[Senate Hearing 110-886]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 110-886

                  THE SURFACE TRANSPORTATION BOARD AND
                   REGULATIONS RELATED TO THE FREIGHT
                           RAILROAD INDUSTRY

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON SURFACE TRANSPORTATION
                  AND MERCHANT MARINE INFRASTRUCTURE,
                          SAFETY, AND SECURITY

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 23, 2007

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation










                  U.S. GOVERNMENT PRINTING OFFICE

73-584 PDF                WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001









       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington           JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey      JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas                 JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware           DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director, and General Counsel
                  Paul Nagle, Republican Chief Counsel
                                 ------                                

      SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE 
                  INFRASTRUCTURE, SAFETY, AND SECURITY

FRANK R. LAUTENBERG, New Jersey,     GORDON H. SMITH, Oregon, Ranking
    Chairman                         JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TRENT LOTT, Mississippi
    Virginia                         KAY BAILEY HUTCHISON, Texas
JOHN F. KERRY, Massachusetts         OLYMPIA J. SNOWE, Maine
BYRON L. DORGAN, North Dakota        JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           DAVID VITTER, Louisiana
MARK PRYOR, Arkansas                 JOHN THUNE, South Dakota
THOMAS R. CARPER, Delaware
CLAIRE McCASKILL, Missouri
AMY KLOBUCHAR, Minnesota














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 23, 2007.................................     1
Statement of Senator Dorgan......................................     3
Statement of Senator Klobuchar...................................     2
Statement of Senator Lautenberg..................................     1
Statement of Senator Rockefeller.................................     5
Statement of Senator Smith.......................................     4
Statement of Senator Vitter......................................     7
    Letter, dated October 22, 2007, to Hon. David Vitter from 
      Terry Huval, P.E., Director, Lafayette Utilities System....     7

                               Witnesses

Carlson, Robert L., President, North Dakota Farmers Union; on 
  Behalf of National Farmers Union...............................    65
    Prepared statement...........................................    67
English, Hon. Glenn, CEO, National Rural Electric Cooperative 
  Association; Chairman, Consumers United for Rail Equity (CURE).    69
    Prepared statement...........................................    72
Ficker, John B., President and CEO, The National Industrial 
  Transportation League..........................................    61
    Prepared statement...........................................    63
Hecker, JayEtta Z., Director, Physical Infrastructure Issues, 
  U.S. Government Accountability Office (GAO)....................    26
    Prepared statement...........................................    27
McGregor, David J., Senior Vice President, NAFTA Logistics, BASF 
  Corporation....................................................    54
    Prepared statement...........................................    56
Moorman, Charles W., Chairman, President, and CEO, Norfolk 
  Southern Corporation; on behalf of the Association of American 
  Railroads......................................................    44
    Prepared statement...........................................    45
Nottingham, Hon. Charles D., Chairman, Surface Transportation 
  Board..........................................................     9
    Prepared statement...........................................    10

                                Appendix

Hayes, Evan, Immediate Past President, National Barley Growers 
  Association; Past President, Idaho Grain Producers Association; 
  Member, Idaho Barley Commission; Executive Committee Member, 
  Alliance of Rail Competition, prepared statement...............    93
Letter, dated October 11, 2007, to Hon. Frank R. Lautenberg from 
  national organizations of agriculture..........................   107
Letter, dated October 19, 2007, (Sent via Facsimile) to Hon. 
  Daniel K. Inouye, Hon. Frank R. Lautenberg, Hon. Ted Stevens 
  and Hon. Gordon H. Smith from Oregon Wheat Growers League......   106
Letter, dated October 22, 2007, to Hon. Daniel K. Inouye, Hon. 
  Frank R. Lautenberg, Hon. Ted Stevens and Hon. Gordon H. Smith 
  from Jim Kerr, Commissioner, North Carolina Utilities 
  Commission; President, National Association of Regulatory 
  Utility Commissioners; John R. Perkins, Iowa Consumer Advocate; 
  President, National Association of State Utility Consumer 
  Advocates and Stephen Brobeck, Executive Director, Consumer 
  Federation of America..........................................   108
Letter, dated October 30, 2007, to Robert L. Carlson from Matthew 
  K. Rose, Chairman, Burlington Northern Santa Fe Corporation....   105
Letter, dated November 5, 2007, to Hon. Frank R. Lautenberg from 
  David J. McGregor, Senior Vice President, NAFTA Logistics, BASF 
  Corporation....................................................   104
Letter, dated February 4, 2008, to Hon. Frank R. Lautenberg from 
  Hon. Charles D. Nottingham, Chairman, Surface Transportation 
  Board..........................................................   109
Matheson, William J., President, Intermodal Services, Schneider 
  National, Inc., prepared statement.............................   103
Response to written questions submitted by Hon. Daniel K. Inouye 
  to:
    Robert L. Carlson............................................   125
    Hon. Glenn English...........................................   126
    Charles W. Moorman...........................................   118
Response to written questions submitted by Hon. Frank R. 
  Lautenberg to:
    Robert L. Carlson............................................   126
    JayEtta Z. Hecker............................................   117
    Hon. Charles D. Nottingham...................................   109
Response to written questions submitted by Hon. Mark Pryor to:
    Hon. Glenn English...........................................   128
    JayEtta Z. Hecker............................................   117
    Charles W. Moorman...........................................   119
    Hon. Charles D. Nottingham...................................   111

 
THE SURFACE TRANSPORTATION BOARD AND REGULATIONS RELATED TO THE FREIGHT 
                           RAILROAD INDUSTRY

                              ----------                              


                       TUESDAY, OCTOBER 23, 2007

                               U.S. Senate,
         Subcommittee on Surface Transportation and
            Merchant Marine Infrastructure, Safety, and Security,  
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:03 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Frank R. 
Lautenberg, Chairman of the Subcommittee, presiding.

        OPENING STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Good morning. The Subcommittee has come 
to order. And we'll get started.
    I thank all of you for being here so promptly. I assume 
that that indicates that your statements will also be finished 
promptly.
    [Laughter.]
    Senator Lautenberg. Take enough time, up to 5 minutes, when 
you do make your statements. And we're going to try and get 
through. We're notified that votes will take place at 11:30, 
and I would hope that we can conclude the business of the 
hearing by then.
    I want to welcome you all here.
    Today, we're going to examine the impact of freight rail on 
the Nation's economy, and what the Federal Government can do to 
ensure fair and competitive access to quality rail 
transportation at reasonable rates.
    America has an excellent passenger rail system in Amtrak, 
and Senator Lott and I have a bill to make it even better. But 
freight rail service is also a pillar of the American economy. 
This industry carries nearly 26 percent of the Nation's 
intercity freight. These trains deliver items we rely on every 
day, from cars to coal. Companies transport their products by 
rail because it's efficient, especially for large, frequent 
shippers. And the public benefits, when goods move by rail, 
with lower consumer prices, and less traffic, less pollution, 
and less reliance on foreign oil. In New Jersey and elsewhere, 
each container offloaded from a ship and placed on a train 
means fewer trucks on the highways.
    But these benefits come at a cost. Rail lines are already 
operating at or above capacity, and that puts a strain on the 
tracks, bridges, locomotives, rail cars, and overall 
infrastructure. With rail shipping projected to increase 44 
percent by 2020, railroads need to invest more. To meet future 
demands to make these investments, railroads must charge 
adequate and competitive shipping rates to cover their costs. 
For 25 years, rail shipping rates haven't even kept up with 
inflation. It only makes sense that the industry has to resort 
to whatever sources it can to find the funds to make these 
needed investments. And that could include increased rates. 
But, as rates change, shippers also must have access to a fair, 
fast, and affordable way to challenge unreasonable rates and 
anticompetitive practices by their railroads. And that's why 
this Surface Transportation Board role is so crucial.
    Congress created this Board to decide, on a case-by-case 
basis, how to balance a strong railroad industry to support our 
national economy with the need to make sure that railroad 
customers receive quality service at fair and reasonable rates. 
The Board has made rulings to improve and simplify the process 
for shippers who want their charges reviewed, but we're still 
waiting to see the results of these efforts, and the GAO also 
looked into rail rates and our current system of economic 
regulation.
    Now, these are clearly areas for improvement in the current 
system. Senator Rockefeller and other members of the Commerce 
Committee have introduced legislation to overhaul this system. 
And, while I have not joined this effort, I agree that the 
railroad industry must better respond to the needs of its 
customers. Without better cooperation between shippers and the 
railroad industry, I expect that Congressional action may 
eventually be necessary. I look forward to hearing from the 
Surface Transportation Board and GAO about what improvements we 
can make now.
    Finally, I am deeply disappointed in the Surface 
Transportation Board majority's decision to let unregulated 
solid-waste processing on rail properties continue to operate. 
The Board had a chance to make the law clear and let states 
like New Jersey protect the health and environment of their 
residents and communities, but it failed. Now it's clear that 
Congress must close the loophole the Board left open, which 
will take more time and leave more residents at risk.
    So, once again, I thank all the witnesses for their 
attendance today. I look forward to your testimony. And to my 
colleagues, I would allow 3 minutes for an opening statement so 
that we can see all of the witnesses and hear from them.
    Senator Klobuchar?

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you, Mr. Chairman. Thank you for 
holding this important hearing.
    In my state, we have a revitalization going on in the rural 
parts of our state, which is about half our State, and we're 
seeing, with the demand for energy, some exciting new things. 
But we basically are heading into a 21st-century rural economy 
with a 20th-century transportation system. And some of that has 
to do with the state of the roads and the bridges, but some of 
it also has to do with what's going on with rail.
    And I am particularly interested in the issue that the 
Chairman raised about the cost for our captive shippers. This 
is something I heard all over our state, from Bemidji to 
Worthington, Minnesota. And it's about the fact that captive 
shippers with access (to many times) only one rail line have 
been suffering, and it's becoming difficult for them to pay the 
rates, as they're trying to build their businesses at this 
time.
    And the current system is broken in a number of ways. 
First, rail customers have been paying unfairly high prices to 
ship their goods to market. We have a number of examples of 
times where the pricing was done in a way that prices only to 
the end of the line, as opposed to segments of the line, so 
that there are wild differences in how much their charges can 
be.
    Second, rail customers have been denied a fair and 
efficient process for challenging rail rates and railroad 
practices. Shippers must pay steep filing fees of over $100,000 
just to get their complaint heard. Then they must pay millions 
of dollars to litigate their case, which is sure to drag on for 
years.
    And, finally, after all that, the Surface Transportation 
Board's decisions almost invariably tilt in favor of the 
railroads. The bottom line is that the shippers lose, the 
railroads win, and the system isn't working for our economy.
    To address this problem, I'm pleased to have joined with a 
number of my colleagues, including my Commerce Committee 
colleagues, Senators Rockefeller, Dorgan, Snowe, Vitter, and 
Thune, to introduce Senate bill 953, the Railroad Competition 
and Service Improvement Act of 2007. This bipartisan 
legislation has a simple goal, to level the playing field by 
promoting more reasonable competitive rail prices and by making 
the Surface Transportation Board more accountable to shippers.
    Thank you, Mr. Chairman, for holding this hearing today.
    Senator Lautenberg. Thank you.
    Senator Dorgan?

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. Thanks 
for holding the hearing.
    I think it is important that we consider S. 953. Senator 
Rockefeller, I, and others have worked on it for a long, long 
while. Much of what we find ourselves doing in this committee 
is to try to preserve or to restore some competition.
    In the area of rail service, railroads are very important 
to this country. We can't do without railroads. We have to have 
railroads that work, provide good service; so, they're very 
important. But there has been this orgy of mergers and this 
love affair between the big railroads, and they marry up, and 
now we have four Class I railroads providing 90 percent of the 
freight rail transportation in our country. What we have, 
effectively, is unregulated near-monopolies.
    Now, it seems to me that it does call for a bit of 
regulation in areas where regulation is necessary. I hate to 
say this, but I do it, nonetheless. I think, frankly, the 
regulatory agency, the Surface Transportation Board, is 
relatively worthless. I've watched it, worked with it, hectored 
it, challenged it for a long, long time as a member of the 
Commerce Committee, and I, frankly, have very low regard for 
the what the Surface Transportation Board has done, and not 
done.
    One of the few complaints to have been brought there 
recently was Basin Electric Power Cooperative in North Dakota. 
They were challenging new coal rates imposed upon them by 
Burlington Northern in 2004. The STB found that the doubled 
rates, which are about four to five times higher than it costs 
Burlington Northern to move the coal to Basin, were not 
unreasonably high. That is why, it seems to me, most people 
don't complain, because, first of all, they can't afford the 
filing fee, although I should tell you, Senator Klobuchar, I've 
added an amendment to an appropriations bill this year, that--
passed the full Appropriations Committee, that will take the 
filing fee from, I believe, $178,000 down to $350.
    Senator Klobuchar. Very good.
    Senator Dorgan. That's progress. And it would be the same 
fee that you would file, were you able to go to Federal court. 
Because you're prevented from going to Federal court, I've had 
the Appropriations Committee pass my amendment taking the 
filing fee to $350.
    My point is not that I dislike the railroads. We need the 
railroads. But, I think when you have monopolies, or near-
monopolies, that treat captive shippers in a manner that they 
determine how they want to treat them, I think you need to have 
some effective oversight and some effective regulation. We 
hope, however, that we could instill some additional 
competition. That's why we have offered S. 953.
    Let me just make one other ironic point. When Basin 
Electric filed their case, I believe when Mr. Nober was the 
chairman of the Surface Transportation Board. By the time the 
case was resolved, Mr. Nober was working for the company that 
was the subject of the complaint, which describes another 
significant problem with the Surface Transportation Board.
    So, I look forward to this hearing and look forward to the 
witnesses.
    Thank you, Mr. Chairman.
    Senator Lautenberg. Thanks very much.
    Senator Smith, the Ranking Member of the Subcommittee, I 
welcome you. Please summarize your statement

              STATEMENT OF HON. GORDON H. SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Mr. Chairman. I appreciate your 
holding this hearing.
    And I also want to thank our witnesses for being here 
today.
    Since the enactment of the Staggers Act of 1980, we have 
seen the rail industry undergo a remarkable transformation. The 
rail industry of the 1970s was over-regulated and in a state of 
physical and financial decay. Twenty percent of U.S. rail 
mileage was operated by bankrupt carriers. With the Staggers 
Act, Congress injected market influences into the system, and 
the economics of the industry turned around.
    Today's railroads carry roughly double what they did in the 
1980s, the number of accidents on railroads have been halved, 
and the rates for most shippers have gone down. Still, there 
are some in the shipping community who believe that the 
promises of the Staggers Act have not been fully achieved. They 
point to persistently high rates and poor service in some 
areas.
    As someone who has operated a business and had to make 
decisions about whether to ship by rail, barge, or truck, I do 
understand their concerns. However, I don't agree with the 
conclusion that some have drawn, that the answer to these 
shippers' problems is greater Federal regulation in the 
marketplace.
    Last week, we heard from Secretary Peters about the 
dramatic growth in the movement of freight that is expected 
over the next two decades. To accommodate this additional 
freight, we are going to need to make new investments in all 
modes of transportation. And right now the railroads are the 
only transportation source that pays its own way.
    I believe that we need to keep the railroads on the path 
where they can continue to generate the revenue and capital 
needed to increase capacity to meet future demands.
    That being said, I do have concerns with some of what we 
have seen recently with regard to private equity investment in 
the railroad industry. Private equity firms perform a 
legitimate function in our economy. Many different sources of 
capital will be needed to finance transportation infrastructure 
projects in the coming years.
    However, I am concerned about reports of short-term 
investor goals trumping what is in the best interest of the 
industry and in the long-term interests of our country.
    Last month, the short line railroad that provided service 
along a 130-mile stretch of rail in southwest Oregon announced 
that it would suspend service due to safety concerns involving 
the line's tunnels. To date, the company that owns the line has 
not given the local communities any assurances of its plans to 
fix the tunnels or reinstate service. As you can imagine, the 
situation has generated a great deal of concern and stirred a 
lot of debate in the State. Recently, the short line's parent 
company was purchased by a major private equity firm. And right 
now, people in southwestern Oregon are wondering what this will 
mean for the future of rail line service. Private equity firms 
are not just investing in short line companies, they are major 
investors in a number of Class I railroads.
    I look forward to hearing from our witnesses what they 
believe will be the long-term impact of private equity 
involvement in the railroad industry.
    So, Mr. Chairman, the hearing is very timely for the 
purposes of my state, and I thank you for holding it.
    Senator Lautenberg. Thank you.
    To our colleagues who have just arrived, I've asked 
everybody to try and keep their statement to 3 minutes. The 
record will be kept open for submitted questions.
    And, with that, I'd call on Senator Rockefeller.

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman.
    My statement will be very short. Senator Dorgan, how long 
have we been at this?
    [Laughter.]
    Senator Dorgan. A long time.
    Senator Lautenberg. I can confirm that.
    Senator Rockefeller. In my case, 23 years, with no progress 
whatsoever. And I would just say, of all the issues in Congress 
that--confront the American people, this is the one that makes 
me the angriest, the most outraged, and where I see the most 
cynical manipulation of the marketplace, where people are 
upping their profits while sticking it to consumers all over 
the country in all 50 States plus the District of Columbia. And 
nobody seems to care. One of the reasons that nobody seems to 
care is that the railroads--the America Railroad Association 
has brilliantly managed to stay beneath the radar. That's a 
very good place for their factual base to be, because it does 
not stand scrutiny.
    But I will have some questions for Mr. Moorman--should he 
choose to answer them. I find this the single greatest 
embarrassment in government at this point. The Surface 
Transportation Board, the former chairman of this committee, 
ran it for years and years, just as the former committee 
chairman would have run it; that is, doing nothing, let the 
railroads have their way; and they have. They have done untold 
damage in West Virginia and all across the country. They love 
to make deals, are very good at making little deals, so that 
they say, ``Well, we'll give a little relief to you over here 
on a bottleneck situation,'' but, no, no, no, as a matter of 
broad principle, not at all. I voted for John Snow seven times 
for Secretary of the Treasury. It's not legal, but I did it. I 
was so anxious to get him out of CSX----
    [Laughter.]
    Senator Rockefeller.--that it didn't really make a 
difference to me where he went or what he did. And I'm not sure 
what he did at Treasury, either, but it was certainly less 
harmful than what he did at CSX.
    So, I'm going to be here a long time. I'm just approaching 
my 50th birthday. And----
    [Laughter.]
    Senator Rockefeller. Senator Dorgan, Senator Klobuchar, and 
I are going to keep this up until we finally win it. The law is 
on our side. The railroads are anticompetitive. They're 
breaking the law. I don't know whether it's criminal or not, 
but they're breaking the law through their bottleneck 
arrangements. And they are an embarrassment to our Nation and 
destructive to our economic progress.
    Thank you, Mr. Chairman.
    Senator Lautenberg. Thanks, Senator Rockefeller.
    I also intend to be here for a long time.
    [Laughter.]
    Senator Rockefeller. Yes, but you disappeared for 6 years, 
Senator Lautenberg.
    [Laughter.]
    Senator Lautenberg. Senator Vitter?

                STATEMENT OF HON. DAVID VITTER, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Vitter. Thank you, Mr. Chairman. And thank you, 
Ranking Member Smith, both, for having this hearing. I agree 
that it's very, very important, and I share most of your 
concerns about the lack of adequate competition in this 
industry. And that's why I'm a proud original co-author of the 
reform legislation we have come together to propose.
    I really think a lack of healthy competition in this sector 
is costing Americans money and costing America jobs. Let me 
point to one example of each.
    In the State of Louisiana, we have a utility system in the 
area of Lafayette, Louisiana. The City of Lafayette owns it, 
its own electric generating station. And, to run that station, 
it has to get its coal from the Powder River Basin, in Wyoming, 
about 1,500 miles away.
    Currently, there are two railroads coming from the Basin 
that travel to Alexandria, Louisiana, very near Lafayette, 
Louisiana, so you might think, great, problem solved, 
competition. Well, unfortunately, you'd be wrong, because, for 
the last 20 miles to Lafayette, from--between Alexandria and 
Lafayette, there is only one major railroad provider. And you 
would think, well, that shouldn't be too big an issue. You have 
competitive rates for the huge majority of the 1,500 miles, you 
may have higher rates per mile for the last 20 miles. No, it 
doesn't work that way, either. Current law and practice allows 
one rail provider, who controls that last 20 miles, to push its 
pricing monopoly all the way back the full 1,500 miles to the 
Power River Basin. And so, they turn a 20-mile monopoly into a 
1,500-mile monopoly.
    I'd like to submit, for the record, a letter from the 
Lafayette Utilities System.
    [The information previously referred to follows:]

                                 Lafayette Utilities System
                                    Lafayette, LA, October 22, 2007
Hon. David Vitter,
U.S. Senate,
Washington, DC.

    Dear Honorable Vitter:

    We understand that the Surface Transportation and Merchant Marine 
Subcommittee of the Senate Commerce, Science, and Transportation 
Committee will conduct an oversight hearing on the operation of the 
Surface Transportation Board on Tuesday, October 23rd. We ask that you 
submit this letter setting forth the problems the City of Lafayette, 
Louisiana is experiencing as a captive rail customer of the Union 
Pacific Railroad.
    Railroad captivity, as I will explain in a moment, is costing 
electric customers in Lafayette an estimated $15 million more annually 
in 2008 as opposed to the competitive rail rates that we believe we 
should be paying to move coal to our electric generating plant. This 
``cost of captivity'' translates to an extra $300 yearly for 
electricity by a medium usage residential customer. Stuller Settings, 
an international jewelry setting manufacturer who provides 1,700 jobs 
in Lafayette is paying an extra $110,000 per year for electricity. 
Finally, schools that are served by the City of Lafayette electric 
utility are paying an extra $1.5 million per year for electricity due 
to our captivity. We believe strongly that this tax on the people, 
companies and educational system in Lafayette is unwarranted and must 
stop.
    Why is this happening? The City of Lafayette owns its own electric 
generating station to provide power to the residents and businesses of 
Lafayette. Our coal-fired power plant is fueled by coal from the Powder 
River Basin in Wyoming. The city purchases the coal at the mine mouth 
and pays for the transportation to our generating facility on the Red 
River near Alexandria, Louisiana. We move the coal in unit trains of 
hopper cars that we own and maintain. The distance of the movement is 
approximately 1,500 miles.
    In the Powder River Basin there are two railroads that can move our 
coal, the Burlington Northern and the Union Pacific. However, only the 
Union Pacific serves the entire route to our plant. About 20 miles from 
our plant is a switching facility where rail cars from the Kansas City 
Southern Railroad can be switched to the Union Pacific Railroad for 
movement into our plant. Thus, for approximately 1,480 miles of our 
transportation we should have access to competition. We should be able 
to move the unit trains of coal on the Burlington Northern, to the 
Kansas City Southern and finally to the Union Pacific for movement into 
our plants. We realize that we are captive to the UP for the last 20 
miles of the movement and are likely to pay much higher rates on that 
segment. Alternatively, the Union Pacific could bring our coal trains 
to our plant, but the longest segment, the 1,480 mile segment, should 
be at competitive rates.
    However, the City of Lafayette does not have access to rail 
competition for any portion of this 1500 movement because the Union 
Pacific refuses to provide a separate rate to move coal cars from its 
switching facility with the Kansas City Southern to our plant. Without 
this rate, we have no option but to move our coal on the Union Pacific 
for the entire length of the movement--at high, captive rail rates. In 
the so-called ``bottleneck'' case decided in December 1996, the Surface 
Transportation Board sanctioned this practice which allows the Union 
Pacific to block our access to competition.
    Senator Vitter, probably no ruling of the Surface Transportation 
Board has been more controversial with rail customers than this 
December 1996 decision that blocks many of us from available railroad 
competition. A former Chairman of the Surface Transportation Board, in 
his testimony to the House Railroad Subcommittee in March, 2004, said 
that rail customers like us could just build a rail line out to the 
competing railroad, if we wanted access to competition. In our case, 
that ``build out'' in 2004 would have cost us about $60 million because 
we would have been required to build a railroad bridge across the Red 
River to reach the Kansas City Southern Railroad. I can assure you that 
this was not a viable option for the City of Lafayette. Since 2004, the 
two western railroads have not been competing vigorously with each 
other, but rather are offering standard terms for coal transportation 
when current contracts expire--so today there is really no railroad 
competition to which we could build.
    We see no sign that the Surface Transportation Board intends to 
revisit the ``bottleneck'' decision and require railroads to provide 
rates that will allow their customers to reach competing railroads. If 
we are to have access to railroad competition, which we believe was 
promised in the Staggers Rail Act of 1980, Congress must enact S. 953, 
the Railroad Competition and Service Improvement Act of 2007. This 
legislation will release us from our captivity and remove the captivity 
tax that the residents and businesses of our city are paying.
    Thank you, Senator, for your leadership on this important issue. 
The time for Congress to act is now; every day of delay means our 
customers are paying another increment of captivity cost in their 
electric bills.
            Sincerely,
                                               Terry Huval,
                                                          Director,
                                            Lafayette Utilities System.

    Senator Vitter. In it, system representatives say, 
``Railroad captivity is costing electric customers in 
Lafayette, Louisiana, an estimated $15 million more annually in 
2008, as opposed to the competitive rail rates they should be 
paying to move coal to their electric generating plant. This 
cost of captivity translates to an extra $300 yearly for 
electricity by a medium-usage residential customer.'' Also, 
``Schools that are served by the City of Lafayette Electric 
Utility are paying an extra $1.5 million per year for 
electricity, due to their captivity.'' So, that's a real 
problem for Americans, consumers.
    It's also a real problem for jobs. One of our significant 
industries in Louisiana is the chemical--petrochemical industry 
and related industries. It is under assault from competition 
worldwide. And there are a lot of factors in other countries 
that, quite frankly, we will never be able to compete with on 
that factor alone. But there are some things we can control, 
and railroad rates are one of them; also, the cost of natural 
gas is another. Those two factors, by far--by far--talk to 
anyone in that domestic industry--are the two most onerous 
factors that make them less and less competitive worldwide 
every year. And that means, over time, exporting good jobs to 
other countries, other places, including out of Louisiana.
    So, this is a real problem, Mr. Chairman. I believe the 
bill we have rallied around is a real and a reasonable 
solution, and I look forward to the rest of this hearing.
    Senator Lautenberg. Thank you very much, Senator Vitter.
    They've just changed the time for the votes. So, what I'm 
going to do is ask all of the witnesses to come to the table at 
the same time, assuming we've got enough chairs. Do we have 
them there? And I would urge you to consolidate your statements 
to 3 minutes, and then we'll have to adjourn for a period of 
time, as much as an hour, and while I hate to burden the 
witnesses or my colleagues with decisions about whether or not 
to miss an opportunity ask questions, I'll leave it optional. 
The record will be kept open. I ask all of those who will be at 
the witness table to please respond promptly to written 
questions. We'll keep the record open for a period of time, but 
your responses are essential.
    And so, with that, Mr. Nottingham, Ms. Hecker, Mr. Moorman, 
Mr. McGregor, Mr. Ficker, Mr. Carlson, Mr. Matheson--oh, Mr. 
Matheson is not here, right? He is here? OK--and Mr. English--
please--come to the witness table.
    All right. And we're going to allow 3 minutes, I remind 
you. And I'd like not to wield a heavy hammer, so please be 
conscious. You'll see the red light.
    Mr. Nottingham, please?

  STATEMENT OF HON. CHARLES D. NOTTINGHAM, CHAIRMAN, SURFACE 
                      TRANSPORTATION BOARD

    Mr. Nottingham. Thank you, Senator Lautenberg. It's good to 
be back in this room with the subcommittee and with you.
    My name is Charles Nottingham. I am Chairman of the Surface 
Transportation Board, and I'll dispense with my prepared 5-
minute oral statement and just give a very quick executive 
overview, if I could, in the interest of the Subcommittee's 
schedule today.
    Over the past 12 months, the Surface Transportation Board 
has taken a number of proactive steps to reform, streamline, 
and modernize our oversight and rail regulatory procedures. To 
summarize some of the highlights of the past year, I'd like to 
just review the following actions that we've taken.
    In September 2006, we instituted a rulemaking proceeding to 
modernize the way we calculate the railroad industry's cost of 
capital to more accurately reflect the financial health of the 
rail industry.
    In October of 2006, we reformed the rate review process for 
large rate cases to streamline and improve the accuracy of the 
process, to close a loophole that permitted carriers to 
manipulate the process, and to address a legal vulnerability 
identified by the U.S. courts of appeals.
    In September 2007, we overhauled the procedures for 
handling smaller rail rate cases so that all shippers will have 
a practical and feasible means of challenging rail rates. We 
investigated the fuel surcharge practices of the railroads, 
and, in January 2007, concluded that their fuel surcharge 
programs were unreasonable, because they were misleading and 
because they required captive shippers to bear surcharges that 
were higher than the increased fuel costs attributable to their 
traffic.
    In November 2006, we held a hearing on issues related to 
the transportation of grain, to explore whether further changes 
to the regulatory framework are necessary in that area.
    In July 2007, we held a hearing and announced that we are 
establishing an advisory committee on the transportation of 
energy commodities to monitor the ability of the railroads to 
handle the future energy needs of the Nation. And that 
committee will be meeting for the first time tomorrow, here in 
Washington.
    In August of this year, 2007, we ordered a railroad 
providing inadequate service to sell its line to another entity 
that would provide better service to the shippers depending on 
that service. We recently contracted with an independent 
economic consulting firm to conduct a sweeping national study 
of rail competition-related issues, and we'll be reporting to 
this body next fall, as soon as that study is complete.
    The Board has taken a number of steps to ensure that--in an 
area, I know, of particular concern to the chairman--that 
waste-handling facilities do not use preemption to subvert 
appropriate review and regulation.
    That was just a few highlights; I'll conclude there and be 
happy to take questions.
    [The prepared statement of Mr. Nottingham follows:]

      Prepared Statement of Hon. Charles D. Nottingham, Chairman, 
                      Surface Transportation Board
    Good morning, Chairman Lautenberg, Ranking Member Smith and members 
of the Subcommittee. My name is Charles Nottingham, and I am Chairman 
of the Surface Transportation Board (STB or Board). I appreciate the 
opportunity to appear before this Subcommittee today to address issues 
related to this Subcommittee's oversight of the Board.
    This is my first appearance before this Subcommittee since I became 
Chairman of the STB in August 2006. It has been an extraordinary year 
for me personally, and an unusually busy year for the Board. In 
addition to handling its normal workload of formal actions, the Board 
has taken numerous steps this year to proactively monitor the rail 
industry and reform the Board's existing regulations to modernize and 
improve how we regulate the railroads.
    Before elaborating on these efforts in this written testimony, I 
will first provide an overview of the Board and its responsibilities.
Overview Of The STB
Administration
    The Board has kept up with its steady workload, and issued 1,139 
decisions and court-related matters in FY 2007, with new cases being 
filed even as pending cases were resolved. A summary of significant 
decisions and hearings is included as Attachment 1 to this testimony. 
In recent years, the Board experienced an increase in the number of 
major rail rate disputes and work related to these disputes. In past 
years, the Board had two or three of these cases pending at any one 
time. At the end of FY 2007, it had three rail rate cases pending. The 
Board had one pipeline rate dispute, which was resolved during the 
fiscal year, and one water carrier rate dispute that was pending at the 
end of FY 2007, but has since been dismissed. The Board also defended 
numerous decisions in court during the fiscal year. A list of court 
cases decided within the past twelve months and court cases currently 
pending is attached to this testimony as Attachment 2.
    Congress has authorized a 150 FTE staffing level for the STB. 
Currently, we have 141 employees on board. We are actively seeking to 
fill the remaining vacancies. In addition, we are cognizant that 
pending legislation on Amtrak and commuter rail issues could require 
additional Board staff and we have analyzed what our staffing needs 
will be should the pending legislation become law.
    The Board is also aware that it, like many other Federal agencies, 
is facing a major drain on its human capital through attrition. In the 
latest government-wide statistics available from the Office of 
Personnel Management (OPM), the average age of the Federal worker is 
45.3 years. The average STB employee is 50 years old. Forty-five 
percent of the Board's employees have over 25 years of service. Thirty-
three percent of those in management positions are eligible for 
immediate retirement. While it is not expected that the majority of 
these employees will retire when eligible, the STB has prepared a draft 
succession planning framework, which it has submitted to OPM, to ensure 
that the STB has a viable workforce from which to groom future leaders.
Statutory Responsibilities
    The STB is charged by statute with resolving railroad rate and 
service disputes and reviewing railroad restructuring transactions 
(mergers, line sales, line constructions, and line abandonments). In 
addition, the Board has limited jurisdiction over certain trucking, 
bus, household goods, ocean carrier, and pipeline matters.
    It is important to note that the substantial deregulation effected 
in the Staggers Rail Act of 1980 was carried forward by the ICC 
Termination Act of 1995 (ICCTA), which retains the directive that the 
Board issue administrative ``exemptions'' that suspend active 
regulation in areas where the market is competitive. The Board's 
governing statute, like virtually all other modern statutes of economic 
regulatory agencies, assumes that aggressive regulation is not 
necessary where there is competition, because in such circumstances 
competition will discipline businesses and prevent market abuse. Our 
statute, at 49 U.S.C. 10101, establishes a Federal policy ``to allow, 
to the maximum extent possible, competition and the demand for services 
to establish reasonable rates for transportation by rail,'' and to 
``minimize the need for Federal regulatory control over the rail 
transportation system,'' but ``to maintain reasonable rates where there 
is an absence of effective competition.'' It also permits the Board to 
intervene with respect to railroad rates only ``[i]f the Board 
determines . . . that a rail carrier has market dominance over the 
transportation to which [the] rate applies.'' 49 U.S.C. 10701(d)(1).
    Under the law, a carrier is considered not to have market dominance 
where its rates produce revenues that are less than 180 percent of its 
``variable costs'' of providing the service. (Variable costs are the 
portion of a carrier's costs that change with the amount of traffic 
handled, unlike the fixed portion of its costs.) Also, if there are 
competitive alternatives for moving the traffic between the same 
points--that is, competition either from other railroads (intramodal 
competition) or from other modes of transportation such as trucks, 
pipelines, or barges (intermodal competition)--then the Board does not 
have authority to regulate the rate, even if the revenues exceed 180 
percent of the variable costs of providing the service. Finally, the 
Board has limited jurisdiction over rail transportation contracts 
between shippers and carriers.
    When Congress passed the Staggers Act in 1980, the Nation's rail 
system was in desperate financial straits. It was burdened with 
unproductive assets, forced to provide unprofitable services, and 
hampered by excessive government regulation. Recognizing that a sound, 
healthy rail transportation system is essential to the Nation's 
economy, Congress put in place reforms directing that railroads be 
treated, in most respects, more like other businesses. Since that time, 
the railroad industry's financial condition has steadily improved. 
Today the industry is considered by most independent analysts to be 
relatively healthy.
    Unlike most businesses, however, railroads are common carriers. As 
common carriers, they have an obligation to provide service to the 
general public on reasonable request. In order to ensure that shippers 
receive the needed level of service, the railroads' financial resources 
must be sufficient to maintain a sound and sufficient infrastructure. 
At the same time, transportation of commodities vital to the Nation's 
economic wellbeing must be efficient and reasonably priced.
    In 1980, the rail system was faced with excess capacity, which made 
it difficult for railroads to provide service efficiently and on a 
financially sustainable basis. The Staggers Act made it easier to shed 
excess capacity and become more efficient in other ways, and the system 
has now been largely rationalized and made more productive.
    In recent years, the U.S. economy has expanded, and the rail 
network, like other transportation sectors, has become capacity-
constrained. Railroads, however, cannot respond as readily to capacity 
constraints (by quickly building new track and other facilities) as 
some other transportation sectors can. For example, trucking companies 
can purchase new equipment or hire new drivers. Not only are rail 
construction projects expensive and time-consuming, but these projects 
can generate significant opposition on environmental and community-
impact grounds.
    On April 11, 2007, the Board held a public hearing focused on rail 
capacity, traffic forecasts, and infrastructure requirements. Because 
the Nation's freight rail system will be relied upon to handle 
significant increases in traffic in the years ahead, the Board wanted 
to get a better understanding of whether current and planned or 
forecasted investments will be adequate to meet rail capacity demands, 
and, if not, what new policies and strategies need to be pursued. That 
hearing, which lasted 12 hours, brought together representatives of 
large railroads; short line railroads; Federal, state, regional, and 
local government interests; many different shipper interests; rail 
passenger carrier interests; and rail labor. The hearing documented 
widespread consensus among stakeholders that rail capacity will become 
increasingly constrained by traffic growth. A representative of one of 
the Nation's ports testified that container traffic typically carried 
by truck or rail entering North American ports from overseas will grow 
by more than 100 percent by the year 2020, from over 48 million Twenty 
Foot Equivalent Units (TEUs) in 2005 to an anticipated 130 million 
TEUs. Furthermore, representatives of the large railroads that make up 
the Class I railroad industry testified that--despite their plans to 
increase investment levels in the system every year--their anticipated 
capacity investments will not keep up with forecasted increases in rail 
service demands. In sum, the rail system's capacity shortfall that we 
see in many markets today will dramatically worsen unless bold new 
policies and strategies are adopted.
    Another important indicator of the adequacy of an individual 
railroad's revenues is the railroad's cost of capital. The Board is 
required by statute to make an annual assessment of the railroad 
industry's cost of capital. This determination is an input in the 
Board's review of rail rate challenges and rail line abandonment 
proposals. A railroad's cost of capital reflects the carrier's cost to 
raise capital both through debt and through equity arrangements. While 
the cost of debt is easy to determine, the cost of equity is far more 
difficult. Indeed, how best to calculate the cost of equity is the 
subject of a vast literature spanning the fields of finance, economics, 
and regulation. Since 1981, the Board has been using the same basic 
approach to estimate the cost of equity, but concerns recently have 
been raised that the approach is outdated and may be overstating the 
industry's cost of capital and thus the revenue needs of the 
industry.\1\
---------------------------------------------------------------------------
    \1\ The cost of equity for 2005 using the current methodology was 
calculated to be 15.2 percent, compared to 8.4 percent using the 
proposed methodology; similar disparities are reflected in prior years' 
calculations (e.g., 2003: 12.7 percent vs. 8.0 percent; 2004: 13.2 
percent vs. 8.2 percent).
---------------------------------------------------------------------------
    Given the importance of this cost-of-capital figure in many of our 
regulatory procedures, we launched a rulemaking to improve our 
methodology and to ensure the accuracy of this important measurement. 
The comment period is scheduled to close at the end of October, and we 
will carefully consider all comments before issuing a final rule.
GAO Report and STB Competition Study
     The Government Accountability Office (GAO) prepared a report in 
2006,\2\ and a supplement in 2007,\3\ addressing railroad rates, 
competition, and capacity. The 2006 Report analyzed general trends in 
the industry and also highlighted particular markets. The 2007 
Supplement updated some of the information in the 2006 Report.
---------------------------------------------------------------------------
    \2\ The report is entitled Industry Health Has Improved, but 
Concerns about Competition and Capacity Should Be Addressed.
    \3\ The supplement is entitled Freight Railroads: Updated 
Information on Rates and Other Industry Trends.
---------------------------------------------------------------------------
    As GAO documented in the 2007 Supplement, between 1985 and 2005, 
rates did not keep pace with inflation for each of the four major 
categories of rail traffic separately tracked by GAO (coal, grain, 
motor vehicles, and miscellaneous mixed shipments). Moreover, GAO found 
that despite an uptick in recent years, rail rates overall for 2005 
remained below 1985 levels even in nominal terms. At the same time, the 
Board's index for tracking changes in railroad costs (the Railroad Cost 
Adjustment Factor) shows that the costs that the railroads themselves 
had to pay for the goods and services that they use in their business 
increased by 80 percent from 1985 to 2005. Thus, the fact that rates 
overall remained at or below 1985 levels even with these recent cost 
increases demonstrates that, in general, rail rates have been held down 
for most shippers.
    The 2006 GAO Report focused to some extent on concerns over higher 
rate levels in parts of the agriculture sector. Last November, the 
Board held a public hearing to obtain information from interested 
parties about the grain transportation market in general, and in 
particular about the market conditions in the grain industry that may 
have caused grain rates to diverge from the long-term general trend of 
reduced rail rates for most shippers. Because U.S. and Canadian grain 
producers compete, both with each other and in a global marketplace, 
the agency also wanted to hear about the interplay between the American 
and Canadian wheat markets, how the Canadian regulatory system differs 
from the American system, and what impact those differences might have 
on grain production in the United States.
    There are of course areas--states like North Dakota and Montana--in 
which rail rates tend to be higher than average, as the 2006 GAO Report 
points out.\4\ That is largely because of the economics of the railroad 
industry: under principles of ``differential pricing,'' railroads, with 
high ``sunk'' costs and with fierce competition for most traffic, are 
expected to charge more, even substantially more, from their captive 
traffic than from their competitive traffic if they are to achieve 
enough revenues to cover their costs and invest in necessary 
facilities. Although differential pricing is practiced in many other 
industries--such as airlines, utilities, hotels, and movie theaters--we 
understand that shippers on the captive end of this differential 
pricing scale would not be satisfied with the status quo. But if 
differential pricing is to be substantially tempered in the industry, 
then revenues will have to come from some source other than captive 
shippers. And if other sources of revenue cannot be found, then 
infrastructure investment will suffer, as will rail service.
---------------------------------------------------------------------------
    \4\ For some areas, rates can be higher because traffic is seasonal 
and there is little volume during off-peak times.
---------------------------------------------------------------------------
    To further address GAO's observations about areas with less 
competition, the Board recently commissioned an extensive study on the 
extent of competition in the railroad industry. The study will also 
assess various policy issues, including current and near-future 
capacity constraints in the industry; how competition and regulation 
impact capacity investment; how capacity constraints impact 
competition; and how competition, capacity constraints, and other 
factors affect the quality of service provided by railroads. The 
economic consulting firm Christensen Associates, based in Madison, 
Wisconsin, has begun work on a contract valued at approximately $1 
million to deliver this study to the STB for publication in the Fall of 
2008.
    Another rulemaking that the Board is currently completing involves 
interchange commitments that may be part of sale or lease contracts 
when large carriers sell or lease lighter-density portions of their 
lines to smaller carriers (referred to by some as the ``paper barrier'' 
issue). Some parties take the view that these arrangements have helped 
facilitate the growth of the short-line industry into a vibrant force 
in the transportation sector--with well over 500 carriers today 
operating nearly 46,500 miles of track with nearly 20,000 employees--
while others are concerned that they have tended to freeze in place the 
competitive status quo, rather than allowing the development of new 
competitive options not available before the transaction. A Board 
decision addressing a request for a general rule regarding such 
contractual interchange commitments is imminent.
Rate Regulation
    As is the case with other industries, when capacity is tight, 
carriers will seek to raise their rates. As a result of differential 
pricing, those shippers without competitive options often see their 
rates rise the most. Thus, with tight capacity throughout the industry 
today, the Board's rate processes are particularly important, and I 
will now turn to that matter.
    Rate Disputes. Under the statute, the Board is directed to ensure 
that rates are reasonable while at the same time not precluding 
railroads from obtaining adequate revenues. Balancing these potentially 
conflicting objectives is not an easy task. Rates that are too high can 
harm rail-dependent businesses, while rates that are held down too low 
will deprive railroads of the revenues needed to pay for the 
infrastructure investments that are in turn needed to give shippers the 
level and quality of service that they require. The Board has recently 
improved its procedures for handling rate cases, with one set of 
procedures for large rate cases and two other procedures for smaller 
cases.
    Large Rate Cases. With often hundreds of millions of dollars at 
stake, large rate disputes raise complex questions over the value of 
the assets needed to serve the shipper, the operating costs to serve 
the shipper, and the degree of differential pricing a carrier needs to 
earn a reasonable return. To resolve these large disputes, in 1985 the 
Board's predecessor agency, the ICC, created a sophisticated, although 
complex, approach known as ``Constrained Market Pricing,'' or CMP. CMP 
provides a framework for the Board to regulate rates while affording 
railroads the opportunity to cover their costs. Although CMP is 
premised on the need for differential pricing, CMP principles also 
impose constraints on a railroad's ability to price, even for their 
captive traffic.
    CMP sets up four potential constraints on railroad pricing. The 
constraint that is typically used is the stand-alone cost (SAC) test. 
Under SAC, a railroad may not charge a shipper more than what a 
hypothetical new, optimally efficient carrier would need to charge the 
complaining shipper if such a carrier were to design, build, and 
operate--with no legal or financial barriers to entry into or exit from 
the industry--a system to serve only that shipper and whatever group of 
traffic that shipper selects to be included in the analysis. The 
ultimate objective of the SAC test is to ensure that the complaining 
shipper is not charged for a carrier's inefficiencies or for facilities 
or services from which the shipper derives no benefit. This assures 
that the complaining shipper is not required to unfairly subsidize 
other customers of the railroad.
    Although the U.S. courts of appeals have affirmed every challenged 
SAC case issued by the Board since the agency was created in 1996 \5\ 
(whether they were challenged by the shipper or the railroad involved), 
during the past few years it became apparent that a loophole gave 
railroads the ability to ``game'' the outcome of future SAC 
determinations. Moreover, in a recent court decision, the Board was 
warned that part of its SAC methodology was on ``shaky ground.'' \6\ 
Finally, the complexity and costs of litigating a SAC case had 
increased over time, often costing $3-$5 million and 2-4 years for a 
shipper to bring, or a railroad to defend, a case. For these reasons, 
the Board found it necessary in 2006 to make some significant changes 
in how we will apply the SAC test and how we will calculate the amount 
of relief in a large rate case. The revisions reflect a significant 
milestone in the STB's ongoing effort to reduce litigation costs, 
create incentives for private settlement of disputes, and shorten the 
time required to develop and present large rail rate cases to the STB. 
These rules were completed last Fall within 8 months of the notice of 
proposed rulemaking.
---------------------------------------------------------------------------
    \5\ See Otter Tail Power Co. v. BNSF Ry., 484 F.3d 959 (8th Cir. 
2007); Arizona Elec. Power Coop., Inc. v. STB, 454 F.2d 359 (D.C. Cir. 
2006); BNSF Ry. v. STB, 453 F.3d 473 (D.C. Cir. 2006); PPL Mont., LLC 
v. STB, 437 F.3d 1240 (D.C. Cir. 2006); Wisconsin Power & Light Co. v. 
Union Pac. R.R., 62 Fed. Appx. 354 (D.C. Cir. Apr. 30, 2003); McCarty 
Farms, Inc. v. STB, 158 F.3d 1294 (D.C. Cir. 1998); Burlington N.R.R. 
v. STB, 114 F.3d 206 (D.C. Cir. 1997).
    \6\ In particular, the United States Court of Appeals for the 
District of Columbia, in affirming one of the Board's more recent SAC 
decisions that had been challenged by a railroad, explicitly stated 
that, if the Board were ``presented with a model [for allocating 
revenue for so-called ``cross-over traffic''] that took account both of 
the economies of density and of the diminishing returns thereto, a 
decision to adhere to its [existing] model would be on shaky ground 
indeed.'' BNSF Ry. v. STB, 453 F.3d 473, 484 (D.C. Cir. 2006).
---------------------------------------------------------------------------
    In the first test of our new guidelines for large rate cases, the 
shippers in two recent cases may have been disadvantaged by the 
changes. Those cases were initiated under the old rules and decided 
under the new rules. Because of the unique procedural posture of those 
cases, the Board has taken the nearly unprecedented step of allowing 
those shippers to redesign significant portions of their cases if they 
choose to do so.
    Small Rate Cases. In 1996, in response to a Congressional 
directive, the STB adopted simplified guidelines for assessing the 
reasonableness of challenged rail rates in cases in which a full SAC 
presentation is too costly. Under these guidelines, the agency 
established three ``benchmarks'' to determine the reasonableness of a 
challenged rate in a small rate case. The three benchmarks look at the 
carrier's overall revenue needs, how the railroad prices its other 
captive traffic, and how comparable traffic is priced.
    Shippers, however, noted several shortcomings to the small rate 
case procedures that discouraged them from filing cases. For example, 
many stated that it was unclear what shippers would qualify to use the 
guidelines. In addition, shippers (and railroads) wanted greater 
clarity as to how the three benchmarks would be applied in a particular 
case. Shippers also expressed concerns about how railroads might use 
the discovery process to unreasonably prolong a case. As a result of 
these ambiguities, no cases were decided under the 1996 simplified 
guidelines, although two cases were filed and then settled.
    The agency held several public hearings on this matter from 2003 
through 2007, and its staff met with staff from other economic 
regulatory agencies to gather information on how those agencies handle 
smaller disputes. On September 5, 2007, the Board issued a decision 
updating our process for reviewing rate complaints in cases too small 
to warrant the cost of litigating a full SAC case. The Board's 
decision, which makes the rate review process available to shippers of 
all sizes, allows smaller rate cases to proceed on one of two tracks. 
First, freight rail customers may seek up to $1 million in relief over 
a 5-year period, using a revised version of the three-benchmark test 
with more predictability built into it. A shipper using that approach 
would have a Board ruling on its case within 8 months of the filing of 
its complaint.
    Under a second approach, freight rail customers can seek up to $5 
million in relief over a 5-year period, by using a process that focuses 
on whether the carrier is abusing its market power by charging more 
than it needs to earn a reasonable return on the replacement cost of 
the infrastructure used to serve that shipper. This is a simpler form 
of the SAC test that is applied in large cases; it relies on 
standardization of many of the components in order to reduce the cost 
and complexity of litigating the case. A Board decision in a rate case 
brought under this approach would be issued within 17 months after the 
filing of the complaint.
    In finalizing this rule, the Board received a number of suggestions 
and comments from the shipper community on how to improve that 
proposal. The Board implemented the following changes to the initial 
proposal, at the urging of a shipper or to respond to shipper 
criticisms with the initial approach:

   Modified the eligibility approach to ensure that all captive 
        shippers have a meaningful forum for seeking protection from 
        unreasonable rates by raising the relief available under the 
        simplified guidelines;

   Increased the maximum value of recovery under the ``Three-
        Benchmark'' approach five-fold, from $200,000 to $1,000,000;

   Removed the formal ``aggregation'' approach, which may have 
        unnecessarily prevented a captive shipper that ships to 
        numerous destinations from a single origin from seeking relief 
        under the simplified guidelines;

   Required railroads to participate in mandatory 20-day, non-
        binding mediation at the beginning of the case;

   Expedited the procedural schedules to the maximum extent 
        practical;

   For the Simplified-SAC analysis:

    Excluded depreciation on equipment when calculating 
            operating expenses;

    Removed the annual adjustment process for a rate 
            prescription to make the case simpler and less expensive;

   For the Three-Benchmark analysis:

    Provided equal access for shippers to the confidential 
            Waybill Sample;

    Permitted the shipper to submit evidence of ``other 
            relevant factors'' to rebut certain presumptions 
            established in the methodology.

    In addition, the Board rejected numerous proposed changes by the 
railroad community that were opposed by the shippers. For example, the 
railroads asked the Board to permit movement-specific adjustments to 
its Uniform Rail Costing System used to estimate the variable cost of a 
movement and whether it falls above or below the 180 percent 
jurisdictional threshold. The Board, at the shippers' urging, rejected 
that change, which would have made these cases more expensive.
    Before the Board's recent changes, the majority of captive rail 
traffic had been effectively blocked from Board rate review due to the 
complexity and resulting high costs of the previous procedures. The 
Board's new procedures--which have been challenged in court by numerous 
rail interests--ensure that the rate review process will be accessible 
to all captive traffic that moves under common carrier rates.
    In all rate cases, the Board will require mediation up front, which 
we have found is a good way of encouraging adversaries to narrow their 
differences and possibly reach a mutually satisfactory settlement. 
Indeed, earlier this year a small rate case involving Williams Olefins, 
LLC and Grand Trunk Corporation was resolved privately within only a 
few weeks pursuant to mediation by Board staff.
    Fuel Surcharges. Another matter that has concerned shippers in the 
past few years is the way the railroads were assessing fuel surcharges. 
In recent years fuel costs have been unpredictable and volatile, with 
some sharp upward spikes. Fuel is a substantial component of railroad 
costs, and carriers have sought to recover their increased fuel costs 
through surcharges. Some shippers felt that the surcharges they were 
being assessed were greater than the increased fuel costs that could be 
attributed to their movements. Captive shippers voiced concerns that 
the fuel surcharge programs of the carriers, which were expressed as a 
percentage of the base rate, virtually guaranteed that captive shippers 
with high base rates would bear the increased fuel costs of other 
shippers. They also objected to the carriers' practices of ``double 
dipping'' by first raising the base rate using an index that includes 
changes in fuel costs and then adding a separate fuel surcharge to the 
same movement.
    In May 2006, the Board held a public hearing on the matter. In 
January of this year we issued a decision declaring it an unlawful 
practice for carriers to use a fuel surcharge to recover more than the 
increased fuel costs attributable to the particular movement to which 
the surcharge is applied. This action, with industry-wide effect, 
demonstrates that the Board will use aggressively the authority granted 
to it by statute to stop unreasonable practices, thereby protecting 
shippers and advancing the public interest.
Service Quality and Railroad-Shipper Relationships
    The Board actively monitors railroad industry performance. We 
receive monthly reports from each Class I railroad, tracking such 
indicators of congestion and efficiency as the number of freight cars 
on line, train speeds, and terminal dwell time (the amount of time cars 
spend in railroad terminals to make connections between trains). 
Moreover, as it has done for several years now, the Board has asked 
each of those carriers to provide forward-looking information on how 
the railroads are preparing to handle end-of-year peak shipping demands 
in several key markets: agriculture (grain, grain products, and 
ethanol); coal; chemicals; and intermodal traffic. This year the Board 
also asked the carriers for their performance goals (with respect to 
cars-on-line, terminal dwell time, train speed, and employment levels), 
as well as information on critical capacity-related infrastructure 
needs this year and their capital needs for increasing capacity in 
2008. The carriers' responses are available on our website.
    On July 18, 2007, the Board held a field hearing in Kansas City, 
Missouri, to examine issues related to the efficiency and reliability 
of railroad transportation of resources critical to the Nation's energy 
supply, including coal, ethanol and other biofuels. Speakers at the 
hearing represented the interests of railroads, utilities, coal 
shippers, and other energy commodities such as ethanol. To address 
these issues further, the Board has established a Rail Energy 
Transportation Advisory Committee (RETAC) to provide advice and 
guidance to the agency and to serve as a forum for the discussion of 
emerging issues regarding the railroad transportation of energy 
resources such as coal and ethanol and other biofuels. RETAC is 
expected to address matters such as rail performance, capacity 
constraints, infrastructure planning and development, and effective 
coordination among suppliers, railroads and energy-resource users. The 
first meeting of RETAC will be held on October 24.
    The Board has a very effective Rail Consumer Assistance Program, 
run by our Office of Compliance and Consumer Assistance (OCCA), which 
handles about 100 disputes in a typical year. A few of these informal 
disputes concern rate issues, but the majority relate to service. The 
process is easy to use and shipper-friendly. It can be engaged by a 
simple telephone call, fax, letter, or e-mail. The follow-up by our 
staff is prompt and effective. Our consumer assistance staff has 
addressed a variety of issues, in addition to rates and service, 
including: car supply issues; claims for damages; demurrage issues 
(charges for holding rail cars for too long); fuel surcharges; employee 
complaints; and community concerns. Our staff cannot always resolve the 
issues informally, but they are often successful at bringing the 
parties closer together and getting them to talk to each other without 
resorting to litigation or formal Board adjudication.
    During the past year, the staff working in the consumer assistance 
program proactively negotiated changes to the railroad industry's 
embargo rules (rules that govern temporary stoppage of railroad service 
due to track damage or other causes) that will do much to hold carriers 
to their common carrier obligation to their shippers. We also resolved 
two situations in which the crossing or interchange point between two 
railroads had been blocked, in each case getting the railroad or 
railroads involved to work out mutually acceptable compromises. We 
successfully secured rail service for a new shipper in Texas when a 
large railroad refused to serve it. We assisted a small grain shipper 
in Nebraska with a rate dispute, persuading the carrier to compromise 
with the shipper, and assisted a shipper in Missouri with its freight 
claims, persuading the carrier to honor the claims. And we assisted a 
shipper organization by persuading a large carrier to modify its 
freight car information system to provide information that was needed 
for the businesses of the involved shippers.
    When parties cannot resolve their differences informally, they can 
engage the Board's formal processes by filing a complaint. For example, 
the Board may temporarily substitute another carrier for a carrier that 
is unable or unwilling to provide adequate service on its lines. We 
have used those rules several times in the past few years. This past 
year, following up on a 2006 authorization of such alternative rail 
service at the request of a shipper in Texas, the Board extended the 
temporary relief until a long-term solution could be developed. In 
August, the Board ordered the lines involved to be sold, at a price set 
by the Board to reflect the value of the property, to either of two 
entities which the Board found should result in improved rail service 
to shippers. This particular ``forced sale'' was complex and lengthy. 
The Board's decisions demonstrate that we will use every available 
tool, where necessary, to protect shippers receiving inadequate 
service.
    The Board acted to preserve shippers' service options in a case in 
Ohio this year involving a railroad that would not let another railroad 
cross its line. In that case, a Class I rail carrier had unilaterally 
removed the crossing diamonds that were needed for a short line to 
serve several potential shippers. The Board made clear that a carrier 
may not undercut another carrier's ability to fulfill its common 
carrier obligation by unilaterally severing track of the other carrier 
that is part of the national transportation system. The Board directed 
the Class I carrier to promptly reinstall the crossing.
Preemption
    One of the most difficult issues facing the Board this year is how 
to improve the Board's ability to ensure effective regulation of rail 
operations that handle solid waste. We have made significant progress 
in this area, and I would like to take this opportunity to highlight 
some of our recent actions.
    The express Federal preemption contained in the STB's governing 
statute at 49 U.S.C. 10501(b) gives the Board exclusive jurisdiction 
over transportation by rail carriers. It is important to keep in mind 
that preemption applies both to cases that require STB licensing 
authority, and also to some that do not.
New Rail Construction
    If a project involves building a new rail line into what would be a 
new service area for the railroad, it requires a license from the Board 
and an environmental review under NEPA. In such cases, the Board's 
existing processes are sufficient to allow full consideration of the 
environmental and other issues that arise. This is shown by New England 
Transrail, which involves a plan to construct, acquire and operate 
track in Massachusetts to carry a variety of commodities, including 
municipal solid waste (MSW) and construction and demolition debris 
(C&D) for connection to other rail carriers. In that case, the Board, 
in a preliminary decision issued in July 2007, made clear that the 
Board will conduct a detailed NEPA review and that New England 
Transrail will not be allowed to enter the rail business until 
extensive environmental, safety, public health, and other public 
interest considerations are fully addressed.
Acquisition of an Existing Rail Line
    If a project involves a new carrier seeking to acquire or operate 
an existing rail line, the new carrier must also obtain authority from 
the Board. While NEPA review can be triggered, the Board has grown 
concerned recently that the summary class exemption process used in 
many of these cases does not always provide enough information about a 
pending proposal to allow us to handle our regulatory responsibilities 
effectively and efficiently.
    Indeed, we recently have begun a proceeding to consider whether to 
increase the information required from all of those seeking to use the 
class exemption procedure to acquire, lease and operate rail lines. In 
a number of recent cases, including matters involving Freehold, New 
Jersey and Croton-on-Hudson, New York, the Board has stayed the 
effectiveness of a notice invoking the class exemption to allow a more 
searching inquiry and to solicit further evidence. We hope that our 
rulemaking will improve this process and lessen the need for stay 
requests.
Construction of Facilities Ancillary to an Already-Authorized Rail Line
    Finally, there are those activities that although part of rail 
transportation, may not be subject to STB licensing. These activities 
include making improvements to existing railroad operations, such as 
adding track or facilities--including transload facilities where 
materials are transferred between truck and rail--at existing railroad 
locations, to better serve the needs of a railroad's service territory. 
They also include construction of ancillary spur, industrial, team, 
switching, or side tracks by an already-authorized rail carrier.
    Because no Board license is required in these types of cases, there 
is no occasion for the Board to conduct a formal NEPA review or impose 
specific environmental conditions. However, as the Board has repeatedly 
explained, other Federal environmental laws continue to apply, and 
state and local police powers are not preempted entirely. In addition, 
any interested party, community, or state or local authority concerned 
that the Federal preemption is being wrongly claimed to shield 
activities that are not ``transportation by rail carrier'' can ask the 
Board to issue a declaratory order addressing that issue. 
Alternatively, they can go directly to court to have that issue 
addressed.
    The Board tries to be proactive where environmental concerns are 
brought to our attention. STB staff conducts site visits to rail 
facilities where MSW or C&D is handled, if appropriate. This month, the 
Board issued an order in a matter in Yaphank, New York requiring an 
entity constructing facilities there to immediately cease that activity 
and to either obtain Board authorization for the construction or a 
Board decision finding that such activity does not require our 
approval.
    Moreover, some states have adopted regulations, such as New 
Jersey's 2D regulations, that accommodate Federal preemption but allow 
the states to inspect and impose other requirements on rail-related 
waste facilities under the police powers they retain. I believe it 
would be consistent with everything the Board has said about the scope 
of preemption that states can apply their regulations to rail-related 
waste facilities so long as the regulations are not applied in a 
discriminatory manner and do not unreasonably interfere with the 
railroad's ability to conduct its operations.
    While the statutory and regulatory issues presented in cases 
involving rail-related waste facilities are quite complex, the public 
interest and public policy considerations involved in these 
controversies require policymakers to balance several important, and 
often conflicting, policies. The Board will continue to work hard to 
identify and implement administrative and regulatory strategies that 
improve our ability to ensure effective regulation in this area.
Amtrak
    Currently there is pending legislation that would give the STB 
significant new responsibilities regarding Amtrak. Those 
responsibilities include resolving performance complaints, assisting in 
the development of service metrics, and determining compensation 
between Amtrak and commuter authorities for Northeast Corridor access 
costs if agreement cannot be reached.
    With those increased responsibilities will also come the need for 
additional Board staff in order to ensure that we have the ability both 
to meet our current caseload requirements and to provide an evenhanded 
and efficient resolution of the Amtrak matters entrusted to us. I would 
be remiss if I did not note that the Senate FY 2008 appropriation for 
the STB is 5.6 percent lower than the Board's FY 2008 request. But I am 
certain that all involved will continue to work to ensure that the 
Board has sufficient appropriations to carry out all of our 
responsibilities.
Conclusion
    The past 12 months have been noteworthy for the number of proactive 
steps taken by the Board to reform, streamline, and modernize our 
oversight and rail regulatory procedures. To summarize, some of the 
highlights of the past year include the following:

   In September 2006, we instituted a rulemaking proceeding to 
        modernize the way we calculate the railroad industry's cost of 
        capital to more accurately reflect the financial health of the 
        rail industry;

   In October 2006, we reformed the rate review process for 
        large rate cases to streamline and improve the accuracy of the 
        process, to close a loophole that permitted carriers to 
        manipulate the process, and to address a legal vulnerability;

   In September 2007, we overhauled the procedures for handling 
        smaller rail rate cases so that all shippers will have a 
        practical and feasible means of challenging rail rates;

   We investigated the fuel surcharge practices of the 
        railroads, and in January 2007 concluded that their fuel-
        surcharge programs were unreasonable because they were 
        misleading and because they required captive shippers to bear 
        surcharges that were higher than the increased fuel costs 
        attributable to their traffic;

   In November 2006, we held a hearing on issues related to the 
        transportation of grain to explore whether further changes to 
        the regulatory framework are necessary;

   In July 2007, we held a hearing and announced that we are 
        establishing an advisory committee on transportation of energy 
        commodities to monitor the ability of the railroads to handle 
        the future energy needs of the Nation;

   In August 2007, we ordered a railroad providing inadequate 
        service to sell its line to another entity that would provide 
        better service;

   We recently contracted with an independent economic 
        consulting firm to conduct a sweeping national study of rail 
        competition-related issues; and

   The Board has taken a number of steps to ensure that waste 
        handling facilities do not use preemption to subvert 
        appropriate review and regulation.

    Of the more important actions that will take place between now and 
the end of next year, the STB will:

   Issue final rules on how to calculate the cost of capital 
        for the rail industry;

   See that the competition study is completed, and analyze the 
        results and recommendations contained therein;

   Test the new simplified rate guidelines on three newly filed 
        small rail rate disputes (and perhaps more cases, if filed);

   Finish our investigation into the concerns about the 
        appropriateness of certain interchange commitments that large 
        carriers may enter into when they sell or lease light-density 
        portions of their lines to smaller carriers;

   Consult with our new energy advisory committee for guidance 
        on a range of significant issues that affect the public 
        interest in a reliable delivery network for coal and liquid 
        biofuels;

   Continue to examine the infrastructure and capacity needs of 
        the rail network and the railroads' capital investment levels, 
        and to emphasize the critical importance of developing new 
        strategies to meet those challenges;

   Review the recently announced proposal by the Canadian 
        Pacific Railway to acquire the Dakota, Minnesota & Eastern 
        Railroad, as well as the Canadian National Railway's proposal 
        to acquire the Elgin, Joliet & Eastern Railway;

   Improve the Board's ability to ensure effective regulation 
        of rail operations that handle municipal solid waste and 
        related materials;

   Address the current ambiguity as to whether certain types of 
        arrangements between rail carriers and shippers reflect 
        contracts (for which regulatory remedies are unavailable), or 
        whether they reflect common carrier service subject to Board 
        regulation; and

   Prepare the STB to have the capability to address potential 
        conflicts between passenger rail and freight rail operations 
        and to implement potential legislative proposals in this 
        regard.

    I appreciate the opportunity to discuss these issues today, and 
look forward to any questions you might have.
                                 ______
                                 
                              Attachment 1
   Summary of Surface Transportation Board Significant Decisions and 
               Hearings--October 1, 2006-October 16, 2007
Rulemakings
    EP 646 (Sub-No. 1)  Simplified Standards for Rail Rate Cases
   9/05/07--Modified the Board's simplified rail rate 
        guidelines by creating a simplified stand-alone cost approach 
        for medium-sized rail rate disputes and revising its three-
        benchmark approach for smaller rail rate disputes. The Board's 
        decision also places limits on the total relief available over 
        a 5-year period under these two simplified approaches.

    EP 656  Motor Carrier Bureaus--Periodic Review Proceeding
   5/7/07--Completed periodic review, pursuant to 49 U.S.C. 
        13703(c), of agreements of motor carriers to engage in rate-
        related collective activities. The Board terminated approval of 
        the agreements of all remaining motor carrier bureaus. To 
        provide sufficient time for parties to adjust to a new 
        environment without antitrust immunity for motor carrier bureau 
        activities, the decision was made effective in 120 days.

   6/28/07--Postponed, to January 1, 2008, the effective date 
        of Board's decision terminating its approval of antitrust 
        immunity for motor carrier bureau agreements.

    EP 657 (Sub-No. 1)  Major Issues in Rail Rate Cases
   10/30/06--Decision adopted procedural and substantive 
        changes regarding proper application of the stand-alone cost 
        test in rail rate cases.

    EP 659  Public Participation in Class Exemption Proceedings
   10/19/06--Decision adopted changes in the procedures for 
        certain exemptions to ensure that the public is given notice of 
        a proposed transaction before the pertinent exemption becomes 
        effective, and to allow the Board to process these notices of 
        exemption, and any related petitions for stay, in an orderly 
        and timely fashion.

    EP 661  Rail Fuel Surcharges
   1/26/07--Found that computing rail fuel surcharges as a 
        percentage of a base rate is an unreasonable practice and 
        directed carriers to change this practice. Board also concluded 
        that the practice of ``double dipping,'' i.e., applying to the 
        same traffic both a fuel surcharge and a rate increase that is 
        based on a cost index that includes a fuel cost component, such 
        as the Railroad Cost Adjustment Factor (RCAF), is an 
        unreasonable practice and directed carriers to change this 
        practice as well. Board announced it would proceed with a 
        proposal to impose mandatory reporting requirements for all 
        Class I railroads regarding their fuel surcharges, in STB Ex 
        Parte No. 661 (Sub-No. 1).

    EP 661 (Sub-No. 1)  Rail Fuel Surcharges [reporting requirement]
   1/26/07--Proposed to require all large (Class I) railroads 
        to submit a monthly report containing the following 
        information: (1) total monthly fuel cost; (2) gallons of fuel 
        consumed during the month; (3) increased or decreased cost of 
        fuel over the previous month; and (4) total monthly revenue 
        from fuel surcharges.

   8/14/07--Adopted final rules to require all Class I 
        railroads to submit a quarterly report containing the following 
        information: (1) total quarterly fuel cost; (2) gallons of fuel 
        consumed during the quarter; (3) increased or decreased cost of 
        fuel over the previous quarter; (4) total quarterly revenue 
        from fuel surcharges; and (5) revenue from fuel surcharges on 
        regulated traffic.

    EP 664  Methodology to be Employed in Determining the Rail 
Industry's Cost Of Capital
   8/14/07--Proposed to revise the Board's method for 
        calculating the railroad industry's cost of capital by 
        computing the cost of equity using a capital asset pricing 
        model rather than a discounted cash-flow analysis.

    EP 669  Interpretation of the Term ``Contract'' in 49 U.S.C. 10709
   3/29/07--Requested public comment on a proposal to interpret 
        the term ``contract' in 49 U.S.C. 10709 to embrace ``any 
        bilateral agreement between a carrier and a shipper for rail 
        transportation in which the railroad agrees to a specific rate 
        for a specific period of time in exchange for consideration 
        from the shipper.''

    EP 670  Establishment of a Rail Energy Transportation Advisory 
Committee
   3/9/07--Provided notice seeking public comments on the 
        establishment of a Rail Transportation Advisory Committee to 
        provide independent advice and policy suggestions on issues 
        related to the reliability of rail transportation of resources 
        critical to the Nation's energy supply.

   7/17/07--Announced the establishment of the Rail Energy 
        Transportation Advisory Committee and requested nominations of 
        candidates to serve on the committee.

   9/21/07--Announced the appointment of 23 individuals to 
        serve on the newly established Rail Energy Transportation 
        Advisory Committee.

    EP 673  Information Required in Certain Notices of Exemption
   10/04/07--Granted a petition filed by 6 Class I rail 
        carriers to institute a rulemaking proceeding to consider 
        requiring more information in notices of exemption for 
        acquiring and operating rail lines and to reconsider the 
        Board's Effingham decision.
Annual Regulatory Determinations
    EP 290 (Sub-No. 4)  Railroad Cost Recovery Procedures--Productivity
   1/31/07--Proposed to adopt 1.017 (1.7 percent per year) as 
        the measure of average change in railroad productivity for the 
        2001-2005 (5-year) averaging period, a decline of 0.2 percent 
        from the measure of 1.9 percent that was developed for the 
        2000-2004 period.

    EP 542 (Sub-No. 14)  Regulations Governing Fees for Services 
Performed in Connection with Licensing and Related Services
   4/6/07--Decision adopted 2007 user fee update and revised 
        fee schedule to cover certain costs.

    EP 552 (Sub-No. 10)  Railroad Revenue Adequacy--2005
   10/23/06--Found one Class I carrier, Norfolk Southern, to be 
        revenue adequate in 2005.

    EP 558 (Sub-No. 9)  Railroad Cost of Capital--2005 determination
   2/12/07--Denied Western Coal Traffic League's petition for 
        reconsideration of the cost-of-capital decision for 2005. The 
        Board rejected various technical challenges and said that it 
        would address the League's argument that the Board should 
        replace its discounted cash-flow methodology with a capital 
        asset pricing model in a new proceeding, EP 664.

    EP 558 (Sub-No. 10)  Railroad Cost of Capital--2006 determination
   5/16/07--Instituted a proceeding to determine the railroad 
        industry's cost of capital for 2006 and required comments from 
        all Class I railroads.
Rail Cases
Major Rate Cases
    NOR 42088  Western Fuels v. BNSF
    9/10/07--Found that BNSF had market dominance over the 
transportation at issue, but that the complainant had not demonstrated 
that the challenged rates were unreasonably high. The complainant was 
offered an opportunity to submit supplemental evidence.

    NOR 41191 (Sub-No. 1)  AEP Texas v. BNSF
   9/10/07--Found that BNSF had market dominance over the 
        transportation at issue, but that the complainant had not 
        demonstrated that the challenged rates were unreasonably high. 
        The complainant was offered an opportunity to submit 
        supplemental evidence.

    No. 42095  Kansas City Power and Light v. Union Pacific RR
   3/29/07--Found that the parties had shown cause why the case 
        should not be dismissed (on grounds that the transportation at 
        issue is covered by contract) and directed the parties to 
        submit a proposed procedural schedule.
Small Rate Cases
    No. 42098  Williams Olefins, L.L.C. v. Grand Trunk Corporation
   2/15/07--Dismissed this small rate complaint after the 
        parties confirmed that they had reached a mediated settlement 
        with the assistance of Board staff.

    No. 42099  et al. E.I. DuPont de Nemours and Co. v. CSX 
Transportation
   9/7/07--Decided that three small rate cases filed by DuPont 
        in August would be adjudicated under the Board's new simplified 
        guidelines for small- and medium-sized rate cases, and directed 
        DuPont to supplement its complaints as warranted under the new 
        guidelines.
Acquisition of Control
    FD 35031  Fortress Investment Group--Control--Florida East Coast 
Ry.
   9/28/07--Approved the acquisition of control of Florida East 
        Coast Railway by Newco and Fortress Investment Group LLC.
Construction, Acquisition, or Operation of Rail Lines and Facilities
    FD 30186  (Sub-No. 3) Tongue River RR Co.--Construction and 
Operation--Western Alignment
   10/9/07--Approved Tongue River's application for 
        construction and operation of a 17.3-mile rail line in Montana 
        as part of a route previously authorized for construction to 
        move coal out of the Powder River Basin and modified previously 
        imposed environmental conditions.

    FD 34421  HolRail LLC--Construction and Operation Exemption--In 
Orangeburg and Dorchester Counties, SC
   2/12/07--Denied HolRail's petition to cross CSX's right-of-
        way, because HolRail's proposal to construct in the right-of-
        way in the form of a crossing petition was an inappropriate use 
        of the crossing statute, and denied HolRail's request for 
        authority to construct and operate its preferred route.

    FD 34797  New England Transrail--Construction Acquisition and 
Operation Exemption
   7/10/07--Found that New England Transrail would, if 
        authorized, become a rail carrier subject to the Board's 
        jurisdiction, but also found that some of its planned 
        activities related to the handling of construction and 
        demolition debris would extend beyond the scope of rail 
        transportation and therefore would not be subject to Federal 
        preemption from most state and local laws. The Board held an 
        oral argument in this case on 4/19/07.

    FD 34909  CSX, Norfolk Southern and Conrail--Joint Use
   10/5/06--Granted a petition for exemption filed by CSX, 
        Norfolk Southern, and Conrail to provide for the joint use and 
        joint rail freight operations over 7.69 miles of abandoned rail 
        line of the former Staten Island Railway Corporation in New 
        York and New Jersey.

    FD 34986  Ashland RR--Lease and Operation--In Monmouth County, NJ
   8/16/07--Rejected a notice of exemption by Ashland to 
        acquire and operate 1.5 miles of track in Freehold Township 
        because Ashland failed to provide information on whether it 
        proposed to transload solid waste at a facility on the line to 
        be acquired.

    FD 35020  Northern and Bergen RR--Acquisition Exemption--A Line of 
the New York & Greenwood Lake Ry.
   5/25/07--Stayed the effective date of the exemption to 
        provide additional time for the parties to meet to discuss 
        concerns about the rail facility's compliance with health and 
        safety regulations.

   6/25/07--Denied further stay of the exemption.

    FD 35024  et al. Washington State Dept of Transportation--
Acquisition--Palouse River and Coulee City RR
   5/30/07--Granted Washington State DOT authority to acquire a 
        total of 296 miles of rail line from the Palouse River and 
        Coulee City Railroad on an expedited basis in four separate and 
        related transactions.

    FD 35036  Suffolk & Southern Rail Road LLC--Lease and Operation 
Exemption--Sills Road Realty, LLC
   6/1/07--Provided that the exemption in this proceeding would 
        not become effective until further order of the Board and 
        directed Suffolk & Southern to file supplemental information.

   8/13/07--Directed Suffolk & Southern to file supplemental 
        information required in a prior Board decision and to explain 
        why it sought to withdraw its petition filed in this case.

   10/12/07--Reopened proceeding in light of evidence that 
        construction of intended rail facilities may be occurring 
        despite prior reports appearing designed to give a different 
        impression and directed that any construction activities cease 
        until the Board either grants construction authority or rules 
        that no authority is needed.

    FD 35042  U.S. Rail Corp--Lease and Operation Exemption--Shannon G.
   6/15/07--Ordered that the proposed exemption would not 
        become effective until further order of the Board and directed 
        U S Rail to file supplemental information.

    FD 35063  Michigan Central Railway--Acquisition And Operation 
Exemption--Norfolk Southern
   8/2/07--Commenced a proceeding to consider the petition of 
        Michigan Central Railway to exempt its acquisition and 
        operation of certain railroad lines of the Norfolk Southern 
        Railway Company in Michigan and Indiana.

    FD 35068  Soo Line RR Co. d/b/a Canadian Pac. Ry.--Acquisition and 
Operation--BNSF Ry.
   9/07/07--Granted a petition for Soo to acquire BNSF's 
        interest in and to operate 36.26 miles of rail line in North 
        Dakota previously jointly owned by CP and BNSF and to acquire 
        and operate a contiguous 9.96-mile line owned by BNSF.
Unreasonable Practice Complaints
    No. 42060 (Sub-No. 1)  North America Freight Car Association v. 
BNSF Ry. Co.
   1/26/07--Denied complaint challenging storage and demurrage 
        charges on empty private freight cars when held on BNSF 
        property beyond a ``free time'' period. Complainants had 
        alleged that the imposition of such charges, which had not been 
        imposed in the past, was an unreasonable practice, constituted 
        a failure to furnish adequate car service, violates 
        requirements regarding demurrage charges, and violates the 
        shipper allowance provisions.
Requests for Declaratory Order
    FD 34527  Maumee & Western RR Co.--Pet. for Dec. Order--CSXT 
Crossing Rights at Defiance, OH
   5/9/07--Granted request for declaratory order and found that 
        CSXT is obligated to restore the crossing diamonds it had 
        removed at Defiance, unless the parties agree to a different 
        crossing arrangement.

    FD 34818  City of Jersey City, et al.--Pet. for Dec. Order
   8/9/07--Determined that Conrail needs abandonment 
        authorization from the Board before it may transfer ownership 
        of the pertinent property for nonrail use.

    FD 34865  Arkansas Midland Railroad Company--Pet. for Dec. Order--
Caddo Valley RR Co.
   5/2/07--Found that the right of first refusal under 49 
        U.S.C. 10907(h) [under which a railroad forced to sell its rail 
        line under the feeder line railroad provisions has a right of 
        first refusal if the line is subsequently sold] applies in a 
        situation where the stock of the feeder line buyer is proposed 
        to be sold instead of the asset (line) itself.

    FD 34914  T3DesertXpress--Pet. for Dec. Order
   6/27/07--Granted DesertXpress' petition, finding that its 
        proposed construction is not subject to state and local 
        environmental review, land use restrictions, or other 
        discretionary permitting requirements because of Federal 
        preemption.

    FD 35021  Union Pac. RR Co.--Petition for Declaratory Order
   5/16/07--Denied a request by UP for a declaratory order as 
        to whether ``Option 2 of Circular 111'' (a rate made available 
        by the UP to its customers which depended upon certain 
        commitments from both carrier and shipper as to term, volume, 
        rates and service) was a contract or a tariff. The Board denied 
        the railroad's request on the grounds that such a determination 
        depended on the facts surrounding the execution of each 
        particular Option 2 agreement, and those facts were not placed 
        before the Board.
Forced Sale and Alternative Service
    AB-556 (Sub-No. 2)  Railroad Ventures--Abandonment Exemption--
Between Youngstown, OH, and Darlington, PA
   2/15/07--Reversed the Board's prior decision to the extent 
        that it had considered newly introduced evidence pertaining to 
        certain expenditures and tentatively concluded that none of the 
        $375,000 portion of the purchase price set aside for repairs 
        need be turned over to Railroad Ventures.

    FD 34890  PYCO--Feeder Line Application
   8/31/07--Ordered South Plains Switching to sell its rail 
        lines in Lubbock, TX, to either PYCO Industries or Keokuk 
        Junction Railway under the terms set by the Board pursuant to 
        49 U.S.C. 10907.

    FD 34917  Pioneer Industrial Railway Company--Alternative Service 
Request--Central Illinois Railroad Company
   1/12/07--Denied request for Pioneer to provide alternative 
        rail service over line of Central Illinois but reopened a prior 
        decision granting an adverse discontinuance application that 
        sought removal of Pioneer as a carrier authorized to serve the 
        line.
Motor Carrier Cases
    MC-F-21020  FirstGroup plc--Acquisition--Laidlaw International, 
Inc.
   4/5/07--Approved, subject to opposing comments being 
        submitted, the application of FirstGroup, plc to acquire 
        Laidlaw International, Inc., the parent of Greyhound Lines, 
        Inc. No opposing comments were received, and the decision 
        therefore became effective 5/21/07.

    RR 999 (Amendment No. 4 to Released Rates Decision No. MC-999)  
Released Rates of Motor Common Carriers of Household Goods
   6/13/07--Decision amended the Board's previous decisions 
        authorizing motor carriers of household goods to offer 
        ``released rates,'' under which they limit their cargo 
        liability, to comport with a statutory change in the standard 
        liability of motor carriers for damage to, or loss of, the 
        household goods they transport.

    RR 999 (Amendment No. 5 to Released Rates Decision No. MC-999)  
Released Rates of Motor Common Carriers of Household Goods
   6/13/07--Decision proposed, and sought comment on, three 
        changes to the Board's released rates authorization to enhance 
        the protection of consumers whose household goods are damaged 
        or lost by motor common carriers.
Pipeline Cases
    NOR 42084  CF Industries v. Kaneb Pipe Line
   11/21/06--Granted the parties' joint motion to approve their 
        settlement agreement without condition and place it under seal.
Water Carrier Cases
    WCC 101  Guam v. Sea-Land Service et al.
   2/02/07--Denied carriers' motion to dismiss and ordered 
        carriers to submit all additional evidence regarding effective 
        competition in the Guam market by March 19, 2007, and ordered 
        the Government of Guam (GovGuam) to submit its reply by April 
        18, 2007.

   8/30/07--Denied petitions for reconsideration filed by 
        GovGuam and the Caribbean Shippers Association and modified the 
        procedural schedule.

   10/12/07--Granted GovGuam's motion to dismiss its complaint.
Hearings
    EP 665  Rail Transportation of Grain
   11/02/06--The Board held a public hearing as a forum for 
        interested persons to provide views and information about the 
        market conditions pertaining to rail transportation of grain.

    EP 646 (Sub-No. 1)  Simplified Standards for Rail Rate Cases
   1/31/07--The Board held a hearing regarding proposed changes 
        to its procedures for determining the reasonableness of 
        challenged railroad rates in those small- and medium-sized 
        cases in which a full stand-alone cost (SAC) presentation is 
        too costly.

    EP 664  Methodology to be Employed in Determining the Rail 
Industry's Cost Of Capital
   2/15/07--The Board held a hearing regarding the appropriate 
        methodology to be employed by the Board in determining the 
        railroad industry's estimated cost of capital, which would then 
        be used by the agency in future, annual cost-of-capital 
        decisions.

    EP 671  Rail Capacity and Infrastructure Requirements
   4/11/07--The Board held a hearing as a forum for interested 
        persons to provide views and information about: rail-freight 
        traffic forecasts; the extent of capacity constraints and the 
        ability of railroads to meet rising demand; the infrastructure 
        investment needed to ensure that the Nation's freight-rail 
        system continues to operate in an efficient and reliable 
        manner; possible solutions to the challenges presented by 
        growing rail traffic and limited capacity; and the potential 
        role of public-private partnerships and innovative financing 
        tools in meeting these challenges.

    FD 34797  New England Transrail--Construction Acquisition and 
Operation Exemption
   4/19/07--The Board held an oral argument in the New England 
        Transrail case to permit the parties of record to discuss the 
        extent to which NET's planned activities would constitute 
        transportation by rail carrier and thus lie within the Board's 
        exclusive regulatory jurisdiction.

    EP 672  Rail Transportation of Resources Critical to the Nation's 
Energy Supply
   7/18/07--The Board held a hearing in Kansas City, Missouri, 
        to provide a public forum for examination of issues related to 
        the efficiency and reliability of railroad transportation of 
        resources critical to the Nation's energy supply, including 
        coal, ethanol and biofuels.
                              Attachment 2
                 STB's Record in Court--Since 10/1/2006
Cases Decided on the Merits
    Mayo Foundation v. STB (8th Cir. No. 06-2031). Rail Line 
Constructions. In response to challenges brought by various 
environmental groups, community interests located along the line, and 
others, the court upheld an STB decision on remand re-authorizing 
Dakota Minnesota & Eastern to construct a rail line to serve coal mines 
in the Powder River Basin. (4 petitions embraced.) 472 F.3d 545.

    Springfield Term. Ry. v. STB (D. Mass. No. 04-12705-RGS). Rail 
charges. In response to a challenge brought by a rail carrier, the 
court upheld an STB decision addressing court-referred issues as to 
when a claim for car mileage allowance accrues. (2 petitions embraced.) 
472 F. Supp. 2d 89.

    Black et al., v. STB (6th Cir. No. 06-3045). Rail Labor Protection. 
In response to a challenge brought by individual employees who were not 
supported by their union, the court upheld an STB decision declining to 
overturn a labor arbitration ruling. 476 F.3d 409.

    American Orient Express Ry. v. STB (D.C. Cir. Nos. 06-1077 & 06-
1080). Rail Passenger Service. In response to a challenge brought by a 
business that operates passenger services over lines owned by Amtrak 
and other rail carriers, the court upheld an STB decision finding that 
petitioner is a rail carrier subject to Board jurisdiction. (2 
petitions embraced.) 484 F.3d 554.

    Otter Tail Power Co. v. STB (8th Cir. No. 06-1962). Rail Rates. In 
response to a challenge brought by a shipper, the court upheld an STB 
decision finding that challenged rates had not been shown to be 
unreasonably high. (3 petitions embraced.) 484 F.3d 959.

    DHX, Inc. v. STB (9th Cir. No. 05-74592). Water Carrier practices. 
The court upheld an STB decision denying a freight forwarder's 
challenge to rates and practices of two water carriers serving Hawaii.
Pending Cases
    Northern Plains Resource Council v. STB (9th Cir. Nos. 97-1011, 97-
70099, 97-70217, & 97-70037). Rail Line Construction. Challenges 
brought by property owners and others to an STB decision approving the 
construction and operation of the Tongue River rail line in Montana. 
Case held in abeyance. (4 petitions embraced.)

    Railroad Ventures v. STB (6th Cir. No. 05-3157). Rail Abandonments; 
OFA Sales. Challenge brought by a business that bought a rail line, but 
then provided poor service, to an STB decision regarding one of the 
terms and conditions for the forced sale of the rail line under offer 
of financial assistance procedures.

    District of Columbia v. STB (D.C. Cir. No. 05-1220). Preemption. 
Challenge brought by the District of Columbia government and the Sierra 
Club to an STB decision declaring that an act of the District of 
Columbia seeking to govern the transportation of hazardous materials 
moving by rail through the District is preempted by the Interstate 
Commerce Act. (2 petitions embraced)

    Kershaw Sunnyside Ranches et al., v. STB (9th Cir. No. 05-76364). 
Adverse Abandonment. Challenge brought by a landowner to an STB 
decision denying an application for adverse abandonment of rail track 
running through a portion of its property.

    Tri-State Brick & Stone of N.Y. v. STB (D.C. Cir. No. 06-1334). 
Preemption. Challenge by a business that leases property next to a rail 
yard to an STB decision finding that the petitioner is not a rail 
carrier and thus not protected from state and local land use laws.

    BNSF Ry. v. STB (D.C. Cir. Nos. 06-1372 et al.). Rail Rates. 
Challenges by various large rail carriers, a carrier association, and a 
shipper group to an STB rulemaking decision modifying the standards and 
procedures for addressing large rail rate disputes. (4+ petitions 
embraced.)

    Western Coal Traffic League v. STB (D.C. Cir. No. 07-1064). 
Railroad Cost of Capital. Challenge by a shipper group to an STB 
decision applying established procedure for determining cost of capital 
for railroad industry in 2005, while exploring in a separate rulemaking 
whether current method for computing cost of equity should be replaced 
with some other technique.

    North Am. Freight Car Ass'n v. STB (D.C. Cir. No. 07-1070). Rail 
Charges. Challenge by a group of railcar owners to an STB decision 
denying complaint against a carrier's imposition of storage and 
demurrage charges on empty private freight cars.

    HolRail LLC v. STB (D.C. Cir. No. 07-1088). Rail Crossing. 
Challenge by a shipper-owned new rail carrier to an STB decision 
denying request to invoke the crossing statute to use another carrier's 
right-of-way in connection with the proposed construction of a new rail 
line.

    Caddo Valley Railroad Co. v. STB (8th Cir. No. 07-2066). Feeder 
Line Sale. Challenge by a small rail carrier to an STB decision finding 
that the statutory right of first refusal to repurchase the line 
applied to the sale of the entire stock of the business.

    CSX Transportation, Inc., et al., v. STB (D.C. Cir. No. 07-1369). 
Small Rate Guidelines. Challenges by four large railroads and a 
railroad association to the newly modified small rate guidelines. (5 
petitions embraced.)

    212 Marin Boulevard, LLC, et al., v. STB (D.C. Cir. No. 07-1397). 
STB jurisdiction. Challenge by rail carrier and property developers to 
an STB decision finding that certain property sold to a developer for 
residential housing is part of a line of railroad that remains subject 
to STB jurisdiction until abandonment authority is obtained. (2 
petitions embraced.)

    Senator Lautenberg. Thank you very much.
    Now we have Ms. Hecker, please? Thank you. And, also, the 
3-minute rule, if you can keep an eye on that. Thank you.

           STATEMENT OF JayEtta Z. HECKER, DIRECTOR,

                PHYSICAL INFRASTRUCTURE ISSUES,

          U.S. GOVERNMENT ACCOUNTABILITY OFFICE (GAO)

    Ms. Hecker. Certainly.
    Thank you, Mr. Chairman and other members of the Committee. 
I am very pleased to be here. I'm actually speaking on a body 
of work that we've done for this committee that included a 
comprehensive, very intensive review, a 25-year retrospective 
on the Staggers Act, looking at what's happened to rates, 
looking at what happened to competition, and looking at the 
performance of the STB. And I'll summarize some of the comments 
in each of those areas, very quickly.
    The story on rates, I think, as many of you know, they've 
generally declined since 1985 in most of the commodities. But, 
most recently, since 2001, they have started to tick up. And, 
in fact, in 2005, there was the largest annual increase in the 
20-year period. So, there has been a 9-percent annual increase 
in rates just between 2004 and 2005. But rates, overall, are 
still below 1985 levels and the level of inflation.
    On the other hand, on the rate issue, as you know, 
railroads have shifted many costs to shippers, such as car 
ownership. And there is a category of reporting that is 
required, called ``miscellaneous revenue,'' and this category 
has actually increased more than tenfold between 2000 and 2005, 
from a little over 100 million to 1.7 billion. This has led us 
to recommend that STB revise its data collection so that there 
is more accurate and consistent reporting on railroad revenue 
data.
    On the captivity issue, there are real challenges in 
accurately measuring captivity, and our comprehensive review of 
all the data and all the trends and all the correlations 
continue to raise questions whether there are pockets of 
potentially captive shippers who are paying much higher rates. 
At the same time, as many of you know, it's pretty clear that 
captive shippers really do not have an effective relief process 
in the way the STB has been working. So, while these pockets 
are there, and the Staggers Act clearly contemplated that there 
would be some access, there would be some places where 
competition might not work, that that opportunity should be 
there for relief, there has been little relief in the 25 years 
since the Act.
    That led us to recommend a rigorous analysis by the STB of 
the state of competition, not adjudicate, not wait for cases to 
come in, not on a reactive basis, but take a comprehensive 
review. And it was our view that they had the authority to do 
that. We actually had some debate with them, and there were 
early views that, ``Oh, no, that's not within our authority,'' 
and we very clearly defended that recommendation, and we're 
very pleased that the Board has, in fact, ultimately, agreed. 
Although they're not doing the study themselves, they've let a 
contract, and they have a contractor doing this national review 
of the state of competition.
    Our concern was that it really is time to get some 
comprehensive data, not the kind of sample overview data that 
we could collect, but to really determine whether these rates 
represent the real market forces--there is a strained 
congestion and capacity problem, so that there are some real 
factors to rate increases--or whether these really represented 
abuse of market power. So, we're very pleased that that 
recommendation is being followed.
    We also recommended, as I said, some data improvements, and 
there has been some, but not very complete, response to our 
recommendation. And, on the concern for relief, there has been 
some effort, as the Chairman outlined; and many of those, it's 
really too soon to tell whether those changes will really 
result in meaningful relief.
    Thank you, Mr. Chairman.
    [The prepared statement of Ms. Hecker follows:]

      Prepared Statement of JayEtta Z. Hecker, Director, Physical 
   Infrastructure Issues, U.S. Government Accountability Office (GAO)
    Mr. Chairman and members of the Committee:

    We appreciate the opportunity to testify on the freight railroad 
industry. As you know, over 25 years ago, Congress transformed Federal 
regulation of the railroad industry. After almost 100 years of economic 
regulation, the railroad industry was in serious economic trouble in 
the 1970s, with rising costs, losses, and bankruptcies. In response, 
Congress passed the Railroad Revitalization and Regulatory Reform Act 
of 1976 and the Staggers Rail Act of 1980. Together, these pieces of 
legislation substantially deregulated the railroad industry. In 
particular, the 1980 Act encouraged greater reliance on competition to 
set rates and gave railroads increased freedom to price their services 
according to market conditions, including the freedom to use 
differential pricing--that is, to recover a greater proportion of their 
costs from rates charged to shippers with a greater dependency on rail 
transportation. At the same time, the 1980 Act anticipated that some 
shippers might not have competitive alternatives--commonly referred to 
as ``captive shippers''--and gave the Interstate Commerce Commission 
(ICC), and later the Surface Transportation Board (STB), the authority 
to establish a process so that shippers could obtain relief from 
unreasonably high rates. However, only a rate that produces revenue 
equal to at least 180 percent of the variable cost of transporting the 
shipment can be challenged.
    Policymakers continue to believe that the Federal Government should 
provide a viable process to protect shippers against unreasonably high 
rates, as well as address competition issues, while still balancing the 
interests of both railroads and shippers. Over the past 10 years, 
significant consolidation has taken place in the freight railroad 
industry, while railroads--particularly Class I railroads \1\--have 
seen their productivity and financial health improve. Railroad 
officials express concern that any attempt to increase economic 
regulation will reduce carriers' ability to earn sufficient revenues 
and limit future infrastructure investment.
---------------------------------------------------------------------------
    \1\ As of 2004, a Class I railroad is any railroad with operating 
revenue above $277.7 million.
---------------------------------------------------------------------------
    Since the passage of the Staggers Rail Act in 1980, we have issued 
several reports on the freight railroad industry.\2\ We issued our most 
recent report in October 2006 and, at your request and the request of 
other members of this Subcommittee, issued an updated report in August 
2007 to include 2005 data that was not yet available in October 2006. 
My comments today are based on those recent reports and will focus 
primarily on the updated information, including (1) recent changes that 
have occurred in railroad rates and how those changes compare to 
changes in rail rates since 1985, (2) the extent of captivity in the 
industry and STB's efforts to protect captive shippers, and (3) STB's 
actions to address our recent recommendations. We reviewed STB 
documents in September and October 2007 to update the information in 
our recent reports and conducted our review in accordance with 
generally accepted government auditing standards.
---------------------------------------------------------------------------
    \2\ See GAO, Freight Railroads: Industry Health Has Improved, but 
Concerns About Competition and Capacity Should Be Addressed, GAO-07-94 
(Washington, D.C.: Oct. 6, 2006) and Freight Railroads: Updated 
Information on Rates and Other Industry Trends, GAO-07-291R 
(Washington, D.C.: Aug. 15, 2007). In addition, see the list of related 
GAO products at the end of this report.
---------------------------------------------------------------------------
In Summary
    While railroad rates have generally declined and declined for most 
shippers since 1985, rates began to increase in 2001. In 2005 rates 
experienced a 9 percent annual increase over 2004 \3\--the largest 
annual increase in twenty years--and rates increased for all 13 
commodities that we reviewed. For example, rates for coal increased by 
nearly 8 percent while rates for grain increased by 8.5 percent. 
However, despite these increases, rates for 2005 remain below their 
1985 levels and below the rate of inflation over the 1985 through 2005 
period. In addition, over 20 years, railroad companies have shifted 
other costs to shippers, including railcar ownership. Revenues that 
railroads report as ``miscellaneous revenue''--a category that includes 
some fuel surcharges--increased more than ten-fold from $141 million in 
2000 to over $1.7 billion in 2005. We have recommended that STB revise 
its data collection methods to more accurately collect data on railroad 
revenue.
---------------------------------------------------------------------------
    \3\ We constructed rate indexes to examine trends in rail rates 
over the 1985 to 2005 period. In our August 2007 report, we reported a 
7 percentage point change in the rate index. Using 1.0 as our 1985 base 
we reported the change 0.8 to 0.87 from 2004-2005. This 7 percentage 
point change translates into an annual increase of 9 percent. In this 
testimony we refer to the annual increase and not the percentage change 
in the rate index.
---------------------------------------------------------------------------
    It is difficult to precisely determine how many shippers are 
``captive'' because available proxy measures can overstate or 
understate captivity. However some data indicate that potentially 
captive traffic appears to have decreased, while at the same time, data 
also indicates that traffic traveling at rates significantly above the 
threshold for rate relief has increased. This trend continued in 2005 
as tonnage and revenue from traffic traveling at rates above the 
statutory threshold for rate relief declined, while a subset of this 
traffic representing traffic traveling at rates substantially above the 
threshold (greater than 300 percent of the variable cost of 
transporting the shipment), increased in 2005. This increase followed 
declines in 2003 and 2004 but continued a general upward trend since 
1985. In October 2006, we reported that STB's efforts to protect 
captive shippers have resulted in little effective relief for those 
shippers. We also reported that economists and shipper groups have 
proposed a number of alternatives to address remaining concerns about 
competition and capacity--however, each of these alternative approaches 
have costs and benefits and should be carefully considered to ensure 
the approach will achieve the important balance set out in the Staggers 
Act of allowing the railroads to earn adequate revenues and invest in 
its infrastructure while assuring protection for captive shippers from 
unreasonable rates.
    STB has taken some actions to address our past recommendations, but 
it is too soon to determine the effect of these actions. Our October 
2006 report noted that the continued existence of pockets of 
potentially ``captive shippers'' raised questions as to whether rail 
rates in selected markets reflected justified and reasonable pricing 
practices, or an abuse of market power by the railroads. Based on STB's 
statutory authority to adjudicate unreasonable rates and to inquire 
into and report on railroad practices, we recommended that the Board 
undertake a rigorous analysis of competitive markets to identify the 
state of competition nationwide and to determine in specific markets 
whether the inappropriate exercise of market power is occurring and, 
where appropriate, to consider the range of actions available to 
address such problems. STB has awarded a contract to conduct this study 
and we commend STB for taking this action. It will be important that 
these analysts have the ability that STB has through its statutory 
authority to inquire into railroad practices as well as sufficient 
access to information to determine whether rail rates in selected 
markets reflect justified and reasonable pricing practices or an abuse 
of market power by the railroads. The Chairman of the STB recently 
testified that these analysts would have that authority and access. We 
also recommended that STB ensure that all freight railroads are 
consistently and accurately reporting all revenues collected from 
shippers. While STB has revised its rules on establishing and 
collecting fuel surcharges, these rules did not address how surcharges 
are reported in the Carload Waybill Sample and STB has not yet taken 
steps to accurately collect data on other miscellaneous revenues. STB 
has also taken a number of steps to revise its rate relief process. 
While these appear to be positive steps, it is too soon to tell what 
effect these changes will have and we have not evaluated the effect of 
these changes.
Background
    In the past, the ICC regulated almost all of the rates that 
railroads charged shippers. The Railroad Revitalization and Regulatory 
Reform Act of 1976 and the Staggers Rail Act of 1980 greatly increased 
reliance on competition to set rates in the railroad industry. 
Specifically, these Acts allowed railroads and shippers to enter into 
confidential contracts that set rates and prohibited ICC from 
regulating rates where railroads had either effective competition or 
rates negotiated between the railroad and the shipper. Furthermore, the 
ICC Termination Act of 1995 abolished ICC and transferred its 
regulatory functions to STB. Taken together, these Acts anchor the 
Federal Government's role in the freight rail industry by establishing 
numerous goals for regulating the industry, including to:

   allow, to the maximum extent possible, competition and 
        demand for services to establish reasonable rates for 
        transportation by rail;

   minimize the need for Federal regulatory control over the 
        rail transportation system and require fair and expeditious 
        regulatory decisions when regulation is required;

   promote a safe and efficient rail transportation system by 
        allowing rail carriers to earn adequate revenues, as determined 
        by STB;

   ensure the development and continuation of a sound rail 
        transportation system with effective competition among rail 
        carriers and with other modes to meet the needs of the public 
        and the national defense;

   foster sound economic conditions in transportation and 
        ensure effective competition and coordination between rail 
        carriers and other modes;

   maintain reasonable rates where there is an absence of 
        effective competition and where rail rates provide revenues 
        that exceed the amount necessary to maintain the rail system 
        and attract capital;

   prohibit predatory pricing and practices to avoid undue 
        concentrations of market power; and

   provide for the expeditious handling and resolution of all 
        proceedings.

    While the Staggers Rail and ICC Termination Acts reduced regulation 
in the railroad industry, they maintained STB's role as the economic 
regulator of the industry. The Federal courts have upheld STB's general 
powers to monitor the rail industry, including its ability to subpoena 
witnesses and records and to depose witnesses. In addition, STB can 
revisit its past decisions if it discovers a material error, or new 
evidence, or if circumstances have substantially changed.
    Two important components of the current regulatory structure for 
the railroad industry are the concepts of revenue adequacy and demand-
based differential pricing. Congress established the concept of revenue 
adequacy as an indicator of the financial health of the industry. STB 
determines the revenue adequacy of a railroad by comparing the 
railroad's return on investment with the industry-wide cost of capital. 
For instance, if a railroad's return on investment is greater than the 
industry-wide cost of capital, STB determines that railroad to be 
revenue adequate. Historically, ICC and STB have rarely found railroads 
to be revenue adequate--a result that many observers relate to 
characteristics of the industry's cost structure. Railroads incur large 
fixed costs to build and operate networks that jointly serve many 
different shippers. Some fixed costs can be attributed to serving 
particular shippers, and some costs vary with particular movements, but 
other costs are not attributable to particular shippers or movements. 
Nonetheless, a railroad must recover these costs if the railroad is to 
continue to provide service over the long run. To the extent that 
railroads have not been revenue adequate, they may not have been fully 
recovering these costs.
    The Staggers Rail Act recognized the need for railroads to use 
demand-based differential pricing to promote a healthy rail industry 
and enable it to raise sufficient revenues to operate, maintain and, if 
necessary, expand the system in a deregulated environment. Demand-based 
differential pricing, in theory, permits a railroad to recover its 
joint and common costs--those costs that exist no matter how many 
shipments are transported, such as the cost of maintaining track--
across its entire traffic base by setting higher rates for traffic with 
fewer transportation alternatives than for traffic with more 
alternatives. Differential pricing recognizes that some customers may 
use rail if rates are low--and have other options if rail rates are too 
high or service is poor. Therefore, rail rates on these shipments 
generally cover the directly attributable (variable) costs, plus a 
relatively low contribution to fixed costs. In contrast, customers with 
little or no practical alternative to rail--``captive'' shippers--
generally pay a much larger portion of fixed costs. Moreover, even 
though a railroad might incur similar incremental costs while providing 
service to two different shippers that move similar volumes in similar 
car types traveling over similar distances, the railroad might charge 
the shippers different rates. Furthermore, if the railroad is able to 
offer lower rates to the shipper with more transportation alternatives, 
that shipper still pays some of the joint and common costs. By paying 
even a small part of total fixed cost, competitive traffic reduces the 
share of those costs that captive shippers would have to pay if the 
competitive traffic switched to truck or some other alternative. 
Consequently, while the shipper with fewer alternatives makes a greater 
contribution toward the railroad's joint and common costs, the 
contribution is less than if the shipper with more alternatives did not 
ship via rail.
    The Staggers Rail Act further requires that the railroads' need to 
obtain adequate revenues to be balanced with the rights of shippers to 
be free from, and to seek redress from, unreasonable rates. Railroads 
incur variable costs--that is, the costs of moving particular 
shipments--in providing service. The Staggers Rail Act stated that any 
rate that was found to be below 180 percent of a railroad's variable 
cost for a particular shipment could not be challenged as unreasonable 
and authorized ICC, and later STB, to establish a rate relief process 
for shippers to challenge the reasonableness of a rate. STB may 
consider the reasonableness of a rate only if it finds that the carrier 
has market dominance over the traffic at issue--that is, if (1) the 
railroad's revenue is equal to or above 180 percent of the railroad's 
variable cost (R/VC); and (2) the railroad does not face effective 
competition from other rail carriers or other modes of transportation.
Rail Rates Have Increased Recently But Have Generally Declined Since 
        1985, While Railroads Have Shifted Other Costs to Shippers
    Rail rates have generally declined since 1985, but experienced a 9 
percent annual increase between 2004 and 2005--the largest annual 
increase in 20 years. Although rates have generally declined, railroads 
have also shifted other costs to shippers, such as the cost of rail car 
ownership, and have increased the revenue they report as miscellaneous 
more than 10-fold between 2000 and 2005.
Rail Rates Have Recently Increased But Generally Declined Since 1985
    Following a period of general decline since 1985, rates began to 
increase in 2001. Rates experienced a 9 percent annual increase from 
2004-2005, which represents the largest annual increase in rates during 
the 20-year period from 1985 through 2005. This annual increase also 
outpaced inflation--about 3 percent in 2005. However, despite these 
increases, rates for 2005 remain below their 1985 levels and below the 
rate of inflation for the 1985 through 2005 period, and rates overall 
have declined since 1985.\4\ Because the set of rail rate indexes we 
used to examine trends in rail rates over time does not account for 
inflation we also included the price index for the gross domestic 
product (GDP) in Figure 1.
---------------------------------------------------------------------------
    \4\ We constructed rate indexes to examine trends in rail rates 
over the 1985 to 2005 period. These indexes define traffic patterns for 
a given commodity in terms of census region to census region flows of 
that commodity, and we calculated the average revenue per ton-mile for 
each of these traffic flows. The index is calculated as the weighted 
average of these traffic flows in each year, expressed as a percentage 
of the value for 1985, where the weights reflect the traffic patterns 
in 2005. By fixing the weights as of one period of time, we attempted 
to measure pure price changes rather than calculating the average 
revenue per ton-mile in each year. Over time, changes in traffic 
patterns could result in a substitution of lower priced traffic for 
higher priced traffic, or vice versa, so that a decrease in average 
revenue per ton-mile might partly reflect this change in traffic 
patterns. The rate index for the overall industry was defined 
similarly, except that the traffic pattern bundle was defined in terms 
of broad commodity, census region of origin, and mileage block 
categories. For comparison, we also present the price index for gross 
domestic product over this period.



    Source: GAO analysis of STB data.
While Generally Declining over the Long Term, Rates for Several 
        Commodities Have Increased in Recent Years
    Similar to overall industry trends, rates for individual 
commodities have increased from 2004-2005. In 2005, rates increased for 
all 13 commodities that we reviewed. Rates for coal increased by 7.9 
percent while rates for grain increased by 8.5 percent. In 2005, the 
largest rate increase (for fireboard and paperboard) exceeded 11 
percent, while the smallest increase (for motor vehicles) was about 2.7 
percent. Figure 2 depicts rate changes for coal, grain, miscellaneous 
mixed shipments, and motor vehicles from 1985 through 2005.



    Source: GAO analysis of STB data.
Railroads Have Shifted Costs to Shippers
    In 2005, freight railroad companies continued a trend of shifting 
other costs to shippers. Our analysis shows a 20 percentage point 
increase shift in railcar ownership (measured in tons carried) since 
1987. In 1987, railcars owned by freight railroad companies moved 60 
percent of tons carried. In 2005, they moved 40 percent of tons 
carried, meaning that freight railroad company railcars no longer carry 
the majority of tonnage (see Fig. 3).



    Source: GAO analysis of STB data.
Reported Miscellaneous Revenue, Including Fuel Surcharges, Increased 
        Ten-Fold Since 2000
    In 2005 the amount of industry revenue reported as miscellaneous 
increased ten-fold over 2000 levels, rising from about $141 million to 
over $1.7 billion (see Fig. 4). Miscellaneous revenue is a category in 
the Carload Waybill Sample for reporting revenue outside the standard 
rate structure. This miscellaneous revenue can include some fuel 
surcharges,\5\ as well as revenues such as those derived from 
congestion fees and railcar auctions (in which the highest bidder is 
guaranteed a number of railcars at a specified date). In 2004, 
miscellaneous revenue accounted for 1.5 percent of freight railroad 
revenue reported. In 2005, this percentage had risen to 3.7 percent. 
Also, in 2005, 20 percent of all tonnage moved in the United States 
generated miscellaneous revenue.
---------------------------------------------------------------------------
    \5\ Fuel surcharges are charges associated with recouping the cost 
of fuel.



    Source: GAO analysis of STB data.
Captive Shippers Are Difficult To Identify But Concerns Remain and Past 
        STB Actions Have Led to Little Effective Relief
    In October 2006 and August 2007, we reported that captive shippers 
are difficult to identify and STB's efforts to protect captive shippers 
have resulted in little effective relief for those shippers. We also 
reported that economists and shipper groups have proposed a number of 
alternatives to address remaining concerns about competition--however, 
each of these alternative approaches have costs and benefits and should 
be carefully considered to ensure the approach will achieve the 
important balance set out in the Staggers Act.
Captive Shippers Remain Difficult To Identify, But Some Measures 
        Indicate Captivity Is Dropping in the Railroad Industry
    It remains difficult to determine precisely how many shippers are 
``captive'' to one railroad because the proxy measures that provide the 
best indication can overstate or understate captivity. One measure of 
potential captivity--traffic traveling at rates equal to or greater 
than 180 percent R/VC--is part of the statutory threshold for bringing 
a rate relief case before STB.\6\ STB regards traffic at or above this 
threshold as ``potentially captive,'' but, like other measures, R/VC 
levels can understate or overstate captivity.\7\ Since 1985, tonnage 
and revenue from traffic traveling at rates over 180 percent R/VC have 
generally declined, while traffic traveling at rates substantially over 
the threshold for rate relief (greater than 300 percent R/VC) has 
generally increased. This trend continued in 2005, as industry revenue 
generated by traffic traveling at rates over 180 percent R/VC dropped 
by roughly half a percent. Tonnage traveling at rates over 180 percent 
R/VC dropped by a smaller percentage.
---------------------------------------------------------------------------
    \6\ Another condition of bringing a rate relief case before STB is 
a railroad not facing effective competition from other rail carriers or 
other modes of transportation.
    \7\ For example, it is possible for the R/VC ratio to increase 
while the rate paid by a shipper is declining. Assume that in Year 1, a 
shipper is paying a rate of $20 and the railroad's variable cost is 
$12; the R/VC ratio--a division of the rate and the variable cost--
would be 167 percent. If in Year 2, the variable costs decline by $2 
from $12 to $10 and the railroad passes this cost savings directly on 
to the shipper in the form of a reduced rate, the shipper would pay $18 
instead of $20. However, because both revenue and variable cost 
decline, the R/VC ratio--$18 divided by $10--increases to 180 percent.



---------------------------------------------------------------------------
    Source: GAO analysis of STB data.

    Traffic traveling at rates substantially over the threshold for 
rate relief has generally increased from 1985 to 2005 (see Fig. 6). In 
2003 and 2004, the percentage of both tonnage and revenue traveling at 
rates above 300 percent R/VC declined from the previous year, but each 
increased again in 2005. For example, the share of tonnage traveling at 
rates over 300 percent R/VC increased from 6.1 percent in 2004 to 6.4 
percent in 2005. Figure 6 shows tonnage traveling at rates above 300 
percent R/VC from 1985 through 2005.



    Source: GAO analysis of STB data.

    Some areas with access to one Class I railroad also have more than 
half of their traffic traveling at rates that exceed the statutory 
threshold for rate relief. For example, parts of New Mexico and Idaho 
with access to one Class I railroad had more than half of all traffic 
originating in those same areas traveling at rates over 180 percent R/
VC. However, we also found instances in which an economic area may have 
access to two or more Class I railroads and still have more than 75 
percent of its traffic traveling at rates over 180 percent R/VC, as 
well as other instances in which an economic area may have access to 
one Class I railroad and have less than 25 percent of its traffic 
traveling at rates over 180 percent R/VC.
STB Has Taken Actions To Protect Captive Shippers But Efforts Have Led 
        to Little Effective Relief
    STB has taken a number of actions to provide relief for captive 
shippers. While the Staggers Rail and ICC Termination Acts encourage 
competition as the preferred way to protect shippers and to promote the 
financial health of the railroad industry, they also give STB the 
authority to:

   adjudicate rate cases to resolve disputes between captive 
        shippers and railroads upon receiving a complaint from a 
        shipper;

   approve rail transactions, such as mergers, consolidations, 
        acquisitions, and trackage rights;

   prescribe new regulations, such as rules for competitive 
        access and merger approvals; and

   inquire into and report on rail industry practices, 
        including obtaining information from railroads on its own 
        initiative and holding hearings to inquire into areas of 
        concern, such as competition.

    Under its adjudicatory authority, STB has developed standard rate 
case guidelines, under which captive shippers can challenge a rail rate 
and appeal to STB for rate relief. Under the standard rate relief 
process, STB assesses whether the railroad dominates the shipper's 
transportation market and, if it finds market dominance, proceeds with 
further assessments to determine whether the actual rate the railroad 
charges the shipper is reasonable. STB requires that the shipper 
demonstrate how much an optimally efficient railroad would need to 
charge the shipper and construct a hypothetical, perfectly efficient 
railroad that would replace the shipper's current carrier. As part of 
the rate relief process, both the railroad and the shipper have the 
opportunity to present their facts and views to STB, as well as to 
present new evidence.
    STB also created alternatives to the standard rate relief process, 
developing simplified guidelines, as Congress required, for cases in 
which the standard rate guidelines would be too costly or infeasible 
given the value of the cases. Under these simplified guidelines, 
captive shippers who believe that their rate is unreasonable can appeal 
to STB for rate relief, even if the value of the disputed traffic makes 
it too costly or infeasible to apply the standard guidelines.
    Despite STB's efforts, we reported in 2006 that there was 
widespread agreement that STB's standard rate relief process was 
inaccessible to most shippers and did not provide for expeditious 
handling and resolution of complaints. The process remained expensive, 
time consuming, and complex. Specifically, shippers we interviewed 
agreed that the process could cost approximately $3 million per 
litigant. In addition, shippers said that they do not use the process 
because it takes so long for STB to reach a decision. Last, shippers 
stated that the process is both time consuming and difficult because it 
calls for them to develop a hypothetical competing railroad to show 
what the rate should be and to demonstrate that the existing rate is 
unreasonable.
    We also reported that the simplified guidelines also had not 
effectively provided relief for captive shippers. Although these 
simplified guidelines had been in place since 1997, a rate case had not 
been decided under the process set out by the guidelines when we issued 
our report in 2006. STB had held public hearings in April 2003 and July 
2004 to examine why shippers have not used the guidelines and to 
explore ways to improve them. At these hearings, numerous organizations 
provided comments to STB on measures that could clarify the simplified 
guidelines, but no action was taken. STB observed that parties urged 
changes to make the process more workable, but disagreed on what those 
changes should be. We reported that several shipper organizations told 
us that shippers were concerned about using the simplified guidelines 
because they believe the guidelines will be challenged in court, 
resulting in lengthy litigation. STB officials told us that they--not 
the shippers--would be responsible for defending the guidelines in 
court. STB officials also said that if a shipper won a small rate case, 
STB could order reparations to the shipper before the case was appealed 
to the courts.
    Since our report in October 2006, STB has taken steps to refine the 
rate relief process. Specifically, in October 2006, STB revised 
procedures for deciding large rate relief cases. By placing restraints 
on the evidence and arguments allowed in these cases, STB predicted 
that the expense and delay in resolving these rate disputes would be 
reduced substantially. In September 2007, STB altered its simplified 
guidelines for small shippers to enable shippers who are seeking up to 
$1 million in rate relief over a 5-year period to receive a STB 
decision within 8 months of filing a complaint. STB also created a new 
rate relief process for medium size shipments to allow shippers who are 
seeking up to $5 million in rate relief over a 5-year period to receive 
a STB decision within 17 months of filing a complaint. Additionally, 
STB also stated that all rail rate disputes would require nonbinding 
mediation.
Shipper Groups and Others Have Suggested Alternative Approaches That 
        Have Costs and Benefits
    Shipper groups, economists, and other experts in the rail industry 
have suggested several alternative approaches as remedies that could 
provide more competitive options to shippers in areas of inadequate 
competition or excessive market power. These groups view these 
approaches as more effective than the rate relief process in promoting 
a greater reliance on competition to protect shippers against 
unreasonable rates. Some proposals would require legislative change, or 
a reopening of past STB decisions.\8\
---------------------------------------------------------------------------
    \8\ Another proposal, articulated by economists Curtis Grimm and 
Cliff Winston, calls for the elimination of STB. This proposal 
recognizes that captive shippers have likely been hurt by a lack of 
competition, but it states that allowing the Department of Justice to 
review rail mergers instead of STB and ending the potential for 
reregulation of the industry could lead railroad officials and shippers 
to negotiate an agreement to address remaining rail competition 
concerns. Curtis Grimm and Clifford Winston, ``Competition in the 
Deregulated Railroad Industry: Sources, Effects, and Policy Issues,'' 
(AEI--Brooking Institution. Washington, D.C.: 2000).
---------------------------------------------------------------------------
    These approaches each have potential costs and benefits. On the one 
hand, they could expand competitive options, reduce rail rates, and 
decrease the number of captive shippers as well as reduce the need for 
both Federal regulation and a rate relief process. On the other hand, 
reductions in rail rates could affect railroad revenues and limit the 
railroads' ability and potential willingness to invest in their 
infrastructure. In addition, some markets may not have the level of 
demand needed to support competition among railroads. It will be 
important for policymakers, in evaluating these alternative approaches, 
to carefully consider the impact of each approach on the balance set 
out in the Staggers Act. The targeted approaches frequently proposed by 
shipper groups and others include the following:

   Reciprocal switching: This approach would allow STB to 
        require railroads serving shippers that are close to another 
        railroad to transport cars of a competing railroad for a fee. 
        The shippers would then have access to railroads that do not 
        reach their facilities. This approach is similar to the 
        mandatory interswitching in Canada, which enables a shipper to 
        request a second railroad's service if that second railroad is 
        within approximately 18 miles. Some Class I railroads already 
        interchange traffic using these agreements, but they oppose 
        being required to do so. Under this approach, STB would oversee 
        the pricing of switching agreements. This approach could also 
        reduce the number of captive shippers by providing a 
        competitive option to shippers with access to a proximate but 
        previously inaccessible railroad and thereby reduce traffic 
        eligible for the rate relief process (see Fig. 7).

        
        
    Source: GAO.

   Terminal agreements: This approach would require one 
        railroad to grant access to its terminal facilities or tracks 
        to another railroad, enabling both railroads to interchange 
        traffic or gain access to traffic coming from shippers off the 
        other railroad's lines for a fee. Current regulation requires a 
        shipper to demonstrate anticompetitive conduct by a railroad 
        before STB will grant access to a terminal by a non-owning 
        railroad unless there is an emergency or when a shipper can 
        demonstrate poor service and a second railroad is willing and 
        able to provide the service requested. This approach would 
        require revisiting the current requirement that railroads or 
        shippers demonstrate anticompetitive conduct in making a case 
        to gain access to a railroad terminal in areas where there is 
        inadequate competition. The approach would also make it easier 
        for competing railroads to gain access to the terminal areas of 
        other railroads and could increase competition between 
        railroads. However, it could also reduce revenues to all 
        railroads involved and adversely affect the financial condition 
        of the rail industry. Also, shippers could benefit from 
        increased competition but might see service decline (see Fig. 
        8).

        
        
    Source: GAO.

   Trackage rights: This approach would require one railroad to 
        grant access to its tracks to another railroad, enabling 
        railroads to interchange traffic beyond terminal facilities for 
        a fee. In the past, STB has imposed conditions requiring that a 
        merging railroad must grant another railroad trackage rights to 
        preserve competition when a merger would reduce a shipper's 
        access to railroads from two to one. While this approach could 
        potentially increase rail competition and decrease rail rates, 
        it could also discourage owning railroads from maintaining the 
        track or providing high-quality service, since the value of 
        lost use of track may not be compensated by the user fee and 
        may decrease return on investment (see Fig. 9).
        

        
    Source: GAO.

   ``Bottleneck'' rates: This approach would require a railroad 
        to establish a rate, and thereby offer to provide service, for 
        any two points on the railroad's system where traffic 
        originates, terminates, or can be interchanged. Some shippers 
        have more than one railroad that serves them at their origin 
        and/or destination points, but have at least one portion of a 
        rail movement for which no alternative rail route is available. 
        This portion is referred to as the ``bottleneck segment.'' 
        STB's decision that a railroad is not required to quote a rate 
        for the bottleneck segment has been upheld in Federal court.\9\ 
        STB's rationale was that statute and case law precluded it from 
        requiring a railroad to provide service on a portion of its 
        route when the railroad serves both the origin and destination 
        points and provides a rate for such movement. STB requires a 
        railroad to provide service for the bottleneck segment only if 
        the shipper had prior arrangements or a contract for the 
        remaining portion of the shipment route. On the one hand, 
        requiring railroads to establish bottleneck rates would force 
        short-distance routes on railroads when they served an entire 
        route and could result in loss of business and potentially 
        subject the bottleneck segment to a rate complaint. On the 
        other hand, this approach would give shippers access to a 
        second railroad, even if a single railroad was the only 
        railroad that served the shipper at its origin and/or 
        destination points, and could potentially reduce rates (see 
        Fig. 10).
---------------------------------------------------------------------------
    \9\ The U.S. Court of Appeals for the Eighth Circuit affirmed STB 
decision that a bottleneck carrier generally need not quote a separate 
rate for the bottleneck portion of the route. Mid-American Energy Co. 
v. Surface Transportation Board, 169 F. 3d 1099 (8th Cir.: Feb. 10, 
1999). The D.C. Circuit affirmed STB holding that separately 
challengeable bottleneck rates can be required whenever a shipper has a 
contract over the nonbottleneck segment of a through movement. Union 
Pacific Railroad v. Surface Transportation Board, 202 F. 3d 337 (D.C. 
Cir.: 2000).



---------------------------------------------------------------------------
    Source: GAO.

   Paper barriers: This approach would prevent or, put a time 
        limit on, paper barriers, which are contractual agreements that 
        can occur when a Class I railroad either sells or leases long 
        term some of its track to other railroads (typically a short-
        line railroad and/or regional railroad). These agreements 
        stipulate that virtually all traffic that originates on that 
        line must interchange with the Class I railroad that originally 
        leased the tracks or pay a penalty. Since the 1980s, 
        approximately 500 short lines have been created by Class I 
        railroads selling a portion of their lines; however, the extent 
        to which paper barriers are a standard practice is unknown 
        because they are part of confidential contracts. When this type 
        of agreement exists, it can inhibit smaller railroads that 
        connect with or cross two or more Class I rail systems from 
        providing rail customers access to competitive service. 
        Eliminating paper barriers could affect the railroad industry's 
        overall capacity since Class I railroads may abandon lines 
        instead of selling them to smaller railroads and thereby 
        increase the cost of entering a market for a would-be 
        competitor. In addition, an official from a railroad 
        association told us that it is unclear if a Federal agency 
        could invalidate privately negotiated contracts (see Fig. 11).
        

        
    Source: GAO.
STB Has Taken Steps To Address Problems, But Actions Are Too Recent To 
        Be Evaluated
    STB has taken some actions to address our past recommendations, but 
it is too soon to determine the effect of these actions. In October 
2006 we reported that the continued existence of pockets of potential 
captivity at a time when the railroads are, for the first time in 
decades, experiencing increasing economic health, raises the question 
whether rail rates in selected markets reflect justified and reasonable 
pricing practices, or an abuse of market power by the railroads. While 
our analysis provided an important first step, we noted that STB has 
the statutory authority and access to information to inquire into and 
report on railroad practices and to conduct a more rigorous analysis of 
competition in the freight rail industry. As a result, we recommended 
that the Board undertake a rigorous analysis of competitive markets to 
identify the state of competition nationwide and to determine in 
specific markets whether the inappropriate exercise of market power is 
occurring and, where appropriate, to consider the range of actions 
available to address such problems.
    STB initially disagreed with our recommendation because it believed 
the findings underlying the recommendation were inconclusive, their on-
going efforts would address many of our concerns, and a rigorous 
analysis would divert resources from other efforts. However, in June 
2007, STB stated that it intended to implement our recommendation using 
funding that was not available at the time of our October report to 
solicit proposals from analysts with no connection to the freight 
railroad industry or STB proceedings to conduct a rigorous analysis of 
competition in the freight railroad industry. On September 13, 2007, 
STB announced that it had awarded a contract for a comprehensive study 
on competition, capacity, and regulatory policy issues to be completed 
by the fall of 2008. We commend STB for taking this action. It will be 
important that these analysts have the ability that STB has through its 
statutory authority to inquire into railroad practices as well as 
sufficient access to information to determine whether rail rates in 
selected markets reflect justified and reasonable pricing practices, or 
an abuse of market power by the railroads. The Chairman of the STB has 
recently testified that these analysts would have that authority and 
access.
    We also recommended that STB review its method of data collection 
to ensure that all freight railroads are consistently and accurately 
reporting all revenues collected from shippers, including fuel 
surcharges and other costs not explicitly captured in all railroad rate 
structures. In January 2007, STB finalized rules that require railroads 
to ensure that fuel surcharges are based on factors directly affecting 
the amount of fuel consumed. In August 2007, STB finalized rules that 
require railroads to report their fuel costs and revenue from fuel 
surcharges. While these are positive steps, these rules did not address 
how surcharges are reported in the Carload Waybill Sample. In addition, 
STB has not taken steps to address collection and reporting of other 
miscellaneous revenues--revenues deriving from sources other than fuel 
surcharges.
    As stated earlier, STB has also taken steps to refine the rate 
relief process since our 2006 report. STB has made changes to the rate 
relief process that it believes will reduce the expense and delay of 
obtaining rate relief. While these appear to be positive steps that 
could address longstanding concerns with the rate relief process, it is 
too soon to determine the effect of these changes to the process, and 
we have not evaluated the effect of these changes.
    Mr. Chairman, this concluded my prepared statement. I would be 
happy to respond to any questions you or other Members of the Committee 
may have at this time.
Related GAO Products
    Freight Railroads: Updated Information on Rates and Competition 
Issues. GAO-07-1245T. Washington, D.C.: Sept. 25, 2007.
    Freight Railroads: Updated Information on Rates and Other Industry 
Trends. GAO-07-291R. Washington, D.C.: Aug. 15, 2007.
    Freight Railroads: Industry Health Has Improved, but Concerns About 
Competition and Capacity Should Be Addressed. GAO-07-94. Washington, 
D.C.: Oct. 6, 2006.
    Freight Railroads: Preliminary Observations on Rates, Competition, 
and Capacity Issues. GAO-06-898T. Washington, D.C.: June 21, 2006.
    Freight Transportation: Short Sea Shipping Option Shows Importance 
of Systematic Approach to Public Investment Decisions. GAO-05-768. 
Washington, D.C.: July 29, 2005.
    Freight Transportation: Strategies Needed to Address Planning and 
Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 2003.
    Railroad Regulation: Changes in Freight Railroad Rates from 1997 
through 2000. GAO-02-524. Washington, D.C.: June 7, 2002.
    Freight Railroad Regulation: Surface Transportation Board's 
Oversight Could Benefit from Evidence Better Identifying How Mergers 
Affect Rates. GAO-01-689. Washington, D.C.: July 5, 2001.
    Railroad Regulation: Current Issues Associated with the Rate Relief 
Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999.
    Railroad Regulation: Changes in Railroad Rates and Service Quality 
Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999.
    Interstate Commerce Commission: Key Issues Need to Be Addressed in 
Determining Future of ICC's Regulatory Functions. GAO-T-RCED-94-261 
Washington, D.C.: July 12, 1994.
    Railroad Competitiveness: Federal Laws and Policies Affect Railroad 
Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991.
    Railroad Regulation: Economic and Financial Impacts of the Staggers 
Rail Act of 1980. GAO/RCED-90-80. Washington, D.C.: May 16, 1990.
    Railroad Regulation: Shipper Experiences and Current Issues in ICC 
Regulation of Rail Rates. GAO/RCED-87-119. Washington, D.C.: September 
9, 1987.
    Railroad Regulation: Competitive Access and Its Effects on Selected 
Railroads and Shippers. GAO/RCED-87-109, Washington, D.C.: June 18, 
1987.
    Railroad Revenues: Analysis of Alternative Methods to Measure 
Revenue Adequacy. GAO/RCED-87-15BR. Washington, D.C.: October 2, 1986.
    Shipper Rail Rates: Interstate Commerce Commission's Handling of 
Complaints. GAO/RCED-86-54FS. Washington, D.C.: January 30, 1986.

    Senator Lautenberg. Thank you.
    I feel badly, I know that you've worked on these statements 
that you're making. They all, in full text, will be accepted 
into the record. So, let me ask your understanding. The rules 
were changed in the middle of the game, unfortunately. So, 
whatever you want to summarize as information, please.
    And the next witness will be Mr. Moorman.

           STATEMENT OF CHARLES W. MOORMAN, CHAIRMAN,

PRESIDENT, AND CEO, NORFOLK SOUTHERN CORPORATION; ON BEHALF OF 
             THE ASSOCIATION OF AMERICAN RAILROADS

    Mr. Moorman. Thank you, Mr. Chairman, members of the 
committee, for the opportunity to testify.
    I'm Wick Moorman. I am the Chief Executive Officer of 
Norfolk Southern Corporation. I'm here today representing not 
only Norfolk Southern, but the members of the Association of 
American Railroads. And I'm very pleased to have a chance to 
testify about what I consider to be one of the central issues 
facing our country for the next 20 years or more, and that is, 
what role will the railroads play in addressing what is clearly 
a looming transportation crisis that we have in this country? 
And my message today is a very simple one: How much investment 
is made in the freight rail system will be largely dependent 
upon the actions of both the Congress and the Surface 
Transportation Board.
    I'll skip a historical overview, although I lived through 
the bad days, pre-Staggers. I'll just simply say that you'll 
recall that, in the 1970s, it was an actively debated issue as 
to whether or not the rail industry would be nationalized.
    Staggers came in, in 1980, and it did two things. The first 
is, it did facilitate the elimination of excess capacity in the 
system, and there was an enormous amount of excess capacity. 
The second was that it provided for differential pricing in our 
industry. And differential pricing is key to making the 
economics of the railroad work, and making them viable. It's 
also important to say that differential pricing is part of 
almost every industry in this country. It's clearly something 
that's employed, and it's part of the market system.
    Well, by any indication, Staggers has been a huge success, 
although it took a while coming. There's a chart up here, you 
can see, about rates. I'll give you some quick numbers. 
Hundreds of billions have been invested in the rail industry 
since then, and the rail industry infrastructure is in the best 
shape it's ever been in. Real rates, adjusted for inflation, 
are down 50 percent over the same period. Productivity is up 
171 percent. And, finally, from the safety perspective--and, I 
will tell you, we put safety first in everything we do--
accident rates are down 80 percent.
    Over the past 3 years, our industry has finally moved to 
the point where we're earning an adequate return, although our 
returns are still below the norm for American industry. And the 
good news is, we're making money; the better news is, we're 
plowing it back into the companies in more and more investment. 
That should be no surprise, and it's a good-news story from 
every perspective, be it reducing highway congestion by working 
with our trucking partners and converting truck traffic to 
intermodal, hiring new workers in unprecedented numbers, 
offering much better service to our customers, and offering a 
much greener alternative, in terms of fuel consumption and 
reduced CO2 and other emissions.
    In sum, we're ready to play an even larger part in 
enhancing our Nation's freight transportation infrastructure, 
and enhancing our Nation's competitiveness.
    Let me just briefly say something about what's happening in 
the regulatory and legislative arena, and that is that the STB, 
which the drafters of Staggers recognized as a mechanism for 
safeguarding against unreasonable rates, is in place, and, as 
you've heard from Chairman Nottingham, is active. For all of 
the people you can find who think that the STB has failed the 
shippers, I would remind you that their other charge was to 
ensure that the railroads earn a long-term adequate return. 
And, if you look at our industry, that's not happened, either. 
And, in fact, if you look at the history of rate cases at the 
STB, over the last 20 years, they've split, about 50-50, 
between shippers and the carriers. Nonetheless, the STB is 
promulgating new regulations that will adversely impact the 
railroad industry, including the rules at the so-called small 
shipper. And, in fact, one such small shipper, E.I. DuPont, has 
filed three rate cases under the new rules.
    S. 953, I will just say that we may disagree, but I think 
that it imposes a regulatory scheme on our railroads, which 
could be worse than pre-Staggers. It would inevitably erode the 
profitability of our railroads. It would erode the investment. 
And it offers the very real possibility of returning us to the 
dark days of 1970.
    Rather, as a public policy, let me urge you to consider S. 
1125, the Infrastructure Tax Credit bill sponsored by Senators 
Lott and Conrad, which, in addition to giving railroads even 
more incentive to invest in new capacity, gives shippers also 
that same credit if they want to invest in new capacity or even 
invest in alternate access to another rail system. It's good 
public policy. It's good for the country.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Moorman follows:]

Prepared Statement of Charles W. Moorman, Chairman, President, and CEO, 
Norfolk Southern Corporation; on Behalf of the Association of American 
                               Railroads
    Chairman Lautenberg, Ranking Member Smith, and Members of the 
Committee, thank you for the opportunity to testify about the railroad 
industry. I am Charles W. Moorman, Chief Executive Officer of Norfolk 
Southern Corporation. I am pleased to represent today the member 
railroads of the Association of American Railroads (``AAR'').
    As you know, the AAR is the world's leading railroad policy, 
research, and technology organization focusing on the safety and 
productivity of rail carriers. AAR members include the major freight 
railroads in the United States, Canada and Mexico, as well as Amtrak 
and several short line holding companies. Based in Washington, D.C., 
the AAR is committed to keeping the railroads of North America safe, 
reliable, efficient, clean, technologically advanced, and secure.
    Norfolk Southern Corporation is a member of the AAR. Norfolk 
Southern is one of the Nation's premier transportation companies. Its 
Norfolk Southern Railway subsidiary operates approximately 21,000 route 
miles in 22 states, the District of Columbia and Ontario, Canada, 
serving every major container port in the eastern United States and 
providing superior connections to western rail carriers. Norfolk 
Southern operates the most extensive intermodal network in the East.
    Although I represent the AAR today, my comments will reflect to 
some extent the experiences of Norfolk Southern. However, I can assure 
you that the examples of infrastructure investment, pervasive 
competition in the transportation marketplace, and real-world examples 
of economics in practice that I provide would be similar to those 
experienced by other railroads.
    In this testimony, I will briefly outline the importance of the 
rail industry to the Nation and of the Staggers Act to the rail 
industry. Next, I will address the vital role railroads play in meeting 
our Nation's transportation needs. Railroads absolutely must continue 
to play an ever-increasing role in our economy as demand for freight 
transportation continues to increase because of our ability to move 
more freight safely, with less fuel, and in a more environmentally-
friendly manner. I then will discuss the substantial investment 
railroads have made to expand their infrastructure to handle more 
freight and how railroads must be able over the long-term to attract 
the necessary resources and to earn a return on their investment. That 
of course is a truism for almost any industry which wishes to maintain 
its infrastructure and to expand to meet the needs of customers, but it 
is particularly relevant given the extraordinary capital requirements 
of our industry. I will examine how extensive and pervasive competition 
is in the transportation marketplace. Finally, I will note that 
legislative and regulatory actions that create disincentives to 
railroads investing in infrastructure are bad policy because they risk 
returning the industry to its pre-1980 state. Even if the results of 
errant policy were not that dramatic, they would undermine our national 
goal of having a transportation system in place to meet the growing 
demand for freight transportation.
I. The Staggers Act of 1980 Has Been a Resounding Success
    The Staggers Act was a historic piece of legislation that gave 
railroads the tools to become an effective component of the national 
transportation system. Among its important elements, the Staggers Act:

   Freed railroads and shippers to negotiate terms and rates 
        for shipments and to enter into confidential contracts outside 
        the regulatory regime;

   Provided for a regulatory backstop when railroads and 
        shippers did not enter into a contract to prevent railroads 
        from abusing any market power over the minority of shippers 
        without effective transportation alternatives;

   Expanded the power of the Interstate Commerce Commission, 
        and now the Surface Transportation Board, to exempt traffic 
        from regulation and encouraged the use of that power; and

   Made it easier for railroads to shed unprofitable lines.

    The results of this statute were vital, but took decades to bear 
fruit and put the industry on a path to greater returns. The successes 
were aided by population and demand growth, which are underscoring the 
need for more of the approaches of Staggers, not less. The fact that 
Staggers injected market influences into the rail industry and 
lightened the regulatory thumb on the industry has been widely 
documented. Railroads' productivity improved, and many of those 
productivity improvements were passed on to shippers. Railroads shed 
unprofitable lines and invested in infrastructure elsewhere. Railroads 
became safer.
    Consider the following analysis performed by the Government 
Accountability Office. In Figure 1, GAO looked at rail rates from 1985 
to 2005 and compared it to the gross domestic product (``GDP'') price 
index.



    Source: GAO analysis of STB data.

    Amazingly, rail rates today are about the same as they were 20 
years ago, even before accounting for inflation. Moreover, as shown in 
Figure 2, GAO's analysis shows that rail rates for nearly all 
commodities are as low as they were in 1985, and rail rates for all 
commodities have increased substantially slower than the gross domestic 
product (``GDP'') price index.




    Source: GAO analysis of STB data.

    The results would be even more dramatic had GAO taken inflation 
into account in its analysis.
    Here are my essential points today:

        1. The U.S. desperately needs more transportation resources, 
        including more railroad resources.

        2. The railroads are the only transportation resource that pays 
        its own way, and the costs are exceptionally high.

        3. To keep paying our way and building to meet the Nation's 
        growing needs, we have to be able to earn fair returns on that 
        substantial investment.

        4. Re-regulation will hurt returns, prevent much new 
        investment, and ultimately hurt service and employment.

        5. Recent STB decisions have the potential for significant 
        negative effects on railroad revenues by giving shippers more 
        expeditious ways of reducing our rates, and in the STB's cost-
        of-capital decision, reducing the costs reflected in rate 
        computations. Indeed, the long-term effects of the latter 
        decision may be quite serious for the industry and for the 
        American transportation system.

        6. We are proud to be the safest, most fuel efficient, and 
        environmentally friendly ground transportation by far.

        7. We want to help take the load off the highways, reduce U.S. 
        fuel demand, and remain one of the true advantages of U.S. 
        manufacturers.

II. Railroads Play a Large Role in the Economy and Are Vital in This 
        Time of Growing Freight Demand
A. Railroads Are a Competitive Advantage for the United States
    Railroads play a critical role in our economy, and their importance 
is growing. Today's freight railroads are among the few genuine 
advantages that U.S.-based manufacturers have compared to overseas 
manufacturers. The commodities the railroads transport are essential to 
the economy. For example, railroads transport:

   More than 70 percent of coal used for electric power;

   35 percent of the grain harvest;

   70 percent of automobiles made in America; and

   21 percent of chemicals.

    Railroads transport these goods efficiently as well. As the World 
Bank's Louis Thompson has noted, ``[b]ecause of a market-based approach 
involving minimal government intervention, today's U.S. freight 
railroads add up to a network that, comparing the total cost to shipper 
and taxpayers, gives the world's most cost-effective freight service.'' 
Put another way, rail freight transportation is one of this country's 
comparative advantages that help us compete in that world economy.
B. Freight Demand Is Growing, But the Ability for Highways to Grow Is 
        Limited
    The demand for freight transportation is growing and will continue 
to grow. The Department of Transportation has estimated that the demand 
for freight transportation would increase by 55 percent between 1998 
and 2020.\1\ More recently, DOT projected that total freight 
transportation demand would rise 92 percent from 2002 to 2035, 
including an 88 percent increase for railroads.\2\ Similarly, the 
American Association of State Highway and Transportation Officials 
projected that freight tonnage will grow by almost 57 percent between 
2000 and 2020. Whether 88 percent, 55 percent, 57 percent, or some 
other percent is the exact right estimate is not what is important. 
What is important is that demand has been growing and is expected to 
continue to grow substantially. According to some of the materials 
circulated by Consumers United for Rail Equity (``CURE''), ``We're in a 
perpetual rush hour for freight. It's a lot like hitting interstates in 
Chicago at 5:00 p.m., every day of the week.'' \3\
---------------------------------------------------------------------------
    \1\ U.S. DOT, Federal Highway Administration, Freight Analysis 
Framework, October 2002.
    \2\ Federal Highway Administration, Freight Facts and Figures 2006, 
Table 2.1.
    \3\ Quoting Marcia Zarley Taylor, Rush Hour on the Rails, (Sept. 7, 
2006).
---------------------------------------------------------------------------
    Railroads will be critical to meet this growing demand for freight 
transportation. Railroads will have to play a large role because 
highways will be unable to absorb that kind of growth in demand for 
freight transportation. There is a maintenance backlog across the 
highway system as recently illustrated by the tragic collapse of the 
highway bridge in Minnesota. The American Society of Civil Engineers 
(``ASCE'') estimates that the annual need for bridges, roads, and 
transit is $94 billion, but that we spend less than $60 billion.\4\ 
Still the highway trust fund balances continue to decline. In addition, 
highways are already choked in many parts of the country, which 
according to ASCE costs drivers $63.1 billion a year.\5\ Given the 
issues the highway trust fund faces, the limited amount of the Federal 
budget that is available to cover all discretionary spending, of which 
transportation is only a small part, and the maintenance needs of our 
highways and bridges, highway capacity is not likely to expand to any 
significant degree in the future.
---------------------------------------------------------------------------
    \4\ http://www.asce.org/reportcard/2005/actionplan07.cfm.
    \5\ Id.
---------------------------------------------------------------------------
C. Railroads Will Have To Be Part of the Long-Term Solution to the 
        Nation's Transportation Needs
    In short, efficient and effective rail transportation is not just a 
necessity today. It will continue to be vital to the health of the U.S. 
economy for years to come. To play that role, railroads must plan and 
invest years before traffic growth may materialize because of the 
delays involved in building rail capacity. Of course, to justify that 
investment, railroads must be able to look out into a predictable 
future and determine that their investment will be permitted to 
generate sufficient returns for their owners.
    The need for railroads to expand is not just some railroad talking 
point. It is the real world--not because railroads say so and not 
because DOT, AASHTO, and other experts forecast large growth in freight 
demand--because rail customers say so. Recently, a coalition of coal 
shippers filed comments with the Surface Transportation Board in which 
they made the case for rail capacity as follows:

        ``It is critical, of course, that the railroads maintain 
        adequate capacity and infrastructure to transport coal to 
        utility power plants. As explained above, coal shippers are 
        dependent upon rail carriers to provide needed coal 
        transportation service, and disruptions in this service due to 
        inadequate capacity can impose substantial damages upon 
        electric generating utilities and their customers.'' \6\
---------------------------------------------------------------------------
    \6\ Ex Parte 671, Rail Infrastructure and Capacity Requirements, 
Comments of Concerned Captive Coal Shippers, at 11 (April 4, 2007).

    The point is that rail capacity is essential. That coal shipper 
association wants capacity to handle present ``coal traffic volumes'' 
and wants railroads to ``stay ahead of growing coal traffic demands in 
the future.'' \7\ Shippers of all types are asking for more capacity, 
but that kind of investment can only be justified if adequate returns 
on the investment are possible.
---------------------------------------------------------------------------
    \7\ Ex Parte 671, Rail Infrastructure and Capacity Requirements, 
Comments of Concerned Captive Coal Shippers, at 23 (April 4, 2007).
---------------------------------------------------------------------------
    The need for additional capacity was recently highlighted in a 
study by Cambridge Systematics. In September of this year, Cambridge 
Systematics presented the NATIONAL RAIL FREIGHT INFRASTRUCTURE CAPACITY 
and INVESTMENT STUDY. The study is one of many requested by the 
National Surface Transportation Policy and Revenue Study Commission, 
established by Congress in 2005. This study seeks for the first time to 
qualify the need for freight rail infrastructure investments. I would 
like to highlight some of their findings. ``This study indicates that 
an investment of $148 billion (in 2007 dollars) for infrastructure 
expansion over the next 28 years is required to keep pace with economic 
growth and meet the U.S. DOT's forecast demand. Of this amount, the 
Class I freight railroads' share is projected to be $135 billion and 
the short line and regional freight railroads' share is projected to be 
$13 billion. Without this investment, 30 percent of the rail miles in 
the primary corridors will be operating above capacity by 2035, causing 
severe congestion that will affect every region of the country and 
potentially shift freight to an already heavily congested highway 
system.
    The projected rate of growth over the next 30 years is not 
extraordinary, but it comes after two decades of growth in rail freight 
tonnage that has absorbed much of the excess capacity in the existing 
rail freight system. Most of the moderate-cost capacity expansions have 
already been made; future capacity expansions will be purchased at a 
higher cost because they will require expensive new bridges and tunnels 
and more track and larger terminals in developed areas.
    The Class I railroads anticipate that they will be able to generate 
approximately $96 billion of their $135 billion share through increased 
earnings from revenue growth, higher volumes, and productivity 
improvements, while continuing to renew existing infrastructure and 
equipment. This would leave a balance for the Class I freight railroads 
of $39 billion or about $1.4 billion per year to be funded from 
railroad investment tax incentives, public-private partnerships, or 
other sources.
    These investment projections assume that the market will support 
rail freight prices sufficient to sustain long-term capital 
investments. If regulatory changes or unfunded legislative mandates 
reduce railroad earnings and productivity, investment and capacity 
expansion will be slower and the freight railroads will be less able to 
meet the U.S. DOT's forecast demand.'' \8\
---------------------------------------------------------------------------
    \8\ ``National Rail Freight Infrastructure Capacity and Investment 
Study''.
---------------------------------------------------------------------------
III. The Ability of Railroads to Play a Larger Transportation Role 
        Depends on the Availability of Sufficient Resources for a 
        Sustained Period
    Let me start by pointing out that railroads spend dramatically more 
than other industries for capital expenses. The average amount of every 
incoming dollar that goes to capital spending on the railroad is five 
times more than the average U.S. manufacturing company--five times.
    Norfolk Southern--like other railroads--has invested record sums to 
increase its capacity and improve its operations while maintaining its 
focus on safety. But, the biggest challenge we continually face is 
having the resources to maintain our existing infrastructure and to 
expand that infrastructure to meet the increasing demand for our 
service and the changing shipping patterns and needs of our customers.
    U.S. freight railroads have been devoting enormous resources to 
maintain their existing infrastructure, to improve their operations and 
infrastructure and to alleviate the capacity constraints that arise 
from increasing freight demand. Indeed, from 1996 to 2005, the average 
U.S. manufacturer spent 3.4 percent of revenue on capital spending. The 
comparable figure for freight railroads was 17.2 percent, or more than 
five times higher.
    Likewise, Norfolk Southern makes large capital expenditures every 
year to maintain and expand its infrastructure. Between 2000 and 2006, 
our capital expenditures have totaled more than $6.3 billion, while our 
net income over the same period was only $5.2 billion. Over the same 
period, our expenses for track maintenance were approximately $2.8 
billion. In 2007, Norfolk Southern capital expenditures will be 
approximately $1.4 billion, which is almost equal to its total net 
income from 2006.\9\
---------------------------------------------------------------------------
    \9\ Net income for 2006 was $1.48 billion.
---------------------------------------------------------------------------
    The expenditures we make are necessary to maintain and to expand 
our physical plant and locomotive and car fleet so that we can serve 
our customers better, handle larger volumes of freight safely, and 
respond to our customers' changing shipping patterns. At the same time, 
capacity expansion projects must generate returns sufficient to justify 
the investment.
    The facts demonstrate that railroads continue to invest to expand 
their capacity. Consider some of Norfolk Southern's investments in just 
the last 2 years.
    In 2006, Norfolk Southern among other things:

   Closed a deal to create a joint venture with the Kansas City 
        Southern Railway, which will result in $300 million of 
        investment mostly to upgrade the rail line between Meridian, 
        Mississippi and Shreveport, Louisiana, so that the line can 
        move more freight more quickly across the line. Already, 45 
        miles of formerly non-signaled territory have been converted to 
        centralized train control, 100 miles of crosstie replacement 
        has been completed, 150 miles of ballast and surfacing work has 
        been done, and 45 miles of rail has been replaced with new rail 
        in three locations.

   Opened a new rail line to the coal-powered Keystone 
        Generating Station in Shelocta, Pennsylvania. The $44 million 
        public-private partnership trims 51 miles off the trip from 
        Saltsburg, Pennsylvania to Shelocta and increases the capacity 
        of the plant.

   Began work on the $62 million Rickenbacker Intermodal 
        Terminal in Columbus, Ohio, which will increase freight 
        capacity in that region by more than 40 percent.

   Added infrastructure in the following corridors: Memphis, 
        Tenn. to Chattanooga, Tenn.; Chattanooga, Tenn. to Atlanta, 
        Ga.; Atlanta, Ga. to Jacksonville, Fla.; Charlotte, N.C. to 
        Manassas, Va.; West Virginia Secondary; Columbus, Ohio to 
        Cincinnati, Ohio; Goldsboro, N.C. to Morehead City, N.C.; St. 
        Louis, Mo. to Louisville, Ky.; and our route to Albany, N.Y. 
        and New England.

   Acquired 142 additional locomotives.

    Norfolk Southern's announced 2007 capital budget includes, among 
other things:

   Beginning work on its Heartland Corridor project. This 
        ambitious public-private partnership will improve 30 tunnels in 
        four states so that they are able to handle double-stacked 
        intermodal trains. It includes the development of a new Norfolk 
        Southern-owned intermodal facility in Columbus, Ohio, which 
        when fully developed will have the capacity to handle 400,000 
        lifts per year. When completed, Norfolk Southern will shorten 
        the time it takes for containers to travel from port to plains 
        by over 20 percent and the distance they travel by more than 20 
        percent.

   Investing in capacity by making capital roadway 
        improvements. Norfolk Southern plans to spend $610 million for 
        rail, crosstie, ballast and bridge programs, including $73 
        million in infrastructure investments for increased capacity. 
        In addition, Norfolk Southern plans to spend $47 million for 
        communications, signal, and electrical projects; $41 million 
        for maintenance of way equipment; and $16 million for 
        environmental projects and public improvements such as grade 
        crossing separations and crossing signal upgrades.

   Making capital investments in intermodal terminals and 
        equipment to add capacity to the Norfolk Southern intermodal 
        network, increase access and capacity for coal traffic, bulk 
        transfer facilities, and vehicle production and distribution 
        facilities--all at a cost of about $97 million.

   Spending about $60 million for capital projects related to 
        computers, systems and information technology, which will 
        enhance safety and improve operating efficiency and equipment 
        utilization.

   Investing approximately $321 million in capital on equipment 
        to:

    Purchase 53 six-axle locomotives and upgrade existing 
            locomotives (Subsequent to the announced 2007 capital 
            budget, Norfolk Southern also made a commitment to acquire 
            an additional 50 locomotives, 20 of which are expected to 
            be delivered in the fourth quarter of 2007.).

    Purchase 1,300 new higher-capacity coal cars as part of 
            a multiyear program to replace the existing coal car fleet.

   Purchase 739 freight cars as their leases expire; certify 
        and rebuild 388 multilevel automobile racks; and add 
        supplemental restraints to multilevel racks.

   Renewing expiring equipment operating leases covering more 
        than 2,800 cars.

   Leasing 200 additional construction debris cars.

   Repairing freight cars at a cost of $56 million. Our repair 
        plan for 2007 reflects a 17 percent increase in repairs over 
        the number of cars repaired in 2006. Norfolk Southern has 
        announced a new car repair facility in Portsmouth, Ohio that 
        will open next year.

    In addition, Norfolk Southern is hiring and training 1,300 train 
and engine employees. Other railroads could--no doubt--provide a 
similarly extensive list.
    Railroads try to balance their customers' competing needs and 
invest to maximize their network. If we had only intermodal customers, 
our investments would be different than if we had only coal customers 
or only chemical customers. In fact, Norfolk Southern serves thousands 
of customers with different transportation needs for their thousands of 
different commodities. The investments we make represent our best 
judgment as to how to strike the right balance, consistent with the 
requirement that we obtain adequate returns on our capital and serve 
our varied customers.
    In the current and expected growth environment, it is especially 
important that railroads have the resources and the ability to improve 
their infrastructure now to meet future needs for three reasons. First, 
capacity is not limitless. Second, capacity is expensive. Third, it 
takes time to build rail infrastructure and capacity.\10\ Given the 
time it takes to add infrastructure and the long lives of the assets 
required to expand capacity, it is essential for railroads to take a 
long view on infrastructure investments, which is how we manage our 
business at Norfolk Southern.
---------------------------------------------------------------------------
    \10\ For example, it took years for the industry to reach agreement 
on a plan to address rail congestion in Chicago. After several years of 
effort on this historic public-private partnership, the rail industry, 
local officials, and state leaders were able to join together to seek 
Congressional funding for the public benefits that would flow from the 
project. Even today, the project is not fully-funded, and it is unclear 
how long it will take to make it a reality--even though it is clearly 
needed. Moreover, even when it is approved and fully funded, the 
design, permitting, engineering, environmental review, and construction 
of a major project can take years. As another example, from the time 
Norfolk Southern started the environmental permitting process to build 
a new intermodal yard in Atlanta to the time it opened its $110 million 
facility in Austell, Georgia was about 5 years. Just how many years it 
takes to make a project a reality depends on the time required to 
secure the necessary permits, local opposition, resources and money 
available, and the railroad's ability to complete the work in a way 
that least impacts its ability to serve its customers whose traffic 
moves on those lines. However, while delivering highway and 
environmental relief, railroad expansion still seems to require far 
less time and money than highway expansion.
---------------------------------------------------------------------------
    Today, railroads are investing in capacity to address the growing 
demand for freight transportation and have incentive to do so. 
Uncertainty across the regulatory and legislative landscape is making 
it challenging to determine whether railroads should continue to invest 
at current levels. If the government creates disincentives for railroad 
investment, then the question is who will pay for the transportation 
capacity the Nation will need in the future.
IV. Competition in the Transportation Marketplace Is Greater than Ever
    Some shipper groups have called for legislation to re-regulate the 
railroads. These calls are based on a desire to artificially lower 
rates, not on competition. Today there is more competition in the 
transportation marketplace than ever, and re-regulation would hobble 
railroads and ultimately customers.
    First, railroads face competition from other modes of 
transportation. Motor carriers are the railroads' largest competitor. 
Railroads also compete vigorously against other modes, including barges 
and pipelines. Motor carriers are the railroads' competition for 
intermodal traffic. When the railroad gains that business, trucks are 
removed from the highway system and less fuel is consumed. But trucks 
compete with railroads to transport many commodities and have the vast 
majority of intercity freight. While railroads have approximately 40 
percent of the intercity freight ton-miles, railroads have only 10 
percent of the intercity freight revenues. There are a number of 
examples where railroads compete against trucks; for example in 2001 
Norfolk Southern constructed a new Intermodal terminal for serving the 
Cleveland area. In 2000, our volume in the Chicago-Cleveland lane was 
10,500 units. In 2006, we handled 75,961 units--an increase of 621 
percent. The response in 2001 to our new facility and train services in 
the lane was immediate and significant, with our monthly volumes 
tripling once the facility opened. Prior to this, much of this volume 
had been trucked to/from Chicago. Also in 2001, Norfolk Southern began 
serving the Georgia Port Authority's new Mason ICTF facility in 
Savannah, which allowed for direct ship to train transfer of 
containers, combined with direct line haul service to Atlanta and 
points beyond, and thus avoiding the delays associated with using the 
local port belt railroad to access the pier or a dray to our off pier 
terminal. Being only 250 miles to Atlanta, truck was the predominant 
mode in this lane. At the same time, as the new terminal opened, 
Norfolk Southern added additional dedicated intermodal trains in the 
lane, allowing us to strongly compete with trucks in terms of transit 
time. As truck capacity in the Savannah area continues to tighten and 
container volumes moving through the port continue to increase, more 
and more traffic is being diverted off the highways and on to Norfolk 
Southern. Since 2000, volume has grown 528 percent in this lane. It 
continues to grow in 2007, despite the overall slow down in the 
industry. We have been able to handle this traffic because rail 
provides a better value. But, the bottom line is that trucks are a real 
constraint in the marketplace.
    Barges are also a key competitor. Recently, Norfolk Southern was 
able to win some business from barges; however, our customers can go 
back and forth. Alabama Electric Cooperative, which had received coal 
by barge, recently awarded Norfolk Southern a coal transportation 
contract. In another example, we were able to move to rail chemical 
business that Rohm and Hass had transported by barge. Again, barges are 
also real and threatening competitors.
    Additionally, many large railroad customers are large companies, a 
number with resources far in excess of the railroads. These companies 
know how to maximize their leverage. Most large companies have multiple 
rail-served facilities with some of the facilities served by one 
railroad, some facilities served by another railroad and some 
facilities served by two railroads. The customer uses its traffic at 
the dually-served facilities to negotiate a better rate/service package 
on traffic at the single-served facilities. That is one source of 
leverage. Another source is product competition. For example, assume we 
are the sole serving carrier at a chemical plant that ships to numerous 
receivers. When the receiver can use another product in lieu of the one 
produced at our solely-served facility, if our rate is too high, we 
will lose the business. The STB won't allow us even to mention product 
competition in a rate case, but our customers ``mention'' it often to 
us. It is real. Another major source of competition is geographic 
competition. For example, while Norfolk Southern has chemical and coal 
plants that are served only by us, our customers often have similar 
facilities served by another railroad. If our rate is too high, our 
customer will increase production at the facility served by another 
railroad and we lose business. Utilities have yet another source of 
competition that could be viewed as a combination of product and 
geographic competition. Instead of producing electricity at its coal-
fired, solely-served facility, it has the option of producing 
electricity at one of its other facilities that do not use coal or 
purchasing electricity produced elsewhere by other utilities. In short, 
even where there is only one railroad serving a facility, there are 
market factors at play. These competitive constraints are real.
    Look at the most recent GAO report. Rail rates in 2005 were at 
about the same level they were 20 years earlier--and that does not take 
inflation into account! If rail rates are increasing due to increased 
demand, that is what is supposed to happen. There is clearly no 
structural problem. If railroads had unchecked monopoly power, the 
numbers in the GAO report would never have occurred.
    Third, competition even among railroads has increased since 1980. 
Shippers who have access to one railroad today have rarely been served 
by more than one railroad. Policymakers should understand that Staggers 
did not degrade historic options. If they ask any shipper who complains 
of having only one railroad serving its facility: ``when in history did 
your facility get served by more than one railroad,'' they are likely 
to hear ``never'' in the overwhelming majority of cases.
    Moreover, the Interstate Commerce Commission and the Board's merger 
policies have protected shippers that had access to multiple rail 
carriers prior to the merger and generally ensured that such shippers 
had access to multiple carriers after the merger.
    Other areas have been opened to multiple carrier access when single 
carrier access was all that previously existed, such as the Bayport 
Loop in Houston, Texas, as a result of the Board's policies to promote 
build-ins where the economic sense of such a build-in is shown by 
private entities putting up the money. In the Union Pacific/Southern 
Pacific merger, the STB created over 4,000 miles of new trackage rights 
and gave competitive access to every new shipper that locates on them.
    Additionally, mergers have expanded single-line service, which 
means dramatically more shippers benefit from the inherent efficiencies 
that resulted from being able to ship from origin to destination on one 
railroad rather than having to use many railroads to get from origin to 
destination.\11\ For example, Norfolk and Western was a coal railroad, 
while Southern Railway was a more diverse railroad. Given their 
individual geographic reaches, however, neither could have developed 
what has become the Norfolk Southern intermodal system. Neither Norfolk 
and Western nor Southern Railway reached New York. Norfolk and Western 
reached Chicago but not Atlanta. Southern Railway reached Atlanta but 
not Chicago--so neither had the size, scope and density to develop an 
effective and competitive intermodal network. Absent the mergers, there 
would still be more railroads, but with fewer resources and access to 
fewer markets, which would not be better for rail customers.
---------------------------------------------------------------------------
    \11\ What mergers removed was the need in many instances for a 
customer's shipment to be moved by multiple carriers--and the 
inefficiencies associated with the interchanges that were needed 
between railroads. That is dramatically different from an assertion 
that mergers have lessened competition for customers who have never had 
their origin or destination served by more than one carrier.
---------------------------------------------------------------------------
    Some shippers claim that the government should mandate access, so 
that customers who have never been served by more than one railroad can 
receive service from multiple railroads. They argue that government 
access--such as mandated switching, trackage rights, terminal access, 
and interline rates--is competition. Actually, it is not. Railroads 
require expensive infrastructure to serve a facility. There have been 
build-ins by railroads and build-outs by shippers at facilities that 
can generate enough rail traffic to justify service by two or more 
railroads (again, resulting in an increase in competition since 1980), 
but most shipper facilities simply do not generate that level of 
traffic. In other words, there is not enough money to support two 
railroads at most shipper facilities, which is why relatively few 
facilities have ever had service by more than one railroad. True market 
competition does not keep two competitors in a market--or force more 
competitors into a market--that will support only one. These shippers 
really want the government to force one railroad to subsidize another 
railroad by providing below market access to its lines, which would 
remove any incentive for the owning railroad to invest in such 
infrastructure.
V. Policymakers Should Reject Legislation and Regulation That Will 
        Create Disincentives for Railroads To Invest in the 
        Infrastructure Needed To Meet the Growing Demand for Freight 
        Transportation
    Any legislation or regulatory action that would result in railroads 
being unable to invest would be bad transportation policy at any time. 
But legislation or regulatory action that would result in railroads 
being unable to invest would be particularly bad at this time, when the 
Nation needs railroads to expand.
    We know it is bad policy because of history. The Staggers Act was 
adopted because the U.S. railroads were breaking. Re-regulation of the 
railroad industry will result in the catastrophe the industry saw 
before the adoption of the Staggers Rail Act of 1980, which was marked 
by rail bankruptcies, decrepit infrastructure that resulted from years 
of inability to invest in maintenance, and government bailouts. But it 
will be much worse now because the entire transportation infrastructure 
is strained in a way it was not then.
    Before the Staggers Act, regulation of the rail industry was 
expansive. The U.S. House of Representatives said: ``Regulatory 
constraints . . . impinged upon management's ability to adjust rates, 
merge corporate entities, abandon facilities and services, and improve 
productivity.'' \12\ Rate regulation was pervasive and regulation 
restricted price competition.\13\ ``Railroading has fallen on difficult 
times.'' That was how the Department of Transportation summed up the 
situation in 1978.\14\
---------------------------------------------------------------------------
    \12\ H.R. Rep. No. 96-1035 at 85 (1980).
    \13\ Id. at 88.
    \14\ Dept. of Transp., A Prospectus for Change in the Freight 
Railroad Industry, at 2 (Oct. 1978)(``Prospectus'').
---------------------------------------------------------------------------
    The detrimental effects of this excessive regulation are well 
known, as are the successes of the Staggers Act. In the same 1978 
report, the Department found that railroads were unable to attract 
capital from private sources and unable to maintain their physical 
plants.\15\ Indeed, the Interstate Commerce Commission tracked standing 
derailments, which were railcars that were not moving but that simply 
fell off the tracks because the tracks were in such poor shape.
---------------------------------------------------------------------------
    \15\ ``Even the healthiest industry does not rely solely upon 
internally generated cash to finance current capital expenditures--
virtually all industries obtain additional funds through the sale of 
equity or debt. With some exceptions, however, railroad earnings are 
too low to attract new equity or debt other than for equipment 
purchases or rollover of old debt. . . . As a result, the availability 
of private capital for future investments may be curtailed, because 
investors believe that returns generated with the investment of 
additional capital will not equal returns from alternative investments 
with similar risks.'' Prospectus at 69.
---------------------------------------------------------------------------
    Railroads throughout the Northeast failed. The result of that 
expansive and invasive regulatory regime was bankrupt railroads, 
including the largest bankruptcy in America to that time--the 
bankruptcy of the Penn Central. The government had to step in and 
create what came to be known as Consolidated Rail Corporation or 
Conrail. Only the Staggers Act stopped the decline of the industry, 
which took many years to reverse. We need to be clear that the Staggers 
success was hardly an overnight sensation. It has literally taken 
decades for the railroads to reach a level of returns that allows new 
investment to serve the Nation's needs.
    Already, recent efforts by the Surface Transportation Board, which 
at a minimum are injecting uncertainty into the industry and at worst 
could substantially impact our ability to earn our cost of capital, are 
causing us to look hard at our willingness to invest in the future. In 
the last month, the Board has issued erroneous calculations of our 
industry cost-of-capital, which is based on historic costs of assets 
with long-lives rather than on the cost of actually replacing the 
assets, and expanded options for shippers to gain rate relief, which 
options could result in a downward rate spiral and rate compression.
    Are we returning to a legal regime that restricts the railroad 
industry's ability to invest in infrastructure? Are we on the path to 
having the industry look like it did before 1980? I am very concerned 
that we are headed down that path. The results may not be that dramatic 
right away. But any policy that deters private investment in 
transportation capacity moves us further from the national goal of 
building a transportation system sufficient to handle the growing 
demand for freight transportation.
    Legislative and regulatory threats to rail capacity will create 
substantial disincentives for railroads to invest. If railroads are 
unable to invest in their own capacity, who will make up the 
difference? Or, will freight just stack up around the country because 
there is not enough capacity to move it? Such threats would directly 
reduce existing capacity, which would adversely affect all rail 
customers. If enacted, such legislation would adversely affect 
railroads' ability to justify many investments in infrastructure that 
will be needed to handle tomorrow's freight. Policymakers must 
recognize that if such threats become reality, capacity will be reduced 
and replacing the lost capacity will take significant time and money.
    Instead, policymakers should focus on ways to make it easier for 
private companies to invest in infrastructure, which is why I encourage 
you all to support legislation to provide tax credits to railroads that 
invest in capacity.
VI. Conclusion
    A railroad's ability to transport customers' shipments is dependent 
on capacity. Capacity is dependent on private companies, who are 
responsible to their shareholders to make good investments and to 
provide a return on the shareholders' investment, earning returns that 
justify investments in capacity. Today, railroads are stepping up to 
meet the growing demand for freight service that is projected over the 
coming decades. Their investments are allowing them to not only compete 
against each other, but to compete against all modes of transportation, 
such as trucks and barges. Whether railroads will be able to continue 
to do so, will depend on policymakers making wise choices and not 
creating disincentives to such investment.

    Senator Lautenberg. Thanks very much.
    Now we have Mr. McGregor, please.

 STATEMENT OF DAVID J. McGREGOR, SENIOR VICE PRESIDENT, NAFTA 
                  LOGISTICS, BASF CORPORATION

    Mr. McGregor. Chairman Lautenberg, Ranking Member Smith, 
members of the subcommittee, my name is David McGregor. I'm the 
Senior Vice President responsible for logistics for BASF 
Corporation, headquartered in Florham Park, New Jersey.
    BASF ships over 40,000 rail cars per year, at a cost 
exceeding $125 million annually, so I think you can understand 
why we have such a keen interest in this matter.
    This hearing is well timed, as we feel strongly that the 
Surface Transportation Board is in need of legislative reform. 
Under the current statutory scheme, and given the regulatory 
mechanisms now in place, captive rail shippers like BASF, are 
at an extreme disadvantage. An effective means for relief from 
unreasonable rates or poor service by the Nation's railroads is 
absent at the STB. In our view, the current system is broken. 
Reform is needed. Congress should act.
    Today, many rail shippers operate under a monopoly 
situation. Fifty percent of BASF's production sites are 
serviced by only one railroad where no competitive alternative 
exists. It's hard to believe that, in this day and age, 
monopolies can exist, but they do. No, we're not talking about 
the board game Monopoly, with Boardwalk or Park Place, but 
real-life towns with real-life people. Take, for example, 
BASF's Washington/New Jersey site, where the serving railroad 
has proposed rate increases of up to 165 percent, or at our 
Spartanburg, South Carolina, site, where the railroad proposes 
a 96-percent increase. Such outrageous increases would not 
happen if a competitive alternative existed or if this STB 
enforced its mandate. The impact of being captive perhaps 
wouldn't be as bad if we had a more proactive STB to turn to 
when disputes arises. But we don't. The average cost of an STB 
rate case is $3 million, and it can take upwards of 3 years to 
litigate. Even if a shipper somehow prevails, at best it breaks 
even after you consider cost and time. The current system 
provides a no-win situation for shippers.
    Next, I'd like to invite the subcommittee to look at the 
matter of differential pricing. The STB says that this 
sanctioned-pricing scheme is required for the financial well-
being of the industry. It argues that individual captive 
shippers must suffer, in comparison to their marketplace 
competitors for the common good to provide the railroads 
adequate margins to sustain the capital spending necessary in 
their industry. In our view, the STB has overlooked the fact 
that the concept arbitrarily applies rate and service 
disadvantages based on nothing more than geographical 
misfortune, where, by the luck of the draw, some shippers are 
captive to one railroad. The net result is to make American 
manufacturing less competitive.
    Next, we'd like to recommend that the STB abandon its 
theoretical concept that rail-to-rail competition is not 
important. It is. Rail-to-rail competition is critical in those 
instances, for example, where there are limited or no modal 
alternatives to rail. Further, the STB seems to have accepted 
at face value oversimplified arguments about alleged shipper 
leverage over the railroads. Perhaps its members have never sat 
across the table from a railroad that threatens 100-percent or 
more rate increases at a captive facility unless excessive rate 
increases are accepted at other noncaptive sites.
    The STB seems fixated with the notion that if railroads 
were to operate in a market free of protections, they would be 
forced to lower their rates to a point that would undermine 
their ability to reinvest in their business. That is faulty 
thinking. For example, BASF and thousands of other 
manufacturers are able to maintain similar levels of capital 
investment through the sale of our products without the market 
protections the railroads enjoy.
    In conclusion, BASF is not asking for reregulation, as some 
have suggested. We're simply asking that the STB do what 
Congress had intended, and, where necessary, provide it with 
the tools to maintain a level playing field for railroads and 
shippers alike.
    This issue boils down to one of simple fairness and equity. 
We believe that S. 953, introduced by Senators Rockefeller, 
Dorgan, Klobuchar, Cantwell, Thune, and Vitter of this 
subcommittee, will restore fairness and equity to the STB 
proceedings.
    Thank you for this opportunity, and I'm prepared to answer 
your questions.
    [The prepared statement of Mr. McGregor follows:]

    Prepared Statement of David J. McGregor, Senior Vice President, 
                   NAFTA Logistics, BASF Corporation
    Good morning, Mr. Chairman, Ranking Member Smith, and Members of 
the Subcommittee. My name is David McGregor, and I am Senior Vice 
President for North American logistics for BASF Corporation, 
headquartered in Florham Park, NJ. At BASF, I have responsibility for 
all modes of transportation, all warehousing, and all distribution 
activities. I am pleased to be here today on behalf of BASF to assist 
the subcommittee with its oversight of the Surface Transportation Board 
(STB).
    In the opinion of BASF, this hearing is well timed, with the STB 
presently in need of legislative reform. Under the current statutory 
scheme and with the regulatory mechanisms now in place, captive 
commercial rail shippers, like BASF, are placed at an extreme 
disadvantage, without the means for effective relief from unreliable 
service at unreasonable rates imposed by the railroads. I respectfully 
urge this subcommittee to look carefully at the practices of the STB, 
as they relate to the commercial rail industry. My testimony here today 
will describe the following:

   BASF's status as a ``captive'' commercial rail shipper.

   How prior STB decisions have promoted a failed status quo.

   The unfairness in current pricing.

   Why the STB underestimates the importance of rail to rail 
        competition.

   The STB should be promoting free and open markets.

   BASF's support for S. 953, a means for reforming and 
        improving present STB practices and procedures.

    I trust that the views of BASF will not be shared by all those who 
are appearing with me as witnesses, including the STB and the 
railroads. We have some serious disagreements on how and even whether 
STB reform is necessary. But, as we have worked collegially in the past 
with the railroads on matters such safe handling, rail car design, and 
satellite tracking technology, I remain hopeful that we can reach some 
common ground on STB reform.
BASF: The Chemical Company
    As one of the largest chemical companies in North America, BASF is 
a responsible producer of materials for a variety of industries. With 
over 16,000 employees and nearly 50 U.S. production sites, we provide 
catalysts to vehicle manufacturers, ensuring trucks, buses, and 
automobiles run as clean as possible. We maximize home energy 
efficiency with formaldehyde-free insulating products, and our 
dispersions serve as the frame for water-based paint and coating 
products. In short, BASF has become The Chemical Company. With the 
highest emphasis on safety, we ship 40,000 rail cars a year to move our 
products to market, with an annual cost exceeding $125 million.
Monopolies Do Exist: Captive Rail in America
    For most Americans, the term ``monopoly'' refers to the board game 
that uses locations like ``Boardwalk,'' ``Park Place,'' and in keeping 
with the theme of this hearing, ``Reading Railroad.'' But it will 
interest this subcommittee to learn that monopoly is actually a very 
real thing for commercial rail shippers in this country. Instead of 
``Boardwalk,'' ``Park Place,'' and the other popular squares on the 
game board, we invite the subcommittee's attention to towns like 
Washington, NJ; Freeport, TX; and Spartanburg, SC, homes to BASF 
manufacturing sites, where one railroad--and only one railroad--goes in 
and out of the facilities. These facilities and many others like them 
across America are commonly referred to as ``captive'' rail sites, and 
they are routinely subject to abuses by the railroads.
    In a very recent example of abusive railroad rate practices, 
consider the ``take-it or leave-it'' offer detailed below (Table 1). 
These are actual per-car rate offers, involving traffic where BASF is 
captive to only one railroad monopoly, including commodities in some 
instances, which are prohibited from moving by truck as a matter of 
policy. You can see that on this small sample alone, BASF will be 
subject to rate increases totaling $7.9 million, and exceeding 100 
percent on average.





    BASF has concluded that for the time being, filing an STB rate 
case, with historic average cost and duration of $3 million and 3 
years, is not a worthwhile effort. The current process simply does not 
provide the shipping community with a meaningful remedy or relief. The 
STB's most recent decision on September 7, 2007, which favored the 
railroad over Basin Electric Corp., despite a 100 percent rate 
increase, certainly offers little hope.\1\ The STB is now considering a 
railroad's latest request to dismiss DuPont's recent filing, arguing 
that ``rate cases involving hazardous materials should not be 
determined under a methodology that is less rigorous than a stand-alone 
cost analysis.'' \2\ Only time will tell if the STB will accept this 
argument, allowing the railroad to change the rules in the middle of 
the game. Given these actions and decisions, we are left with the 
unfortunate opinion that in today's regulatory environment, a rate case 
filing with the STB offers no value to the shipping community.
---------------------------------------------------------------------------
    \1\ Western Fuels Association, Inc.; and Basin Electric Power 
Cooperative v. BNSF Railway Company, STB NOR42088 0 (STB served Sep. 7, 
2007).
    \2\ DuPont, E.I DuPont De Nemours and Company v. CSX 
Transportation, Inc., STB NOR 42100 (STB filed Aug. 31, 2007).
---------------------------------------------------------------------------
Recent STB Decisions Promote Failed Status Quo
    Historic and noteworthy STB missteps, which precede the current 
chairmanship, include acceptance of inappropriate mergers and the 
ongoing failed rate dispute process. The former includes the UP/SP 
merger and the NS/CSX split up of Conrail, which many characterize as 
near disasters in both operational and financial terms. The Government 
Accountability Office (GAO) characterizes the current failed rate 
dispute process as inaccessible to shippers and rarely used.\3\
---------------------------------------------------------------------------
    \3\ GAO, Freight Railroads: Industry Health Has Improved, but 
Concerns about Competition and Capacity Should Be Addressed, GAO-07-94 
(October 2006).
---------------------------------------------------------------------------
    While I must commend the current Chairman for his noteworthy 
efforts to quickly enact improvements in a difficult and complex 
environment, the questionable quality of even the most recent decisions 
and actions, offer evidence recognizable to even the layman, that 
today's STB requires reform. Ten months after the GAO recommended that 
the STB perform a study of the competitive environment of freight 
railroads for example, the STB reluctantly accepted. The STB's passive 
attitude in both establishing the study and subsequently permitting 
another full year to pass before requiring its results in late 2008, 
fall well short of the sense of urgency demonstrated by the GAO.
    Next, consider the STB's January 2007 ruling on unfair railroad 
fuel surcharges practices amounting to a $6.4 billion overcharge to 
their customers.\4\ Despite the fact that Congress explicitly states, 
``it is the policy of the U.S. Government to encourage honest and 
efficient management of railroads,'' \5\ the STB took no action on this 
fuel scheme for a full 3 years after the railroads initiated it. The 
STB then dedicated considerable time and effort debating its 
jurisdiction to even consider the issue. This predisposition toward 
inaction and great care repeatedly exercised to avoid perception of 
exceeding procedural jurisdiction, lends itself to the consistent 
benefit of the railroads and to the consistent detriment of shippers.
---------------------------------------------------------------------------
    \4\ Rail Fuel Surcharges, STB Ex. Parte No. 661 (STB served Jan. 
26, 2007).
    \5\ 49 U.S.C. 10101.
---------------------------------------------------------------------------
    Once the STB conceded that its office, not another, was the 
appropriate body to review this railroad matter, only disappointment 
followed in the form of an ineffective decision, with astonishing 
failings highlighted by the following:

        a. The STB recommended, but failed to mandate, the use of a 
        consistent fuel index across railroads. In the words of 
        dissenting STB Vice Chairman Buttrey, ``the use of a single 
        well recognized index would make fuel surcharges more 
        transparent to the shipping community, the public, and the STB, 
        and to impose reporting requirements without mandating a 
        specific index seriously undercuts the effectiveness of that 
        reporting.'' \6\
---------------------------------------------------------------------------
    \6\ Rail Fuel Surcharges, supra note 4.

        b. The STB failed to prescribe a consistent, best practice 
        methodology, or peg/base level across carriers. This means one 
        railroad can continue to charge fuel based on mileage, another 
        on ton mileage, and another by railcar weight. Some may set the 
        peg/base level at a WTI $64 barrel level, others at WTI $26, or 
        any other unlimited combination of methodologies and peg/base 
        levels. Beyond transparency concerns highlighted by Vice 
        Chairman Buttrey, this great shortcoming clearly increases the 
        administrative burden for shippers, and more importantly, 
        increases the likelihood of continued carrier manipulation, 
        such as the post-decision increase to base freight rates that 
        several carriers applied on April 26, 2007, offsetting the 
        reduction in fuel surcharge revenues in full. While astonishing 
---------------------------------------------------------------------------
        to many, this is not surprising under current STB oversight.

        c. The STB prescribed that a quarterly report must be provided 
        from each Class I carrier regarding total fuel expenditures and 
        consumption, keeping the report narrow ``to avoid the 
        regulatory burden.'' \7\ Such narrow reporting is nearly 
        useless toward achieving the end of ensuring honest and 
        efficient management of railroads, and without some broader 
        level of reporting, it is impossible to determine if rail 
        shippers continue to be exploited on an individual basis. 
        Clearly, after exposing an exploitive practice, the regulatory 
        burden should not be the height of concern.
---------------------------------------------------------------------------
    \7\ Id.

    These missteps and the ongoing rate case debacle are important to 
be sure. My greater concern however, falls to deficiencies in STB 
policy underpinnings that truly damage the intended balance between 
shippers and railroads.
Rail Pricing: Where Is the Fairness? Where Is the Relief?
    The STB sanctions ``differential pricing,'' the industry preferred 
term which applies when a railroad charges a premium to customers that 
are captive to only one railroad monopoly, and have no other options. 
The STB says that this sanctioned pricing scheme is required for the 
financial well being of the industry. It argues that individual 
shippers must suffer against their marketplace competitors for the 
common good, in order to provide railroads adequate margin for their 
high levels of capital spending and maintenance.
    Reason and cause aside, the STB has overlooked the fact that this 
concept applies arbitrary and disproportionate rate and service 
disadvantages to shippers on the strict basis of their geographical 
misfortune and nothing more. The differential penalty for a shipper 
that has access to only one railroad monopoly, compared to a 
neighboring shipper that has access to two railroads, will typically 
result in rail rates that are 50 percent higher. Further, this effect 
is wide spread and growing, where The World Bank's Louis Thompson, 
cites an estimate 40 percent captivity rate in 1980, has grown to 
greater than 50 percent today,\8\ chiefly due to the STB's lax historic 
merger oversight. The STB makes no apologies for this failing however, 
and in fact appears to accept the argument that rail to rail 
competition is not important.
---------------------------------------------------------------------------
    \8\ The World Bank, Regulatory Developments in the U.S.: History 
and Philosophy, pg. 11 (March 2000).
---------------------------------------------------------------------------
The STB Underestimates the Importance of Rail to Rail Competition
    When the STB advises that rail to rail competition may not matter 
if another mode is available, even at higher cost,\9\ it demonstrates a 
preference for textbook theory over real world practice. Rail to rail 
competition is first and foremost critical in those instances where 
there are physical and economic limitations to modal shifts, applicable 
to shippers across industry, including chemical, coal, agriculture 
goods, and more.
---------------------------------------------------------------------------
    \9\ Testimony of W. Douglass Buttrey, Chairman, STB, Before the 
Senate Subcommittee on Surface Transportation and Merchant Marine, 
Hearing on Economics, Service and Capacity (June 21, 2006).
---------------------------------------------------------------------------
    While shippers know that arguments about potential shipper leverage 
against railroads has been oversimplified, the STB seems to have 
accepted them at face value. For example, one railroad argues that 
large customers can use their traffic at dually served facilities to 
negotiate a better rate/service package on traffic at the captive 
monopoly served facilities.\10\ I believe that members of the STB 
accept this notion, because they have never sat across from a railroad 
that threatens 100 percent rate increases at captive facilities unless 
excessive rate increases are accepted at the dually served facilities, 
such as the example we detailed above in Table 1. In these instances, 
rail to rail competition is critical.
---------------------------------------------------------------------------
    \10\ Testimony of Charles W. Moorman on Behalf of the Association 
of American Railroads, Before the House Transportation and 
Infrastructure Committee, Hearing on Rail Competition and Service 
(September 20, 2007).
---------------------------------------------------------------------------
    The Association of American Railroads (AAR) represents that rail to 
rail competition will develop if there is sufficient demand.\11\ 
Shippers understand the fallacy of this idea, but are not confident 
that the STB embraces it. While there are rare exceptions, barriers to 
entry seldom permit new carrier competition, in that new railroads 
simply do not have access to the thousand of miles of land grants that 
were provided to the industry in it's infancy over 100 years ago.
---------------------------------------------------------------------------
    \11\ AAR, Overview of Railroad Regulation, (June 2007).
---------------------------------------------------------------------------
    Closing this topic, The World Bank clearly disagrees with the STB. 
The World Bank advises that ``the concept of rail to rail competition 
being less important than intramodal competition, becomes highly 
questionable in countries where the rail share is high.'' \12\ This 
point becomes moot however, as the STB takes the position that extended 
application of free market competition among railroads would dry 
investment, an incorrect concept on many levels.
---------------------------------------------------------------------------
    \12\ The World Bank, Final AICCF: Directions of Railway Reform, Pg. 
4 (September 2001).
---------------------------------------------------------------------------
The STB Should Be Promoting Free and Open Markets
    The STB acts under the principle that if railroad monopolies were 
required to operate in free and open markets, they would suddenly begin 
pricing services at unsustainable levels, generating inadequate 
infrastructure capital. In reality however, we must presume that 
railroads, like any business would instead act responsibly and with 
self control, pricing services at reasonable and sustainable levels, 
posing little risk to investment capital supply.
    Like railroads, the operations of chemical producers are highly 
capital intensive. In 2006, BASF's North American capital and 
maintenance spending totaled $944 million; 2007 spending is projected 
at $1.1 billion. Industrywide, chemical producers spend $23.5 billion 
annually on capital investment compared to railroad's $8.4 billion. 
Further, chemical producers incur $20.8 billion in Research and 
Development spending, compared to railroad's $300 million.\13\ I ask 
this distinguished Subcommittee, why do the railroads require 
regulatory subsidies in the form of monopoly permissive treatment, to 
fund similar capital spending levels that BASF and the chemical 
industry fund through the sale of its products, without capital flight, 
under free market conditions?
---------------------------------------------------------------------------
    \13\ Bureau of Economic Analysis (2005).
---------------------------------------------------------------------------
    Competitive access already works in U.S. We invite the subcommittee 
to look at BASF's Geismar, LA facility, which ships nearly 10,000 rail 
car loads annually, and is served by the Canadian National (CN). In 
1999, competitive access was granted to the Kansas City Southern (KCS). 
The CN and the KCS have shared in this business for years, with the CN 
providing KCS access to the business through a reasonable reciprocal 
switch charge, which the KCS pays for on a large volume of traffic. The 
CN accepts this compensation, and year after year moves the business 
with strong and sustainable service and no sign of capital erosion.
    A similar opportunity allowed us free market access to two 
competing railroads, where the origin of the movement in question is 
jointly accessible by railroad A and railroad B (Table 2), both having 
tracks into the site, but the destination is served by the tracks of 
only railroad A, while railroad B's tracks are located just a few miles 
away. For a reciprocal switch charge of $582, paid by B to A however, 
railroad A will move railcars those remaining few miles for railroad B, 
allowing railroad B to effectively access the destination and compete 
for the business. In our example, railroad B under-bid railroad A's 
rate offer by 35 percent, willingly, and despite the additional 
reciprocal switch cost that railroad B incurred and railroad A did not. 
This demonstrates again, that the competitive access model does indeed 
work in the U.S. today, and that with the establishment of reasonable 
and sustainable interswitching rates, it can continue to work and even 
thrive.




    These examples highlight how competitive access works in the U.S. 
rail industry today, sustainably, and without capital flight. For more 
convincing evidence I ask this Subcommittee to examine the Canadian 
rail industry. Free market access is not only permitted but required 
under Canadian rail oversight, and Canadian railroads, similar is size 
and structure to their U.S. peers, not only succeed, but thrive under 
such constraints, running significantly more profitable operations, 
again, without, and have seen no such investment flight.
    In summary, and to quote Dr. Curtis Grimm, former economist at the 
Interstate Commerce Commission's Office of Policy Analysis, what we saw 
from the Staggers Act of 1980, and in these examples is that ``when 
faced with new competitive opportunities, railroads cut costs and 
increase productivity.'' If open market competition were permitted, the 
same will happen again.\14\ Corroborating Dr. Grimm's view, the 
variance in operating ratio across railroads, ranging from near 60 
percent to near 80 percent, provides certain evidence that opportunity 
for productivity gains remain. History also tells us that railroad 
oversight has been and should continue to be dynamic.
---------------------------------------------------------------------------
    \14\ Testimony of Curtis M. Grimm Before the House Subcommittee on 
Railroads (March 2004).
---------------------------------------------------------------------------
A Solution Has Arrived: Support S. 953
    The solution for many of the problems that I have described lies 
with S. 953, the Railroad Competition and Service Improvement Act, a 
bill introduced by Senator Rockefeller, a member of this subcommittee. 
This bill has received bipartisan support and presently has 11 
cosponsors. In addition, it enjoys private sector support from a cross-
section of American industry that ships by rail, including chemistry, 
paper, glass, fertilizer, petroleum, electrical utilities, and the 
farming community. BASF hopes that today's oversight hearing will lead 
to the subcommittee's favorable consideration of S. 953.
    In particular, S. 953, if enacted, will ensure customer access to 
rail competition, establish a workable rail rate challenge process, 
mandate a proactive Surface Transportation Board, and clarify railroad 
obligation to serve.
    I'd like to finish with one important thought. While the Staggers 
Act of 1980 is used by many as a near synonym for rail deregulation, it 
was by no means the only legislation in this area. Rail regulatory 
policy in fact has been amended every 12 years on average since 1887 
(see Appendix 1), where we are now into the 27th year of Staggers, with 
no updates to reflect the significant challenges the industry faces. I 
believe that the greatest mistake we can make now, in fact the only 
fatal mistake, is further inaction.
Conclusion
    Thank you very much for the opportunity to present testimony and 
assist the members of this subcommittee in the panel's oversight of the 
STB. BASF looks forward to being an active partner with the 
subcommittee, the railroads, and the STB itself, as we seek to find 
common ground on the ways to improve service by the STB to commercial 
rail shippers. I would be pleased to answer any questions that 
subcommittee may have for me.
                               Appendix 1





    Senator Lautenberg. Mr. Ficker?

        STATEMENT OF JOHN B. FICKER, PRESIDENT AND CEO, 
         THE NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE

    Mr. Ficker. Thank you, Mr. Chairman, members of the 
committee.
    My name is John Ficker. I'm President and CEO of The 
National Industrial Transportation League, a 100-year-old 
organization that represents shippers and carriers. We have a 
long history with the rail industry. In fact, in 1907 that was 
probably the primary method of moving goods throughout the 
country.
    We have done a bit of a history lesson here this morning, 
and I will only re-emphasize the fact that the framers of the 
Staggers Act had two goals in mind. One was to encourage the 
rail industry to retain and obtain financial well-being and 
health, and the other was to rely on competition to be the 
marketplace arbiter, rather than regulation.
    To that extent, there has been great success in the area of 
financial stability in the rail industry, and nothing could be 
more proof of that than the current investment cycle. I think, 
Senator Smith, you asked a question about private equity 
investment. When Warren Buffett invests over 17 percent in 
Burlington Northern Santa Fe, that says something to me about 
the financial health of the industry. When the UP reports, 
yesterday, or the day before, a 34-percent increase in third 
quarter profits, that says that the industry is healthy 
financially. So, let's give the framers of the Staggers Act a 
pat on the back and say, ``Job well done.''
    As far as the private equity firms, I share your concern, 
Senator, with that, and we're watching that very closely. But 
other things have changed in that marketplace in the last many 
years. Obviously, the mergers that were mentioned earlier, the 
capacity constraints, the massive abandonments of excess 
capacity through the 1980s and 1990s, and the growth in our 
economy has led to a capacity-strained environment, both on 
rail, truck, and even at our ports; and service challenges 
continue. The operating environment of the railroads has 
changed from one of massive amounts of single cars to large 
numbers of unit trains of coal, grain, and intermodal traffic. 
And also, they've begun to shift away from the contracting 
authority that was granted by the Staggers Act to more public 
pricing in order to be able to adjust more rapidly to the 
pricing mechanisms and the market conditions.
    Many of our members deal in the commodity business and 
understand the ebbs and flows of a commodity market. But the 
challenge in planning for transportation spending over a period 
of time has become increasingly difficult.
    And I would like to comment, if I could, for a moment, on 
the Surface Transportation Board. We've very pleased at the 
work of the STB has done over the last year under the 
leadership of Chairman Nottingham. Several things I'll mention, 
that he already alluded to. First being the fuel surcharge 
change that took place earlier this year. We're very pleased 
that that took place. We believe it should be further expanded 
to all modes--all carriers--or, excuse me, all shippers, not 
just those that are regulated by the STB. Second, we believe 
that the cost of capital exercises currently going on, 
proceeding before the STB, is an important one to be 
considered. It's about time, we believe, that the--Wall Street 
and financial communities recognize that the rail industry was 
successful. I believe the Board should recognize their revenue 
adequacy, as well. It's kind of a wonderment to me that the 
Board could say that the railroads were in terrible shape when 
Wall Street was touting them as an incredibly sharp investment 
idea.
    And, finally, the proposal that's in front of the Board is 
the same methodology that the Federal Reserve Board uses.
    Earlier, it was mentioned, the simplified rate-case 
procedure. We believe that that's a step in the right 
direction, but we're concerned about some of the components of 
that, and we've asked the STB, along with 41 other 
associations, to take a look at some of the components of that, 
and the details, to make it more advantageous.
    And, finally, I'd like to mention an effort that the NIT 
League has been involved in for over a year. We believe the 
best solution to the problems between shippers and carriers, as 
Senator Smith alluded to, is a private-sector solution, not a 
legislative solution. We believe--and we have been working with 
the railroads over the last year to develop a simple, fast, and 
expeditious methodology that's fair to both parties, to allow 
disputes to be resolved in a confidential manner, allowing 
that--those disputes to come forward, both from the rail side 
and from the carrier side. And we are pleased to say that we're 
in discussions with the AAR and the railroads at this very 
moment. I would love to have the opportunity to brief the staff 
and the Senators and the members of the committee on our 
particular proposal, to see where we can help in this 
environment, as, again, we believe strongly that the best 
solution is a private-sector solution.
    I thank the committee for this opportunity, and look 
forward to your questions.
    [The prepared statement of Mr. Ficker follows:]

       Prepared Statement of John B. Ficker, President and CEO, 
             The National Industrial Transportation League
    The National Industrial Transportation League is pleased to have 
been invited to present testimony on the Surface Transportation Board 
(STB) and regulation related to railroads. The League is the Nation's 
oldest and largest association of companies interested in 
transportation. We recently celebrated our 100th anniversary. Its 600-
plus members range from some of the largest companies in the Nation to 
much smaller enterprises. Many members of the League ship via rail, and 
are vitally interested in the capacity, service, and competitiveness of 
the Nation's rail industry. But League members also substantially ship 
via other modes, both domestically and internationally, and the 
problems of capacity must also be looked at in this broader context, as 
many modes are facing capacity constraints.
    Throughout its history, the League has been active in rail matters 
before Congress, the Interstate Commerce Commission, its successor 
agency the Surface Transportation Board, as well as in private sector 
discussions and negotiations with railroads both individually and 
collectively. The League has always supported a strong and viable rail 
network to provide the essential transportation services in support of 
both the defense of the United States and the economic vitality of our 
country. As Committee members know well, the Staggers Rail Act changed 
the regulatory landscape of the rail industry from one that was heavily 
controlled by government regulators to one that emphasized competitive 
markets as the primary and most efficient arbiter of the relationship 
between shippers and carriers, and where regulation was confined to 
those instances where there was a lack of effective competition. The 
framers of the Staggers Act had two primary goals, to restore financial 
health to the rail industry, which at the time was facing major 
financial challenges; and to make competition, not regulation, the 
guiding force in the rail transportation market.
    Since the passage of the Staggers Act much has changed. A once-
tenuous rail industry financial environment has morphed into a positive 
one. Today, the rail industry is recognized by Wall Street as 
financially successful and one to be considered by today's investors. 
Nothing could provide more evidence of this change than the recent 
investment by one of America's most respected investors, Warren 
Buffett, who has taken a major stake in BNSF. Additionally, major 
investment houses such as JP Morgan Chase, Morgan Stanley, Bear Stearns 
and Credit Suisse all have indicated that the rail industry has become 
an attractive investment opportunity--a further indication of the 
financial health of the industry. Finally, the fact that many railroads 
have begun stock buyback programs is an indication of their internal 
confidence in their financial strength and stability. This past week, 
America's largest railroad, the Union Pacific announced a 27 percent 
increase in 3rd quarter profits on 34 percent increase in operating 
revenue. This is clear evidence of the achievement of one of the major 
goals of the Staggers Act.
    Since the implementation of the Staggers Act many other factors 
have changed the transportation environment. Mergers have consolidated 
the industry from over 40 Class I carriers to just seven. At the same 
time, there has been major growth in the number of short line 
railroads. The U.S. economy has undergone significant changes as well, 
which have in turn caused major changes in the rail industry. Massive 
growth in imported consumer products has led to significant growth in 
intermodal movements. Increase in the movement of unit trains of coal, 
grain and other products have strained a system that had for years been 
reducing capacity. A combination of traffic growth; change in traffic 
mix; driver shortages in the motor carrier industry; and reductions in 
rail capacity through abandonments, have all led from a system once 
characterized by excess capacity across all modes, to a situation in 
which there are across-the-board capacity shortages, not only in rail 
transportation, but in trucking as well. This period also saw an 
enormous increase in fuel costs. These factors have strained the 
transportation system, causing congestion at key points both in truck, 
rail and ports. To meet the ever-growing demand, rail carriers 
encouraged rail shippers to acquire additional equipment, which put 
further pressure on an already-strained system. Service levels 
deteriorated as evidenced with the peak season problems encountered in 
2004.
    All of these forces have created a rail industry far different from 
the ones the framers of the Staggers Act worked to correct. The 
capacity constraints caused rail carriers to shift their focus away 
from seeking additional volumes and instead to try to restrict the 
volume of traffic handled. A new word entered the rail transportation 
lexicon: ``de-marketing.'' With rapidly increasing demand, railroads 
found themselves in the enviable situation of being able to 
significantly increase prices charged to shippers well beyond the 
increase in costs incurred. The mark for ``whatever the market would 
bear'' increased substantially. While many League member companies are 
in commodity businesses that deal with price fluctuations based on 
supply and demand, they now found a situation of rapidly increasing 
rail transportation costs.
    The Staggers Act provided carriers and shippers the opportunity to 
enter into contracts to allow predictable costs for shippers and 
predictable volumes for carriers. The introduction of capacity 
constraints has allowed carriers to discontinue offering contracts to 
many shippers and to shift to public pricing. This approach permits 
rail carriers to adjust prices more rapidly, thus impacting shippers' 
ability to plan their transportation costs. In many cases shippers had 
little recourse when carriers increased prices since there were few or 
no competitive alternatives to rail transportation.
    The League actively participated in the Government Accountability 
Office (GAO) study which is in part the subject of this hearing. League 
staff and several League members met with GAO staff to discuss rail 
issues, and provided information to assist GAO in its study. Much of 
the League's discussion with GAO centered on the problem of the rail 
industry's capacity constraints. In March of last year, the League and 
several of its members appeared before a panel organized by the GAO to 
consider the current state of the rail industry and to advise GAO on 
its study.
    As the GAO study points out, the needs of the rail industry and its 
marketplace have changed dramatically and these changes require a new 
approach. There must be an increased emphasis on value provided by the 
rail industry to shippers and to the economy as a whole. Creative and 
collaborative approaches must be the new mindset. Carriers must have 
the opportunity to realize a fair return on their investment while 
providing shippers with quality service. Carriers and shippers must be 
increasingly flexible to deal with rapidly changing circumstances.
    The most significant challenge the rail industry and its customers 
face is the need to expand existing rail capacity to meet with growing 
demand. The Association of American Railroads (AAR) released a study, 
National Rail Freight Infrastructure Capacity and Investment Study, in 
September indicating that projected growth in rail volumes will require 
major investments. The report was done by Cambridge Systematics, in 
cooperation with the railroads themselves, points out that in the next 
28 years an investment of $148 billion to meet the projected demand. 
The American Association of State Highway and Transportation Officials 
(AASHTO) has released a study in May called America's Freight Challenge 
indicating rail freight demand will increase by 69 percent based on 
tons and 84 percent based on ton-miles by 2035. According to the U.S. 
Chamber of Commerce, by 2020, even with modest economic growth, the 
total domestic tonnage carried by the U.S. freight system will increase 
by almost 67 percent and international trade will nearly double.
    These many factors require the STB to adjust its regulatory 
approach to deal with this new reality. It is no longer appropriate to 
utilize past practices to respond to today's marketplace. First and 
foremost, the STB needs a more balanced regulatory approach. The League 
is pleased that under the leadership of Chairman Nottingham, the STB 
appears to have adopted such an approach. Earlier this year the STB 
announced a more fair and balanced approach to fuel surcharges. In this 
connection, the League believes that if railroads desire to cover the 
changes in their cost of fuel, they should be able to apply a cost-
based fuel surcharge to all rail shipments, whether they are 
commodities regulated by the STB or not. However, if rail carriers 
enter into contracts that do not allow for the application of such 
cost-based surcharges, those remaining shippers that are subject to 
fuel surcharges should not be made to make up, for the shortfall in 
fuel cost recovery.
    The STB's recent proposal to modify its calculation of the rail 
industry's cost of capital is also a positive development. That 
decision more closely aligns the STB's calculation of the rail 
industry's cost of capital with that used by the Federal Reserve Board. 
The change is long overdue: it was a cause for wonderment that, while 
Wall Street analysts were touting the financial strength of the rail 
industry, the STB was citing the industry's poor financial condition. 
If the STB follows through with its proposal, the view of the financial 
community and the view of the regulatory agency would be more 
reasonably aligned. We urge the STB to act promptly to adopt its 
proposal.
    The recently announced decision on Simplified Rate Case standards 
is also in part a step in the right direction, although the League is 
still seriously concerned about several important aspects of the 
decision. This effort, mandated by Congress over 10 years ago, was 
recently released by the STB. The League has been active in this 
proceeding for years and believes that shippers need an reasonable 
approach to resolving rate disputes with carriers--one of the services 
the STB is directed to provide. The League believes that this decision, 
while in part a step forward, needs further changes. The League, along 
with 41 other associations and entities, has recently asked to the STB 
to reconsider its decision in a number of important respects. The 
League looks forward to early and favorable action by the STB on its 
petition. A matter of some concern is the recent action by the AAR and 
five Class I railroads in filing a petition for judicial review of this 
decision with the D.C. Appellate Court which could suggest that the 
railroads intention is to impact the positive direction of the STB.
    However, the League believes that the optimal solution to the 
issues confronting shippers and rail carriers is a private sector 
agreement that will address the needs of both. The League has been 
engaged with the railroads through the AAR in just such discussions. 
The League has developed a proposal that would provide an alternative 
dispute resolution methodology for shippers and carriers that would be 
simple, fair and expeditious. It is the League's hope that such an 
agreement would provide the framework for a new relationship between 
the parties, allowing all parties to quickly resolve their differences 
and focus on the larger issues facing our freight transportation 
industry. As these discussions are on-going, we do not believe it is 
appropriate to discuss them publicly. The League would be pleased to 
brief Members and staff at their convenience.
    The League is pleased to have the opportunity to present our views 
before the committee and looks forward to helping in developing 
solutions to deal with the challenges of meeting the growing 
transportation needs of our country.

    Senator Lautenberg. Thank you very much, Mr. Ficker.
    Mr. Carlson?
    Mr. Carlson. Right here, Mr. Chairman.

           STATEMENT OF ROBERT L. CARLSON, PRESIDENT,

            NORTH DAKOTA FARMERS UNION; ON BEHALF OF

                     NATIONAL FARMERS UNION

    Mr. Carlson. Thank you, Mr. Chairman, thank you, members of 
the Committee, for allowing me to attend this very important 
hearing.
    My name is Robert Carlson. I'm President of the North 
Dakota Farmers Union, representing more than 40,000 member 
families. In addition, I am representing the concerns of 
affiliated grain cooperatives that market farmers' grains in my 
state and the region. And I'm also representing the National 
Farmers Union and its 300,000 members nationwide.
    I will abbreviate my written remarks considerably and try 
to make some key points.
    Number one, Farmers Union supports passage of Senate bills 
772 and 953. For the record, the rail industry has said its 
current prosperity is due to the Staggers Rail Act of 1980. 
There's widespread consensus that railroads are enjoying 
financial rewards due to deregulation. But these rewards are 
literally coming at the expense of captive shippers, such as 
farmers on the Northern Great Plains. Senate bill 772 and 953 
are the only hope family farmers and locally owned grain 
elevators have in restoring a measure of fairness that 
otherwise has been left behind in this era of deregulation.
    We are at the mercy of Burlington Northern Santa Fe. We are 
customers. Indeed, we're captive customers, which ought to make 
us more valuable to BNSF. That captivity, however, means we 
have no realistic shipping options. Service and rates, as 
determined by the railroad, can literally dictate which 
shippers prosper and which ones are sidetracked.
    During the car shortage of 2003 and 2004, BNSF records show 
that 70 percent of the past-due orders for grain cars were for 
shippers in North and South Dakota, Montana, and Minnesota, 
areas that qualify as captive to BNSF. Farmers and elevator 
managers are equally frustrated by unjustly high rates and 
extremely poor service.
    This is a strong statement, but true, that I'm going to 
make next. I would prefer a grain elevator manager tell you 
some of the horror stories I have heard. Unfortunately, the 
Surface Transportation Board does not have a witness protection 
program.
    [Laughter.]
    Mr. Carlson. Elevator managers say they prefer not to voice 
their concerns out of fear of reprisal. BNSF does have the 
market power to make or break its own customers. I understand 
this. I served on a board of a large farmer-owned grain 
elevator cooperative. Farmers do pay the freight. If freight 
rates go up, the price elevators, in turn, pay farmers for 
their crops goes down. This puts farmers in my State at a huge 
price disadvantage, as compared to farmers in Nebraska, where 
BNSF faces significant competition from Union Pacific, and, 
subsequently, shipping rates are less.
    And therein lies the problem. Captive shippers pay more 
than those who have options. The Staggers Act allows and 
encourages railroads to use differential pricing. They can 
charge a North Dakota elevator significantly more to move a 
carload of grain 400 miles to Minneapolis than to move the same 
car another 400 miles from Minneapolis to Chicago. Why is this, 
given the distance and cost is roughly the same? Because two 
railroads compete for traffic over the 400 miles between 
Minneapolis and Chicago.
    Rates in Montana and North Dakota are between 250 and 550 
percent of variable costs, significantly higher than the STB's 
benchmark of excessive.
    I'll move to my conclusion.
    I would ask Congress to pass Senate bills 772 and 953 to 
restore a measure of competition to rail transportation. 
Railroads are sounding the alarm that these policies will lead 
to reregulation. We don't think that's true. Paper barriers, 
final-offer arbitration, and rail quotes over rail segments are 
all provisions in this legislation that will provide access to 
increased competition and provide captive shippers access to 
rate and service problem resolution.
    We also ask Congress, simultaneously, to make the STB more 
accountable to shippers and to make rate challenges more 
affordable and accessible to captive shippers, whose pockets 
are not nearly as deep as the rail industry, and whose pockets 
have been emptied by a rail industry whose market power is 
virtually unchecked.
    Thank you.
    [The prepared statement of Mr. Carlson follows:]

          Prepared Statement of Robert L. Carlson, President, 
    North Dakota Farmers Union; on Behalf of National Farmers Union
    Hello, and thank you to the Senate Subcommittee on Transportation 
for the opportunity to visit with you today. I am grateful to be a 
member of this panel of people who have a vested interest in this 
Nation's rail transportation system.
    My name is Robert Carlson. I am a farmer. Today, I am speaking on 
behalf of the more than 40,000 member families of North Dakota Farmers 
Union. In addition, I am representing the concerns of the affiliated 
farmer-owned cooperative grain elevators in my state, and I am also 
representing National Farmers Union and its 300,000 members nationwide.
    For more than 10 years, I have been President of North Dakota 
Farmers Union, a general farm organization that has served farmers, 
ranchers and cooperatives for more than 80 years. Rather than give 
narrow focus to a specific crop or type of livestock, Farmers Union is 
able to see the entire picture of family farm agriculture. Our focus is 
to strengthen the viability of family farms for generations to come. In 
this quest, we have and continue to look well beyond the farm gate. We 
take a keen interest in what customers are demanding of us. Those 
customers could be consumers buying groceries, bakeries buying four or 
another nation seeking a shipload of soybeans.
    Depending on market demand, our crops may be bound for the export 
terminals of the Pacific Northwest, flour mills near Chicago, feedlots 
in southern states or ethanol plants in Iowa, to name a few. Our 
nation's rail system is vital in terms of national security and 
economic growth. The viability of this Nation's family farms and 
ranches is entirely dependent on railroads. I'd like to say this is a 
win-win partnership for both producers and railroads. Sadly, it is not.
    Railroads in general have put rural America low on the list when it 
comes to service. And, in areas where little if any true competition 
exists, railroads have squeezed excessive profits from farmers and 
grain elevators, while in return giving us a ``take it or leave it'' 
level of service.
    Farmers Union supports passage of Senate Bills 772 and 953. The 
former being the Railroad Antitrust Enforcement Act of 2007, the latter 
being the Rail Competition and Service Improvement Act of 2007. For the 
record, the rail industry has said its current record prosperity is due 
to the Staggers Rail Act of 1980. There is widespread consensus that 
railroads are enjoying financial rewards due to deregulation. These 
rewards are literally coming at the expense of captive shippers such as 
farmers on the Northern Great Plains. Senate Bills 772 and 953 are the 
only hope family farmers and locally-owned grain elevators have in 
restoring a measure of fairness that otherwise has been left behind in 
this era of deregulation.
    We are at the mercy of BNSF, a company that itself seems merciless 
in treating grain elevators and farmers as if they were a nuisance. We 
are customers. Indeed, we are captive customers which ought to make us 
more valuable to the BNSF. That captivity, however, means we have no 
other realistic shipping options. In a free enterprise system, 
competition drives innovation, lower costs and better service. 
Railroads are quick to serve intermodal customers between, say, Chicago 
and Seattle, as that traffic can be won away by a competing railroad 
that also serves both end points. BNSF gives far less attention to 
serving grain elevators in North Dakota because that grain has no other 
realistic way to move to market. In fact, grain has been piled up as 
grain elevators run out of storage on account of a lack of trains. Why 
would BNSF do this? Because the grain isn't going anywhere, allowing 
the railroad to get around to delivering cars when it is more 
convenient to them. In this process, grain elevators and farmers wait 
on the sidelines to market their grain. Service and rates as determined 
by the railroad can dictate which shippers prosper and which ones are 
sidetracked.
    During the car shortage of 2003-04, BNSF records show that 70 
percent of the past due orders for grain cars were for shippers in 
North and South Dakota, Montana and Minnesota--areas that qualify as 
captive to BNSF. Farmers and elevator managers are equally frustrated 
by unjustly high rates and extremely poor service.
    I would prefer a grain elevator manager tell you some of the horror 
stories I have heard. Unfortunately, the Surface Transportation Board 
does not have a witness protection program. Elevator managers say they 
prefer not to voice their concerns out of fear of reprisal. BNSF does 
have the market power to make or break its own customers. I understand 
this: I served on the board of a large farmer-owned grain elevator 
cooperative.
    It is worth noting that farmers really do pay the freight. When you 
buy a car, you pay a transportation fee. If you buy something online, 
you pay for the packaging and shipping. Yet when a grain elevator ships 
wheat to a flour mill or for export, the elevator pays the railroad. If 
rail freight rates go up, the price elevators in turn pay farmers for 
their crops will go down. This puts farmers in my state at a huge price 
disadvantage as compared to farmers in Nebraska, where BNSF faces 
significant competition from Union Pacific and, subsequently, shipping 
rates are less.
    As you know, the Interstate Commerce Commission was abolished in 
1995. In its place, Congress created the Surface Transportation Board 
which was told to limit its level of oversight (read: regulation) of 
the railroads. The STB has made it extremely difficult for shippers to 
challenge rail rates as excessive. The costs to do so are enormous in 
terms of time and money. Further, farmers and grain elevators have 
little expectation the STB would order and police any effective change 
in the event the rail industry was found guilty.
    My state used to be served by five Class I railroads. Today, only 
two operate in the state as a result of mergers. Mergers have reduced 
more than 40 Class I railroads in 1980 to seven today. And of these, 
four--two in the West, two in the East--effectively control more than 
90 percent of the traffic. While that may not seem like a true 
monopoly, it clearly shows market dominance. Further, as these 
railroads tend to exclusively serve vast areas of territory in which 
there is no effective competition, they have become monopolies. In the 
Upper Great Plains, BNSF does not lose sleep at night over the threat 
of competition from trucks, river barges or Union Pacific.
    We appreciate our short line and regional railroads. In most cases 
they are models of customer-friendly service. But it is important to 
remember they are not competition to the Class I lines. In fact, they 
are indebted to the Class I railroads for car supply, pricing and off-
line service. Short lines, regionals and Class I railroads all could be 
more innovative and competitive if paper barriers would be removed to 
allow for a more competitive interchange of cars to seek lower shipping 
rates. This kind of consumer approach is what most Americans are used 
to. As an example, you are not forced to buy your groceries from a 
specific store, you are free to choose. These bills are meant to give 
shippers more choices in routing their products to market.
    Therein lies the problem. Captive shippers pay more than those who 
have options. The Staggers Act allows--encourages--railroads to use 
differential pricing. They can charge a North Dakota elevator 
significantly more to move a carload of grain 400 miles to Minneapolis 
than to move the same car another 400 miles from Minneapolis to 
Chicago. Why is this, given the distance and cost is roughly the same? 
Because two railroads compete for traffic over the 400 miles between 
Minneapolis and Chicago.
    According to law, the STB may entertain a rate challenge from a 
shipper providing the railroad is charging a rate that is in excess of 
180 percent of variable costs and the railroad faces no effective 
competition. The Government Accountability Office (GAO) has found that 
``traffic traveling at rates significantly above the threshold for rate 
relief has increased. We (GAO) reported that STB's rate relief process 
to protect captive shippers has resulted in little effective relief for 
those shippers.'' In 2006, the GAO raised the question of ``whether 
rail rates in selected markets reflected justified and reasonable 
pricing practices, or an abuse of market power by the railroads?'' The 
GAO further found that some areas with access to a single Class I 
railroad ``also have more than half their traffic traveling at rates 
that exceed the statutory threshold for rate relief.''
    Rail rates in Montana and North Dakota are between 250-450 percent 
of variable costs--signifcantly higher than the STB's benchmark of 
excessive. Why, then, are shippers not lining up to file rate 
complaints with the STB? Cost and complexity come to mind. Few shippers 
are willing to risk the tens of thousands of dollars (some estimates 
suggest it would take several million dollars) and years that pursuing 
a rate case will demand. Even more telling is shippers have little hope 
the STB would--or could--order any meaningful action should the 
challenge be successful. Most shippers have observed the STB does a 
better job advocating for the rail industry's right to earn an 
``adequate'' profit as opposed to limiting the rail industry from using 
market power to charge as much as possible from shippers who are at 
their mercy.
    GAO singled out STB's rate relief process as ``inaccessible to most 
shippers (and) expensive, time consuming and complex.''
    This obstacle has deterred many shippers from even trying to seek 
relief from what are, by STB definition, excessive rates. This is why 
the North Dakota Legislature in 2003 and again in 2005 appropriated 
state funds to support a rate case filing before the STB. Both North 
Dakota Farmers Union and North Dakota Farm Bureau contributed toward 
this initiative.
    In January 2007 the STB ruled the railroads were overcharging 
customers through a fuel surcharge. One study estimated the railroads 
pocketed $3 billion due to overcharging. Adding insult to injury, the 
railroads had been linking fuel surcharges to rates, meaning captive 
shippers had to pay even more than other shippers to cover the 
railroad's cost of fuel. The surcharges had nothing at all to do with 
the actual increase of fuel prices relating to the fuel consumed to 
move grain from an elevator to a buyer. The STB did tell railroads to 
link fuel surcharges to actual distance of each car movement, which 
made sense. The STB did not ask the railroads to refund the 
overcharges.
    The railroads have taken advantage of grain shippers, especially 
captive shippers in the Upper Great Plains. This is not a healthy 
business arrangement. It is hardly a partnership, though it ought to 
be. Another item worth noting is that grain elevators have invested 
huge sums of capital in adding miles of rail sidings and grain storage 
to handle unit trains, which ostensibly make the railroads more 
efficient in the short run and leave the elevators deeply invested for 
the long haul.
    In North Dakota, 90 percent of our spring wheat--and we grow the 
most in the Nation--moves by rail, the balance by truck. According to 
the Upper Great Plains Transportation Institute, more than 80 percent 
of all North Dakota grains and oilseeds move by rail. And, I hasten to 
mention that Canadian Pacific has limited route miles in North Dakota. 
BNSF remains the 700-pound gorilla in the room. Yet for the few 
fortunate grain elevators that do have access to both Class I railroads 
in my state, the shippers prefer using Canadian Pacific by a factor 
approaching five-to-one.
    As it stands, captive shippers are living with higher rates. The 
railroads are using market power to extract every extra dime of profit 
possible. The STB has not protected captive shippers from being 
exploited. I could go on at length about the service and pricing abuses 
that exist.
    Rather, I would ask Congress to pass Senate Bills 772 and 953 to 
restore a measure of competition to rail transportation. Railroads are 
sounding the alarm that these policies will lead to reregulation. This 
is not true. Not at all. Paper barriers, final offer arbitration and 
rate quotes over rail segments are all provisions in this legislation 
that will provide access to increased competition and provide captive 
shippers access to rate and service problem resolution. We also ask 
Congress simultaneously to make the STB more accountable to shippers 
and to make rate challenges more affordable and accessible to captive 
shippers whose pockets are not nearly as deep as the rail industry--and 
whose pockets have been emptied by a rail industry whose market power 
is virtually unchecked.

    Senator Lautenberg. Mr. English, please?

             STATEMENT OF HON. GLENN ENGLISH, CEO,

  NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION; CHAIRMAN, 
            CONSUMERS UNITED FOR RAIL EQUITY (CURE)

    Mr. English. Thank you very much, Mr. Chairman.
    I'm Glenn English. I'm the Chairman of the Consumers United 
for Rail Equity. I'm also the Chief Executive Officer of the 
National Rural Electric Cooperative Association.
    Mr. Chairman, the focus here is on stranded shippers, not 
shippers in general. Stranded shippers, that 20 percent of the 
traffic that is being abused. We have a chart that was put up 
by the railroads, focusing with regard to the rates. Well, 
let's focus on one with regard to the difference between those 
who have competition and those who do not. And, as you can see, 
there is a vast difference. This is exactly what Harley 
Staggers was concerned about in 1980 when he put this 
legislation together and put a provision in there to protect 
stranded shippers.
    Now, the General Accounting Office has just pointed out 
that the rate challenge process of the Surface Transportation 
Board is inaccessible to most rail captive customers. And the 
rate reductions claimed by the railroads since the Staggers 
Act, to a large extent, are due to railroads shifting cost to 
customers. Now, that's the real issue that we have before us, 
Mr. Chairman. This is something that we've lived with for 27 
years. The intent of the Staggers Act has not been carried out. 
Those who tout the Staggers Act are not people who tout all the 
provisions of the Staggers Act, nor do they enthusiastically 
support that.
    Now, obviously, this legislation set up a--an entity, a 
body--first, the Interstate Commerce Commission and then the 
Surface Transportation Board--to address this issue, to protect 
the captive shippers, to protect them against a monopoly, to 
protect them against abuse. The system has not worked. That's 
basically what the GAO report says: It has not worked, and it 
is not working today. And the Congress has done absolutely 
nothing to require that the intent of the law has been carried 
out.
    Now, the question is raised, Mr. Chairman, as to why. Why 
hasn't the Surface Transportation Board done their job? Why 
haven't they carried it out, in 27 years? Why haven't they done 
this? And I would suggest to you that, certainly the perception 
of the captive shippers--and, I would go further than 
perception; I think it is badly obvious as to why they haven't 
carried it out, and I would point to an article, that I believe 
has been handed out to all the Senators, from Frank Wilner in 
the Argus Rail Business, on August 27, 2007. He makes the 
point--and I think it's a very good one--he states, ``Were the 
public to perceive judges had a favorable bias toward an 
industry that subsequently hired them away from the courts, 
anarchy would follow.'' But that's exactly what has happened in 
this case. If you go back and review each and every member of 
the Surface Transportation Board since it has been created, 
every former member has gone to work for the railroads. Now, I 
know, in the Congress, myself included, certainly had a 
cooling-off period before we could go work and come back to the 
Congress. There are 100 Senators, 435 House Members, the 
President of the United States, to review all of our work. But, 
even then, we had a cooling-off period that we couldn't, in 
fact, come back and lobby our colleagues or talk to our 
colleagues. Now, I understand, for the Senate, it's 2 years--2-
year cooling-off period. There is no cooling-off period, as far 
as the Surface Transportation Board. These people go to work 
over there, and each and every one of them knows where they're 
going to go to work after they leave the Surface Transportation 
Board. Each and every one of them do.
    [The information referred to follows:]

                  Argus Rail Business--August 27, 2007

                       Perception of bias at STB

                            by Frank Wilner

    Justice is said to be blind--except to the facts--and rightly so. 
Were the public to perceivejudges had a favorable bias toward an 
industry that subsequently hired them away from thecourts, anarchy 
would follow.
    So what's going on at the STB and its predecessor Interstate 
Commerce Commission (ICC),where shipper perception is that the agency 
exhibits a favorable bias toward railroads?
    Regulators say the perception is incorrect. But consider the facts 
creating the perception:

   The previous two chairmen of the STB were hired by the 
        railroads they regulated. LindaMorgan became Union Pacific's 
        (UP) principal outside legal counsel at Covington & Burling, 
        filling avacancy created when UP hired her predecessor to head 
        its law department in Omaha.Meanwhile, Roger Nober departed the 
        STB to become outside legal counsel to BNSF(and other 
        railroads) at the firm of Steptoe & Johnson; and, one year 
        later, was hireddirectly by BNSF to head its law department in 
        Ft. Worth.

   CSX hired former STB member Jake Simmons as a consultant.

   The Association of American Railroads (AAR) hired former STB 
        member William Clyburnas a consultant.

   CSX hired former ICC Chairman Reese Taylor as a consultant.

   BNSF predecessor Burlington Northern hired former ICC member 
        Betty Jo Christian asoutside counsel.

   BNSF predecessor Burlington Northern hired former ICC 
        Chairman Darius Gaskins tohead its marketing department, and 
        later elected him chief executive.

   Short line railroad holding company RailTex elected former 
        ICC Chairman HeatherGradison to its board of directors.

   The AAR hired former ICC member Karen Phillips, now a 
        Canadian National lobbyist.

    Senior STB/ICC seniorstaff members also have been offered lucrative 
employment by railroads:

   Northern Southern (NS) hired Nober's chief of staff, John 
        Scheib, who formerly was outside counsel to UP.

   The AAR hired Simmons's attorney-adviser, Dennis Starkes.

   NS hired Simmons's chief of staff, Rick Crawford.

   BNSF predecessor Santa Fe Railway hired ICC Secretary Sidney 
        Strickland.

   UP predecessor Southern Pacific hired ICC's Congressional 
        relations officer, Alex Jordan.

   The AAR hired ICC department head Alan Fitzwater, 
        subsequently a Burlington Northernlobbyist.

   The AAR hired ICC Acting Secretary Nancy Wilson.

    The STB, meanwhile, has hired numerous railroad officials to senior 
positions.

   STB chief economist William Huneke, and STB economists 
        William Brennan and Randy Resor, are former Association of 
        American Railroads employees. Also, STB economist Michael 
        Boyles previously was employed by a consulting firm performing 
        economic evidentiary work for railroads in rate reasonableness 
        cases decided by the STB.

   Current STB member Douglas Buttrey appointed as his chief of 
        staff, Alice Saylor, a former senior officer of the American 
        Short Line and Regional Railroads Association, and previously a 
        railroad attorney.

   Current STB Chairman Charles Nottingham hired as his chief 
        legal adviser, Scott Zimmerman, who had been outside regulatory 
        counsel for NS.

   Senior STB attorney Ray Atkins is a former attorney with 
        UP's outside law firm, Covington & Burling.

    Not for more than half a century has someone with a shipper 
background been confirmed by the Senate to the ICC/STB. That was Rupert 
Murphy, nominated by President Eisenhower in 1955. The lone STB senior 
employee in recent years with shipper experience, Gerald Fauth, 
departed four years ago.
    None of this is meant to suggest there has been--or is--any 
wrongdoing at the STB or its ICC predecessor. It is meant to explain 
why shippers perceive a bias in decisionmaking, and why Congress is 
advancing legislation to force the STB to protect shippers from rail 
monopoly power as promised by the Staggers Rail Act of 1980.

    Now, you tell me, if you know where you're going to go to 
work before the fact, if you know that every one of your 
predecessors has gone to work for the Surface Transportation 
Board, if, in fact, if you're a staff member over there, a 
senior staff member, virtually every one of those staff people 
have gone to work for the Surface Transportation Board, now you 
tell me, is that going to influence your decision? The 
perception of those of us who are captive shippers, it 
certainly does. We think it's obvious. This matter needs to be 
corrected.
    The last time there was a favorable ruling coming out of 
the Surface Transportation Board--and I'm talking about just a 
little bit of correction, just a little bit of correction--was 
back in 2001. My goodness, this is so rare that it is just 
outrageous.
    Mr. Chairman, I'd say that this calls for action. We have 
to pass some kind of legislation to bring around a correction.
    Now, over in the other body, whenever I testified over 
there, quite frankly, frustration overcame me. I've got to say 
that. But I just said, you know, golly gee, if you're not going 
to live up to this provision of the Staggers Act, why don't you 
repeal it? Have the nerve to repeal it. Don't give the Surface 
Transportation Board a fig leaf of somehow they're taking care, 
looking after those people who are supposedly under their 
protection--namely, stranded shippers--under the law, as it is 
provided.
    Now, this, I think, makes it very obvious, Mr. Chairman, 
the perception is there. And I can assure you that if the 
American people ever come to focus their attention on the 
Surface Transportation Board, then we will see that kind of 
outrage that this article portrayed.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. English follows:]

Prepared Statement of Hon. Glenn English, CEO, National Rural Electric 
  Cooperative Association; Chairman, Consumers United for Rail Equity 
                                 (CURE)
    Mr. Chairman and members of the Committee:

    My name is Glenn English. I am the Chief Executive Officer of the 
National Rural Electric Cooperative Association. I also serve as 
Chairman of Consumers United for Rail Equity (CURE), a rail customer 
advocacy group representing a broad array of vital industries--chemical 
manufacturers and processors; paper, pulp and forest products; farmers; 
cement and building material suppliers; and many more. Mr. Chairman, 
members of this coalition have experienced deteriorating service and 
sharply increased rates and appreciate the leadership shown by 
committee members Senators Dorgan, Rockefeller, Cantwell, Klobuchar, 
Vitter and Thune in the effort to address the longstanding problems 
facing rail customers.
    As member-owned, not-for-profit organizations, the obligation of 
electric cooperatives is to provide an affordable and reliable supply 
of electricity to our consumers. We take our obligation to serve very 
seriously. The personal and economic health of our members and our 
communities depends on it.
    Mr. Chairman, we believe there is also an overriding national 
public interest in the operation of the rail system. The railroad 
industry is not just another private sector industry. Railroads provide 
vital services important to a range of national interest activities 
from the movement of war material, to distribution of some of the most 
important domestic energy sources, to providing vital links in the 
supply chain that bring domestically produced commodities and 
manufactured products to domestic and international markets. 
Unfortunately, we believe the railroads are not as serious about their 
obligation to serve the public interest as is my industry. They have 
consistently failed to fulfill their basic ``common carrier'' 
obligation.
    Mr. Chairman, we believe that the system established by Congress to 
ensure competition in the national rail system and to protect 
``captive'' rail customers from railroad monopoly abuse is not working. 
The Surface Transportation Board (STB) is failing in its responsibility 
to rail customers and to the Nation. We believe that the STB cannot and 
will not correct its mistakes in a timely manner and that legislation, 
such as S. 953, the Railroad Competition and Service Improvement Act of 
2007, must be enacted if rail customers are to receive the access to 
competition and protections from monopoly abuse promised in the 
Staggers Rail Act of 1980.
The Staggers Rail Act of 1980 Today: Not What Harley Staggers 
        Envisioned
    Twenty-seven years ago, Congress passed the Staggers Rail Act of 
1980. A review of the debate from this landmark legislation reveals 
that Members of Congress envisioned a far different regulatory regime 
and a far different national rail system than is in place today. Mr. 
Chairman, my then colleague in the House, Harley Staggers, spoke of a 
bill that would ``assure a healthy vibrant system of railroads across 
the United States, and yet it would provide timely review to the 
Interstate Commerce Commission (ICC) by captive shippers who feel they 
are facing exorbitantly high rates charged by the railroads.'' Upon 
signing the Staggers Act, President Carter announced that the proposal 
would ``benefit shippers throughout the country by encouraging 
railroads to improve their equipment and better tailor their service to 
shipper needs.''
    Unfortunately for the consumers in this country, these predictions 
have only partly become true. This nation's few remaining major 
railroads are exceedingly prosperous, thanks to their unrestrained 
ability to increase prices at will and transfer almost every imaginable 
cost to the shipper. But, clearly the railroads are not tailoring their 
service to shipper needs. In fact, high costs and unreliable service 
have become the accepted norm for most railroad companies, and shippers 
simply have nowhere to turn for relief.
    Members of Congress need to be able to see their legislation 
carried out in the manner in which they intended. Many legislators talk 
about the Staggers Rail Act and the success it had in bringing back 
vitality to the rail industry, and there is a lot of truth to that. 
But, the provisions with regard to protecting captive rail shippers 
from abuse by monopoly railroads have not been in keeping with what 
Harley Staggers intended.
    There is something to be said for understanding the intent of the 
law, and what was promised. When I was in Congress, I became very 
frustrated when a piece of legislation was passed and was sent over to 
the Administration or some regulatory body, only to be interpreted 
differently than what was intended when it passed. That is what we have 
occurring here.
    Captive shippers need the Staggers Rail Act carried out as intended 
by Congress. That means that we need the faithful implementation and 
enforcement of those protections that Harley Staggers and his 
colleagues wrote into the legislation. That is not taking place today. 
That's the bottom line.
    The private interests of the railroad industry--but not the public 
interests of the Nation--continue to be protected by a Surface 
Transportation Board that is unwilling to provide adequate oversight of 
the railroad industry or to restrain their unbridled exercise of market 
power over captive customers. Under the watch of the STB (and its 
predecessor the ICC) the railroad industry has been allowed to 
consolidate from more than 40 major railroads in 1980 to just four 
major railroads today that carry over 90 percent of the Nation's rail 
freight. That's what this issue comes down to. Any entity that requires 
rail service, is not served by two of the remaining railroads and must 
rely on railroads for transportation has no access to transportation 
competition. That rail customer must do business with the railroad that 
holds the customer captive on any terms dictated by the railroad. 
That's what's known as monopoly power.
    The STB shows bias toward the railroad industry monopolies and 
against the legitimate interests of rail customers. Recent STB actions 
suggest that--without major reform--shippers and consumers will 
continue to be at the mercy of a greedy railroad industry. That, we 
believe, threatens the health of our economy and in many instances our 
national security interests.
Government Accountability Office: Concerns About Competition and 
        Captive Rail Rates
    The Government Accountability Office (GAO) issued a report last 
fall outlining a pervasive and increasing lack of competition in the 
rail industry. The GAO report, first issued in October 2006 and 
supplemented and updated on August 15, 2007, was requested by a number 
of Members on this Committee. The GAO found that rail prices are on the 
rise and a significant number of rail customers are paying more than 
three times what it costs the railroads to move their freight.
    The GAO concluded:

   ``Concerns about competition and captivity (in the rail 
        industry) remain as traffic is concentrated in fewer 
        railroads.''

   ``[The Surface Transportation Board's] rate relief processes 
        are largely inaccessible and rarely used.''

   ``We believe that an analysis of the state of competition 
        and the possible abuse of market power, along with the range of 
        options STB has to address competition issues, could more 
        directly further the legislatively defined goal of ensuring 
        effective competition among rail carriers.''

   ``Significant increases in freight traffic are forecast, and 
        the industry's ability to meet them is largely uncertain.''

   ``Costs, such as fuel surcharges, have shifted to shippers, 
        and STB has not clearly tracked the revenues the railroads have 
        raised from some of these charges.''

    The GAO report showed that freight rail rates are continuing to 
rise, even as carriers shift more and more costs to rail customers. 
Railcars owned by freight railroads no longer carry the majority of 
tonnage. The GAO study concluded that railcar ownership has shifted by 
20 percent since 1987, with rail company cars carrying only 40 percent 
of the load in 2005, compared with 60 percent in 1987.
Railroad Profitability: A Golden Age of Railroading
    Opponents of any changes in railroad policy have said for at least 
20 years that current rail policy is necessary to ensure the financial 
viability of the rail industry and that the rail industry will go broke 
if any constraints are put on its existing monopoly power. Now, the 
rail industry is not going broke, they're in the black and thriving on 
Wall Street. Obviously America's major railroads are doing very well 
financially. Meanwhile, rail customers have waited two decades to see 
the Surface Transportation Board, and its predecessor the ICC, carry 
out the promises that were made in the Staggers legislation. Rail 
customers need these promised benefits today.
    Simply put, the railroads have turned the corner from the difficult 
days that led to the Staggers Act and are now clearly able to attract 
and retain the capital they need to run their railroads and run them 
profitably. What we actually have today are record profits, record 
share prices, and enough revenue in the rail industry for the major 
railroads to buy back billions of dollars worth of their stock. We're 
seeing that happen today. This mature, basic American industry has 
become the darling of hedge funds and other aggressive investors. Why? 
Because railroads enjoy pricing power over an ever-increasing number of 
their customers.
    I have a chart that compares the difference in rail transportation 
prices paid by customers with access to competition and those rail 
customers without access to competition. The rates have declined 
steeply for rail customers with access to competition and are remaining 
relatively low. Where there is no competition, the rates are going up. 
The chart shows average competitive and captive rates for four 
different commodity groups in the first quarter of 2007. There is no 
way that this variation in rates between captive and competitive rail 
customers is meeting the intent of the law. The promise that was made 
twenty-seven years ago is not being carried out here. The blatantly 
defective implementation of the Staggers Rail Act by the STB is 
unacceptable to rail customers, and it should be unacceptable to 
Congress.

STB Process Is Broken

    The GAO study also concluded that the rate relief processes of the 
STB are largely inaccessible and rarely used. Now why would they be 
rarely used? Well, I would suggest that those who are captive shippers 
see little hope that the Surface Transportation Board will provide any 
meaningful relief from high railroad rates. The railroads say they are 
already subject to strict regulation and that shippers have a right to 
file complaints with the STB regarding rates. This--of course--is far 
from the truth. It is important to understand the very limited extent 
to which railroad rates are subject to any review by the STB.
    Only an extremely small set of rail rates are eligible to be 
considered for any relief by the STB and these rates are not 
``regulated'' in the classic sense of that term. Classic regulation 
requires regulators to protect the public interest over the private 
interest. In this case, the STB has turned into an agency that protects 
the private railroad monopoly interests. Here is how they do it.
    Any rail movement for which there is a rail contract is exempt from 
the STB's jurisdiction altogether. In addition, the STB has exempted 
from its jurisdiction much other traffic (including intermodal traffic) 
from its regulation. STB Chairman Nottingham testified to the House 
Transportation and Infrastructure Committee on September 25th that only 
10 percent or less of rail rates are subject to review by the STB.
    For rail traffic that is ``captive'' and thus subject to 
regulation, the railroads have the initial flexibility to impose any 
rate they want without seeking any form of ``prior approval'' from the 
STB. The rail customer may then challenge the rate, but only if the 
rail customer can prove to the STB that the customer has no 
economically viable option but to use the railroad in question (an 
absence of effective competition) and the rate is at least 80 percent 
higher than the direct cost to the railroad of moving the customer's 
freight (the rate exceeds the jurisdictional threshold of 180 percent 
of variable costs).
    The rail customer then has the right to seek rate relief from the 
STB, but only if the rail customer can prove to the STB that the rate 
exceeds a reasonable maximum. This reasonable maximum is called ``stand 
alone cost''--what it would cost the customer at current prices to 
build and operate its own railroad to move its own freight. Since the 
STB cannot reduce a rate to a level below 180 percent of variable 
costs, captive rail customers will always pay at least 80 percent more 
than it is costing the railroad to move their freight. The rail 
customer in a ``stand alone cost'' case must pay a filing fee to the 
STB of $178,200 to begin this process.
    Congress did not provide in legislation this rate standard or this 
process in which the rail customer bears all burdens of proof. This 
process was developed by the STB and the Interstate Commerce Commission 
before it. The Staggers Rail Act simply directs the regulatory agency 
to ensure ``reasonable rates'' for those rail customers without access 
to competition while allowing the railroads the chance to generate 
sufficient revenues to attract and retain capital.
    In recent years, it has been impossible for shippers to obtain 
meaningful relief at the STB. While the jurisdictional threshold (or 
minimum a rail customer must pay) is set at 80 percent above the 
railroads' direct cost, shippers have been unable to get any rate 
relief when their rates amount to 3 to 5 times--or more--the direct 
cost of moving the freight in question. Extracting margins of 300 to 
500 percent from rail customers, who have no alternative but to use a 
single monopoly railroad for transportation, is not in any sense 
``reasonable'' and is not what Congress intended. These enormous rates 
on individual rail customers are not fair and are simply not in the 
best interests of the Nation.
    The STB's September 10th decisions in the Basin Electric and AEP 
West Texas cases underscore that the STB process is fundamentally 
broken. After Basin's long term contract with its rail carrier expired, 
the rail carrier--Basin's only option for moving coal to its power 
plant in Wyoming--doubled its rates to Basin and refused to provide a 
long term contract. Basin brought a rate complaint to the STB. After 
Basin and the other owners of the plant invested 3 years and more than 
$6 million, the STB on September 10th ruled that Basin should receive 
no relief from these rates. In the case, Basin proved that the new rate 
(as of today) is more than 6 times the direct cost to the railroad of 
moving the coal and, if the rate were to remain in place for twenty 
years, would escalate to over 8 times the direct cost to the railroad. 
Mr. Chairman, in this case the STB essentially sanctioned a $1 billion 
transfer from electricity customers of the owners of this plant to 
Burlington Northern over the next 20 years.
    Basin played by all of the rules. They submitted volumes of 
evidence supported by dozens of expert witnesses--the most 
comprehensive rate case ever presented to the STB. They responded 
promptly and completely to the STB's every request and filed multiple 
rounds of supplemental information. They had a strong case and met all 
of the evidentiary requirements for establishing the unreasonableness 
of the involved rates.
    After Basin had submitted mountains of evidence in this case and 
the evidentiary record was closed, the STB implemented new rules it 
claimed will improve the rate challenge process. The STB promised these 
changes would not prejudice Basin's case and, over the objections of 
Basin and all other rail customers with pending rate cases, applied 
these new rules to pending cases, including Basin's case. The STB was 
wrong. In its final decision the Board admitted the new rule changes 
were prejudicial to Basin and may have destroyed any prospects for this 
nonprofit electric cooperative to obtain rate relief.
    The clear message from the STB to Basin customers is that the STB 
will protect the private economic interests of the monopoly railroads 
no matter the costs to the public. A second message may be even more 
troubling: the STB doesn't really understand the implications of its 
rules and its rules changes.
Will the STB Correct its Implementation of the Staggers Rail Act 
        Without 
        Legislation? No! Three Examples:

    Mr. Chairman, some Members of Congress and others acknowledge that 
the STB processes are not operating properly--as the October 2006 GAO 
report verifies--but want to believe that the STB can and will make 
adjustments in its policies to get back on track implementing the 
Staggers Rail Act properly. Rail customers have heard this argument 
before. In fact, we have heard it for at least a decade since the last 
major rail merger left the Nation with essentially four major railroad 
systems. We see no evidence that the STB is on track to correct its 
implementation of the Staggers Rail Act.
I. The Rate Process Does Not Work
    Rail customers have complained that the rate process doesn't work. 
The GAO report says it's ``inaccessible'' to most rail customers. I 
just discussed the changes the STB recently made to its ``large rate 
case'' rules--which hurt rail customers. The STB also had ``small rate 
case'' rules. The rules that have been in place for 10 years have been 
used twice, with both cases being settled. Three ``small rate cases'' 
were recently filed by DuPont. Currently, 36 rail customer groups 
oppose the new ``small rate case'' rules and have asked the STB to 
reconsider these rules.
II. Rulings Block Access to Rail Competition
    Rail customers point out two rulings of the STB sanctioning 
railroad practices that artificially prevent rail customers from 
accessing rail competition.
    In the ``bottleneck'' decision of 1996, sometimes referred to as 
the ``quote-a-rate provision,'' the STB decided that a railroad is not 
required to move a customer's cars to a junction where that customer 
could reach competition on another railroad. This ruling has resulted 
in captivity for many rail customers. Chairman Nottingham, in his 
testimony to the Senate Judiciary Committee on October 3rd, said that 
the ``bottleneck'' issue was the issue he heard the most about during 
his pre-confirmation visits with stakeholders and others. But in the 14 
months since becoming Chairman, he hasn't had time to ``get his arms 
around'' this issue. Without Congressional directive, this issue will 
not be resolved fairly by the STB.
    The STB also sanctions a second anti-competitive practice that 
allows major railroads to include in their track lease contracts with 
short line railroads provisions that prevent the short line from doing 
meaningful business with any railroad other than the railroad from 
which it obtains its track. These provisions are called ``paper 
barriers'' or ``tie-in agreements.'' Since many short line railroads 
interconnect with more than one major railroad, these ``paper 
barriers'' are major impediments to competition. The STB held a hearing 
on this issue and indicates that it will issue a decision before the 
end of October. There is no indication of whether the STB will ban 
these types of agreements at all, only ban them for the future, or 
allow them conditionally. Since there are several hundred short line 
railroads operating under these contractual limitations, rail customers 
are extremely interested in what the STB will rule with regard to 
existing agreements.
    The fact, Mr. Chairman, is that more than a year after GAO's 
recommendation that the STB study rail competition has the STB agreed 
to a study of competition issues. The study will take at least a year 
Meanwhile, the STB has taken absolutely no action on the second part of 
the GAO's recommendation that they act to ensure competition--and rail 
customers suffer from lack of competition every day while the STB 
ponders.
III. Fuel Surcharges
    The STB has not moved from its passive position to a more pro-
active regulatory oversight position even though the rail system has 
consolidated to four major carriers--consolidations that were all 
approved by the STB, sometimes over the objections of the Department of 
Justice. An example of the problems caused by this passivity is the 
abuse of fuel surcharges by the major railroads.
    Last summer, when this Subcommittee conducted its last STB 
oversight hearing, fuel surcharge abuses were a focal point of the 
hearing. At this Subcommittee's hearing, the Acting STB Chairman 
testified that the Board couldn't determine who was right on the issue: 
the major railroads or their customers. Seven months later, the STB 
finally ruled that the customers were right. In January of this year, 
the STB held that the railroads were abusing the fuel surcharge program 
and often ``double dipping'' on fuel costs. The STB ordered the 
railroads to change their practices by the end of April 2007.
    The STB did not, however, fine the railroads, order refunds or 
credits to rail customers for overcharges or act early to enjoin this 
practice until the railroads could justify its fuel surcharges to the 
STB. The result: a recent study performed for the American Chemistry 
Council put the price tag on fuel overcharges at $6.4 billion.
    This entire problem could have been avoided if the STB had acted 
pro-actively, as they are empowered to do, to enjoin this practice 
early until the railroads could justify their practices. As it is, the 
railroads have pocketed their ill-gotten gains before the STB acted 
with no penalties for their past unreasonable practices.
IV. Conclusion
    Mr. Chairman, these examples illustrate why the STB is not on track 
to correct its misapplication of the Staggers Rail Act. Moreover, even 
if the Board were to suddenly decide to correct its practices, it will 
take years of agency action and further years of litigation while the 
railroads test the legality of any ``improvements'' before any new 
concepts of the STB are tested fully. For these reasons, enacting S. 
953 is a more certain and faster avenue to ensure that the STB is 
implementing the Staggers Rail Act as intended by Congress.
Implement the Staggers Act Or Repeal It
    If Congress doesn't believe there is a compelling crisis for 
captive shippers under the status quo, then the honest thing to do is 
to repeal the Staggers Act. Either Congress should insist on its will 
being carried out, or it should repeal the law that was intended to 
ensure competition and protect rail customers. Rail customers have 
heard the worn refrain before: give the STB a little more time, they 
are trying to correct their problems, ``next year, next year.'' How 
many years do we have to go before the Congress says enough is enough? 
The STB gets interested in rail customer issues only when Congress is 
interested in this issue. If Congress says we will not do anything but 
give the STB a little more time, the STB's interest in reforming its 
practices will cease as the focus of Congress moves on to other issues.
    Rail customers are in crisis and we need action now.
S. 953 Is the Solution: Reform Is Not ``Re-Regulation''
    S. 953, the Railroad Competition and Service Improvement Act of 
2007 puts the STB back on track to implement the Staggers Rail Act of 
1980 as it was intended. This legislation is a constructive and 
balanced approach to correcting the problems at the Surface 
Transportation Board.
    I want to address two allegations that are being made by opponents 
of this important legislation. First, many opponents charge that the 
legislation ``re-regulates'' the Nation's railroads. This allegation of 
``re-regulation'' is flat wrong, as the CEO of Union Pacific conceded 
in his testimony to the House Transportation and Infrastructure 
Committee on September 25th on the House companion legislation to S. 
953. What the railroads call ``re-regulation'' refers only to requiring 
that the STB serve--as Congress intended--the public interest rather 
than only the private monopoly interests of the railroads.
Here Are the Facts
    No railroad rate that is not subject to regulation by the STB today 
will become subject to regulation under S. 953. No provision of S. 953 
empowers the STB to take any action that could be termed as ``re-
regulatory'' under the most generous interpretation of that term.
    However, S. 953 does improve the process for determining if a 
railroad rate to a rail customer without access to competition is 
reasonable. But this legislation does not broaden the universe of rates 
eligible for this review process. The bill also does not reduce the 
minimum level of rate that qualifies for review by the STB. That 
minimum is a rate that is 80 percent more than the direct cost to the 
railroad of moving the freight in question.
    The bill overturns the ``quote-a-rate'' and ``paper barrier'' 
decisions of the STB--two improper interpretations of the Staggers Rail 
Act that allow the railroads to prevent their customers from reaching a 
competing railroad. These provisions are ``pro-competitive'' and will 
extend competitive deregulated rail service to more rail customers. 
Efforts to ensure competition in the freight rail industry are to 
ensure that the STB's rate challenge process works are not re-
regulatory.
    Second, opponents of S. 953 use a graph that shows railroad rates 
declining significantly since 1980. This graph confuses the issue by 
introducing irrelevant information. The data represents all railroad 
rates, not just the rates paid by rail customers without access to 
competition. Until the last few years, the majority of rail customers 
did have access to competition and their rates have declined 
significantly. The rates of the minority of customers without access to 
competition were not declining, but were ``averaged out'' by the 
declining overall competitive rates. If the railroads were to show a 
graph of captive rates over the last two decades, that graph would go 
in exactly the opposite direction from the graph showing declining 
rates.
    Mr. Chairman, S. 953 will provide the tools necessary for the STB 
to ensure that there is competition in the rail industry and that 
captive rail customers have a fair process for challenging rates. The 
bill will achieve the goals envisioned by Harley Staggers in 1980. Rail 
customers need an equitable forum to voice their concerns and a 
regulatory agency that operates in the public interest rather than for 
the private interests of the Nation's Class I railroads.
Conclusion
    Mr. Chairman, thank you for conducting this hearing today. We look 
forward to working with this Committee and with all of the other 
stakeholders involved to resolve these critical rail transportation 
issues in an objective and constructive manner.

    Senator Lautenberg. Thank you.
    Let the elapsed time that ran over not be an endorsement. 
Mr. English, don't take any comfort from that.
    Mr. English. Well, I just assumed it because I was last, 
Mr. Chairman, and you were trying to be kind to me.
    Senator Lautenberg. Because you were so unspecific about 
the things that----
    [Laughter.]
    Mr. English. Well, I'll be happy to read all the names into 
the record.
    Senator Lautenberg. Thank you very much.
    [Laughter.]
    Senator Lautenberg. We had expected the vote to kick off at 
11; and it has not. So, we'll take advantage of the time.
    But I would ask, among the witnesses, if we were to recess 
for 45 minutes, whether that time for you to sit with us and 
review some questions is available to any or all of you. For 
those who can't, we understand. And, in terms of my colleagues?
    Senator Rockefeller. Mr. Chairman, I think that--the votes 
don't start until 11:30.
    Senator Lautenberg. This is not sleight of hand, I can tell 
you.
    [Laughter.]
    Senator Lautenberg. They just changed the vote to 11:30.
    Now, let's go back, and you all repeat your testimony.
    [Laughter.]
    Senator Rockefeller. Now we can have two glorious rounds of 
questions.
    Senator Klobuchar. Right. We're ready to go.
    Senator Lautenberg. All right. What we'll do is try to 
limit our questions to 3 minutes to see how far we can go 
along, with four, five, six of us here now--4 minutes, and see 
what that does for us. And I'll start.
    Ms. Hecker, in 2005, members of the Commerce Committee, 
including me, asked your agency to examine rail shipping rates 
and infrastructure needs. Now, in your opinion, is the system 
working as it should?
    Ms. Hecker. Well, there was that balance that was in the 
Act, and, basically, there is unmistakable evidence that an 
industry that was near collapse has been recovered, and, as 
many of you said, has become an important economic engine in 
this whole economy. So, we have a vital, efficient, and very 
important and functioning rail industry.
    The balance that was called for, in our view, has not 
really been fully implemented. It's the inefficiency, the 
inaccessibility of the captive or the stranded shipper that 
really, in our view, has been an area that requires far more 
attention.
    Senator Lautenberg. So, it is not working, you say, as it's 
intended. Are there any specifics that you would point to where 
you think it's failed?
    Ms. Hecker. Well, one is in the attitude, in our view, of 
the way the Board has seen itself. It's seen itself as 
reactive, in our view, responding to cases that were brought 
before it, and not really taking an affirmative role in 
monitoring and promoting competition. And it's our view, as Mr. 
Ficker pointed out, a preeminent element of the Staggers Act 
was to rely on competition, not laissez-faire, just leave it 
alone and hope it'll come, but actually the ability to promote 
competition. And there are a number of areas where the Board 
could take some action. Some of them are old rule--rulemakings 
that would need to be revisited. But there are some ways they 
could really enhance the functioning of the market.
    Senator Lautenberg. Mr. Nottingham, do you think that 
renewed interest in the railroad industry by Wall Street, 
including large hedge fund investors, might have any negative 
effects on the industry or its ability to safely move our 
Nation's freight?
    Mr. Nottingham. Mr. Chairman, it's hard to say. It 
obviously depends on their conduct--their future conduct, and 
their actions. I will say, generally speaking, we welcome, at 
the Board, more investment in the rail sector, I think, as a 
taxpayer personally and a consumer--I would say that more 
investment is needed. We have a huge infrastructure capacity 
problem, and we're way behind. We had a major hearing on this 
topic in April.
    I know there is a lot of uneasiness, because these are some 
new people. Some of them operate from--with foreign addresses 
on their return envelopes. And it's not always clear that they 
necessarily have a deep passion for railroading and providing 
better rail service. But that remains to be seen. And the 
minute any of them actually enters the rail business, we will 
be spending quality time with them and watching them very 
carefully, and using every tool in our toolbox to make sure 
they conduct themselves in the public interest.
    Senator Lautenberg. Thank you.
    Mr. McGregor, in the case of BASF, what impact has 
excessive rail shipping rates had on consumers, in your view?
    Mr. McGregor. Well, we clearly have to pass those costs on 
to our customers. I mean, if you look at, for example, in 
selected lanes at one captive site that we have, we've seen 
annual increases--in 1 year--of over $8 million. You know, 
clearly we have to pass those costs on to our customers, and 
that makes us less competitive in the global economy.
    Senator Lautenberg. Thank you.
    Senator Smith?
    Senator Smith. Thank you, Mr. Chairman.
    Mr. Nottingham, I noted in my opening statement that there 
is a rail line in the Coos Bay area, now owned by a private 
equity firm, giving no assurance at all to their willingness to 
spend money to maintain these tunnels. Layoffs have occurred in 
the timber industry, in particular an entire section of my 
State is being affected by this. I'm wondering if, as the 
Chairman of the STB--do you believe that the private equity in 
some way compromises a railroad's common carrier obligation? Do 
you think that it is something that I should be concerned 
about? I know Coos Bay is.
    Mr. Nottingham. Senator Smith, thank you for the question. 
We don't have any information to indicate to us that there is 
any linkage between the type of investors or the type of 
ownership structure or the background of owners and any 
problems out in the rail network. Now, that's not to say there 
are no problems. We're monitoring, working very closely with 
your constituents in the--at the Coos Bay Port and the related 
stakeholders. Yesterday, we received, for the first time, a 
written description of specific problems out there. We knew 
about those problems before, because we've been in discussions. 
I met with their attorney, just last week. The----
    Senator Smith. But, do you feel the STB has a role in 
making sure that investments are made and maintenance is done, 
so that these situations don't occur? Do you have the 
authority? Do you feel like you're on top of the situation?
    Mr. Nottingham. Yes, sir, we do. I have to be a little 
careful at delving into the details of that matter, because it 
may well come to us formally. Right now, it's in the informal 
stage. But, generally speaking, in a case such as Coos Bay, but 
not speaking about that case, in particular, so I don't have to 
recuse myself if it comes to us formally, a railroad has the 
responsibility to keep its rail lines open and running 
effectively for its customers, or it has an obligation to 
abandon and make room for someone else. And that's what we'll 
be looking at. Will the railroad step up and put forward a 
prompt repair schedule for that line? And, if not, will it be 
abandoning and allowing other carriers? And we have heard there 
could be some interest in other carriers. West Coast----
    Senator Smith. From what you know, the----
    Mr. Nottingham.--port access is a prime--is prime real 
estate.
    Senator Smith. From what you know, this particular 
situation--I don't want you to answer in a way that you have to 
recuse yourself, but, I mean, it really does seem that the 
obligation that the railroad has to its common carrier 
responsibility is really lacking. And so, anything you can do 
to put the spurs in these folks, a lot of people are counting 
on that, and I would appreciate anything and everything you can 
do, and as soon as you can do it.
    Mr. Nottingham. Senator, we will continue to work in a very 
focused manner on that. We were in touch yesterday--my office 
was in touch with the Federal Railroad Administration, which, 
of course, has the lead on the safety concerns. The railroad in 
question has cited severe safety concerns of a human-life-
threatening-type potential nature. We don't know that those 
concerns are valid for a fact. We will defer to FRA. They 
apparently have done a visit and inspections, and they should 
be making a report very soon. And then, we look forward to 
working with the port to make sure they have the opportunity to 
avail themselves of all the legal tools that we can then use to 
resolve that problem out there.
    Senator Smith. Well, I thank you for that. Only one other 
question, Mr. Nottingham. In your testimony, you talked about 
the growing capacity demands that will occur in the next 10 to 
15 years. Now, that is going to require a tremendous amount of 
investment. Obviously, there are many feelings about this, how 
it's best accomplished, whether through re-regulation or by 
letting the private markets accomplish this. You are 
undoubtedly familiar with the bills that are being presented. 
What do you think these bills, if passed, would have--what 
impact would they have on competition, on the marketplace, 
actually, providing the investment to make these capacity 
enhancements?
    Mr. Nottingham. Well, Senator, your question goes to the 
very heart of the top rail transportation policy problem before 
us as a country. And it's a problem that, unfortunately, many 
of the witnesses today just skipped on by or barely touched 
on----
    Senator Smith. So, do we----
    Mr. Nottingham.--which is the----
    Senator Smith.--do we need----
    Mr. Nottingham.--capacity crisis that we face.
    Senator Smith. Yes. I mean, so, do we best do this--meet 
the capacity demands through reregulation or through 
investment?
    Mr. Nottingham. I do have concerns that some of the 
proposals mentioned this morning do not appear to work to 
actually provide the benefits, not only to meet the capacity 
problems that you and I are talking about right now, but also 
actually don't work to help shippers, which is unfortunate, 
it'll come back to our agency, presumably, to take the blame if 
they don't work as implemented. We will implement, as best we 
can, any regime this Congress enacts into law, but I do have 
some concerns, and we have not been asked for a formal 
assessment of any of the Senate bills that were mentioned this 
morning, I don't believe, but we'd be happy to do that, upon 
request.
    Senator Smith. Thank you very much.
    Senator Lautenberg. Thank you very much.
    Senator Klobuchar?
    Senator Klobuchar. Thank you, Mr. Chairman.
    I wanted to follow up, Mr. Nottingham, about some of the 
things that Mr. English was raising, and that is just because 
the situation seems so one-sided here, I was interested to 
learn about the fact that your two immediate predecessors left 
the Surface Transportation Board to represent the railroads, 
one joined the law firm that represents Union Pacific, the 
other took the General Counsel position at Burlington Northern. 
And I wondered if you had numbers on how many other staff 
members have gone to join railroads.
    Mr. Nottingham. Senator, I don't have those numbers with me 
today. We're an agency of about 140 employees. We are managed 
by a three-person Board, confirmed by this committee. It's 
bipartisan. I can say to you that none of the three members of 
the Board have any past affiliation with railroads. I can 
certainly say I do not. And I have conferred repeatedly, 
because this issue is a little bit of a canard that comes up 
amongst people who, frankly, work full-time as lobbyists or 
stakeholders for one perspective. Have there been some high-
profile cases in the past? Absolutely, yes. Does that make my 
life a little more complicated some days? Yes. I wish, you 
know, it wasn't so easy to point at----
    Senator Klobuchar. Is there a cooling-off period between 
when someone leaves the employment of the Surface 
Transportation Board and goes to a railroad?
    Mr. Nottingham. Well, I've been a Federal employee off and 
on for upwards of 8 or 9 years, and when I left Federal service 
previously, I went to State government, so I've never really 
personally had to explore the cooling-off process, and thinking 
about a future career in the private sector. But I am told that 
we are covered by the same laws that cover the entire Executive 
Branch, which do include a cooling-off period.
    Senator Klobuchar. Do you know how many staff members you'd 
hire that have captive-shipper experience? I know there are a 
lot of people who have been hired from the railroads. Could you 
give me numbers on how many you've hired that have had that 
kind of experience on the other side?
    Mr. Nottingham. Sure, I can--I'd be happy to give you both 
those numbers for the record, if we could.
    I can--I'm pleased to introduce to you today, because she's 
sitting behind me, my Chief of Staff, Rachel Campbell, who 
worked in the private sector for shipper interests, primarily, 
in her law career. And that's just one example. We don't--it 
should be of no surprise that when we look for expertise in the 
rail transportation sector, we actually get some people who 
apply who have expertise and experience in the rail 
transportation sector. I don't think we want to send--put a 
sign up saying those people are not wanted. Many of them come 
with different----
    Senator Klobuchar. I'm not suggesting that. I'm just trying 
to figure out--it seems as though, given the money that it 
costs to bring a claim, the issues we're seeing on that chart 
with the rate differential, that there should be some action 
taken. I'm not seeing that action, so I'm trying to figure out 
what the motivation is.
    And, I guess, the other question that I have, for Ms. 
Hecker, is, in this report you did in October 2006, you asked 
the Surface Transportation Board to do a study, and I think 
they waited 10 months to begin that study, and we're not going 
to see the required results until late 2008. Do you think we 
can just wait for them to act, when we've seen no action, as 
Mr. English was pointing out, in terms of decisions, to help 
these shippers? Or do you think it would be reasonable to 
proceed with some legislation?
    Ms. Hecker. Well, we have not specifically reviewed 
legislation. The concern that we had is that there are 
significant costs and risks to many of the actions that the 
Board could take, or legislative actions. And there is a 
continuing national interest in the economic viability and 
investment by this industry. And I think everyone agrees that 
we can't handle all the freight on the roads, and we need to 
have growing capacity on the railroads. So, there is a balance 
issue, and it is true that many of these actions do have the 
potential to reduce railroad revenues. And, therefore, it was 
our recommendation, and, we believe, the facts of a far more 
comprehensive, rigorous review than has ever been done--not 
reaction to a particular case--many of the shippers who are 
captive were captive before all the mergers, and no one's 
looked at those conditions. So, this comprehensive review, in 
our view, from a public policy standpoint, is the way to go, 
and then wait and see what the Board does with it. I mean, the 
study is just a study to get the evidence, and the real action 
then is, when we get the evidence, what the appropriate actions 
are to restore that balance.
    Senator Klobuchar. And so, I'm supposed to go back to my 
State and tell these captive shippers, whose rates have, in 
some cases, doubled, tripled, that they should wait for a study 
by a Board that hasn't found in their favor----
    Ms. Hecker. Well, the reality is--you know, we talk about 
rates going up; rates have mostly gone down, for every single 
commodity, for 25 years; and it's one of the few industries. 
So, we have a more efficient industry. There are rates going 
up, and that's what happens in an economy where there is a 
constrained capacity. So, it's tighter all around, and that's 
why I think we need far more factual review of whether some of 
these recent rate increases actually represent market 
conditions or a real abuse of market power.
    Senator Klobuchar. Another way to do it and I will finish 
with this--is if we had a process that made it easier for 
people to challenge the rates. That process was set up. It is 
not easy for them to challenge them. So, then they are left 
with awaiting a study that we're told we'll get in late 2008. 
And that's why I'm pleased to hear that Senator Dorgan has 
taken the initiative to at least try to get those fees reduced 
so it's easier for them to challenge the rates.
    Senator Lautenberg. Thank you very much, Senator Klobuchar.
    Senator Vitter?
    Senator Vitter. Thank you, Mr. Chairman.
    Mr. McGregor, I think that you said--correct me if I'm 
wrong--that in your company's rail universe, about half of what 
you deal with are--is on the captive side, and about half of 
what you deal with has some competition.
    Mr. McGregor. That's correct.
    Senator Vitter. If you compare those two halves, what do 
the prices look like?
    Mr. McGregor. Well, in some cases, as we said, the prices 
are extremely high. For example, on the captive side. I mean, 
we illustrated, in our testimony, that in some cases they 
approach at least 50 percent more than the noncaptive areas.
    Senator Vitter. And, on average, how much higher do you 
think they are?
    Mr. McGregor. I would say, on average, probably in the 
realm of 50 percent.
    Senator Vitter. OK. I also want to explore whether, 
actually, that captive situation impacts the noncaptive side. 
Are there situations, in terms of negotiations with railroads, 
where they actually use a captive line to impact and increase 
the rates beyond what they could otherwise on the noncaptive 
side?
    Mr. McGregor. In fact, I'm glad you asked that question, 
because that, in fact, is the case. I mean, currently, we are 
in negotiations where we're faced with significant increases at 
captive sites where we, in fact, have a competitive alternative 
for the total book of business that this particular service and 
railroad enjoys. When we have, basically, suggested that we're 
going to move that noncaptive business to a competing railroad, 
the response that we get from the railroad is, ``Well, that's 
fine, you can go do that, but on your captive business, we're 
basically going to generate the same amount of revenue that we 
had previously.'' So, I'm just a simple logistician, quite 
frankly, and--at the end of the day, though, that seems like an 
egregious sort of abuse of a monopoly power.
    Senator Vitter. So, in fact, the existence of some captive 
lines also impacts the rates on your noncaptive lines.
    Mr. McGregor. Absolutely.
    Senator Vitter. OK.
    Mr. Moorman, do you think that negotiating practice is fair 
or right or should be allowed?
    Mr. Moorman. That's a negotiating practice that obviously 
cuts both ways, because we have lots of customers with lots of 
noncaptive traffic who attempt to bundle their business, and do 
so successfully.
    I would make one point about Mr. McGregor's testimony----
    Senator Vitter. But if you can just answer the question 
first, do you think that practice by the railroads----
    Mr. Moorman. I think----
    Senator Vitter.--of saying, ``You move what you want on the 
noncaptive side, but the result is going to be rates going even 
more through the roof on the captive side''?
    Mr. Moorman. Well, I would say that, in some situations, 
that's what the rail industry has to do if, in fact, it's going 
to be able to continue to invest in the way that it is today. 
Deferential pricing is not a practice that is uncommon in other 
industries.
    I would point out one other thing, if I might, about the 
BASF testimony. And I would actually ask, Mr. Chairman, that 
you think about a hearing about this. One of the issues that 
concerns BASF, along with other chemical shippers, is that a 
lot of the material they're shipping, and some that's in 
question, is the so-called toxic inhalation hazard material. 
And, as you know, there are lots of issues in our industry and 
in--from the standpoint of public policy about the shipment of 
this material and the liability imposed. And that's one of the 
considerations that we have been looking at in thinking about 
this traffic.
    Senator Vitter. So, to go back to my question, Mr. Moorman, 
you acknowledge that the presence of, maybe, a few captive 
lines also increases the rates in many situations on noncaptive 
lines beyond the competitive level----
    Mr. Moorman. I----
    Senator Vitter.--through bundling.
    Mr. Moorman. Business is bundled, not only in the railroad 
industry, but in a lot of industries.
    Senator Vitter. So, that monopoly situation flows over and 
impacts----
    Mr. Moorman. It's a----
    Senator Vitter.--a whole lot of----
    Mr. Moorman. Well----
    Senator Vitter.--lines that you would otherwise say are 
competitive.
    Mr. Moorman. I would disagree with your characterization of 
``monopoly,'' but I would say, where traffic is less 
competitive, do we use that in negotiations with customers for 
their entire book of business? Yes, we could. Just as they use 
in negotiations traffic that is more competitive.
    Senator Vitter. The other specific example I used is the 
Lafayette Utility System, where they have competition, they 
have choices for 1,480 miles of the 1,500-mile length between 
there and Powder River Basin, but they don't have choices, they 
don't have competition, in the last 20 miles. Do you think it's 
right, fair, should be allowed, for the lone carrier for the 
last 20 miles to extend its monopoly for the whole 1,500 miles?
    Senator Lautenberg. We've been--if you have a very short 
response, or otherwise we're going to have to move on.
    Senator Vitter. I would like some response, Mr. Chairman. 
Thank you.
    Mr. Moorman. I would say that the economic reality is that 
the rail industry should be allowed to capture an adequate 
return on its investment for the entire route.
    Senator Vitter. I'll take that as a yes.
    Senator Lautenberg. Thank you.
    Senator Vitter. And, Mr. Chairman, if I----
    Senator Lautenberg. I'm sorry, we have colleagues here. 
Everybody wants to have a chance. I can't sacrifice their time. 
If you have other questions to submit, please do it in writing.
    Senator Dorgan?
    Senator Dorgan. Mr. Chairman, thank you very much.
    Ms. Hecker, you talked about rail rates going down. But 
this hearing is about captive shippers. Have you broken out 
what has happened to rates with respect to captive shippers, as 
opposed to all rates?
    Ms. Hecker. It's very hard to do that. So----
    Senator Dorgan. I know it's hard.
    Ms. Hecker.--in fact, we don't have detailed data like 
that.
    Senator Dorgan. So, you've not done that?
    Ms. Hecker. We have it by commodity, and we've broken it 
out by region.
    Senator Dorgan. I understand. Have you broken it out by 
captive shippers?
    Ms. Hecker. No, we've not been able to do that.
    Senator Dorgan. That's the point of the hearing.
    Ms. Hecker. And that's why we recommended the study.
    Senator Dorgan. Right. And that's the point of the hearing.
    Mr. Nottingham, first of all, when I said the STB, I felt, 
was worthless, it's not you, personally, or your staff. I just 
think, as an agency, it has disserved what I think should be an 
effective referee's role, and not only you, but your 
predecessors, have not done nearly as much as we would have 
expected. But the ``worthless'' quote is not about you, 
personally, it's about an agency and its response.
    You say, ``Railroads are expected to charge more, even 
substantially more, from their captive traffic than from their 
competitive traffic if they are to achieve enough revenues to 
cover their costs and invest in necessary facilities.'' I mean, 
that answers the issue here in front of us, doesn't it? You're 
saying, as Chairman of the Board, railroads are expected to 
charge more for their captive traffic. If you were captive, you 
think you would like that, you think you wouldn't be here 
objecting?
    Mr. Nottingham. Sir, thank you for the introduction to your 
question. And I did--I noted you did say ``relatively 
worthless,'' and I took that as a huge----
    Senator Dorgan. Well, I modified it.
    [Laughter.]
    Mr. Nottingham.--step forward. In my review of past hearing 
records, you never--it was never that kind, so I think we're 
taking a huge leap, and I'll take pride in that.
    [Laughter.]
    Senator Dorgan. I eliminated the word ``relatively,'' 
actually. I modified it in the second case.
    [Laughter.]
    Mr. Nottingham. But, thank you, and I will answer your 
question.
    Senator Dorgan. All right.
    Mr. Nottingham. Of course captive shippers should not be 
expected to be happy about differential pricing. That's why 
I've made it a point to go visit and spend time with them, and 
hear about their specific situations in Montana, in Brainerd, 
Minnesota, and elsewhere. And that's why we're doing this 
unprecedented study. We need to get a handle on that. But it 
is--we need to be straightforward and say that the framers of 
Staggers knew exactly what they were doing, that there was a 
differentially priced regime they were putting in, just as we 
all don't pay the same price for our airline seats when we're 
on an airplane, and, if we go to a movie theater----
    Senator Dorgan. Well, Mr. Nottingham----
    Mr. Nottingham.--at different times of day or at different 
age groups, we pay different ticket prices. This is not a 
unique concept, differential pricing. But, the answer to your 
question is, no, I don't expect captive shippers to be pleased 
with it.
    Senator Dorgan. All right. But this is not equivalent to 
seeing a movie. This is an essential transportation. There are 
people that are held captive.
    Now, you said that, when you went around and visited with 
folks, you found the most recognized issue, the one raised most 
often with you, was the bottleneck issue. And you've been there 
14 months, I don't see any movement to fix that or deal with it 
the so-called quota rate, or the bottleneck issue. So, after a 
year or so, should we expect, on an issue that you heard the 
most about, that you'd take some action?
    Mr. Nottingham. Well, we--the main reason we haven't done 
anything specific on the bottleneck policy issue is, one, it is 
pending in the legislation here today, but, two, we are in the 
midst of an unprecedented series of reforms at the Board, and 
it's literally a capacity question. We have the railroads all 
over us in court trying to stop our reforms, for the record, at 
the same time we have the shipper groups saying we're in--sort 
of this bizarre, friendly relationship with the railroads.
    We are--the cost of capital rulemaking we have with us 
today is probably the single most significant change the STB or 
the ICC has ever proposed in leveling the playing field between 
shippers and railroads. That, combined with the new small rate 
case resolution process, plus the larger case resolution 
process----
    Senator Dorgan. Well----
    Mr. Nottingham.--plus the--what we did proactively--on our 
own initiative, contrary to what Ms. Hecker said--on our own 
initiative on the fuel surcharge, you cannot find an agency in 
this town being more proactive, I would submit, than the STB 
right now.
    Senator Dorgan. Well, except for the fuel surcharge. You 
ordered the railroads to change their practices--after a lot of 
pressure, you finally ordered them to change their practices; 
you didn't order any refunds. And the fact is, it was 
determined they were charging more for the fuel surcharge than 
the fuel cost them. And you didn't order any refunds. But my 
point is this. My point is that you've been there for 14 months 
now, the bottleneck issue has been around forever. Don't blame 
your inaction on the fact that we've got legislation going on, 
and don't tell me that the industry that opposes reform is 
unique. Every industry that is subject to some reform is going 
to come here to an agency or to the Congress and say, ``We 
don't like that. We don't want you to do anything.'' And the 
STB certainly satisfies that urge.
    So, if I might make one final point. Mr. Carlson, we tried 
to get some elevator grain operators to come here and testify. 
None of them would testify. Not one elevator grain operator 
manager would come here. And you had the reason why in your 
testimony. Would you repeat that, why they wouldn't testify?
    Mr. Carlson. Well, they get discriminated against in rates 
and the service, obviously, especially in service. If you have 
a competing grain elevator in your town, and one company, one 
operator, complains about service from BNSF, and the other 
doesn't, guess which one's going to get the cars to take that 
grain that's piled on the ground? We've got--as a result of 
captive shipper status in our State, we've got take-it-or-
leave-it service, high rates, we even have--Senator, you--I'm 
sure you know this--our conservative, fiscally tight-fisted 
State legislature has twice--two legislative sessions, 2003 and 
2005--appropriated State funds to bring a rail rate case to the 
STB. So, I mean, this is a serious problem, and it's 20-some 
years that we've been experiencing this. And finally we're 
beginning to see some attention.
    Senator Dorgan. Mr. Chairman, thank you very much.
    Senator Lautenberg. My pleasure.
    Senator Rockefeller?
    Senator Rockefeller. Thank you, Mr. Chairman.
    Chairman Nottingham, I'm just going to pick up on something 
that Senator Dorgan said, but you failed to answer, and that is 
that the Board did investigate these areas, fuel charges by AAR 
members, but I want to ask the question, why did you not ask 
for refunds?
    Mr. Nottingham. Senator, thank you for the question, 
because I was hoping to have a chance to answer it. The simple 
reason we have not ordered refunds in the fuel surcharge area 
is primarily due to the fact that we've not received a single 
formal complaint requesting refunds.
    Senator Rockefeller. I see. So you know it's a problem, but 
nobody's come to you, and so, you haven't had to do anything.
    Mr. Nottingham. We have corrected the problem using----
    Senator Rockefeller. Is that passive or is that aggressive?
    Mr. Nottingham. It's incredibly aggressive. The Board has 
never acted as aggressively.
    Senator Rockefeller. How are you aggressive?
    Mr. Nottingham. We, on our own motion, sir, with no 
complaint, did something the Board had never done before, which 
is conduct an unreasonable-practice inquiry over threats of 
litigation by the railroads that we didn't have that authority.
    Senator Rockefeller. Right. And then did nothing about it.
    Then did nothing to solve it.
    Mr. Nottingham. We ended that practice and set a new 
national model, and we'd be happy to look at any complaint. In 
our country, sir, one has to actually present some evidence----
    Senator Rockefeller. Does it occur to you that----
    Mr. Nottingham.--of wrongdoing to get some justice.
    Senator Rockefeller.--as Mr. McGregor said--and I agree, 
I'm not going to say whether you're worthy or not worthy, but 
I've never seen an STB Chairman or Board which has done 
anything but make our situation worse or contribute to the 
comfort of the railroads. I think Mr. McGregor also pointed out 
that the cost of bringing a suit, of bringing something before 
you can get up to $3 million. I go over many, many, many years 
of history of this in my State and on this committee and 
nobody's ever come to you. They don't come, because they know 
they can't afford to come, because you're going to turn them 
down anyway, and they're not going to get their money back, so 
they don't come. Do you deny that?
    Mr. Nottingham. Sir, I recognize, that is a huge problem 
and challenge. It has been largely remedied, in our view, by 
some ambitious actions in the last year. We have completely 
retooled and rewritten the procedures to bring small rate 
cases, as well as the larger ones, which do cost--we've been 
very clear, and recognize this is a problem, formally in 
writing--$3 to $4 million, and we've heard about cases of $5 
million. Currently, under our new rules, though, sir, you can 
come in, and, for a $150 filing fee, get up to a million 
dollars in recovery within 8 months, guaranteed. And DuPont is 
in the process, we understand, of taking advantage of that. We 
look forward to seeing how those cases play out, and then we 
can discuss----
    Senator Rockefeller. Thank you.
    Mr. Nottingham.--how our new rules are actually working.
    Senator Rockefeller. Thank you. Mr. Moorman----
    Mr. Moorman. Yes, sir?
    Senator Rockefeller.--does your railroad have any 
situations where you serve a customer, at either the origin or 
the destination of a movement, with some segment where there is 
a potential for competitive traffic, but for which you refuse 
to provide a shipper rate quote so they can negotiate with 
another railroad? Do you have any such situations?
    Mr. Moorman. Yes, sir, I'm sure we do.
    Senator Rockefeller. Yes, I'm sure you do, too. And why do 
you decide not to do that?
    Mr. Moorman. Because we feel that it is appropriate for us, 
in a market, to quote a through rate to allow us to return an 
adequate--earn an adequate return on the investment we've made 
in the entire route.
    Senator Rockefeller. Do you know, Mr. English--I have 
several heroes in this committee, and you're one of them--on 
this panel--Harley Staggers, a West Virginian, passed this Act, 
and 20 percent of those, as you say, were stranded railroads. 
And what's interesting, they didn't put into the law, at that 
time, any sanction for criminal behavior. If they had done 
that, I sorely suspect that there would be a lot of people at 
this table who weren't just coming year by year to complain 
about something that never gets fixed because the railroads 
always get their way out of it, that there would be criminal 
charges, because they are violating a Federal statute, in my 
judgment, in a criminal way. But, in that it's not in the law, 
nobody can proceed that way.
    Finally--you don't disagree.
    Mr. English. No, Senator, I think you're absolutely right. 
It--but I'm sure that--I knew Harley Staggers, as well, and 
served with him, and I'm sure that this--the way this has 
played out, that it's certainly nothing in--along the lines he 
intended. If he had foreseen this, I think he might have put 
those provisions in, and then we'd have someone else we could 
turn to for stranded shippers.
    Senator Rockefeller. Wouldn't that be nice? Of course, 
they'd still have to go through the STB.
    Mr. English. That would be very nice. There would be a lot 
of people in jail.
    That's correct.
    Senator Rockefeller. Final question, Mr. Chairman, to Mr. 
Moorman. John Snow and some of his predecessors always have 
enjoyed having their Board meetings at The Greenbrier Hotel in 
West Virginia. That is one of our proudest hotels, most 
wonderful hotels. A lot of people have been to The Greenbrier, 
but not been to West Virginia.
    [Laughter.]
    Senator Rockefeller. I'm just wondering, when you're 
talking about making a profit so that you can upgrade your 
stock and track and all the rest of it----
    Mr. Moorman. Yes, sir.
    Senator Rockefeller.--and, in that The Greenbrier is losing 
money, how do you justify The Greenbrier? How do you boast 
about that?
    Mr. Moorman. Well, Norfolk Southern doesn't own The 
Greenbrier.
    Senator Rockefeller. Oh, you're not CSX.
    Mr. Moorman. No, we're not--no, you--no, I----
    Senator Rockefeller. Well, I'm just going to----
    Mr. Moorman. We're looking for simple prison accommodations 
rather than The Greenbrier, I guess.
    [Laughter.]
    Mr. Moorman. But we don't own it.
    Senator Rockefeller. Well, I think you got me on that one. 
Every time I look at somebody, I just see CSX.
    [Laughter.]
    Mr. Moorman. Yes, sir. And we--could I say, Senator, we 
don't want to be viewed as collateral damage in this. So--we 
don't own The Greenbrier.
    Senator Rockefeller. No, you're considered, not as 
collateral, but as major damage.
    [Laughter.]
    Senator Lautenberg. Thank you.
    We're being granted, by omission, more time, so we'll use a 
little bit more of it.
    And, I ask anyone, on the panel, is there a clear benefit 
to the consumer if Congress takes up legislation impacting rail 
rates?
    Mr. English. Yes, sir, I think, you know, the--again, we 
get back to this question. Every consumer who receives or buy--
purchases any products from any stranded shipper is going to be 
paying more than they would otherwise have to pay for that 
product. There's no question. That gets passed along. Whenever 
our electric cooperatives have to import coal from Indonesia 
because of the fact they can get it cheaper than they can from 
West Virginia or from Wyoming, something's wrong. Something is 
wrong. And, obviously, that cost gets passed along. There's 
no--we're not-for-profit, there is nothing else that we can do 
than that.
    So, you know, the point here, Senator, is that this is 
wrong. There is no two ways about it. The Surface 
Transportation Board is not operating the way Harley Staggers 
intended, and somebody needs to fix it or repeal it, one of the 
two.
    Senator Lautenberg. Mr. Moorman, what do you think?
    Mr. Moorman. Senator, let me point out that, for the vast 
majority of rail traffic which is competitive, the consumer is 
an enormous beneficiary, and has been a beneficiary, as the 
charts show you, for a long time. And I'll give you just one 
example of our business, which is our intermodal business, 
which now comprises more than 20 percent of our volumes on--in 
the rail industry, and at Norfolk Southern. The consumer 
benefits, because our rates are lower than trucks. The consumer 
benefits, because trucks come off the highway. And the consumer 
benefits, from an environmental standpoint, because we're the 
more environmentally friendly way to do things. And I can cite 
you lots of examples beyond intermodal in lots of our business 
sectors where there is----
    Senator Lautenberg. Yes.
    Mr. Moorman.--transportation competition, and it's fierce, 
every day.
    Senator Lautenberg. Yes.
    Ms. Hecker, do you have a view on this?
    Ms. Hecker. Actually, I think it's a very important 
question, because, while we definitely agree that the intention 
to protect shippers has not been fulfilled, we also would 
reiterate that the importance of an efficient, well-performing, 
and, in fact, growing railroad industry continues to be very 
much in the national interest. And I just wonder whether, if 
there is legislative action that does something to try to 
restore the balance, recognize that that will definitely reduce 
railroad profits and investment, and balance it with the 
debate, that is already in this committee, about how to support 
expansion of railroad capacity. So, there are two national 
interests here, and whether there might be some potential to 
marry them.
    Senator Lautenberg. Thank you.
    Senator Klobuchar, and we'll try to divide up the minutes, 
take a couple each, then Senator Rockefeller. And we're not 
going to reinstate the committee process. We'll finish this 
now.
    Senator Klobuchar. Thank you. Appreciate it.
    I just had some questions--there has been a lot of debate 
about the status of competition, and I think that, the 
railroads have made clear that there is competition in certain 
areas in the country. But I was just looking at that GAO study 
last year, and it compared two grain shipping routes, from 
Minot and Sioux Falls to Portland, and the railroads carried 
comparable volumes, but the price from Minot was double that 
from Sioux Falls. And so, Mr. Moorman, do you know what the 
difference was, why that would be?
    Mr. Moorman. No, I--that's not an area we serve, and I'm 
not familiar with any of the specifics.
    I will say that it is entirely possible, on two different 
routes, to have two very different cost structures, in terms of 
the infrastructure that's employed, the maintenance that's 
required, and the assets that are used, and how quickly they 
turn. But there are so many variables in railroad costing that 
I just don't know the answer to your question.
    Senator Klobuchar. Would you be surprised if the answer 
that was that the Minot route was served by just one Class I 
railroad, and the Sioux Falls had two?
    Mr. Moorman. It wouldn't surprise me. But, again, I don't 
know what the underlying economics of the moves are.
    Senator Klobuchar. Mr. Nottingham, when you have a 
situation like that--and then I know Senator Rockefeller has 
some questions here, this will be my last one--do you see why 
we would be interested in some kind of regulation so that 
wouldn't happen? It wouldn't have to be rate regulation. We're 
just trying to change the system so that it's easier for these 
captive shippers to make their case.
    Mr. Nottingham. On an emotional level, I can understand why 
some would want to see change. But if you really get into the 
economics and look at the repercussions, we have a system of 
differential pricing, it's a flat-out fact, and we're not 
waiting for a study or for GAO to remind us of that. It's--
everyone knows that we have a system of differential pricing. 
What that means is, some people pay higher rates, some people 
pay lower. There are a lot of shippers out there probably 
paying below so-called market--you know, really low rates, 
because of this system. They're not in the room with us, 
although, actually, Mr. Ficker probably represents a number of 
them. I'll let him speak for that, but he represents probably 
the most diverse group of shippers here.
    So, that is a reality. If there are abuses of that, 
though--statements like ``100 percent more'' or--as a percent 
of what? We need to look at specific cases.
    Senator Klobuchar. Well, this is a pretty clear study. I 
mean, it's double the rate. And I just want to add one more 
thing. For our shippers, they're not that emotional, they're 
just looking at their accounting records.
    Senator Lautenberg. OK.
    Senator Rockefeller, you're the cleanup hitter here.
    Senator Rockefeller. Good.
    Mr. Carlson--I'll make it quick--do you think it's fair to 
say that every time a North Dakota grain shipper is 
overcharged, or, as Senator Dorgan points out, made to haul his 
grain to a distant elevator via several trips in a tractor-
trailer, just to load it and bring it back through his 
property, that, as a result there will be the effect of every 
loaf of bread being more expensive, every bag of frozen 
vegetables being more expensive, every gallon of ethanol being 
more expensive, and that the 20 percent of the shippers, which 
is what this whole hearing is about--not all the good things 
that have happened, environmentally friendly whatever--
``environmentally friendly'' and ``railroads'' don't sync with 
me very well in West Virginia, but I'll try to deal with it 
positively--but isn't that the effect of it--the cost to the 
consumer goes up?
    Mr. Carlson. Cost to the consumer goes up, absolutely, 
Senator. And the cost to the shipper, the farmer, goes up, as 
well.
    Senator Rockefeller. Do you worry about the railroads' 
financial condition? Do you stay up at night worrying about 
that?
    Mr. Carlson. We want to see the railroads be able to 
provide service, and, in a competitive environment, they do. 
But, when they're in a captive environment and have captive 
shippers, what happens is, you don't get service, you get sort 
of a take-it-or-leave-it service, and you pay a higher price; 
you don't get any benefit. So, yes, we don't want the railroads 
to be operating like they were in the 1980s or something like 
that, but we don't want to be gouged. It doesn't seem 
fundamentally fair to us that, if you're a captive shipper, 
you're price-gouged, and, if you're in a competitive area--
we're, in effect, subsidizing somebody who's getting too low a 
rate. That doesn't sound like a good system.
    Senator Rockefeller. Isn't it true, sir, that this whole 
hearing is actually about the 20 percent who are getting gouged 
because there is no competition? All the other conversation is 
nice, but has no relevancy to this hearing. Everybody knows 
that the 80 percent where there is competition, where there 
used to be 50 Class I railroads, like--when I got here, there 
are now four--but the 20 percent that are getting gouged 
because of the bottlenecks and all the rest of it, that's what 
this hearing is about. And the final result is that prices for 
people are going up, while railroads are making money that they 
should not, in a fair system, make.
    Mr. Carlson. Thank you for bringing that to the attention 
of Congress with this hearing.
    Senator Lautenberg. Thank you.
    I note with interest that we've managed to complete this 
abbreviated session.
    I thank each one of you. Again, I know there is a lot of 
work that goes into preparation for your being here, and--am 
sorry that we had to rush you along. But I do note, Senator 
Rockefeller, that the recent House hearing on this topic lasted 
9 hours.
    [Laughter.]
    Senator Lautenberg. Mr. Ficker, were you there?
    Mr. Ficker. We were all there, and thank you so much for 
not doing that to us.
    Senator Lautenberg. Thank you all.
    [Whereupon, at 11:45 a.m., the hearing was adjourned.]
                            A P P E N D I X

 Prepared Statement of Evan Hayes, Immediate Past President, National 
   Barley Growers Association; Past President, Idaho Grain Producers 
   Association; Member, Idaho Barley Commission; Executive Committee 
                 Member, Alliance for Rail Competition
    Mr. Chairman and members of this Committee, my name is Evan Hayes. 
I am a wheat and malting barley producer from American Falls, Idaho, 
Immediate Past President of the National Barley Growers Association, 
past President of the Idaho Grain Producers Association (IGPA) and 
Member of the Idaho Barley Commission. Additionally I serve on the 
Executive Committee of the Alliance for Rail Competition.
    I am pleased to submit this testimony on behalf of the Alliance for 
Rail Competition (ARC), the National Barley Growers Association, the 
Idaho Grain Producers Association, Idaho Barley Commission and the 
agricultural community. The members of the Alliance for Rail 
Competition include utility, chemical, manufacturing and agricultural 
companies and agricultural organizations. Producers of commodities as 
wide ranging as soybeans, dry beans, lentils, rice, wheat, peas and 
sugar beets all have expressed concerns similar to those I will share 
with you today. Together, these organizations represent growers of farm 
products in more than 30 states.
    Barley and wheat growers know that an effective railroad system is 
necessary for the success of our small grains industry. However, we 
continue to face many problems with rail rates and service. Over time, 
rail customers in the United States have grown more captive. As 
captivity levels have risen, a larger and larger share of the cost of 
transportation has been shifted to rail customers and state and local 
governments. Helping our members find solutions to rail freight 
problems remains a top priority for our state and national 
organizations, leading to our alliances with ARC and many other 
commodity coalitions and to our support of S. 953, which would provide 
a number of remedies to rail shippers.
    The U.S. Trade Representative has been working diligently for a 
number of years to open up markets for agricultural trade through 
vehicles such as NAFTA, FTA's and WTO to facilitate a more competitive 
U.S. agricultural industry. However, all of this good work will have no 
positive effect if we cannot get our products to export points 
competitively with rest of the world. We are the only major world 
suppliers with a monopoly railroad between us and our markets which 
have the capability to take out all of the profit in the transaction.
Effects of Growing Rail Captivity
    Since the passage of the Staggers Rail Act of 1980, the degree of 
captivity in many barley and wheat growing regions has increased 
dramatically, and America's farmers continue to experience both 
unreliable service and higher freight rates. We have had continuing 
rail equipment shortages since the railroads started aggressively 
consolidating and merging in the early 1990s. Producers know that 
increasing the breadth of crop production on farms can lead to greater 
efficiency and higher income, but rather than a focus on diversity, 
railroad companies view efficiency as hauling larger and larger 
movements of a single grade crop from a single origin to a single 
destination. Rail investment in grain movement has been shifted to the 
grain merchandiser and farm producer while the service level for less-
than-trainload movements continues to deteriorate. We see value-added 
agriculture having to invest in rail rolling stock to ensure adequate 
equipment supply, yet when railroad service levels do not meet 
railroad-supplied schedules, agriculture is frequently called upon to 
even further increase investment in railroad rolling stock.
    Twenty years ago, there were multiple transcontinental railroads 
servicing agricultural regions. Today, however, whole states, whole 
regions and now whole industries have become completely captive to 
single railroads as a result of many railroad mergers. In the grain 
industry alone there are substantial pockets of captivity in Texas, 
Oklahoma, Arizona, Colorado, Kansas, Nebraska, Wyoming, Idaho, South 
Dakota, Minnesota, North Dakota, Oregon, Washington and Montana. 
Because of these pockets of captivity, the cost of transporting grain 
can represent as much as \1/3\ (or higher) of the overall price a 
producer receives for his or her grain. This cost comes directly from a 
producer's bottom line. It is important to keep in mind that producers, 
unlike other businesses, cannot pass their costs on; as price takers 
and not price makers, producers bear all transportation costs both to 
and from the farm and from the elevator to the processor or export 
terminal.
    Rail captivity has led to rail rates in the Northern Plains that 
have increased 40 percent faster than the Rail Cost Adjustment Factor 
including productivity unadjusted. Rail rates in Montana and North 
Dakota are between 250 and 450 percent of variable cost--far above the 
Surface Transportation Board's ``threshold of unreasonableness'' 
currently at 180 percent. Agricultural rail rates in excess of 250 
percent of variable cost--among the highest freight rates in the 
Nation--can be found in virtually all of the states that have captivity 
issues.
    Service also continues to be a major issue in farm country. During 
the 2003 car shortage, data produced by Burlington Northern Santa Fe 
(BNSF) showed that the most captive areas on the system were singled 
out for the highest level of past due grain orders. Of the 22,147 cars 
that were past due, more than 70 percent of the past due orders were in 
the captive northern tier states of Montana, Minnesota, North Dakota 
and South Dakota, though this area of the country makes up less than 20 
percent of that rail system.
    In October, the Government Accountability Office issued a report, 
GAO 07-94, Freight Railroads--Industry Health Has Improved, But 
Concerns About Competition and Capacity Ought to Be Addressed, 
available in full at http://www.gao.gov/new.items/d0794.pdf, confirming 
what we in the captive shipper industry have been stating for years: 
those areas that are captive pay the highest freight rates yet receive 
some of the worst service.



Wheat Is On the Ground in The Grain States--and More Harvesting To Do
    Following the grain harvest in 2007, there were more than 10 
million bushels of Colorado wheat stored on the ground primarily in 
areas where there was a lack of adequate rail service--captive branch 
line areas. Colorado did not experience a record crop--while the 2007 
Colorado winter wheat crop was above average at 87.75 million bushels, 
it was well below the all-time record crop of 134.55 million bushels, 
produced in 1985, and the most recent high of 103.2 million bushels in 
1999, and was smaller than wheat crops produced in 10 of the last 28 
years. Yet millions of bushels sat on the ground because they were 
produced in areas served by single railroads with no rail-to-rail 
competition--areas we call captive.
    Since 80 percent of Colorado's winter wheat moves by rail to export 
position in the Gulf of Mexico and the Pacific Northwest--too far to 
truck--the railroads know wheat on the ground will still be there when 
they get ready to move it. While U.S. wheat prices are at record highs, 
Colorado producers and elevator operators are being shut out of the 
market because they are located on captive rail lines. One of the 
railroads has suggested that the reason for wheat on the ground in 
Colorado is that wheat is not being marketed. How cruel is that 
statement. When the railroad won't supply adequate car supply--wheat 
cannot be marketed in an orderly manner--but does anyone on this 
Committee believe that with record high prices any elevator would not 
like to market all of the grain they can get their hands on--providing 
they can move the grain. Compounding this problem is that the corn and 
millet harvests are just beginning and these commodities cannot be 
stored on the ground. The lack of rail cars creates an economic embargo 
on Colorado wheat producers, keeping them from fully participating in 
these record high prices. I am advised by Darrell Hanavan, Executive 
Director of Colorado Wheat Administrative Committee, that this has 
resulted in wider basis than normal and a loss of 25 to 50 cents per 
bushel to wheat producers. I am also hearing reports that producers 
cannot deliver wheat to elevators because they are plugged, and these 
producers are contemplating storing their millet and corn crops on the 
ground because their farm storage is full--and there may not be any 
relief in sight until December or January.
    I am also advised that, along with Colorado, there is wheat has 
been stored on the ground in South Dakota, North Dakota, Montana, and 
Washington. In Idaho, wheat has been stored on the ground for up to 3 
months. In order to create wealth for farm producers, we need to ship 
what we produce. In Idaho, more than 50 percent of our wheat is shipped 
into export channels.
States With Rail Captivity Continue To Lose Economic Base Due to High 
        Rail Costs
    One of the major malting barley customers that I sell to located a 
new malting plant in Idaho 4 years ago to supply its Mexican breweries. 
After one and a half years of negotiation to find a competitive 
transportation relationship with the single railroad that served this 
area, the brewing VP told the Idaho Governor in a meeting I attended 
that if the company knew when they planned to put this plant in Idaho 
what they know now about the effects of captivity, they would never 
have located in Idaho.
    There have been many news reports in Idaho over the last few years 
of plant closings where the companies have publicly stated that one of 
the main reasons for shutting down have been high transportation costs. 
In the potato industry, Idaho supplied potatoes to the JR Simplot plant 
in Heyburn, Idaho (famous for McDonald French fries) for many years 
until the plant was shut down and moved to Canada, meaning the loss of 
hundreds of local jobs. Mr. Simplot told us the reason was high freight 
costs, and, indeed, most of the shipment of frozen and fresh potatoes 
in my area today has been forced to trucks.
    In February 2002, the FMC Corporation's closed its Astaris, ID 
phosphorous plant (loss of 440 jobs). The Idaho State Journal newspaper 
reported, ``Using the Monopoly game as an example, Paul Yochum detailed 
how delivery costs at FMC hurt the company. If you land on a railroad 
in Monopoly, you pay the owner $25. Unless he owns all four railroads, 
in which case you pay him $200. We once negotiated with several 
railroads, but following several buyouts, the number of (rail) owners 
plummeted and our negotiating leverage stopped.'' Yochum went on to 
add, ``FMC's foreign competitors can pick from any number of shipping 
lines; we are at a significant disadvantage to foreign producers 
delivering goods.''
    The UP is so very proud of their monopoly that they have recently 
issued their own Monopoly version of the game, called Union Pacific-
Opoly--collector's edition. In this game, the UP recognizing the power 
of their own monopoly states that if you land on the Denver-Rio Grande 
you must pay ``four times the amount shown on the dice,'' however, if 
you own both the Denver-Rio Grande and the Western Pacific--you are 
allowed to charge 10 times the amount shown on the dice.''
    Malsters in Idaho have told me that delays in rail service continue 
to threaten their existence because railroad delays cause cash-flow 
problems.
    When the railroad decided it didn't want to haul sugar beets about 
10 years ago, it just quit hauling in Idaho and now, with one 
exception, all beets in Idaho have been forced to truck.
    It is important to realize that rural communities wherever they are 
located need access to world markets to bring wealth back to our 
communities. Without reliable, equitable and efficient rail service, we 
cannot access and compete in that world market.
    From shipping points throughout the farm producing areas of the 
United States, as the GAO report and our data show, we pay some of the 
highest freight rates because we are captive in our region to a single 
railroad. Concentrations of railroads in this country in the last 20 
years have forced more and more farm product into trucks hauling 
further and further each year.
Grain Rail Rates
    The GAO report I referenced earlier found that the entirety of the 
western United States is served by one or two railroads. Large areas 
shaded in black in Figure 12,\1\ below, illustrate the portions of 
Oregon, Idaho, Montana, North Dakota, South Dakota, Colorado, Texas, 
Oklahoma and Arkansas that are served by a single railroad.
---------------------------------------------------------------------------
    \1\ GAO Report 7-94 Freight Railroads, Industry Health Has 
Improved, but Concerns about Competition and Capacity Should Be 
Addressed, Page 26



---------------------------------------------------------------------------
    Source: GAO analysis of BEA and GIS data.

    Additionally, the GAO showed that all industry tonnage originating 
with access to one Class I railroad mirrors the previous graph--Figure 
13.\2\
---------------------------------------------------------------------------
    \2\ Ibid, Page 27.

    
    
---------------------------------------------------------------------------
    Source: GAO analysis of BEA, DOT, and STB data.

    The GAO pulls these observations together with Figure 18, which 
shows changes in tonnage traveling at rates over 300 percent R/VC from 
1985 to 2004.\3\
---------------------------------------------------------------------------
    \3\ Ibid, Page 34.
    
    
---------------------------------------------------------------------------
    Source: GAO analysis of BEA, DOT, and STB data.

    Page 35 of the GAO report confirms what wheat and barley producers 
experience everyday.


    Source: GAO analysis of STB data.

    Finally, the GAO report correctly establishes the link between 
single railroad access and elevated percentage of tonnage above the 
threshold for rate relief.


    Source: GAO analysis of BEA, DOT, and STB data.

    Our consultant's \4\ research of R/VC levels on grain from the 
western growing areas confirm what the GAO found. (Please see the 2006 
Montana Rail Grain Transportation Survey and Report, prepared for the 
Montana Rail Service Competition Council and A Joint Survey and 
Analysis by the Montana Department of Transportation and Whiteside & 
Associates, at: http://rscc.mt.gov/docs/Rail_Grain_
Transp_Survey_2006_Final_05_22_07.pdf).
---------------------------------------------------------------------------
    \4\ Whiteside & Associates, Billings, Mont.
---------------------------------------------------------------------------
    In examining the R/VC levels on rates to common destinations of the 
Pacific Northwest, we find large areas moving at rates considerably 
above the threshold. The chart below shows that areas where little or 
no rail-to-rail competition exists are exposed to much higher R/VC, in 
line with the GAO study. This graph shows points in Montana, Idaho, 
South Dakota and North Dakota that experience R/VC levels upwards to 
300 percent. This analysis can be done for points in all parts of the 
grain growing areas of the country.


    A historical look of the R/VC ratios for various markets further 
confirms the conclusion presented by the GAO. The chart below shows 
that, between 2003 and 2006, without fuel surcharges, R/VC ratios were 
well in excess of the threshold on movements from origins all over the 
Plains to the Pacific Northwest. If railroad-applied fuel surcharges 
were added to these rates, the R/VC ratios would be even higher.


    Examination of R/VCs from 2003-2006 into the Gulf Coast finds a 
similar story. Origin states including Colorado, Kansas, Nebraska, 
Oklahoma and Texas routinely see wheat rates well above the threshold 
and some as twice as high as the threshold level.


    The highest R/VC historical numbers can be found in the movements 
into the Twin Cities from across the Northern Plains. The chart below 
illustrates rates as high as 500+ percent R/VC over the 2003-2006 
period. In all of these examples, we did not select certain points but 
found that the analysis agreed with the GAO report that the trend is 
consistent all over affected states. Here the affected states (which 
also have little or no rail-to-rail competition) are Idaho, Minnesota, 
Montana, North Dakota and South Dakota.


    What is clear is that the areas of the country served by single and 
dual rail are experiencing increasing rate levels that are not found in 
areas that have some rail-to-rail competition.


    Perhaps not noticed by the GAO, however, was the timing of the 
sharp increase in the percentage of tonnage traveling at rates over 300 
percent of revenue to variable costs, which began rapidly increasing in 
1997-1998 at the same time the Surface Transportation Board allowed the 
BNSF merger and the Union Pacific/Southern Pacific merger--mergers that 
eliminated the last vestiges of rail competition in the western half of 
the U.S.
    While one might debate the exact level of the R/VC costs with 
railroad experts, what is indisputable is the highest R/VC is found in 
the captive areas in Arizona, California, Colorado, Idaho, Kansas, 
Minnesota, North Dakota, Nebraska, South Dakota, Oklahoma, Oregon, 
Texas and Washington. We also know that the grain experience is 
mirrored in coal, silica, sand, plastics, chemicals and many other 
industries covering the width and breadth of this country.
    I would echo what ARC wrote in comments in STB's Ex Parte 665, ``At 
every turn, grain producers face Board-created barriers to reasonable 
rates, adequate service, and rail to rail competition that the STB 
shows little inclination to remedy. In these and other respects, the 
promise of the Staggers Rail Act is belied by the way its provisions 
have been interpreted by the ICC and STB, so as to insulate the 
railroad industry from effective regulatory oversight and from 
marketplace discipline.''
The Transportation Cost Shift
    We recognize the need of railroads to make an adequate return, but 
remain concerned that the Surface Transportation Board has not focused 
on the price being paid by producers and has not seen fit to provide 
reasonable remedies to guard against market abuse. The evidence 
presented by GAO studies in 2006, 2002 and 1999 all point to the same 
conclusion--that the STB is not adequately protecting large parts of 
the country from market abuse where no competition exists.
    Railroads' claims to this Committee and to the Surface 
Transportation Board that their rates are falling neglect the fact that 
costs are being shifted to agricultural producers in captive areas. 
Transportation costs for farm producers and state governments are 
actually rising.
    One of the most comprehensive studies on the effects of this cost 
shifting was conducted by the Montana Department of Transportation and 
Whiteside & Associates in March 2006 (http://rscc.mt.gov/docs/
Rail_Grain_Transp_Survey_2006_
Final_05_22_07.pdf). The report came to eight conclusions:

        1. Grain is being hauled farther and farther over the state and 
        county highway systems.

        2. The majority of farm producers have experienced increasing 
        hauling distances over the past 10 to 20 years. More than 70 
        percent of Montana grain producers are hauling their products 
        farther than they were 10 years ago, and 100 percent of those 
        hauling farther than 10 years ago are also hauling farther than 
        they were 20 years ago. This trend reflects the transition to a 
        smaller number of elevators located in the state. Distances to 
        local elevators continue to increase in all of the Plains 
        states; data from all respondents shows an average one-way haul 
        today of 37.19 miles compared to an average haul of 17.35 miles 
        10 years ago (an increase of 114 percent) and 9.69 miles 20 
        years ago (an increase of 285 percent).

        3. Those farm producers experiencing increased haulage are 
        hauling more than three times as far as those farm producers 
        who have not experienced any increased hauling distances.

        4. The non-wheat crops are experiencing significantly greater 
        hauling distances even than wheat crops, further burdening 
        alternative and rotational crop practices.

        5. Some counties show average hauling distances upwards of 80 
        miles.

        6. The 2006 harvest in Montana could be best described as a 
        tale of two cities--with winter wheat showing average to above 
        average yields and spring wheat, durum, barley, pulse, peas and 
        lentils showing average to below average yields.

        7. The vast majority of farm producers have the capability to 
        store most, if not all, of their grain production.

        8. Even with the diversity of yields, most Montana farm 
        producers experienced elevator pluggings multiple times during 
        harvest due to lack of rail cars.

    This all adds up to an increase in the portion of transportation 
costs being borne by farm producers and the state as railroads continue 
their push to serve fewer and fewer facilities. As there are fewer, 
smaller elevators serving as the principal markets for our crops, farm 
producers have to pursue markets for their crops farther and farther 
away from their farms, meaning more and ever distant trucking.
    Captive shippers also continue to suffer car and service 
disruption. Shippers that order rail cars well in advance are still 
experiencing delays after promised delivery dates. This can and does 
cause major problems during and after harvest and costs both the farm 
producer and elevators loss of income.
    The high rates and lack of service continue to be especially 
frustrating for producers in our northern wheat growing states who need 
only look across the border to see a much more effective system. 
Canadian freight rates on wheat westbound--right across the border--are 
only \2/3\ of the rail rates our growers pay in Montana. U.S. wheat 
growers produce some the highest quality wheat in world, yet are often 
rendered residual suppliers against their Canadian counterparts and 
find themselves at a significant competitive disadvantage in both 
domestic and foreign markets because of these shipping issues.
    There is currently no effective regulatory body to address these 
frustrations and complaints. The Surface Transportation Board does not 
balance the needs of shippers and the railroads. In fact, we believe 
the STB has abandoned its lawfully designated role as a regulator of 
railroads.
Fixing the Problem
    Railroad market power should not foreclose access to otherwise 
competitive grain elevators, ports, coal mines or chemical plants.
    The railroads' common carrier obligation and historic concerns 
about discrimination are related issues that should be re-examined.

   Should it really be the case that a railroad is free to 
        decide which of two similarly-situated shippers succeeds and 
        which one fails, so long as every mile of track over which they 
        are served is not identical?

   Is it really in the public interest for railroads to force 
        industry consolidation, notwithstanding the demise of smaller 
        elevators, mines, power plants and factories nationwide, 
        because unit train service is more efficient?

   Should intermodal freight always displace bulk freight for 
        an extra penny a ton in profit?

    We have reports of railroads raising their rates just to drive off 
unwanted rail traffic, thereby abandoning common carriage. We also have 
reports of the railroads refusing to service locations that the 
railroads deem operationally unacceptable. The result appears to be 
that railroad market power is being exerted to create haves and have-
nots in the shipping community.
Conclusions
    Agricultural growers together with the members of the Alliance for 
Rail Competition truly believe that a healthy and competitive railroad 
industry is essential for their continued viability. However, with poor 
service, a lack of available cars, increased rail rates and a 
regulatory agency that does not meet the needs of shippers, it is 
increasingly difficult for agricultural producers to remain competitive 
in a world marketplace.
    We believe that the government needs to be the facilitator and the 
catalyst for increasing competition in this historically strong 
industry. We believe the railroad industry can survive and prosper in a 
competitive environment and, indeed, we know from history that 
competition breeds innovation and efficiency. In light of the horrific 
situation U.S. grain producers are facing with major railroads unable 
to meet common carrier obligations all over the Nation, it is time that 
public policy in this area needs to be reexamined. The Alliance for 
Rail Competition and the agricultural community believe the STB and its 
predecessor, the ICC, have failed to protect the interests of the 
captive rail shippers as the Staggers Rail Act intended. It is time 
that Congress step up to the plate and protect the interest of captive 
rail shippers.
    Grain producers, along with members of ARC, believe that both 
railroads and shippers would be better off with more competition in the 
marketplace, and we strongly support provisions in S. 953, a bill that 
calls for increasing competition without increasing regulation. We 
fervently believe that final offer arbitration as outlined in S. 953 
will provide a host of benefits where competition cannot physically be 
created. Providing for ``final offer'' arbitration and the removal of 
``paper barriers'' will restore balance to the commercial relationship 
between the railroads and their customers.
    We believe this legislation will improve rail transportation by 
providing fairness and openness in the negotiations between railroads 
and their customers over rates and service. By simply requiring 
railroads to provide rates to their customers between any two points on 
their system, many additional rail customers will gain access to the 
benefits of rail transportation competition.
                                 ______
                                 
         Prepared Statement of William J. Matheson, President, 
            Intermodal Services, Schneider's National, Inc.
    Honored members of the Senate Committee on Commerce, Science, and 
Transportation:

    My name is Bill Matheson. I am President of Schneider's Intermodal 
Services, one of the largest providers of truckload intermodal services 
to our Nation's shippers. As such, we are both customer to the 
railroads and a supplier to the shipping customers. Our job is to 
manage the entire door-to-door experience for the customer, linking the 
rail line-haul services with box provision, drayage, and customer 
service. Rail-based intermodal service is inherently complex. We are 
the glue that holds it together. That gives us the unique perspective 
on the commercial regulation of rail-based intermodal that I am pleased 
to offer you today.
    I start by underscoring that the current form of commercial rail 
freight transportation regulation has clearly succeeded. Since 
deregulation in 1980, rail rates have decreased dramatically at the 
same time the carriers have increased their profitability. The cost of 
American goods has fallen while the performance of our infrastructure 
has increased. As a Nation we have increased our already significant 
lead in global transportation performance.
    It is true that, since 2001, rail rates have increased, at times 
significantly. While naturally any increases are challenging, so far we 
are not unduly troubled by those increases, for two reasons. First, the 
increases are largely due to real increases in costs, notably fuel. 
Second, the increased margins that have also occurred are the normal 
market consequence of an industry making the transition from 60 years 
of excess capacity to tight capacity. Moreover, there is ample evidence 
that much of the resulting increase in profit has flowed directly into 
increased capital spending on rail infrastructure. As veterans of the 
wide-scale rail service failures of the late 1990s, we believe that 
that our rail infrastructure is in need of increased investment in both 
maintenance and capacity. We are glad to see it occurring.
    To date, market forces have prevented the escalation of this market 
power to unreasonable levels. We are reassured, for instance, that the 
current freight downturn has worked to somewhat ease rate pressure. The 
market continues to work.
    We can, however, see two factors that could change that equation. 
First, renewed and sustained economic expansion on top of the 
relatively tight capacity conditions existing in the current 
marketplace could outstrip the ability of the industry to increase 
capacity. Market abuses could occur under those conditions. We 
recommend that the Surface Transportation Board monitor and encourage 
rail investment in capacity, for line of road, terminal operations, and 
equipment. Continued rail investment in capacity is a necessary 
condition of the current successful deregulated design.
    Second, competitive intermodal service has precariously survived 
the widespread merger movement that began in the 1970s and accelerated 
with deregulation. We retain competitive choice in most major markets, 
but clearly have less choice than before. Approval of additional 
mergers would upset the current fragile equilibrium. Moreover, recent 
experience with large scale mergers has revealed major service 
disruptions with little evidence of offsetting market benefit. We urge 
the Surface Transportation Board to approach additional mergers with 
extreme caution.
    In summary we believe that, if the Surface Transportation Board 
works to ensure adequate rail investment and tight oversight of 
mergers, it will not have to resort to the much more problematic policy 
tool, renewed rate regulation. That tool has demonstrated limited 
efficacy in the past and must be reserved to remedy only the most 
dramatic market failures. We are clearly not in that situation today.
                                 ______
                                 
                                           BASF Corporation
                                 Florham Park, NJ, November 5, 2007
Hon. Frank R. Lautenberg,
Chairman,
Subcommittee on Surface Transportation and
Merchant Marine Infrastructure, Safety, and Security,
U.S. Senate,
Washington, DC.

    Dear Chairman Lautenberg:

    Thank you once again for permitting me to testify before the 
Subcommittee on October 23 regarding oversight of the Surface 
Transportation Board (STB) and regulation related to railroads. I 
respectfully submit this letter, which I ask be entered into the record 
of the hearing, as my response to a comment concerning the movement of 
toxic inhalation hazard (TIH) commodities. During the hearing, it was 
stated that the additional risk railroads incur in transporting TIH 
commodities should serve as yet another justification for egregious 
rate increases.
    First, let me be clear: safety and secure handling are the highest 
priorities for BASF throughout the company. Our employees complete 
rigorous training and testing. Our equipment, including the railcars 
that we own, receive the highest levels of inspection and maintenance. 
Oversight, crosschecks and documentation are regular parts of our 
processes and procedures.
    In logistics, my area of responsibility, whether we are shipping a 
TIH or non-TIH product, safety is number one on our list. Further, our 
record supports our efforts. Consider BASF's shipment of ethylene oxide 
(BO), a TIH used widely in laundry detergents and hospital cleansers. 
BASF and its equipment have yet to be the cause of a rail accident or 
harmful release where BO was shipped. We are proud of this record, and 
we are doing everything we can to ensure that it continues.
    The railroads however, have a different record. In recent years, 
there have been a number of instances where railroad employee missteps 
and track problems resulted in derailments or accidents involving TIH 
shipments. In at least two cases, these incidents resulted in 
fatalities, followed by costly litigation. To mitigate the financial 
impact of their negligence and the corresponding litigation risk, 
railroads have imposed egregious rate increases on these TIH movements, 
up to 250 percent in 1 year.
    Despite the contrast between BASF's TIH safety record and the one 
belonging to the railroads, we have invested significant time and 
effort to develop a workable solution. We have no choice quite frankly, 
given the current regulatory vacuum at the STB. So with the help of 
nearly a dozen insurance carriers, solicited both domestically and 
internationally, BASF developed a tower of liability coverage that 
would indemnify the railroads from their own negligence. The plan would 
cost BASF millions in premiums, but since it mitigates the railroad's 
TIH liability risk, in hopes of returning to more normal rate 
increases, we have pushed ahead. We offered this arrangement nearly 2 
months ago, but the railroad's response has only been repeated delay.
    Given this situation, we are beginning to wonder how sincere the 
railroads are. They publicly state TIH risk as justification for 
egregious rate increases and risk/liability transfer provisions, yet 
when offered a solution, their silence is deafening. Many in the 
shipping community conclude that despite our good faith efforts, our 
only accomplishment has been to call the railroad's bluff on yet 
another rate increase scheme, not surprisingly, left unchallenged by 
the STB.
    I appreciate the opportunity to submit my response. If there are 
any comments or questions regarding this submission, I would be pleased 
to address them. I look forward to continuing to work with the 
subcommittee on STB oversight and reform.
            Sincerely,
                                            David McGregor,
                                             Senior Vice President,
                                                       NAFTA Logistics.
                                 ______
                                 
                  Burlington Northern Sante Fe Corporation,
                                   fort Worth, TX, October 30, 2007
Mr. Robert Carlson,
President,
North Dakota Farmers Union,
Jamestown, ND.

    Dear Mr. Carlson:

    I had the opportunity to review your testimony presented to the 
Senate Commerce Committee with regard to rail re-regulation. While I 
disagree with many of your comments, and will set forth my perspective 
below, I am particularly concerned about your allegation that BNSF 
Railway Company (BNSF) retaliates against grain elevator facilities 
whose managers speak against BNSF.
    I have confidence that our car ordering system is transparent to 
the marketplace; our allocation process is transparent, and car orders 
are assigned and generally filled on an oldest-order basis. This 
ensures that there is no discrimination between customers. If there are 
instances of retribution or intimidation of which you or others are 
aware, I would like to be informed personally. Not only is such a 
discrimination incompatible with our corporate values, but it would be 
the subject of discipline, if true.
    I do not believe your testimony takes into account our current 
track record of service, customer outreach and responsiveness in North 
Dakota. Admittedly, in 2004, BNSF had service issues related to grain 
car availability, overall growth of volumes across the railroad and a 
large harvest. In the years since 2004, we have made record investment 
in grain cars and locomotives, and we have also initiated an Ombudsman 
program to improve not only North Dakota rail service, but to 
strengthen ties and understanding between the company and its customers 
there. It has been very successful, and we have replicated the 
Ombudsman program across our agriculture network.
    BNSF Ombudsman Jon Long has lived and worked in North Dakota for 3 
years, meeting one-on-one with virtually all of the non-shuttle or 
single-car elevators in the state. He has assisted customers in 
correcting service problems such as car order procedures, timely car 
order fill, track leasing and other issues. With an Ombudsman acting as 
``trouble shooter'' and with overall service improvements related to 
improved railroad velocity and capacity, we have worked very hard to 
make it clear that we value all of our customers and their business. 
Furthermore, we encourage our customers to frankly share their customer 
experiences with Mr. Long, especially when we are not meeting their 
expectations.
    This year, North Dakota wheat shipments are up 18 percent, and we 
have kept up with the unprecedented demand and large harvest. We now 
have 31,000 grain covered hopper cars and have spent hundreds of 
millions of dollars on our agriculture business so that we would be 
prepared for the opportunity to move record harvests to the 
marketplace. The BNSF Ag Marketing team was very pleased to have 
received a number of unsolicited compliments this year from the grower 
and elevator trade groups in North Dakota for rail service in light of 
the impressive harvests.
    I also want to address your statements regarding BNSF rates. The 
average BNSF wheat rate Revenue/Variable Cost ratio is less than 180 
percent--not the 250 to 450 percent that you shared in your testimony. 
Further your comments regarding North Dakota rates and comparing them 
with Nebraska rates are inaccurate. Grain movements of comparable 
mileage on our network are, for the most part, similar, regardless of 
geographic location and whether or not the origin and destination are 
served by more than one railroad. Any additional variance in rates is 
not related to being served by one railroad, but rather a difference in 
grain markets at that particular point in time. As you know, Nebraska 
mostly produces Hard Red Winter Wheat, while North Dakota produces 
Spring Wheat and Hard Red Winter Wheat. The respective crops are. 
flowing to entirely different markets and customers, each with a 
differing set of economic circumstances that vary with supply and 
demand.
    As you can see, I have copied Senator Dorgan and the North Dakota 
Congressional delegation here, and I am requesting that he submit my 
letter to you to the Senate Commerce Committee for inclusion in the 
public record for the hearing at which you testified. It is not my 
intent to challenge you personally; however, I feel I must address the 
misleading impression left by your October 23 testimony.
    As our customers in North Dakota know, Kevin Kaufman, BNSF's Group 
Vice President, is responsible for our agriculture business and is 
available to discuss any aspect of our service in North Dakota. I 
invite you to contact him or Jon Long to learn more about BNSF's 
ongoing outreach to its customers. It couldn't be more different than 
what you portrayed in your testimony, and I invite you to learn more 
about it.
            Sincerely,
                                           Matthew K. Rose,
                   Chairman, President and Chief Financial Officer,
                              Burlington Northern Santa Fe Corporation.
cc: Senator Byron Dorgan
Senator Kent Conrad
Congressman Earl Pomeroy
                                 ______
                                 
                                Oregon Wheat Growers League
               Pendleton, OR, October 19, 2007 (Sent via Facsimile)
Hon. Daniel K. Inouye,
Chairman,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.

Hon. Frank R. Lautenberg,
Chairman,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.

Hon. Ted Stevens,
Ranking Minority Member,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.

Hon. Gordon H. Smith,
Ranking Minority Member,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.

          RE: Support for Railroad Competition and Service 
                            Improvement Act of 2007--S. 953

    Dear Chairman Inouye, Ranking Member Stevens, Chairman Lautenberg, 
and Ranking Member Smith:

    As a statewide trade association representing more than 4,000 
wheat, barley, rye, triticale, canola, and mustard producers in Oregon, 
the Oregon Wheat Growers League offers this correspondence in support 
of S. 953 the Railroad Competition and Service Improvement Act of 2007.
    Oregon's producers are absolutely dependent upon a cost effective 
and efficient rail system as more than 80 percent of the wheat crop 
grown in Oregon is destined for export year in and year out. If the 
crops grown in the far reaches of the countryside cannot be shipped 
affordably to the Port of Portland for export, the growers lose their 
ability to compete in the global marketplace. Rail transportation 
remains a critical component to the agriculture industry as farmers 
bring inputs (fuel, fertilizer, machinery, etc.) to the farm and ship 
the resulting production of commodities to both domestic and 
international markets. The agricultural industry is the only industry 
in America where farmers pay retail for their inputs and sell their 
manufactured goods (e.g., crops) into the wholesale market and pay the 
freight both directions. Unfortunately the lack of competition among 
the railroads has resulted in unreasonably high rates and unreliable 
service for agriculture producers.
    S. 953 is critically important to ensure rail customers have access 
to competitive rail service and that those rail customers without 
access to competition are protected from unreasonable railroad rates 
and practices and have access to reliable and affordable rail service. 
We believe S. 953 goes a long way toward addressing the problems U.S. 
agriculture has had and will continue to have with lack of rail 
competition and unreliable service in the absence of meaningful 
legislation. The Oregon Wheat Growers League urges you to continue your 
efforts to move S. 953 through Congress.
            Sincerely,
                                               Mike Noonan,
                                                    2007 President,
                                           Oregon Wheat Growers League.

                                           Tammy L. Dennee,
                                      CMP, CAE, Executive Director,
                                           Oregon Wheat Growers League.
cc: John Richards--Office of Senator Rockefeller
                                 ______
                                 
                                                   October 11, 2007
Hon. Frank R. Lautenberg,
U.S. Senate,
Washington, DC .

    Dear Chairman Lautenberg,

    As leading national organizations representing a variety of 
agriculture interests whose members depend on rail for a significant 
portion of their transportation needs, we are writing to express our 
strong support for S. 953, the Railroad Competition and Service 
Improvement Act of 2007.
    Rail transportation remains a critical component to the agriculture 
industry as it moves commodities to domestic and international markets 
from the producers in rural America. We continue to be supportive of 
safe, efficient, and economical rail infrastructure system. However, 
the lack of competition among the railroads has resulted in 
unreasonably high rates and unreliable service for the agriculture 
producers, which could result in loss of market share to international 
competitors.
    S. 953 is critically important to ensure that rail customers have 
access to competitive rail service and that those rail customers 
without access to competition are protected from unreasonable railroad 
rates and practices and have access to reliable rail service. The 
legislation also includes provisions such as final offer arbitration, 
which are especially important to the agriculture industry.
    We believe S. 953 goes a long way toward addressing the problems 
U.S. agriculture has had and continue to have with lack of rail 
competition and unreliable service. The legislation has a significant 
co-sponsorship from Senators representing agriculture constituencies. 
We hope that you would join them in co-sponsoring and actively 
supporting this important legislation.
            Sincerely,
                              Alliance for Rail Competition
                               American Soybean Association
                     American Sugarbeet Growers Association
                     National Associations of Wheat Growers
                        National Barley Growers Association
                          National Corn Growers Association
                                     National Farmers Union
                       United States Beet Sugar Association
                               USA Dry Pea & Lentil Council
                                      U.S. Dry Bean Council
                                        USA Rice Federation
                                 ______
                                 
                                         NARUC, NASUCA, CFA
                                                   October 22, 2007
Hon. Daniel K. Inouye,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC .

Hon. Frank R. Lautenberg,
Chairman,
Surface Transportation and Merchant Marine Infrastructure, Safety, and 
Security Subcommittee ,
Washington, DC .

Hon. Ted Stevens,
Ranking Minority Member,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Hon. Gordon H. Smith,
Ranking Minority Member,
Surface Transportation and Merchant Marine Infrastructure, Safety, and 
Security Subcommittee,
Washington, DC.

Dear Senators:

    We are writing in support of S. 953, the Railroad Competition and 
Service Improvement Act of 2007. This legislation corrects problems in 
the Surface Transportation Board's implementation of the Staggers Rail 
Act of 1980 that were identified and verified in the October 2006 
report of the Government Accountability Office (GAO).
    The October 2006 GAO report found that there is a lack of 
competition in the national rail system, that the Surface 
Transportation Board (STB) is not exercising its authorities to ensure 
rail customer access to competition and that the rate challenge 
processes of the STB are ``inaccessible'' to most rail customers. We 
strongly agree with the findings of the GAO.
    Our specific concerns focus on the movement of coal to our Nation's 
electricity generating facilities. Today, approximately 50 percent of 
the Nation's electricity supply is produced from coal-fired electric 
generators. In most cases, coal is moved from the mines to the 
generator by rail. Often, there is only one available railroad for the 
movement, in which case the electricity generator is subject to the 
monopoly power of the railroad when it comes to rates and service. 
Except where public service commissions find that a utility has 
incurred coal transportation costs imprudently, every dollar of 
excessive rail rates or extra costs incurred due to railroad delivery 
problems flows straight through to the customers of the utilities that 
own these ``captive'' generating facilities.
    On September 25, Terry Huval, the Director of Utilities for 
Lafayette, Louisiana, and current Chairman of the Board of the American 
Public Power Association, testified to the House Transportation and 
Infrastructure Committee that the ``cost of rail captivity'' to the 
universities, community colleges and schools in Lafayette, Louisiana, 
is $1.52 million annually!
    We encourage you as leaders of the Senate committee of jurisdiction 
over the Surface Transportation Board to ensure that rail customers 
have access to competitive rail transportation where possible and pay 
reasonable rates when they don't by ensuring the enactment of S. 953, 
the Railroad Competition and Service Improvement Act of 2007 in this 
Congress.
            Sincerely,
                                                  Jim Kerr,
                                                      Commissioner,
                                   North Carolina Utilities Commission.
                                                         President,
              National Association of Regulatory Utility Commissioners.

                                           John R. Perkins,
                                            Iowa Consumer Advocate,
                                                         President,
              National Association of State Utility Consumer Advocates.

                                            Stephen Brobeck
                                                Executive Director,
                                        Consumer Federation of America.
                                 ______
                                 
                              Surface Transportation Board,
                                   Washington, DC, February 4, 2008
Hon. Frank R. Lautenberg,
Chairman,
Subcommittee on Surface Transportation and Merchant Marine 
            Infrastructure, Safety, and Security,
U.S. Senate,
Washington, DC.

Dear Chairman Lautenberg:

    At the oversight hearing on the Surface Transportation Board (STB 
or Board) and regulation related to railroads on October 23, 2007. I 
committed to provide the Subcommittee with a written response to a 
question asked by Senator Klobuchar. Senator Klobuchar asked how many 
STB staff members have experience working for shippers.
    The STB recently completed a staff survey, in which all of the 
Board staff was encouraged to participate. The survey had a 93 percent 
response rate, which included 126 responses. The survey covered a wide 
range of workplace issues and included a few questions about the 
employment history of our staff. Twelve employees responded in the 
survey that they previously worked for or on behalf of shippers or 
shipper interests. Twenty five employees responded that they have 
worked for rail interests. The vast majority of our staff arc long-term 
Federal employees with no direct experience working for shippers or 
railroads. None of the three Board members has ever worked for rail 
interests.
    I hope the Subcommittee finds this information helpful. If I can 
provide any additional information, please do not hesitate to contact 
me.
            Sincerely,
                                     Charles D. Nottingham,
                                                          Chairman,
                                          Surface Transportation Board.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                       Hon. Charles D. Nottingham
    Question 1. We know railroads are operating at capacity in places 
because Amtrak trains are seriously delayed when they travel over 
freight lines. At my request, the Inspector General's office is 
currently investigating the impact of these delays on Amtrak's costs 
and revenue. While the investigation is not complete, the initial 
impression is that Amtrak is losing tens of millions of dollars because 
of these delays. Are these delays simply a matter of poor dispatching 
practices?
    Answer. The Surface Transportation Board has no authority to 
collect data regarding Amtrak delays, nor is Amtrak required to report 
any information about costs or finances to the STB. Accordingly, I do 
not know whether or not Amtrak delays are simply a matter of poor 
dispatching practices because of operational issues.

    Question 2. After 3 years of examining railroad `fuel surcharge' 
programs, the Board found that some were unfair. How should rail 
shippers who overpaid go about getting refunds?
    Answer. The Board's inquiry into fuel surcharge programs began in 
March 2006, when it issued a notice that it would hold a hearing in May 
2006, in STB Ex Parte No. 661, Rail Fuel Surcharges. The proceeding 
concluded less than a year later (not 3 years) in January 2007 when the 
Board found it unreasonable for railroads to apply what they label as a 
fuel surcharge if the charge is not limited to recouping increased fuel 
costs that have not been reflected in the base rate. The Board found 
that railroads should not call a charge a fuel surcharge if it is 
designed to recover more than the incremental cost of fuel attributable 
to the movement involved, or if the cost is being recovered through the 
application of an escalator to a base rate that already incorporates 
changes in fuel costs.
    The Board did not, however, limit the total amount that a carrier 
can charge, through a combination of base rates and surcharges, for 
providing rail transportation. Nor could the Board do so without 
individually examining the reasonableness of the total amount charged 
for a particular shipment. For that reason, and because the Board may 
not award damages if a party has not filed a complaint, the agency did 
not attempt to determine whether damages would be due in particular 
situations. Rather, if shippers want to be reimbursed for charges paid, 
they will have to request refunds from the carriers and, if they are 
not satisfied with the response, bring actions individually. Complaints 
for overcharges (charges in excess of those contained in the applicable 
shipment documents) can be brought through either a complaint to the 
Surface Transportation Board or a civil action in court pursuant to 49 
U.S.C. 11704(b). Complaints for damages resulting from violations of 
the Interstate Commerce Act must be addressed to the agency rather than 
a court. To date, no shipper has brought a complaint to the Board 
concerning a particular application of a fuel surcharge.

    Question 3. Some shippers have stated that they are reluctant to 
bring cases before the STB because they say it is expensive, time-
consuming, and could lead to reprisal from the railroads. Should 
Congress grant the Surface Transportation Board the ability to actively 
investigate rates or services, as opposed to considering them only when 
a case is brought before it?
    Answer. While I do not believe that the STB requires additional 
statutory authority in order for the agency to accomplish its mission 
and implement our governing statutes, I am generally supportive of the 
notion that Federal regulatory agencies should be able to initiate 
investigations under appropriate circumstances and when reasonable 
suspicion exists to trigger such an investigation. The power to 
initiate government investigations must, however, be carefully managed 
to prevent abuse and to prevent unreasonable costs and burdens being 
placed on law-abiding regulated entities. The ability of an agency to 
initiate investigations should never be construed as an alternative to 
the agency making an informed and balanced decision based on a complete 
record documenting the views of interested parties. The Board's current 
practice of largely relying on the adversarial process initiated by a 
complaint to build a detailed and balanced record upon which to make 
decisions works well and should not be abandoned. Additional authority 
granted to the Board should only supplement and enhance this 
adversarial process, not replace it. Additionally, any extension of STB 
powers along these lines would require additional staff and budget 
resources, which would necessitate a thorough workload plan and 
staffing assessment prior to initiating any such change in authority.
    By way of background, the Board has the authority to look into 
problem areas on its own motion, as it did in the case of fuel 
surcharges. See 49 U.S.C. 721(a) (the Board shall carry out the 
Interstate Commerce Act; enumeration of a particular power does not 
exclude another power the Board may have to carry out the statute); 49 
U.S.C. 721(b)(1) (the Board has authority ``to inquire into and report 
on the management of the business of carriers''). The Board does not, 
however, have the authority to award relief for past actions except 
upon complaint. See 49 U.S.C. 11701(a) (the Board may institute an 
investigation that could lead to an award of damages only upon 
complaint).
    Before 1996, section 11701(a) authorized the Board's predecessor, 
the ICC, to initiate an investigation on its own initiative. The 
deletion of the own-motion investigation provision was intentional. See 
H. Conf. Rept. No. 422, 104th Cong., 1st Sess. 194 (1995) (the adopted 
House provision changed the underlying ``source of the agency's 
authority to investigate rail matters under its jurisdiction, [which] 
is now limited to action on the basis of a complaint, not on the 
agency's own motion''). See also 49 U.S.C. 10704(b) (the Board may 
begin rate proceedings only on complaint).
    When addressing particular shipments, the Board must necessarily 
depend upon the parties to develop an adequate record upon which to 
make a fully informed decision, and upon the adversarial process to 
ensure that it has adequately considered all sides of an issue and the 
potential ramifications of the possible actions available to it. 
Considering that millions of dollars are often at stake in these 
complex commercial disputes, it is not surprising that shippers and 
railroads choose to invest large sums of money and significant time in 
an effort to prevail in this adversarial process.
    I am not aware of any particular instances of a railroad 
``reprisal''; any evidence of such conduct can and should be brought to 
the Board's attention for appropriate corrective action. I can assure 
you that any instance of reprisal by any party before the STB would be 
handled as a high priority matter and would trigger strong sanctions.
    Finally, while the STB's adjudicative processes, like other 
commercial litigation, can be expensive and time-consuming, I believe 
that the Board's recent actions will substantially reduce the costs and 
time involved in bringing a rate complaint. In September 2007, in STB 
Ex Paste No. 646 (Sub-No. 1), Simplified Standards For Rail Rate Cases, 
the Board revised its rate review procedures to ensure that small- and 
medium-sized freight rail rate disputes can be resolved in a 
simplified, expedited and affordable manner.
    The new procedures allow freight rail customers with small rate 
disputes to obtain an award of up to $1 million in rate relief, with a 
Board decision issued within 8 months of filing a complaint. The filing 
fee for this simplified process is $150. The Board's new procedures 
also provide, to customers with medium-sized rate disputes, another 
avenue under which they can obtain an award of up to $5 million in rate 
relief, with a Board decision issued within 17 months of filing a 
complaint. Customers can choose which process they would like to use. 
Moreover, in an effort to minimize litigation, the Board will require 
non-binding mediation at the outset in all rail rate disputes.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                       Hon. Charles D. Nottingham
    Question 1. The October 2006, GAO report criticizes the STB for 
failing to ensure rail customer access to competition in the rail 
industry. Rail customers in my state complain particularly about 
``paper barriers''--provisions in track lease agreements that prevent 
short line railroads from doing a meaningful amount of business with 
any major railroad other than the railroad from which the short line 
leases its track. I understand that the Antitrust Division of the 
Department of Justice, in a 2004 letter to the then chairman of the 
House Judiciary Committee, indicated that these agreements might 
violate the antitrust laws but for the railroad exemption from the 
antitrust laws. What is the STB doing to address the issues surrounding 
these so-called ``paper barriers''? Do you believe the STB has an 
obligation to address this issue?
    Answer. The Board has recently addressed this issue. After 
examining the matter, the Board concluded in October 2007 that it would 
be inappropriate to assume, as some parties would prefer, that every 
contractual agreement of this sort is contrary to the public interest. 
Rather, because both the terms of such interchange commitments and the 
situations in which they are used vary so much, the Board found it 
better to look at these provisions on a case-by-case basis, so that any 
benefits of such arrangements can be examined together with the 
problems they may cause. The Board is in the process of revising its 
rules to ensure appropriate Board scrutiny of existing arrangements and 
arrangements that may be proposed in the future. The Board's decision 
was issued in October 2007, in STB Ex Parte No. 575, Review of Rail 
Access and Competition Issues--Renewed Petition of Western Coal Traffic 
League.
    I believe that a wholesale retroactive canceling or amending of 
contracts agreed to by informed businesses would be troublesome from a 
legal, policy, and business perspective. For transactions not 
completely undone, there could be significant problems regarding 
adjustment of the compensation between the parties to the original 
transaction on an ex post basis. Because of the multifaceted, 
interdependent nature of provisions in sale/lease agreements, a 
determination of adjustments could be complex and prone to litigation, 
which, depending on the contracts, could take place at the Board, 
before an arbitrator or in the courts. In the meantime, ongoing 
business relationships could be disrupted en masse, and critical 
investment and marketing decisions might be put on hold. Moreover, some 
short lines operate with marginal cash reserves and could be 
significantly weakened if they had to operate under less favorable 
terms or provide compensatory adjustments to the seller/lessor carrier.
    Some parties assume that these types of agreements are 
anticompetitive, but as the Board observed in its decision in STB Ex 
Parte No. 575, many of these agreements helped promote competition by 
empowering short lines and enabling them to enter into deals that would 
otherwise have been prohibitively expensive. No shipper faces less 
competition as a result of an interchange commitment than it would have 
faced had the line remained in the hands of the larger railroad. 
Moreover, the line may have been an under-served, under-maintained 
branch line, with the larger railroad focusing its attention on its 
larger, main-line customers. If so, a more attentive short line may 
provide smaller shippers with better service and improved access to the 
national rail system than they might otherwise have had. Thus, as the 
Board explained in its STB Ex Parte No. 575 decision, ``viewed ex ante 
(i.e., before the sale or lease of the facilities), the agreements may 
have been beneficial and furthered the public interest in a number of 
ways, including better service and/or better rates, and the creation or 
strengthening of short line railroads that have the potential to expand 
into other markets, and thereby ultimately add to competition.''
    Finally, I should point out that railroads would face difficulty 
attracting investment in a regulatory climate in which the Board 
rewrites the terms of contracts between railroads regardless of the 
circumstances.

    Question 2. At the outset of the implementation of the Staggers 
Rail Act in 1980, this legislation predicted a reliance on competition 
to set rates and gave railroads increased freedom to price their 
service according to market conditions, including the freedom to use 
differential pricing--that is to recover a greater proportion of their 
costs from rates charged to those shippers with a greater dependency on 
rail transportation. At the same time, the legislation anticipated that 
``captive shippers'' would likely exist where competition was lacking. 
Therefore, the ICC, and later the STB was established to provide a 
process through which shippers could obtain relief from unreasonably 
high rates.
    What major changes have occurred within the industry since the 
enactment of the Staggers Act that would lead to an increase in 
``captive shippers''? Does the STB's current process meet the needs of 
today's shippers that may be suffering from ``captive'' rates? What is 
the STB doing to ensure that the Board continues to work in an industry 
that has evolved significantly since the Staggers Act into one 
consisting of only seven Class I railroads?
    Answer. The Staggers Act, passed in 1980, was intended to enable 
rail carriers to rationalize their systems to enhance the industry's 
efficiency and improve the industry's financial health. As a result, 
various railroad mergers were proposed, and most were approved, with 
substantial competition-protecting conditions, by the Board and the 
ICC. The agency ensured that none of those mergers caused any shipper 
that had previously been served by more than one railroad to become 
captive to a single railroad.
    While the rail system now has fewer Class I long-haul carriers, 
there is an increasingly large number of smaller short-haul lines that 
handle the traffic. As for rates, as the GAO found in its recent 
reports, rail rates overall have declined substantially since the 
Staggers Act, although there has been a recent slight uptick, and there 
are some pockets in which particular captive shippers may be paying 
more. Moreover, while acknowledging that it is difficult to determine 
the precise number of captive shippers, GAO's analysis indicated that 
the extent of captivity is dropping. Since 1985, GAO found that the 
amount of potentially captive traffic traveling at rates over 180 
percent of variable cost and the revenue from that traffic have both 
declined. (Revenues generated from traffic traveling at rates over 180 
percent of variable cost decreased from 41 percent of all rail revenues 
in 1985 to 29 percent in 2004.)
    A major concern in recent years is that infrastructure is becoming 
inadequate to meet current demand for service. Therefore, the agency 
must engage in a difficult balance so that it does not preclude 
carriers from earning sufficient revenues to invest in needed capacity 
while also protecting captive shippers from paying unreasonably high 
rates.
    I believe that we have adapted our processes to address the current 
environment. We recently significantly reformed our procedures for 
handling both large cases, in STB Ex Parte No. 657, Major Issues in 
Rail Rate Cases, and small rate cases, in STB Ex Parte No. 646 (Sub-No. 
1), Simplified Standards For Rail Rate Cases. For large rate cases, we 
changed our procedures to correct various flaws that had been brought 
to our attention that required broad methodological changes, some 
favored by shippers, others by railroads, and one favored by neither 
side but necessary to keep the rate review process manageable and 
sensible. For small- and medium-sized freight rail rate disputes, the 
new procedures are designed to make the process affordable and 
expedited.
    We are also in the process of revising the way we calculate the 
rail industry's cost of capital, in STB Ex Parte No. 664, Method to Be 
Employed In Determining the Railroad Industry's Cost of Capital, so 
that our decisions will more accurately reflect the current health of 
the industry in today's environment.
    Additionally, to better understand the current competitive 
environment the STB has contracted with Christensen Associates, an 
economic consulting firm with extensive experience analyzing the 
transportation sector and other markets, to conduct an independent 
study that will assess the current state of competition in the freight 
railroad industry in the United States. The study should include a 
comprehensive analysis of a wide range of issues including competition, 
capacity, and the interplay between the two. The study will also 
examine various regulatory policy alternatives. We expect that it will 
be completed in the fall of 2008.
    The Board has taken other actions as well to address changes in the 
industry and in rail transportation needs:

   We investigated the fuel surcharge practices of the 
        railroads, and required carriers to change the manner in which 
        such surcharges are calculated.

   We held an informational hearing on issues related to the 
        transportation of grain.

   We are in the process of providing for full disclosure of 
        the terms of any contractual interchange commitments that 
        accompany the sale or lease of rail lines.

   We held a hearing on emerging energy issues and established 
        an advisory committee on transportation of energy commodities 
        to monitor the ability of the railroads to handle the future 
        energy needs of the Nation.

   We held a hearing to examine the current and future 
        infrastructure and capacity needs of the rail network, and the 
        railroads' capital investment levels and strategies to meet 
        those challenges.

   We are exploring the ambiguity in certain new types of rail 
        pricing arrangements that have aspects of both contract rates 
        (for which regulatory remedies are unavailable) and common 
        carrier rates (which are subject to Board regulation).

    Question 3. In the GAO's supplemental report released in August of 
this year, they cite fuel surcharges as being hard to clearly define 
and tie directly to the cost of fuel. They also cite ``miscellaneous 
revenues'' reported by the railroads as being difficult to clearly 
identify. What has the STB done to improve upon their data collection 
to clearly understand and identify these surcharges and revenue 
sources?
    Answer. In August 2007, in STB Ex Parte No. 661, Rail Fuel 
Surcharges, the Board finalized its new requirement that all Class I 
rail carriers submit a quarterly report of fuel costs, consumption, and 
surcharge revenues, due 30 days after the end of each reporting period. 
That report must include the total fuel costs and the total number of 
gallons of fuel consumed, for all freight, yard and work train 
locomotives. Also to be included in that calculation is fuel charged to 
train and yard service (``function 67--Locomotive Fuels'') and all 
other fuel used for railroad operations and maintenance, including 
motor vehicles and power equipment not charged to function 67--
Locomotive Fuels. Carriers must also report the total increase or 
decrease in the cost of fuel and the total fuel surcharges billed for 
all traffic. They also must break out the total fuel surcharges billed 
on regulated traffic.
    In addition, in December 2007, in STB Ex Parte No. 385 (Sub-No 6), 
Waybill Sample (Clarification), the Board instructed carriers that 
participate in the ``waybill sample'' (a statistical sampling of 
freight bills) to report fuel surcharge revenue in the same field, so 
as to achieve uniformity in the reporting of fuel surcharges.
    These actions were taken as part of an ongoing effort to ensure 
that fuel surcharge revenues are properly reflected. We will continue 
to monitor and address how surcharge revenues are reported.

    Question 4. A second obstacle to competition, according to the rail 
customers in Arkansas, is the refusal of a major railroad to provide a 
rate to take a customer's cars to a competing major railroad. 
Apparently, the STB allowed this practice in a December 1996, case 
called the ``bottleneck'' case. What is the STB doing about this 
``bottleneck'' issue?
    Answer. The Board's judicially affirmed ``bottleneck'' policy 
reflects the long-established principle of railroad law that a shipper 
generally may not require a carrier that can provide the full 
``through'' service from origin to destination to carry the traffic for 
only part of the move and turn the shipment over to a competitor for 
the remainder of the haul. The bottleneck policy was addressed 11 years 
ago in response to attempts by coal shippers to limit the ability of 
railroads to price differentially. Under differential pricing, a 
railroad may charge higher rates to captive shippers with greater (more 
inelastic) demand. What that means is that shippers that do not have 
competitive alternatives, and that have less flexibility in how much 
rail service they need, will generally pay higher rates than those that 
either have transportation alternatives or that can adjust how much 
they ship based on how much the carrier charges. Thus, if there is only 
one railroad that can provide service between a coal mine and a power 
plant that depends upon receiving a certain number of coal shipments, 
the carrier may be able to charge a higher rate than it could if there 
were another, competing carrier that could also provide the service.
    In the bottleneck cases, the utility companies sought the ability 
to break up their movements into separate legs, in an attempt to get a 
lower rate on the segment of the move where they could use a competing 
carrier, and to be able to bring a separate rate challenge for the 
shorter bottleneck segment of the move.
    The Board found that shippers cannot break up a through movement in 
this manner, because ordinarily a carrier has a statutory right (in 
section 10705) to use a routing that protects its ``long haul,'' and 
because the Supreme Court has made clear that only the entire rate from 
origin to destination can be challenged. See Great Northern Ry. v. 
Sullivan, 294 U.S. 458, 463 (1935) (a shipper's ``only interest is that 
the charge shall be reasonable as a whole''). The only exception that 
the Board could find to these longstanding legal principles is when 
there is a separate rail transportation contract with another carrier 
for a segment of the move. The Board found that the more recently 
enacted provision that entitles shippers and carriers to enter into 
such contracts for transportation outside the Board's jurisdiction (see 
section 10709) supersedes the law applicable to non-contract 
transportation. Therefore, shippers are free to enter into contracts 
that achieve the result of bypassing the bottleneck rule and those 
contracts fall outside of the STB's purview.
    I understand the consumer-rights appeal of empowering rail 
customers to break up trip segments into their component parts so that 
they can drive down the rates. But the bottleneck policy reflects the 
long established legal framework under which the rail industry has 
operated. I do not believe that categorically changing the way that the 
industry operates would be appropriate without further study and 
analysis. We have engaged a contractor, Christensen Associates, to 
examine various competitive issues over the next year, and we 
anticipate that the contractor will examine the bottleneck issue.
    I am particularly concerned about the potential impact on the 
railroad industry's ability to engage in differential pricing if a 
carrier's participation were limited to a very small portion of those 
movements that it would otherwise depend upon to cover the current 
portion of its fixed and common costs. Differential pricing is common 
in all modes of transportation, and carriers depend on differential 
pricing to provide enough revenue to cover the fixed and common costs 
that cannot be attributed to specific traffic. Under any other 
approach, such as an assigned weight-and-distance approach or cost-plus 
approach, railroads would end up losing whatever traffic could move by 
another carrier or other mode of transportation offering lower rates, 
such as trucks, thereby adding to highway congestion and safety 
problems. And without the ability to make up the difference in order to 
obtain sufficient revenues, carriers would lack the means or incentive 
to reinvest sufficiently in their rail systems to continue to provide 
the level of rail service that our Nation needs. In the end, with 
railroads earning substantially lower revenues the size and shape of 
the rail system could change in ways contrary to the public interest. 
The natural outgrowth of such a scenario would be that carriers would 
focus their more limited revenues on their high-volume, low-cost 
routes, and would invest less in maintenance and service to higher-cost 
routes, thereby adversely impacting captive shippers and many rural and 
other regions.

    Question 5. The GAO's supplemental report concluded that the STB 
has the statutory authority and access to information to conduct 
rigorous analysis of competition in the freight rail industry that 
would rely on more than sample data. Do you agree with this assertion? 
Has the STB undertaken such an analysis to determine whether rail rates 
in selected markets reflect justified and reasonable pricing practices 
or an abuse of market power by the railroads? Do you have adequate 
funding and/or personnel to conduct such analysis and collect relevant 
data? Why to this point have you not completed such a study? How long 
would it take to conduct such a study?
    Answer. The GAO report issued in November 2006 recommended that an 
independent study of competition in the rail industry be conducted. The 
STB was unable to conduct such a study immediately on its own without 
jeopardizing its work on important initiatives such as those to reform 
its rail rate review procedures for small cases and to revise how it 
calculates the cost-of-capital for the rail industry. The Board's FY 
2007 funding, however, which was contained in the appropriations bill 
enacted on February 15, 2007, was adequate to commission a study by an 
outside contractor, and on March 1, 2007, the agency began a 
procurement process to award a contract. Last fall the Board entered 
into a contract with Christensen Associates to perform the study. The 
agency will provide adequate support personnel as needed from our 
present full-time staff. The study will be quite complex and resource-
intensive, and that is why it will take the contractor a full year to 
complete. This study will be published toward the end of this year.

    Question 6. I understand that the STB is in the process of 
finalizing new reporting requirements for rail companies to report fuel 
surcharges and miscellaneous revenues to the STB. Where is the STB in 
this process? How would you rate the STB's current ability to 
accurately collect this type of data?
    Answer. I would give the STB a positive rating for its current 
ability to accurately collect data on fuel surcharges and miscellaneous 
revenues. As I indicated in the answer to Question 3, the Board has 
finalized new reporting requirements for fuel surcharge data that will 
demonstrate how the carriers are complying with the agency's directive 
that fuel surcharges be appropriately tied to fuel cost increases. The 
Board will also address a recently filed petition suggesting that fuel 
surcharge revenues should be reported as a separate item in the Waybill 
Sample. We will continue to make any appropriate refinements to the 
data collected.

    Question 7. In 2005 the electric utilities were not getting enough 
coal delivered for their power plants. The CEO of Arkansas's rural 
electric generating company wrote the Chairman of the STB seeking 
assistance with this problem. I am told that my constituent never got a 
response to his letter from the Chairman of the STB, but rather 
received a letter in response from the railroad that was in question. 
What legal authority does the STB have to assist a rail customer, such 
as my rural electric utility, that believes it's not receiving 
sufficient coal deliveries from its rail carrier? Why did the Arkansas 
Electric Cooperatives not receive a response from the STB? Why would a 
company sending a letter to the STB specifically and receive a response 
from the rail company in question and not the STB?
    Answer. The Interstate Commerce Act, at 49 U.S.C. 11101(a), 
requires rail carriers to provide transportation or service on 
reasonable request. However, there are a variety of valid reasons, 
consistent with the common carrier obligation, why a particular shipper 
may not receive the exact level of service it wants at the exact time 
it wants it. The Board stands ready to ensure that carriers meet their 
common carrier obligation so that shippers receive services that are 
reasonable under the circumstances.
    Service complaints or problems can often best be handled 
informally. In carrying out its mandate, the STB has established a very 
effective Rail Consumer Assistance Program, run by our Office of 
Compliance and Consumer Assistance (OCCA), to assist shippers with 
their service complaints. OCCA handles about 100 disputes in a typical 
year, the majority of which relate to service. The process is easy to 
use; it can be engaged by a simple telephone call, fax, letter or e-
mail. The follow-up by our staff is prompt and effective. Our consumer 
assistance staff can often bring the parties together and address their 
issues in a manner satisfactory to all interests. If the attempts at 
informal resolution are not successful, the shipper can then file a 
formal complaint with the Board. Such a complaint will be heard on a 
public record, and the Board's decision will be appealable in court.
    I should note that on July 18, 2007, after hearing about coal 
supply concerns from a variety of sources, the STB held a field hearing 
in Kansas City, Missouri, to examine issues related to the efficiency 
and reliability of railroad transportation of resources critical to the 
Nation's energy supply, including coal, ethanol and other biofuels. 
Speakers at the hearing represented the interests of railroads, 
utilities, coal shippers, and other energy commodities such as ethanol. 
To address these issues further, the STB has established a Rail Energy 
Transportation Advisory Committee (RETAC) to provide advice and 
guidance to the agency and to serve as a forum for the discussion of 
emerging issues regarding the railroad transportation of energy 
resources such as coal and ethanol and other biofuels. RETAC is 
expected to address matters such as rail performance, capacity 
constraints, infrastructure planning and development, and effective 
coordination among suppliers, railroads and energy-resources users. 
RETAC has already held its first meeting and has gotten off to a good 
start.
    I can not tell you why the CEO of Arkansas Electric Cooperative, 
Mr. Gary Voight, did not receive a response to his 2005 letter directly 
from the then STB Chairman, to whom the letter was addressed. I can 
tell you that it was referred to OCCA for informal handling. In the 
past, OCCA would sometimes forward such correspondence to the carrier 
involved in an attempt to engage the parties in dialogue. Since I 
became Chairman, I have made sure that OCCA does not contact the 
carrier involved or forward correspondence to the carrier without first 
obtaining clearance from the complaining shipper or other party. I also 
ensure that all letters addressed to me (other than those that might be 
construed as pleadings in pending cases, as to which I cannot respond 
on the merits because of the prohibition against ex parte contacts) are 
answered promptly.
    I recently called Mr. Voight, and apologized for the fact that he 
did not receive an appropriate response from the STB. I also informed 
Mr. Voight that it is my practice to respond to all inquiries. I was 
pleased to learn from him that rail service and coal stockpiles are 
greatly improved today, compared with 2005.

    Question 8. How many rate challenge cases are currently filed with 
the STB? How long does it take to process a case and make a 
determination? What is the average cost of a case to a shipper and a 
railroad?
    Answer. There are currently three small rate cases and one large 
rate case pending before the STB for an initial determination as to the 
reasonableness of the challenged rates. There are two other large rate 
cases in which the agency has made an initial determination and the 
shipper has sought reconsideration by the Board (and, in one of those 
cases, the shipper plans to revise its evidentiary presentation at the 
Board's suggestion). Deciding large rate cases is time consuming and 
costly for both shippers and railroads.
    The time and expense to process a rail rate case depends upon the 
size of the case. In a large rate case, where tens of millions of 
dollars or more are often at stake, the Board must use the most precise 
approach feasible for the case. In those cases, shippers typically 
proceed under the Board's ``stand-alone cost'' (SAC) test. It can take 
as much as a year and a half for the parties to develop a complete 
evidentiary record, and another 9 months for the Board to fully review 
the record and prepare its decision. While the Board does not collect 
information regarding the cost of rate cases, we have been advised that 
shippers have spent as much as $4.5 million to pursue such a case, 
although the Board expects that figure to be considerably lower with 
the reforms that it has recently made to the process. In any event, the 
time and expense associated with a large rate case is not out of line 
with what it takes to litigate complex commercial disputes of this 
magnitude in the courts.
    For smaller rate cases, the Board's procedures should be 
considerably less expensive. For the smallest category of cases, those 
in which the rate relief sought does not exceed $1 million over a 5-
year period, the Board will issue its decision within 8 months after 
the complaint is filed, and we expect that neither party would need to 
spend more than $250,000 to present its case.
    Finally, for a medium-sized rate case, one in which the rate relief 
sought does not exceed $5 million over a 5-year period, the Board will 
issue its decision within 17 months after the complaint is filed, and 
we expect that neither party would need to spend more than $1 million 
to present its case.

    Question 9. What is your opinion of establishing an independent 
arbitration board to assist the STB with case load?
    Answer. I do not believe that an independent arbitration board is 
necessary. The STB is fully capable of carrying out the mandates of the 
Interstate Commerce Act itself. The STB does not have a serious backlog 
of cases, we meet our statutory deadlines, and as I have discussed 
above, we have taken significant steps to streamline and simplify our 
decisional processes in important areas.
    One reason I do not generally favor mandatory, binding arbitration 
is because the very ``rough justice'' that virtually unreviewable 
arbitral decisions can produce can undercut the predictability that the 
Board seeks to provide for shippers and railroads. Indeed, although 
some parties tout the Canadian system of arbitration, my understanding 
is that it produces inconsistent and unpredictable results that are not 
necessarily based on any economically sound methodology and that can 
interfere with the development of reasonable business plans.
    Moving beyond rate disputes, I would note that, because arbitral 
rulings have no precedential value and are not available for review or 
research, they would not provide a resource of knowledge to assist in 
resolving similar disputes. Less rigid and far less expensive 
alternative dispute resolution mechanisms, such as mediation, can be 
done by the STB's trained staff while still allowing parties the 
opportunity to obtain a formal Board resolution of the dispute should 
the mediation fail. I should note that our mediation policy has worked 
well and that two small rate cases, BP-Amoco v. Norfolk Southern and 
Williams Olefins, L.L.C. v. Grand Trunk Corporation were successfully 
mediated by Board staff in the last 2 years.

    Question 10. Do you believe the Board approved ``stand alone cost'' 
(SAC) model, that compares the rates charged by a railroad with the 
rates that would be charged by a fictional competing railroad is the 
best method for determining market dominance or whether a shipper's 
rates are unreasonable or difficult to prove?
    Answer. The Board's constrained market pricing methodology, which 
includes the SAC test, is the best method that I am familiar with for 
purposes of resolving large rail rate disputes. Railroad rate 
regulation, like rate regulation in other industries, is complex. The 
courts have concluded that the Board's sophisticated ``constrained 
market pricing'' methodology, which includes the SAC test, is an 
appropriate methodology that simulates the results of a competitive 
market in the rail industry. Under SAC the complaining shipper is 
required to pay for the costs of its service, plus a reasonable profit, 
but it is not required to bear the costs of carrier inefficiencies or 
of facilities that are not used for its own traffic.
    I am always open to new ideas, and I would entertain any 
suggestions as to a new rate methodology, but to date, it has not been 
demonstrated to me that there is any better method of regulating rail 
rates in major cases. SAC allows railroads to price differentially 
while still limiting charges to those attributable to a particular 
shipper's service, plus a share of the reasonable return needed on the 
carrier's fixed costs. Were the SAC test discarded, the Board would 
have to fundamentally alter how the reasonableness of rail rates is 
judged. I am concerned that a return to a cost-based approach would not 
allow for demand-based differential pricing. That, in turn, would deny 
railroads the ability to cover all of their costs (including a 
reasonable return on capital) as a result of the business reality that 
railroads serve a customer base that includes both captive and 
competitive traffic. Because the competitive traffic would not pay its 
allocated portion of the fixed and common costs if a less expensive 
transportation alternative is available, a carrier must have the 
ability to charge more to its captive traffic to make up the shortfall. 
And over the long run, the captive traffic is better off under demand-
based differential pricing than it would be under a cost-based 
approach, because demand-based differential pricing allows the carrier 
to retain the traffic with competitive alternatives, which makes some 
contribution to the fixed and common costs, thereby reducing the amount 
that the remaining traffic base needs to cover.
    Finally, I would note that the SAC test is not used to determine 
whether a carrier has market dominance over the traffic to which a 
challenged rate applies.

    Question 11. Has the STB considered altering this method or 
reducing the burden of proof from the shippers?
    Answer. As I have discussed, the Board already has made substantial 
strides at simplifying the way the SAC test is administered, including 
some major substantive changes to the methodology. The Board has also 
substantially improved the way it will handle smaller rate cases, as I 
have also discussed. I believe that those changes will improve the 
process substantially for both types of cases and reduce the litigation 
burdens on a shipper significantly. The Board has not sought to 
fundamentally change its judicially approved basic approach for 
assessing rate reasonableness, and no party has brought to the agency a 
reasonable alternative.
                                 ______
                                 
 Response to Written Question Submitted by Hon. Frank R. Lautenberg to 
                           JayEtta Z. Hecker
    Question. You note in your testimony that rail rates have increased 
in recent years. This could be because of new pricing power by the 
railroads or just increased market prices for transportation generally. 
Have you looked at whether rates for truck and maritime transportation 
have increased as well?
    Answer. We did not examine how rates for maritime and truck 
transportation have changed in recent years. We recognize that some of 
the same factors that influence railroad shipping rates could also 
influence rates for maritime and truck transportation. However, we are 
not able to say how the railroad rate increases that we reported 
compare with rates changes for other modes commonly used for freight 
shipments, because such an examination was outside the scope of our 
review.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                           JayEtta Z. Hecker
    Question 1. In October, 2006, the GAO filed a report on the state 
of the freight rail industry pursuant to a request from a number of 
Members of this Committee, including myself. The GAO supplemented that 
report on August 15, 2007. We requested this report in March 2005. The 
main portion of the report was issued in October, 2006 and supplemented 
with 2005 data on August 15, 2007. One of your major recommendations 
was that the STB study the lack of competition in the rail industry and 
take necessary corrective action. The STB has finally commissioned a 
study on the lack of competition in the rail industry, but has it made 
any public commitments to address this issue after the study is 
completed?
    Answer. We are not aware of any specific plans or commitments the 
Board has made on this issue beyond commissioning the study. STB 
announced in September 2007 that it had awarded a contract for a 
comprehensive study on competition, capacity, and regulatory policy 
issues to be completed by the Fall of 2008. As you know, our 
recommendation to the Board was twofold; one, that it undertake a 
rigorous analysis of competitive markets to identify the state of 
competition nationwide, and two, that it consider the range of actions 
available to address the inappropriate exercise of market power should 
it learn of such problems in specific markets. We commend STB for 
commissioning this study. The steps the Board takes after it receives 
the results will be critically important to addressing the issues 
associated with the continued existence of pockets of potentially 
``captive shippers'' that we discussed in our October 2006 report.

    Question 2. The GAO found that the rail customer protections at the 
STB were largely ``inaccessible'' to rail customers due to filing fees, 
complexity of the processes, the cost of pursuing a case at the STB and 
the time required to pursue relief at the STB. Is that correct? What 
recommendations has GAO proposed for improving the rail rate relief 
process for rail customers?
    Answer. While we did not offer specific recommendations, in 2006 we 
reported that STB's standard rate relief process was widely viewed as 
inaccessible to most shippers and we highlighted a number of potential 
alternative approaches. Specifically, we found the process was 
expensive, time consuming, and complex. We also reported that the 
simplified guidelines had not effectively provided relief for captive 
shippers. We discussed the pros and cons of alternative approaches that 
shipper groups, economists, and other experts in the rail industry have 
suggested might provide more effective remedies than the rate relief 
process, including such remedies as reciprocal switching (where 
railroads transport cars of a competing railroad for a fee) and 
trackage rights (where one railroad grants access to its tracks to 
another railroad).
    Since our report was issued in October 2006, STB has taken steps to 
refine the rate relief process by, among other things, (1) revising 
procedures for deciding large rate relief cases by, for example, 
placing restraints on the evidence and arguments allowed in these 
cases, (2) altering its simplified guidelines for small shippers to 
enable shippers who are seeking up to $1 million in rate relief over a 
5-year period to receive an STB decision within 8 months of filing a 
complaint, and (3) creating a new rate relief process for medium-size 
shipments to allow shippers who are seeking up to $5 million in rate 
relief over a 5-year period to receive an STB decision within 17 months 
of filing a complaint. These appear to be positive steps that could 
address longstanding concerns about STB's rate relief process. However 
it is too soon to determine the effect of these changes on the process, 
and therefore we have not evaluated their effect.
                                 ______
                                 
  Response to Written Question Submitted by Hon. Daniel K. Inouye to 
                           Charles W. Moorman
    Question. What are the biggest challenges when it comes to adding 
new commuter/passenger operations to your railroad, and what would be 
the impact on that if the so-called railroad competition bill passed 
the Congress?
    Answer.
Passenger/Commuter Rail
    The biggest challenge regarding adding new commuter/passenger 
operations is finding ways to accommodate the passenger operations 
without adversely affecting current or future freight operations. 
Often, this means that capacity must be expanded to make room for 
passenger trains.
    Because of a huge increase in rail freight traffic in recent years, 
there is much less room to spare on the U.S. rail network today than 
there was even just a few years ago. Thus, train ``slots'' have become 
increasingly scarce on many rail corridors. When passenger trains fill 
these slots, it erodes freight railroads' ability to serve those areas 
because those slots are not available to freight trains.
    Moreover, because of the generally higher speed at which they 
operate and their typical priority status, passenger trains consume 
more infrastructure capacity than freight trains and create freight 
train delays as they travel across the freight rail network. Further 
allowing passenger trains to fill these slots at below-market prices 
would make this situation even worse, resulting in a major subsidy from 
freight to passenger railroads.
    Freight railroads agree that passenger rail has a potentially 
important role in alleviating highway congestion in certain corridors, 
and freight railroads are committed to working reasonably and 
cooperatively with Amtrak and commuter railroads to help them succeed 
where practicable. But the goal of reducing pollution, highway 
congestion, and greenhouse gas emissions by expanding passenger rail 
will not be realized if passenger trains interfere with freight service 
and, as a result, force freight onto the highways or prevent railroads 
from meeting the huge future growth in freight transportation demand 
that the U.S. DOT and others expect.
The Railroad ``Competition'' Bill
    If the so-called railroad ``competition'' bill (S. 953/H.R. 2125) 
passed Congress, the impact would be overwhelmingly negative--for 
shippers, railroads, rail employees, and the economy at large.
    Freight railroads need more capacity, not less. The demand for 
freight transportation has grown and is projected to continue to grow. 
The United States Department of Transportation (``DOT'') has estimated 
that the demand for freight transportation will increase by 55 percent 
between 1998 and 2020. More recently, DOT projected that total freight 
transportation demand will rise 92 percent from 2002 to 2035, including 
an 88 percent increase for railroads. Similarly, the American 
Association of State Highway and Transportation Officials projected 
that freight tonnage will grow by almost 57 percent between 2000 and 
2020.
    In fact, a recent study by Cambridge Systematics found that 
railroads need an estimated $148 billion in new capacity by 2035 to be 
able to handle the freight traffic increase predicted by DOT. That 
amount is on top of the hundreds of billions of dollars necessary to 
maintain and replace existing rail infrastructure over the period and 
in addition to massive amounts necessary to maintain, replace, and 
expand locomotives, freight cars, and other rail-related equipment.
    But the whole point of S. 953/H.R. 2125 is to force railroads to 
lower their rates to certain favored shippers (most of whom are more 
profitable than railroads) to below-market levels. These forced rate 
reductions would translate directly into lower railroad earnings--
potentially billions of dollars per year--taking railroads away from 
the financial sustainability they need.
    Consequently, spending on track and equipment would shrink; the 
industry's existing track and equipment would deteriorate; needed new 
capacity would not be added; and rail service would become slower, less 
responsive, and less reliable. It would be impossible for railroads, in 
the face of the huge revenue loss they would confront from 
reregulation, to make the massive ongoing investments in capacity 
expansion our Nation desperately needs.
    America has a great freight rail network. It just needs more of it, 
and S. 953/H.R. 2125 will not help achieve that.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                           Charles W. Moorman
    Question 1. What would be the impact of Senator Rockefeller's bill 
(S. 953) on the railroad industry should it pass Congress?
    See section on The Railroad ``Competition'' Bill above.

    Question 2. According to the GAO report, industry rates for 2005 
increased by approximately 7 percent from 2004 levels. Why do you 
believe there was an average rate increase that exceeded inflation?
    Answer. Any number of market forces can result in rates rising more 
or less than the inflation rate during any one period of time. During 
the period between 2004 and 2005, demand for rail transportation 
increased markedly. Although railroads have invested substantially in 
infrastructure, the rapid growth in rail traffic (or ``demand'' for 
rail service) during that period meant that, on some critical corridors 
and at some locations, rail capacity (or ``supply'') tightened. 
Whenever supply tightens or grows slower than demand, economists expect 
prices to rise. So, we should not be surprised that market forces work 
in the rail market in the same way that they work in other markets. 
Additionally, when multiple-year contracts expire rate increases 
reflect what has transpired in the market during all the years since 
the parties entered into the contract.
    Recent railroad rate increases for some shipments over the past 
couple of years also need to be put in context. As measured by revenue 
per ton-mile, average U.S. freight rail rates continue to be a bargain. 
As measured by revenue per ton-mile, average U.S. freight rail rates 
have fallen 55 percent in inflation-adjusted terms from 1981 to 2006. 
In addition, a recent GAO report, which included the following chart, 
also demonstrates that rail rates substantially lagged economy-wide 
inflation. The deviation would be even greater had GAO taken inflation 
into account.


    Source: GAO analysis of STB data.

    Another way to put the recent rate increases into perspective is to 
compare rail rates to the prices of other products in our economy. 
Looking at data from the Bureau of Labor Statistics, we can compare the 
prices from January 1984 to November 2007. On the one hand, the price 
of gasoline is up over 150 percent; the price of electricity is up over 
45 percent; the price of potato chips is up over 45 percent; and the 
price of a whole chicken is up over 35 percent.
    No one could reasonably believe that rates should decrease forever, 
or that rail rates should not keep pace with other general economic 
indices. Rail rates have a long way to climb before they are even on 
par with the increases of other commodities or of general economic 
indices.
    Moreover, railroads need to earn adequate returns. Unlike trucks 
and barges, which travel on heavily-subsidized highways and waterways, 
U.S. freight railroads finance the vast majority of their 
infrastructure spending themselves. They need to be able to earn enough 
to do this, which is why adequate rail earnings are critical. As the 
Congressional Budget Office has noted, ``[a]s demand increases, the 
railroads' ability to generate profits from which to finance new 
investments will be critical. Profits are the key to increasing 
capacity because they provide both the incentives and the means to make 
new investments.''
    As their traffic continues to grow, railroads will have to 
concentrate increasingly on building substantial new capacity in 
addition to maintaining and replacing their existing infrastructure and 
equipment. In order to expand infrastructure and service, railroads--
like every other business in a free market economy--must obtain from 
their customers the resources they need to support the growth their 
customers want and need.

    Question 2a. Are increases evenly distributed across all of your 
routes?
    Answer. I cannot speak to how other railroads price, but NS prices 
traffic according to market factors. Different market factors affect 
different traffic. Some of those factors include the volume of traffic 
the customer will tender; the unique characteristics of the rail 
movement; the length of haul; the level of equipment utilization that 
results from the customer's ability to load and unload railcars or from 
the amount of time the equipment will have to move empty; the 
availability of other modes of transportation; the length of contract 
term; the projected costs for NS to move the traffic; the availability 
of rail capacity; and other market factors. Accordingly, rate increases 
(or decreases) vary by customer, by commodity, by route, or all of the 
above.

    Question 2b. Where did your company increase rates the most? Why?
    Answer. NS's rates increased the most where the market forces 
dictated larger rate increases.

    Question 2c. Where are some of the highest increases among your 
customers?
    Answer. The highest rate increases tend to be in situations where a 
customer's long-term contract expires. In those situations, the extent 
of the changes in the market forces since the last contract was 
negotiated is greatest.

    Question 2d. Is there a particular shipper (industry) that is 
leading the complaints against the industry on rail issues? Why do you 
think they are so vocal?
    Answer. It appears that most complaints regarding rail issues 
emanate from shipper groups representing the electric utility, 
chemical, and grain industries. In a sense, it seems that railroads 
might be a sort of a scapegoat for other competitive pressures.
    For example, the chemical industry cannot do much to influence the 
extremely high price of natural gas, the industry's primary feedstock. 
Railroads are a much smaller cost to the chemical industry, but are an 
easier ``target.''
    Much of the electric utility's discourse is promoted by electric 
cooperatives and their consultants and trade association spokesmen. For 
decades, electric cooperatives have worked hard to obtain and retain a 
set of special advantages not available to most businesses. By 
advocating reregulation of freight railroads, electric cooperative hope 
to gain yet another government-conferred special advantage.
    And while freight railroads have been an essential and highly cost 
efficient lifeline to the domestic and international market for our 
agricultural sector, sometimes those who have not taken full advantage 
of potential rail efficiencies or who are geographically or 
competitively challenged vis-a-vis other producers are not fully 
accepting of the underlying market dynamics.
    The Staggers Act of 1980, which partially deregulated railroads, 
has been a tremendous success. Staggers, however, did not bestow on 
railroads a special public service obligation, verging on the 
governmental, to subsidize other businesses, compensate for regional 
disadvantages or characteristics, or serve as the instrument for 
advancing local objectives or special interests at the railroads' 
expense.

    Question 2e. Does the STB have a requirement to protect ``captive 
shippers'' from unfair rail rates?
    Answer. ``Fairness'' is an imprecise and qualitative concept. For 
example, some rail customers seem to believe that ``fairness'' means 
that railroads should charge the same rate to all shippers to transport 
their product the same distance. Other shippers apparently think that 
``fairness'' requires a rail rate for a given route to be no more than 
a certain markup over the costs of that route alone, regardless of a 
railroad's system-wide revenue needs. And still other rail users may 
consider it ``unfair'' ever to lose a case brought before the STB.
    That said, the STB does have the statutory and regulatory authority 
to determine whether a particular rail rate exceeds a reasonable 
maximum and take certain other actions if a railroad is found to have 
``market dominance'' or to have engaged in anticompetitive behavior.
    Indeed, STB guidelines impose a set of constraints that prevent 
railroads from abusing their pricing freedom. The most important of 
these constraints is the stand-alone cost (``SAC'') test, which in 
theory is firmly rooted in sound economic theory. The SAC test acts as 
a surrogate for competition in those instances where competitive 
markets do not exist by determining the total costs that a 
hypothetical, efficient new railroad would incur to construct and 
operate a rail line to serve the traffic in question. If the rates 
charged by the existing railroad generate revenue higher than what the 
SAC test finds necessary to recover the full costs of the hypothetical 
railroad, the existing railroad's rates are considered to be 
unreasonably high.
    In such an instance, the STB can order the existing railroad to 
lower its rate to the level of the hypothetical railroad and pay 
reparations to the complaining shipper. If the existing railroad's 
rates are lower than those of the hypothetical railroad, the existing 
railroad's rates are considered reasonable. Because the SAC test 
estimates the current cost of replacing the needed rail service, it 
guarantees that in the long run shippers pay no more for rail service 
than would be charged by an efficient new entrant.
    The STB recently issued new rate reasonableness guidelines in which 
it created two additional tests that shippers with so-called small rate 
complaints and medium-sized rate complaints can use. Although these new 
procedures require less time, expense, and effort to bring and 
adjudicate, certain aspects of these new guidelines are worrisome. For 
example, they do not require the STB to actually examine the 
transportation at issue, which means the risks and costs associated 
with transporting highly hazardous materials may not be properly taken 
into account.

    Question 2f. Do you believe the current Revenue to Variable Cost or 
Stand Alone Cost formulas for determining unfair rail rates and 
captivity is adequate?
    Answer. Railroads believe that the current regulatory regime--under 
which competition and market forces are the determining factors in 
setting rail rates and service standards in most cases, with maximum 
rate and other protections available to rail customers who truly need 
them--is, by and large, an appropriate one. It strikes a reasoned 
balance between providing railroads the freedom to compete effectively 
in the marketplace and providing shippers the means necessary to combat 
actual abuse of railroad market power and anticompetitive railroad 
behavior, where it may exist.
    The SAC test in general is the most appropriate and in theory is an 
economically-based test--which the STB itself has repeatedly noted. 
However, the STB last year enacted a new set of rules to alter the 
stand-alone cost test. NS believes that several of these changes are 
inconsistent with the underlying economic basis for the test and are 
appealing those limited changes. Regulatory mechanisms for assessing 
the reasonableness of rates that are not economically-based are 
worrisome because they may not appropriately account for the needs for 
investment in and replacement of the Nation's rail system.
    NS is very concerned about recent regulatory actions that seem to 
be altering the balance in rail regulation that has served the United 
States well since the Staggers Act of 1980. A major objective of the 
STB is to ensure the long-term strength and health of railroads--
because strong and healthy railroads are in the best interest of the 
public. Several recent STB decisions are troubling because they could 
have the effect of undermining the ability of our country's railroads 
to play as strong a role as possible in addressing our growing 
transportation crisis. Going forward railroads need the continued 
flexibility that deregulation has offered to efficiently handle the 
rapidly expanding transportation needs of our domestic economy and 
sustain our Nation's domestic efficiency and international 
competitiveness.

    Question 3. According to the GAO's supplemental report, fuel 
surcharges in 2005 tripled from 2004 levels ($633 million to over $1.7 
billion). Also, ``miscellaneous revenue'' accounted for 1.5 percent of 
revenue in 2004 and rose to 3.7 percent in 2005. Can you explain why 
these charges would increase by that much?
    Answer. Again, on matters of rates and charges, I can only address 
NS and cannot comment on what other railroads may or may not be doing. 
But it should not be surprising that revenues from fuel surcharges 
increased over this period. First, the average price of West Texas 
Intermediate nearly doubled between January 2004 and December 2005. 
Second, as contracts that did not include a fuel surcharge provision 
expired during this time period, fuel surcharge provisions were 
included in new contracts during the course of negotiations, which 
meant more and more customers began to pay fuel surcharges.

    Question 3a. Were these increases universal for all customers that 
you serve?
    Answer. As noted above, some customers with long term contracts did 
not pay fuel surcharges during this period. Other customers may have 
negotiated other terms, such as higher base rates in lieu of a fuel 
surcharge or for an individualized fuel surcharge.

    Question 3b. Should railroads reimburse customers if they were 
overcharged for fuel&rcharges?
    Answer. NS cannot speak for other railroads and their fuel 
surcharge policies. But, NS does not accept the premise of the question 
that customers could have been overcharged.
    Today, NS does not charge a fuel surcharge on traffic that NS 
originates and that moves pursuant to public tariffs. We do, however, 
negotiate contracts that include a fuel surcharge mechanism of one 
variety or another. These mechanisms are intended to reflect the 
changes that occur in the marketplace for transportation services as 
fuel prices fluctuate. For example, trucks are our largest competitor. 
But we know that rail is more competitive versus trucks at higher oil 
prices. One reason NS has a fuel surcharge mechanism is to reflect the 
relative nature of that competitive advantage over our competition. 
Fuel surcharges therefore are not intended to serve as a straight-pass 
through of fuel costs.
    It is important to understand that NS strives to set its overall 
prices at market levels. We use the market as our gauge when 
negotiating contract arrangements and when determining the appropriate 
level of our public rate authorities. The total price--whether the 
transportation rate, a fuel surcharge, other charges, or a combination 
of these items--must be at market levels. Maintaining rates at market 
levels is critically important in these times in which more capacity 
investment is needed.

    Question 4. I understand the capital intensive nature of the rail 
industry, but I also understand that freight railroads are currently 
sufficiently profitable and are reinvesting at a high rate.
    Answer. Railroads' financial health has improved over the past 
couple of years. But even in 2006, when railroads hauled more freight 
than ever before, their ``record'' earnings were still below most other 
industries.
    Return on equity (``ROE'') is a common profitability measure. 
According to Value Line data, the ROE for the rail industry in 2006 was 
14.0 percent--possibly the best ROE for the rail industry ever. By 
contrast, the median ROE in 2006 for the 89 industries (encompassing 
approximately 1,700 firms) that Value Line tracks was 16.7 percent--19 
percent higher than the rail figure. In fact, in 2006 railroads ranked 
just 58th among the 89 industries Value Line tracks.
    ROE data from the Fortune 500 tell a similar story: rail 
profitability is substandard compared to most other industries, even in 
2006 when railroads had ``record'' profits.
    In other words, what was probably the best financial year ever for 
railroads was not enough to get them even to the halfway point among 
all industries. Given this result, railroads respectfully disagree with 
the claim that they are ``sufficiently profitable.''
    Moreover, improved rail earnings were a primary goal of railroad 
deregulation in the first place. The effectiveness of deregulation 
should not lead anyone to conclude that it is no longer needed.
    Railroads are doing their part regarding re-investment. Since 
Staggers, U.S. freight railroads have spent approximately $400 billion 
on capital expenditures and maintenance expenses related to their 
infrastructure and equipment. Railroads are investing record amounts--
investments were higher in 2006 than ever before and are thought to 
have been higher still in 2007 (with increasing amounts going to 
capacity expansion)--in an effort to provide reliable, efficient 
service to current customers and meet the tremendous growth in freight 
demand everyone is predicting. Absent any changes in the legislative or 
regulatory regime that creates disincentives for railroads to invest, 
they expect to continue to invest massive amounts of private capital to 
ensure the U.S. freight rail system remains the world's best and can 
handle the freight transportation needs of our economy.

    Question 4a. Can you explain how your company is currently 
reinvesting to expand rail opportunities for shippers that are 
currently strained due to capacity and facility shortages?
    Answer. U.S. freight railroads have been devoting enormous 
resources to maintain their existing infrastructure, to improve their 
operations and infrastructure, and to alleviate the capacity 
constraints that arise from increasing freight demand. Indeed, from 
1997 to 2006, the average U.S. manufacturer spent 3 percent of revenue 
on capital spending. The comparable figure for freight railroads was 17 
percent, or more than five times higher.
    Likewise, NS makes large capital expenditures every year to 
maintain and expand its infrastructure. Between 2000 and 2006, NS's 
capital expenditures have totaled more than $6.3 billion, while its net 
income over the same period has been only $5.2 billion. In 2007, NS 
budgeted to spend another $1.34 billion, which is almost equal to its 
total net income from 2006. These expenditures are required to maintain 
and to expand the NS physical plant and locomotive and car fleet so 
that NS can serve its customers better, handle larger volumes of 
freight, and respond to its customers' changing shipping patterns.
    At the same time, NS keeps in mind the need to justify new capacity 
expansion. For example, the construction of new track or new yard 
capacity requires investment in assets that have a very long life and 
that are not easily moved. Therefore, capacity expansion projects must 
generate returns sufficient to justify making the investment. At NS, 
many projects do not get approved the first time they are proposed 
because NS simply cannot afford to complete every needed project each 
year.
    In the current environment in which freight demands are forecasted 
by many groups to increase substantially over the next 20-30 years, it 
is especially important that railroads have the resources and the 
ability to improve its infrastructure now to meet future needs because 
(1) capacity is expensive and resources and money are limited and (2) 
it takes time to build rail infrastructure and capacity.
    For example, it took years for the industry to reach agreement on a 
plan to address rail congestion in Chicago. After several years of 
effort on this historic public-private partnership, the rail industry, 
local officials, and state leaders were able to join together to seek 
Congressional funding for the public benefits that would flow from the 
project. Even today, the project is not fully-funded, and it is unclear 
how long it will take to make it a reality--even though it is clearly 
needed.
    Moreover, even when it is approved and fully funded, the design, 
permitting, engineering, environmental review, and construction of a 
major project can take years. For example, from the time NS started the 
environmental permitting process to build a new intermodal yard in 
Atlanta to the time NS opened its $110 million facility in Austell, 
Georgia, was about 5 years. Just how many years it takes to make a 
project a reality depends on the time required to secure the necessary 
permits, resources and money available, and the railroad's ability to 
complete the work in a way that least impacts its ability to serve its 
customers whose traffic moves on those lines. The good news, however, 
is that railroad expansion typically requires far less time and money 
than highway expansion.
    Given the time it takes to add infrastructure and the long lives of 
the assets required to expand capacity, it is essential for railroads 
like NS to take a long view on infrastructure investments. But the 
railroading truth is that it takes resources today to invest for 
tomorrow. NS intends to continue to maintain and build a strong network 
to meet future shipping needs, but legislative and regulatory changes 
are real threats to its ability to do so.

    Question 4b. Are your reinvestment efforts primarily focused on 
improving rail rates, access and service for routes currently serving 
areas of tight demand?
    Answer. In making its investment decisions, NS focuses on making 
our overall rail network more efficient and on serving all its 
customers well. NS' individual customers have different needs and place 
different priorities on such factors as transit-time, price, safety, 
damage-free handling, and frequency of service and switching. NS tries 
to balance these competing needs and to invest to provide the best 
service to the most customers. In other words, NS invests to maximize 
its network. If NS had only intermodal customers, its investments would 
be different than if there were only coal customers or only chemical 
customers. In fact, NS serves thousands of customers with different 
transportation needs for their thousands of different commodities. The 
investments NS makes represent its best judgment as to how to strike 
the right balance.
    Accordingly, we spend money in a variety of areas. For example, in 
2006, Norfolk Southern among other things:

   Closed a deal to create a joint venture with the Kansas City 
        Southern Railway, which will result in $300 million of 
        investment mostly to upgrade the rail line between Meridian, 
        Mississippi and Shreveport, Louisiana, so that the line can 
        move more freight more quickly across the line. Already, 45 
        miles of formerly non-signaled territory have been converted to 
        centralized train control, 100 miles of crosstie replacement 
        has been completed, 150 miles of ballast and surfacing work has 
        been done, and 45 miles of new rail have been replaced with new 
        rail in three locations.

   Opened a new rail line to the coal-powered Keystone 
        Generating Station in Shelocta, Pennsylvania. The $44 million 
        public-private partnership trims 51 miles off the trip from 
        Saltsburg, Pennsylvania to Shelocta and increases the capacity 
        of the plant.

   Began work on the $62 million Rickenbacker Intermodal 
        Terminal in Columbus, Ohio, which will increase freight 
        capacity in that region by more than 40 percent.

   Added infrastructure in the following corridors: Memphis, 
        Tenn. to Chattanooga, Tenn.; Chattanooga, Tenn. to Atlanta, 
        Ga.; Atlanta, Ga. to Jacksonville, Fla.; Charlotte, N.C. to 
        Manassas, Va.; West Virginia Secondary; Columbus, Ohio to 
        Cincinnati, Ohio; Goldsboro, N.C. to Morehead City, N.C.; St. 
        Louis, Mo. to Louisville, Ky.; and our route to Albany, N.Y. 
        and New England.

   Acquired 142 additional locomotives.

   Acquired 400 rapid-discharge, aluminum coal cars.

    Norfolk Southern's announced 2007 capital budget included, among 
other things:

   Investing in capacity by making capital roadway 
        improvements. Norfolk Southern plans to spend $610 million for 
        rail, crosstie, ballast and bridge programs, including $73 
        million in infrastructure investments for increased capacity. 
        In addition, Norfolk Southern plans to spend $47 million for 
        communications, signal, and electrical projects; $41 million 
        for maintenance of way equipment; and $16 million for 
        environmental projects and public improvements such as grade 
        crossing separations and crossing signal upgrades.

   Making capital investments in intermodal terminals and 
        equipment to add capacity to the Norfolk Southern intermodal 
        network, increase access and capacity for coal traffic, bulk 
        transfer facilities, and vehicle production and distribution 
        facilities--all at a cost of about $97 million.

   Spending about $60 million for capital projects related to 
        computers, systems and information technology, which will 
        enhance safety and improve operating efficiency and equipment 
        utilization.

   Investing approximately $321 million to:

    Purchase 53 six-axle locomotives and upgrade existing 
            locomotives (Subsequent to the announced 2007 capital 
            budget, Norfolk Southern also made a commitment to acquire 
            an additional 50 locomotives.).

    Purchase 1,300 new higher-capacity coal cars as part of 
            a multiyear program to replace the existing coal car fleet.

    Purchase 739 freight cars as their leases expire; 
            certify and rebuild 388 multilevel automobile racks; and 
            add supplemental restraints to multilevel racks.

   Renewing expiring equipment operating leases covering more 
        than 2,800 cars.

   Leasing 200 additional construction debris cars.

   Repairing freight cars at a cost of $56 million. Our repair 
        plan for 2007 reflects a 17 percent increase in repairs over 
        the number of cars repaired in 2006. Norfolk Southern has 
        announced a new car repair facility in Portsmouth, Ohio that 
        will open next year.

    Obviously, our people are another critical asset. Expenditures made 
to hire, train, and pay crews are not capital dollars, but clearly 
additional crews expand our capacity. NS is hiring and training 1,300 
train and engine employees this year.
    Finally, NS keeps in mind the need to justify new capacity 
expansion. For example, the construction of new track or new yard 
capacity requires investment in assets that have a very long life and 
that are not easily moved--capacity expansion projects must generate 
returns sufficient to justify making the investment.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                           Robert L. Carlson
    Question 1. As you know better than anyone, there has been a record 
wheat crop this year, only to be followed by record wheat sales due to 
the favorable global wheat market. An unprecedented 80-90 percent of 
this year's crop has already been sold in addition to wheat in storage. 
Is it fair to criticize railroads for struggling to haul in a few 
months what they normally haul in a year?
    Answer. Farmers, ranchers, and their cooperatively-owned supply and 
marketing businesses are grateful for the investment in line capacity 
improvements, locomotives and higher capacity cars undertaken by U.S. 
railroads. However, in recent years, railroads have literally 
sidetracked grain shipments in order to run ``piggyback'' and 
intermodal container trains due to limited crew availability and track 
capacity. It makes good business sense to give priority service to the 
traffic which is most likely to be lost in highly competitive markets. 
Grain shippers understand they do not warrant priority service, yet 
they have been frustrated when car deliveries have lagged well behind 
what would seem reasonable delivery times. Railroads need flexibility 
in managing the challenges of shifts in demand for shipping--this 
should not come at the expense of captive shippers who have little 
access to effective alternatives.

    Question 2. A large part of your testimony centered on captivity 
and lack of an additional rail carrier, but isn't capacity a larger 
issue? Capacity is more constrained than it was several years ago, not 
only on rail, but in trucking and barge transportation as well. If you 
had service from two capacity constrained railroads, how do you think 
it would change service levels?
    Answer. Overall capacity is an issue. In fact, North Dakota grain 
shipments to the Pacific Northwest were significantly delayed because 
the railroads serving North Dakota were unable to obtain track time on 
another railroad that served the export terminals--the latter railroad 
having capacity constraints of its own. We appreciate that railroads 
are enjoying a surge in demand unthought of a decade ago. We can 
empathize with the capital intensive nature of railroads, and that 
decisions made today to expand capacity will have to be supported by 
difficult-to-project business volumes for years to come. Railroads have 
had good success in generating new traffic, thanks to the constant flow 
of consumable goods-laden containers from China, unit coal trains 
fanning out from Wyoming, and ethanol tank trains, to name a few. 
Farmer-owned grain elevators too have made significant investments in 
heavier and longer sidings and additional storage and handling 
facilities to load unit trains. Agricultural shippers have done their 
share to make railroads more efficient in terms of equipment usage and 
turnaround times. I do believe the free market system works in that 
competition may achieve rate and service improvements which were once 
the focus of the ICC. Absence of competition will not resolve capacity 
concerns; however, competition may encourage railroads to take 
corrective measures to keep trains rolling regardless of whether they 
are loaded with DVD players or durum wheat. Rural communities have lost 
thousands of miles of railroad track and service as the industry 
rationalized its overcapacity. The rail industry has transitioned from 
too much capacity and too little profitability to an environment in 
which profitability seems healthy related to too little capacity.

    Question 3. I often hear from wheat trade association 
representatives that wheat rail rates keep climbing to unreasonable 
levels making them uncompetitive in domestic and global grain markets. 
Does it make sense that a railroad would price you out of the 
marketplace--after all, if you're not selling your products, the 
railroads aren't hauling them and therefore losing a business 
opportunity?
    Answer. I recently met with two officials of Burlington Northern 
Santa Fe who offered an example of a grain rate in Montana that 
actually priced farmers--and the railroad--out of a specific market 
because the competing railroad in Canada had a lower rate for the same 
crop. The BNSF officials said they reviewed and ultimately reduced the 
rate to allow farmers to sell grain that in turn moved on BNSF rails. 
Unlike two service stations across the street from each other, 
railroads may be blind to situations in which their own rates are 
costing them business. The question is, will a railroad be willing to 
entertain a request from shippers to lower a rate? Again, if the 
railroad already is running at full capacity, it naturally will be 
selective in encouraging less profitable traffic. From a business point 
of view, the railroads might be lauded as managing assets to generate 
the best return for investors. From the farmers' point of view, 
discouraging some agricultural traffic would be a costly mistake. 
Farmers have much more to lose than railroads.
                                 ______
                                 
 Response to Written Question Submitted by Hon. Frank R. Lautenberg to 
                           Robert L. Carlson
    Question. In your testimony, you note that shipping grain from a 
North Dakota grain elevator to Minneapolis costs much more to move than 
shipping it about the same distance to Chicago. Similarly, you can get 
an airline ticket from Washington to Fargo for $464 to go 1,340 miles, 
but you can get a ticket to Los Angeles from Washington for half that 
price, to travel twice the distance. If this sort of demand-based 
pricing is accepted in other industries, why is it unfair for rail 
shippers?
    Answer. The example given helps illustrate the complexities of 
pricing for different markets. If just one airline were serving the 
Nation's coastal markets, it might well charge a higher price 
regardless of the actual air miles or cost per mile to operate as 
compared to routes for which competition cuts into market share. 
Washington and Los Angeles are served by numerous airlines all 
competing for market share. Burlington Northern Santa Fe dominates its 
market in North Dakota. Shippers have no realistic alternatives, other 
than to pay higher freight rates as compared to farmers in states whose 
agricultural shippers have competing railroads and/or navigable 
waterways. The concern by North Dakota farmers is simple: are railroads 
using market dominance to charge excessively high rates which may, in 
effect, be subsidizing ``sale'' rates charged in other states to keep 
business? Captive shippers--be they wheat farmers in the Midwest or 
power generation plants in the South--do have legitimate concerns 
regarding both service levels and rates relative to shippers that enjoy 
access to competitive options. In a free market, companies will charge 
what the market will bear. Is this universally fair? Not necessarily. 
And this is why Congress and the Surface Transportation Board has the 
role and authority to consider the viewpoints of the rail industry, the 
shippers who have voiced concerns over the industry's pricing and 
service approaches, and the consumers who overall are affected by the 
situation. The questions remain, what is a fair rate, and what is 
excessive, and whom will determine this benchmark and make sure it is 
fairly applied?
                                 ______
                                 
  Response to Written Question Submitted by Hon. Daniel K. Inouye to 
                           Hon. Glenn English
    Question. The 2006 GAO report, in its description of the various 
shipper-mitigation remedies found in the Rockefeller bill, states that 
while some shippers could see increased head-to-head rail competition 
and reduced rates, it is also likely to discourage railroads or cost 
them sufficient business as to prevent further investment leading to 
capacity restraints, reduced maintenance, and lesser service. Is that 
in a shipper's best long term interest? Didn't utilities across the 
country claim that 2005 coal delivery disruptions could have been 
avoided had the railroads invested in more infrastructure? Do you share 
that belief? What is your opinion of the railroads current reinvestment 
methods?
    Answer. The public policy adopted by Congress in 1980 was that 
transportation competition rather than government regulation would 
govern the relationship between the railroads and their customers. 
Where no competition is available, the Federal regulatory agency is to 
ensure that the prices paid by rail customers are reasonable.
    Rail customers believe that the major problem they confront today 
is a lack of access to railroad competition coupled with a lack of 
effective regulation by the Surface Transportation Board in those 
instances where the rail customer does not have access to rail 
competition. In other words, rail customers are not receiving the 
benefits of the policy adopted by Congress in 1980: access to 
competition; effective regulation where there is no competition. Rail 
customers seek the benefits Congress intended when it passed the 
Staggers Rail Act of 1980.
    As you know, rail customers are most concerned about two 
anticompetitive policies sanctioned by the STB: ``bottlenecks'' and 
``paper barriers''. Specifically, we seek the reversal of current 
``bottleneck'' policy such that a railroad is required to provide a 
rate to take its customer's freight to a competing railroad and the 
repeal of ``paper barriers'' such that short lines are free to do 
business with any major railroad with which they can physically 
interchange traffic. If these two policies are reversed, the number of 
captive rail customers will be reduced but not totally eliminated. 
Where there is new competition, we would expect the rail rates to drop, 
but we would also expect the rail traffic to increase across 
competitive routes.
    We are not at all convinced that increased competition in the rail 
industry would lead to reduced investment in the rail industry or even 
reduced profitability. The railroads and Wall Street hail the Staggers 
Act for leading to their improved financial performance today. The 
Staggers Act replaced government regulation with competition. Having 
hailed the Staggers Act for allowing them to compete, the railroads 
should not be allowed to complain that providing the actual level of 
competition contemplated by Congress in 1980 will hurt them 
financially. We know anecdotally of many instances where non-
competitive rail rates have moved freight from the railroads to trucks. 
There is no reason that a more competitive rail industry couldn't 
attract even more freight from the Nation's highways.
    American economic policy is clear: there should be no price 
regulation of competitive markets; but there must be government price 
regulation where an essential service is being provided in the absence 
of competition. If Congress were to determine that there must be less 
competition in the rail industry, which provides an essential 
transportation service to the Nation, then there must be effective 
government price regulation that is much more rigorous than the current 
STB system. Rail customers would prefer to avoid more government 
regulation by ensuring increased access to railroad competition.
    Rail coal customers across the Nation believe that the coal 
delivery problems of 2005 and 2006--some of which continues today--
could have been avoided if the two railroads providing coal 
transportation from the Powder River Basin had maintained their tracks 
properly. Rail customers were paying prices, often captive rail prices, 
that included funds for track maintenance. We do not know why the 
railroads suspended maintenance of the critical tracks coming from the 
Powder River Basin, but they have admitted that they did and we believe 
the failure to remove coal dust that had accumulated in the ballast of 
the tracks is what led to the derailments and the resulting service 
disruptions.
    As for the railroad reinvestment strategy, we believe that the 
major railroads are taking money generated by captive rail customers 
and investing heavily in container traffic movements. As Wall Street 
makes clear from time to time, reinvestments in captive movements is 
not viewed as a wise investment since the railroads can increase their 
profits from these movements by simply increasing their prices without 
running any risk that an investment might not prove to be prudent. 
Those of us who use Powder River Basin coal are pleased that the two 
railroads serving the Basin are investing $100 million or so to improve 
the shared tracks from the Powder River Basin. However, this is a small 
investment against the $8 billion in revenue that all the major 
railroads generated in 2006 from the movement of coal. This is a 
particularly small investment when one recognizes that the western 
railroads are in the process of forcing their customers to pay extra to 
prevent the accumulation of coal dust on their tracks and the coal-
burning utilities normally are required to provide all of their own 
coal cars--a cost traditionally borne by the railroads.
    Recently, the Republicans on the House Transportation and 
Infrastructure Committee had a public ``round table'' discussion of the 
railroad infrastructure investment issue. The entire conversation 
focused on the investments needed for container traffic--the vast 
majority of which is imported rather than exported goods. Thus, in 
addition to the captive rail customer belief that they are paying 
unreasonably high rates so that the railroad industry can invest in 
non-related traffic, some captive rail customers are domestic 
manufacturers whose products (or the consumer products manufactured 
from their products) are being displaced by foreign products imported 
in containers, the movement of which they are subsidizing. This is a 
result not intended by Congress and highly frustrating to domestic 
manufacturers who are fighting to remain competitive in the global 
market.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                           Hon. Glenn English
    Question 1. In November 2000, the STB established its Rail Consumer 
Assistance Program (RCAP) in an effort to allow the public informal 
access to agency staff and to expand the opportunity for private sector 
resolution of railroad-related issues. This program provides shippers 
with access to informal assistance with any type of rail related 
transportation problem.
    Has this program benefited shippers? Does this provide adequate 
representation or assistance from the STB? How can the STB improve its 
assistance to shippers facing rail rate problems or other problems with 
rail companies?
    Answer. Our experience is that this informal ``jaw boning'' process 
is no substitute for legal protections for rail customers. In fact, one 
of the most odious examples of the inadequacies of STB rail customer 
remedies occurred with one of your constituents. In the Summer of 2005, 
when the Burlington Northern was falling short in its coal deliveries 
to Arkansas Electric Cooperative, Inc., Gary Voigt, the CEO of Arkansas 
Electric, wrote the Chairman of the STB, Roger Nober, in August 2005 
complaining of the failure of coal deliveries. Mr. Nober, who is now 
Vice President for Law and General Counsel of Burlington Northern, 
never responded to Mr. Voigt's letter. However, in November 2005, Mr. 
Voigt received a dismissive response to his letter not from the STB, 
but from a Vice President of the Burlington Northern! To date, Mr. 
Voigt has never received a response from the STB to his August 2005 
letter to the STB Chairman. So much for the adequacy of the STB ``jaw 
boning'' process.
    The STB can best improve its assistance to shippers facing rail 
rate problems or other problems with rail companies in two ways. First, 
the STB needs to adopt pro-competitive rules and a workable rate 
challenge process, as well as rules to enforce the railroad obligation 
to serve, as intended and directed by Congress in 1980. Second, the STB 
needs to be pro-active, as opposed to passive, in discharging its 
responsibilities to Congress to protect rail customers from railroad 
monopoly abuse.

    Question 2. According to the GAO's supplemental report, fuel 
surcharges in 2005 tripled from 2004 levels ($633 million to over $1.7 
billion). Also, ``miscellaneous revenue'' accounted for 1.5 percent of 
revenue in 2004 and rose to 3.7 percent in 2005. Do you know why these 
charges increased by that much? Should shippers be reimbursed if they 
were overcharged?
    Answer. We believe that the steep rise in ``miscellaneous revenue'' 
reflects fuel surcharge overcharges by the major railroads. Indeed, in 
January 2007, the STB found that the railroads had been abusing their 
fuel surcharge mechanism and were ``double dipping'' through these 
surcharges. However, the STB neither quantified the overcharges nor 
ordered refunds to rail customers.
    The American Chemistry Council commissioned a study by a railroad 
economic research firm named Snavely King Majoros O'Connor & Lee, Inc. 
The study, which was released in September 2007, found that the total 
overcharge by five of the seven Class I railroads was $6.4 billion for 
the period 2003 through the first quarter of 2007. Of course, we 
believe that the STB should direct the railroads to return the 
overcharges to their customers. The STB deserves some credit for 
finally acting to stop this abusive practice. However, most pro-active 
regulatory agencies of either the Federal or state governments would 
have acted earlier to stop these practices and would have ordered 
refunds immediately.

                                  
