    [Senate Hearing 110-199]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 110-199

        AN EXAMINATION OF S. 772, THE RAILROAD ANTITRUST ENFORCEMENT ACT

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

                                    HEARING

                                   before the

                           SUBCOMMITTEE ON ANTITRUST,
                     COMPETITION POLICY AND CONSUMER RIGHTS

                                     of the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                OCTOBER 3, 2007

                                   __________

                              Serial No. J-110-36

                                   __________

             Printed for the use of the Committee on the Judiciary

                        U.S. GOVERNMENT PRINTING OFFICE
    37-552                      WASHINGTON : 2007
    _____________________________________________________________________________
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                           COMMITTEE ON THE JUDICIARY

                      PATRICK J. LEAHY, Vermont, Chairman
    EDWARD M. KENNEDY, Massachusetts     ARLEN SPECTER, Pennsylvania
    JOSEPH R. BIDEN, Jr., Delaware       ORRIN G. HATCH, Utah
    HERB KOHL, Wisconsin                 CHARLES E. GRASSLEY, Iowa
    DIANNE FEINSTEIN, California         JON KYL, Arizona
    RUSSELL D. FEINGOLD, Wisconsin       JEFF SESSIONS, Alabama
    CHARLES E. SCHUMER, New York         LINDSEY O. GRAHAM, South Carolina
    RICHARD J. DURBIN, Illinois          JOHN CORNYN, Texas
    BENJAMIN L. CARDIN, Maryland         SAM BROWNBACK, Kansas
    SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
                Bruce A. Cohen, Chief Counsel and Staff Director
          Michael O'Neill, Republican Chief Counsel and Staff Director
                                     ------

       Subcommittee on Antitrust, Competition Policy and Consumer Rights

                         HERB KOHL, Wisconsin, Chairman
    PATRICK J. LEAHY, Vermont            ORRIN G. HATCH, Utah
    JOSEPH R. BIDEN, Jr., Delaware       ARLEN SPECTER, Pennsylvania
    RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
    CHARLES E. SCHUMER, New York         SAM BROWNBACK, Kansas
    BENJAMIN L. CARDIN, Maryland         TOM COBURN, Oklahoma
                         Jeffrey Miller, Chief Counsel
                    Peter Levitas, Republican Chief Counsel

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page
    Feingold, Hon. Russell D., a U.S. Senator from the State of
      Wisconsin, prepared statement..................................   101
    Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     3
    Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     1
        prepared statement...........................................   103

                                   WITNESSES

    Berg, William L., President and Chief Executive Officer,
      Dairyland Power Cooperative, La Crosse, Wisconsin..............     8
    Bush, Darren, Associate Professor of Law, University of Houston
      Law Center, Houston, Texas.....................................    15
    Moates, G. Paul, Esq., Partner, Sidley Austin LLP, Washington,
      D.C............................................................    17
    Nottingham, Charles D., Chairman, Surface Transportation Board,
      Washington, D.C................................................     5
    Szabo, Robert G., Member, Van Ness Feldman, Executive Director
      and Counsel, Consumers United for Rail Equity (CURE)...........    13
    Vander Schaaf, Ken, Director, Supply Chain Management, Alliant
      Techsystems, Inc., Radford, Virginia...........................    10

                             QUESTIONS AND ANSWERS

    Responses of William L. Berg to questions submitted by Senator
      Kohl...........................................................    29
    Responses of Darren Bush to questions submitted by Senators Kohl
      and Specter....................................................    32
    Responses of G. Paul Moates to questions submitted by Senators
      Kohl and Specter...............................................    46
    Responses of Charles D. Nottingham to questions submitted by
      Senator Kohl...................................................    52
    Responses of Robert G. Szabo to questions submitted by Senators
      Kohl and Specter...............................................    61
    Responses of Ken Vander Schaaf to questions submitted by Senator
      Kohl...........................................................    70

                           SUBMISSIONS FOR THE RECORD

    Berg, William L., President and Chief Executive Officer,
      Dairyland Power Cooperative, La Crosse, Wisconsin, prepared
      statement......................................................    71
    Bush, Darren, Associate Professor of Law, University of Houston
      Law Center, Houston, Texas, prepared statement.................    76
    Department of Justice, Office of Legislative Affairs, William E.
      Moschella, Assistant Attorney General, Washington, D.C., letter    96
    Federal Trade Commission, Deborah Platt Majoras, Chairman,
      Washington, D.C., letter.......................................    99
    Moates, G. Paul, Esq., Partner, Sidley Austin LLP, Washington,
      D.C., prepared statement.......................................   105
    Nottingham, Charles D., Chairman, Surface Transportation Board,
      Washington, D.C., prepared statement and letter................   123
    Szabo, Robert G., Member, Van Ness Feldman, Executive Director
      and Counsel, Consumers United for Rail Equity (CURE), prepared
      statement......................................................   152
    Vander Schaaf, Ken, Director, Supply Chain Management, Alliant
      Techsystems, Inc., Radford, Virginia, prepared statement.......   166

        AN EXAMINATION OF S. 772, THE RAILROAD ANTITRUST ENFORCEMENT ACT

                                  ----------

                           WEDNESDAY, OCTOBER 3, 2007

                                           U.S. Senate,
            Subcommittee on Antitrust, Competition Policy and
                Consumer Rights, Committee on the Judiciary,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 10:30 a.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
    Chairman of the Subcommittee, presiding.
        Present: Senators Kohl, Feinstein, and Hatch.

     OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
                           STATE OF WISCONSIN

        Chairman Kohl. We will get started. Senator Hatch is on the
    way. We welcome one and all here this morning. Today we are
    meeting to consider an important piece of legislation to halt
    what I regard as anticompetitive practices harming businesses
    and consumers that do depend on freight railroads across our
    country. Our legislation, S. 772, is a bipartisan bill which
    passed the Judiciary Committee without dissent just 2 weeks
    ago. Nevertheless, we are holding this hearing today at the
    request of some members of the Committee who do want to further
    explore this issue.
        Our legislation will eliminate obsolete antitrust
    exemptions that protect freight railroads from competition and
    result in higher prices to millions of consumers every day all
    across our country. The railroad industry--unlike every other
    form of freight transportation, including trucking and
    aviation--enjoys immunity from most aspects of antitrust law.
    No good reason exists for this antitrust exemption. The best
    argument that the defenders of the current antitrust exemption
    can make is that it is unfair to subject the railroads to
    antitrust law because they are already subject to regulation.
    We believe that this argument is without merit.
        First, dozens of other industries in our economy are
    regulated and yet remain subject to antitrust law. Most
    importantly, all the other parts of the transportation industry
    are subject to extensive regulation--including aviation, under
    the supervision of the Department of Transportation, and
    trucking, under the supervision of the Surface Transportation
    Board. And yet they are also subject to antitrust law in almost
    every respect.
        Other examples abound, ranging from telecom to energy. No
    other regulated industry possesses the total immunity from
    Justice Department merger review enjoyed by the railroad
    industry. And yet the need for antitrust enforcement is
    greatest in the case of railroads. Unlike the dozens of airline
    and trucking competitors that shippers may choose from, in many
    areas of our Nation only one freight railroad serves businesses
    that rely on railroad shipping. Defenders of the railroad
    antitrust exemption, therefore, bear a very heavy burden to
    explain why their industry should be treated any differently
    from other regulated industries.
        Second, as railroad advocates themselves often point out,
    the railroad industry has, in fact, been substantially
    deregulated by legislation in recent decades. Most importantly,
    most railroad rate setting has been removed from the oversight
    of the Surface Transportation Board. Despite this deregulation,
    the obsolete antitrust exemptions remain in place, insulating a
    consolidating industry from obeying the rules of fair
    competition.
        The effects of this unwarranted antitrust exemption are
    plain to see. Consolidation in the railroad industry in recent
    years has resulted in only four Class I railroads providing
    over 90 percent of the Nation's freight rail transportation.
    Just less than three decades ago, in 1979, there were 42. The
    lack of competition in the railroad industry was documented in
    an October 2006 GAO report. That report found that, shippers in
    many geographic areas ``may be paying excessive rates due to a
    lack of competition in these markets.'' These unjustified cost
    increases cause harm throughout the economy. Consumers suffer
    higher electricity bills because a utility must pay for the
    high cost of transporting coal; manufacturers who rely on
    railroads to transport raw materials charge a higher price for
    their goods; and American farmers who ship their products by
    rail pass on these cost increases in the form of higher food
    prices.
        The ill effects of this consolidation are exemplified in
    the case of ``captive shippers''--industries which are served
    by only one railroad. Two of these captive shippers are
    testifying at our hearing today. Over the past several years,
    these captive shippers have faced spiking rail rates--price
    increases which they are forced to pass along into the price of
    their products, and ultimately, to consumers. In August of
    2006, the Attorneys General of 17 States and the District of
    Columbia sent a letter to Congress citing problems due to a
    lack of competition and urged that the antitrust exemptions be
    removed. The letter stated that ``rail customers in our States
    in a variety of industries are suffering from the classic
    symptoms of unrestrained monopoly power: unreasonably high and
    arbitrary rates and as well as poor service.''
        In my State of Wisconsin as well as around the Nation,
    victims of a lack of railroad competition abound. About 40
    affected organizations in my State have told us that they are
    feeling the crunch of years of railroad consolidation and
    anticompetitive railroad practices. The reliability,
    efficiency, and affordability of freight rail have all
    declined, and consumers are feeling the pinch. For example, to
    help offset a 93-percent increase in shipping rates in 2006,
    Dairyland Power Cooperative in Wisconsin had to raise
    electricity rates by 20 percent. Similar stories exist across
    the country. Dozens of organizations, unions and trade groups--
    including the American Public Power Association, the American
    Chemistry Council, American Corn Growers Associations, and AFL-
    CIO and many more affected by monopolistic railroad conduct--
    have endorsed our legislation.
        Adoption of our legislation will be an excellent first step
    to bring needed competition to the railroad industry. By
    clearing out this thicket of outmoded antitrust exemptions,
    railroads will be subject to the same laws as virtually every
    other industry throughout our country. Government antitrust
    enforcers will finally have the tools to prevent
    anticompetitive transactions and practices by railroads. And,
    likewise, private parties will be able to utilize the antitrust
    laws to deter anticompetitive conduct as well as to seek
    redress for their injuries.
        On the Antitrust Subcommittee, we have seen that in
    industry after industry, vigorous application of our Nation's
    laws is the best way to keep prices low and the quality of
    service high. The railroad industry is no different. All those
    who rely on railroads to ship their products--whether it is an
    electric utility for its coal, a farmer to ship grain, or a
    factory to acquire its raw materials or ship out its finished
    product--deserve the full application of the laws to end
    anticompetitive abuses which are too prevalent in this industry
    today.
        [The prepared statement of Senator Kohl appears as a
    submission for the record.]
        So we are happy to have our witnesses here today. We look
    forward to your testimony, and we are delighted to have the co-
    Chairman of this Committee, Senator Hatch from Utah, and we
    welcome his comments.

    STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
                                OF UTAH

        Senator Hatch. Well, thank you, Mr. Chairman. I appreciate
    you having these hearings, and I appreciate your leadership on
    this Committee.
        Mr. Chairman, I am very concerned about the reports I
    received from a variety of Utah businesses. They believe that
    they are being charged excessive and unwarranted prices for the
    rail shipment of their goods. I am especially concerned that
    these same businesses believe that they would be charged
    considerably less in an environment free of railroad antitrust
    exemptions.
        As a matter of legal principle, I have always been
    inherently suspicious of any special industry exemptions from
    our antitrust laws unless those exemptions served an important
    purpose in maintaining market competition or other significant
    public policy considerations.
        The greatness and resilience of the American economy is
    based on the foundation of competition. Only through
    competition does the American economy renew itself to meet the
    challenges of the future.
        Over the past 30 years, Congress has enhanced that notion
    by deregulating and removing antitrust exemptions for a number
    of industries, including airlines, trucking, and telephone
    industries.
        Now, that being said, important questions remain regarding
    S. 772. Paramount among them is the inquiry into what effect
    this bill will have if enacted. Simply put, if the bill is
    passed, will the result be reduced prices for shippers? That is
    a central question that I hope can be answered today or will be
    answered today.
        Now, Mr. Chairman, transportation costs are an important
    part of any business plan. When businesses choose where to
    locate their factories and operations, they make this choice
    based on the cost of shipping their products from the place of
    manufacture to the marketplace.
        Now, I have been informed that when large manufacturers
    seek new locations to build factories, many of these companies
    stipulate that they will only choose sites that are serviced by
    two railroads. And why? Well, because manufacturers do not wish
    to be beholden to one railroad and find themselves held captive
    to a sole transporter.
        This point was enforced by an August 17th letter written to
    the Judiciary Committee by the Attorneys General of several
    States. And I find this point to be particularly troubling
    since Utah is primarily served by only one large railroad
    corporation. Indeed, one of today's witnesses, Mr. Ken Vander
    Schaaf, will testify that ATK, Utah's largest defense
    contractor, has seen the shipping costs from its Promontory
    plant increase by 50 percent over the last 5 years.
        I am also concerned about a practice that is currently
    permitted by the Surface Transportation Board called
    ``bottlenecking.'' Under this practice, if a railroad owns the
    tracks for the last few miles of a shipment, that railroad is
    not required to quote prices for portions of the shipment that
    other railroads can offer. This creates what is referred to in
    the business as ``captive shippers,'' and these corporations
    are justifiably concerned that they are paying higher rates
    because of the lack of competition.
        Equally as disconcerting are the reports of paper barriers
    where short-line railroads are provided with overly discounted
    if not free access to railroad lines if the short-line
    operators agree only to transfer shipments through the major
    railroad that owns the lines, that particular line used by the
    short-rail operator.
        Now, Mr. Chairman, these are troubling points that require
    close scrutiny. I appreciate your calling this hearing and the
    willingness of the distinguished panel of witnesses to come
    before us today and report on their knowledge of the
    transportation industry.
        I might add there is another side to it, too, and that is,
    we are going to have to upgrade the railroads in this country,
    and we are going to have to create more of them. Just the
    energy costs alone and savings alone through railroad use are
    really substantial, and we cannot ignore that either. But if
    railroads are charging too much and taking advantage of their
    antitrust exemption in ways that really were not contemplated,
    then we have got to look at this very, very seriously, as I
    know you are doing.
        So I want to thank you for your energy in this matter, and
    I want to thank you for holding this hearing and the
    willingness of these distinguished witnesses on this panel to
    come before us today to report on their knowledge of the
    transportation industry.
        Thank you, Mr. Chairman.
        Chairman Kohl. Thank you, Senator Hatch.
        Before I introduce our witnesses, I would like to note that
    Senator Dianne Feinstein is with us today. She is from
    California, and we very much appreciate her presence at this
    hearing.
        Our first witness today will be Charles Nottingham. Mr.
    Nottingham is the Chairman of the Surface Transportation Board.
    Since 2002, Chairman Nottingham has also served as the
    Associate Administrator for Policy and Governmental Affairs at
    the Federal Highway Administration.
        Our next witness will be William Berg. Mr. Berg is
    President and CEO of Dairyland Power Cooperative in La Crosse,
    Wisconsin. He serves on a variety of boards and committees,
    including the Rail Energy Transportation Advisory Committee of
    the Surface Transportation Board.
        Our next witness will be Ken Vander Schaaf. Mr. Vander
    Schaaf is the Director of Supply Chain Management at ATK in
    Radford, Virginia, where his responsibilities include
    management of transportation services. He is a member of the
    Institute for Supply Management of the Carolinas and Virginia.
        Our next witness will be Bob Szabo. Mr. Szabo is a partner
    at the Van Ness Feldman law firm. He is also Executive Director
    of Consumers United for Rail Equity, or CURE, where he provides
    legislative and legal counsel as well as management services.
        Our next witness will be Darren Bush. Dr. Bush is an
    Associate Professor of Law at the University of Houston Law
    Center, where his primary research interests are antitrust and
    regulated industries, energy, and intellectual property. Dr.
    Bush also served in the Transportation, Energy, and Agriculture
    Section of the Antitrust Division at the Department of Justice.
        Our final witness will be G. Paul Moates, testifying on
    behalf of the Association of American Railroads. Mr. Moates is
    a partner at Sidley Austin LLP, where is head of the firm's
    transportation practice. Mr. Moates regularly represents
    railroads and the railroad industry's trade association, and he
    has served as lead counsel in a number of large railroad merger
    cases before the Surface Transportation Board.
        We thank you all for appearing here, and we would like you
    to stand and raise your right hand and repeat after me. Do you
    swear and affirm that the testimony you are about to give
    before the Committee will be the truth, the whole truth, and
    nothing but the truth, so help you God?
        Mr. Nottingham. I do.
        Mr. Berg. I do.
        Mr. Vander Schaaf. I do.
        Mr. Szabo. I do.
        Mr. Bush. I do.
        Mr. Moates. I do.
        Chairman Kohl. We thank you so much.
        Chairman Nottingham, we will take your testimony at this
    time.

         STATEMENT OF CHARLES D. NOTTINGHAM, CHAIRMAN, SURFACE
                 TRANSPORTATION BOARD, WASHINGTON, D.C.

        Mr. Nottingham. Good morning, Chairman Kohl, Ranking Member
    Hatch, and Senator Feinstein. My name is Charles Nottingham,
    and I am Chairman of the Surface Transportation Board. I
    appreciate the opportunity to appear before this Subcommittee
    today to provide the Board's views on S. 772, the Railroad
    Antitrust Enforcement Act. I will briefly summarize my written
    testimony.
        It is important to state at the outset that railroads today
    are already largely subject to the antitrust laws. For example,
    they face civil and criminal liability for violations of the
    Sherman Act, such as price fixing, market allocation, and bid
    rigging, and they have been successfully sued for violating
    that Act.
        Where the railroads do have express statutory immunities,
    they are narrowly drawn, and in administering the Interstate
    Commerce Act, the Board vigorously enforces core antitrust
    principles. Rail carriers should be subject to the full weight
    of Federal antitrust laws, except where the enforcement of the
    antitrust laws may conflict with the need for single, uniform,
    and integrated economic regulation of the rail industry by the
    Board.
        The Board does not believe that immunities once granted
    under particular economic and legal circumstances should remain
    in place regardless of changes in the economic and legal
    environment that occur over time. For example, in May of this
    year, the Board used its discretion to terminate antitrust
    immunities for motor carrier rate bureaus that had been
    recognized for more than 70 years. The Board's decision in the
    area of motor carrier rate bureaus demonstrates out commitment
    to the antitrust laws and our willingness not to be constrained
    by past policy decisions or jurisdictional turf considerations.
        We are concerned that at least two provisions of the
    proposed legislation would interfere with the Board's ability
    to effectively regulate this Nation's interconnected rail
    network. First, let me address Section 2 of the bill.
        Presently, only the Department of Justice or the STB may
    bring suit for injunctive relief against a common carrier
    subject to STB jurisdiction. The bill would permit private
    parties to obtain injunctive relief against rail carriers in
    individual Sherman or Clayton Act challenges. This proposal
    presents serious risks to centralized oversight of the National
    Rail Transportation System.
        District courts are not responsible for meeting national
    rail transportation policy goals, nor do the district courts
    possess the institutional expertise to consider how a decision
    resolving one case will affect other carriers and shippers on
    that line, or on other lines in different parts of the country.
        Unlike many other industries, the National Rail System,
    while comprising hundreds of individual railroads, nevertheless
    operates as a single, integrated, complex, and interdependent
    network. Operational changes or issues arising in one location
    can have significant operational ramifications hundreds of
    miles away, including effects on other freight carriers as well
    as on Amtrak and commuter lines. Only the Board is charged with
    looking at the rail industry from a national perspective and
    ensuring that remedies to resolve individual disputes comport
    with national rail policy objectives and do not cause
    unintended operational and service problems elsewhere.
        Giving district court's injunctive power in rail-related
    disputes would also create a great potential for conflicting
    decisions from individual courts. The Board, and the ICC before
    it, has developed a consistent body of law that approaches
    competition issues with a viewpoint broadened by other rail
    transportation goals and that provides the basis upon which
    both carriers and shippers shape their conduct and assess
    potential remedies. In contrast, district courts looking solely
    at the antitrust laws without regard to the many public
    interest considerations mandatory in board review might well
    come up with different rules and different remedies to fix
    competition issues. Finally, many of the injunctive remedies
    that a district court might order in an antitrust case may
    themselves require board approval. In sum, we believe that
    Section 2 of the bill is antithetical to Congress' longstanding
    support for a rail regulatory system that charges a single
    economic regulatory body with oversight over the rail industry.
        Let me now turn to the Board's concerns regarding Section 3
    of the bill.
        In 1995, Congress declined to repeal the antitrust
    exemption for rail mergers, acquisitions, and other
    transactions, choosing instead to keep that review with the
    agency that regulates the economic activity of the industry.
    Section 3 would subject rail mergers, acquisitions, leases,
    joint use, and trackage rights agreements to both the approval
    process and criteria of the Interstate Commerce Act and
    separate Clayton Act standards and procedures. We are concerned
    that this dual enforcement regime could result in some of the
    same problems raised by the potential for district court
    injunctions described above. We are also concerned that it
    would diminish the considerable benefits of a single,
    comprehensive review in which the views of all parties,
    including those of DOJ, and affected shippers are transparent
    and considered.
        From a substantive viewpoint, there is very little
    disagreement between the Board and the antitrust enforcers on
    the outcome of mergers. Although critics of the Board make much
    of those few instances of disagreement between the Board and
    DOJ, there has only been one recent case, in 1996, where the
    Board did not follow DOJ's recommendation that merger authority
    either be denied or conditioned on expansive divestitures. The
    benefit of hindsight shows that the Board made the right
    decision in that one recent case, which was the UP-SP merger, a
    decision supported by the vast majority of impacted rail
    customers.
        Further, the Board's new merger rules anticipate the types
    of major rail merger proposals we could see in the future,
    which would likely involve the creation of a transcontinental
    railroad, by merging one carrier from the West with another
    carrier from the East. Under traditional merger analysis by DOJ
    or the FTC, such a vertical integration of two partners with
    complementary, not overlapping, systems would not be perceived
    to carry as significant a risk of competitive harm as a
    horizontal merger of two direct competitors. However, under the
    new STB merger rules, to offset any harm that could not be
    mitigated merging carriers would need to show how the proposed
    merger would enhance competition. We are concerned that dual
    merger review would frustrate the Board's ability to fashion
    merger conditions based on public interest concerns.
        The Board has also found that continued oversight of larger
    rail mergers is critical to ensuring that remedies are working
    effectively. These types of chores are best left to a single
    decisionmaker. That decisionmaker should be the one that is
    least limited in both what it can consider and what conditions
    it can and will impose, which in this instance would be the
    Board.
        I am concerned, therefore, that this bill is not targeted
    to remove just those exemptions that have grown outdated or are
    no longer useful but, rather, is a sweeping change that removes
    them all. These changes would make it more difficult for the
    STB to perform its regulatory oversight responsibilities.
        The Board understands and is sensitive to the concerns of
    rail customers about rail rates and service. During my 14-month
    tenure at the Board, we have implemented an unprecedented
    series of regulatory actions and reforms aimed at halting
    unreasonable rail industry practices, increasing access to the
    Board's dispute resolution procedures, and examining the
    accuracy of our industry cost-of-capital determination that
    impacts rates and affects many aspects of the relationship
    between railroad and their customers. We have also initiated a
    $1 million national study of rail competition being managed by
    Christensen Associates, an economic consulting firm based in
    Madison, Wisconsin.
        In conclusion, S. 772 would make efficient, uniform
    regulation of the rail industry more difficult by creating
    duplicative and overlapping regulatory schemes. Likewise,
    subjecting the rail industry to a potential patchwork of
    judicial injunctions scattered across the country could cause a
    ripple effect of operational problems for freight, Amtrak, and
    commuter rail transportation. These complications could
    increase the cost of providing rail service--costs that likely
    would be passed on to rail customers in the form of higher
    rates. Therefore, I am concerned that the legislation may
    create more rate and service problems, not fewer problems.
        Thank you for giving me the opportunity to testify here
    today, and I will be happy to answer any questions you may
    have.
        [The prepared statement of Mr. Nottingham appears as a
    submission for the record.]
        Chairman Kohl. Thank you, Mr. Nottingham.
        Mr. Berg, you may commence, and I would like to request
    that the witnesses keep their comments to 5 minutes. Mr. Berg?

      STATEMENT OF WILLIAM L. BERG, PRESIDENT AND CHIEF EXECUTIVE
       OFFICER, DAIRYLAND POWER COOPERATIVE, LA CROSSE, WISCONSIN

        Mr. Berg. Chairman Kohl and members of the Subcommittee, my
    name is William Berg. I am President and CEO of Dairyland Power
    Cooperative, headquartered in La Crosse, Wisconsin.
        Dairyland Power is a nonprofit generation and transmission
    cooperative supplying at wholesale the electricity needs of our
    25 member distribution cooperatives, who in turn serve over
    575,000 people living in Minnesota, Iowa, Illinois, and
    Wisconsin. As a relatively small electric utility serving
    mostly rural residences and farms, we are very concerned about
    holding down costs because, ultimately, all the costs that we
    incur in the generation and distribution of electricity flow
    through to our members. Our largest single cost item in
    generating electricity is rail transportation, and as I will
    explain, those costs have mushroomed.
        We annually use about 3.2 million tons of coal in three
    coal-fired plants in western Wisconsin. Three-quarters of that
    coal comes from the Powder River Basin in Wyoming. For the
    delivery of that coal, we are captive to and dependent upon the
    only two railroads currently serving the Powder River Basin, or
    PRB, as it is called. Because of the virtually unrestrained
    market power that these railroads have over PRB movements, we
    are, in fact, paying more and receiving less. In 2005,
    Dairyland experienced a 13-percent shortfall of scheduled coal
    shipments, yet we were hit with rate increases averaging about
    93 percent beginning in 2006--resulting in more than $35
    million of increased annual costs.
        These dramatic rate increases were the major factor in our
    board's decision to increase electricity rates to our members
    by over 20 percent during 2006. Our members are truly suffering
    as a result of the railroads' predatory price increases, and we
    cannot tolerate a virtual doubling of rates, especially at a
    time when our service quality is actually declining. Moreover,
    these rate increases came at the end of a short-term, 3-year
    contract that already included annual escalations and provided
    adequate cost recovery.
        We are certainly not alone in this situation. BadgerCURE,
    an organization of over 45 Wisconsin groups, businesses, and
    organizations, has been formed to pursue sensible policies to
    help address railroad competition and service problems.
        Since utilities have no viable alternative to rail in
    moving coal from the Powder River Basin to their power plants,
    and since the two railroads now appear to have no incentive to
    improve the existing demand/supply imbalance, we cannot protect
    ourselves through normal business negotiations. At our largest
    plant, we have rail access from only one provider. At our other
    plants, which receive coal by barge, we must still secure rail
    delivery to the barges. Although there may be more than one
    railroad for those hauls, the absence of competition and
    apparent allocation of markets have allowed the railroads to
    preserve market share even while eliminating performance
    guarantees and dramatically raising prices. The railroads seem
    to be able to exercise almost absolute market power, with
    little effective recourse by Dairyland or other, even much
    larger, railroad customers.
        We strongly support S. 772, legislation that will provide
    for a more competitive landscape in the Nation's freight
    railroad industry. Along with S. 953, the Railroad Competition
    and Service Improvement Act of 2007, which has been referred to
    the Senate Commerce, Science, and Transportation Committee.
    With the enactment of S. 772, rail customers will have the full
    range of the Nation's antitrust laws to help deal with
    anticompetitive railroad actions, and the legislation may help
    serve as a deterrent to future anticompetitive behavior. For
    instance, S. 772 may help defer the following competitive
    problems:
        Bottlenecks. Dairyland is a ``bottleneck: utility, that is,
    the last segment of the trip to our unit-train plant is served
    by only one railroad. Railroads often refuse to quote rates for
    shipments to or on the bottleneck segment, denying the benefits
    of competition on the other segments.
        Paper barriers. Major railroads have spun off or leased
    segments of their tracks to short-line carriers with
    contractual terms that prohibit the acquiring carrier from
    competing with the major railroads.
        Public pricing. Dairyland traditionally received coal
    transportation via confidential contracts. Now, approximately
    two-thirds of our rail business moves under so-called ``public
    pricing'' documents manufactured by the railroads. We are
    concerned that high public rail prices provide signals between
    these western carriers regarding elevated pricing aspirations
    for Dairyland's traffic.
        Refusal to bid. Even in what should be considered
    ``competitive'' situations where two railroads are able to
    serve a property, increasingly we do not see competitive bids.
    For example, coal we receive by barge is theoretically
    competitive, since there are several rail-to-barge transloading
    facilities in different locations. Our experience is that one
    railroad offers public pricing while the other railroad offers
    nothing or exceedingly high prices. Competition does not work
    in a duopoly market if one of the duopolists refuses to bid.
        In response to recent regulation, rail representatives
    suggest that legislative relief is ``re-regulation.'' We
    disagree. We have also heard the railroads state that the
    legislative relief would result in their decision not to add
    infrastructure. We understand that the railroads need a
    reasonable profit to operate, and they must have enough capital
    to make needed improvements. However, the rate increases to
    Dairyland have no correlation to improved service and
    infrastructure improvements. Of necessity, we are going to be
    partners for many decades to come, but I question whether the
    railroads will ever have an incentive to improve service,
    properly maintain and grow infrastructure, and effectively
    compete for service unless changes are made by Congress.
        Railroads also aggregate numbers as they defend themselves
    from the issue of high rates. Those aggregate numbers really do
    not tell the real impact for an individual shipper like
    Dairyland Power. The bottom line is this: every month Dairyland
    has to pay millions of dollars more because of rail rates that
    have nearly doubled, and as a cooperative, every single cent of
    that has to come out of our members' pockets.
        In light of the current consolidated state of the railroad
    industry and the problems we are experiencing in obtaining
    competitive rail service, Dairyland respectfully submits that
    the Committee got it right when it recently approved S. 772,
    and we urge the full Senate to pass this important bill as soon
    as possible.
        Thank you again for the opportunity to testify.
        [The prepared statement of Mr. Berg appears as a submission
    for the record.]
        Chairman Kohl. Thank you, Mr. Berg.
        Mr. Vander Schaaf?

        STATEMENT OF KEN VANDER SCHAAF, DIRECTOR, SUPPLY CHAIN
                   MANAGEMENT, ATK, RADFORD, VIRGINIA

        Mr. Vander Schaaf. Chairman Kohl, Senator Hatch, and
    distinguished members of the Committee, thank you for the
    opportunity to discuss the issue of rail transportation costs
    and the quality of service experienced by a captive customer. I
    am Ken Vander Schaaf, the Director of Supply Chain Management
    at the Radford Army Ammunition Plant, operated by my employer,
    ATK Ammunition Systems, which is headquartered in Utah. ATK is
    an advanced weapons and space systems company headquartered in
    Edina, Minnesota, with 52 facilities in 21 States, including
    the States of Utah and Wisconsin. Given our large number of
    facilities spread across the country, our company has an
    overarching interest in the competitive transportation
    environment in general, including via rail.
        ATK strongly supports S. 772, the Railroad Antitrust
    Enforcement Act. If S. 772 had been the law of the land over
    the last few decades, we would see a more competitive rail
    industry today, with fewer of the problems that I am here to
    discuss. Today I will address our captive customer status at
    two of our facilities. The first is ATK's Launch Systems
    facility near Promontory, Utah, a private facility that
    supplies large solid rocket boosters for NASA's Space Shuttle
    program, the Department of Defense's Minuteman and Trident
    strategic missile systems, and other large defense, commercial,
    and civil rocket programs. The second is the Army's Radford
    Army Ammunition Plant, which ATK operates under a Government-
    owned, contractor-operated agreement with the U.S. Army.
        ATK's Promontory facility is a captive customer of the
    Union Pacific Railroad. The solid rocket motors manufactured
    here are loaded by ATK onto railcars at our facility in
    Corinne, Utah. Union Pacific then transports the solid rockets
    to Titusville, Florida, among other locations. Because of the
    enormous size of most of these rocket motors, there is no other
    way to ship these products.
        In recent years, Union Pacific has instituted substantial
    price increases. In 2002, ATK Promontory paid about $14,000 per
    rail car to Union Pacific to move the shuttle's rocket
    boosters. By April 2007, the rate increased to over $21,000 per
    rail car, an increase of over 50 percent in 5 years.
        Union Pacific cites two main reasons for these rate
    increases: a ``special train'' service and increased fuel
    costs. The special train service was initiated in 1994 by Union
    Pacific to facilitate the flow of traffic across their lines.
    The creation of the service was Union Pacific's decision, not
    ATK's, yet we are now paying for it. The second reason given
    for these rate hikes is that the Surface Transportation Board
    now requires all fuel surcharges to be based on transportation
    mileage. This now permanent rate hike is an added cost to
    previous fuel surcharges that were already in excess of the
    actual cost of fuel expended.
        Our Promontory facility also experiences a lack of
    reliability by their rail carrier. Union Pacific often misses
    promised pick-up or delivery dates, and the transit times are
    routinely longer than promised. Because we are limited to only
    one rail carrier at each of our locations, we are forced to
    comply with the carrier's performance, prices, and attitude
    toward service.
        A solid rocket booster shipping to Cape Canaveral in
    Florida is too massive to move in any other way than a
    railroad. These financial and schedule costs ultimately add
    excess cost and risk to our Government customers at NASA and
    the Department of Defense.
        ATK and its heritage companies have continuously operated
    Radford Army Ammunition Plant in southern Virginia under the
    contract with the U.S. Army since the 1940's. Radford is the
    only domestic source of nitrocellulose, which is required in
    the production of all ammunition products, including those
    utilized by the military, law enforcement, and civilian
    sportsmen. At Radford, we annually produce 21 million pounds of
    nitrocellulose, 8.5 million pounds of propellant, and 4.5
    million pounds of commercial powder. In other to produce
    nitrocellulose and the resulting propellants, significant
    quantities of chemicals must be safely transported to Radford.
    Radford has historically relied almost exclusively on rail
    shipments to receive these raw materials. The deliveries are
    critical to our ability to supply the Army and other customers
    with propellants.
        Of increasing concern are rising transportation costs and
    the decreased quality of rail service experienced by ATK at
    Radford. Historically, the Radford Plant was served by two
    railroads--the Virginian and Norfolk Western. The Virginian was
    acquired by the Norfolk Southern, and we are now a ``captive
    customer,'' relying on a single rail provider for the receipt
    of chemicals. We frequently experience rail schedule slips at
    Radford. We plan around those potential scheduled slips by
    building excess inventory into our business plans so that
    operations continue uninterrupted to meet the Department of
    Defense's required delivery schedules. This practice adds cost
    and overhead to our operations.
        Norfolk Southern has raised transportation substantially.
    Prior to the last few years, we viewed Norfolk Southern's price
    increases as both realistic and relatively justified. However,
    in May 2006 things changed. Cherokee Nitrogen, ATK's supplier
    for ammonia, advised us that, effective June 1, 2006, Norfolk
    Southern's freight rate for ammonia shipments to Radford would
    increase from $39 per ton to $65 per ton--a 69-percent
    increase. This massive price increase demonstrates the ability
    of a monopoly railroad to levy price increases at will, with
    little if any notice.
        In the last 15 months, the rail increases to move ammonia
    have increased from $39 per ton to $132 per ton in July 2007,
    an increase of over 330 percent.
        Significant fuel surcharges have also added to the cost of
    shipments. Whenever the cost of oil increases, our rail carrier
    has unilaterally added the fuel surcharge to the cost of
    shipments. Our experience is that the railroads then quickly
    modify the tariff rates to incorporate the higher rates such
    that there is never a corresponding drop in cost of freight
    when the price of oil does fall.
        At Radford, we believe that the Norfolk Southern Railroad
    is deliberately trying to price itself out of the business of
    shipping some chemicals. The end result of this strategy will
    be the movement of hazardous materials from the railroads to
    the highways. In ATK's perspective, movement by rail has
    several inherent safety advantages over shipping by truck on
    the highway: railcars are constructed of stronger materials
    than are tank trucks; rail traffic is more segregated from
    other modes of transportation; and the number of railcars
    required to transport the same quantity of material via highway
    increases by as much as a factor of five.
        Likewise, there are significant advantages to the shipper
    and to the receiver when shipping with larger volumes. As the
    number of individual shipments increases--as it would if we
    were to ship via truck rather than rail--the potential exposure
    of our workers to these potential hazardous chemicals increases
    as well. While the chemical industry has a very good safety
    record in handling chemicals properly, each unnecessary
    transfer increases the opportunity for an incident or an
    accident
        All of us at ATK are extremely proud of the role we play in
    support of our homeland security, law enforcement, space
    exploration, and outdoor sportsmen customers. However, our
    ability to perform those missions safely and economically for
    our customers is negatively impacted by the quality of the
    service we receive and the extremely high rates demanded by the
    monopoly rail carriers. There is also the larger issue of
    increased costs borne by NASA and the Department of Defense,
    and ultimately the U.S. taxpayer, as they annually transport by
    rail millions of tons of equipment, products, and supplies to
    and from depots, military bases, and ports.
        Thank you again, Chairman Kohl and Senator Hatch, for your
    leadership on this issue, and for your Committee's continued
    interest in looking for ways to redress these important issues.
    We look forward to working with you in support of this and
    other possible legislation needed to solve the issues facing
    ATK and other companies held captive by this monopoly of
    railroad companies.
        In closing, in addition to S. 772, I would like to direct
    your attention to S. 953, the Railroad Competition and Service
    Improvement Act, which seeks to improve the rate challenge
    process, provide for service complaint remedies by the Surface
    Transportation Board, and a more proactive STB in general. We
    hope that the Senate Commerce Committee before which this bill
    is pending will move this bill quickly and encourage members of
    this Committee to work with their colleagues there to move S.
    953 rapidly to the floor.
        I would be pleased to respond to any questions you might
    have. Thank you.
        [The prepared statement of Mr. Vander Schaaf appears as a
    submission for the record.]
        Chairman Kohl. Thank you, Mr. Vander Schaaf.
        Mr. Szabo? And, again, I would like to request that you
    keep your comments to 5 minutes or less. Mr. Szabo?

        STATEMENT OF ROBERT G. SZABO, MEMBER, VAN NESS FELDMAN,
       EXECUTIVE DIRECTOR AND COUNSEL, CONSUMERS UNITED FOR RAIL
                             EQUITY (CURE)

        Mr. Szabo. Mr. Chairman and Senator Hatch and Senator
    Feinstein, thank you for the opportunity to speak today. I am
    the Executive Director of CURE, which is a membership
    organization that advocates S. 772 and other remedies for the
    current rail customer problem. We strongly support your
    legislation. We strongly support this Committee's action in
    reporting the bill.
        We believe if S. 772 becomes law, it will address three of
    the major problems confronting--would address the major problem
    confronting rail customers, which is a lack of access to
    competition. We think there are three specific problems that it
    will correct that lead to that lack of competition: the first
    one is overconcentration of the rail industry; the second one
    is the paper barriers or tie-in agreements that Senator Hatch
    mentioned; the third is the bottleneck or failure to quote
    rates, again that Senator Hatch mentioned. And, by the way, we
    are in complete agreement with both of your opening statements,
    and I believe you set forth the problem very clearly.
        Mergers and acquisitions. Most of them are done. There are
    some that could still happen. We believe that some have not
    occurred properly. Some did not occur with the right conditions
    to address anticompetitive impacts. We do not agree with the
    Chairman that, in retrospect, the one that the Department of
    Justice opposed, which was the UP and the Southern Pacific, has
    worked out well. It has not worked out well for some rail
    customers. And, therefore, we believe that any further mergers
    and acquisitions should be both under the Board, which has the
    first call on these matters, but that the Department of Justice
    should have the right to go to Federal district court and
    enjoin the merger and acquisition if it violates the antitrust
    laws.
        S. 772 will not prevent the STB from having a higher
    standard than the antitrust laws. We are happy that they are
    more vigilant today than they were once upon a time. They have
    a more progressive policy than they used to have, but it has
    not been tested by any merger. So that is the first issue.
        The second issue, paper barriers, I would like to refer to
    a schematic that is on the back of my testimony which sets
    forth this problem. After partial deregulation, the railroad
    industry began to rationalize its system to meet the needs of
    the country, and 500 short-line railroads were created. In each
    case, that transaction had to be approved by the STB and was
    not subject to Department of Justice approval. What happened,
    shippers thought that this would be a means of competition.
    Unfortunately, what happened is most of these transactions
    creating the short line were not sales of track to the short
    line. They were leases of operating rights on the tracks.
        The terms of these agreements were not made public during
    the public comment period. Later, we came to understand that in
    most of these lease agreements there are prohibitions that
    prevent the short line from doing business with any railroad
    other than the one from which they are leasing the track. This
    means that the customers on that track can only go to one major
    railroad, even though the track that is being operated by the
    short line may go to two major railroads. So we are prevented
    from competition.
        The schematic that I have, Attachment A, is one example. It
    is a Union Pacific example, moving coal from the Powder River
    Basin. I do not mean to be picking on the UP, but this happens
    throughout the rail system. There are two railroads in the
    Powder River Basin that can move coal out of the basin. That is
    the Burlington Northern and the UP--the two major railroads in
    the West. But often there is only one railroad that can bring
    it to the power plant. In this case, the Red Railroad is the
    UP, and they can bring it to the plant. This line, which is not
    coming through very well, that goes down through Memphis is the
    Burlington Northern. But there is a short line that can
    intersect with the Burlington Northern and bring the coal to
    the power plant.
        On a map, you would think that this power plant is in good
    shape, that it has competition. But if you look at the next
    page, this is a provision extracted from the lease agreement
    that basically says if the short line does 95 percent--unless
    the short line does 95 percent of its business with UP, it pays
    a confiscatory annual rent for the track. The first 5 percent,
    no annual rent; 95 percent, $10 million. It escalates to $90
    million.
        This lease was not made--agreement is not public, but it
    was filed on the record of the Securities and Exchange
    Commission and was found by a law firm. UP does not like us to
    talk about this, but we believe these are in many of the
    agreements that prevent competition. We think those are
    anticompetitive. We do not think they would stand under the
    antitrust laws.
        The second mechanism is the one Senator Hatch mentioned
    previously-the bottleneck, or the failure to quote a rate. I
    have another schematic. This is, again, UP. We are not trying
    to pick on UP.
        Chairman Kohl. Mr. Szabo, we are at 5 minutes. Would you
    conclude?
        Mr. Szabo. I will. At any rate, this prevents access to
    competition. The utility in Lafayette testified that the
    captivity that they pay for their coal which passes through to
    the ratepayers is costing the school systems in Lafayette,
    Louisiana, $1.5 million extra a year.
        We believe, Mr. Chairman, that antitrust laws will help
    with competition in the rail industry. Thank you.
        [The prepared statement of Mr. Szabo appears as a
    submission for the record.]
        Chairman Kohl. Thank you, Mr. Szabo.
        Dr. Bush?

         STATEMENT OF DARREN BUSH, ASSOCIATE PROFESSOR OF LAW,
            UNIVERSITY OF HOUSTON LAW CENTER, HOUSTON, TEXAS

        Mr. Bush. Mr. Chairman, Ranking Member Senator Hatch from
    my home State of Utah, and other distinguished members of the
    Subcommittee, I want to thank you for giving me the opportunity
    today to speak about competition policy in the context of a
    deregulated railroad industry. My remarks today are my own, as
    I, quite sadly, do not represent anyone in this matter.
        As I and others have set forth in a fairly recent report to
    the United States Antitrust Modernization Commission, the
    burden of establishing the case for any immunity should fall on
    the proponents of the immunity who, at a minimum, should
    clearly explain why conduct within the scope of an immunity is
    both prohibited or unduly inhibited by antitrust liability and
    is in the public interest, make some estimation as to the
    effects of the proposed--of the immunity, what the immunity
    will have in addition to its intended effect--in other words,
    other external effects; and demonstrate that the immunity is
    necessary to achieve the desired policy outcome.
        In the case of railroads, I find no clear benefit to the
    immunity except perhaps to the railroads and to the Surface
    Transportation Board in the form of exclusive jurisdiction. The
    benefits of such a regulatory scheme are dubious at best, and
    the conduct sought for continued immunization has
    characteristics that could lead and perhaps has led to serious
    consumer injury. I only have time today to talk about this in
    the context of mergers.
        For example, it is fair to say that the Surface
    Transportation Board and its predecessor, the Interstate
    Commerce Commission, have rarely met a merger that they did not
    like. However, this is by design. As I mentioned in my written
    testimony, the purpose of the STB's merger authority harkening
    back to the 1920's was to consolidate the railroad industry.
    The formulaic requirements of balancing the total effect of the
    merger's cost and benefits naturally led to a pro-merger stance
    with immediate potential speculative efficiency gains and other
    potential benefits accruing to interested stakeholders such as
    the railroads and labor outweighing consumer injury.
        Sadly, the goal of the policy, which was consolidation and
    increased investor returns, along with system stability, did
    not come to fruition. Some recent mergers have created service
    disruptions and spawned shipper complaints, some of which you
    have heard here today. And while the STB has revamped its
    merger policy to some degree, it is yet to be tested by any
    railroad merger. The question arises as to whether the STB will
    be able to resist its past practices of allowing mergers to
    come to fruition with Acela-like speed.
        Moreover, in the context of today's discussion, I find no
    reason to conclude that there is something so special in the
    railroad regulation realm that should isolate it from other
    industries that exhibit similar issues, including potential
    natural monopoly conditions in some component of the industry,
    high coordination needs for purposes of providing service and
    protecting public safety, and where exists some modicum of
    competition. Absent such a showing, there appears little
    argument against concurrent jurisdiction. Rather, it is the
    case that much of railroad policy has moved away from
    regulation to market forces. In that instance, it is imperative
    that antitrust fill the gap left by regulators. Otherwise, we
    are left with the worst of all possible worlds: a business
    subject to neither competition policy nor regulation.
        Because the world of railroads is one of extreme levels of
    market concentration, the anticompetitive stakes are high. Any
    future merger could potentially yield strong and persistent
    anticompetitive effects. The consideration of these effects
    might be lost in the STB's calculus of total benefits to
    consumers, the railroads, labor, or other stakeholders to the
    transaction. The antitrust laws, in contrast, do not
    necessarily consider transfers from consumers to stakeholders
    to be a good thing. Moreover, the antitrust agencies more
    readily consider the full spectrum of competitive harms.
        I find it similarly disingenuous to argue that courts will
    likely cause disruption of national railroad policy in the wake
    of an antitrust suit brought by a private plaintiff or a State
    attorney general acting as parens patriae. Many agencies live
    with the potential of court action against a company subject to
    the agency's regulation. Unless there is something unique about
    railroads--and I do understand that there is something about a
    train that is magic--there is little justification for granting
    immunity here while embracing competition policy elsewhere. In
    most instances, historically such choices between immunity and
    antitrust law application were not made due to industry
    idiosyncrasies, but rather due to industry lobbying and
    political pressure.
        Antitrust immunity without justification is merely special
    interest legislation transferring wealth from consumers,
    shippers and others to railroads. It is not just in the context
    of mergers that this exists, but you have also heard testimony
    with respect to paper barriers and other things. Therefore, the
    Surface Transportation Board has let a lot of anticompetitive
    effects take place without any justification.
        I see that I am out of time, and I will play by the rules
    and entertain any questions afterward. Thank you.
        [The prepared statement of Mr. Bush appears as a submission
    for the record.]
        Chairman Kohl. Thank you very much, Dr. Bush.
        Mr. Moates?

    STATEMENT OF G. PAUL MOATES, ESQ., PARTNER, SIDLEY AUSTIN LLP,
        WASHINGTON, D.C., ON BEHALF OF ASSOCIATION OF AMERICAN
                               RAILROADS

        Mr. Moates. Chairman Kohl, Senator Hatch, Senator
    Feinstein, my name is Paul Moates, and I am testifying here
    today on behalf of the Association of American Railroads. I am
    a senior partner in the Washington office of the international
    law firm of Sidley Austin, and I have approximately 30 years of
    experience in representing individual freight railroads as well
    as the AAR on antitrust and regulatory matters, including most
    of the major merger cases and rate cases that have occurred in
    the last 25 or 30 years. I thank the mt for this opportunity to
    present the railroad industry's views on S. 772, the Railroad
    Antitrust Enforcement Act of 2007.
        Frankly, we believe this legislation is a solution looking
    for a problem. In developing that needless solution, it would
    subject railroads to an unwarranted dual system of regulation.
    Longstanding statutory schemes should be altered only if there
    is an identified problem and only if the proposed legislation
    would be effective in remedying that perceived problem.
        With respect, neither condition exists with respect to this
    legislation. Indeed, it is based on a number of faulty
    premises. The first is that railroads enjoy broad antitrust
    immunities. That is simply not true. As Chairman Nottingham
    said before me this morning, railroads are generally subject to
    antitrust laws, and the immunities they do have are limited in
    scope and also subject to regulatory oversight by the STB.
        In particular, the antitrust laws prohibit anticompetitive
    agreements among railroads to collude in the setting of rates,
    the allocation of markets, or otherwise unreasonably
    restraining trade. Railroads also continue to be subject to the
    STB's regulatory jurisdiction with respect to certain rates and
    services, the terms of entry and exit, and mergers and other
    restructurings. The statutory antitrust exemptions that remain
    exist because of the need to avoid dual and potentially
    conflicting regulation by the courts and the STB. Moreover,
    they allow the railroads to work together in a limited way, a
    very limited way, to efficiently address some of the issues
    created because of the industry's network characteristics.
        The second faulty premise is that this legislation would
    benefit shippers by subjecting railroads to dual merger
    jurisdiction. It would attempt to do this by eliminating the
    STB's current exclusive jurisdiction over rail mergers while
    giving the antitrust enforcement agencies concurrent authority
    to review and challenge such mergers. Even more troubling, the
    bill would allow DOJ or the FTC retroactively to challenge
    mergers that were approved by the ICC or STB long ago and
    subsequently consummated. There is no reason to believe that
    this change in the law will provide shippers with additional
    relief in any possible future merger cases. Indeed, the Clayton
    Act standard of preserving competition does not in any way give
    shippers more protections than the STB standard for major rail
    mergers of requiring that merger applicants demonstrate that
    their proposed transaction would result in enhancements to
    competition.
        Moreover, dating back at least to the passage of the
    Staggers Act, the STB and ICC before it have consistently used
    their authority to impose conditions on mergers to ensure that
    no customer has lost two-railroad service.
        Another of the solutions in S. 772 looking for a problem is
    elimination of the limited exemption that railroads have under
    Title 49, Section 10706, establishing procedures for handling
    car hire payments, railroad car hire payments. That exemption,
    although severely limited, nonetheless remains important since
    it fosters coordination on matters that enhance network
    efficiency and are not controversial. It is also important to
    recognize that even those rules do not involve the setting of
    car hire rates. Such rates are established through bilateral
    negotiations between the owners and users of the equipment. In
    fact, let me emphasize again that under this exemption,
    competing railroads do not and have not for many years
    collectively set freight rates of any kind. That seems to be a
    very erroneous premise here this morning.
        The third faulty premise is that this legislation would
    merely level the playing field and treat railroads like other
    industries. But I would submit this is belied by the very
    language in the bill. In several instances, the bill addresses
    specific antitrust exemptions that currently apply to a number
    of industries in addition to railroads, but eliminates them
    only with respect to railroads. One must ask why these
    exemptions are sound policies for other industries but not for
    railroads.
        In addition, this legislation would not replace the
    existing STB regulatory scheme with antitrust remedies where
    limited immunities exist. Rather, it would superimpose
    antitrust remedies on top of STB regulation. Moreover, it will
    not provide rail customers with any new protections from
    allegedly high rates because high prices alone do not
    constitute an antitrust violation.
        Finally, we have a major concern mentioned by Chairman
    Nottingham about Section 2 of the bill, which permits private
    injunctions and thereby introduces the very real possibility of
    dual but inconsistent regulation of railroads. So long as there
    remains a single regulatory body charged with oversight of the
    industry, it is imperative that the antitrust laws and national
    transportation policy be implemented in a harmonious fashion,
    and permitting courts to fashion equitable remedies in civil
    actions and also by discouraging courts from deferring to the
    STB's expertise, Section 4 of the bill threatens to disrupt
    that harmony.
        My time is up. I will stop, sir. Thank you.
        [The prepared statement of Mr. Moates appears as a
    submission for the record.]
        Chairman Kohl. We thank you very much, Mr. Moates.
        We will now start our questions, and I would request that
    the Senators keep to 7 minutes.
        Mr. Berg and Mr. Vander Schaaf, how would repealing the
    railroad's antitrust exemption help you? What remedies would it
    give you that you believe you need and don't have under the
    current law? Mr. Berg first, and then Mr. Vander Schaaf.
        Mr. Berg. I cannot help but feel that this is going to
    help. I am not an antitrust expert, so I do not know the
    intricacies involved. But clearly, as we have been dealing with
    the railroads recently, it is obvious to us that there are many
    anticompetitive practices going on, as I mentioned in my
    testimony. At least the net result of that is what I have
    declared, and it has increased our rates.
        If we ask going forward will this help our rates, it would
    be easier for me to answer the question if we did not adopt
    this legislation what would happen to our rates. And I can only
    see things getting worse. I think the rates will go up in the
    future from the railroads. They dealt with us with pretty
    strong arms. And Dairyland, as I mentioned, is a small utility.
    We have to be considered, I would say, easy pickings. To try to
    do anything to counteract, bring cases to the STB and so on, it
    is a very daunting process for us.
        So we are looking for any help we can get. We think that
    the elements described in here to make sure that the
    telegraphing of prices through these rate circulars or tariffs
    is not going to harm us in the future, that the railroads be
    able to bid on certain hauls that we have before us, all of
    this is going to help us in the future.
        Chairman Kohl. Mr. Vander Schaaf?
        Mr. Vander Schaaf. My answer is probably going to be a
    little strange because I suspect that S. 772 right now today
    will not do much for us at Radford or Promontory. The damage is
    already done. We are down to one railroad. Even though we had
    two at Radford, I do not see it going back to two railroads.
    But for our other locations around the country and as we expand
    and grow, we do see some of those locations potentially being
    positively impacted by this legislation. And I think it is a
    foundation for future legislation, for example, S. 953 in
    combination being able to make it more competitive and having
    better access for a level playing field rather than a
    monopolistic railroad situation where they truly have the upper
    hand; and it is not just what they can do to us today, it is
    the fear of what they can do to us tomorrow.
        For example, the 300-percent increases that we have already
    experienced, our perception is that they want to get out of
    some of the freight business that they haul for us, and they
    could continuously increase that until we have a very unsafe or
    a less safe situation in moving it via truck rather than rail.
        So it is a good foundation step. It is the right direction.
    We strongly support this and other legislation that will
    support leveling of the playing field for us in the
    manufacturing industry.
        Chairman Kohl. Mr. Bush, and then Mr. Moates, the railroad
    industry argues that it should not be subject to antitrust
    regulation because the Surface Transportation Board already
    regulates the railroads, but many, in fact most industries,
    including transportation industries like aviation and trucking,
    are now under the jurisdiction of various regulatory bodies,
    and yet antitrust law applies to them.
        So the question is: Why should railroads be any different?
        Mr. Bush. That is a very good question, Senator. I have yet
    to see any reason that the railroads should be different than
    any other industry which requires high degrees of coordination
    such as electricity markets. Other transportation sectors have
    high--portions of the transportation sector have high degrees
    of coordination as well. So there does not seem to be any
    reason why the railroads should be different.
        The threat that a private plaintiff or some district court
    will somehow usurp national transportation policy has not
    appeared in any way, shape, or form in other industries as
    well. In fact, quite the contrary, when there is a regulatory
    body there, regardless of the degree of the immunity, the
    courts will be very reluctant to entertain any sort of action.
    There is judicial hesitation when there is even what I call
    ``immunity by proximity.'' If the regulator is there and there
    appears to be an antitrust exemption, that exemption spreads
    out to other conduct within the industry to a degree not
    contemplated by Congress. So--
        Chairman Kohl. OK. Thank you.
        Mr. Moates?
        Mr. Moates. Senator Kohl, my first response is railroads
    are not that different. As I said in my prepared remarks,
    railroads are today and have for a very long time been subject
    to the vast preponderance of the antitrust laws, including
    Sections 1 and 2 of the Sherman Act and other provisions of the
    antitrust laws that you are familiar with.
        The limited immunities that the industry has enjoyed and
    that are addressed in some respect by this bill have been put
    in there by Congress at different points in time for very sound
    reasons. They were put in there because there were certain
    efficiencies that were recognized that would result. I
    mentioned, for example, the Association of American Railroads
    has a Car Hire Committee that exists under an agreement
    approved by the Surface Transportation Board under Section
    10706 for that committee to get together for the limited and
    express and very limited purpose of discussing the protocols
    for how railroads will charge one another for the railroad
    equipment that is on the national system. They do not set the
    rates. As I said, that is done on a bilateral basis. Just how
    are we going to make this clearinghouse work? You know, I am
    the Norfolk Southern and my car is in California. How do I
    track that and how do I get paid for it? That has served the
    industry well. It has served the customers of the industry,
    including shippers well, and I think those kind of limited
    immunities should remain.
        If I could make one comment, too, about mergers. Mr. Vander
    Schaaf's prepared testimony included the statement that he has
    repeated here this morning that Radford Arsenal became a
    captive shipper as the result of a railroad merger. He cites
    the merger of the Virginia Railway with the Norfolk and
    Western. Well, he is technically correct, but it has to be
    pointed out that merger took place in 1959. In 1959. So we are
    not talking about some very recent development here that has
    caused Radford to become captive.
        Chairman Kohl. Senator Hatch?
        Senator Hatch. Well, thank you. This is an interesting
    hearing to me, and I am still very much concerned about what is
    the best way to go here.
        Mr. Vander Schaaf, as an expert in supply chain management,
    if you were advising a company on where to build its next
    large-scale manufacturing factory, how important do you believe
    it is that the sites being considered be serviced by more than
    one railroad? And do you believe that when States are trying to
    attract businesses that companies will look less favorably
    because they only have one railroad provider? And if so, why?
        Mr. Vander Schaaf. Prior to my time with ATK, I was working
    with Union Carbide and Dow Chemical, and with Union Carbide it
    was very much a serious consideration of do we have competitive
    access, especially in the Houston area. And we looked at
    building access through secondary lines to get to that second
    railroad at substantial cost.
        So it is a very, very important part of a decision of where
    you are going to be putting your facilities, how you can take
    the facilities you have and there to create competitive
    advantage, or competitive access with the railroads, because
    when you are tied to any monopoly, you know that you are coming
    into the discussions at a disadvantage. And so we are--you
    know, take the example of if you wanted to move your rocket
    boosters from Utah to Florida, would you make the decision to
    build the rockets in Florida instead of Utah? I do not think
    that will ever be the decision for ATK, but it is definitely a
    consideration that becomes more and more as the freight becomes
    greater and greater. Now, I am not making any suggestion they
    are leaving Utah, Senator.
        Senator Hatch. I understand. I have had enough burdens this
    morning without you making those suggestions.
        [Laughter.]
        Senator Hatch. Chairman Nottingham, I do not understand why
    the Surface Transportation Board would allow such bottlenecks
    to develop in the rail system. When I say ``bottlenecks,'' I am
    referring to the STB sanction practice of permitting railroads
    to quote only the price for an entire freight movement when the
    alternative carrier might compete for a portion of the
    shipment. Now, clearly if there was not an exemption from the
    antitrust laws, those engaging in this activity would be in
    violation of Section 2 of the Sherman Act for refusing to deal
    and Section 1 for using a tie-in arrangement.
        Now, the question, I think, needs to be asked. What benefit
    do consumers receive when the STB permits these type of
    practices? And why do these practices not violate Interstate
    Commerce Act Section 10702, the prohibition of unreasonable
    practices?
        Mr. Nottingham. Thank you for the question, Senator Hatch.
    The so-called bottleneck controversy is indeed one of the most
    controversial issues we face. I heard about it as a nominee as
    I made my rounds visiting with stakeholders and Members of the
    Senate and House. It is a policy adopted--its history goes back
    to the 1920's, to be honest, I believe, in some Supreme Court
    case law, and it is not something that I have had the
    opportunity to get my figurative arms around in my first 14
    months on the job. We have initiated enormous reforms, and one
    thing you have not heard today is why more shippers have not
    been taking advantage, although it has been recent changes in
    our expedited and much more accessible dispute resolution and
    rate review process. And we invite any shipper--what you are
    really hearing about today is concerns about rates and service.
    And, unfortunately, this bill will not actually fix that
    situation, but our new procedures which need to be taken
    advantage of will.
        But getting to your question, to play out this scenario
    briefly, if this bill becomes law--and, of course, if it did,
    we would dutifully and energetically implement it. It presumes
    that there would then be litigation that would somehow result
    in a railroad quickly and cheaply parking basically rail cars
    and allowing for a switch to take place at no added cost and
    that that would actually all happen seamlessly and that there
    is a big amount of extra capacity at the freight yards around
    our country.
        Having visited many of the freight yards around the
    country, I can tell you that we have a huge--the No. 1 problem
    we have is a lack of capacity. The No. 1 challenge we face is
    we need to build extensive, more rail infrastructure across
    this country. And, unfortunately, this bill will not help to do
    that, and it is not clear how this bill would actually result
    in--
        Senator Hatch. You would prefer something that would give
    incentives to do that?
        Mr. Nottingham. Absolutely. Yes, sir. I think that is where
    the focus of our agency is going to be over the coming years
    and should be for all of who care about transportation. As a
    highway person, by way of background, having run a large State
    highway department in Virginia and working at the Federal
    Highway Administration, I just know that the highway system is
    not standing there ready, willing, and able to take more and
    more freight. We have got to have the freight railroads pick it
    up.
        It is also not completely clear to me--and I stand to be
    corrected by the experts here--as to whether or not the Justice
    Department can look into bottleneck problems. Justice has wide
    latitude to go into, and has in the past on occasion, the
    antitrust enforcement avenues vis-a-vis the rail industry.
        Senator Hatch. Well, Mr. Moates--and I have questions for
    the rest of you, too, but let me ask Mr. Moates this: I
    understand that the railroad industry has taken the position
    that S. 772 will not solve the problem of dramatic shipping
    cost increases or price increases. They believe that the
    legislation is designed to penalize the railroad industry
    because prices have increased, yet the bill will not have any
    real effect on costs charged to shippers.
        Now, how can that be? Does not S. 772 amend the Clayton Act
    so that shippers can seek injunctive relief against railroads?
    And granted that the STB currently has brought injunctive
    relief authority--but even some of STB's supporters concede
    that the Board needs to improve their handling of these
    matters. So why not permit the railroad's own customers the
    ability to seek injunctive relief?
        Mr. Moates. Well, Senator Hatch, a couple of points in
    response to your question.
        First, the STB has broad injunctive authority; so does the
    Justice Department. Has not used it, has not had to use it for
    some time. As I said during my prepared remarks, a high rate,
    as you well know, is not evidence of a monopoly. If any of the
    gentlemen here represent shippers today believe their rates are
    unlawfully high under the Commerce Act, they have an avenue of
    redress--that is, Chairman Nottingham's agency. They can
    complain about the level of those rates, and if they can
    successfully prevail in a maximum reasonable rate case, relief
    is available to them in the form of a prescribed reasonable
    rate and possibly reparations.
        Tying back to your question of Chairman Nottingham on the
    bottlenecks, too, which I think is implied in what you just
    asked me, the Board does have procedures for complaining about
    bottleneck cases. Those procedures, for reasons best known to
    the shippers, have not been invoked. It is what is called Ex
    Parte No. 575, and it requires that the shippers show an
    anticompetitive purpose in the so-called bottleneck railroad
    not opening up its facilities.
        If there is such an egregious situation, why haven't we
    seen those cases? Those procedures have not been tried.
        Senator Hatch. OK. Mr. Chairman, could I ask two more
    questions? I have to leave, and I would like to just ask these
    two questions.
        Chairman Kohl. Sure. Go ahead.
        Senator Hatch. OK. I would like to ask Professor Bush--
    welcome to the Committee, and we are proud of you, and let me
    ask you this question: I was very interested in your testimony
    where you state that ``the existence of an express immunity
    providing protection from the antitrust laws for some
    particular conduct may actually provide immunity for other
    types of antitrust conduct.''
        Now, could you explain in greater detail how that theory
    applies to the railroad antitrust exemptions and, in
    particular, the merger exemption?
        Mr. Bush. Thank you for the question. As you move away from
    a regulated world where portions of that regulation are sort of
    stripped away, as the STB has done in their ratemaking region--
    a lot of the rates are not set in sort of an STB realm, but are
    subject to the antitrust laws. The fact, for example, that
    there is a potential for re-regulation by the STB of
    deregulated--rates that the agency has deregulated may give
    pause to a judge who has a private plaintiff action before him.
    The judge will sit there and think: On the realm of my docket,
    do I want a case that could be potentially moot if the agency
    decides to re-regulate? In other words, the agency could walk
    away from regulation and then decide to come back to it later.
    So you can have reluctance by a judge and even private
    plaintiffs to bring an action because of what--this is immunity
    by proximity.
        With respect to merger authority, while you may repeal the
    actual express immunity within the act, there is still the
    notion of implied immunity, which I have mentioned in my
    testimony, and the doctrine of primary jurisdiction. In the
    context of implied immunity, even if it is not express
    immunity, if the regulation is perceived as so pervasive a
    judge may find that it is impliedly immune because of the
    pervasiveness of the regulation, and you only need to look at
    two recent Supreme Court cases to have that notion even before
    the Supreme Court, the Credit Suisse case and Part 4 of the
    Trinko case.
        Senator Hatch. Mr. Moates, you seem to disagree with that.
    Did you disagree with that comment?
        Mr. Moates. No. I was not in agreement with his reference
    to Trinko.
        Senator Hatch. I am just wondering. You just looked a
    little dyspeptic there for a minute.
        [Laughter.]
        Mr. Moates. I am sorry.
        Senator Hatch. No. That is fine.
        Mr. Szabo, how can one argue that the railroads are not
    scrutinized for antitrust violations? And is that not the
    responsibility of the Surface Transportation Board? And was not
    the largest civil antitrust judgment ever rendered or ever
    handed down really against a railroad by the 5th Circuit in re
    Burlington N., Inc. though admittedly the railroad subsequently
    settled the case? And shouldn't the Department of Justice be
    permitted to prosecute railroads that violate the Sherman
    Antitrust Act?
        Mr. Szabo. I am not familiar with that case, Senator, but
    absolutely, we believe that the Department of Justice should be
    able to pursue Sherman antitrust violations. We believe the
    general policy that the Congress has set down for rail policy
    as contained in Title 49 of the U.S. Code, 10101, is very
    similar to what an antitrust court would look at if it has an
    antitrust issue before it. We believe the STB has not looked at
    that properly and has not included competition as an important
    element. So we believe they have not done their job, and that
    is why we want the antitrust laws to apply.
        Senator Hatch. Mr. Chairman, I appreciate you letting me
    ask those two additional questions, and I want to express
    appreciation for this whole group of people. I appreciate all
    of you. I appreciate your being here, and I appreciate the
    concerns that you have raised. Let's keep looking at this and
    see what we can do that is best for all concerned.
        Thank you.
        Chairman Kohl. Thank you, Senator Hatch.
        Senator Feinstein?
        Senator Feinstein. Well, thank you very much, Mr. Chairman.
    As you know, I am not a member of the Committee, but at the
    markup, I did say that there had not been a Committee hearing,
    and you agreed to have one, and I want you to know I very much
    appreciate that. I tried to listen as carefully as I could, and
    it seems to me a pretty clear case where you have shippers who
    feel one way and the people kind of in charge feeling another.
        I have been reading the letter here from the Department of
    Justice, and this was a letter sent to James Sensenbrenner back
    in 2004. The issue of bottlenecks was raised. I want to just
    raise the paper barrier issue and then ask the Surface
    Transportation Board to respond to what DOJ says in this
    letter.
        Let me just read it quickly. ``Paper barriers are created
    when Class I railroads spin off of their trackage to short-line
    or low-density carriers with contractual terms that prohibit
    the acquiring carriers from competing with the Class I
    railroads for business. Since these contractual terms are part
    of an underlying sale transaction that is reviewed and approved
    by the Surface Transportation Board, they may be exempted from
    the reach of antitrust laws''--that would be under the present
    situation--``depending on the scope of the approval language in
    each of the Board's relevant orders. If the paper barriers were
    subject to the antitrust laws, they would be evaluated under
    Section 1 of the Sherman Act. The Department would examine
    whether the restraint is ancillary to the sale of the trackage,
    i.e., whether the restraint is reasonably necessary to achieve
    the pro-competitive benefits of the sale.''
        What this is saying to me is that if the antitrust
    exemption were removed, it would clearly fall under the
    antitrust laws, and there would be the opportunity to find a
    remedy. Do you agree with that or disagree? And if so, why?
        Mr. Nottingham. Senator, thank you for the question. I
    agree with some of what you said and disagree with others. We
    actively have before us at the Board--
        Senator Feinstein. Excuse me. I am not saying this. This is
    the Department of Justice.
        Mr. Nottingham. Oh, DOJ.
        Senator Feinstein. I quoted exactly--
        Mr. Smith. I saw the letter, and Will Moschella is an old
    friend. When he used to work for Congressman Wolf, I worked
    next door for both Congressman David and Congressman Goodlatte,
    both Mr. Wolf's neighbors, and he is a good man.
        I have not heard anything in the last period of years from
    DOJ on this issue, but we welcome their input and would work
    with them on this issue. We have right before us now, it is
    important for the Subcommittee to know, a very important
    rulemaking consideration that is pending. We have told Congress
    in other venues, just last week on the House side, that we
    expect to have something finally out on the issue of paper
    barriers this month. And we do have some concerns in that area.
        I will say it is important to understand what they really
    are, though. These are typically underused track that a
    railroad that is serving a group of customers--so one railroad
    serving a group of customers agrees to let another railroad
    serve that group of customers. It is not an effort or a
    technique to reduce competition. In fact, one of our concerns--
    and this will be addressed as we come out with final rules.
    What would the outcome be, in other words, if railroads Class I
    were to stop entering into these agreements? Would you actually
    have more competition or would you just be taking business away
    from short lines who are actually doing an excellent job at
    lower cost providing--meeting shippers' needs?
        And so the issues are always a little more complicated than
    we can get in in a quick answer, but I do urge the Committee to
    look at our work when we come out in the next few weeks, and I
    would be happy to come up and brief the staff or the members on
    it.
        Senator Feinstein. All right. We have just begun a vote, so
    my time is limited. But is there a response from the shippers
    to this point?
        Mr. Szabo. Senator Feinstein, we think paper barriers are
    bad. We think that without paper barriers, people would locate
    on these short lines, and they would have access to
    competition. Short lines would become more robust. Perhaps over
    time several short lines would unite to become another rail
    system. We think they are a blight on competition.
        Senator Feinstein. Thank you.
        I very much appreciate this, Mr. Chairman. It has certainly
    given me a much clearer view of what the issues are and the
    legislation, so thank you very, very much. I appreciate it.
    Thank you, gentlemen, too.
        Chairman Kohl. Thank you, Senator Feinstein.
        We do not have a lot of time. There is a vote. But I would
    like to ask another question.
        Mr. Szabo, railroads claim that regulation of their
    industry is so pervasive that applying antitrust is
    unnecessary. But hasn't the regulation of railroads by the STB
    been greatly reduced in recent decades by such legislation as
    Staggers and the ICC Termination Act?
        Mr. Szabo. Mr. Chairman, that is not correct. The STB is
    supposed to allow a rate challenge process for rail customers
    who do not have access to competition. The GAO report you cited
    earlier says it does not work, that, in fact, it is
    inaccessible to most rail customers. The new rules that Mr.
    Nottingham referred to, when they were proposed, rail customers
    united, 36 groups said these were worse than current law. No
    changes were made to the proposed rules, and rail customers do
    not believe the STB is improving its process. So we disagree
    with that proposition.
        Chairman Kohl. Mr. Berg and Mr. Vander Schaaf, what is your
    view? How effective is the STB for a shipper to challenge an
    excessive rate charge by a railroad or to get remedy? Mr.
    Vander Schaaf?
        Mr. Vander Schaaf. From my experience we have never gone to
    the STB just from a standpoint of the challenges of doing it
    and the perception that the results will not be favorable.
    Seeing as we have not done it, I do not have an answer of proof
    that it did not work. But the perception is that it is one more
    act of futility.
        Chairman Kohl. Mr. Berg?
        Mr. Berg. I essentially share that. We are considering
    doing that based on our 2006 rate increases from the railroads.
    But we have to take into consideration the recent results that
    we have seen out of the STB, including a sister generation and
    transmission cooperative who did not get any relief and spent
    $6 million in the effort trying to do that.
        Chairman Kohl. Mr. Nottingham?
        Mr. Nottingham. Thank you, Senator. I would say Mr. Szabo
    needs to look at the record carefully. In our proceeding he
    just reference where he said no comments coming from shippers,
    including his coalition, were taken into consideration, I
    strongly object to that. I think the record is very clear that
    between the public comment period and the final rule,
    significant changes, including raising the bar to allow cases
    up to $1 million to be brought into our most simply dispute
    resolution process for only a $150 filing fee, were made, and
    many more. And I would urge him to look back at that record and
    try to correct his statement today.
        But we are in the midst of enormous changes at the STB. We
    are conducting a vigorous oversight. We are being sued by the
    railroads as we sit here today. They object violently to some
    of our reforms. I am also happy to report we are being sued by
    many, many shippers. It seems that everybody is suing us, and
    we feel, if that is the case, we must be somewhere in the
    middle and doing our job.
        Chairman Kohl. All right. Mr. Nottingham, in 1979, there
    were 42 Class I freight railroads in the United States, 42 in
    1979. Today, only four railroads serve 90 percent of the
    Nation's railroad traffic, and there are only seven freight
    railroads remaining in total.
        Chairman Nottingham, how many railroad mergers and
    acquisitions has the STB or its predecessor agency, the ICC,
    blocked among Class I railroads in the last three decades?
        Mr. Nottingham. Mr. Chairman, I would like to be able to
    respond on the record to you for that to make sure I get it
    just right. I was a youngest in 1979, but in reading the
    history, I can say that the GAO report you cited last year
    stated very clearly that rates have come down overall over a
    25-year period since the Staggers Act and now. There are not
    just seven railroads in the country, although there are seven
    Class I's. There are more then 500 short line, and they play an
    increasingly important role.
        We are seeing some merger activity currently. Recently, the
    Canadian Pacific announced a significant--looking at a
    substantial merger with the DM&E. That is not before us yet,
    but it is coming very soon for our review. We have just seen
    the announcement by the Canadian National of an potentially
    important merger that may get them out of the Chicago gridlock
    situation. And we have seen some other significant short-line
    activity, the Florida East Coast case, recently a merger.
        So there is a lot of merger activity out there. My
    understanding of the history, the Board has approved the vast,
    vast majority, but in recent years, being the last 20 or so
    years--that is important to understand the context--massive
    bankruptcies and massive underinvestment in the rail industry,
    not surprising that proposals to consolidate and invest more in
    basically dysfunctional railroads would be looked on with some
    approval by the agency charged with, in part, looking after the
    economic health of the network for the benefit of shippers. In
    most cases, shippers come to us and support mergers because
    they see the dysfunctional nature. They are paying the price of
    lack of investment pre-merger. But we look at each one
    independently, of course, on the merits.
        Chairman Kohl. Should the Justice Department be able to
    review railroad mergers? Mr. Moates, Mr. Bush, Mr. Szabo.
        Mr. Moates. Senator Kohl, thank you for that question. It
    does, and indeed, if you will permit me, I am going to brag
    about one of the defeats of my career. I can help answer the
    prior question.
        I was counsel to the Santa Fe Pacific in the Atchison,
    Topeka, and Santa Fe Railway in the mid-1980's when the
    Interstate Commerce Commission turned down our application for
    a merger between the Santa Fe and the Southern Pacific. It did
    that in large measure because of the forceful opposition of the
    Antitrust Division of the Department of Justice, which
    participates per statute as a party in all rail merger cases.
    So the Justice Department, believe me, plays a very significant
    role in all railroad merger cases, and the ICC and today the
    STB pays a lot of attention to its views.
        So I know about one they got turned down because it was my
    case.
        Chairman Kohl. Thank you.
        Dr. Bush?
        Mr. Bush. There is a difference between participating in
    another agency's regulatory proceeding and actively
    investigating a transaction. When I worked at the Department of
    Justice, when I was investigating a transaction, I had all
    sorts of authority to engage in document requests, conduct
    depositions, engage in civil investigative demands of
    competitors, talk to customers, and all of these things that
    are not traditionally a good use of resources when another
    agency has exclusive jurisdiction.
        Therefore, the Department of Justice's guesstimates as to
    the potential anticompetitive effects of a merger absent those
    powers does not suggest that the agency might have really
    concurred with those decisions had they had that authority.
        Chairman Kohl. Mr. Szabo?
        Mr. Szabo. Mr. Chairman, I think your bill has it right.
    There was the UP-SP merger that was approved by the STB in
    1996. I believe it was 1996. The Department of Justice
    strenuously objected in comments. Those comments were ignored.
    They had no recourse. Your bill would allow them to go in and
    try to enjoin it if the STB had not done it properly. So I
    believe that is correct.
        Chairman Kohl. Thank you. Well, gentlemen, I have to run to
    a vote. It has been a really good hearing. We will keep the
    record open for some additional questions and your comments. I
    would appreciate staying in touch with you if I can as we move
    along in this process. We will attempt to find a common ground
    and the right balance and justice in this matter, and your
    being here helps us a great deal.
        Thank you so much for being here. This hearing is closed.
        [Whereupon, at 11:57 a.m., the Subcommittee was adjourned.]
        [Questions and answers and submissions for the record
    follow.]

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