[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




                   U.S. GOVERNMENT PRINTING OFFICE
41-210 PDF                  WASHINGTON : 2008
----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001


             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

[GRAPHIC] [TIFF OMITTED] T1210.001

[GRAPHIC] [TIFF OMITTED] T1210.002

[GRAPHIC] [TIFF OMITTED] T1210.003

[GRAPHIC] [TIFF OMITTED] T1210.004

[GRAPHIC] [TIFF OMITTED] T1210.005

[GRAPHIC] [TIFF OMITTED] T1210.006

[GRAPHIC] [TIFF OMITTED] T1210.007

[GRAPHIC] [TIFF OMITTED] T1210.008



               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.]

    [GRAPHIC] [TIFF OMITTED] T1210.009
    
    [GRAPHIC] [TIFF OMITTED] T1210.010
    
    [GRAPHIC] [TIFF OMITTED] T1210.011
    
    [GRAPHIC] [TIFF OMITTED] T1210.012
    
    [GRAPHIC] [TIFF OMITTED] T1210.013
    
    [GRAPHIC] [TIFF OMITTED] T1210.014
    
    [GRAPHIC] [TIFF OMITTED] T1210.015
    
    [GRAPHIC] [TIFF OMITTED] T1210.016
    
    [GRAPHIC] [TIFF OMITTED] T1210.017
    
    [GRAPHIC] [TIFF OMITTED] T1210.018
    
    [GRAPHIC] [TIFF OMITTED] T1210.019
    
    [GRAPHIC] [TIFF OMITTED] T1210.020
    
    [GRAPHIC] [TIFF OMITTED] T1210.021
    
    [GRAPHIC] [TIFF OMITTED] T1210.022
    
    [GRAPHIC] [TIFF OMITTED] T1210.023
    
    [GRAPHIC] [TIFF OMITTED] T1210.024
    
    [GRAPHIC] [TIFF OMITTED] T1210.025
    
    [GRAPHIC] [TIFF OMITTED] T1210.026
    
    [GRAPHIC] [TIFF OMITTED] T1210.027
    
    [GRAPHIC] [TIFF OMITTED] T1210.028
    
    [GRAPHIC] [TIFF OMITTED] T1210.029
    
    [GRAPHIC] [TIFF OMITTED] T1210.030
    
    [GRAPHIC] [TIFF OMITTED] T1210.031
    
    [GRAPHIC] [TIFF OMITTED] T1210.032
    
    [GRAPHIC] [TIFF OMITTED] T1210.033
    
    [GRAPHIC] [TIFF OMITTED] T1210.034
    
    [GRAPHIC] [TIFF OMITTED] T1210.035
    
    [GRAPHIC] [TIFF OMITTED] T1210.036
    
    [GRAPHIC] [TIFF OMITTED] T1210.037
    
    [GRAPHIC] [TIFF OMITTED] T1210.038
    
    [GRAPHIC] [TIFF OMITTED] T1210.039
    
    [GRAPHIC] [TIFF OMITTED] T1210.040
    
    [GRAPHIC] [TIFF OMITTED] T1210.041
    
    [GRAPHIC] [TIFF OMITTED] T1210.042
    
    [GRAPHIC] [TIFF OMITTED] T1210.043
    
    [GRAPHIC] [TIFF OMITTED] T1210.044
    
    [GRAPHIC] [TIFF OMITTED] T1210.045
    
    [GRAPHIC] [TIFF OMITTED] T1210.046
    
    [GRAPHIC] [TIFF OMITTED] T1210.047
    
    [GRAPHIC] [TIFF OMITTED] T1210.048
    
    [GRAPHIC] [TIFF OMITTED] T1210.049
    
    [GRAPHIC] [TIFF OMITTED] T1210.050
    
    [GRAPHIC] [TIFF OMITTED] T1210.051
    
    [GRAPHIC] [TIFF OMITTED] T1210.052
    
    [GRAPHIC] [TIFF OMITTED] T1210.053
    
    [GRAPHIC] [TIFF OMITTED] T1210.054
    
    [GRAPHIC] [TIFF OMITTED] T1210.055
    
    [GRAPHIC] [TIFF OMITTED] T1210.056
    
    [GRAPHIC] [TIFF OMITTED] T1210.057
    
    [GRAPHIC] [TIFF OMITTED] T1210.058
    
    [GRAPHIC] [TIFF OMITTED] T1210.059
    
    [GRAPHIC] [TIFF OMITTED] T1210.060
    
    [GRAPHIC] [TIFF OMITTED] T1210.061
    
    [GRAPHIC] [TIFF OMITTED] T1210.062
    
    [GRAPHIC] [TIFF OMITTED] T1210.063
    
    [GRAPHIC] [TIFF OMITTED] T1210.064
    
    [GRAPHIC] [TIFF OMITTED] T1210.065
    
    [GRAPHIC] [TIFF OMITTED] T1210.066
    
    [GRAPHIC] [TIFF OMITTED] T1210.067
    
    [GRAPHIC] [TIFF OMITTED] T1210.068
    
    [GRAPHIC] [TIFF OMITTED] T1210.069
    
    [GRAPHIC] [TIFF OMITTED] T1210.070
    
    [GRAPHIC] [TIFF OMITTED] T1210.071
    
    [GRAPHIC] [TIFF OMITTED] T1210.072
    
    [GRAPHIC] [TIFF OMITTED] T1210.073
    
    [GRAPHIC] [TIFF OMITTED] T1210.074
    
    [GRAPHIC] [TIFF OMITTED] T1210.075
    
    [GRAPHIC] [TIFF OMITTED] T1210.076
    
    [GRAPHIC] [TIFF OMITTED] T1210.077
    
    [GRAPHIC] [TIFF OMITTED] T1210.078
    
    [GRAPHIC] [TIFF OMITTED] T1210.079
    
    [GRAPHIC] [TIFF OMITTED] T1210.080
    
    [GRAPHIC] [TIFF OMITTED] T1210.081
    
    [GRAPHIC] [TIFF OMITTED] T1210.082
    
    [GRAPHIC] [TIFF OMITTED] T1210.083
    
    [GRAPHIC] [TIFF OMITTED] T1210.084
    
    [GRAPHIC] [TIFF OMITTED] T1210.085
    
    [GRAPHIC] [TIFF OMITTED] T1210.086
    
    [GRAPHIC] [TIFF OMITTED] T1210.087
    
    [GRAPHIC] [TIFF OMITTED] T1210.088
    
    [GRAPHIC] [TIFF OMITTED] T1210.089
    
    [GRAPHIC] [TIFF OMITTED] T1210.090
    
    [GRAPHIC] [TIFF OMITTED] T1210.091
    
    [GRAPHIC] [TIFF OMITTED] T1210.092
    
    [GRAPHIC] [TIFF OMITTED] T1210.093
    
    [GRAPHIC] [TIFF OMITTED] T1210.094
    
    [GRAPHIC] [TIFF OMITTED] T1210.095
    
    [GRAPHIC] [TIFF OMITTED] T1210.096
    
    [GRAPHIC] [TIFF OMITTED] T1210.097
    
    [GRAPHIC] [TIFF OMITTED] T1210.098
    
    [GRAPHIC] [TIFF OMITTED] T1210.099
    
    [GRAPHIC] [TIFF OMITTED] T1210.100
    
    [GRAPHIC] [TIFF OMITTED] T1210.101
    
    [GRAPHIC] [TIFF OMITTED] T1210.102
    
    [GRAPHIC] [TIFF OMITTED] T1210.103
    
    [GRAPHIC] [TIFF OMITTED] T1210.104
    
    [GRAPHIC] [TIFF OMITTED] T1210.105
    
    [GRAPHIC] [TIFF OMITTED] T1210.106
    
    [GRAPHIC] [TIFF OMITTED] T1210.107
    
    [GRAPHIC] [TIFF OMITTED] T1210.108
    
    [GRAPHIC] [TIFF OMITTED] T1210.109
    
    [GRAPHIC] [TIFF OMITTED] T1210.110
    
    [GRAPHIC] [TIFF OMITTED] T1210.111
    
    [GRAPHIC] [TIFF OMITTED] T1210.112
    
    [GRAPHIC] [TIFF OMITTED] T1210.113
    
    [GRAPHIC] [TIFF OMITTED] T1210.114
    
    [GRAPHIC] [TIFF OMITTED] T1210.115
    
    [GRAPHIC] [TIFF OMITTED] T1210.116
    
    [GRAPHIC] [TIFF OMITTED] T1210.117
    
    [GRAPHIC] [TIFF OMITTED] T1210.118
    
    [GRAPHIC] [TIFF OMITTED] T1210.119
    
    [GRAPHIC] [TIFF OMITTED] T1210.120
    
    [GRAPHIC] [TIFF OMITTED] T1210.121
    
    [GRAPHIC] [TIFF OMITTED] T1210.122
    
    [GRAPHIC] [TIFF OMITTED] T1210.123
    
    [GRAPHIC] [TIFF OMITTED] T1210.124
    
    [GRAPHIC] [TIFF OMITTED] T1210.125
    
    [GRAPHIC] [TIFF OMITTED] T1210.126
    
    [GRAPHIC] [TIFF OMITTED] T1210.127
    
    [GRAPHIC] [TIFF OMITTED] T1210.128
    
    [GRAPHIC] [TIFF OMITTED] T1210.129
    
    [GRAPHIC] [TIFF OMITTED] T1210.130
    
    [GRAPHIC] [TIFF OMITTED] T1210.131
    
    [GRAPHIC] [TIFF OMITTED] T1210.132
    
    [GRAPHIC] [TIFF OMITTED] T1210.133
    
    [GRAPHIC] [TIFF OMITTED] T1210.134
    
    [GRAPHIC] [TIFF OMITTED] T1210.135
    
    [GRAPHIC] [TIFF OMITTED] T1210.136
    
    [GRAPHIC] [TIFF OMITTED] T1210.137
    
    [GRAPHIC] [TIFF OMITTED] T1210.138
    
    [GRAPHIC] [TIFF OMITTED] T1210.139
    
    [GRAPHIC] [TIFF OMITTED] T1210.140
    
    [GRAPHIC] [TIFF OMITTED] T1210.141
    
    [GRAPHIC] [TIFF OMITTED] T1210.142
    
    [GRAPHIC] [TIFF OMITTED] T1210.143
    
    [GRAPHIC] [TIFF OMITTED] T1210.144
    
    [GRAPHIC] [TIFF OMITTED] T1210.145
    
    [GRAPHIC] [TIFF OMITTED] T1210.146
    
    [GRAPHIC] [TIFF OMITTED] T1210.147
    
    [GRAPHIC] [TIFF OMITTED] T1210.148
    
    [GRAPHIC] [TIFF OMITTED] T1210.149
    
    [GRAPHIC] [TIFF OMITTED] T1210.150
    
    [GRAPHIC] [TIFF OMITTED] T1210.151
    
    [GRAPHIC] [TIFF OMITTED] T1210.152
    
    [GRAPHIC] [TIFF OMITTED] T1210.153
    
    [GRAPHIC] [TIFF OMITTED] T1210.154
    
    [GRAPHIC] [TIFF OMITTED] T1210.155
    
    [GRAPHIC] [TIFF OMITTED] T1210.156
    
                                    
