the railroads have made
significant economic gains in recent years, any return to
former habits of under-investing in the railroads will
immediately threaten the hard-won gains. Today's hearing, to
your credit, Madam Chairlady, will give us an opportunity to
hear from parties involved in operating and regulating
railroads, including CSX Corporation, the Federal Railroad
Administration, and the Surface Transportation Board regarding
the potential impact of hedge fund investments may have in our
Nation's railroads.
I look forward to hearing this testimony and to assessing,
under the leadership of our Chairwoman Congressman Brown,
whether Congressional action is needed to protect our Nation's
railroads from potentially unscrupulous investment practices
and, with that, I yield back.
Ms. Brown of Florida. Thank you. Now, I would like to yield
to the Chairman of the Full Committee, Mr. Oberstar, who is
really the transportation guru of the whole world.
Mr. Oberstar. Oh, my goodness. Thank you, Madam Chair, but
I don't know if I want that weight on my shoulders. But you are
very kind. Thank you for convening this hearing.
History is important as we consider the subject matter of
today's hearing on hedge funds and private equity funds. It
reminds me of a hearing held in this very room 23 years ago by
our former Full Committee Chairman and Subcommittee Chairman
then of the Aviation Subcommittee, Mr. Mineta. The hearing was
entitled, To Regulate Attempts to Acquire Control of Airlines.
Then-Chairman Mineta called the hearing in response to efforts
of Mr. Carl Ikon to control TransWorld Airlines, at the time
one of the Nation's premier air carriers.
In the course of that hearing, Mr. Ikon, seated right at
that hearing, made commitments to the Members of the
Subcommittee about what he would do once he took control of the
airline. Those assurances led the Committee and Congress that,
generally--there was quite a substantial outcry from among our
colleagues about that potential takeover--to defer action on
the bill. The bill's title was Preservation of International
Air Service Act. It would require the Department of
Transportation to review pending airline acquisitions by Wall
Street investors.
The wheel turns, seems to come around to the same place, a
revolution described as a turn in the same direction until you
come back to the point where you started, the G.K. Chesterton
description. Mr. Ikon failed to abide by the commitments. Once
he took control of TWA he sold off a billion four hundred
million dollars in assets, gates, aircraft, their trans-
Atlantic route. They had a non-stop from St. Louis to London
Heathrow, a privileged route, a valuable route. He sold it for
$4 million to American Airlines. They made the money back by
the end of that year, it was so valuable a service.
That eliminated TWA's ability to compete in the aviation
market. It took St. Louis out of international service; it
diminished the value of St. Louis as a hub, as a city that
could compete in the national/international marketplace.
And then, what did he do with that? Did he reinvest it in
TWA? No. He took the cash, diverted the assets to other
investments that Mr. Ikon owned, Texaco, and other private
investments of Ikon's. And while he committed to improving his
relationship with labor, by the end of 1993 TWA's employees
were imploring the Committee to do something to get him out,
and we finally did. We made him personally responsible for the
retirement plan, and rather than do that he left TWA.
But he took with him 10 years worth of frequent flier miles
for himself, his family, for whomever else he chose to
distribute those valuable assets to. That is the lesson that
sticks in my mind as we begin this hearing, a bad taste in the
mouth.
The Children's Investment Fund--I have had a visit,
personally, with its founder--says there are long-term value-
oriented investment fund. They would like CSX to take a number
of steps that, personally, I find disconcerting. Diverting
capital expenditure investment for stock buy-backs; freezing
capital spending in what they call an uncertain regulatory
environment, and I expect to have a lively discussion about
that subject later on.
Now, these private equity funds often have different
priorities than the company whose assets they are acquiring, or
have acquired, or have a significant stake in. And those
priorities in this case may conflict with the long-term
viability of a railroad. An investor often commits his or her
money to a hedge fund for a period of time, one to five years,
expects a reasonable return on that investment. That puts
pressure on the Fund to provide a maximum return on the
investment within that window of time.
Now, fortunately, on the Surface Transportation Board, we
have some skilled members who understand these issues,
especially Mr. Mulvey, who has a Ph.D. in railroad economics
and served on this issue for 25, 30 years. He knows the subject
matter, and you are not going to hoodwink him. But there are a
lot of people who do not have that kind of experience. That is
why we have these hearings.
So short-term gains against long-term view, the railroad
has been around for 150 years, and the Federal Government, as
we displayed in the hearing on the Rail Competition Bill,
between 1851 and 1871 gave the railroad 173 million acres of
public land for the public use, convenience, and necessity, and
gave the Railroad the rights to the minerals, the timber, and,
as it turned out, oil and gas and coal, and the right to sell
that property as their own, which, in many cases they did.
The public has a great interest in the viability of the
railroads. It knitted the Country together from east to west
and from north to south, provided a new measure of mobility.
Today they account for over 40 percent of freight ton miles. It
is more than any other mode. They deliver nearly 70 percent of
all coal; they deliver 70 percent of the automobiles produced
in this Country. There are lots of other factors, but I do not
think that those hedge fund investors are looking at the long-
term investment requirements of the railroads.
And I remember just 15 years ago when Rob Krebs of BNSF was
positioning his railroad to make $2 billion or $3 billion of
investment in its roadbed and its rolling stock capital and was
told by Wall Street, oh, no, no, you can't do that. You have to
return the money to shareholders. And had they made the
investments then, they would be in a much stronger position
than they are today, and that goes for the other railroads.
So I think, Madam Chair, this is a very critical hearing
that comes at a critical time when we have these--just as we
had with aviation--investments that divert the energy and the
focus and the purpose of transportation. Railroads are facing
that issue today.
Ms. Brown of Florida. Thank you, Mr. Chairman.
Mr. DeFazio will be our last speaker before we hear from
the panel.
Mr. DeFazio. Thank you, Madam Chair. Thank you for calling
this extraordinarily important hearing.
I think there might be one place for agreement in the room
no matter which side of this issue you are on in terms of the
investment, is that it would be hard to disagree with the fact
that rail is the most efficient way to move freight throughout
many routes which are incredibly congested in America; and it
is an incredibly valuable asset that need to be optimally
utilized, and I think if we start at that point. then we have
to determine what these investments mean toward enhancing that
capability.
And I am particularly concerned and share a number of the
concerns raised by the Chairman and others here today about the
difference between a patient capital and, essentially,
speculative short-term capital. We do not need speculative
short-term capital to invest in the Nation's critical
infrastructure, including rail, but we do need patient capital.
I think we do need better coordination and perhaps partnership
in working with the Federal Government between existing
railroads. We need to look at some of, and revisit some of the
deregulation which is a historic artifact now because of the
closure of a line in my district.
I spent time reading of some of the procedures and rules
and regulations regarding feeder line applications and the
various forms of abandonment, and they were written in a
different era with a different industry and really do not apply
to today's world, or should not apply, but they do. And we need
to revisit those.
Certainly, I have heard complaints as recently as this
morning from captive shippers, so there are a host of issues
before this Committee that are extraordinarily important. The
Chairwoman traveled with me recently in a Surface Subcommittee
to Europe where we saw extraordinary variance in terms of
investment. We saw in Britain where their first deregulation
was disastrous, and then now they have put together a non-
profit to manage their rail bed and do have a vibrant and
competitive rail industry, more passenger than freight than we
do, and with the private sector paying a fair rate of return
for the use of that.
We saw, elsewhere in Europe other very enhanced rail
investments being made through, you know, public-private
partnerships or public investment, and we need to come to terms
with those issues here in United States. But I can say,
unequivocally, the one thing we do not need and we perhaps need
to consider fitness standards for anyone who acquires over a
certain percentage of railroads assets, you know, something
that we used to finally get Frank Lorenzo out of destroying
airlines after it had gone through--how many did he go through?
Three. Three before we got rid of him. We do not need those
kind of characters involved in our rail system. It has enough
problems. We want to make it better.
Thank you, Madam Chair.
Ms. Brown of Florida. Thank you. And now I am very pleased
to introduce and welcome our first panel of witnesses here this
morning.
Our first witness is Administrator Joseph Boardman of the
Federal Railroad Administration.
Our second witness is Mr. Charles D. ``Chip'' Nottingham,
of the Surface Transportation Board.
And the third witness is Mr. W. Douglas Buttrey, a board
member of the Surface Transportation Board.
And our final witness for this panel is Vice Chairman
Francis P. Mulvey of the Surface Transportation Board.
Let me remind the witnesses that under our Committee rules,
oral statements must be limited to five minutes, but the entire
statement will appear in the record. We also will allow the
entire panel to testify before questioning of the witness.
We are pleased to have all of you here today, and I
recognize Administrator Boardman for his testimony. Welcome.
TESTIMONY OF JOSEPH H. BOARDMAN, ADMINISTRATOR, FEDERAL
RAILROAD ADMINISTRATION, U.S. DEPARTMENT OF TRANSPORTATION;
CHARLES D. NOTTINGHAM, CHAIRMAN, SURFACE TRANSPORTATION BOARD;
W. DOUGLAS BUTTREY, SURFACE TRANSPORTATION BOARD MEMBER; VICE
CHAIRMAN FRANCIS P. MULVEY, SURFACE TRANSPORTATION BOARD
Mr. Boardman. Good morning. Thank you, Chairwoman Brown,
Ranking Member Shuster, Full Committee Chair Oberstar and other
Members. I am pleased to be here on behalf of Secretary of
Transportation Mary Peters.
There are those who would say that investment is not FRA's
business because safety can be maintained by making spot
repairs, adjusting operating speeds, lowering bridge ratings,
and catching defective conditions just before they cause an
accident. As applied to a single location at a given point in
time, such an approach may be workable; however, common sense
tells us and history confirms that at some point management of
the railroad will lose the capacity to manage all those
developing problems, and if it does not make minimal systematic
investments, shippers, railroad employees and the public will
pay the price.
There have been two major reasons for under-investment in
the basic infrastructure, the first caused by Government over-
regulation and the second caused by short-sightedness on the
part of rail executives often under pressure from the financial
community to show short-term profit. Both are serious; neither
can be ignored.
The Staggers Rail Act of 1980 accomplished a dramatic
reduction in the economic regulation of the rail industry.
Railroads were able to rationalize their systems, set rates
that permitted them to recover their cost and make a modest
profit, modernize work practices to reduce employee personal
injuries and plow back earnings into their facilities and
operations so that they could be more efficient.
FRA makes it a point to conference with the railroads on a
regular basis seeking to understand their plans for investment
and urging attention to areas that seem to need work, as judged
by early indicators, FRA safety inspection activities, and
actual safety results. FRA will never be satisfied until the
entire industry makes additional progress across a broad front
of safety issues, but when we talk with rail executives about
these issues, they usually understand our concerns and, in
general, they share our aspirations for improved safety through
investment.
Why would rail executives be willing to elevate safety to a
first-rank goal? Certainly, they are interested in safeguarding
their employees and the public, but there is something else at
work here: safety is great for business, particularly in the
era of significant demand and limited capacity.
Department estimates of tonnage on the railroad system will
increase by 88 percent through 2035. To meet this growth, the
industry is ramping up investment. Up to now, it has been able
to rely on significant productivity gains where the railroad
industry has moved more freight over smaller networks with
fewer employees. The railroads are now expanding capacity on
their highest density routes by double or triple tracking and
also looking at new cost-effective technological improvements
that will also increase capacity.
The new investments that will advance safety, service, and
environmental stewardship and asset utilization over the coming
years will include a transition to electronically-controlled
pneumatic brakes and other technology that will help the
locomotive engineer achieve fuel savings and limit in-train
forces that can result in derailment.
Under FRA waiver and encouragement, two railroads are
presently trying out stand-alone ECP brakes, trains in coal
service, and are gathering data to validate the business case
for additional investments. In addition, positive train control
technologies will play a significant role as well, but only
when the practical issues have been wrung out through the kinds
of demonstrations now underway.
These are transitions that will unfold over a decade or
more, and it will take patience to see results. FRA has issued
and enforces a wide range of safety regulations and has
sponsored collaborative research with the railroad industry to
introduce innovative technologies to improve railroad safety;
however, it would be difficult for the industry to accomplish
and achieve its positive safety record without the funds to
improve and maintain the rail system.
Many investors have come to view railroads as potentially
attractive investments. Among the entities increasing
investments in the railroad industry are a variety of financial
institutions, individuals, and investment funds. These
investors are risking their money in belief that the railroads
will provide a competitive return on their investment by
improving shareholder value. While the interest of these new
investors in raising railroad deterrence has in some cases
created tensions between them and railroad management, the
pressure to improve returns through gains in efficiency is
healthy. An efficient railroad is usually a safe railroad.
Let me say it again: safety is great for business.
Contemporary railroads will prosper as they provide very
reliable service efficiently. A railroad that is capable of
doing that year in and year out will make the necessary
investments in infrastructure, rolling stock, employee
training, and advanced technology, and with proper attention to
a good safety culture, the safety record will follow.
The Congress and the FRA help in this process along with
laws and regulations that set specific expectations that
everyone has to live up to, and we serve as a constant reminder
that safety must be the first priority, but often as not,
industry will lead the way with investments and innovations to
make the railroad work better for all concerned.
Thank you.
Mr. Nottingham. Good morning, Chairwoman Brown, Ranking
Member Shuster, Chairman Oberstar, and Members of the
Subcommittee. I appreciate the opportunity to appear before
this Subcommittee today to discuss investment in the rail
industry, an issue that is vitally important to the freight
railroads, their customers, employees, and the Nation's
transportation system as a whole.
When Congress passed the Staggers Act in 1980, the Nation's
rail system was in desperate financial straits. It was burdened
with excess capacity and unproductive assets, forced to provide
unprofitable services and hampered by excessive Government
regulation. It was not an industry into which many investors
wanted to put their dollars.
Since 1980, regulation has been reduced, carriers have been
permitted to shed unprofitable lines, and the rail system has
rationalized much of its excess capacity. Today the Nation's
rail system includes not only the seven major, or Class I,
railroads but also more than 500 regional and short-line
railroads. Those 500-plus railroads come in many shapes and
sizes, from regional carriers that operate a thousand track
miles or more and large publicly-traded holding companies that
own and operate dozens of short-lines to small, privately held,
individual railroads that operate over very short distances
with as little as an employee or two. It is a diverse and
dynamic industry.
In recent years, the U.S. economy has expanded, and the
rail network, like other transportation sectors, has become
capacity-constrained. Unlike some other transportation sectors_
trucking companies, for example, which can buy new equipment or
hire more drivers_railroads cannot respond as readily to
capacity constraints by quickly building new track and other
facilities.
Railroads are increasing their capital investments, which
are the dollars spent on track, right-of-way, and rolling stock
that will directly help capacity constraints. Hopefully, this
will lead to better service and fewer trucks on our already
congested highways. Between 2004 and 2007, the market
capitalization of the large railroads has increased by 24.1
percent annually in real terms which indicates that the market
expects railroad earnings to continue to be stable or to grow.
At the same time capital investment has increased annually by
21.6 percent, again in real terms. It appears that railroads
are investing in their infrastructure to the extent that they
believe that those investments will pay off in the market.
Consistent with the growth in stock prices, railroads have
recently attracted renewed interest from the financial
community. Since late 2006 several investment funds, including
Berkshire Hathaway, have acquired substantial positions in
several Class I railroads.
As you are aware, concerns with recent international
investment in railroads remain, and new attention is turning to
new investors who have not traditionally invested heavily in
railroads such as hedge funds and certain large institutional
investors, some of which are international. This latest
interest in the rail industry carries with it the possibility
of a railroad takeover by a non-railroad entity, and it has
raised questions about what role the STB would play in that
situation.
When a non-carrier buys a controlling interest in the stock
of a holding company that owns several unrelated rail carriers,
it must obtain STB authority. For example, Fortress Investment
Group sought and received Board approval when it obtained
control of the Rail America family of small railroads in 2007.
However, if a non-carrier were to acquire a controlling
interest in the stock of a single railroad or a single
integrated rail system, regulatory approval would not be
required in advance under our statute.
With that being said, however, I do not believe that the
statute needs to be changed to give the Board more extensive
review authority at this time. I understand the concern that an
investor, any investor, with a very short-term focus could
disrupt interstate commerce if a policy of diverting revenues,
degrading service to shippers, and cutting back on capital
spending were to be implemented. At this juncture, however, I
believe that the Board's existing tools are sufficient to
ensure that carriers, regardless of their ownership status,
carry out their common carrier obligation as railroads.
The common carrier obligation is the statutory duty of
railroads to provide transportation or service on reasonable
request. A railroad may not refuse to provide service merely
because to do so would be inconvenient or unprofitable. The
common carrier obligation, however, is not absolute and service
requests must be reasonable.
In recent years, the Board has seen an increasing number of
questions arise regarding the extent of a railroad's common
carrier obligation. As a result, the Board is holding a hearing
next month on April 24th to highlight the common carrier
obligation, to provide a better understanding of it, and to
assist us in monitoring carriers' compliance with it.
A railroad controlled by a large non-railroad investor
would still be bound by the same obligations of all railroads.
It still would have to fulfill the common carrier obligation,
it still would have to maintain reasonable rates and practices
and it still would have to file for abandonment or
discontinuance authority if it were not going to provide
service over a line.
Under our statute, the Board can investigate and report on
the management of rail carriers under our jurisdiction. If the
Board were to look into the management of a carrier and find
violations of its common carrier obligation, the Board or the
Department of Justice could take enforcement action to compel
the carrier to comply with the statute and with STB orders. The
Board could also, on complaint, find that the carrier violated
the statute and award damages.
Given the Board's ability to address potentially negative
influences by activist investors, it is important that we not
overreact and adopt new policies that might discourage positive
investment in railroads. As chairman of the STB, I would like
all types of investors, big or small, domestic or
international, activist or passive, who abide by the law and
who respect our Nation's need for continued improvements in
rail infrastructure and customer service to know that our
Government welcomes and encourages their willingness to invest
in our Nation's privately-owned rail system.
Freight railroads in the U.S. are in reasonably good
financial shape and are attracting investors of all types and
sizes. The rail industry's ability in future years to continue
this trend will largely determine whether the rail sector will
have the resources needed to meet growing demand for rail
service.
At the same time, the Board will remain vigilant and
proactive to ensure that interstate commerce is not harmed by a
short-sighted effort to extract large profits at the expense of
maintaining the infrastructure and providing reasonable service
to rail customers.
I appreciate the opportunity to discuss these issues today
and look forward to any questions you might have.
Thank you.
Ms. Brown of Florida. At this time, we have three votes, so
we are going to stand on official recess, and we will be back
right after the vote. We wanted to give you adequate time, we
didn't want to rush you, Dr. Mulvey.
[Recess.]
Ms. Brown of Florida. Mr. Mulvey, you may begin.
Mr. Mulvey. Well, thank you, Chairwoman Brown, and Ranking
Member Shuster, who is not back yet, and Chairman Oberstar,
thank you very much for giving me the opportunity to testify
before you today on railroad investment issues.
Capital spending on the part of the railroads has increased
in recent years, as graph 1 which I have attached to my
statement shows. However, when you examine it over a longer
period and when you put it in real dollar terms adjusting for
inflation, the picture becomes a little less clear. As also
shown in graph 1, real capital investment by the Nation's
railroads has been relatively unchanged since the Staggers Act
and, in fact, in constant dollar terms it is even less today
than it was in 1980.
However, it is also true that the railroads have
substantially rationalized their networks. The second graph
traces the decline of route miles and track miles operated by
the Nation's Class I railroads. These trends toward a shrunken
system represent a continuation of a policy of reducing the
size of the railroad network that began after World War I,
although the pace of abandonments certainly accelerated after
Staggers.
Graphs 3 and 4 show that, while there has been some
fluctuation, capital investments on a per track mile and a per
route mile basis have increased in recent years.
We can make similar observations about locomotives and
rolling stock. The railroads today operate far fewer
locomotives, but they are dramatically more powerful, roughly
50 percent more powerful than those in 1980.
Class I car fleets are only 40 percent of what they were in
1980, but today's rail cars are bigger, travel longer
distances, and in longer trains. Moreover, some of the decline
in rail car fleets has been taken up by Class II and Class III
railroads and even more so by shippers who now more often
provide their own cars.
The upshot is that, despite the smaller network, fewer cars
and locomotives, and greatly reduced work force, the railroads
are carrying twice as much traffic today as they did in 1980.
They are truly doing more with less.
Historically, the railroads were plagued with excess
capacity, but system rationalization combined with substantial
traffic growth has meant the railroads now experience capacity
constraints, and when demand exceeds available supply, prices
will rise, and rail industry profits are higher than they have
been for decades. One would hope that some of these profits are
reinvested to grow the system so the projected growth in rail
traffic can be accommodated.
Much of the railroads' investment goes towards maintaining
and replacing the capital stock as it wears out. Only about one
fifth of rail capital investment goes towards expanding the
infrastructure, although that share has been increasing
recently. Still it is doubtful that investment by the Nation's
railroads will be sufficient to meet the investment need.
And what is that need? A recent study estimated that the
railroads will need $148 billion between now and 2035 to meet
the forecast demand for service just to retain their relative
share of the freight transportation market. The study's authors
estimated that revenue growth and productivity improvements by
the Class I's could cover part of the need, but still leave a
shortfall of nearly $40 billion. And that simply is to maintain
their market share.
If we want the Nation's freight railroads to carry more
truck traffic, take traffic off the highways and put it onto
the railroads, and if we want the railroads to expand the
infrastructure so that they can accommodate more inter-city
passenger trains and commuter trains, the shortfall would be
far greater than this.
The railroads will only invest as much as they feel is
justified by current and reasonably foreseeable demand.
Building on speculation that traffic will materialize is highly
unlikely in an industry with a history of excess capacity and
with capital assets that are very long lived.
Questions about the future of the coal-fired power plants,
changes in traffic flows through the Panama and Suez Canals,
the development of alternative port facilities in Mexico and
Canada, the long-term potential of ethanol and other biofuels,
and other issues must be answered with much more certainty
before the Nation's privately-owned railroads can be expected
to dramatically increase their investments.
So where will the monies come from? There are a number of
potential sources, all of which hold promise but also can
present problems. Investment tax credits are favored by the
railroads. Public-private partnerships are favored by the
Administration, and a railroad trust fund is a possibility that
was favored by a former Member of this Committee,
Representative Lipinski. These are all potential sources of
investment capital.
However, another source of potential capital investment,
hedge funds, has recently become of growing importance. This
has attracted the interest of the railroad community, the
Congress and other industry observers. The concerns appear to
center around whether the relatively short-term strategy of
most hedge funds squares with the needs of the railroads for
long-term commitments of investment capital, as well as around
the nationality of some of the hedge funds investors.
With respect to the latter, I do not believe that the
nationality of the investors should necessarily be a concern.
After all, historically, America's railroads were largely
financed by European investors; still, national security must
be a consideration in looking at who is investing in this key
component of our infrastructure. Nor would I categorically rule
out any particular type of investor or investment strategy as
necessarily inappropriate for the U.S. railroad industry.
Having said that, I am concerned about investors who might
take over a railroad and proceed to scale back on investment
and begin to effectively disinvest in the infrastructure. By
the way, Mr. Oberstar, I would like to mention that you would
be happy to hear that one of your favorite investors, Mr.
Icahn, has recently announced he wants to invest between $400
million and $1.6 billion in CSX.
Mr. Oberstar. Beware.
Mr. Mulvey. Beware. As Chairman Nottingham has said, the
Board's authority over railroad capitalization is limited
primarily to our review of merges and acquisitions, but we can
step in and exercise our authority to ensure that railroads
fulfill their common carrier obligations. Let me give you an
example.
Last year we required a railroad to sell its line to
another carrier because the shipper demonstrated that the
service that the railroad was providing was not adequate. We
can respond when railroads behave in a way that causes them to
not fulfill their common carrier obligations, and as the
Chairman mentioned, we are holding a hearing on that next
month.
But today we are facing a conundrum. We want the Nation's
railroads to be operating as efficient private sector
enterprises, but we also want them to invest in anticipation of
public and private demands for rail infrastructure. As a
Nation, we need to decide what we want from our Nation's
railroads and how we will be able to finance it.
That completes my remarks, and I will be happy to answer
any questions.
Ms. Brown of Florida. Thank you.
Mr. Buttrey.
Mr. Buttrey. Good afternoon, Chairman Oberstar, Chairwoman
Brown, Ranking Member Shuster, and Members of the Subcommittee.
My name is Douglas Buttrey. I have had the privilege to serve
as a member of the Surface Transportation Board since May 28th,
2004. I appreciate the opportunity to appear before the
Subcommittee today, as you conduct this hearing on investment
in the rail industry.
The Board's chairman, Charles Nottingham, has submitted
testimony which discusses the issues that are the subject of
this hearing today. The chairman's testimony covers everything
that I would have said, so rather than duplicating coverage, in
the interest of time, I will instead associate myself with his
remarks and endorse the chairman's formal filed testimony. And
I would be happy to answer any questions that you might have.
Thank you very much.
Ms. Brown of Florida. Thank you.
Chairman Nottingham, in your testimony you made a
distinction between traditional long-term investors such as
Warren Buffett and a non-traditional investor such as the hedge
fund. Why is this distinction important? And anyone else that
would like to respond to this on the panel.
Mr. Nottingham. Well, yes. Thank you for the question. It
is important for several reasons. One is, up until several
years ago, we really didn't see a big influx or big presence of
large, the degree and extent and types of large investors in
the railroad industry as we are seeing today. It is probably, I
would say, a good problem to have, generally speaking, because
who would have thought 20 or 30 years ago we would be here
talking about possibly too much investment from too many people
around the world and elsewhere? So it is in many respects a
healthy challenge to have.
It is something we need to be mindful of. Probably Mr.
Buffett himself would not describe himself as a traditional
railroad investor, because up until recent months and years, he
really was not a big investor in the railroads as far as we
know. And so whether it is individuals such as Bill Gates, who
is a major investor in railroads, privately, or Warren Buffett
or these hedge funds_and, of course, ``hedge funds'' is a label
that, frankly, I was not real familiar with until a couple of
years ago. I think we used to call them large investors or
partnerships, and they come in all stripes and flavors and
sizes, and some have outstanding reputations, some have
reputations that are a little different than that; but it is
worth noting that, generally speaking, across the economy we
are seeing more influence throughout corporate America, by
large institutional investors, including hedge funds but also
large pension funds and large university funds_for example,
endowments_and those large investors often watch each other, of
course, and will play off each other.
Mr. Mulvey mentioned the recent interest of Mr. Icahn in
the CSX, as well, that has been reported. We do not know his
motivations right now, but it is something we are going to stay
on top of. So that is just a quick overview in an effort to be
responsive.
Mr. Mulvey. One difference is that hedge funds often are
more active, and there will be a testimony by Professor
Greenwood later on, but they are more activist investors and
they often target particular firms with a plan_with a strategy_
to make changes. Most other investors tend to be more like Mr.
Buffett, for example, and the pension funds, et cetera,
traditional investors, they are more passive; they do not seek
to make major changes in the railroad operations. That is one
major difference.
Another difference is the way hedge funds are structured.
They tend to fly under the SEC rules because of restrictions on
who can be part of the hedge fund, et cetera, and that has
caused some people to be suspicious about hedge funds. Whether
or not that is justified is another issue.
Mr. Nottingham. And, Chairwoman Brown, if I could just
follow up, I meant to make this point as well. As I speak with
rail industry leaders and investors, and we get visited a lot
by analysts from Wall Street and elsewhere and others, I have
learned that the days when the investment pool was largely, or
significantly, comprised of passive investors, people who are
just parking their money into a corporation for many years and
maybe checking on it at the end of each year, or periodically,
those days are long gone.
All the investors now are making changes on a daily basis
to their portfolios. They move in real time, and whether it is
electronic commerce or technology that helps with that, that is
probably a factor. But what I hear from experts is that there
is really no such thing as a large class of truly passive
investors that just check on their investments periodically and
do not typically make adjustments.
Ms. Brown of Florida. Mr. Boardman?
Mr. Boardman. I just wanted to make a general comment, Ms.
Brown, and that is, based on my testimony and I think some
others have mentioned this, is the necessity in this industry
for patience. And whether it is the electronic controlled
pneumatic brakes, whether it is a positive train control,
whether it is an investment by investors that are private or
whether it is by Government as identified even in our RRIF
program, our Rail Rehabilitation Infrastructure Financing, the
period of time necessary to make these major capital
investments requires patience on all investors. Thank you.
Ms. Brown of Florida. Mr. Boardman, I have a follow-up for
you. You mentioned that safety is good for business, but the
only rail-related issue on the table is the positive train
control. And for some reason rail has resisted this system. Can
you explain why? Because studies show that PTC has a quick pay-
back period. Why has the railroad resisted a full-fledged PTC
system if they are so concerned about safety?
Mr. Boardman. I think what we can see right now is that if
you go on certain sections of the corridor, Northeast Corridor,
you are going to see positive train control. I think we would
like to see them move faster. NTSB, I think, has as one of
their critical elements positive train control.
But I think you are going to see the business case made for
that in ECP as we go forward, which is again a requirement for
patience in this process. We see people today that are making
real progress in positive train control, and the railroads are
involved in that.
Ms. Brown of Florida. Mr. Shuster, please.
Mr. Shuster. Just a follow-up on PTC technologies. We are
still not there quite yet, that is correct.
I had thought the second reason was there is a big concern
amongst labor that if you put PTC in place, the potential to
have just one crew on the train, that is there, and that has
some concern with labor that they are going to eliminate jobs.
Is that also part of the concern with PTC?
Mr. Boardman. Well, certainly, Mr. Shuster, early on in the
process of PRC, one of the elements that was being floated
around was one-man crew. And that never got resolved because
that did not move forward at that point in time, and that will
still be an issue that will have to be dealt with on the labor
side of things.
But what we are seeing today with the ETMS system that is
already being implemented, that there is success with it, that
in we expect in the future that to grow.
Mr. Shuster. And staying with safety, if a railroad or the
industry were to freeze temporarily infrastructure investment,
what is your estimate on how quickly we would see degradation
in safety and efficiencies? Is it weeks? Months? A year?
Mr. Boardman. Tomorrow.
Mr. Shuster. Tomorrow.
Mr. Boardman. Because I think what we see in the necessity,
and I think a railroad up here would tell you that that cannot
happen; you cannot freeze investment in the necessity for us to
maintain safety and continue to have an operating railroad.
Mr. Shuster. Right. With that in mind, the Board, Chairman
Nottingham, you had said here that until somebody takes over a
railroad, you do not have the authority to act until you see
something going on in there. For instance, if there were a
situation like that and Mr. Boardman said tomorrow it would
happen, how quickly would you expect the STB to be able to
respond to that, if you saw it happening? If somebody said, we
are freezing today, and we are not in the court system.
If you are in a court system you have to prove that, you
have to have a train fall off a track, or you have to have
something bad happen. But in light of the fact that we know how
important it is to have investment to continue to flow, what
would your response be to somebody coming in and saying, we are
freezing, or, we are stopping or significantly reducing?
Mr. Nottingham. That kind of worst case scenario, which by
your hypothetical, Mr. Shuster, would flow out of a transaction
where a non-rail carrier not needing our pre-approval were to
buy a single railroad or gain control of a single railroad, it
is correct we would not have a statutory role in pre-approving
that transaction. But as soon as that transaction is done, it
is sort of, welcome to our world. You are now a railroad, and
we have full oversight over you. We will act very quickly and
very aggressively, including working with the Justice
department.
If anybody is violating the common carrier obligation, we
can direct service over your line, meaning put your competitors
on your line. We can talk about what Mr. Mulvey referenced as
to what we did in the Lubbock, Texas area last year with a
smaller railroad but we actually took the railroad away from
the operator, who in that case was acting irresponsibly, and
had a forced sale.
And so we know one thing for sure: these investors do want
to make money. And the idea of actually having their line taken
from them, having their competitors put on the line by the STB
or, worst case, us looking at their license to even do business
as a railroad and possibly revoking that. These are pretty
draconian steps that we have available to us that any profit-
seeking enterprise would be wise to stay very, very clear of.
Mr. Shuster. Next question, change to accounting using
historic costs versus replacement costs. STB uses historic cost
and, having somewhat of a business background, I am a little
confused as to why the use historic versus replacement. Can you
sort of walk me through that and why do you do that?
Mr. Nottingham. Sure, I will try. It is a big issue that
has come up in a number of public forums, including some of our
hearings. It came up in our recent cost of capital inquiry
where we updated and significantly changed the way we measure
the railroad's cost of capital.
In the witness's statement you will have before you in the
next panel_from TCI_I noticed in their statement they have an
extensive discussion of their position that we should look at
and use more often the replacement costs. And there is, I
think, some common sense strength behind that argument, which
is, in other words, if you are a railroad or any business, or
even a homeowner, and you have to look at your infrastructure,
whether it is the roof on your garage or other infrastructure_
you do not necessarily look at all these in the day-to-day
practical, real world, what it cost you 20 years ago to put
that roof on your garage. If you have to replace it, what you
are worried about is what it is going to cost you when you have
to replace it.
Mr. Shuster. Right.
Mr. Nottingham. And when you look at thousands and hundreds
of thousands of bridges and tunnels out there across the rail
system, the replacement costs are just staggering. Now, I will
say the accountants in corporate accounting have used historic
costs for many decades. The Board and the ICC before us have
used it. It is considered in the accounting profession a very
mainstream accepted practice. The railroads have indicated at
one of our hearings that they are probably going to come
forward in the near future with a proposal for some type of new
rulemaking or new policy, and we look forward to seeing that.
Mr. Shuster. To use replacement costs instead of----
Mr. Nottingham. I believe so. That is what they indicated
at the hearing, and so we would put that out, of course, if we
thought it had some merit, we would put it out for public
comment.
And that does, of course, have real implications, too, on
how we measure the railroad's financial health.
Mr. Shuster. And I wonder if I could just get Mr. Mulvey to
respond, if he has the same viewpoint on that.
Mr. Mulvey. Basically, replacement cost makes more sense
from an economic standpoint, what it costs actually, what the
asset actually is worth today rather than what it was worth 100
years ago. And so replacement cost makes more sense.
The reason why we use historic costs, however, is that
getting a handle on what replacement cost would be, would be a
very, very Herculean undertaking.
Mr. Shuster. I did not hear that.
Mr. Mulvey. A big undertaking. It is something that would
take the railroads quite a while to do, but, obviously, we
valued the railroads in the past; I believe they were valued
back in 1920 when they were returned to the private sector
after being nationalized during World War I. Valuation is
possible.
You also need to determine which of the assets need to be
replaced. Historically, when you had all this excess capacity
out there, a lot of those assets were redundant and did not
need to be replaced. So you would not want to include those.
Today, however, as we move more toward full capacity in the
system, virtually all the assets need to be replaced and
therefore should be valued.
Now, as Mr. Nottingham said, the railroads, in their
testimony a few months ago, indicated that they might be
willing to try and find some way of getting a handle on what
the replacement costs would be, and we are looking to see
whether or not we want to open a hearing on that.
Mr. Shuster. Thank you very much.
Ms. Brown of Florida. Mr. Oberstar?
Mr. Oberstar. I want to thank the witnesses for their
presentations. They were all very thoughtfully done and
different aspects of the issue.
Let me come back to Mr. Boardman and follow up on the
question that Chairwoman Brown asked about positive train
control. We have seen figures, cost figures, for the investment
in PTC that runs from something I might call more realistic to
billions of dollars. Do you have solid figures on what it would
cost to install positive train control?
Mr. Boardman. I think we have good estimates, Mr. Chairman,
that we could use, depending on the type of positive train
control that goes in. We can provide those for you. I do not
have them today.
Mr. Oberstar. Well, it might be a different matter in the
high speed, relatively high speed, Northeast Corridor.
Mr. Boardman. Yes, sir.
Mr. Oberstar. And in a different matter in a corridor where
you have only a few passenger trains on long-haul surface or
commuter lines, is that the case?
Mr. Boardman. Yes. I think, for example, down in Panama
right now, Kansas City Southern runs a sort of a positive train
control that is fairly simple back and forth across Panama.
Mr. Oberstar. One of the impediments to expanding commuter
passenger rail service, put a passenger rail service rather
than commuter rail because it covers the whole range, is the
implementation of positive train control. If you are going to
have a really safe passenger system where we are mixing freight
and passengers on the same lines, then you need these
additional safety devices. Where in France, in Spain, Germany,
Italy, Denmark, the freight trains do not run on the lines with
passenger rail.
Provide us those figures in different scenarios such as we
have discussed, and expand upon that.
Mr. Boardman. We will do that, sir.
Mr. Oberstar. And we will make that available to all
Members on the Subcommittee.
Mr. Mulvey, your testimony is very intriguing. You have
some remarkable data, as you always have. But you discussed in
your written submission the 1989 effort of Congress that was
vetoed by Bush 41 to--as they call him affectionately in the
family--the ICC authority to approve buy-outs by non-carrier
investors. Would that be a useful tool for the STB, whether,
and considering these in this scenario: one, authority to
approve; two, authority simply to review and comment upon?
Mr. Mulvey. I think it would. We have testified before that
in the ICC Termination Act of 1995 our ability to initiate
investigations on our own was limited. And we have said before
that we do think that it is time to revisit some of the
limitations that were put on the Board. It was an important
process to begin to allow the railroads to become more
efficient and more competitive, et cetera, and to cut back on
regulatory activism.
But times have changed, and I think it would be useful to
give the Board more authority with respect to being able to
launch investigations on its own. Today, we have to wait until
somebody files a complaint before we can launch a rate case. We
did, for example, launch our own investigation of the fuel
surcharge issue. We did that under the guise of it being a
practice rather than a rate.
We do think that there should be some changes in the
legislation now with regard to George Herbert Walker Bush's
veto. While that is not dispositive, certainly it is indicative
of how we feel about our ability to do anything on this matter,
and it may require that we get Congressional legislation again
that would not be vetoed by whoever is in the White House when
the legislation gets passed.
Mr. Oberstar. We do not want to do anything in the
legislative arena that is going to discourage investment
capability. We want all modes of transportation to be able to
attract investment capital that is going to enhance the ability
of the various modes to grow, to meet the public demand. And
they are common carriers, whether they are trucking, or bus, or
interline, or railroads, or the waterways.
But where there is a strong public interest quotient in
these investment matters, and where investment could tip the
balance away from the common carrier purpose would be a matter
of importance to the public interest, do you not think?
Mr. Mulvey. I agree. I mean, the railroads do have a public
interest component, and railroads, as I said in my testimony,
are willing to invest up to where they see there is a private
return on their private investment capital. And the railroads
want the public sector to invest where there are public
benefits above and beyond the private benefits. The problem has
been how to get those public monies invested in the railroads
and get the railroads to agree to accept public assistance, as
well as whatever rules and regulations are going to go along
with that public money.
I think the railroads feel that if you take the money,
well, what does that make you? And so they said, well, we
eschew taking public funds. We would rather do it ourselves,
and we are doing fine. But as a lot of these studies have
shown, if you are looking for the railroads to greatly expand
the amount of freight that they handle or even maintaining
their market share, or have the capacity to handle more
passenger service, the investment is going to have to be
significantly greater than the railroads are capable of
investing.
Mr. Oberstar. Well, the comparison with the airlines is, I
think, appropriate, though not exclusively or uniformly
applicable throughout the mode. But they are both capital
intensive sectors; they are both common carriers; they both
serve the broad public interest; they are both vital to
mobility of people and goods in our economy. And the concerns
we had in the 1980s and early 1990s, when, subsequent to Mr.
Meadows' hearings, I held hearings on the subject, was, as you
put it so well, not the source or identity of investors but the
time frames and the goals for those investments. What are you
going to do with these investments?
Now, in the buy-out of R.J. Reynolds, cracker manufacturers
could be a dime a dozen. Department stores come and go. But
airlines are crown jewels in our transportation. Railroads are
unique. We only have four big-class ones, and three sort of
Class Is with an asterisk on them, and that is it. And they are
responsible for the massive movement of bulk commodities in the
economy.
And so what criteria do you establish to evaluate goals for
investments and time frames for investments?
Mr. Mulvey. That is difficult. With your analogy to the
airlines one of the big differences is that, while the airlines
are capital-intensive, most of that capital is in the airports
and in the airways' navigation systems, and those are provided
by the public sector.
The railroads are the only--well, I should not say only,
the pipelines, too, I suppose--but the railroads are the major
common carrier that have to provide their own rights-of-way,
their own infrastructure. And somebody who is going to take
over a railroad needs to have the understanding that that
infrastructure is critical to the Nation's overall economic
well-being, and to industries other than the railroads.
Too often we look at the railroads, large railroads and
shortline railroads working together as if they are the only
players. But there is also the shipping public; there is also
the economy at large which needs to be taken into account when
we are evaluating these investments and investment strategies.
Mr. Oberstar. Thank you very much, Madam Chair. I
appreciate it, and there are others Members who have questions.
Ms. Brown of Florida. Thank you.
We are going to have additional rounds, but, you know, as I
sit here I am thinking we are in the middle of a war, and we
are talking about aviation. But the railroad is how we, through
the military and the common carrier, move that equipment. And I
want to know, do we have the tools in place to protect the
traveling public--not the traveling, but the military--and
making sure that we do not compromise the system?
I am talking to you, Mr. Nottingham.
Mr. Nottingham. Yes, Madam Chairwoman. We do have those
tools and, first of all, we have not seen any problems in that
regard, and if we were to, a complaint by anybody connected
with the military would be treated by us as the highest
priority. We would act on that with immediacy.
And that could include even a licensing type issue of
whether such a railroad is even fit to continue to be a player
in our system. Anyone who would disrupt military supply or
logistics, it is just unheard of, but it is a fair hypothetical
to think about. We should be prepared, as we always try to be,
for worst case scenarios.
Ms. Brown of Florida. Well, I am just thinking that this is
something that we need to consider as we move forward. We talk
about airline as a common carrier, but we don't send military
equipment on airlines but we do through the railroads.
Mr. Boardman, do you want to respond to that?
Mr. Boardman. No, I agree. It is important that the
railroads be in a position to handle the Nation's military
security needs. Some thing do go by air today, but still heavy
equipment and tanks and all of that need to move by rail.
But, as Mr. Nottingham has said, we have not had any
complaints from the DOD or anybody else that the railroads are
not fulfilling their obligations right now.
Ms. Brown of Florida. Mr. Brown.
Mr. Brown of South Carolina. Thank you, Madam Chair, and
thank you, panel, for being part of this discussion today. I
represent Charleston, South Carolina, which is a port city, and
we are certainly infected by transportation needs and the
railroads being one. And that leads me to my question.
The impact of expansion of the Panama Canal on the East
Coast ports cannot be underestimated. Container traffic through
Charleston alone is expected to grow by nearly 300 percent by
the year 2020 with other regional ports seeing similar
increases. And this is my question: What strains will that
place on rail infrastructure on the East Coast? And if there
are any plans to prepare for it.
Mr. Nottingham. Congressman Brown, it is an excellent
question. Thank you. That trend, increasing and growing trend,
even currently as the economy appears to be softening,
continues to march forward. In other words, more freight
needing to move coming into our ports.
We had a hearing in April of last year where we invited, we
had leaders from the port community who participated, and they
forecast that we should be getting prepared for, basically, a
doubling of port traffic over the next 15 to 20 years, and we
do not have the infrastructure in place in most of our port
locations, if not all of them today, to handle a doubling of
traffic and containers and trucks and rail. And rail will be,
must be, a key to meeting that challenge.
I had the pleasure and the privilege of walking and seeing
and touring the port of Jacksonville with Chairwoman Brown last
year, and they have some exciting plans and developments there,
and I think that that is an example of a port that is well
positioned with room to grow with the right kind of smart
planning. Charleston is an incredibly dynamic port. I used to
work for the Commonwealth of Virginia with the Port of
Virginia, and Charleston was a very tough competitor to try to
attract business when you had Charleston there.
So we need to focus on_what is the big question_getting our
infrastructure developed, making sure we have, and we are going
to need, more investment which links back, of course, to this
hearing. And just one of my messages today for the Committee is
just be cautious about not sending too many signals to
investors that they are not wanted because we have not seen any
problems yet with any investors from a macro perspective.
We have regional safety-related embargoes. We will hear
about them, I am sure, later in the next panel. We have other
problem spots, but we do not have a trend of a problem of
investors trying to harm rail transportation. We need more
investment from everywhere we can get it as long, as I said in
my remarks, they respect our laws and have respect for our
public interest and our transportation needs.
Mr. Brown of South Carolina. Let me follow up on another
question to Mr. Boardman. What is your position on the creation
of a user fee supported rail infrastructure and trust fund?
Would this idea help or hinder the projected freight rail
capacity shortfall? And do you agree that it would inject
politics into what should be business decisions, or would it
invest in improved capacity?
Mr. Boardman. Mr. Congressman, I do not have a position on
that. It is not something that FRA generally deals with. We can
go back and look and look at a U.S. DOT position on that, but
nor the FRA.
Mr. Brown of South Carolina. Well, let me ask you one
further question. Rail infrastructure lasts a long time, so
there is always the temptation of a rail management to defer
maintenance to help the company short-term financial position.
But lack of regular maintenance would, ultimately, impact
safety. Does FRA have any new technology in place which can
detect deteriorating track conditions before they actually
become a safety hazard?
Mr. Boardman. Absolutely, we do, Congressman. That is
something we can talk about. We have, in particular, and most
of the railroads today are recognizing a joint bar crack
detection system, an automated joint bar crack detection system
that was developed by the FRA and is being adopted by the
industry.
There is also other technology out there today that it is
making improvement, and railroads are beginning to invest in
it. One is what we call WILD, which is a roadside detector. It
is a wheel-impact load detector. It tells the railroads whether
there is too much weight or if there is an outer-round wheel on
the rail today that negatively impacts the ability for the rail
to withstand the loads.
There is also other roadside detection systems, whether it
is acoustic bearing sensors or hot box detectors, which has
been used for a long period of time. And there are many other
technologies, and we would be happy to explain those to you and
provide additional information in the future.
Mr. Brown of South Carolina. Are the railroads pretty
responsive once you make that determination?
Mr. Boardman. Yes. We are seeing them develop and make
investment in that area. I am always anxious to see them invest
faster than they are, and we encourage them in each one of the
periodic meetings that we are in to use all of those tools and
resources to reduce risk throughout their systems.
Mr. Brown of South Carolina. Thank you. Thank you, Madam
Chair.
Ms. Brown of Florida. Thank you.
Mr. DeFazio?
Mr. DeFazio. Thank you, Madam Chair. Chairman Nottingham,
as I understand--and I am going to focus in on one merger
because it has had particularly, or one acquisition detrimental
impact in my district, which is the Fortress Acquisition of
Rail America.
From what I can tell in reviewing the documents submitted
and the back and forth, it seems like the major focus and
pretty much the entire focus, or the only focus of the Board in
this matter, was whether or not they intended to try and create
linkages in a monopoly as opposed to how they might operate or
continue to operate or meet their common carrier obligations.
Is that pretty much what your charge is, and that is what
you did in this case?
Mr. Nottingham. That is a significant part of it, sir. We
look at transactions. We look at the impact on competition
nationally and regionally. We look at whether any shippers will
be left with only one rail carrier.
Mr. DeFazio. Or none?
Mr. Nottingham. Or none, or if they previously had one or
more.
Mr. DeFazio. Well, mine got left with none, so--okay. So,
but yet you do not think you need--you mentioned earlier when
you are talking about capital, you said, well, you are really
looking at the MNA issues. But I mean once someone takes over a
line, what is your scrutiny of their--what do you do on an
annual basis to scrutinize their capital investment?
Mr. Nottingham. We have arranged, we make a revenue
adequacy determination on the Class I railroads. We keep and
capture----
Mr. DeFazio. Revenue adequacy, but, I mean, do you track if
the revenue would be adequate to make capital investment? Do
you track it to the point of they made capital investment? They
have a plan for capital investment? They have a long-term plan
to operate the railroad and invest adequately to maintain the
capital? That is not part of your charge, really, is it, and
you do not do that?
Mr. Nottingham. It generally is. We generally do, but it is
not a question, for example, if a small short-line decides for
a year or two they are not going to make any significant
capital on----
Mr. DeFazio. But that is 10 years. It is in the case of
CORP, it was 10 years ownership by Rail America, 10 years of
virtually on investment to the point of credible safety
problems, which were amazingly and suddenly discovered by
Fortress, who apparently didn't do due diligence. It says here
in their filing, they have no current plan to abandon any rail
lines in connection with the proposed transaction.
Now, how long would your board hold them to that? What do
you consider to be current? Is it the day after they sign the
papers, week, ten weeks? In their case it was 220 days to
closure. Immediately, abrupt, non-notified closure. So you
think they were acting in good faith here when they had no
current plan to abandon, when they took over and you shouldn't
have any concerns about these sorts of things?
Mr. Nottingham. I want to pick my words carefully. Because
we are told we may well have an active complaint brought to us
on that very situation soon. And the three board members here
will be the three decision-makers on what to do with that
complaint. So I will be careful not to characterize the facts
on the ground there, but do want you to know we have been very
actively engaged, and I have personally, in trying to make sure
we get that service restored in Oregon.
We know how important it is. We know it is a serious
problem. As you point out, it is a problem that appears to have
been developing well before Fortress was on the scene. As FRA
has validated, it does appear to be based on some very real
safety problems.
Mr. DeFazio. I understand the problems. It seems to me
there is a problem with the existing system of oversight, when
a rail line is able to defer maintenance for more than ten
years with no scrutiny, get sold and then 220 days later be
shut down because they have problems that have been more than
ten years in the making.
I guess my major concern about your testimony is this sort
of, all capital is alike, all capital is not alike. And I am
not talking about passive investors, but I am talking about
whether someone is a predatory investor, some want to strip
assets, or someone who is a speculative investor and wants to
optimize their current revenues and meanwhile sit on potential
assets. In the case of this line, and again, perhaps you can't
respond because you are anticipating a complaint, but the point
is there is some major potential in that line if we end up with
a major container port in Coos Bay, which is being seriously
looked at by Maersk.
But in the interim, it is not particularly profitable to
operate. So how long would we allow someone to not abandon
something but to not operate it and to sit on it because they
are betting that it might be worth something down the road but
they don't want to help the shippers today and meet their
common carrier obligation.
Mr. Nottingham. As I stated in my statement, the law is
very clear on the common carrier obligation. No railroad can
abandon or stop service on the line just because they are not
making money on it or if it is inconvenient. I will defer to my
colleague, Joe Boardman, on the safety----
Mr. DeFazio. Well, I get that. I get that. But at a certain
point, I have read through those statutes or the rules about
abandonment and notification and feeder line. It all really
seems based 30 years ago. I really can't believe that you don't
think as current chairman that this stuff doesn't refer to a
system that doesn't exist any more, which is a few massive,
monopoly railroads in this Country with huge feather-bedding
problems and other under-investment problems and neglect and
all that stuff, shutting off their past interests to today's
world which is very different. I just think we do need some new
tools, new scrutiny. Vice Chairman Mulvey, would you comment on
any of this?
Mr. Mulvey. I share your concern about what is happening in
your district. As Chairman Nottingham has said, we have tried
to monitor this. We sent people up there to help work with the
ports and the shippers and the railroads to see what can be
done. And there is a lot of disagreement over who is going to
be responsible for, I believe it was $24 million in cost,
whether the railroad was responsible or whether or not the
shippers had to contribute a substantial amount.
I think one of the problems is that the Board is relatively
small. This problem may be one that is not unusual around the
Country, where railroads have spun off their shorter line
operations. The short-line operator has not made the
investments in the infrastructure that they should. This is not
brought to our attention. We don't have a lot of ability to do
oversight until someone brings it to our attention as a common
carrier obligation issue.
So by the time the shut-down occurs, you have safety
problems, and we agree with Mr. Boardman that this railroad
right now cannot be operated safely. The problem is manifest,
and now we have to see what can be done about it.
Mr. DeFazio. Thank you. Anybody else? Thank you, Madam
Chair.
Ms. Brown of Florida. Mr. Westmoreland?
Mr. Westmoreland. Thank you very much, Madam Chairman.
Talking about the Oregon problem and the Coos Bay tunnel, could
you explain exactly why, Mr. Boardman, could you explain
exactly why the tunnel was closed?
Mr. Boardman. I can't give you the technical answers to why
the tunnel was closed, but it was no longer safe to conduct
operations is the answer. In other words, our obligation really
is, as I was sitting here thinking, as the Chairman was
talking, is that we would be more likely tan anything else to
err on the side of greater safety and want to shut down the
tunnel if there was a safety concern with that. When we went
out to take a look at it, sure enough, and we borrowed some
expertise that we didn't have at the time to evaluate the study
that was done by the railroad, we agreed that what they were
looking at was real, there was a real problem there and there
was going to have to be major investment required here in order
for this to continue to stay open.
Mr. Westmoreland. Would you say that that line being
privately owned made it more of a problem than if it had not
been?
Mr. Boardman. If it wasn't privately-owned, the alternative
would be a public operation, is that what you mean, sir?
Mr. Westmoreland. Yes.
Mr. Boardman. I think that the difficulty today, whether
you are on the private side or the public side, is finding the
resources necessary for you to make the improvements in an area
that you might like to improve but may not be able to pay back.
That is part of the difficulty that we see in some of the loan
applications that we see coming forward, even from the private
sector, is they have to be able to pay back, they have to have
it.
I think, and I do understand what Congressman DeFazio is
saying, that if a railroad or anybody buys the line on
speculation for land development, so to speak, or a future
opportunity for profit, then that is maddening for those who
want to grow their economy in the communities that this
operates in. And I don't have a good answer to what to do about
that. I think those are the tools that both Chairman Nottingham
and Mr. Mulvey were trying to talk about, of how they dealt
with that and how they would deal with that. We deal with it
very differently, and it is much more clear-cut for us in the
sense of looking at it, is it safe, isn't it safe, and if it
isn't safe, it should be shut.
Mr. Westmoreland. Thank you. No further questions, Madam
Chairman.
Mr. DeFazio. Madam Chair, if I could just for a moment
follow up on that.
Ms. Brown of Florida. Yes.
Mr. DeFazio. My understanding is prior to the acquisition
by Fortress, there was a pending application for a loan or that
line to make safety improvements. I don't know if you are
familiar with that.
Mr. Boardman. I trust you, having investigated this,
Congressman, that that is the case.
Mr. DeFazio. A RRIF loan.
Mr. Boardman. Yes. I trust that it occurred, I don't know
about it.
Mr. DeFazio. I was just wondering, because what you are
saying is, in some cases you make a determination or the hard
facts are someone can't show they have the wherewithal to pay
it back. In this case, I understand, it was just arbitrarily
withdrawn. There was no finding that the revenue didn't exist
to pay back the loan just when the speculators, excuse me, the
Fortress Group took over Rail America. They just withdrew the
loan application.
Mr. Boardman. I understand.
Ms. Brown of Florida. Let me just say that Mr. Giles, CEO
of Rail America, will be on the next panel.
Mrs. Napolitano.
Mrs. Napolitano. Thank you, Madam Chair. There are many,
many questions that I would like to put forth, but in the
interest of time, I have the one to Mr. Mulvey. This is kind of
a question piggy-backing with Congressman DeFazio's question
regarding CSX's obligation to carry. They are suggesting, the
TCI's recommendation is that they double the rates over the
next ten years. What impact would this have on their ability to
fulfill, CSX, of the common carrier obligation. And either you
or the Chairman, would you care to address that?
Mr. Mulvey. Doubling the rates would probably cause an
awful lot of rate cases to be brought before the Board.
Certainly that traffic that was truck competitive or otherwise
intermodally competitive might in fact leave the railroads and
go onto our highways. That traffic that is captive and has no
alternative would have no choice but to either pay the rates or
bring a case before the Board as being an unfair and
unreasonable rate, at which time the Board would launch a
proceeding to examine whether the rate was reasonable. If we
found it to be unreasonable, we would order the rates to be
rolled back.
So we can act if they try to raise the rates too much.
Mrs. Napolitano. How would you be able to then have
oversight over whether or not it is reasonable?
Mr. Mulvey. The way it stands right now, the shippers who
are being charged these rates will have to bring the case
before the Board. Now, the Board has recently undertaken some
actions, which are making it easier and cheaper to bring a rate
case before the Board. Some of these large rates cases were
taking years to process and were costing millions of dollars.
We have instituted a number of changes which we hope will speed
the process up and lower its cost.
Also, we just instituted a set of procedures for small rate
cases which will allow shippers to bring cases before us for a
$150 filing fee and to follow one or two procedures, depending
upon the value of the case, to get relief from these excessive
rates, if indeed a doubling was attempted.
Mrs. Napolitano. What kind of priority would you give those
cases?
Mr. Mulvey. As soon as we get them, we open up a proceeding
and begin to process them.
Mrs. Napolitano. How are you running them?
Mr. Mulvey. However we need to make sure we have the staff
to do it.
Mr. Nottingham. Those cases would get the highest priority.
And those comments, I have seen some of the comments in the
public domain about TCI believing perhaps that they could just
come in and wholesale dramatically raise rates. I just have
advice for folks looking at investing in railroads. It is one
thing to do a textbook exercise and talk to some consultants
about how you can squeeze more profits out of a going concern.
But in the real world of really operating a railroad and
regulated environment with this Committee watching closely,
other Committees, our agency, it is not just a textbook
clinical exercise. And anyone who thinks they can just come in
and double rates and easily walk away with huge profits I think
is kidding themselves and showing some naivete. We would expect
significant rate complaints to us. As my colleagues has
mentioned, we have made it much easier, cheaper and quicker to
bring those cases. CSX actually is faced with the first two
under our new reformed simplified standards currently under the
current management.
Mrs. Napolitano. Great. I have more questions, and I am
running out of time. As the railroad industry grows, the
railroad companies are putting in investment. But is it
sufficient for upgrading their infrastructure, for training
employees, for investing in green locomotives? And of course,
assisting communities with congestion mitigation and safety?
I can dovetail an accident in Riverside County day before
yesterday, that the emergency crews were formulating an action
plan but have stayed clear of the derailment because there were
two rail cars that contained hydrochloric acid and some other
substances, they had to evacuate the whole area.
Are we scrimping in the infrastructure to provide safety
mitigation for the communities? Is that part of what you may be
looking at as they increase their rate? Are they going to put
that back into the infrastructure?
Mr. Boardman. We would provide that information,
Congressman, to STB or to anybody else looking at the
investment in safety. That is why I jumped in here for the
Chairman. I am somewhat familiar with the accident that
occurred yesterday as well, and the difficulties that you have
had in the past in some of those safety issues. I guess, and
earlier on in your question, I would have to say, where would
you draw the bar of what is satisfactory. To us, satisfaction
is to get to almost a zero tolerance in those kinds of
situations. So we need to make sure that there is continuing
improvement and process in every one of those categories,
whether it is in releases such as occurred yesterday or whether
it is in more catastrophic releases or whether it is in just
generally improving investment and safety infrastructure
throughout California and all the other States across the
Nation.
Mrs. Napolitano. Well, specifically because it is the
Alameda Corridor, and it is going to be more than just
California that is going to have to be addressed in terms of
being able to upgrade that infrastructure for the safety of the
communities that you are going to go through. So in essence, I
don't see any real meat in saying to the railroad companies,
you ave had banner years, how much of that are you going to put
back into your infrastructure for the safety of the communities
where you are going through?
Mr. Boardman. That is exactly right, and it is one of the
reasons we meet with them every year to talk about, what are
they investing in this year, how are they making improvements.
We are basing it on our inspection reports, the real safety
data that comes out, and looking for a continuing improvement.
Mrs. Napolitano. But shouldn't it be more than just once a
year? People's safety is worth more than that.
Mr. Boardman. I meet with them once a year, every one of
them, I make sure that I do that. We have our regional folks
meeting with them on a very much more frequent basis.
Mrs. Napolitano. Does that translate to meeting with the
communities themselves to be able to assure them that they are
taking steps? Because none of my communities have ever even
said that they have any contact with anybody, whether State,
local, Federal, coming in to talk to them about the safety of
their back yard.
Mr. Boardman. I understand. Part of the way we do that is
we work with the California Public Utility Commission. They are
part of us and part of the agreement that we work with them on.
And they have a much closer contact with a lot of those
communities, so we do work with them.
Mrs. Napolitano. Which was my reason last year, last budget
year, to be able to introduce the ability for them to have some
oversight on those areas that you do not. That was my point.
Mr. Boardman. I understand. I understand that issue.
Mrs. Napolitano. Thank you, Madam Chair.
Ms. Brown of Florida. Mr. LaTourette.
Mr. LaTourette. Thank you very much, Madam Chairman, and I
apologize for not being here for the questions.
Administrator Boardman, it is nice to see you again. But if
you have already answered this question, then I don't have any
questions. Have you been asked at all during the course of the
rounds of questioning to opine on one of the proposals that the
railroads have put forward in this Congress, and I think the
bill has been introduced by Mr. Meeks of New York and Mr.
Teaberry of Ohio, relative to infrastructure tax credit?
Mr. Boardman. Mr. Former Chair, Mr. Congressman, the
Department has looked at the investment tax credit from the
standpoint of we haven't taken a position for or against that.
At this point in time we understand it, we understand what the
railroads are trying to accomplish here but have not taken a
position.
Mr. LaTourette. And Mr. Nottingham or any other members of
the STB, is that something that you have one, looked at and
two, believe that the STB has any dog in that fight?
Mr. Nottingham. We have looked at it, and I will speak for
myself, as the Chair of a decisionally-independent agency, it
is a good idea. It is good for job creation, it would allow
shippers, and I emphasize shippers, not just railroads, and
railroads, big and small, to actually be incentivized to go out
and build more rail infrastructure, which is good for safety,
good for job creation, good for mobility, good for congestion
relief. We need to get moving and ask ourselves every day, what
are we doing today to get more rail infrastructure built. And
the investment tax credit idea is an excellent idea in that
regard. It is not going to solve every problem everywhere, but
it will help. And it is something that the last time I checked
had some bipartisan support. I am not lobbying for it, you
asked ask the question, I think it is a very good idea.
Mr. LaTourette. Dr. Mulvey or Mr. Buttrey, do either of you
have a different opinion or the same opinion? Dr. Mulvey?
Mr. Mulvey. Not too much different. It can help, obviously.
I think one of the concerns that has been expressed is making
sure that investments made under the investment tax credit just
don't simply substitute for investments the railroad would have
made otherwise. So we do need to make sure that this increases
net investment rather than simply substitutes tax credit
investment that would have been made otherwise. But in terms of
getting money into the system, anything would help. I suppose I
am a little more skeptical about its chances right now, given
the other demands on the budget, but we will see.
Mr. LaTourette. Mr. Buttrey, any observation you want to
make?
Mr. Buttrey. I would agree with my colleagues who have
already spoken to the issue and I would have nothing
substantive to add to what they said. I think it is a good idea
as well.
Mr. LaTourette. Thank you very much. Thank you, Madam
Chair.
Mr. Shuster. Madam Chair, could I just follow up real
quickly on that question from Mr. LaTourette? I think it is
pretty well known in the Class Is that we need to invest in
significant amounts of money. I have some knowledge, but can
you address the situation in the short-lines? Is it a greater
problem that we see in Mr. DeFazio's case, where there is a
tunnel that needs over $20 million? What is the situation among
short-lines with the need to invest in infrastructure for not
only capacity but more importantly for safety?
Mr. Boardman. I can address it first and then perhaps my
fellows can add to it, is that one of the definitions or
reasons that we have so many short-lines, over 500 short-lines
today, is as a result of the Staggers Act and the
rationalization of the system that many of those properties
were much less profitable or looked at with the fact that they
didn't make as much money as some of the main lines, as the
Class Is rationalized them.
So the answer, I believe, is that it is more difficult on
the short-lines today to find the resources necessary to make
an improvement on a bridge or to make line improvements to
compete for the future. It was one of the reasons, again, that
the RRIF program was established and worked forward. And I
believe also another reason that Congress in the past has
approved some tax incentives with the short-line railroads.
Mr. Nottingham. I would just add to that, Mr. Shuster, that
the short-line industry, by experience, has greatly benefitted
from the investment tax credits they have received in the past.
I have gotten that on good authority from a number of short-
lines. And they very much fill that gap, they stand between
having no service for many communities and actually having some
service. They often are the outgrowth of the Class Is having
fully rationalized their network and gotten rid of track that
was not highly profitable, especially in a Class I slightly
more regulated environment with some higher costs and more
labor regulations.
So the short-line role should never be forgotten. They make
an incredible impact every day, they are filling a lot of gaps
and needs. But you are right, within the short-line community,
that is where we are seeing more of these situations of some
difficult maintenance and infrastructure condition problems. A
lot of them are longstanding, a lot of them go back to the
reason the Class I shedded that line to begin with.
Mr. Mulvey. I worked on the investment tax credit for the
short-lines. We originally had a bill that was much larger. The
study that preceded this was a study by Zeta-Tech, I believe.
They identified, this was 10 years ago, about $7 billion in
short-line railroad needs if they were going to be able to
accommodate the 286,000 pound cars. Now, the investment tax
credit that finally passed, I believe, allowed for $1 billion
over three years. I don't believe all of those monies have yet
been spent.
Meanwhile, I think the need has probably grown over that
time. Mr. Boardman mentioned the RRIF program. Unfortunately,
that program has taken a long time to get started and has not
exactly been spending money like a drunken sailor. There are
great needs out there for the short-lines, and we are going to
need to find ways of getting more money to them, if they are
going to operate safely and continue to be a valuable part of
our rail transportation system.
Ms. Brown of Florida. Mrs. Napolitano.
Mrs. Napolitano. Thank you, Madam Chair. One more question
to Mr. Mulvey. TCI recommends that CSX limit capital spending
under certain circumstances, including efforts to fund a
greater than normal stock buy-back. Your thoughts?
Mr. Mulvey. The Children's Investment Fund believes that
the CSX's capital structure is one that is not reflective of
other industries of similar risk and wants them to buy back
stock so that they have a debt equity ratio that is more
similar to other industries. My wife is a financial analyst,
and she would be better able to answer that question, but she
is not here. So my best effort is, if you are looking for ways
to spend money on the railroads, one would think that investing
in the plant and equipment to handle, as I said, the future
growth that is projected for the industry is a better spending
of the money than buying back stock. But there I am speaking as
a public policy analyst as opposed to an investor in the
railroads.
Mrs. Napolitano. And the other two gentlemen?
Mr. Nottingham. Just to point out that as I have learned
over the last couple of years and in acclimating to this job,
the tension between Wall Street, so to speak, investors and
railroads on the very question you raise about the appropriate
level of stock buy-backs, this goes aback a long time. It
predates the recent flurry we have sense of interest by the
Warren Buffets and the Children's Investment Funds and large
hedge funds. It goes back to the anecdote that Chairman
Oberstar mentioned about the former CEO of the Burlington
Northern Santa Fe, Mr. Krebs, who launched a very controversial
infrastructure improvement investment program against the
vociferous criticism and opposition of most of Wall Street and
the investment community. Years later, that was shown to be a
brilliant tactical decision. That railroad was helped
tremendously by those decisions.
It just goes to show that this is an age-old tension about
basically, return more money now to investors or invest more in
the infrastructure. I think we will see that tension continue
to play out in the years ahead.
Mrs. Napolitano. But are you in a position to make any
recommendations to those boards of directors, if you will, of
the different rail companies, to say to them, your investment
now is going to pay off in the future, much like BNSF?
Mr. Nottingham. I would just generally certainly encourage
more investment by the railroads in their infrastructure. At
the same time, I try to be wise to what I am not an expert in.
Of course, the railroads have to keep their eyes on a couple of
different balls. One of them is they have to make their
business attractive to investors. If they lose too many
investors, then they have no money for their capital
infrastructure. So they are constantly calibrating that balance
between possibly doing some stock buy-backs, possibly doing
some things to make investors happy in the shorter run while
also keeping their going concern well invested in.
Mrs. Napolitano. Then the flip side of that would be, how
much are they losing in public opinion, because of the
derailments and because they are not upgrading the
infrastructure and they are not addressing those issues that
are vital to the taxpayer?
Mr. Nottingham. And the way public opinion often plays out,
of course, in publicly-traded corporate America is through
activist shareholders. That is what we are partly here today to
talk about and the next panel will be, I am sure, very much
focused on. Through our shareholder rights we all have, whether
you are involved, as many of us are, in the Federal thrift
savings plan----
Mrs. Napolitano. But I am talking specifically, when you
have derailments, that costs the company, that costs the
overall, how would I say, bright name of a rail company doing
its job. They are there, but you don't see them. You know they
operate. But once you have an accident, then they are in the
spotlight and they are not getting--they are getting adverse
publicity, to be honest.
Mr. Nottingham. Right, and it is costly. They are exposed
to liability.
Mrs. Napolitano. Right, but how do you balance that? Does
that play a part in how they are looking at investments in
their infrastructure?
Mr. Nottingham. I think it does. It has to. Railroads know,
as Mr. Boardman pointed out, that safety is good for business
and it is bad for business to have a reputation for having
safety problems. Investors, whether they be in New York or Hong
Kong or London, they look at the safety situation. They look at
the reputations of the railroads. Because the exposure there is
huge, the liability exposure, if you are a poorly-run railroad
and you are prone to accidents, and they pay enormous insurance
premiums.
So railroads are very, for their self-interest, not for any
charitable or community interest, those might exist, too, those
self-interests. But for their self-interests and their profit
motive, they want to be as safe as they can. Because nothing is
worse for business than having a reputation as an unsafe
railroad.
Mrs. Napolitano. And the money they lose in the suits and
the attorney fees. Thank you. Thank you, Madam Chair.
Ms. Brown of Florida. Now, Mr. Lipinski.
Mr. Lipinski. Thank you, Chairwoman. I want to follow along
the lines of the questioning of Chairwoman Brown and Chairman
Oberstar and also Chairman DeFazio, actually. The concern over
what type of impact this type of investment may have on
improvements in railroad infrastructure and rail service in the
Country, I represent part of Chicago. And we all know it is the
rail hub of the continent. Certainly, I have had experience
with all the Class I railroads. CSX, in my experience, has
generally been very positive in their public responsiveness.
But in addition to that, as you are all familiar with,
CREATE, the much-needed rail modernization program, not just
for the Chicago region, but for the Nation or really for the
continent. In the SAFETEA-LU bill, I was able to work with
Chairman Oberstar to get $100 million for that. The Class I
railroads have put in $100 million, including CSX, has put that
in and is currently moving forward. Hopefully working on that
some more, certainly the need of more investment, and more
investment in the next Highway Bill.
But it is critical that there is this investment also by
the railroads. It is a good example of a good public-private
partnership. So in light of, I am just interested in the
Federal Government's perspective, the FRA, STB, in light of
what we talked about here, Rail America, what your thoughts are
and what type of impact that this type of investment may have
on improvements to rail infrastructure in the future.
Let me throw this other part out there also, and leave it
out there for comments. Chairman DeFazio raised this issue with
Rail America, the rail line abandonment. What type of oversight
do you have right now over such things as this, and do you
think there is room for a greater oversight on those? Let me
throw that out there and get your comments.
Mr. Nottingham. Well, just real quick, because you touched
on some very important issues, Congressman, thank you and thank
you for personally showing me the great project when we were in
your district over a year ago, with Mr. Mulvey as well. It is a
project I have been working on since I was at the Federal
Highway Administration on the highway aspect of it and the
funding. It is a tremendously important project. It is at the
top of the list of important things we could do to improve rail
congestion and generally surface congestion.
As most of us know, it takes longer to get across Chicago
in a rail car than it does to get from the Port of L.A.-Long
Beach to Chicago, in many cases. We can't go forward in
perpetuity with that kind of reality. But that is your
question, on abandonments and our powers, we do have broad
powers. In an abandonment situation or probably I might
rephrase your question to an embargo situation, we often see
what Mr. DeFazio was just talking about as an embargo situation
based on safety grounds.
Generally speaking, I won't speak to any particular case,
because we do have one or more coming to us, we believe, the
rail carrier has an obligation to reopen the line as promptly
as is reasonably possible or to abandon the line and to put up
for sale, so another carrier can come in and operate that.
Again, you cannot embargo a line or stop service on a line just
because it is no longer convenient for you or profitable to
operate that. You have to go through the processes and the
regulations that we have on the books. So I would hope that
answered at least most of your questions.
Mr. Lipinski. Mr. Mulvey?
Mr. Mulvey. With regard to the CREATE project, as you are
aware, I have been a long-time supporter of it and I have been
out there several times. I am glad to see the project is moving
forward. It is a very good project, and it is critical to the
efficiency of the Nation's rail transportation system. As part
of CREATE, there might be some new line construction or there
will be some abandonments. One of the Board's responsibilities
is to conduct an environmental analysis of any new construction
or any abandonments to make sure that they are done in a way
that is environmentally sensitive. So we will be involved in
any new construction that is associated with CREATE or other
projects in the Chicago area. As you are aware, there are
certainly other projects in the Chicago area right now that we
are watching and monitoring very, very closely.
So any construction or abandonments that are associated
with those projects, our Section of Environmental Analysis will
undertake the appropriate study.
Mr. Lipinski. Mr. Boardman, do you have anything to add?
Mr. Boardman. Only I guess insofar as, I am not sure you
were here earlier, Congressman, that the thing I think that is
particularly important is the necessity for patience by an
investor to be involved in railroad investments because of the
time that it takes to have a, not only a pay-back, but also a
business case made for some of the technology that is out there
and available today.
In particular, just as an aside, as the CREATE project
moves forward, there are other things that are occurring around
it now which drive it as well. We are seeing some activity now
in the private activity bonds, for example, some of the
railroads around Chicago. Because as we have discussed in the
past, and I have also been involved with this for a long period
of time, there is an absolute necessity to fix this problem,
and it is going to get fixed.
Mr. Lipinski. Thank you.
Ms. Brown of Florida. I want to thank the panel, and in
closing, I want to know what recommendations you have, and you
can submit those to us later, and anything else you want to
add, that will ensure that Congress does not endanger future
railroad investment by the financial markets, taken in
consideration common carrier, our stakeholders, whether it is
the union, whether you say to the port, and we are bringing in
those big ships. But it doesn't work if we don't have the rail
in place and that investment in place, or else you are talking
about 3,000 trucks a day, 365 days a year, which would destroy
my entire community.
So it is a delicate balance we have here. We want the
investment, but we do not want, it is a balance.
Mr. Boardman. I will submit, as you offered, an opportunity
in writing to you, Chairwoman.
Ms. Brown of Florida. Thank you, Mr. Boardman.
Mr. Nottingham. I would like to do the same, and continue
to work closely with you and your Committee and Subcommittee,
Madam Chairwoman. You raised some critical issues. I think
hearings like today's are very helpful in that regard. This is
a very dynamic and exciting time in the rail transportation
world, especially here in the United States. A lot of good
things are happening that weren't happening 5, 10, 15, 20 years
ago, that are largely good. We have some challenges and some
things we need to be watchful for, too, to make sure we don't
have any sharp players getting involved looking for a quick
opportunity at the public's expense. But I think we have the
tools to protect against that. And we look forward to working
with you in the months and years ahead.
Ms. Brown of Florida. Thank you. I want to make sure that
you have the tools that you need.
Mr. Mulvey?
Mr. Mulvey. I just wanted to join the Chairman in thanking
you. If we have any suggestions for legislation or legislative
changes that we think are necessary, we will provide those to
you as well. Thank you.
Ms. Brown of Florida. Thank you. Mr. Buttrey?
Mr. Buttrey. Thank you, Madam Chairman. I have nothing to
add.
Ms. Brown of Florida. Thank you all very much.
Second panel.
Thank you very much. I would like to welcome and introduce
our second panel. Our first witness is Mr. Snehal Amin, a
Partner with the Children's Investment Fund. Our second witness
is Mr. Michael Ward, Chairman, President and CEO of CSX
Corporation. And I want to do a disclaimer here, because I want
everybody to clearly understand that CSX is in my district. I
have been an elected official for 25 years, and I appreciate
the support and the community involvement that CSX has given
our community. It is the kind of partner I want all of the
companies to be in my community.
Thirdly, Mr. John E. Giles, CEO of Rail America. And our
final panelist is Mr. Robin Greenwood, Assistant Professor at
the Harvard Business School.
Let me remind the witnesses that under Committee rules,
oral statements must be limited to five minutes, but the entire
statement will appear in the record. We will also allow the
entire panel to testify before questioning the witness. We are
very pleased to have all of you here this afternoon, and I
would recognize Mr. Amin for his testimony. Welcome.
TESTIMONY OF SNEHAL AMIN, PARTNER, THE CHILDREN'S INVESTMENT
FUND; MICHAEL WARD, CHAIRMAN, PRESIDENT AND CEO, CSX
CORPORATION; JOHN E. GILES, CHIEF EXECUTIVE OFFICER, RAIL
AMERICA; ROBIN GREENWOOD, ASSISTANT PROFESSOR, HARVARD BUSINESS
SCHOOL
Mr. Amin. Thank you, Madam Chairman, Ranking Member
Shuster, Members of the Subcommittee. My name is Snehal Amin
and I am a Partner at The Children's Investment Fund
Management, commonly known as TCI.
I appreciate the opportunity to testify before you and hope
to answer three questions for the Subcommittee. First, who is
TCI? Second, what does TCI hope to accomplish in the railroad
industry, and at CSX in particular? And third, how can we as a
Nation avoid a freight transportation crisis?
We founded TCI to invest with the philosophy we believe in,
which is long-term, fundamental investing for the benefit of a
cause we believe in, which is helping children in poverty. The
majority of our investor base is U.S. institutions, largely
prominent university endowments. We are based in London and
regulated by the U.K. equivalent of the SEC. And true to our
cause, the vast majority of TCI's profits have gone to our
charitable foundation, which is dedicated to eliminating
disease and poverty amongst children in the developing world.
What does TCI hope to accomplish in the railroad industry
and at CSX in particular? The short answer is the full
realization of potential. Railroads are the freight
transportation answer. They are the cheapest, most efficient,
most environmentally friendly form of land-based
transportation, and they do not require taxpayer dollars. But
as valuable as railroads are to America today, their potential,
we believe, is far greater.
If there is one statistic I hope you will remember from my
testimony, it is this: U.S. trains sit idle 80 to 90 percent of
the time and when they move, they move at an average speed of
20 miles an hour. An idle train is an opportunity lost for
shippers, for workers and for shareholders. We can do better.
Smart yards work in Canada; onboard computers work in
Brazil; ECP brakes work in South Africa. They should all work
in America. American industry is usually at the forefront of
technology and service. Why should we not hold our railroads up
to the same standard? We at TCI do.
We judge relative to potential, not the past. In CSX, we
see the potential to be the best railroad in America. Instead
today, it is average or below average on nearly every major
metric of performance. Despite this, CSX top management looks
to us to be the most highly compensated railroad management
team in the world, having taken home $120 million over the past
three years and entitled to a golden parachute payment worth a
further $95 million.
Industry best pay for lagging performance is a corporate
governance failure and one which no truly long-term stakeholder
should tolerate. CSX is too important to too many
constituencies to let this under-performance persist.
That is why we are nominating a minority slate of five
directors out of a board of twelve for the board of CSX. TCI is
not seeking and has never sought control of CSX. In fact, if we
are successful, only one director on the board of twelve will
be from TCI. The four other nominees are former CEOs and
directors of some of the best-run railroads in the world, as
well as of iconic U.S. companies, such as Disney and Marriott.
Together, they would add over 50 years of railroad experience
to the CSX board, where today not a single director has any
railroad operating experience, except for the Chairman, who is
also the President, who is also the CEO.
How can we as a Nation avoid a freight transportation
crisis? We work together. We shed historical biases, we embrace
change and we focus on constructing solutions instead of battle
plans. The cost of not doing so is too great. AASHTO estimates
that it could cost shippers and highway users an additional $1
trillion over the next 20 years if the railroads do not
increase their capacity. You can increase capacity in one of
two ways, either through productivity or through investment.
And we need to focus on both.
If U.S. railroads ran as efficiently as Canadian National,
we estimate that that would create 30 to 40 percent new
capacity in the system, enough for up to 20 years of growth.
There are always skeptics, but we believe what CN did is
replicable. Our nominees believe it is replicable. And the CN
management team believes it is replicable, and they should
know, as they have done it.
On investment, I want to make one thing very clear. We have
never, and nor would we ever suggest that railroads cut any
spending in maintenance or safety. The accusation that we have
heard several times so far in this Committee that that has been
the case is absolutely untrue.
I would make one other comment with respect to railroad
investment, which is, the investment capital market is highly
competitive. Railroads early only 1 to 2 percent returns on
replacement value, amongst the lowest returns of any industry
anywhere in the world. For the railroads to attract the
hundreds of billions of dollars they need to privately maintain
and grow their infrastructure, returns must rise, which is why
we have expressed concern over the proposed legislation that we
believe would actually have the opposite effect.
In closing, let me reiterate that as a truly long-term and
engaged investor, we want railroads that are even safer, that
provide better service, that attract more customers and
therefore earn higher returns. We are committed to doing our
part to achieve this objective and we ask others to be as well.
Thank you for your attention. I would be happy to take any
questions.
Ms. Brown of Florida. Mr. Ward?
Mr. Ward. Thank you, Madam Chairman, Ranking Member Shuster
and Members of the Subcommittee. I do appreciate the
opportunity to present CSX's views on the important subject of
investing in the railroad industry. I am here today as the
Chairman and CEO of CSX, and as a railroader with more than 30
years of experience.
I am committed to creating value for all of CSX's
shareholders, and that value arises when CSX meets its public
service and common carrier obligation to our customers, our
35,000 employees, the communities where we do business and you,
the policy-makers who make the laws that shape our operating
environment. What is good for CSX shareholders is good for our
customers and for our Country.
As you are aware, North America's Class I freight railroads
and their outstanding employees are unequaled in performance
and safety. They are truly the envy of the world. A well-run
and well-maintained national freight rail infrastructure helps
strengthen our economy. Railroads take demand off the congested
highways and railroads reduce fuel consumption and
environmental impacts and create high-paying jobs. Rail
transportation is one of the genuine competitive advantages
that U.S. businesses have in the global economy.
But that competitive advantage could be put at risk if
railroads are pressured to stop investing for the future.
Today, some activist hedge funds would have our Nation's
railroads stop building new capacity to prepare for future
economic growth. That is simply a bad idea.
At a time when we hear constant warning about the Nation's
crumbling transportation infrastructure, railroads are
investing billions of dollars in private capital to help
address those needs. As increasingly congested cities
throughout the Country look for answers to passenger
transportation needs, public-private partnerships with rail can
be part of the solution. And as our military is deployed on
missions around the globe, the Nation's freight railroads serve
as a critical link in the supply chain.
In face of these important needs, I would urge Congress to
carefully examine any attempt by hedge funds to exercise
control over a U.S. railroad and compromise the future
viability of freight rail transportation. As our Country grows,
demand for rail use is growing sharply. U.S. freight volumes
are expected to increase 90 percent over the next 30 years. In
recent years, every single blue chip policy study to look at
the issue has called for dramatically increased investment in
rail infrastructure. This is just not a CSX issue. Every expert
agrees that the Nation's freight rail infrastructure requires
sharply increased investment to meet the country's growing
transportation needs.
The CSX management and the board of directors have been
executing a balanced plan that in the past three years has
dramatically improved operations and safety while providing
shareholders with a greater than 150 percent return. That is
better than the rest of the North American rail industry, and
better than 94 percent of the S&P 500 companies. We intend to
keep those returns attractive for investors by continuing to
deliver for our customers and living up to our public
responsibilities. That means investing nearly $5 billion of
capital on our network between now and 2010 to meet growing
demand.
CSX hopes that those who invest see the promise of the
industry and share our commitment to safe and efficient
service. Wall Street investment in the railroad industry at
this time is a truly exciting validation of the benefits rails
can bring to today's economy, the environment and the
overwhelming traffic needs. But given the importance of
railroads, we think Congress should have some very serious
questions about what it means to this Country if hedge funds
determine the business strategies for critical national
infrastructure with core economic and public safety
responsibilities.
Let's take TCI as an example. TCI wishes to determine, even
control, central business strategies of CSX and other major
railroads. Over the last 13 months, TCI has made public
statements and private demands, calling for a number of short-
sighted strategies, including freezing investments in
infrastructure expansion, doubling customer rates over the next
decade, doing a leveraged buy-out and more than doubling CSX's
debt to junk status.
So let's talk about some of these concepts. The demand that
CSX freeze investment in infrastructure is just plain
irresponsible. Anyone who understands the rail industry,
indeed, the transportation network as a whole, knows we need to
maintain and even increase our investments where possible to
prepare for future demand. That is true any time, but
especially at this critical moment when the Nation is
outgrowing its infrastructure.
The Government has designated CSX and the Nation's rail
networks as critical infrastructure vital to the Nation's
economic interests. We treat it as such and invest millions
every year to identify, guard against and prevent threats from
those who would do our Nation harm. CSX is also critical to the
timely deployment of the United States armed forces, having
moved over 10,000 carloads of munitions and vehicles in 2007
alone.
So turning to some of the other ideas of TCI, when a hedge
fund demands that an entire industry double its rate over 10
years, you have to question their understanding of the
industry, its marketplace and the regulatory environment. When
a hedge fund seeks to have a railroad more than double its debt
to junk credit status on the eve of the worst credit crisis in
a generation, you have to question its understanding of the
industry and its capital intensity.
Finally, there is another basic policy question for
Congress' consideration that is particularly apt in the context
of railroads. It is the obscurity of these organizations that
wish to control strategy of the rail industry. When secretive
hedge funds seek to direct strategy for major railroads, I
respectfully urge Congress to learn more about who are they,
what is their experience, what are their incentives, to whom
are they accountable, and most important, what are their real
objectives and plans? The decisions these funds wish to drive
will affect the quality of business opportunity and life in the
United States for decades.
Madam Chairman, I want to express my appreciation to you
and Members of the Subcommittee for highlighting this important
issue and for your recognition that while increased investment
in the railroad industry is a positive development, our
company's responsibility to these investors must be balanced
with our commitment to our employees, our customers, the
communities we serve and most certainly our role in helping the
Country continue to achieve its promise.
Thank you, Madam Chairman.
Ms. Brown of Florida. Thank you.
Mr. Giles.
Mr. Giles. Good afternoon, Chairwoman Brown, Ranking Member
Shuster and Members of the Subcommittee.
My name is John Giles, and I am the CEO of Rail America. I
began working in this industry some 39 years ago as a fireman
and locomotive engineer on the old Baltimore and Ohio Railroad
Company, in Indianapolis, Indiana. I spent the first 12 years
of my career in various operating positions for three different
railroads and shortly after deregulation, progressed up the
management ranks through marketing and eventually executive
positions at CSX.
As background to my involvement in Rail America, Fortress
executives and I discussed investing in the rail industry for
quite some time before seeking to acquire Rail America and
taking the company private in February of 2007. Fortress has
been active in other transportation and logistics businesses,
owning a jet leasing company, a shipping company and other
logistical enterprises. The rail industry was a natural
extension of their existing stakeholdings in the transportation
industry, with railroads being particularly well-positioned to
benefit from international trade and expanding global markets.
As we studied Rail America before our investment, we became
unified behind the belief that we could operate these
properties better and more efficiently. We believed we could
engage with customers by more effectively addressing shippers'
transportation needs, and thereby creating value with
customers, expanding our own business and thereby being
successful.
Rail America today is the leading operator of short-lines
and regional railroads in North America. We operate in 27
States in the U.S. and 3 provinces in Canada. Most recently, in
November of 2007, Fortress also acquired the Florida East Coast
Railway, and invited my management team to explore and consider
synergies with our Rail America operations.
We currently manage these independent properties as
separate and independent companies, but with some common
leadership and a goal toward sharing management and operating
best practices. As background, almost of Rail America's
properties were at one time or another part of the larger Class
I railroad system. While in Class I ownership, these lines were
operated as low density, relatively high cost branch lines that
the Class Is either sold at auction or leased to companies like
Rail America. These lines by definition had infrastructure
needs and were susceptible to fragile economic conditions,
generally being dependent upon business fortunes of one or
sometimes only a few online customers and industries.
By definition, Rail America's rail lines are generally the
exclusive route of ingress and egress available to shippers and
receivers for accessing the larger Class I rail system. We are
the only source of rail access to the broader regional and
national rail networks for distribution of shippers, goods and
products. Our services are frequently billed by our Class I
affiliates through inter-line settlements as a segment in the
longer Class I movement.
Like all good owners, Fortress demands that we run a high
quality, safe and profitable business operation, one that helps
its existing customers to succeed and expand their business and
further seeks to expand our rail services to new businesses. We
strive for operational efficiency in order to provide Fortress
with enhanced shareholder value and ultimately a fair return on
its investment.
I will briefly mention the core values that we have
developed over time that we live and operate with at Rail
America and FEC. And I won't go into any detail, but integrity,
respect, fact-based, heads in the game, hands on, and a
demanding partner.
Since February of 2007, our new management has taken over
these core values and we are driving them through the
organization. Early on, a tremendous effort was made toward
safety and efficiency, as Rail America had been a laggard in
the industry in both areas. Since we have arrived, human factor
derailments are down 4 percent, FRA reportable train accidents
are down 16 percent, and year to date in 2008 personal injuries
are down 60 percent.
Another area of management focus is on improving our
capital infrastructure. One of the things that we found is that
we needed to bring in more experts and skill sets that were not
resident within Rail America. So we recently recruited a bridge
and structure expert and we also added signals and
communications to our own in-house expertise.
To summarize, Fortress and my management team came to Rail
America to create and develop a high-performance organization
with the goal of running safe, efficient and profitable
railroads. We have made significant strides toward achieving
these goals and toward developing an organization that is
capable of assuming a leadership role in the American Short-
line and Regional Railroad Association, and engaging
effectively and responsibly with the Federal Railroad
Administration and the Surface Transportation Board.
Our association with Fortress as an owner and shareholder
is enabling us to achieve financial, infrastructure and safety
improvements. Their ability to assemble and install a new
management team with a longer term focus upon operational and
safety performance is unburdened by shorter term objectives of
public company boards of directors and shareholders.
Two, the reduced expense of operating as a private company
as opposed to a public company. Three, access to financial
expertise and resources necessary to reduce our cost of
capital. And four, Fortress' resources and expertise in
identifying, evaluating and acquiring other synergistic
opportunities in the rail industry, such as the acquisition of
Florida East Coast.
In summary, Rail America and Fortress are committed to the
rail industry for the long term, and we will conduct our rial
operations, improved safety performance and enhance our capital
infrastructure with the long term view in mind.
Are there any questions you would like to ask me?
Ms. Brown of Florida. At the proper time, sir, thank you.
And now, Mr. Greenwood.
Mr. Greenwood. Madam Chairman Brown and Members of the
Subcommittee, it is a pleasure to appear before you today to
discuss activist investing, with a particular focus on recent
investment in the rail industry.
My comments today draw on research that I have done on
hedge fund activism, as well as summarize the contributions of
other researchers working in this area. In my own research, I
have collected data on every incident of hedge fund investor
activism in the U.S. between 1994 and 2006, nearly 1,000 events
in total. This large sample of research has been complemented
by two case studies and a number of interviews and site visits
with activist investors. One of those cases on Kerr McGee,
which is an oil exploration and production company, is in many
ways quite similar to the investment of TCI in CSX today.
So I hope to provide you with a brief but broad overview
touching on four main points. First, what is the proper role of
activist investors? In a publicly-traded corporation, minority
shareholders have little incentive to spend resources
monitoring management, making sure that they take the steps
required to maximize shareholder value. If a firm is being mis-
managed, small shareholders vote with their feet and sell their
shares.
The larger shareholders have more to gain by voicing their
complaints. These so-called activists build up large positions
in the firm and engage in a dialogue with management,
potentially friendly but occasionally hostile, about the best
course of action. Most of us in this room, as passive
shareholders, benefit directly from the actions of activists,
yet importantly, these activists bear all of the costs
themselves.
Second, why is there so much more activism today than 10
years ago, and why are hedge funds doing it, as opposed to
mutual funds or pension funds? The answer, in my view, lies in
the enhanced incentives of hedge fund managers who are paid
handsomely on all their gains, typically 20 percent. Compare
this with mutual fund managers or pension fund managers who
typically will receive a flat fee on assets under management.
For them, activism is simply too expensive, both financially
and reputationally. So it is not surprising that with the
enormous growth of hedge fund capital over the past five to ten
years, there has been a similar growth in activism.
Just to give you an idea, there were virtually no activism
targets at all in the early 1990s. But in 2006, hedge funds
were involved with more than 200 targets in the U.S. alone.
Third, what sorts of firms do activists target and what do
they ask management to do? Generalizing is of course difficult,
but my research reveals a few common themes. Targets tend to
have a high degree of industry concentration. Industries with
valuable hard assets but sluggish returns on capital are
popular. For example, oil and gas companies were popular
targets in 2004 and 2005.
A recurring theme is that firms are under-valued relative
to the value of those assets. This is a theme that we see in
railroads today. Within this broader theme, activists tend to
choose targets that have under-performed relative to their
peers. I believe that this is because the management in these
under-performing firms is more compelled to listen, not
necessarily that they are doing something wrong. What do they
ask for? The most common things are spin-offs and asset sales,
asking the company to put itself up for sale, asking for more
debt, asking for board seats, asking for the removal of a
poison pill and reductions in capital expenditures.
But I am not sure, frankly, how much we learn from studying
their requests alone. I think they make numerous demands and
are quite often happy when companies comply with just one or
two.
Fourth, I think the final and most important questions are,
what do activists accomplish in practice and how does this
relate to shareholder value? The returns to activism have been
incredibly high, no matter how you measure it. Around the
announcement of activism, the stock price increases by about 5
percent on average, presumably reflecting the gains that
investors expect these activists to bring. Following this
initial announcement, the stock prices tended to drift up
further. In other words, other shareholders are benefiting.
But what are the activists getting rewarded for? This has
been the main question in my research. What I found is that the
most significant outcome is undoubtedly when activists push the
company into a takeover. When this happens, the activist
collects a takeover premium of 20 to 50 percent, thus exiting
quickly with a handsome gain. Activists have a knack at making
this happen.
In most other cases however, activism is sort of a non-
event, meaning that the stock price is roughly flat in the
period after the activism, adjusted for the performance of the
market during that time.
Absent a takeover, I do find that firms who remain
independent tend to cut capital expenditures, something that is
asked for today, increase leverage, and do indeed become
slightly more profitable. But to reiterate, I think what is
interesting is that absent a takeover, the stock price is
roughly flat around the time of the activism.
In other words, activists have proven themselves to be
pretty good at putting companies into play, but not that good
at making operational or strategic change. While this may sound
negative for so-called strategic activism, I should make it
clear that there also isn't any evidence that activism destroys
value in those situations.
A final point. I often hear the criticism that activists
are short-term investors, not interested in long-term value
creation. I certainly agree that activists are short-term, and
parts of my research support that claim. At some level it is
obvious in their desire to secure a takeover and get a quick
exit. But I think this misses the point that in theory, the
rest of the market has a somewhat longer horizon. They wouldn't
be willing to reward activism with this high stock price
appreciation if they felt that they were destroying long-term
value.
Thus, to gauge whether the market believes activists can
create value in the rail industry, I think one can learn
something from the recent price appreciation. Naturally, you
can always argue that the rest of the market has it wrong and
management has it right. I think that is not giving investors
much credit. Notwithstanding this, I think this is still an
open issue in research and I expect future research to have
more to say about this important issue.
Thank you and I welcome any questions.
Ms. Brown of Florida. Thank you.
The bell has just gone off, but I am going to go to Mr.
Rahall. But let me just say, Mr. Amin, I have to tell you, in
listening to you, I think I am going to go out and co-sponsor
the Chairman's re-regulation bill. Doubling the rates, and you
indicated that you think that CSX and the railroad is just
average, well, then, everybody tells me what a smart investor
you are. If it is just average, why would you want to invest in
it?
Mr. Rahall.
Mr. Rahall. Wow, Madam Chair, you just hit a couple of
questions I had.
[Laughter.]
Mr. Rahall. I do want to thank you for recognizing me, and
certainly for holding this hearing today. I commend you and
Chairman Oberstar for the tremendous job of leadership you
provided, and this hearing certainly highlights the very
crucial issue to us in West Virginia. It is no secret that CSX
is a valuable partner with our State of West Virginia in so
much that we do. They provide jobs, not only in the rail
industry, but at an infamous resort known as the Greenbrier,
there are an additional 1,500 jobs provided by CSX at that
resort as well. That, I might add, just reinforces the
partnership between CSX and my State of West Virginia.
I would like to ask Mr. Amin a few questions. And Madam
Chair, I ask that my full statement be made part of the record.
Ms. Brown of Florida. Without objection, so ordered.
Mr. Rahall. What is your plan to spend on business with
CSX? I have heard you, Madam Chair, mention that, say you want
to double rates that the railroad charges, how do you expect
that to go over with our shippers of coal in West Virginia, our
coal people? We went through this some 10, 20 years ago after
de-regulation in which they were facing exorbitant rates, and
it was pretty contentious issues at that time, and debate
between the coal and rail industries. So have you discussed
this with the coal industry in any way? And not only what is
their reaction, but what would the consumers' reaction be if,
by doubling the rates as you want to do, the price of
electricity goes up, the price of power goes up? With the
rising price of gas as it is today and other bills that our
consumers are facing, the whole scenario just scares me.
Ms. Brown of Florida. Would you just yield for a second?
Mr. Rahall. Sure.
Ms. Brown of Florida. My understanding is they have asked
the Japanese to raise their rates on the consumer because they
are not getting the kind of return they want.
I yield back.
Mr. Amin. Thank you for the question. Just to clarify one
point on Japan, before I get to your question, Congressman
Rahall, we have definitely not asked Japan for any rate
increases. It is not part of what we are trying to accomplish
in J-Power. I am happy to go into detail, more detail if you
would like on that situation.
But Congressman Rahall, the question you asked is a very
important question, which is, how does rail pricing affect the
customer. We spent a lot of time trying to understand rail
pricing and a lot of time with customers. We as investors
cannot determine the pricing. Our view is the market will
determine the pricing for freight rail. We would make one
observation, which is, freight rail right now charges roughly 3
cents a ton mile, which is exactly what it charged when the
industry was deregulated over 20 years ago.
And in the meantime, over that same period of time, almost
everything that the rails move has doubled in price, whether
that be coal or agriculture or chemicals. So we have seen for a
long time that rail rates were deflationary or flat.
But back to the central point, which is what does TCI think
on pricing, we are not in control of pricing. What we are
trying to do is add experience to the board of CSX. We haven't
called for management change. The management will continue to
work in the market environment for pricing.
Mr. Rahall. What would you do with the Greenbrier?
Mr. Amin. It is up to the board and----
Mr. Rahall. Fifteen hundred employees work there.
Mr. Amin. I understand. And it is a national heritage site,
and it is incredibly important. We don't have a view, it is
really a question for management and for the board of CSX to
determine what to do with the Greenbrier.
Mr. Rahall. Do you have any plans to reduce jobs, cut jobs,
not only to Greenbrier, but in other sectors of the industry?
Mr. Amin. Our plan is to improve the productivity. It is
not our plan, I would say it is what our nominees believe is
possible, is that you can really improve the productivity of
the system. What does that mean? That means the ability to move
more traffic with the same employee base and with the same
asset base. That is really what we are striving for.
As I mentioned in my opening remarks, we think if the U.S.
railroads ran as efficiently and as productively as Canadian
National, which in many ways, in many terms we see as the
benchmark, that would create 30 to 40 percent additional
capacity that you can move with the same number of rail cars,
the same locomotives and the same employee base. That is what
we are striving to do. There is no question that over time the
freight demands on the railroad system are going to continue to
grow. And productivity is one way of allowing the railroads to
meet that need.
Mr. Rahall. You would not be subject to any SEC filings, is
that right?
Mr. Amin. That is not right. We have made an SEC filing.
That discloses our position, our full position and our
objectives. It is a 13(d) filing.
Mr. Rahall. It is a what?
Mr. Amin. It is a 13(d) filing.
Mr. Rahall. So the plans that you would have for reducing
levels of business investment, cutting of jobs, would that have
to be filed at the time?
Mr. Amin. We don't have plans to do that. The SEC filing--
--
Mr. Rahall. And should your plans change?
Mr. Amin. I don't know whether that would have to be filed
with the SEC.
Mr. Rahall. Okay.
Ms. Brown of Florida. Excuse me, I will give you time when
we return. We are going to break because we have a vote and we
have about five minutes left. We are going to come back, we
just have one vote, so we will have a small recess.
Thank you.
[Recess.]
Ms. Brown of Florida. Mr. Rahall, we are going to start
over and give you your five minutes.
Mr. Rahall. Thank you, Madam Chair. I probably won't take
all of that. I appreciate your indulgence and kindness.
Let me follow up with Mr. Amin on the question I asked you
about the SEC filings. You said you had filed an SEC filing,
Securities and Exchange Commission?
Mr. Amin. That is correct.
Mr. Rahall. Was that a voluntary filing or a requirement?
Mr. Amin. It is a required filing.
Mr. Rahall. And would you continue to file those if you
were to take over CSX as a hedge fund, would you continue to
file SEC?
Mr. Amin. Just to be clear, we have no intention of ever
taking control of CSX. We are a minority shareholder, we only
get 4 percent. And if we are successful, we will have one
person on the board of twelve that is from CSX. The other
directors that we are supporting are all directors that are
completely independent from TCI, the vast majority of which are
people that we didn't even know longer than six months or a
year ago. We don't pay them, we have no real relationship with
them. They have no obligation to support our views or not.
So we are not taking control in any way of CSX.
Mr. Rahall. Would you be subject to Surface Transportation
Board regulations?
Mr. Amin. There would be absolutely no change in the way
that CSX is regulated. The STB would continue to regulate
economically. The FRA would continue to regulate with respect
to safety. There is absolutely no change. The only change that
we are----
Mr. Rahall. Well, what exactly are your plans, then? What
would your plans be?
Mr. Amin. I think you would have to ask Michael Ward that.
We are not trying to manage the railroad, we are not asking to
manage the railroad. We are adding 50 years of railroad
experience to a board that right now has no railroad
experience.
Ms. Brown of Florida. Excuse me, you said the board has no
experience?
Mr. Amin. No railroad operating experience, with the
exception of Mr. Ward.
Ms. Brown of Florida. Excuse me, would you yield for a
second? The people that you are proposing for the board, do
they have railroad experience?
Mr. Amin. Yes, ma'am, they do. Tim O'Toole was the former
CEO of Conrail, spent 20 years of his career, his entire career
in Conrail. Gil Lamphere was the chairman of Illinois Central
and then the Director of Canadian National. Alex Behring ran
the Brazilian railroad for nearly a decade, and in doing that
reduced the accident rate by 86 percent and made it one of the
most technologically advanced railroads in the world. So there
is a combined 50 years of railroad experience amongst our
nominees.
Ms. Brown of Florida. Let me just ask you another question.
You have said it, and you said it to me, that you are not
paying the board members. Have you had any contact with them?
Where do these people come from? Did you see them out?
Mr. Amin. It is our view that the CSX board and
stakeholders would be served by adding railroad experience to
the board. So we hired Heidrick and Struggles, which is one of
the world's leading search firms, executive search firms, to
help us in a process to find directors that we thought would
add the relevant experience to the board. I could reiterate,
these are not people that we have any long-term relationship
with. We didn't know them----
Ms. Brown of Florida. I understand you don't have a long-
term relationship with them. Have you had any discussions with
them?
Mr. Amin. Yes, we did have discussions with them.
Ms. Brown of Florida. And they are your slate that you are
putting before the board?
Mr. Amin. They are nominees that we support for the board
of CSX, correct.
Ms. Brown of Florida. I yield back.
Mr. Rahall. Thank you. In regard to your suggestion that I
ask Mr. Ward that, I am going to give him a chance to respond,
but I want to ask you one last question. And I don't pretend to
know the high finances of hedge funds, but I assume your goal
is to make money for your shareholders.
Mr. Amin. Our goal is to create value for investors, that
is correct.
Mr. Rahall. And that would involve buying back shares of
CSX, I believe you suggested that to the current management of
CSX, that they buy back shares?
Mr. Amin. There are a variety of reasons, a variety of ways
you can create value for shareholders. Share buy-backs are one,
investment in capital infrastructure that has a good return on
capital is another. Improving productivity is a third. We have
advocated all of those.
Mr. Rahall. Do a few of those involve increasing the debt
of the company?
Mr. Amin. We have advocated that it would make sense, in
our opinion, if you can borrow at 5 percent after tax and
redeploy that capital on an infrastructure project that earns
15 percent or stock which we think compounds at a higher rate
than that.
Mr. Rahall. But at least in the bond rating created by a
run-up in debt, thereby decreasing the value, decrease the
ability of CSX as a capital-intensive railroad, as a capital-
intensive company, would that not decrease their ability to
invest further?
Mr. Amin. We believe, and we have done a lot of work with
investment banks, that CSX would continue to have access to
capital, even if its bond rating was lowered. There is another
major Class I railroad today, Kansas City Southern, which has a
lower bond rating than CSX and has more than adequate access to
capital.
It is not in our interest as a long-term stakeholder to do
anything that would harm the long-term health of CSX. And
access to capital is certainly an important factor. It is a
judgment of, how much debt you have is, we wouldn't put so much
debt on it that it would impair the long-term viability of the
business and shut the business off for access to capital. If it
did that, the stock would be worth zero. If you have debt that
you need to refinance and you can't get it refinanced, the
company would go bankrupt and our stock would be worth zero. We
have a $3 billion position in CSX. We can't afford for that to
happen.
Mr. Rahall. Mr. Ward, would you care to respond?
Mr. Ward. Yes, I would like to respond to a couple of the
comments. One, I think the issue around the railroad experience
on the board is very much of a red herring. There is no other
railroad in the Country that does have the railroad experience
that Mr. Amin is suggesting for CSX on their board. And quite
frankly, our slate has 60 years worth of railroad experience on
it that we are running against the 50 he has. And we have 175
years worth of railroad management experience, within our
management team.
The second thing I would like to comment on is the issue
Mr. Amin has brought up about the CN versus CSX. I think we are
really talking about apples and oranges, sort of like comparing
the Canadian Football League against the National Football
League. They have very different operating characteristics in
Canada, they have a different health and welfare system. I
think the more apt comparison is U.S. railroads to U.S.
railroads. And among the four major U.S. railroads, basically
we are number two on most major comparisons.
The final point I would like to make is, Mr. Amin keeps
claiming that TCI is not seeking control of CSX. And just
trying to use some common sense, when you are seeking 40
percent of the seats on the board, when you are trying to
dictate how much money should be borrowed, when you are trying
to dictate where it should be spent, and when you are trying to
dictate how your customers should be charged, I don't know what
you would call that, but it sure starts to feel like there is
much more than an investor interest in our company.
Thank you, Mr. Rahall.
Mr. Rahall. Thank you, Madam Chair.
Ms. Brown of Florida. Mr. Westmoreland.
Mr. Westmoreland. Thank you, Madam Chairman. And Mr. Amin,
the name, the Children's Investment Hedge Fund seems a peculiar
name for a company going around buying railroads. I understand
that you all give it to some charity for children. How long did
it take you all to come up with that name, just out of
curiosity? Because you all seem like a lot of smart people that
are on your board of directors.
Mr. Amin. It didn't take us long. We have a true devotion
to helping children in poverty. The name is not the important
thing, the important thing is we really do donate the vast
majority of profits that we make as partners that manage the
TCI Fund, have been donated to the Foundation. The Foundation
now has over a billion dollars that is destined to children in
need, mostly in Africa and India. It works very closely with
the Gates Foundation and the Clinton Foundation.
Mr. Westmoreland. That is an admirable thing, but I don't
know how you would feel about CSX donating all of their profits
or most of their profits to children or any other charitable
organization from what I have seen and what I have read, and
your testimony and other things about your hedge fund.
Mr. Amin. The one distinction I would make is, this is our
money. For CSX to donate its money, it is not CSX's money, it
is the shareholders' money. We as the shareholders of TCI are
voluntarily donating all that money.
Mr. Westmoreland. So that is for all the people that invest
their money with you?
Mr. Amin. No, it is not. Let me be clear. Our investors get
a return on the fund. We charge a fee to manage the capital.
That fee is how we as the partners who manage the fund earn
profits. And it is that fee, the vast majority of that fee that
we charge to manage the fund----
Mr. Westmoreland. Interesting name for it, though, all the
same.
Let me tell you, I am really in kind of a quandary about
this, because I want to see people invest in our railroads. I
want to see those railroads get investments. Because we need
it. Our infrastructure needs it. I am just not so sure that the
way maybe this Children's Investment Fund is going about it,
dictating board members, talking about raising rates and other
things, is really the right way to do it. But I am all for
investment.
Let me ask you a question. You made some comments, and let
me assure you that I know David Radcliffe. He is no back-
bencher, he is a very smart man, and I promise you, he takes
his job on that board very seriously. So don't underestimate
him, because I don't know about his railroad experience, but I
do know that they use an awful lot of coal that comes off those
railroad cars. I just wanted to make that point to you also.
Talking about splitting the CEO and the chairman, and I am
not that familiar with other railroads, but you do have other
interests in other railroads, I guess, in the United States, is
that true?
Mr. Amin. That is correct. We have a very large position, a
very large investment in Union Pacific, well north of a billion
dollars.
Mr. Westmoreland. Have you written any of these other
railroads a letter, asking them to split the chairman and CEO
roles as you have CSX? Or talked to them about replacing some
of their board members?
Mr. Amin. We have not. And the reason we have not done so
is because we have confidence in the management teams of the
other railroad investments that we have.
Mr. Westmoreland. So it is not really a matter of you
wanting to separate them, it is just that you don't have any
confidence in the current chairman and CEO? Or do you think
that it is just a different type of a management, depending on
the entity?
Mr. Amin. One comment I would make is, we think generically
across the board, across railroads, across any company in the
U.S., it is good corporate governance practice to separate the
chairman and CEO. It is difficult for you as chairman to
evaluate your own deficiencies as a CEO. There is a reason that
we have checks and balances in the U.S. Government, and it
should be no different in corporate America. We pushed for it
harder at CSX, because we think there are corporate governance
failings at CSX, and would highlight a couple of things. One,
industry leading pay----
Ms. Brown of Florida. Would you repeat what you just said?
You think what? I didn't hear what you said.
Mr. Amin. Excuse me. I think we pushed harder for the
changes at CSX, because we think there are corporate governance
failings at CSX. I will give you a couple of examples of why we
feel this way. One is, as I mentioned in the testimony, the
management team is the most highly compensated railroad
management team we think in the world, certainly in North
America, for performance that is average or below average on
almost every metric.
Second, last year the shareholders voted in favor of more
than two to one for a proposal to allow shareholders to call a
special meeting, and management didn't respond for almost a
year, didn't respond for nine months. And when they did
respond, they responded in a way that was very disingenuous,
that didn't give shareholders that right.
These are things that we view as the board not fulfilling
its corporate governance obligation. That is why we are more
focused on these corporate governance issues at CSX than at
Union Pacific, where we do think the management team is doing a
good job and we don't find the same failings.
Mr. Westmoreland. So do you have any plans of sending any
of these letters out to any of the other railroads that you are
involved in?
Mr. Amin. We have no intention to.
Mr. Westmoreland. And let me ask you a question, I am a
little slow when it comes to this investing, but why wouldn't
you pick another railroad? If you are looking out for your
stockholders or whatever, and you think CSX is so bad, why
wouldn't you go into another railroad that was more profitable
and buy into that to get a better return on what your
investment was?
Mr. Amin. The simple answer is because we think there is a
tremendous amount of value that can get created by taking a
business that isn't running as well as it could and getting it
to its full potential. That difference between the way the
business is running and the potential of the business is widest
at CSX.
Mr. Westmoreland. Well, I am sure that CSX is thankful for
your caring so much.
Mr. Ward, did you want to comment?
Mr. Ward. Yes, Mr. Westmoreland, I would like to clear up a
few of these statements that in my view are very deceptive and
not an appropriate representation of the facts. Where we talk
about CSX has been an under-performer, when you are in the top
6 percent of the S&P 500 over the last three years in creating
shareholder value, somehow that does not feel like an under-
performer in my eyes.
Secondly, on our terrible governance ratings, there is a
group called Institutional Shareholder Services who rates the
governance of various companies. Within the transportation
industry, we are ranked in the top 2 percent and in the S&P
500, we are ranked in the top 7 percent. So that doesn't feel
to me like big corporate governance failing.
So I just felt I needed to clarify a few of those
distortions. Thank you, Mr. Westmoreland.
Ms. Brown of Florida. Mr. DeFazio.
Mr. DeFazio. Thank you, Madam Chair.
To shift to another railroad, Mr. Giles, I believe you had
the benefit, perhaps of some of my earlier questioning, in
particular referring to, well, first of all, let's get it
straight, you have extensive experience in rail, 39 years, I
believe, that is admirable. You were working for Fortress and I
assume were intimately involved in the analysis of Rail America
and the acquisitions?
Mr. Giles. That is correct.
Mr. DeFazio. Okay. And the statement that I referenced
earlier that Fortress had to have, it is out of context, ``to
have no current plans to abandon any rail lines in connection
with the proposed transaction.'' I guess the question is, since
you abandoned abruptly with less than a day's notice a rail
line in my district, and proposing to abandon another, and you
have a very extensive network, it may very well be that other
people have received notice of a proposed abandonment or
cessation of service, not technically abandonment, cessation of
service, only 220 days after the acquisition. I guess the
question is, do you think 220 days fits the assertion about no
current plans? Or did you fail to do the due diligence? And if
you failed to do the due diligence, it seems that there is a
problem in the acquisition.
I would further cite the fact that Rail America was in the
process of applying for a RRIF loan for that line. So if they
were applying for a RRIF loan, they had deferred maintenance
for over 10 years, they had a substantial problem with the
tunnels, how come you didn't know about it? And how can have
this assertion that you had no current plans to abandon it?
Mr. Giles. I think the assertion made by Fortress is still
accurate. We have----
Mr. DeFazio. Okay, no current, it just--okay, so we are
going to rest on the abandon. You would like to not operate the
line, sit on the asset, hope that Maersk goes in there at a
future date, you have an incredibly valuable asset and then
begin to operate it again. Unfortunately, we will have lost
substantial number of local businesses and jobs in the interim.
So I guess you aren't proposing to abandon it, you want to sit
on it and not operate it, is that correct?
Mr. Giles. No, sir.
Mr. DeFazio. Okay, then, what are your plans to re-initiate
operation of the line, other than the proposal you made in
response to the Governor, which has been rejected by the State?
Mr. Giles. Right. Let me clarify a couple of things for the
benefit of the Committee. We didn't just come down and close
down the operation. We found and discovered some significant
and serious----
Mr. DeFazio. Well, wait, wait, Let's go back to your due
diligence. You didn't find that when you were examining this,
that there's 10 years of deferred maintenance, there's a
pending loan application to fix up the immediate safety problem
and you didn't know about any of that when you bought the line?
Mr. Giles. I don't believe I said that.
Mr. DeFazio. Well, then you are kind of getting a little
off the track here. You are saying one thing and another.
Mr. Giles. I don't think I have been allowed to say
anything yet.
Mr. DeFazio. Well, go right ahead. You can speak plainly,
clearly and credibly. Otherwise, I will interrupt you.
Mr. Giles. Thank you for that. I will take advantage of
this airspace to correct a couple of things. The first one is,
you said earlier that there was virtually no investment on the
CORP over a 10 year period of time prior----
Mr. DeFazio. Obviously there was inadequate investment,
because the tunnels were substantially deteriorated and they
were applying for a loan to fix up the tunnels, which you
canceled. Or you terminated the process. So you must have been
at the point where you terminated the process, which was many
months before you closed the line. You must have known there
was a problem, is that correct?
Mr. Giles. I was trying to make a statement.
Mr. DeFazio. Well, I am just asking you, look, one day's
notice, you close the line. We got shippers who have stuff
stranded. You could reopen it only to move your own cars out of
there. And you are telling me you want to make a statement. I
want some answers. If you did your due diligence, were you
aware of the problems, the deterioration on that line? Why did
you cancel or decide not to go forward with the loan to repair
the line? Were you aware of that at the time of due diligence
and acquisition? And you are smirking and smiling and that is
fine.
Mr. Giles. I am trying to respond.
Mr. DeFazio. But look. We want to get this line open. As my
Governor said, we are going to get it one way or another. You
are going to rest on the word you didn't abandon it, you just
shut it. You don't have any credible plans to reopen it, you
just shut it. You want to sit on it and hope Maersk goes in
there and you get a big bonus out of it. We are going to
intervene in that process, the State of Oregon is going to
intervene, the port is going to intervene, unless you have a
credible plan to reopen that line in the near future.
Now, can you tell me of a credible plan, since we are not
getting a really accurate rendition of history here?
Mr. Giles. I am doubtful whether I will be allowed to
finish----
Mr. DeFazio. Well, because you are not saying anything that
is credible.
Mr. Giles. Let me start again. I would like to address a
statement you made earlier that said virtually no investment
occurred on the CORP in----
Mr. DeFazio. It was inadequate investment, all right? Let's
leave it at the word inadequate and we will agree. Now, move
forward from there. Did you know about the loans?
Mr. Giles. I would like to clarify that we spent $40
million on the CORP over the last six years.
Mr. DeFazio. You? You? Were you working for CORP?
Mr. Giles. Rail America. Forty million dollars.
Mr. DeFazio. Were you working for Rail America at the time?
Mr. Giles. I was not.
Mr. DeFazio. Okay, then, Rail America, prior to the
acquisition, by the speculators at the Fortress Group invested
some money, an inadequate amount of money, and they knew they
needed to invest more, they were applying for a loan and you
decided not to go forward with the loan. So let's start with
the tense where you evaluated it and where you took it over,
not what they may have done before you people took it over and
closed it down.
Mr. Giles. Good. Thank you for letting me clarify your
earlier statement. I appreciate that.
The second point I would like to make is on the RRIF loan.
Rail America, before we got there, apparently looked into the
RRIF loan process, never filed a RRIF loan application.
Mr. DeFazio. Oh, we understand it wasn't filed. The State
of Oregon told us they were told that they were in the process
of putting together a proposal at the time of the takeover.
Mr. Giles. It was months after we arrived on the scene and
reading the local newspapers in Oregon that we learned about a
RRIF loan in the first place. We did not withdraw any such
loan, it was never progressed, it was never applied for.
Mr. DeFazio. Okay. We understand it was not technically
applied for. Were you aware of the deteriorated state of the
line at the time you acquired it, in doing your due diligence
for your stockholders?
Mr. Giles. Yes.
Mr. DeFazio. You were? Okay. So then how does this ``no
current plans'' fit in? If you were aware of the deteriorated
condition, and now you have closed it, are we resting on the
word abandoned?
Mr. Giles. No.
Mr. DeFazio. You didn't abandon it, you are just closing
it?
Mr. Giles. No.
Mr. DeFazio. It doesn't work, but it is not abandoned?
Mr. Giles. That line would not have been shut down had it
not been for the serious continuing deterioration of those
tunnels.
Mr. DeFazio. Right, but they didn't deteriorate in 220
days.
Mr. Giles. They got gravely worse in that period of time.
Mr. DeFazio. Two hundred and twenty days? That is pretty
extraordinary. So they were pretty good when you took it over,
220 days later, wow, they were a mess.
Mr. Giles. No, they couldn't have been pretty good when we
took them over.
Mr. DeFazio. Okay, so then----
Mr. Giles. In June of 2006, the old Rail America team set
about the business of trying to improve one of the tunnels.
Their plan was to spend a quarter of a million dollars shoring
up a portion of the roof. As they began working on that portion
of the roof, the unsettled conditions caused another section of
the tunnel to cave in. And what was a $250,000 short-term fix
became a $2 million problem for one tunnel alone. Service was
terminated for about six to eight months on that line. This was
in 2006.
So we were aware there were problems and so were you.
Mr. DeFazio. Yes, but I didn't acquire it, and I didn't
close it. Nor did the State of Oregon, nor did the Port of Coos
Bay. So what are your plans, other than your unacceptable plan
where you asked to have your operations subsidized, where you
asked to have other people contribute for most of the work to
reopen the line? Other than the plan you put forward, which the
Governor has soundly rejected, what plan do you have to reopen
that line? Otherwise, is this a constructive abandonment? You
have no plans to reopen it, do you have a plan? Can you tell me
of a plan, other than what has been rejected by the State of
Oregon, which will require extraordinary financial
participation on their part with no ownership?
Mr. Giles. Yes. We have another alternative we want to
explore. But before I----
Mr. DeFazio. Okay, when we will hear about it?
Mr. Giles. Before I get into that----
Mr. DeFazio. When will we hear about it, sir?
Mr. Giles. Soon.
Mr. DeFazio. Soon. Could you give me a time line?
Mr. Giles. No, sir.
Mr. DeFazio. Okay. So is that something that is going to
help you skate through the STB where you are going to be
contested, because they are going to go for a feeder line
application because we have constructive abandonment and you
are going to try to come up with something else that isn't--or
is this going to be a credible proposal and who are you going
to make it to?
Mr. Giles. I don't know how to respond to all that.
Mr. DeFazio. Yes, well, then I guess we will just leave it
at that, because I am way over my time. Thank you, Madam Chair.
Ms. Brown of Florida. Mr. Giles, as we discussed earlier,
there is a major problem. You can elaborate a little bit about
when you all acquired the line. Did you not do the due
diligence on the conditions of the property that you were
buying, the needs and what kind of investment needed to take
place?
Mr. Giles. Right. We did some modest amount of diligence in
advance of the acquisition. This was a situation where the
company was being essentially auctioned. It was in a bid
situation. We were able to go visit 8 of the 42 properties that
comprised Rail America. And we were compelled to make our bid
or choose not to bid based on what we learned from that review.
We did look at the CORP, we looked at it and we knew we had
tunnel problems. We didn't understand how grave they were and
how imminent they were. But we quickly learned. And so we did
our diligence. Perhaps it wasn't sufficient. But I think any
acquirer would have been in the same boat, because you can't
get to 42 properties in a very short period of time.
I do think it is a very unfortunate situation, and I agree
with you, something should be done. We have marshaled proposal
after proposal, we have gone to the State, the Governor, Oregon
DOT, shippers, and Union Pacific, all stakeholders. And we have
said to them, listen, we have thrown a couple million dollars
at this thing many, many times. And it lasts for six to nine
months and then you have the same cave-in problems again.
And again, 99 year old tunnels, sandstone, not granite
construction, they seek and leak and rain continuously and
there is virtually no good drainage within them. There was a
good reason why Southern Pacific short-lined this property. It
was low profit and high capital. So that is the situation were
inherited.
Now, we have gone forward and said, listen, let's get all
the stakeholders together and let's all figure out who wants
this thing to succeed.
Ms. Brown of Florida. Just one second----
Mr. DeFazio. Madam Chair, if I could, we are getting a
reconstruction of history here. They sprung a proposal in a
public press conference which no one had reviewed, none of the
stakeholders. They them came to a meeting with the Governor,
the Governor made some requests. They got back to him two weeks
later, basically reiterating their original proposal.
So it is hard to say there was proposal after proposal and
constructive engagement of all the stakeholders. It is the same
proposal that they made originally, which is, subsidize our
operations, pay for most of our repairs, let us continue to own
the asset in case it becomes worth a lot of money some day, and
we will operate it if you pay for it.
Ms. Brown of Florida. Thank you.
Mr. Giles. Madam Chairman, may I answer one thing, please?
Ms. Brown of Florida. I am going to let you finish. But I
think it is important to look at the history as we figure out
how we are going to go forward. I do think it is important that
we get all the stakeholders in the same room. Perhaps you could
put together a proposal that could be possibly acceptable.
Because one of the things that everybody needs to understand is
that with this common carrier obligation, and you have some
obligations to transport, whether or not it is profit-making,
is not something that is to be considered. Correct me if I am
wrong, Mr. Chairman.
Mr. Oberstar. Yes, common carrier obligation.
Ms. Brown of Florida. Common carrier obligation. So
therefore, we know that people are in this business to make
money. But money is just one aspect of what you have to do to
move the goods. This is a major problem, and I have talked with
you about it. I hope that Mr. DeFazio and the other
stakeholders, that we can work together to come up with a plan
that will be acceptable to everyone.
Mr. DeFazio, would you agree to work with the Chairman?
Mr. DeFazio. Certainly, Madam Chair. I asked, in fact, the
Governor to convene a meeting and Rail America was represented.
The views expressed there by all the other stakeholders, other
than Rail America, were quite similar to the views I am
expressing here today. They did, in response to the Governor,
send back essentially their original proposal. But if they
would like to engage in a constructive discussion that goes
beyond their original proposal, I am certain the Governor would
be happy to convene another meeting of all the stakeholders.
Ms. Brown of Florida. Thank you. You are on that same page,
is that correct?
Mr. Giles. I am on that page, and I welcome that. We have
been endorsing it all along.
I would like to make one comment, if I may.
Ms. Brown of Florida. Yes.
Mr. Giles. I think Commissioner Mulvey said something this
morning that is spot-on. He said railroads are more than
willing to invest when they can anticipate a return on their
investment. When the public benefits dwarf the private
benefits, they tend to look toward public-private partnerships.
That is the situation on the Coos Bay line. There is no
economic return to me on that line and I am seeking a way to
keep the community vibrant and alive and take care of the
shippers. But I need help to do that.
Ms. Brown of Florida. I hear what you are saying. But one
of the ways that, if you decide that you can't do it, then you
can abandon the line and then they could work for someone else
to take over. But I am hoping that we can work through this. I
am certainly willing to work with you and all the other
stakeholders.
Mr. LaTourette.
Mr. LaTourette. Thank you, Madam Chairman.
Mr. Giles, I don't have any questions for you.
[Laughter.]
Mr. LaTourette. Mr. Ward, I do want to, just before I ask
questions about the financing on railroads, thank you. As you
know, we had a derailment in Painesville, within sight of my
district office in Ohio recently. Your company came in, and
because of the overtime that was incurred by the fire
departments and police departments, handed out $600,000 in
checks for the first responders. That made me very popular in
Painesville for a day, so I thank you for that.
[Laughter.]
Mr. LaTourette. I also want to commend you for the fine
work of your staff, particularly Anne Reinke, formerly known as
Chettle. So thank you very much for what you did for our
constituents.
Mr. Greenwood, I wrote down when you were talking that the
activist investors, that your studies show than when just the
announcement of activism, that the Children's Fund is going to
become involved in investing in the UP or in the CSX, can cause
a stock rise of up to 5 percent. Have you studied this
particular instance and did that occur for the CSX stock?
Mr. Greenwood. I haven't looked at this particular
incident. The incidents that I have looked at extend through
the end of 2006. But I do believe that there was such an effect
around the announcement here. But I am sure they can speak
better to that.
Mr. LaTourette. Thank you.
Mr. Amin, first of all, thank you for coming in and talking
to me a couple of times about the issues that we are going to
talk about here today. I think when we talked, you indicated
that your fund owns a little over 4 percent of CSX shares, and
the 3G group also owns something like 4.1, 4.3 percent. I saw a
press release, though, the other day, that was in the
materials, that indicates that you somehow have an additional
11.8 percent of economic interest in derivative securities.
My question to you is, are you and 3G going to show up at
the shareholders meeting in May and vote 8 percent? Are you
going to show up and vote 20 percent? Are you going to show up
and vote more than 20 percent?
Mr. Amin. Eight percent.
Mr. LaTourette. So what is the detail with this other 11.8
percent?
Mr. Amin. The other 11.8 percent is what is known as a
swap, which in simple terms is a contractual arrangement that
you have with an investment bank, where if the stock goes up,
the investment bank owes you money, if the stock goes down, you
owe the investment bank money. It does not entitle you in any
way to the stock itself. It is purely a contractual arrangement
with an investment bank. We have no ability to vote.
So the amount of stock that we will vote at the AGM will be
our disclosed 8 percent.
Mr. LaTourette. But then who does vote the 11.8 percent?
Mr. Amin. If it is voted at all, there may not be stock
underlying that 11.8 percent. It is really up to the investment
banks that we have the contract with whether they want to own
the stock or not own the stock, whether they want to vote it or
not vote it.
Mr. LaTourette. In your testimony and also in conversations
you and I have had, you talk about the fact that this twelve-
member board and the proposal that you have made is that you
are recommending a slate of five. One has a tie to your firm.
You have also indicated that there are other people with
railroad experience.
Just by way of something I am familiar with, we used to
have a company that manufactured steel in Cleveland called LTV
Steel. They got in economic trouble and brought in a new CEO
who had knowledge of the steel industry. But then when I looked
at his background a little bit further, I found out he was also
the same fellow that came to Cleveland and took Diamond
Shamrock out of Cleveland down to Dallas, Texas. What he was
good at was shutting things down. He wasn't so good at running
businesses.
As I looked at two of the members of your proposed slate,
one, Mr. Lamphere, who unless I am wrong was a director of both
Illinois Central and Canadian National, and I think during his
tenure Illinois Central was sold; and the other one, Mr.
O'Toole, Timothy O'Toole, was the president and CEO of Conrail
from 1998 to 2002. Being in the part of the Country where
Conrail operated, I am aware, and this Committee did, I think,
yeoman's work to work with the Surface Transportation Board to
cause the sale or the divestiture of Conrail between CSX and
Norfolk Southern.
So I guess my question to you is, because I have heard you
say that you are interested in long-term investment in this
railroad and other railroads, is there a pattern here, that the
majority of the experience by at least two of these nominees is
in selling railroads and not necessarily running railroads?
Mr. Amin. I would make a couple of observations. First of
all, we do not want a sale of CSX, and we have said publicly
that we don't want the company to be sold.
With respect to the nominees, the two nominees that you are
referring to in particular, the reason that we are supporting
them is because between them they have decades of experience
running railroads. The decision as to whether or not to sell
the railroad is not a decision that Tim O'Toole made. In fact,
Tim O'Toole became CEO after the decision to sell Conrail was
already made. And Mr. Lamphere was actually one of the lead
investors in acquiring Illinois Central.
So I think you could look at it both ways. And Gary Wilson,
who is a third nominee, was one of the lead investors in
acquiring Northwest Airlines. So I think you could say our
nominees have as much experience acquiring as they do
divesting.
But the core of their experience, the decades of experience
they have, which is why we think they are valuable to the CSX
board, is operating experience with respect to the railroads.
The one other point I would mention is CSX, I think in the
acknowledgement, that its board did need railroad board
operating experience is nominating at this AGM a gentleman who
was the CEO of Florida East Coast, which was also recently
sold. We don't think that deters in any way from his ability to
serve as a valuable director at CSX.
Mr. LaTourette. Madam Chairman, may I ask a couple more
questions?
Ms. Brown of Florida. Yes.
Mr. LaTourette. Thank you very much.
This business about freeze. Has that been accurately
portrayed, that it is your recommendation to the CSX board of
directors that until this re-regulation issue gets sorted out
in the United States Congress that they should freeze further
capital investment?
Mr. Amin. I appreciate your asking the question, because it
is a very important point. We believe all investment that is
economically justifiable should be made----
Mr. LaTourette. Including new capital investment?
Mr. Amin. Including new capital investment. One of the
things that would make capital investment not economically
justifiable is if the returns on that capital investment are
either not forecastable because the regulatory framework is not
stable, or if there is proactive moves by Congress to
potentially reduce those returns. We are concerned about some
of the legislation that is being considered, and it is not only
our view, but the view of other CEOs in the railroad industry
and also the vast majority of Wall Street analysts and
investors, that some of this proposed legislation would reduce
the returns.
The statement that we made was that in a situation where
that risk is heightened, and we understand every year since
Staggers, there has been a bill in one form or another that
could potentially reduce the returns, it has never had as much
momentum or perceived risk as it does currently.
So our view, and the statement that we made was, in that
heightened risk stage, it is prudent to freeze expansion cap-
ex, not maintenance cap-ex, not cap-ex that is being spent on
safety, but as Dr. Mulvey stated before, roughly one fifth of
the capital expenditures of these railroads is expansion cap-
ex. That is the cap-ex that we are talking about.
Mr. LaTourette. Let me, because I have already exhausted my
time, I just have one further observation. I think you have
just said what I thought I asked you, and that is that you
wouldn't not do any maintenance, everything is for safety, but
in this heightened concern, whether or not we are going to have
re-regulation of American railroads, you would not, if you were
successful in convincing CSX, no new capacity projects?
Mr. Amin. When the risk of re-regulation is at a heightened
level.
Mr. LaTourette. Okay. Two things, anther Wall Street
analyst indicated that the railroads are one of the rare
industries where under-spending on capital expenditures for
even a year or two can ensure five or ten years of operating
problems. I happen to agree with that. Second thing, the
regulations, the re-regulation threat that appears to be
causing so much angst, not only at your fund but other
investors, is the baby of our Chairman, whom I happen to have
the greatest fondness for and the greatest respect. But I will
tell you, I will never, ever be supportive of the days before
Staggers. On this, we are going to respectfully disagree.
So from an investment standpoint, I think that if you are
going to wait for the Cure Bill and the Cure Coalition to
prevail, it is going to be a long time before CSX or any other
railroad in this Country will build anything.
Thank you very much for your patience.
Ms. Brown of Florida. I am going to yield to the Chairman,
but Mr. Amin, I want you to know that you moved me toward
signing onto the bill.
Mr. Oberstar.
Mr. Oberstar. Well, thank you. This has been a very
interesting exchange this afternoon, a lively exchange of the
kind that we have not had in a while, and a very productive
one.
Mr. Amin, let me just get right to the point. How do you
draw a direct line from any provision or from the totality of
the bill that I have introduced to stimulate competition in the
rail sector to reduction of revenues?
Mr. Amin. There are certain provisions of the bill that we
would point to in this regard. One, for example, is Section 32
of the bill. It is our understanding that that section mandates
that rates be regulated on the basis of historic costs. And the
risk with doing that, I will use an example that Jim Young, the
CEO and Chairman of Union Pacific gives, which hopefully
illustrates the potential danger of doing this. Union Pacific
has a bridge that washed out in a storm. The bridge was on
their books for $600,000. When they went to replace that
bridge, it cost them $20 million to replace.
If the rates that they were allowed to change on that
bridge only reflected $600,000 of value, they would never have
the money or the economic incentive to replace the bridge at a
cost of $20 million. That is the concern that we see, the
historic cost, the book values of these railroads have no
reflection whatsoever to the true economic values of their
assets.
Mr. Oberstar. Your interpretation is just exactly that, an
interpretation. Those are not the words of the Act, and your
inference that the bill will directly regulate rates is simply
not accurate. I wrote the language, I know.
The Staggers Act did not eliminate Government governance,
regulation or oversight of railroads. It greatly reduced the
economic regulation of railroads. It left open a medium for the
shippers and consumers to appeal to a government entity in the
event that they are being mistreated, subjected to
unreasonable, unfair, confiscatory, whatever else you want to
call them, rates, and an opportunity to appeal those rates and
for this Surface Transportation Board to exercise some
independent judgment on whether competition is being unfairly
squeezed out.
That is the purpose of my legislation, is to strengthen the
access of shippers and consumers to the mediating role of the
Surface Transportation Board. Do you think it is reasonable, do
you think it is pro-competitive for a petitioner against an
unfair rate to pay a quarter of a million dollars just to file
a complaint?
Mr. Amin. I don't have a particular view on the rate that
people----
Mr. Oberstar. Well, you're criticizing the whole bill, now,
just tell me, give me an answer to that question. Is that fair
or not?
Mr. Amin. Chairman Oberstar, I honestly don't have a view.
One thing I would add, which I think we agree on, and we have
said this to the commissioners of the STB, we do believe that
the rate case process right now is too long and too costly to
shippers. We don't understand why it takes three years and
costs $5 million for a shipper to bring a rate case to the STB
and----
Mr. Oberstar. That was my next question, is, what about the
fairness of the process by which, so you are saying that that
is unfair?
Mr. Amin. We completely agree and we have given suggestions
to, we have met privately with Dr. Mulvey and given him
suggestions for how we think the process might be expedited in
a way that gives more access to shippers, in a way that is much
more time efficient and much more cost efficient for the
shippers.
Mr. Oberstar. You have demonstrated yourself to have a
considerable knowledge of the rail industry. What about the
bottleneck rule, without having to on my part elaborate what it
means?
Mr. Amin. We followed up with our counsel after the meeting
that we had, and it is our determination based on that that a
shipper today can break the bottleneck if they are able to
contract on the non-captive part of the route. They can force a
railroad to provide a rate for the captive part of that route.
Mr. Oberstar. I think that will come as a surprise to a
great many of the short-line railroads.
Mr. Amin. It may. We can----
Mr. Oberstar. Which is why they are asking for relief.
Mr. Amin. I can't answer that on behalf of the short-lines.
But I am happy to provide the legal analysis of our counsel to
the Committee.
Mr. Oberstar. Well, the Association of American Railroads
has done that vigorously on behalf of the Class Is. I find
their argument unpersuasive, but I would be happy to receive
your legal counsel's opinion on the matter.
You say that it is irresponsible to make long-term
investments without knowing the long-term returns. That was in
your letter to CSX of last fall. That is sound on itself. Long-
term returns, you continue to say, are unknowable while the
regulation risk persists at this heightened level. Kind of news
to me that that is a heightened level of risk when you have a
Republican in the White House who is not inclined to sign the
bill if we succeed in getting it through both bodies. You are
presuming some things that are not in the real world, although
I am going to work as hard as I can to make sure that it does
get to the President.
Mr. Amin. We would never underestimate your power, Mr.
Chairman. To be fair, our advisors in this situation, one of
our advisors had advised us that there was a 50-50 chance of
the bill in its current form passing. That was a concern to us
and that is the basis on which--it may be wrong.
Mr. Oberstar. Those are better numbers than we had two
years ago.
Mr. Amin. But that is the advice that we had gotten from
one of our advisors in Washington, DC.
Mr. Oberstar. All right, well. But there is uncertainty in
all that you undertake in the marketplace. Why is this
uncertainty such a big stumbling block for you?
Mr. Amin. Chairman Oberstar, that is absolutely right. Our
job as investors is to assess uncertainty and ascribe a price
to it. That is what we do as investors. Everything that we do,
you are right, is uncertain. There are some risks that are
greater than others. As we have discussed, there are some
elements of this bill that, in our interpretation, and maybe
our interpretation is wrong and needs to be corrected, but in
our interpretation, posed a risk. I would say it is not only
our interpretation, it is the interpretation of most of the
management teams in the industry and most of Wall Street. It
could be that we have all misinterpreted.
But it is our job to evaluate risks and assign prices to
those risks. That is what we do every day.
Mr. Oberstar. Well, the particular provision of the bill is
not a mandate upon the Surface Transportation Board, it is not
a requirement. But in any event, we are at a stage, we have had
a hearing on the subject matter, we are exploring options for
the various provisions of this bill, we want to achieve
fairness in rail service and fairness for competition in this
business. We went from 60 railroads in 1980 to 7, I usually say
4, but we will include the 3 dwarfs and say, all right, so it
is 7.
But there are not a great many markets in which they
compete head to head. And where competition is likely to
surface in this business is from the short-lines, and they
ought to at least have an opportunity to compete on a fair and
equitable basis.
There are the other impediments and obstacles to shippers
in the marketplace that I think this legislation will open the
door to overcome and reduce the stranglehold that the railroads
have, frankly, on the shipping environment. Now, it is a
delicate balance that we are trying to achieve here. We want to
keep the railroads strong, successful, profitable. But we also
want to be fair to shippers. And I don't think they have been
consistently fair to shippers or to other competitors. And I
think the legislation gives us an opportunity to engage in a
constructive discussion with the railroads, with others like
yourself who are investing in, and we will continue that
dialogue.
We are going to, my intention, my purpose is to move
legislation to create a more fair, equitable rail competition
environment that is beneficial to railroads, but also primarily
to shippers and consumers. I look forward to working with you
on that.
Thank you, Madam Chair.
Ms. Brown of Florida. Thank you, Mr. Chairman.
We have a series of four votes. I am going to go to Mr.
Brown, then we are going to take a recess and come back. Mr.
Brown?
Mr. Brown of South Carolina. Thank you, Madam Chair. I will
be brief.
Thank you, gentlemen, for coming to continue this dialogue.
Mr. Amin, the TCI has accused CSX of reckless spending on
capital improvements. Can you give this Committee any examples
of this reckless spending and where would you like to see CSX
management cut back on capital spending?
Mr. Amin. Our concerns with respect to CSX were that their
capital spending program has not been justified to
shareholders. What I mean by that is, they have not disclosed
to shareholders where the capital is being spent and what types
of returns that capital is obtaining. We asked, we have asked
publicly and we asked before the CRS investor day they had with
all their shareholders that they use that opportunity to share
with their shareholders where the capital was being spent. And
they unfortunately did not. And there are a series, I think we
included in our testimony quotes from other Wall Street
analysts that were equally disappointed in the company's
unwillingness to discuss where that capital was being spent.
Mr. Brown of South Carolina. Let me share with you, I am a
tree farmer back in South Carolina. I know a little something
about long-term investments. But as an investor, I sure like a
quick return. I am wondering, for a firm that was just found in
2004, has your track record after just a few years, how you
expect anyone to believe you have a CSX interest above making a
quick Euro?
Mr. Amin. We appreciate the question, because I think it is
easy to paint all hedge funds or all investors with one brush.
I will give you a couple of observations that will hopefully
help in his. One of the things that we have been advocating
very publicly is ECP brakes. ECP brakes only work if the entire
fleet of rail cards are equipped with them. At the most
aggressive estimate, it would take five years to equip the U.S.
rolling stock with ECP brakes. So for the next five years, it
is only a capital expenditure with no return. If we didn't have
the intention of being a long-term shareholder, it would be
completely irrational for us to advocate spending on ECP
brakes.
Union Pacific is another example where we have, as we have
disclosed, a very large position in Union Pacific. We own
approximately 4 percent of Union Pacific, similar to our
ownership stake in CSX. And we have been supportive of that
management team. The Union Pacific has a larger capital
expenditure program than CSX does. The reason we are supportive
is we have confidence in that management team. They have shared
with us the strategic rationale for making that investment.
That investment also, although it won't earn a real return
until after 2011, according to the UP management. So that is a
long--you wouldn't advocate, you wouldn't support those types
of investments if you didn't plan to be around.
I will give you just one other example which hopefully will
be helpful. One of our largest investments over the history of
the fund is the German stock exchange called Deutsche Borse. It
was unfortunately another situation where we were activists. At
the time, people said the same thing, our fund had only been in
operation for a year, that we were going to be short-term. And
the stock doubled----
Ms. Brown of Florida. Sir, what was one of your largest
investments?
Mr. Amin. It was Deutsche Borse.
Ms. Brown of Florida. That is the one that came into
Jacksonville and cost us 500 jobs. Continue.
Mr. Amin. No, it is not. It is not. Deutsche Borse is not
in Jacksonville. I think you are----
Ms. Brown of Florida. It is not in Jacksonville, but it
bought out a bank, and it cost us 500 jobs in Jacksonville,
Florida.
Mr. Amin. No, I respectfully would like to correct that. I
think you are referring to ABN Amro, which is a different
investment. As I mentioned----
Ms. Brown of Florida. Were you party to that investment?
Mr. Amin. It is a different investment.
Ms. Brown of Florida. The answer is yes or no, were you
party to that investment that cost me 500 jobs in my city?
Mr. Amin. We were an investor in ABN Amro.
Ms. Brown of Florida. You can finish answering Mr. Brown's
question.
Mr. Amin. I would like to just correct something on the ABN
Amro situation, which is, ABN Amro sold the bank that was
located in Jacksonville to CitiGroup before we were active in
ABN Amro. So I think there is no way that anyone could
attribute what happened in Jacksonville to TCI's involvement.
It took place, the sale of that bank to CitiGroup took place
before our involvement in ABN Amro. So it is a really a
discussion that needs to be had with CitiGroup, in which we
have never been a shareholder.
But back to the point on Deutsche Borse, the stock doubled.
Most of the people that thought we were going to be long-term
sold. It tripled, it then quadrupled and it quintupled. And we
are still there, we are still there today as a shareholder in
Deutsche Borse, even thought we have made five times our money.
And if all we wanted to do was a quick 50 percent, we would
have sold out three and a half years ago.
So I would encourage and I would ask that people look at
our track record and what we have asked for publicly to
evaluate whether we really are a long-term shareholder.
Mr. Brown of South Carolina. Madam Chairman, I am not sure
how much time we have left before the votes, but thank you,
gentlemen, for your participation.
Ms. Brown of Florida. Since I know most of us have not had
lunch, we have four votes. We are going to recess and we will
be back around 4:30. Thank you.
[Recess.]
Ms. Brown of Florida. The Subcommittee will come to order.
Let me just say that I hope that we can finish up in the
next 30 minutes.
Mr. Amin, I didn't ask, when we first came here, to have
you sworn in. But I just want you to know that it is a criminal
offense to lie to Congress. But I guess it is no criminal
offense to try to mislead us. So I have a series of questions
that I am going to ask after Mr. Shuster finishes. And I want
you to try to be as truthful as you can with the answer. Okay?
Mr. Shuster.
Mr. Shuster. Thank you.
I guess the one thing that has come out of today that,
although, Mr. Amin and Mr. Ward don't agree on a lot of things,
the one thing they do agree on is the opposition to the re-reg
bill, which I think that we can all, well, at least on this
side of the aisle, many of us and the two of you, and I would
say the three of you at the table, would agree that that is
something we don't want to see. Because it would be bad not
just for the railroad industry, but investors, customers.
Most importantly in my view is, it would be bad for the
American taxpayer. Because I think that is a prescription to
have the railroads come back here in five years, ten years, and
say, we can't afford the $20 billion, $60 billion, $100
billion, whatever it is, so the American taxpayer is going to
have to do it. That being said, I at least find that common
ground reassuring here today.
Mr. Amin, I think it is pretty clear there is, in this
Committee, and you have heard today that there is a great
concern about long-term investment. And you said that the
Children's Fund is, you are long-term investors. Although some
of your initial letters and statements, not necessarily from
you but from Children's Fund I think have a lot of us thinking
we are not sure if that is, if you are just saying that to get
in with the railroad, allow the Congress to put our guard down.
But a couple of things you said, and you have addressed
some of them today, I would just like to go over a few of them.
You said freeze investment on capacity expansion. Because of
the re-reg bill, there is uncertainty. But even in the 1990s,
when the chairman of the board of BNSF saw a lot of
uncertainty, and he still plowed in billions of dollars, and
everybody said, he is crazy, and then lo and behold, six years
later, five years, seven years later, what he did was what all
the other railroads wish they had done.
So you say long-term investor, you say freeze capital,
everybody looks to BNSF and says what they did was the right
thing. So it doesn't add up to me. That is the first thing.
Second thing is doubling the rates over 10 years. If you
ever wanted to see a re-reg bill come to the House Floor, jack
the rates up 7 percent every year, and you are going to have an
avalanche of customers come to Congress saying, you have to
stop this. That is the second thing that you came out and said,
that even though you are against the re-reg bill, once again,
that is a prescription, to me, for Congress to do something to
protect the shippers.
The third thing, I will get them all out and then I will go
back over them with you, in the leveraged buy-out. I don't know
where that came from, but I understand, and to me, a leveraged
buy-out is you want to take the company private so that you can
do what you want to do as a private firm, which gives you a lot
more flexibility and ability to do those things that you want
to do.
And the fourth thing is to increase the debt level. I guess
it was a year ago that you stated at Bear Sterns conference,
increasing the buy-back of the stock to up to 20 percent to
increase the debt by up to five times the earnings. I guess
there are a couple of reasons you could do that, but the first
thing that comes to my mind is you raise the debt, strip all
the cash out, so you are not spending your cash, so you can
take it and do what you want.
So those four statements that I heard, some of them you
refuted, some of them I don't think you have convincingly
refuted, give me great concern about what your long-term
intentions really are. So if you want to go through, and if I
missed one, I will make sure I bring you up to speed on it.
Mr. Amin. Thank you for the opportunity to clarify on these
four statements.
On the first, on freezing investment, it has always been
our view as a long-term investor that you can only make
investments so long as they are in an adequate return. We are
not the only people who say that. I think all investors would
say that. There are quotes from three railroad CEOs in our
testimony that say exactly the same thing, the common theme
being you can only make investments if you earn an adequate
return.
It is our view that H.R. 2125 would impede the railroad's
ability to do that. We acknowledge that there has been a bill
in that form introduced in the House every single year since
Staggers. It is not the existence of the bill in and of itself
that causes us concern. What causes us concern is there is now
a triumvirate of Congress in terms of Congressional power and
Chairman's Oberstar's strong view that that bill needs to be
passed, together with heightened frustration from shippers,
together with labor. That is a triumvirate that is very, very
powerful and very concerning to us as a shareholder. That is a
new phenomenon. That we believe heightens the risk.
Now, that risk has been somewhat diminished as labor has
become neutral. But at the time that we were evaluating this
and at the time we made the statement, it was the advice of our
Washington counsel that there was a 50-50 chance that that bill
in that form would pass. And that is a very, very significant
risk to us as a shareholder. And it is in that context that we
made that statement.
Mr. Shuster. You took the position in the company, it was
last spring, roughly?
Mr. Amin. That is correct.
Mr. Shuster. And right about that time is when I believe
Chairman Oberstar initiated that. So my question would be, why
did you make the investment if you thought that was a real
possibility?
Mr. Amin. At the time that we made the investment, we
didn't feel like the risk was as high as it had developed to be
over the course of the summer and the fall. Maybe that was us
not being as attuned to the risk or the risk actually
increasing. I don't know which one of those two it was. But we
became dramatically more concerned about it in the fall.
The one other thing I would add to that is that we have
spent a lot of time in Washington, D.C. trying to stay on top
of this issue. We have offered to meet with every single Member
of this Rail Subcommittee, we have met several times with the
Surface Transportation Board, several times privately as well
with the FRA, to make sure that we are fully aware of what is
happening in Washington. It is very important to us as a
shareholder.
And you would only, frankly, invest the amount of time to
do that if you had an intention of being here for a long period
of time. It is personally damaging to our reputation if we
invest all this time and then sell out. It is damaging for our
reputation in the U.S. capital markets. Hopefully that
addresses the freeze investment question.
The one other thing I want to clarify on that is that we
have never said, as we have been accused of, that we would cut
any investment in maintenance and in safety.
Mr. Shuster. I didn't say that.
Mr. Amin. In terms of the rates, it is our view that as a
shareholder, we don't control the rates. The rates will be
determined by management and the market. Mr. Ward and the
management of CSX and all the other railroads will determine
the rates.
The one observation we make is that since deregulation, the
rates that the railroads have charged are roughly the same.
They are roughly the same as the rates they were charging in
1980. The value of almost every good that they move is up
roughly 100 percent. So in real terms, the shippers are paying
half the price that they paid in 1980. That is purely an
observation that we make.
Mr. Shuster. Isn't that good? Because the railroads then
have become so efficient that they can offer in real dollars a
price that is lower than it was 20 years ago. Obviously they
are making money. So that is an effect of efficiency and good
management for the industry. Correct?
Mr. Amin. I completely agree. I think what has changed now
from the past 20 years, or frankly, since the interstate
highway system was built is we are no longer in a situation
where there is tremendous excess capacity in the railroad
network. So the railroads now have to earn adequate returns so
that they can continue to invest and grow the network.
That is a fundamental shift from the situation that we have
been in for the past few decades, where there wasn't that
demand or there wasn't that demand to grow the network. So it
wasn't imperative that the railroads earn an adequate return on
replacement value. When you look at the returns on replacement
value, they are 1 to 2 percent. These are not the levels of
returns that are going to attract the $150 billion or hundreds
of billions of dollars, depending on different people's
investments, that the railroads are going to need to grow their
infrastructure.
Mr. Shuster. That gets back to, you said, the statement
somewhere came out that I read that you wanted to increase the
7 percent a year. Once again, that is something that--that is a
dramatic increase. That is what is going to draw the fire of
Congress because you are going to have the agriculture
community, the energy, chemical, all the people that are
involved now coming to us even stronger. So once again, as the
Chairwoman said, that is a formula for re-regulation. So it
seems to me that it doesn't quite add up.
And I take you at your word that you have spent the last
six months, I think, having an awakening that, oh, my goodness,
Washington can affect us a hell of a lot more than we thought
they could.
Mr. Amin. On the third point of the leveraged buy-out, we
raised the idea of the leveraged buy-out with the management
team, we asked them if they were interested in thinking about
it and they were. They invited us to speak with their bankers
about the opportunity to do that. It was not something that we
forced upon the company. We actually, upon doing our own work,
and we have now been studying the industry for a couple of
years and have spent millions of dollars studying it,
determined ourselves that it wasn't the right conclusion, that
a leveraged buy-out was not the right income. We stated
publicly in a speech in May in front of a thousand railroad
investors that we didn't think a leveraged buy-out was the
right solution.
The reason that we raised it is, we think it is important
for railroad management teams, and frankly for any management
board of any company, to constantly evaluate ways of creating
shareholder value. Raising ideas and bringing solutions or
potential opportunities to create value isn't necessarily an
activist thing. There is nothing wrong with asking questions,
is there a better way to do this, is there a better braking
technology, why don't we use ECP brakes. Can positive train
control create value, why not run a precision scheduled
railroad like they do in Canada?
These are questions that we have for management that we
wanted to engage with a constructive dialogue with management
on. We have been able to do that in certain situations. I would
again point to our relationship with Union Pacific, which I
think is very constructive. We asked very similar questions and
we got good answers. And as a result, we have confidence in the
management team there.
But merely asking the question of, is an LBO the right
thing to do, we don't think is wrong for us to do as a
shareholder. It is when people don't ask questions that you end
up with the Enrons of the world.
Mr. Shuster. I agree with that, I think as a shareholder
you have every right to ask those questions. That is not
something that I am concerned about here today. I think you
should be asking those questions. Just the way you have gone
about the whole operation, again, it leads me to some great
questions that obviously we are asking here.
Then the final thing, the debt level, increasing it
substantially.
Mr. Amin. The debt level, yes, sure. It is our view that
all of the railroads, and this is not CSX-specific, all of the
railroads have additional debt capacity that they could use to
redeploy higher returns. Whether that is to buy back stock or
to make capital investments, that would not in any way
jeopardize the long-term health or the capital availability or
the debt availability of these business.
We have done a tremendous amount of work, we have worked
with investment bankers, and we have come to our own views of
how much debt capacity there is. But borrowing debt at a cost
of 5 percent after tax and redeploying it in capital investment
projects or in your own stock at 15 percent is value accretive.
If that debt is available--there is debt available for the
railroads today. We are in one of the worst credit markets that
we have been in probably since the early 1990s. And the
railroads still have access to that debt.
So that to us is an indication that there is another source
of capital here in the context of the discussion that we are
having here, which is how are we going to grow and meet the
rising demands for infrastructure, it is productivity and it is
capital. Well, that is a huge source of capital. It is not just
equity capital that we control. It is a source of capital that
we should actively evaluate to see whether it makes sense to
use.
But the one point I would make is, people say, well, what
you are trying to do is strip out all the cash from the company
and leave it dry. It is not in our interest as a long-term
shareholder to do that. Putting a company in a situation where
it could potentially be bankrupt means our $3 billion
investment in CSX would be worth zero.
Mr. Shuster. I guess that is the whole question here is,
long-term, short-term, short-term it is in your interest to do
it, long-term it is not. Again, there is great doubt about, and
as I said earlier, we don't paint everybody with that broad
brush that hedge funds are all bad, because I think it is
important that there is capital flowing into the railroads. And
there are two sides of the coin, that is what we are trying to
get at here today.
I know I have gone way over my time, but I wonder if we
could give Mr. Ward an opportunity.
Ms. Brown of Florida. Mr. Ward, I am going to give you
adequate time to respond. We have a couple more Members and you
can just jot down and I will give you an opportunity to close,
if that's okay. Is that okay?
Mr. Ward. Yes.
Mr. Shuster. Thank you.
Ms. Brown of Florida. I am going to Mr. DeFazio, but first,
I want to ask Mr. Greenwood a question, since you are here. For
years, I went to the Transportation Conference where we
discussed railroads. And for years, the railroad industry was
in the black, and now it is just beginning to operate--I mean,
it was in the red. Red. Black is what you want. So now----
Mr. Shuster. She didn't want to say that, because red means
that is a Republican State.
[Laughter.]
Ms. Brown of Florida. So now it is in the black. I heard
Mr. Amin make the comment that it is okay for this debt, so
that even though the bond rating would go down, can you clarify
that for us? And while you are talking, you made some analysis
in your paper, which I thought was very good, about the food
industry. But the difference is, we only have a limited number
of railroads.
And it is part of their mission, with the common carrier,
is because, our military and the shippers and all of that, and
the stakeholders and the union. So it is a little bit more
complicated than the restaurant. Because if, for example, I
don't want to go to a certain restaurant, I can go to another
one. That one can close, or some of you all can cook at home. I
don't know, my notes say somebody could cook at home, that is
not me.
So would you explain that?
Mr. Greenwood. Yes. I think a good example of that was in
Kerr McGee, that is a case that I have studied a lot. Kerr
McGee was an oil exploration and production company. They were
targeted by the activist investors JANA and Icahn about two
years ago. One of the things that was asked for was pretty
similar, which was, they asked for a reduction in capital
expenditure, and they asked for repurchase of shares. Now, at
the time, some of the analysts who were covering the stock
warned about a possible credit downgrade.
Now, having said that, I think that was a risk that was on
the table. But having a credit downgrade doesn't mean that the
move is necessarily value-reducing. Just by definition, the
more debt that you take on, the more risk you put on those debt
holders. And so their debt is going to be more risky and you
will face this possibility.
But what you saw was when the repurchase took place, you
saw this quite substantial increase in the stock price. I think
it was probably 3 to 7 percent, something like that, on the
day. It is hard to say unambiguously that a downgrade is a bad
thing.
Ms. Brown of Florida. One last thing. There has been lots
of discussion about raising the rates on shippers, I think it
was said 7 percent a year. In your analysis, do you think that
this would cause Congress to immediately pass a re-regulation
bill.
Mr. Greenwood. I wouldn't be able to speculate on that.
Ms. Brown of Florida. I would speculate on it.
Mr. DeFazio.
Mr. DeFazio. Madam Chair, just to follow up on that point,
what alternative, since you are an economist, there is
something known as monopoly pricing. And I don't think you can
say there is a viable trucking alternative to retail. Many of
these shippers do not have access to another railroad. So as
the Chair postulates, if you were looking at 7 percent a year
for 10 years, basically doubling, using the rule of the sevens,
how can we say this is somehow a market-based system? It is not
market-based in that there are no alternatives, according to a
free market and Adam Smith and--I mean, I guess they have an
alternative, they can just go out of business, not ship their
product or whatever. But they don't have a viable alternative.
Mr. Greenwood. Sir, as an economist, I am absolutely aware
of the anti-trust issues and the possibility of monopoly power
being linked to the ability to raise prices in the future. I
don't know enough about the rail industry in particular to draw
that conclusion here. So I would note that of course it is
theoretically possible, but I wouldn't really be able to make
further comment on that.
Mr. DeFazio. And I was going to ask you about, again, but
since you say you really don't know that much about rail, but
the point is, you have heard some discussion of the common
carrier status. There is a public benefit here which needs to
be protected. I do see some potential conflict between what we
hear about value or return or whatever else and the possibility
of these leveraged buy-outs or investors getting in who have a
different agenda. And there was a proposal which was vetoed by
Bush One to essentially have a fitness review if looking at it,
even though you are not an expert on the industry, where we
have to balance both some public benefit, common carrier status
and the need to attract investment. Do you think that perhaps
having some fitness review to determine whether or not we are
attracting the Warren Buffets of the world, which I look at as
much more patient, long-term capital, or other investors that I
would suggest are not so long-term and not so patient? I say
patient for us, but I am just putting it to you.
Mr. Greenwood. I think you can enter into a very dangerous
situation where you are trying to evaluate the motives of the
investor rather than the outcome of what the investors do. One
argument that I am fond of says that if investors were really
short-term and made significant value destroying decisions,
they would be penalized for that in the market by other
investors.
Mr. DeFazio. How is that? I mean, I come in, I raid
something, I make them strip out a bunch of value, the stock
goes up, I sell, I made a bunch of money. I could retire to my
overseas tax haven and how do I get penalized?
Mr. Greenwood. Because the overall pie has shrunk. So the
remaining value of that equity would have shrunk if other
market participants are sort of correctly evaluating----
Mr. DeFazio. It is all about timing, though. You could have
done that, gotten out and you would have screwed the people who
are still there.
Mr. Greenwood. I think I would disagree with that in the
sense that, it is assuming that the other investors don't know
what is going on. Otherwise, they would have penalized----
Mr. DeFazio. There could be a run, but maybe you are just
first out the door. I mean, maybe, maybe not.
I am not going to reopen a dialogue with Mr. Giles, but I
thought you might want to correct something you said earlier,
because I just was a bit impassioned carrying on about other
things. But I am certain you know that the Coos Bay line was
not closed for six months, it was the Siskew line which you are
now proposing to abandon, because of a fire in a tunnel. There
was never a prior closure on the Coos Bay line. So I just
thought you might want to correct the record there.
Mr. Giles. You are incorrect.
Mr. DeFazio. Well, I have UP sitting behind you, they don't
agree, nor does my staff, nor does anybody else know. If you
could provide me documentation of a six month closure of the
Coos Bay line, an area which I have represented for 21 years in
Congress, we would be shocked.
Mr. Giles. Done.
Mr. DeFazio. Okay, great.
Ms. Brown of Florida. Mr. LaTourette.
Mr. LaTourette. Thank you, Madam Chairman.
I just have two quick areas that I want to take up with
you, Mr. Amin. You will have to forgive me on the first one,
because I am not in your business and I was asking about 8
percent versus 20 percent. So if you have it some place in
front of you, it is your press release of December 19th, 2007.
The last sentence of the first paragraph, the members of the
group also hold derivative securities providing economic
exposure equivalent to an additional 11.8 percent of CSX's
outstanding shares.
I thought what I heard you telling me was that you don't
own them, and if the stock goes up, you somehow have a deal
with people that you get paid, you get a fee from the people
who do own the shares. Is that how that works?
Mr. Amin. That is correct.
Mr. LaTourette. Okay, I just didn't understand.
Thank you. The other question, when we were voting, I read
a Wall Street Journal story. And I don't know if it cost Ms.
Brown 500 jobs or not, but I am familiar with your company's
involvement on ABM Holdings and also there have been a couple
of stories I have read about J-Power in Japan.
My question has to do with whether or not it is coincidence
that you, Atticus and 3G have all decided at the same time to
make investments below the 5 percent threshold, which would
require an additional SEC filing, at the same time, with the
same Class I railroad. And if it is not coincidence, could you
explain to the Committee the relationship that you and your
fund have with Atticus, its managers and owners, Mr. Rothschild
and Mr. Barakett, your relationship, if any, with 3G and its
manager, Mr. Behrens? And again, if it is coincidence, that
will be the answer, we are not going to get to B. But if B, you
talk about the relationship, if you could discuss with us when,
if ever, you discussed with them individually or together the
idea of buying a United States railroad, particularly CSX.
Mr. Amin. The short answer is that it is coincidence. When
we decided we thought the railroads were interesting, it was a
private decision that TCI made. I actually don't know when
Atticus and 3G acquired stock. We have never had any agreement
to work together until December, when we had agreed to work
together with 3G, at which point we made the SEC filing.
Mr. LaTourette. And that was the plan that you had to elect
a non-majority?
Mr. Amin. Correct.
Mr. LaTourette. But until that time, no discussions between
your fund and these other two funds?
Mr. Amin. Until that time, no agreement to work together in
CSX or in any other railroad.
Mr. LaTourette. And I don't want to be too careful with
words, but I understand no agreement, I am asking you did you
ever had any discussions.
Mr. Amin. We have had discussions with lots of other
shareholders, including Atticus ad 3G Capital about the rail
industry. All these discussions were after we found out that
they were investors in the industry, through public disclosure.
Specifically now, we have discussion with as many rail
shareholders as possible because, in order for us to be
successful in this proxy contest with CSX, we need 10 shares
for every share that TCI owns to vote in support of us. So we
actively have dialogues.
Mr. LaTourette. Do you know if Atticus or 3G have a similar
ownership position in the UP that you have talked about, Union
Pacific?
Mr. Amin. I am sorry, I didn't hear the question.
Mr. LaTourette. Do you know, just based upon your own
knowledge, whether or not CSX is the only United States
railroad that the three of you have made an investment in, or
are you aware that 3G and/or Atticus have also made investments
in the Union Pacific that you talked about?
Mr. Amin. Yes, I believe they have both publicly disclosed
that they have investments in Union Pacific as well.
One other point I would make is, we have seen just from the
public disclosures that Atticus has been selling their stock in
CSX. So if the insinuation is that we are working together as a
group, I think the fact that they have sold the vast majority
of their position, at least according to their public filings,
would indicate that is not the case.
Mr. LaTourette. Well, two things, I wasn't making an
insinuation, I was asking a question. And two, because words do
matter, I have enjoyed the times that you have come in and
chatted with me. I think you are a good guy and a good
businessman. I happen to think Michael Ward is a good guy and a
good businessman.
There was a letter, after you sent your first letter, and
then CSX responded, you send a second letter. And just because
words do matter, and maybe where fights get taken to a
different level, I would just commend your attention to page 2
of your second letter back where you expressed disappointment
with CSX's response to your suggestions. And in the second full
paragraph after the quote by Mr. Young of Union Pacific, the
sentence said ``Michael Ward rejected the question outright by
responding ignorantly.'' Now, you may disagree with how he runs
his railroad, and I think as a shareholder you have every right
to ask questions. But a phrase like ``responding ignorantly'' I
don't think rises to the level of public discussion and
discourse.
So I would just, maybe ignorantly means something else to
you than it means to me. But that is kind of a----
Mr. Amin. It doesn't, and I think it was a mistake on our
part.
Mr. LaTourette. I appreciate your saying that.
Mr. Amin. Sometimes in these situations, when you have $3
billion at stake you get a little carried away.
Mr. LaTourette. I get that. Listen, I am just glad you are
not closing a bridge in DeFazio's district.
[Laughter.]
Mr. LaTourette. Thank you very much, Madam Chairman.
Ms. Brown of Florida. Okay. I have a couple of questions,
there are a couple of things I want you to clear up. First of
all, the Japanese situation. And the rate-raising and what you
proposed to the Japanese government.
Mr. Amin. In J-Power, which is a public utility in Japan,
what we have proposed----
Ms. Brown of Florida. Give us a one minute on what
happened. Bring us up to date.
Mr. Amin. I will do my best. I will note that I am not
responsible for that position, so my knowledge of it is
somewhat limited. And we are happy to add details to the
record.
Ms. Brown of Florida. I am just trying to get a pattern of
how you operate.
Mr. Amin. Sure. What we have asked from J-Power was
initially an increase of their dividend. They were paying a
very low dividend, even by Japanese standards, to their
shareholders. We thought they should increase that. We didn't,
our view, and it is similar in Deutsche Borse as it is in CSX,
it wasn't our demand that they do it because we asked for it.
What we said is, let's have the shareholders vote. If the
shareholders decide that they don't want to vote in favor of
it, that that is fine. But ask the shareholders what they would
like.
We asked the same thing in Deutsche Borse when Deutsche
Borse was attempting to acquire the London stock exchange, we
just said, this is a transformational acquisition for you, you
should ask the shareholders whether the shareholders think it
is the right thing to do or not. And it is the same in CSX. We
are not saying, we are just going to put our people on the
board. As I mentioned, we need 10 shares, for every share that
we own, we need another 10 shares to win the favor of our
nominees for us to be successful.
But going back to J-Power, that was the first thing we
asked for. The second thing that we have asked them for is
targets, return on capital targets long term. The return on
capital at J-Power has been deteriorating. And the management
has had no plan or no public plan, at least, to fix that. And
when you see the returns deteriorate without any solution or
any evidence of a plan, that is very concerning as a
shareholder. I think those are the two things that we have
asked for.
I can categorically say, I confirmed this yesterday with
the partner that manages our Asia business, that we have never
asked for a rate increase in Japan.
Ms. Brown of Florida. Okay. That is not exactly what I
read, but if you say you didn't. You didn't ask for a rate
increase, what did you ask them to do, then?
Mr. Amin. We asked for the things that I just mentioned.
The one, this is what we asked of the company. We have asked of
the government to allow us to increase our ownership in J-Power
above 10 percent, and that is a filing that in Japan, if you
want to exceed 10 percent, you have to go to the government and
get their approval. So we have asked that of the government.
Ms. Brown of Florida. Okay. You noted that industry around
the world is investing in new technology, we talked about the
railroads, and our industry, particularly CSX, is falling
behind. However, most observers think that U.S. freight
railroad is the best in the world.
My question to you is why you didn't invest in some of
those that you think are so far ahead of us?
Mr. Amin. We agree that the U.S. freight railroad system is
the best in the world.
Ms. Brown of Florida. Who do you think is the best in the
world?
Mr. Amin. We agree that the U.S., the U.S. freight railroad
system is the best in the world.
Ms. Brown of Florida. Would you say that again?
[Laughter.]
Mr. Amin. We agree that the U.S. freight railroad system is
the best in the world.
Ms. Brown of Florida. Okay.
Mr. Amin. That is not to say, though, that it can be
better. That is what we are striving for. We are not saying
that the Brazilian system is better or the Canadian system is
better. What we are saying is, you can learn from people that
do one thing better than you. So the entire Brazilian system
may not be better, but they have onboard computers that cost
$20,000, they developed it, they had the initiative, they
developed it themselves, and they reduced fuel consumption by
20 percent. And they sell this technology.
So it is not a debate of is Brazil a better railroad system
than the U.S. The question for us is, does it make sense to
implement a similar technology if it can save 20 percent of
your fuel bill when oil is at $100.
Ms. Brown of Florida. You know, excuse me, but I have been
going to these workshops, I haven't been recently, because we
haven't had any recently, but wherein one gallon of gas will
take a train from here, Washington, to New York. So we are
investing in the new technology. I have seen the commercials on
TV. I think that we are going green here.
Mr. Amin. We completely agree. The railroads are the most
fuel-efficient form of land-based freight transportation. There
is no question.
Ms. Brown of Florida. That is right. And as we move
forward, we know in this Congress that we have to invest in the
infrastructure. We are looking at creative ways to do that.
When I go around, and we have been going around to
different areas talking to people who are really interested in
investing in our railroad industry, whether we are talking
about freight or passenger, because eventually we need to go to
double-tracking, so that we can really get passenger rail
running and freight rail and them not intersect together. It is
an exciting time for us.
But I am not interested in, well, it is not just me, you
can tell from my colleagues that we have some real concerns
about your intention. I think what was said earlier is that we
need patience, long-term patience. And that is not what I am
hearing from you.
I know you have hired a lot of great people here and a lot
of lawyers and a lot of lobbyists. But you are going to hire a
lot more if you try to destroy our industry. Because it is a
partnership between a lot of stakeholders, the unions, the
shippers, the military, I mean, it is a lot of things that the
railroad, and it is the fight between even the cities that
don't want certain things to go through their community. So it
is a balancing act, as I told you before.
Mr. Amin. We don't disagree, Chairwoman Brown. I can only
assure you that it is not our intention to do anything that
harms CSX or the U.S. railroad industry. It is absolutely not
our intention to do that, and it would be against our interests
as a long-term shareholder.
Ms. Brown of Florida. I know you heard the Chairman say
earlier, he sat up here 23 years ago and was listening to
somebody's word, and the word didn't mean anything. Ronald
Reagan said, trust but verify. I am going to make sure that we
can verify whatever is happening to this industry.
Mr. Amin. I absolutely agree. That is all that we ask, is
judge us by our actions.
Ms. Brown of Florida. Do you have anything else that anyone
else wants to say? Because I am going to let Mr. Ward have the
last word. Anything that you want to say? I hope you understand
what we have said, we have said it over and over again about
raising these rates on these shippers.
Mr. Amin. No. I understand. I think there is one comment I
would like to close with, which is again, just to bring this
back to what we are trying to accomplish here, is not TCI
taking control. The most fundamental thing we are trying to do,
which is a right of any shareholder in a capitalist system, is
to seek shareholder representation on the board. If you don't
think the board is doing a good job, that is your most
fundamental way to try to change that. And again, the nominees
that we have put forth are not TCI nominees. We have no control
over them. The reason that we put them----
Ms. Brown of Florida. Now, that I don't think is altogether
true. You had a search committee to look for them and you have
had dialogue with them. So the fact is, you are telling us that
you are not paying them, you need to understand that we have
some knowledge of what you are saying. And don't lawyer talk
me.
Mr. Amin. Madam Chairman----
Ms. Brown of Florida. What I am saying is, I understand
what you are doing.
Mr. Amin. I can assure you, Madam Chairman, that I have no
control, if I go to Gil Lamphere, who has been a railroad
investor for 20 years, probably one of the most successful
railroad investors in our generation, and I have a view that he
disagrees with, he is going to vote with what he thinks is
right if he is on the board of CSX. Gary Wilson has been one of
the leading businessmen in this Country for decades. He was the
CFO of Marriott, he was the CFO of Disney, he is on the board
of Yahoo, he was the chairman of Northwest Airlines for 15
years. I can express my view to Gary Wilson, and I hope he
would listen. But he certainly is not going to vote on a board
the way that I want him to vote.
Ms. Brown of Florida. I am not making that decision. But I
just want you to know that the decisions you are making are
going to have repercussions here and other places. You just
need to understand that.
Mr. Amin. We understand that.
Ms. Brown of Florida. Okay. So you are going to be paying a
lot more of those people behind you.
Mr. Amin. I am sure they are excited.
[Laughter.]
Ms. Brown of Florida. They are excited, I know.
Mr. Giles. Before Mike speaks, may I just make one
statement, Madam Chairman?
Ms. Brown of Florida. Yes.
Mr. Giles. That is, I agree with the sentiments that we
talked about earlier today, and I want to assure you that our
company has been looking for a win-win out of this and will
continue to do so. I wanted to pass along those assurances to
you.
Ms. Brown of Florida. Thank you. And we are going to move
forward on this, because you understand this is a very
sensitive situation, and we have to work to see how we can get
it resolved. I am willing to work with you on that.
Mr. Giles. Thank you.
Ms. Brown of Florida. Mr. Ward.
Mr. Ward. Thank you, Madam Chairman. I would like to thank
the Committee today for calling this hearing, because I think
at least for me it has been very enlightening.
You can tell from our dialogue today that TCI is a group of
very clever people and they are very good at choosing their
words as to the way they talk about things. They are not always
factually bound, but they are very clever. The 12 to 13 months
they have been involved with our company, they have come up
with four flawed ideas, all of which would have been a mistake
to implement. They were short-sighted, not understanding the
business or the environment in which we operate.
As I best could tell, in answer to the questions that Mr.
Shuster asked, I think they are largely disavowing those ideas,
but I am not totally certain of that. I guess there is no way
to really say if their slate of 40 percent of our directors,
because it is their slate, does succeed, what ideas they may be
pushing at that time is a little unclear, because their ideas
change quite a bit based on circumstances as to what they think
is important to do.
What I can address for you, though, is what we will do at
CSX, which we have been doing. Contrary to some of the remarks
today, we do not have poor returns, nor do we have poor
governance. Our returns are in the top 6 percent of the S&P 500
over the last three years. I don't know how that can be
categorized as poor results. Our governance ratings by ISS,
which is the group that does that here in the United States,
gives us very high ratings, 98 percent in transportation, 93
percent overall. That doesn't sound like poor governance to me.
The idea of splitting the chairman and CEO is much more of
a European idea than it is an American idea. Here in America,
the common practice in the S&P 500 is the chairman and CEO role
are combined. If you want to talk about best practices, the
chairman and CEO were split at both Enron and WorldCom. So I
guess it is not necessarily the best governance model.
In addition to the returns we have produced, we have given
guidance to Wall Street that our earnings per share will be
increasing 15 to 17 percent over the next period through 2010.
So clearly we have not only delivered for our shareholders, we
continue to.
But there are more constituents than just our shareholders.
We are doing a much better job for our customers now. The
ratings we get from our customers say that the service they are
receiving from us is very good, the best they have seen from us
and one of the best within the industry. If we look at our
employees, our safety numbers, we have improved our personal
injuries by 50 percent.
We are now ranked second in the United States, only behind
the Norfolk Southern in personal injury prevention. We have
improved our train accidents by 42 percent, we are again number
two behind the Norfolk Southern in the U.S. railroads. So we
are running a safer, better service railroad, and we continue
to additionally improve that.
The other thing we are going to do is we are not concerned
about what the Congress may do. We think that they are wise and
will make wise decisions around these issues, around
deregulation. We intend to continue to invest in our business
and we have said publicly we will be investing $5 billion
through 2010. We will build the capacity to help the national
infrastructure in this Nation.
The only thing I can assure this group is you have a team
that has been delivering, will continue to deliver, and we will
fight any attempts that will knock us off the path of serving
those four audiences. So I thank the Committee for its
attention and interest.
Mr. Shuster. May I, Madam Chairman?
Ms. Brown of Florida. Yes.
Mr. Shuster. The first thing I would like to caution you
on, Mr. Ward, don't bet on Congress making wise decisions.
[Laughter.]
Mr. Shuster. And I am one of 435, and I know I am indicting
myself.
Ms. Brown of Florida. You are excluding me, right?
Mr. Shuster. I included myself.
The Canadian National, whose operating ratios are the
highest in the industry, they operate in a different system up
there, for one, I know the track sharing agreements are very
different up there. Let me make my three points and you can
educate me on that.
The second is that when the government privatized them, did
they invest, I think I read they invested billions of dollars
to try and get the track, their infrastructure up to speed,
which I think would have an effect on their operating ratios.
And third, their scheduled rail, is that the right terminology?
How does that fit into CSX companies?
Mr. Ward. Well, Mr. Shuster, as you well know, there are a
lot of differences between railroads. The Canadian Railroad
does have the best operating ratio in the North American
railroads, there is no question about that. They have a very
streamlined operation, a lot of their business is grain and
coal. They do not run through many major urban centers. It is a
very streamlined railroad. It is sort of a T, if you will.
And quite frankly, it has a much lower operating ratio than
any U.S. railroad, not just CSX. The railroads in the United
States tend to have operating ratios between, say, 71 and 78.
So the CN at 60 is in an entirely different league, somewhat
because of their simplicity, somewhat because of the health and
welfare benefit systems in Canada.
So I think most people who really understand the industry
would not draw a direct comparison between and American
railroad and a Canadian railroad. As I said before, it is like
comparing NFL football and CFL football.
That being said, if you look at the progress, and there is
no question our company was not running extremely well three
years ago, and I think quite frankly, some of TCI's criticisms
three years ago would have been quite appropriate. We have
improved the fastest in the last three years of all the major
railroads in all the prime categories, and largely are in the
number two position in most categories that are relevant,
rather than hand-picked, cherry-picked measures as TCI likes to
do.
So we think we can improve. As far as our future guidance,
we say we can get our operating ratio to the low to mid-70s,
which is at this point best among the U.S. railroads. So we are
certainly on a path that I think will be creating a lot of
value for TCI and their investment in us. I think there is a
little bit of an apples and oranges comparison there between
the two, and you are quite right, the government did spend a
lot of money to build a very good infrastructure for the
Canadian National public.
Mr. Shuster. What about the scheduled rail service?
Mr. Ward. I think they were the pioneer in moving toward a
scheduled rail network. I think you will actually find that
most U.S. railroads have moved to some scheme similar to that.
They may not call it a scheduled railroad. We have on our
railroad what we call the One Plan, which is having strong
discipline to taking and having the train leave when it is
supposed to leave and be a much more disciplined operation. So
I don't think that the other rails in the United States might
be quite as strict as the Canadian National is, but I think all
of them have moved to a similar methodology for a lot of their
movements.
Mr. Shuster. How is the response from the customer? I was
in business before, and if you run a schedule very disciplined,
sometimes your customers go, wait a minute, that is not when I
want to be there. If you are running something that scheduled,
are the customers appreciative of it? How is the customer
satisfaction?
Mr. Ward. Actually, I will speculate on this, and this is
second-hand, of course, my understanding is that customers
whose needs are met well by the Canadian National are very,
very happy with their service. Generally they are not too
willing to tailor their services if a customer has a somewhat
different need. Those customers might not be quite as delighted
with what the CN produces.
Mr. Shuster. Thank you.
Ms. Brown of Florida. Thank you. Any further comments? Yes,
sir.
Mr. Amin. I just want to make a couple of comments related
to Mr. Ward's statement. The comparison of Canadian National,
Mr. Shuster, is incredibly important. There are certainly
significant differences between Canadian National and the U.S.
railroads.
That being said, Hunter Harrison, who is the CEO of
Canadian National, grew up in the U.S. railroads, he grew up in
Burlington Northern, a U.S. railroad, was then the CEO of
Illinois Central. He is convinced that what they have
accomplished in Canadian National can be replicated. There are
a couple of differences, while there are advantages that
Canadian National has, there are a couple of disadvantages that
they have. One is they have a less favorable regulatory system.
Their ag rates are regulated. And there is more forced access.
Mr. Shuster. What is regulated?
Mr. Amin. Their agriculture rates are regulated. And there
is more forced access in Canada.
Second, the weather conditions that the Canadian railroads
have to deal with across the board are much, much worse in the
winter than they are here, and weather can have an enormous
effect. Avalanches on the Canadian National Railroad have a
huge effect on the performance of that business.
Third, unit trains, as I think we all know, are the most
efficient form of running rail. And Canadian National has a
lower percentage of unit trains than the U.S., which would
indicate that they should run less efficiently and have a worse
operating ratio than the U.S. railroads. We certainly
acknowledge that there are differences.
And again, I am not here to testify as an expert on the
railroads. That is why we were supporting nominees that have
that railroad experience, that share the view. Can you do
everything that Canadian National has done? No. You can't.
Every business is different. All we are saying is we should
hold ourselves up to a higher standard. They have shown that
tremendous improvement can be made.
Don't forget, Canadian National was, in 1995, was the worst
railroad in North America in almost every metric. At the time,
the U.S. railroads were running at approximately an 80 percent
operating ratio. Canadian National was running at a 97. And
Wall Street thought Canadian National, for all the reasons I
just mentioned, could never get to be as efficient as the U.S.
Well, in that period, they have gone from a 3 percent earnings
margin to a 40 percent earnings margin.
Now we are all saying, well, there are differences and the
U.S. railroads can never get to Canada. We can always justify
the status quo. But our only point is, there must be something
we can learn from what they are doing to implement in the
United States.
Ms. Brown of Florida. You know, I am just so confused,
though, if you think they are doing such a good job, why you
didn't put your money with them.
Mr. Amin. Because as an investor, there are two things that
are important. One is the quality of the business; the other is
can you improve the business from where you are today to that
potential.
Ms. Brown of Florida. But you think they are doing such a
good job, that would be a good investment of your money.
Mr. Amin. I think Canadian National is doing a fantastic
job. I think there is more value that can be created at CSX
than there can be at Canadian National, because Canadian
National is already doing these things. If we implement this at
CSX----
Ms. Brown of Florida. But some of the things that you are
recommending would jeopardize CSX and jeopardize your
investment. For example, what you said about freezing growth
investment until the fate of the re-regulation bill is known.
You have said several things here in your memo that will
jeopardize your investment. If you think Canadian investment is
such a good deal, I just don't know why you didn't invest your
money there? I don't know anything about investments. But I am
just wondering why you didn't do that.
Mr. Amin. All I can reiterate is----
Ms. Brown of Florida. Because I think that in the U.S., we
have the best freight in the world. I am not saying we cannot
improve. But I don't want to duplicate what they are doing in
Canada. They have health insurance. That is not something that
our rail may necessarily have to deal with.
So it is not apples and oranges, and I do understand
football and the little league, what he is saying, so I do
understand that.
Mr. Amin. I don't know how to respond to that.
[Laughter.]
Mr. Amin. All we are saying is, if there is someone that we
can learn from, even though we are the best railroad system,
the best freight railroad system in the world, we don't
question that to be the case, but we can always improve.
Ms. Brown of Florida. Absolutely. But I am very concerned
about this hostile takeover that you are talking about here.
Mr. Amin. I can only reiterate, we are not taking control.
It has never been our intention to take control. I can tell you
right now, we have never sought it and we don't seek control.
It is not what TCI does. We have never, in the history of our
fund, taken control of any business. Like we said, if we are
successful, only one person, one voice out of twelve voices
will be from TCI.
Ms. Brown of Florida. Okay. Mr. Ward, anything additional?
Mr. Ward. We are getting very clever again. They have five
members they have nominated, one is theirs. And yes, they may
not be technically seeking control, but I will reiterate what I
said earlier. When you are trying to control or nominate 40
percent of the board, telling you how much to borrow, how much
to spend, where to spend it, what technologies you ought to be
deploying and what you ought to be charging your customers,
that may not be technically ``control.'' But in most people's
world, that would sure feel very, very close to it.
Thank you, Madam Chairman.
Ms. Brown of Florida. I want to thank the witnesses for
their testimony and the Members for their attendance and
cooperation. This hearing is adjourned.
[Whereupon, at 5:30 p.m., the Subcommittee was adjourned.]
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