[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


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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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