[Senate Hearing 111-1063]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 111-1063
 
                THE FEDERAL ROLE IN NATIONAL RAIL POLICY

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 15, 2010

                               __________

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


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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri           JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota             DAVID VITTER, Louisiana
TOM UDALL, New Mexico                SAM BROWNBACK, Kansas
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                   Bruce H. Andrews, General Counsel
             Ann Begeman, Acting Republican Staff Director
             Brian M. Hendricks, Republican General Counsel
                  Nick Rossi, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 15, 2010...............................     1
Statement of Senator Rockefeller.................................     1
    Prepared statement...........................................     4
Statement of Senator Hutchison...................................     5
    Prepared statement...........................................     6
Statement of Senator Lautenberg..................................     7
Statement of Senator Thune.......................................     9
    Prepared statement...........................................    10
Statement of Senator Johanns.....................................    11
Statement of Senator Kerry.......................................    12
Statement of Senator Dorgan......................................    15
Statement of Senator LeMieux.....................................    36
    Prepared statement...........................................

                               Witnesses

Hon. Herb Kohl, U.S. Senator from Wisconsin......................    16
    Prepared statement...........................................    18
Hon. John D. Porcari, Deputy Secretary of Transportation, U.S. 
  Department of Transportation...................................    19
    Prepared statement...........................................    20
Hon. Daniel R. Elliott III, Chairman, Surface Transportation 
  Board..........................................................    24
    Prepared statement...........................................    25

                                Appendix

Report, dated September 15, 2010, to Chairman Rockefeller from 
  the Office of Oversight and Investigations Majority Staff 
  entitled, ``The Current Financial State of the Class I Freight 
  Rail Industry''................................................    47
Anne Canby, President, Surface Transportation Policy Partnership 
  (STPP); and Founding Member, OneRail Coalition, prepared 
  statement......................................................    56
Letter, dated September 27, 2004, to Hon. F. James Sensenbrenner, 
  Jr., from William E. Moschella, Assistant Attorney General, 
  Office of Legislative Affairs, Department of Justice...........    57
Response to written question submitted to Hon. John D. Porcari 
  by:
    Hon. Bill Nelson.............................................    58
    Hon. Byron L. Dorgan.........................................    59
    Hon. Mark Warner.............................................    60
    Hon. Kay Bailey Hutchison....................................    61
    Hon. John Thune..............................................    63
Response to written question submitted to Hon. Daniel R. Elliott 
  III by:
    Hon. Mark Warner.............................................    65
    Hon. Byron L. Dorgan.........................................    65
    Hon. Kay Bailey Hutchison....................................    66
    Hon. John Thune..............................................    68
    Hon. Olympia J. Snowe........................................    69


                          THE FEDERAL ROLE IN 
                          NATIONAL RAIL POLICY

                              ----------                              


                     WEDNESDAY, SEPTEMBER 15, 2010

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:10 p.m. in room 
SR-253, Russell Senate Office Building, Hon. John D. 
Rockefeller IV, Chairman of the Committee, presiding.

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

    The Chairman. The hearing will come to order.
    Today's hearing is about progress. It's about what's 
required to modernize our transportation system so our 
businesses and workers can stay competitive in the 21st 
century. It's about leveling the playing field. It's about how 
and when we do that. Do we have the guts to do it?
    America is stronger in the global marketplace, and that 
means jobs and economic security are more important than ever. 
One of the keys to this program, obviously, are railroads, our 
national rail system. We all understand that our highways and 
our skies are continuing to get more crowded. That means that 
rail is going to have to become a higher priority. And I am 
pleased that the Obama Administration is hard at work on this 
important issue, and I appreciate the fact that they are 
aggressively implementing important infrastructure programs 
created by Congress.
    I look forward today to hearing from Deputy Secretary 
Porcari, with whom I've met and who is a superb human being and 
policymaker, about the status and the development of the 
Department of Transportation's national rail plan. A 
comprehensive long-term plan for our rail system is long 
overdue. I commend the Department and the Federal Railroad 
Administration for its good work on this issue. But, some 
things are going to have to change before this happens, and 
they're going to have to change, big-time. I'm looking forward 
to hearing from Chairman Elliott, of the Surface Transportation 
Board. He has been already, in his job, now for more than a 
year, and I think he has a lot to tell us.
    While today's hearing is about progress, in many ways it's 
more about lack of progress over the last several decades. It's 
about the natural tendency of large corporations to fight to 
maintain the status quo with which they've lived so 
comfortably. And since they've had such input, if not 
ownership, up until recently, of the ICC and the STB and their 
respective chairmen, I can understand why they don't want to 
change. But, what's at stake here is, are we talking, in public 
policy from the Congress of this country, about what's simply 
good for them, and sort of forgetting about consumers and 
shippers and people and nonfreight railroads, or are we just 
talking about what's good and profitable for them?
    So, we're not going to get to the future on the path that 
we're on now. And, as I say, I've been working on this for 26 
years, so there's a good deal of frustration in me. I met with 
the railroads very early, and they said, yes, they were going 
to go 50-50 with the shippers, and we had a nice little meeting 
in a railroad car, and it was all very pleasant and happy. And 
what's happened is that I had to cause a pause, because the 
railroads weren't showing up to discuss anything. I asked them 
to list their priorities. They didn't do that; they declined to 
do that--the shippers did. The point was that each had to sort 
of go halfway to go at all; they each had to get and give some 
adjustments, so that you can get to a halfway point. And this, 
of course, is the rail freight industry that I'm talking about. 
Passengers are a different thing. They make their money off of 
freight, so they put their concentration on freight; passengers 
and shippers and consumers and the rest of the public comes 
down the line.
    Thirty years ago, the freight railroads were really 
struggling. Congress did a courageous thing, and they amended 
the law to give the railroads an opportunity to do business 
differently. Railroads needed that, badly. That was called the 
Staggers Act. I'm not sure I agree with how the law was written 
back in 1980. I'm sure that I'm agreed at how it has been 
eroded through what I would call--and my language will be 
strong today--through the kind of ownership of the original ICC 
and then the STB, up until recently, by the railroads. And so, 
everything is done differently today, not according to the 
intent of the Staggers Act.
    So, things have worked very well from the railroad's point 
of view. Today, I'm interested in releasing a staff report--
which, if you don't have, it's because you haven't grabbed it--
that documents just how well the big Class I freight railroads 
are doing, these days. To me, it's a shocking report and a 
revealing report. I had stronger language, but I was advised 
not to use that, by a loyal and faithful staff and, I'm sure, 
my Vice Chairman.
    What this important report tells us is that the railroads 
are earning 12 to 13 percent profits, which puts them at the 
top--in fact, the top five--of the Fortune 500. They're just 
getting more and more profitable as the years go by. Because 
they're getting more profitable--and particularly rail 
freight--they're raising their prices on an average of 5 
percent a year. That's a real route to making a lot of money. 
Now, whether that's good for everybody else, that's a different 
matter.
    But, the railroads say things are different. And what they 
say depends on who they're saying it to, what is their 
audience. It's disingenuous. When they're talking to the 
Surface Transportation Board--now a different one, Mr. 
Elliott's agency--they act like it's still 1980. They say 
they're barely making enough money to keep the lights on. When 
they're on their quarterly calls with Wall Street investors, 
it's a very different story. Those companies tout their high 
profit margins--and they can do so very accurately--and their 
power to dictate prices to their customers, which is very 
appealing to Wall Street, because that points at more profits. 
And, at the same time, they're telling Congress that they don't 
have enough money to invest in needed capital projects. And, at 
the same time, they're using billions of dollars of their 
profits to reward their shareholders with dividends and a 
lovely little item called ``stock buybacks.''
    This is all happening at a time when shippers all over our 
country--shippers--folks who need the railroads, have to ship 
things. You had a big brouhaha in Houston; I have them all the 
time in West Virginia; you have them in Massachusetts, you have 
them in North Dakota--when shippers all over our country are 
paying more than their fair share to transport their goods to 
their customers, paying more because they have no other 
alternative, there is no competition. That's what the Staggers 
Act was about. Where there is no competition, people don't have 
the freedoms that they do on the 80 percent of the traffic rail 
structure where there is competition.
    So, in conclusion, as I've said many times before, we need 
a rail system that works, not just for the freight railroads, 
but for all shippers, all passengers, and all consumers. We do 
not have that now, and we're not being dealt with honorably.
    Unfortunately, it is felt like the railroads--some, 
granted, more than others, but all--have attempted to delay 
this process. In fact, I think it's reasonably obvious to me, 
as a reasonably seasoned politician and at least somebody who's 
been here for quite a long time, and in government, that they 
want to stretch this whole process out through the elections, 
hoping that they will gain advantage. In any event, they're 
doing nothing to cooperate in what has been a 2-year-long 
process, since I've been chairman, opening with this wonderful 
meeting on the railroad car, ``Yes, we'll do our part, we'll be 
helpful. We understand change needs to come. We need to get 
this behind us and move on to a national rail plan.'' And I'm 
thinking, you know, all of this should be moving on to a 
national rail plan or should we be moving on to a national 
barge and truck plan? I'm open. I'm open. Whoever serves the 
customers the best.
    So, I'm proud that, for the first time in 30 years, this 
committee reported out a bill, in a bipartisan manner, that 
would update our rail regulations to reflect the economic 
realities of 2010. This legislation may not be on the cover of 
all the newspapers in the country every day, but it benefits 
communities, large and small, and shippers, large and small, 
and people, large and small, all over the United States of 
America. And that should not be underestimated.
    Along with my cosponsors, the wonderful--quite wonderful 
Senator Hutchison, Senator Lautenberg, who's on his way here, 
Senator Thune, Senator Dorgan--Senator Kerry? Put you on right 
now. Want to be a cosponsor?
    [Laughter.]
    Senator Kerry. We have to talk.
    The Chairman. We have to talk, OK.
    [Laughter.]
    The Chairman. Kerry demurs. In other words, we're finally 
engaged in the dialogue to address these concerns before 
bringing the bill to the floor of the Senate. So, I end by 
saying this: I want everybody in this room to know that, 
whether we do this, this year or next, railroad reform is going 
to happen. I'm going to be here; I'm going to be Chairman for a 
long time. Either Congress will do it or we will do it through 
regulation. I'm agnostic. I'd prefer to do it through 
legislation.
    And I also want to make it very clear that today's hearing 
is the first in a series of hearings on this subject. We will 
be coming back to this with some frequency, both in hearings of 
our sort as well as reports from the Department of 
Transportation, which I have not yet asked them for, but will, 
during the course of this hearing.
    So, we're going to examine these issues, and I look forward 
to hearing from our witnesses today.
    [The prepared statement of Senator Rockefeller follows:]

          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia

    Today's hearing is about progress. It's about what's required to 
modernize our transportation system so our businesses and our workers 
can stay competitive in the 21st century. It's about leveling the 
playing field. And it's about how when we do that, America is stronger 
in the global marketplace and that means jobs and economic security.
    One of the keys to this progress is our national rail system. We 
all understand that our highways and skies are continuing to get more 
crowded. That means rail is going to have to become a higher priority. 
I am pleased that the Obama Administration is hard at work on this 
important issue, and I appreciate the Administration's efforts to 
aggressively implement the important infrastructure programs created by 
Congress.
    I'm looking forward to hearing today from Deputy Secretary Porcari 
about the status of the development of the Department of 
Transportation's new ``National Rail Plan.'' A comprehensive, long-term 
plan for our rail system is long overdue. I commend the Department and 
the Federal Railroad Administration for its good work on this issue. 
I'm also looking forward to hearing from Chairman Elliott of the 
Surface Transportation Board. He has been in his job for a little more 
than a year now and is ready to tell us about his future plans.
    While today's hearing is about progress, it's also about the lack 
of progress we have seen over the last few decades. It's about the 
natural tendency of big corporations to fight to maintain a status quo 
that works well for them, but that will not get us where we need to go 
for the future. Of course I'm talking about the freight rail industry.
    Thirty years ago, the freight railroads were really struggling. 
Congress responded by amending the law to give the railroads an 
opportunity to do business differently. I'm not sure I agree with how 
the law was written back in 1980, but I think it's pretty clear that 
the reforms worked from the railroads' point of view.
    Today, I am releasing a staff report that documents just how well 
the big Class I freight railroads are doing these days.
    What this important report tells us is that the railroads are 
earning 12 and 13 percent profit margins, which puts them at the top of 
the Fortune 500. And they're just getting more profitable because 
they're raising their shipping prices by an average of 5 percent a 
year. But the railroads say different things depending on their 
audience.
    When they're talking to the Surface Transportation Board, Mr. 
Elliott's agency, they act like it's still 1980. They say they're 
barely making enough money to keep the lights on. But when they're on 
their quarterly calls with Wall Street investors, it's a very different 
story. These companies tout their high profit margins and their power 
to dictate prices to their customers. And at the same time they're 
telling Congress that they don't have enough money to invest in needed 
capital projects, they're using billions of dollars of their profits to 
reward their shareholders with dividends and stock buybacks. This is 
all happening at a time when shippers all over our country are paying 
more than their fair share to transport their goods to their 
customers--paying more because they have no other alternative.
    As I have said many times before, we need a rail system that works 
not just for the freight railroads, but for all--shippers, passengers, 
and consumers. Unfortunately, it has felt at times like the railroads--
some much more than others--have attempted to delay this process, 
hoping that these reforms will die if they can only stretch the process 
out through the elections. I am proud that for the first time in 30 
years, this Committee reported out a bill--in a bipartisan way--that 
would update our rail regulations to reflect the economic realities of 
2010. This legislation may not be on the cover of all the newspapers in 
the country each and every day but its benefits for communities small 
and large throughout America cannot--and should not--be underestimated.
    Along with my cosponsors, Senators Hutchison, Lautenberg, Thune, 
and Dorgan, we have engaged the stakeholders in a dialogue to address 
their concerns before bringing the bill to the Senate floor. I want 
everybody in this room to know that whether we do it this year or next 
year, railroad reform is going to happen. Either Congress will do it, 
or it will need to be done through regulation.
    Today's hearing is the first in a series to examine these issues 
and I look forward to hearing from our witnesses today.

    Senator Hutchison?

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Is that all you have to say on that?
    The Chairman. Yes. No, it isn't, actually----
    [Laughter.]
    The Chairman.--but it's all I really had to say.
    Senator Hutchison. Well, Mr. Chairman, I am glad that you 
are having this hearing and that we are talking about it. And I 
have tried, since I came to the Senate and was actually 
chairman of the Surface Transportation Subcommittee, to strike 
a balance between the need for a strong rail industry, and a 
profitable one, with the need to help captive shippers, as 
well, because I think that the captive shippers have paid a 
very high price, with the lack of competition on those lines 
that only allow for one way out of a captive shipper site. And 
I've looked at it, and I've seen the destruction to shippers. 
And I tried to fashion a compromise in the STB reform bill, 
years ago, and it's just been very difficult to make this 
happen, to get the parties to the table with a real goal of 
addressing this issue in a responsible way that keeps a healthy 
rail system, as well as a healthy alternative for captive 
shippers.
    So, having said that, I hope that we can keep working on 
it. I really do. And I'm glad that you are highlighting it once 
again to try to solve this issue. I think it's the most 
important issue that is unresolved that I have seen in this 
arena since I came to the Senate.
    I also just want to mention, that we passed, with my 
support and yours, the Rail Safety Improvement Act of 2008, and 
in it we mandated that, by the year 2015, December 31, that 
Positive Train Control be put in place for the lines that are 
going to be carrying toxic materials. We pretty unanimously, or 
fairly unanimously, passed that legislation. However, today the 
FRA has interpreted this in a way that they are going to 
require railroads to base their Positive Train Control on lines 
that were moving TIH as of 2008, 7 years before the mandate 
takes effect. And I think that is not what Congress intended, 
and I am going to urge that the FRA look at that again, because 
products and routes are going to change over a 7-year period. 
By the FRA's own estimates, the present-value cost to install 
and operate PTC over a 20-year period will be between 9.5- and 
13 billion dollars, a cost that will be borne by the railroads 
and the shippers. So, if the FRA view is to stand, Class I 
railroads would have to install Positive Train Control on one-
third more miles of track than they would be using in 2015, and 
that's not what Congress intended. I hope that we can get the 
FRA to step back from that and make it relevant and current, by 
2015 standards, not by 2008 standards.
    I will end by saying, I think the Department is making a 
good start on the national rail plan. I think we need to have a 
national rail plan that includes passenger rail--a strong 
system of passenger rail, high-speed rail--that can compete 
with the other modes of transportation in an effective way. And 
I hope that the national rail plan, as it is developed, will 
include passenger movement for a transportation system in our 
country that can also take much of the burden off highways and 
even the aviation community, where we have congestion.
    So, I'm glad that we're still working on these issues, and 
I hope that we can find a balance, especially on the captive 
shipper issue. And I do hope that we can continue to push for a 
national rail plan that also includes passenger rail, which I 
know Senator Lautenberg is a strong proponent of, as I have 
been, as well.
    Thank you.
    [The prepared statement of Senator Hutchison follows:]

  Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from 
                                 Texas

    Thank you, Mr. Chairman, and thank you for holding today's hearing. 
This committee has been extremely active in addressing rail policy 
issues, most recently securing enactment of legislation to reauthorize 
Amtrak; laying the groundwork for the development of high-speed rail 
service; and addressing rail safety. And of course, last December, the 
Committee unanimously reported S. 2889, legislation to reauthorize the 
Surface Transportation Board (STB) and reform policies that govern the 
economic regulation of the freight railroads. Today's hearing will be a 
good opportunity to take stock of what has been achieved and what still 
needs to be accomplished, particularly in light of the Department of 
Transportation's (DOT) progress report on the National Rail Plan.
    As you know, Mr. Chairman, I am a strong supporter of a national 
network for intercity passenger rail service, and believe high-speed 
rail service can be competitive with highway and air travel along 
densely populated corridors. I also support a healthy freight rail 
industry. Nearly 40 percent of all freight, as measured in ton-miles, 
now moves by rail. Rail transportation reduces the number of trucks on 
our highways, lowering highway maintenance costs; uses less fuel; and 
emits fewer greenhouse gases.
    However, I am also a strong supporter of a better balance at the 
STB between the needs of the freight railroads and their customers. For 
the past 30 years, the railroads have enjoyed virtually unlimited 
ratemaking freedom, and captive shippers have literally paid the price. 
Mr. Chairman, we have worked together very closely on the STB bill, and 
I know you want to see legislation passed this year as much as I do. I 
hope we can use today's hearing to get Mr. Elliott's views about the 
bill and where the STB is headed, and then move to quickly resolve the 
remaining open issues in the Committee bill.
    I realize it may be difficult to reach a consensus on compensation 
for bottleneck rates, but we need to keep trying. That has remained the 
most difficult issue to address throughout this legislative process, 
and it is not surprising given the importance of adequate revenues to 
the industry and, in turn, to infrastructure investment in the network. 
I believe a lot of progress has been made and that we can still 
succeed, even though time is getting short. We have come too far to not 
keep working to achieve a consensus.
    Since today's hearing will include a discussion of the investment 
needs for a national rail system, I want to take this opportunity to 
mention my concerns about the Federal Railroad Administration's (FRA) 
interpretation of the Positive Train Control (PTC) mandate approved, 
with my support, as part of the 2008 Rail Safety Improvement Act. PTC 
is not due on lines carrying passengers and toxic-by-inhalation 
materials until December 31, 2015, yet FRA is requiring the railroads 
to base their PTC plans on lines where TIH moved in 2008, seven years 
before the mandate takes effect. I believe this is an incorrect and 
unfair interpretation of the statute.
    By FRA's own estimate, the present value cost to install and 
operate PTC over a 20-year period will be between $9.5 and $13.2 
billion--a cost that will be borne by the railroads and, I expect, 
their shippers. The costs of installing PTC exceed the benefits by a 
factor of about 20 to 1. FRA's view, if allowed to stand, would require 
Class I railroads to install PTC on approximately one-third more miles 
of track than would be required using the ``2015 map'' for the movement 
of TIH. I look forward to hearing from Deputy Secretary Porcari about 
how DOT plans to address concerns raised by many regarding the 2008 
base year.
    Finally, it appears DOT has made a good start on a National Rail 
Plan. However, as DOT acknowledges, there is much additional work that 
remains to be done to have a detailed plan and roadmap, as well as a 
good estimate of the cost of a fully developed freight and passenger 
rail system, including high-speed rail routes. I look forward to 
hearing more about the Plan and recommendations for any actions needed 
by Congress.
    Thank you again, Mr. Chairman. I look forward to a spirited 
discussion this afternoon about the STB bill and the other rail policy 
issues before us.

    The Chairman. Thank you, Senator Hutchison.
    I call on Senator Lautenberg, who is Chairman of the 
Subcommittee, and then Senator Thune. And, in fact, there are 
relatively few of us here, and so, I really would feel 
comfortable if everybody had something to say, unless you're 
shy.

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

    Senator Lautenberg. Thank you very much, Mr. Chairman.
    We're talking about a fairly sensitive subject here, 
because part of what we're looking at is, what's the place of 
rail, generally, in our society? It's way behind. I mean, that 
we know. Whether it's passenger or freight. We haven't made the 
investments that are essential. And I think it has been very 
harmful to the United States. And I don't want to prolong the 
agony, but I, for one, believe that we have to make sure that 
there is more investment in passenger rail, in freight rail, 
and keep developing the kind of service that we, in the United 
States, should be able to have.
    I look at the Northeast Corridor. The trains that we have 
would not only have to run 243 more flights within the Nation's 
most densely congested airspace every single day, but also add 
30,000 more cars daily to, principally, Highway 95. It's an 
example, only, of how our Nation's rail network reduces 
congestion across the country.
    Freight rail helps relieve congestion. A single freight 
train takes 280 trucks off the road. Single train. Less 
congestion means less time waiting in traffic and a better 
overall, in my view, quality, reliability, and functioning of 
life.
    But, rail doesn't just ease congestion, it reduces our 
dependence on oil, and protects our environment. Trains are 17 
percent more energy efficient than airplanes, and over 20 
percent more efficient than cars. A freight train can move a 
ton of goods 480 miles on a gallon of fuel. And that's why it's 
essential for our country to invest more in rail and make it 
part of a complete national transportation system.
    Two years ago, we took a major step forward, and I used 
passenger rail as a companion with my law to reauthorize 
Amtrak. That law provides $13 billion over 5 years to repair 
Amtrak's infrastructure and grow its service into towns and 
cities that are all ready for passenger rail.
    We note with interest that recently in the State of 
Wisconsin, $800 million was issued as a grant to pursue high-
speed rail interests between Madison and, I believe, Milwaukee, 
but there's a huge contest within the State, almost looking 
like they'd like to reject taking that money, that $800 
million. So, the lack of interest in rail in that place, I find 
shocking, but that's what happens.
    We have to keep goods moving swiftly throughout the 
country, and that's why I recently introduced the Freight Act, 
with Senators Cantwell and Murray, to improve our Nation's 
freight transportation system and provide investments across 
the country.
    There is something else, Mr. Chairman and fellow members of 
the Committee. I am now honored to chair the Subcommittee on 
Homeland Security, in Appropriations. It's massive. We have 
225,000 employees just in that Department--and we're helped by 
other Departments; the CIA and military, and police, you name 
it--and a budget--or an appropriation of about $43 billion. So, 
we're talking about security. And security is so dependent on 
rail that we dare not turn our backs. When the hurricane 
struck--Katrina--rail cars were down there to take people away. 
Whether they availed themselves of it or not, they were there. 
On 9/11, in my neighborhood, the only transportation available 
was rail. And we're lucky to have it. It brought people up from 
Washington to examine the damage that took place--was the only 
way to get here. There were no airplanes flying. The highways 
were jammed. But, rail was available.
    Fortunately, we have strong partners in the interest in 
rail--the White House, President Obama, Vice President Biden--
and they know that, to keep our Nation competitive and keep our 
economy back on track, we can't rely solely on cars, trucks, 
and planes to get people and goods from place to place; we need 
a balanced transportation system, and passenger and freight 
rail are part of that balanced equation.
    Just 2 weeks ago, President Obama called for more 
investment in rail, and put it, and I quote, ``on an equal 
footing in our surface transportation program.'' Now, I look 
forward to hearing more details about this proposal, and 
working with the President and this committee to carry out 
these goals.
    The Chairman was good enough to mention that I am the 
Chairman of the Subcommittee here on this subject. But, the 
report, Mr. Chairman, in all fairness and all respect, arrived 
in my office 2 hours ago. And we have this committee--which is 
pretty important--and, frankly, we have not had a chance, with 
other things that we have to tend to, to be able to give it a 
thorough review. And I would have appreciated more time.
    One thing, the last thing I'll mention, and that is that 
the rail industry--the freight rail industry ought not to be 
presented as pariahs. The rail industry, since 1980, has 
invested its own funds, almost $450 billion in expansion and 
improvement in rail service. And that's a positive thing. So, 
we have to look at this in a balanced way. We want to treat the 
shippers right, but we also want to treat the rail service 
companies that carry so much--the largest carrier of coal out 
of West Virginia. And so, we can't ignore the need to make 
further investments in freight rail service, and make sure that 
they are in our view as we look at the Nation's transportation 
needs.
    Thank you.
    The Chairman. Thank you, Senator Lautenberg.
    Senator Thune.

                 STATEMENT OF HON. JOHN THUNE, 
                 U.S. SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you, Mr. Chairman.
    I want to also thank you for holding this important 
hearing. And I want to thank our witnesses for being here 
today. I look forward to hearing from our witnesses about their 
views on rail policy, particularly as it applies to rural 
States. Many of the Administration's policies, including high-
speed passenger rail, will benefit metropolitan areas, but do 
little, if anything, to assist rural communities. And for South 
Dakota, which does not have Amtrak service and is not a good 
candidate for high-speed rail, freight rail policy is the 
dominant concern. And so, I look forward to hearing from the 
STB Chairman about the Committee's STB reauthorization bill, 
which I am cosponsoring.
    I agree, Mr. Chairman, that the railroad's financial health 
has improved significantly since Staggers. And as we consider 
rail policy today, I think it's instructive to remember the 
state of the rail industry before the Act was passed.
    And I would say, just by way of sort of historical comment, 
that the railroad tradition in my family goes back a long ways. 
My grandfather and great uncle came here from Norway, back in 
1906, and worked on building the railroads across South Dakota. 
My grandfather on my mother's side worked for the railroad, and 
was killed in a railroad accident. And so, when I became the 
State rail director, back in the early 1990s, it was a time 
when the industry had changed a lot in our State, and it was in 
the aftermath of a lot of bankruptcies. And if you go back to 
1970, Congress was forced to step in to create Amtrak to ensure 
the continuation of passenger rail service, which, at that 
point, had become unprofitable; you go back to 1973, Congress 
was forced to create and fund Conrail out of the ashes of the 
Penn Central and other bankrupt eastern railroads. Shortly 
after that, in South Dakota, the bankruptcy of the Milwaukee 
Road--in 1980--put over half of the operating rail mileage in 
the State of South Dakota at risk. And to preserve that vital 
rail service, the State was forced to purchase essential rail 
lines. Even today, the State continues to own about 17 percent 
of the State's active rail mileage.
    So, I think we all need to take pride in the fact that the 
United States is home to the world's premier freight railroad 
system. The industry transports a significant share of 
merchandise, automotive, intermodal, and bulk products 
nationwide. And in South Dakota, of course, it's critical to 
the efficient movement of grain.
    Although the industry is very capital-intensive, it has 
been able, in large measure due to the Staggers Rail Act, which 
passed back in 1980, to fund capital improvements for freight 
operations without government subsidies.
    I've cosponsored Senate bill 2889, the STB reauthorization 
bill, and I agree with the Chairman and the Ranking Member and 
the Chairman of the Surface Transportation Subcommittee, that 
modifications to STB policies are needed to strike a better 
balance between the railroads and their shippers. And I hope 
that we can still pass a consensus bill this year.
    But I also think we must be cautious in our approach, as we 
have been so far, and ensure, Mr. Chairman, that reform does 
not cause unintended economic harm to our freight railroad 
system.
    Finally, I want to express my concern about the 
Administration's latest proposal to spend another $50 billion 
on road, rail, and other infrastructure projects to stimulate 
the economy, when less than half of the infrastructure funding 
provided in the last stimulus Act has been spent. In my view, 
there isn't justification for calling for additional spending 
that will further worsen the deficit in the name of stimulus.
    Mr. Chairman, I thank you again for holding this hearing, 
and look forward to hearing from our witnesses.
    [The prepared statement of Senator Thune follows:]

 Prepared Statement by Hon. John Thune, U.S. Senator from South Dakota

    Thank you, Mr. Chairman, and thank you for holding this important 
hearing. I also want to thank our witnesses for being here today.
    I look forward to hearing from our witnesses about their views on 
rail policy, particularly as it applies to rural states. Many of the 
Administration's policies, including high-speed passenger rail, will 
benefit metropolitan areas, but do little, if anything, to assist rural 
communities. For South Dakota, which does not have Amtrak service and 
is not a good candidate for high-speed rail, freight rail policy is the 
dominant concern.
    I also look forward to hearing the STB Chairman's remarks about the 
Committee's STB reauthorization bill which I am co-sponsoring.
    I agree, Mr. Chairman, that the railroads' financial health has 
improved significantly under the Staggers Act. And thank goodness. As 
we consider rail policy today, I think it is instructive to remember 
the state of the rail industry before the Act was passed. I remember 
this period vividly because I served as South Dakota's rail director in 
the early 1990s in the aftermath of earlier bankruptcies.

   In 1970, Congress was forced to step in to create Amtrak to 
        ensure the continuation of passenger rail service, which had 
        become unprofitable.

   In 1973, Congress was forced to create and fund Conrail out 
        of the ashes of the Penn Central and other bankrupt eastern 
        railroads.

   In South Dakota, the bankruptcy of the Milwaukee Road in 
        1980 put over half of the operating rail mileage in the state 
        at risk. To preserve vital service, the State was forced to 
        purchase essential rail lines. Even today, the state continues 
        to own about 17 percent of the state's active rail mileage.

    I think we should all take pride in the fact that the United States 
is home to the world's premier freight railroad system. The industry 
transports a significant share of merchandise, automotive, intermodal 
and bulk products nationwide, and in South Dakota, is critical to the 
efficient movement of grain. Although the industry is very capital 
intensive, it has been able--in large measure due to the Staggers Rail 
Act of 1980--to fund capital improvements for freight operations 
without government subsidies.
    I have co-sponsored S. 2889, the STB Reauthorization bill and agree 
with the Chairman, the Ranking Member, and the Chairman of the Surface 
Transportation Subcommittee that modifications to STB policies are 
needed to strike a better balance between the railroads and their 
shippers. And I hope we can still pass a consensus bill this year. But 
I also think we must be cautious in our approach--as we have been so 
far, Mr. Chairman, to ensure that ``reform'' does not cause serious--
and unintended--economic harm to the freight railroads.
    Finally, I want to express my concern about the Administration's 
latest proposal to spend another $50 billion on road, rail, and other 
infrastructure projects to stimulate the economy. When less than half 
of the infrastructure funding provided in the last stimulus Act has 
been spent, there is no justification for calling for additional 
spending that will further add to the deficit in the name of 
``stimulus.''
    Thank you, Mr. Chairman.

    The Chairman. Thank you, Senator.
    Senator Johanns, Senator Kerry, and Senator Dorgan. And the 
reason is, I want to hear what they have to say, but also, Mr. 
Porcari and others who are here have just finished up marathon 
sessions in the House, probably need a Coke or some water, if 
anybody can provide them with that.
    Mr. Elliott, are you here, too? Are you thirsty?
    [Laughter.]
    The Chairman. OK.
    Senator Johanns.

                STATEMENT OF HON. MIKE JOHANNS, 
                   U.S. SENATOR FROM NEBRASKA

    Senator Johanns. Mr. Chairman, thank you very, very much. I 
appreciate the opportunity to say a few words, although I can't 
stay here today; I'm part of that impeachment panel.
    The Chairman. Aren't you lucky.
    [Laughter.]
    Senator Johanns. Yes. And it is taking a lot of hours. And 
Senator McCaskill is being very insistent upon us being there 
to make sure we always have a quorum.
    But, I did want to stop by and offer a few thoughts. Let 
me, if I might, start and just say thank you, Mr. Chairman, for 
holding this hearing. I can tell from your opening, but I also 
know that you are very, very committed to rail issues.
    I appreciate that this hearing looks at the whole rail 
industry. But, if I might, I'd just like to focus a few 
comments on freight rail for a moment.
    In many respects, I would suggest that freight rail is 
really an unsung hero when it comes to transportation. Quite 
simply, it carries a lot of freight. Now, if you were to 
measure that in ton-miles, if my numbers are accurate, freight 
rail carries about 39 percent of the domestic freight. But, 
I'll bring it even a little bit closer to home. Rail is 
absolutely critical, central to the shipment of bulk 
commodities in a State like Nebraska. That could be everything 
from coal coming out of Wyoming across the tracks that lay 
across Nebraska, to ethanol, to bulk agricultural commodities, 
like corn and soybeans. Ask anyone who has stopped at a 
railroad crossing in Nebraska for a long time, and they'll tell 
you that trains are very long and they carry a very heavy load.
    Our shippers in the State absolutely depend on rail. 
Without it, we don't survive. It could be corn, it could be 
ethanol, it could be distillers' grain, it could be a whole 
host of things in our State, but, like I said, without a 
successful freight rail industry, we don't survive.
    I hesitate to draw comparisons, Mr. Chairman, but I've sat 
through so many hearings on this Commerce Committee, and even 
with my short time in the Senate, where we've had industries 
come and sit before us, and I just want to cry out, ``What's 
your business plan? Because it seems to me you flirt with 
bankruptcy, year in and year out, and I just can't figure out 
how anybody can survive that way.'' And I won't mention a 
specific company, I won't even mention a specific industry, but 
it is a source of great frustration, when I know how dependent 
we are on that industry for transportation needs, also.
    So, I go back to the days when, literally, freight rail was 
in very, very serious trouble, and an industry that moves this 
fast can find itself in that kind of situation very quickly. 
Therefore, aggressive government intervention is going to be 
something I take a very, very skeptical look at because of my 
concern for our shippers, our agricultural sector, so many that 
depend upon this.
    I think our goal here in the Committee, Mr. Chairman--and I 
applaud you again for this hearing--is a good, strong rail 
network for our Nation. Our shippers need that. Nebraskans need 
that. It is just a part of what our economy is about.
    I'll end my comments here. It's no secret that we have a 
major rail presence in our State. I guess that's obvious. In 
your report, a fairly famous Nebraskan is even quoted. I've 
worked with this industry a long time, as a mayor and as a 
Governor, even as the Secretary of Agriculture.
    The working relationship that I've had has always been 
professional. And I will tell you, that doesn't mean that we've 
always agreed on issues; we haven't. But, it has been a 
professional relationship. What I have appreciated about this 
industry is that it provides quality jobs, quality benefits, 
and quality retirement; again, at a time when our Nation is 
struggling with 10-percent unemployment and trying to figure 
out what is the right course of action to deal with that. I 
think too often we fail to celebrate the successes of what has 
happened in this great country. And here's an industry that has 
kept itself financially working while providing really quality 
jobs.
    Mr. Chairman, thank you again for your leadership on this 
important issue. And thank you for giving me an opportunity to 
say a few words.
    The Chairman. Thank you, Senator. I hope you enjoy the rest 
of your afternoon.
    [Laughter.]
    Senator Johanns. And evening.
    The Chairman. OK.
    In order of appearance, Senator Kerry and then Senator 
Dorgan, please.

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Thank you, Mr. Chairman.
    First of all, let me thank you for giving each of us an 
opportunity to speak. And I particularly want to thank the 
witnesses and our colleague, Senator Kohl, for being so patient 
with us here.
    And, Mr. Chairman, I want the record to show that I did 
support you in committee on your captive shipper initiative. 
And obviously that's critical to you and to the folks in your 
State, and we all understand that.
    In fact, freight, overall, I might add, you know, is 
critical to the Nation in every regard. Senator Lautenberg just 
talked about the fuel savings, and the shipping-per-mile cost, 
which is really quite extraordinary.
    One of the biggest problems we have is, we haven't invested 
sufficiently in the infrastructure of rail overall, so we force 
passenger rail into competition with the freight. And I think 
freight would love nothing more than to have dedicated lines 
for one and the other, and we'd all be better off. And that's 
where we ought to be heading, here, ultimately, although 
there'll always be shared usage in certain areas.
    We've just had a long negotiation, over the last few years, 
with CSX, up in Massachusetts; and I'm proud to say we got to 
the table and finally have bought out some line and have been 
able to increase ridership and increase passenger lines. But, 
it always comes at an expense, in terms of your economy, 
because of the importance of those goods moving by rail.
    And so, we've got to think about this holistically, which 
we really haven't done, Mr. Chairman. So, I'm very grateful to 
you for this hearing today. I can't stay, either, because we 
have a briefing on START, and we have a vote tomorrow on the 
START agreement, in our committee, and I need to go be there 
for that.
    But, I want to say a few words about this:
    This discussion of rail comes at a critical time for our 
economy. And I happen to believe, and have believed for a long 
period of time, that high-speed rail, particularly, but 
passenger rail, as a whole, and the improvement of our rail 
structure, including freight, is absolutely critical to our 
ability to transform the American economy and move in the 
direction that we need to.
    Now, the truth is that the history of rail is, in large 
part, the history of our country. And I believe the development 
of high-speed rail in the years ahead is going to be just as 
important as the development of rail was in the 1800s and the 
early 1900s and the industrialization of the country. It will 
have so many pluses--I mean, cleaner air, ease traffic 
congestion--and we waste billions of competitive dollars every 
day just sitting in traffic, going nowhere. We sit. Now, modern 
communications has improved that. You can't text message now in 
a lot of places, which is appropriate, but you can still 
Bluetooth and talk and conduct business. But, the productivity 
losses are stunning, in terms of that, not to mention fuel just 
evaporates and contributes to the dependency on foreign oil, 
which reduces America's foreign policy choices and national 
security, in the long run. We could save families money, we 
could lessen our dependence on that foreign oil, we'd create a 
lot of jobs in the United States; some of the best returns on 
investment of the public dollar come from those kinds of 
projects.
    So, that's why I've previously introduced a bill called, 
the ``High Speed Rail for America Act,'' and it authorizes $8 
billion, over a 6-year period, for tax-exempt bonds to finance 
high-speed rail projects. And it also calls for an Office of 
High-Speed Passenger Rail to oversee the development of this 
and provide a consistent source of funding.
    I'm also working with Senator Dodd and Congresswoman 
DeLauro and others--and I hope that the Senator from Texas, Kay 
Bailey Hutchison, will be a partner in this as we go forward--
and that is a national infrastructure bank legislation to 
leverage private capital in merit-based commercially viable 
projects of national significance that span both traditional 
and technological infrastructure; that includes roads, 
airports, bridges, high-speed rail, Smart Grid, and broadband. 
It is not a replacement for the highway bill; we don't want it 
to be, it shouldn't be. It's not a replacement for the airport 
appropriations process. It is in addition to them, because we 
have a $2.2-trillion infrastructure deficit in this country.
    Now, the 2008 National Surface Transportation Policy Review 
Study Commission report says that, in the next 50 years, the 
population of the United States is going to grow by 120 million 
people. That is going to hugely intensify the demand for 
transportation services by private individuals and businesses. 
Most of that growth is going to occur in the metropolitan 
areas, and most of the population of the United States lives 
within about 50 miles of a coastline. That includes the Great 
Lakes.
    Estimates indicate that the U.S. needs to invest about $225 
billion annually for the next 50 years to upgrade our existing 
transportation network to a good state of repair and build more 
advanced facilities, just leave alone remaining competitive. 
Right now, the United States is spending less than 40 percent 
of that amount.
    You know, we just don't make choices that are in our common 
interest, unfortunately, anymore. And evidently the politics 
are getting even more interesting with respect to our 
possibility of doing so. Congestion cripples major cities. Our 
infrastructure in small towns is aging at an alarming rate. We 
can't simply focus on building more roads. So, we've got to 
find broader solutions, one of which is this high-speed rail 
concept.
    Now, I'd just very quickly say, Mr. Chairman, we are 
woefully behind even in that. Americans like to think of 
ourselves--we've always thought of ourselves that way--sort of 
the ethic of excellent and primacy, and we like to think of 
ourselves as being number one. And we've been the world's 
number-one economy, and still are today, though we are sliding 
rapidly, and China is growing on us, and there is a time, we 
can all see, where China is going to surpass us, unless we get 
our act together.
    The fact is, Japan, which unveiled the world's first high-
speed rail system in 1964, has a 1,350-mile network that shows 
speeds of more than 300 miles an hour are possible.
    France holds the world's speed record for high-speed rail, 
357 miles per hour, has a 1,180-mile network, and plans to add 
another 1,500 miles.
    Spain plans to spend more than $100 billion, over the next 
year in the largest high-speed rail network in all of Europe. 
It'll create tens of thousands of jobs, and when it's done, 
nearly everyone in Spain will live within 30 miles of a train 
station.
    And earlier this year, China announced a plan to expand its 
high-speed rail system to a network of over 16,000 miles within 
10 years from now. And in this year alone, China has poured 
more than $50 billion into this system. And let me just tell 
you, anybody who believes China isn't moving toward, you know, 
clean energy, you've just got to go see what they're doing. I 
rode, a few months ago, on a 200-mile-an-hour train, bullet 
train from Beijing to Tianjin. The old train took 8 hours and 
ran on diesel. The new train takes 29 minutes, and your water 
barely moves in the glass.
    In Shanghai, there's a Maglev train that goes 300 miles an 
hour.
    So, I'd just say to my colleagues and to all of our folks 
in this country, the Administration is moving, I think, to try 
to lay this plan down. Thanks to Senator Lautenberg's 
leadership, Amtrak was reauthorized with $1.5 billion over a 5-
year period for 11 high-speed rail corridors. But, you can just 
see, $1.5 billion compared to $30 billion, just in 1 year, and 
$800 billion over the next few years in another country. Last 
year, we were successful, a few of us, to get $8 billion, in 
the Recovery Act, to begin to move toward high-speed rail.
    But, we have a long way to go very quickly, Mr. Chairman. 
And I think this hearing is exceedingly important in helping us 
to focus on how we're going to get from here to there, and I 
thank you for having it.
    The Chairman. Thank you very much, Senator Kerry.
    Senator Dorgan, I have a problem. Senator Kohl has been 
waiting. The 9/11 ceremony begins at 3:00, and----
    What is your wish, Senator Kohl?
    Senator Kohl. Let him speak, please.
    The Chairman. Senator Dorgan, you've been requested to 
speak.

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

    Senator Dorgan. Well, Mr. Chairman, I will try to be 
mercifully brief. I understand there has been a lot said here.
    Let me just make a couple of points. And as I was sitting 
here, I was just musing about something I'd read, years ago, 
about a man named ``Head-On Joe'' Connolly. Joe Connolly 
created a business plan to create train wrecks. He bought used 
locomotives, a century ago, when they were to be discarded by 
the railroads--they were done. He'd buy them, and then he'd lay 
a couple of miles of track, and then he'd advertise he was 
going to have a train wreck. He'd have these two locomotives 
get to top speed and hit each other head-on, and he'd sold up 
to 30, 40, 50, 60,000 tickets for people to come and watch 
train wrecks. And then, the business plan didn't work quite as 
well as he thought, because people were being burned by steam 
and hit by flying metal, and finally, his career ended. But, he 
was fabulously successful. They called him ``Head-On Joe'' 
Connolly.
    And so, train wrecks, at least at one point in the lifetime 
of our country, represented a business plan.
    Of course, now that's not a business plan. We're talking 
about, how do you make sure you have a rail system that works, 
that strengthens the rail system? And, you know, 30 years ago, 
when I came to the U.S. House, I was told by one of the old 
bulls of the U.S. House, ``Don't ever pick a fight with the 
railroads, because it's one you'll never win.'' And, you know, 
in retrospect, he was fairly accurate about that. I've had 
great angst about captive shippers and the prices they pay and 
not been able to succeed on that the way we should. And I do 
hope that we're able to finish the work that was started on S. 
2889.
    I know, from having a television set in the bathroom, that 
when I brush my teeth and shave in the morning, I know that we 
use 1 gallon of fuel to move freight 457 miles. I know that 
because every single morning I'm told that in a commercial.
    [Laughter.]
    Senator Dorgan. And I think, ``Good for them.'' You know, 
it's good to know that. And so, I understand the value of 
having a financially successful industry. I think that's very 
important.
    But, I also believe that--we have a report, that's 
referenced in your committee report, saying that the railroads 
have experienced a pricing renaissance. And at least the 
farmers in the upper northern Great Plains would understand 
what that means.
    And that brings me to the final point, that I also 
understand, not just the importance of having a strong rail 
system in America--and I believe that's important for our 
country; our country would not do as well as we are without a 
strong rail system. I also understand the genius of 
competition. Competition's about choice, it's about better 
prices, it's about higher quality, and it's about more 
innovation. And the fact is, in recent decades, there has been 
a relentless march toward less competition in the rail 
industry. And frankly, I don't think that serves our country 
very well.
    The Surface Transportation Board is, you know, off and on, 
either awake or asleep, depending on your perspective of it. I 
think, for a long period of time, all of the regulatory 
functions that we have established have--in order to oversee 
the ``4R'' Act and other issues--have been in a very, very deep 
sleep. And that's why I think we need S. 2889.
    So, I do hope we can find ways to continue to work, 
negotiate issues that still exist, pass legislation that we 
know needs passing, and continue to see a strong rail industry 
in this country, with competition, that gives shippers fair 
prices at the same time.
    Mr. Chairman, thank you very much.
    The Chairman. Thank you, Senator Dorgan.
    Senator Kohl, if you would please come forward and give 
your testimony, and I will be here, even if nobody else is. And 
we welcome you.

                 STATEMENT OF HON. HERB KOHL, 
                  U.S. SENATOR FROM WISCONSIN

    Senator Kohl. Thank you very much, Chairman Rockefeller, 
for holding today's hearing on the Federal role in national 
rail policy and for accommodating my request to testify before 
your fine committee.
    We all share your goal of updating and modernizing our 
Nation's rail policy so that this vital means of transportation 
does truly serve the interests of passengers, rail shippers, 
and consumers all across our Nation.
    I'm testifying today in my capacity as Chairman of the 
Judiciary's Committee's Subcommittee on Antitrust, Competition, 
Policy, and Consumer Rights.
    As we consider the Federal role in national rail policy, I 
believe it's crucial that antitrust law enforcement be a part 
of our Nation's rail policy. On the Antitrust Subcommittee, 
we've seen that, in industry after industry, vigorous 
application of our Nation's antitrust laws is the best way to 
eliminate barriers to competition, to end monopolistic 
behavior, to keep prices low and quality of service high.
    I raise the importance of antitrust and competition 
principles because our current Federal rail policy does not 
include enforcement of the antitrust laws in most respects. For 
decades, the freight railroads have been insulated from the 
normal rules of competition, followed by almost all other parts 
of our economy, and because of an outmoded and unwarranted 
antitrust exemption. Consolidation in the railroad industry in 
recent years has resulted in only four Class I railroads 
providing nearly 90 percent of the Nation's freight rail 
transportation, as measured by revenue; and three decades ago, 
there were 42 such railroads. The railroad industry's obsolete 
antitrust exemptions mean higher prices for consumer and 
manufactured goods, for food, and for electricity.
    As you know, I've introduced legislation designed to repeal 
this obsolete antitrust exemption. This bipartisan legislation 
has 11 cosponsors, including members of both the Judiciary and 
Commerce Committees, and it was reported out of the Judiciary 
Committee on a unanimous 14-to-0 vote in March 2009.
    The ill effects of railroad consolidation and immunity from 
the antitrust laws are exemplified in the case of captive 
shippers, industries served by only one railroad. Over the past 
several years, these captive shippers have faced spiking rail 
rates. They're often the victims of the monopolistic practices 
and price gouging by the single railroad that serves them, 
prices increases which they are forced to pass along in the 
price of their products, and ultimately to consumers. And in 
most cases, the ordinary protections of antitrust law are not 
available to these captive shippers.
    A recent study by the Consumer Federation of America found 
that rail shipping rates for captive shippers are $3 billion 
higher than they would be if the market were competitive. These 
unjustified cost increases cause consumers to suffer higher 
electricity bills because of--a utility must pay for the high 
cost of transporting coal, result in higher prices for goods 
produced by manufacturers who rely on railroads to transport 
raw materials, reduce earnings for American farmers who ship 
their products by rail, and also raise food prices paid by 
consumers. This special exemption is unique to the rail 
industry. Virtually all other regulated industries, including 
telecom, energy, and air transportation, are fully subject to 
antitrust law. Our railroad antitrust legislation is supported 
by the Attorneys General of 20 states, a wide range of consumer 
organizations and leading industry trade organizations, 
including the American Public Power Association, the American 
Chemistry Council, the National Farmers Union, and the American 
Corn Growers Association, among others. Even the Bush Justice 
Department recognized damages done by the railroad antitrust 
exemption, and I would ask consent to introduce into the record 
a 2004 letter from the Justice Department to then-House 
Judiciary Committee Chairman Sensenbrenner detailing the manner 
in which antitrust exemption shields potentially 
anticompetitive conduct.
    [The information referred to is contained in the appendix.]
    So, that's why I'm so pleased, Mr. Chairman, that, in May 
2009, you and I reached an agreement that a repeat of the 
railroad industry's undeserved antitrust exemption would be 
incorporated into your comprehensive rail reform bill. I look 
forward to continuing to work together to achieve this goal. 
However, all should know that if comprehensive rail reform is 
not possible, then I will seek to advance repeal of the 
antitrust exemption by any other means possible.
    All those who rely on railroads to ship their products 
deserve the full application of the antitrust laws to end the 
anticompetitive abuses all too prevalent in this industry 
today.
    I thank you, Mr. Chairman, for your courtesy in allowing my 
testimony today.
    [The prepared statement of Senator Kohl follows:]

      Prepared Statement of Hon. Herb Kohl, Senator from Wisconsin

    Thank you, Chairman Rockefeller, for holding today's hearing on the 
Federal role in national rail policy and for accommodating my request 
to testify before your Committee. We all share your goal of updating 
and modernizing our Nation's rail policy so that this vital means of 
transportation truly serves the interests of passengers, rail shippers 
and consumers all across the Nation.
    I am testifying today in my capacity as Chairman of the Judiciary 
Committee's Subcommittee on Antitrust, Competition Policy, and Consumer 
Rights. As we consider the Federal role in national rail policy, I 
believe it is crucial that antitrust law enforcement be a part of our 
Nation's rail policy. On the Antitrust Subcommittee, we have seen that 
in industry after industry, vigorous application of our Nation's 
antitrust laws is the best way to eliminate barriers to competition, to 
end monopolistic behavior, to keep prices low and quality of service 
high.
    I raise the importance of antitrust and competition principles 
because our current Federal rail policy does not include enforcement of 
the antitrust laws in most respects. For decades freight railroads have 
been insulated from the normal rules of competition followed by almost 
all other parts of our economy by an outmoded and unwarranted antitrust 
exemption. Consolidation in the railroad industry in recent years has 
resulted in only four Class I railroads providing nearly 90 percent of 
the Nation's freight rail transportation, as measured by revenue. Three 
decades ago there were 42. The railroads' obsolete antitrust exemptions 
mean higher prices for consumer and manufactured goods, for food and 
electricity.
    As you know, I have introduced legislation designed to repeal this 
obsolete antitrust exemption. This bipartisan legislation has eleven 
co-sponsors, including members of both the Judiciary and Commerce 
Committees, and was reported out of the Judiciary Committee on a 
unanimous 14-0 vote in March 2009.
    The ill-effects of railroad consolidation and immunity from the 
antitrust laws are exemplified in the case of ``captive shippers''--
industries served by only one railroad. Over the past several years, 
these captive shippers have faced spiking rail rates. They are often 
the victims of monopolistic practices and price gouging by the single 
railroad that serves them, price increases which they are forced to 
pass along into the price of their products, and ultimately, to 
consumers. And in most cases, the ordinary protections of antitrust law 
are unavailable to these captive shippers. A recent study by Consumer 
Federation of America found that rail shipping rates for captive 
shippers are $3 billion higher than they would be if the market was 
competitive. These unjustified cost increases cause consumers to suffer 
higher electricity bills because a utility must pay for the high cost 
of transporting coal, result in higher prices for goods produced by 
manufacturers who rely on railroads to transport raw materials, reduce 
earnings for American farmers who ship their products by rail and raise 
food prices paid by consumers.
    This special exemption is unique to the rail industry--virtually 
all other regulated industries, including telecom, energy, and air 
transportation, are fully subject to antitrust law. Our railroad 
antitrust legislation is supported by the Attorneys General of 20 
states, a wide range of consumer organizations and leading industry 
trade organizations including the American Public Power Association, 
the American Chemistry Council, the National Farmers Union, the 
American Corn Growers Association, among others.
    That is why I am so pleased, Mr. Chairman, that in May 2009 you and 
I reached an agreement that a repeal of the railroad industry's 
undeserved antitrust exemption would be incorporated in your 
comprehensive rail reform bill. I look forward to continuing to work 
together to achieve this goal. However, all should know that if 
comprehensive rail reform is not possible, I will also seek to advance 
repeal of the antitrust exemption by any other means possible. All 
those who rely on railroads to ship their products deserve the full 
application of the antitrust laws to end the anti-competitive abuses 
all too prevalent in this industry today.

    The Chairman. Thank you very much, Senator Kohl. And thanks 
for your patience.
    What we need to do here is going to make you all very 
unhappy, but we have a 9/11 ceremony from 3:00 to 3:30 which 
Senators are asked to attend. And Senator Hutchison and I are 
going to attend. And so, we will be back here at 3:30. So, get 
that report that we've put out, read it, have fun, be nice to 
your neighbors, and see you shortly.
    [Recess.]
    The Chairman. All right. We're here again.
    The Honorable John Porcari, the Deputy Secretary, U.S. 
Department of Transportation, you will testify first--and the 
Honorable Daniel R. Elliott III, Chairman of the Surface 
Transportation Board, will testify second. And then we'll have 
a nice conversation.

               STATEMENT OF HON. JOHN D. PORCARI,

              DEPUTY SECRETARY OF TRANSPORTATION,

               U.S. DEPARTMENT OF TRANSPORTATION

    Mr. Porcari. Thank you, Chairman Rockefeller and members--
--
    The Chairman. I apologize for keeping you waiting.
    Mr. Porcari. I apologize for arriving late, but it worked 
out.
    Mr. Chairman and members of the Committee, I appreciate the 
opportunity to update you on the Department of Transportation's 
ongoing efforts to deliver a modern, efficient, world-class 
passenger and freight rail system in America.
    Over the last 18 months, our Department has helped to usher 
in a new era for rail transportation in this country with 
unprecedented levels of investment and a renewed sense of 
direction. In his Labor Day Address to the Nation, President 
Obama reiterated his commitment to building our current 
investments in high-speed rail and to invest in the long-
overdue overhaul of Amtrak's fleet. He also announced an 
ambitious plan to lay and maintain 4,000 additional miles of 
rail across our country. Clearly, freight and passenger rail 
has a central role to play as part of a robust and balanced 
transportation network that strengthens all the forms of 
transportation this country relies on.
    We appreciate the support we've received from this 
committee as we've worked to achieve the Administration's 
vision. That includes a strong freight rail industry that 
builds upon its current 40-percent market share, particularly 
in the area of intermodal container movements at distances of 
500 miles or greater. We see access to the private financial 
markets as a critical way to help fund the rail improvements 
needed for this expanded role. For that reason, we need to 
preserve a fiscally healthy freight rail system, but we also 
need to remember that cost-effective transportation is a 
critical element of our domestic economy in global 
competitiveness. Thus, our public policies and strategies need 
to assure a balanced system under which rail earns financial 
returns sufficient to keep and expand access to private capital 
markets, but not at the sole expense of limited-option 
shippers. At the same time, we're committed to providing the 
large majority of Americans with access to an integrated system 
of high-speed and intercity passenger rail service.
    Portions of the system may involve use of existing rail 
rights-of-way and infrastructure. A key to the success of this 
vision will be a positive working relationship between the 
freight railroads, the States, and this Department. To this 
end, the Department has worked with States and railroads to 
clarify our expectations. We will not build a world-class 
passenger rail system at the expense of losing our world-class 
freight rail system. We want all our partners to understand, 
we're not pursuing an either/or strategy, but we insist on 
tangible performance outcomes, and consensus on those outcomes, 
to assure we receive sustained improvements in passenger rail 
service in return for funds invested for passenger 
improvements.
    Regrettably, the difficulty in achieving timely stakeholder 
agreements between the States and freight railroads has delayed 
putting Americans to work building our rail system of the 
future. Just as we enthusiastically support a vision for the 
future of rail that includes both stronger passenger and 
freight systems, expanding our investment in freight rail 
requires a freight rail industry that's committed to the needs 
of the 21st century passenger rail.
    We are seeing some signs of progress. Notably, Burlington 
Northern Santa Fe, an industry leader, recently reached an 
agreement with Washington State to improve passenger rail 
service between Seattle and Portland, Oregon. We're grateful to 
BNSF for brokering this agreement. We sincerely hope that the 
promises of cooperation that we've recently received from other 
freight railroads will soon result in additional stakeholder 
agreements. We are looking, quite frankly, for some facts on 
the ground to verify that.
    And, in closing, America's future and its economy depends 
upon an efficient, safe, and reliable transportation system. We 
believe that rail can play an increasingly important role in 
meeting our freight and passenger rail mobility needs. In fact, 
we're finalizing a progress report on our first-ever national 
rail plan. That'll serve as an effective blueprint for 
achieving these goals in the months and years ahead.
    Mr. Chairman, that concludes my testimony, and I'll be 
happy to answer any questions.
    [The prepared statement of Mr. Porcari follows:]

    Prepared Statement of Hon. John D. Porcari, Deputy Secretary of 

           Transportation, U.S. Department of Transportation
    Chairman Rockefeller, Ranking Member Hutchison and members of the 
Committee: I am honored to appear before you today on behalf of 
President Obama and Secretary of Transportation Ray LaHood to discuss 
the rail industry as it continues to evolve to meet this Nation's 
transportation needs.
The Administration's Transportation Strategic Goals
    Throughout the history of this nation, transportation has played a 
key foundational role in economic development, providing for the common 
defense, and in defining a quality of life that is the envy of the 
world. Today the U.S. has the best transportation system in the world. 
But this system must continue to evolve if we are to remain the global 
leader in coming decades. As we develop policies that impact 
transportation, we must look at transportation from a system 
perspective. It is in this context that the Department has identified 
five strategic goals that will guide the Department in meeting the 
challenges of transportation in the 21st Century. These are:

   Safety: Improve public health and safety by reducing 
        transportation-related fatalities and injuries.

   State of Good Repair: Ensure the U.S. proactively maintains 
        its critical transportation infrastructure in a state of good 
        repair to preserve transportation safety, reliability, capacity 
        and efficiency.

   Economic Competitiveness: Promote transportation policies 
        and investments that bring lasting and equitable benefits to 
        the Nation and its citizens, including the encouragement of 
        expanded transportation-oriented domestic manufacturing much 
        like that spurred by the growth of the railroads in the 19th 
        Century and the automobile industry in the 20th Century.

   Livable Communities: Foster livable communities through 
        place-based policies and investments that increase 
        transportation choices and access to transportation services.

   Environmental Sustainability: Advance environmentally 
        sustainable policies and investments that reduce carbon and 
        other harmful emissions from transportation sources and lessen 
        transportation's dependence on fossil fuels.

    In developing our policy, legislative and funding initiatives, we 
at the Department are moving beyond traditional modal programmatic 
stereotypes. We are looking at transportation policy and investment 
from a bottom-line perspective. We are asking where does our policy 
emphasis and transportation investment yield the greatest benefit when 
viewed against these goals?
    A challenge in taking such an approach is that it forces us to look 
beyond existing policy and programmatic structures. The traditional 
Federal approach to rail transportation, certainly for the last several 
generations, has been markedly different than the approach to other 
forms of transportation. While we have made significant public 
investments in highway, aviation, transit and waterway infrastructure 
over the past 30 years, the same cannot be said for rail.
    The Administration believes that we need to take a new look at rail 
transportation--both freight and passenger. Indeed, freight rail has 
often been off our radar screens except when there was an accident. Yet 
40 percent of U.S. freight, when measured on a ton-mile basis, moves by 
rail. Intercity passenger rail also plays a significant role in meeting 
mobility needs in several intercity corridors; and commuter rail 
service has experienced a sustained period of growth.
Rail Aligns Well with the Department*s Strategic Goals:
    Rail is safe. According to the Bureau of Transportation Statistics' 
National Transportation Statistics, 2010 the fatality rate related to 
movement of intermodal containers by rail is nine times better than 
moving similar containers by highway. Passenger rail is also safer than 
travel by auto.
    Rail is an efficient user of infrastructure and right-of-way thus 
having a positive effect on our efforts to maintain assets in a state 
of good repair and to offset the demand for investments in other forms 
of transportation. Some estimate that to compensate for shutting down 
Amtrak's Northeast Corridor would require the addition of seven new 
lanes to I-95. Given the cost of highway construction, particularly in 
urban areas, rail construction is a sound investment. On the freight 
side, a single intermodal train moves the equivalent of 300 truck 
movements. And, as I will discuss later, for the last 30 years, freight 
rail service has consistently attracted private capital into building 
and maintaining needed infrastructure.
    Rail contributes to our economic competitiveness. Rail's efficient 
access to ports facilitates the global trade for key areas of our 
economy such as agriculture. Rail investment also offers a significant 
opportunity to develop and expand domestic manufacturing in the 
atrophied rail supply industries. Rail is integral to the development 
and growth of our Nation's regional economies.
    Rail transportation can be a key element of our strategies for 
enhancing the livability of our communities. Rail transportation played 
a key role in the development of the U.S. in the 19th and first half of 
the 20th Century. Many communities grew up around their rail 
connection. Now those urban rail corridors offer significant 
opportunities to increase public transportation and reduce dependence 
upon single passenger automobile travel. But this must be done without 
impacting critical freight mobility.
    Approximately 57 percent of petroleum used in the U.S. is imported, 
and approximately 71 percent of U.S. consumption of petroleum is by the 
transportation sector (of which rail's share is 2.13 percent). Studies 
by the Federal Railroad Administration have concluded that transporting 
freight by rail, when measured on a gallons per ton-mile basis, is 3 to 
4 times more energy efficient than moving that same freight over a 
highway. Passenger rail is 21 percent more energy efficient when 
measured on a BTUs per passenger mile basis. (The FRA fuel use study 
can be found at http://www.fra.dot.gov/Downloads/
Comparative_Evaluation_Rail_
Truck_Fuel_Efficiency.pdf.) Not only does rail offer the opportunity to 
reduce our dependence on petroleum products but also the greenhouse 
emissions that result.
    The Department's experience with the Transportation Investment 
Generating Economic Recovery (TIGER) Grants offers testament to the 
strength of rail as part of a truly modal neutral transportation system 
where decisions are based on efficiency and performance. Authorized by 
the American Recovery and Reinvestment Act (ARRA), the TIGER grants 
were the first discretionary modal neutral program where investments 
decisions would be based upon objective results-based criteria and not 
upon allocation of resources into specified modal stovepipes. In this 
competitive decision-making environment, rail projects received the 
greatest allocation of funds. This allocation is even more significant 
when one realizes that freight rail projects do not traditionally 
compete for public funds.
Passenger Rail initiative and Freight Railroads
    The President's High-Speed Intercity Passenger Rail (HISPR) Program 
is one of the Administration's most high-profile transportation 
initiatives. Through this program we seek to bring the benefits of high 
performing intercity passenger rail service to regions across the 
country. Our vision is of a multi-tiered passenger rail network, with 
services that are designed to meet the mobility demand of the regions 
they serve, and that are integrated in the local public and highway 
systems. Thus, at one end of the spectrum we envision services at 
sustained peak speeds of 150 to 220 mph, on dedicated infrastructure, 
serving large urban areas (what we are calling High-speed Rail 
Express), particularly those experiencing highway and airline 
congestion. As part of the network, we also envision a Regional network 
linking the Express service to mid-sized urban areas with convenient, 
frequent service at sustained peak speeds of 90 to 125 mph. We see 
Emerging high-speed rail and Feeder routes that will connect regional 
urban areas to the intercity passenger rail network.
    We envision that Regional, Emerging and Feeder elements of the 
passenger rail network will be built upon a mixture of dedicated rail 
infrastructure and infrastructure and/or rights-of-way shared with 
freight operations. It is the shared track and rights of way that have 
caused some concerns within the freight rail industry, which I wish to 
address here.
    The Interstate Highway program is now over 50 years old--50 years 
in which to develop procedures, regulations, guidance and precedent 
that define the relationships of the various participants. By contrast, 
the President's new program investing in high-speed and improved 
intercity passenger rail is still in its formative stages. In the 
absence of such a well defined program such as exists for highways, it 
is understandable that there would be some degree of concern on the 
part of the private sector freight railroads, over the specifics of 
investments in improved passenger rail on rights of way, including 
infrastructure they own and operate for the financial benefit of their 
shareholders. We in the Department are attempting to provide clarity to 
the basic relationships between private freight railroads and the 
States that will need to exist to make the program successful.
    Our top priority is and always will be safety. Beyond that, we have 
identified the key elements that must be in the agreement between the 
State and its key stakeholder, the private freight railroad. These 
elements are:

   America's world-class freight rail system must be preserved 
        and improved.

   HSIPR grants are for the benefit of existing or future 
        intercity passenger rail service and will fund infrastructure 
        improvements necessary to ensure a high level of performance.

   Agreements must achieve the necessary balance to protect 
        both the private and public interests.

   Agreements must achieve and maintain quantifiable 
        performance outcomes based upon objective, mutually agreed-upon 
        analysis/modeling including:

      --operating slots/frequencies

      --trip times

      --reliability (to the extent it is under a party's control).

    In its most basic terms, the States and the Federal Government are 
seeking to purchase, through capital investments, specific performance 
for passenger rail service improved or expanded under this program. We 
are not looking for the freight railroads to participate in the new 
HSIPR program beyond their current obligations under the Railroad 
Passenger Service Act of 1970 and the Passenger Rail Investment and 
Improvement Act of 2008 without compensation. On the other hand, it is 
not the purpose of HSIPR funds to add freight capacity, except where 
the freight railroad is a financial participant in the specific 
improvements.
    This summer, we experienced a pause in all State negotiations of 
stakeholder agreements as the freight railroads absorbed the meaning of 
their obligations where public funds improved their infrastructure or 
other assets. I am happy to report that in recent weeks we have seen 
stakeholder agreements that meet our bottom line principles reached 
between the Northern New England Passenger Rail Authority and Pan Am 
Railways for improvements between Portland and Brunswick, ME; between 
Vermont and the New England Central Railroad (NECR) subsidiary of Rail 
America for improvements to the rail line between Brattleboro and St. 
Albans, VT; and between Washington State and the Burlington Northern 
Santa Fe Railway (BNSF) for improvements between Seattle, WA and 
Portland, OR.
    The agreements reflect real progress. The Department understands 
that other stakeholder agreements based upon the principles articulated 
above are in advanced stages of discussion. Unfortunately, we 
understand that in other corridors, progress has not been as promising. 
Some States have suggested that they be given the right of access to 
freight railroad infrastructure in a manner analogous to Amtrak, for 
the purpose of implementing the Administration's new passenger rail 
program. The Department remains hopeful that the freight railroads will 
see an alignment between their interests and those of the public in the 
success of this new program, just as have BNSF, NECR, and Pan Am. Thus 
at this time we are not proposing inclusion of the legislation 
requested by the States into any bills pending before this Committee.
Rail As A Means To Meet Freight Mobility Needs
    As we move from the recession to economic expansion, the freight 
rail movements needed to support our economy will grow. Based upon past 
experience as documented by the U.S. Census Bureau's Commodity Flow 
Survey, it is not unreasonable to expect that the freight tonnage 
hauled in 25 years will be nearly 25 percent greater than what is 
hauled today. Our present transportation system cannot handle such 
growth without changes in how we do things. Success for our economy in 
the future will take policies and investments that improve our capacity 
and efficiency beginning today.
    Rail today carries 40 percent of the total domestic freight 
movements. The Department believes that increasing that percentage 
could be a cost-effective approach to meeting our stated strategic 
goals. Increasing the percentage of certain intermodal movements could 
be particularly telling on the investment needs in other forms of 
transportation. To be clear, this does not imply disinvesting in 
highways or waterways. Indeed, transportation of freight will grow on 
all modes of transportation in the future. It means developing policies 
and investments that place all the modes on a level playing field where 
objective, merit-based measures define how the Department's limited 
resources will be used in the future to ensure that each mode operates 
as efficiency as possible. This will be one of the guiding principles 
as the Department considers options for reauthorization of surface 
transportation legislation.
    One attribute of the freight railroad segment of the rail industry 
has been its ability over the last 30 years to attract private capital 
for infrastructure investment. Not so long ago, certainly within the 
professional careers of several in this room, this was not the case. 
Large segments of the rail industry were in bankruptcy protection or 
Federal ownership. We certainly do not want to go back that era. We 
learned then and know now that Federal funding cannot alone sustain a 
healthy freight rail industry.
    Affordable Federal investment options for the future will most 
likely be focused on addressing bottlenecks, much as the Alameda 
Corridor does in Los Angeles and the CREATE Project is designed to do 
in Chicago. This will mean that freight railroads will need to be 
profitable to attract the level of private capital investment necessary 
to assure that the rest of their systems as a whole are built and 
maintained to meet our freight mobility needs of the future. This is 
particularly true given a number of new initiatives underway including 
implementing positive train control, new air quality standards for 
locomotives, and new security initiatives.
    At the same time, public policy needs to be sensitive to shippers 
who have limited transport options. Freight railroads must be able to 
earn enough to assure we avoid another era of the downward spiral of 
declining service quality, declining investment, and declining revenue. 
On the other hand, freight railroad profitability should not be tied 
solely to revenues from shippers with limited transportation options. 
Finding the correct balance will be difficult and we need to recognize 
that history would indicate that we will be very fortunate indeed if we 
find this balance the first time. (The Staggers Rail Act of 1980 was 
the fourth piece of legislation enacted within a decade to address the 
rail financial crisis.) So any policy changes need to include 
provisions for quick correction if they are found to be detrimental to 
transportation investment.
    In closing, America's economy depends upon an efficient, safe and 
reliable transportation system. The Obama Administration believes that 
rail can play an increasingly important role in meeting our freight and 
passenger mobility needs. But this cannot be just a responsibility of 
the Administration and the Congress. It requires commitments from our 
States and local partners. They too need to put into place the 
appropriate policies, program structures and investments, both public 
and private to achieve this enhanced opportunity for rail. It also 
requires that our the private sector partners' policies recognize that 
the larger public interest in rail transportation, in particular 
passenger rail transportation, is foundational to achieving that part 
of the larger vision that they are most interested in.
    The next several months will be exciting as we address these 
issues. Secretary LaHood and I look forward to working with the 
Committee in realizing this once in a lifetime opportunity for American 
rail transportation.
    I appreciate this opportunity to appear before you today and look 
forward to answering any questions you might have.

    The Chairman. Thank you.
    Mr. Elliott.

  STATEMENT OF HON. DANIEL R. ELLIOTT III, CHAIRMAN, SURFACE 
                      TRANSPORTATION BOARD

    Mr. Elliott. Good afternoon, Chairman Rockefeller, Senator. 
Thank you very much for your comments, Deputy Secretary. Thank 
you for your invitation to speak today. It is an honor to 
appear before you today.
    We are the economic regulators of the national freight rail 
system, which is recognized as the world's most efficient and 
cost effective. It is our job to make sure that we have the 
right rules in place for the rail industry of today and 
tomorrow. Finding the proper Federal role in national rail 
policy is always a continuing balancing act. My mission is to 
ensure that our oversight properly balances the interests of 
all segments of the transportation industry: carriers, 
customers, suppliers, and workers.
    Over the next year, I plan to tackle longstanding issues 
that would better balance the agency's mission and priorities 
with the economic realities of today's railroad industry. These 
issues include looking at the competitive access rules, 
revisiting the need for existing broad exemptions to 
regulation, and looking at how much we charge to file a case 
with the Board.
    But, first I want to thank the Committee for the hard work 
it has done toward the first reauthorization of the STB since 
it was created, in 1996. By reaching across political lines, 
this committee worked together to create a good bill. The bill 
would restore our ability to start investigations on our own. 
It would give us the ability to send small disputes to a quick 
and inexpensive arbitration process. It would authorize a 
budget that would allow us to be more proactive. We stand ready 
to carry out Congress's wishes. But, I also appreciate that 
Congress has a lot of other very important things it needs to 
do, and a limited time to do them. And I do not want to sit 
still while important matters are in my power to pursue, 
despite my agency's limited resources.
    First, we need to revisit Board rules on railroad industry 
competition, including those that govern competitive access. 
Those rules were adopted over 25 years ago, when the financial 
health of the industry was completely different than it is 
today.
    Second, for similar reasons, I also believe it is time to 
revisit several of the Board's exemption rulings which removed 
the Federal protections of reasonable service and rates from 
various shippers in the 1980s. At the time, most of the 
shippers supported the exemptions; but, many of those same 
shippers now say that these exemptions have outlived their 
usefulness.
    Third, I would like to review the level of filing fees and 
complaint cases. Right now, a shipper has to pay a filing fee 
of over $20,000 to complain about a service or other 
unreasonable practice. That does not seem right. I understand 
that agencies are supposed to charge fees that recover their 
costs, but I am concerned that high fees may discourage 
meritorious complaints.
    Fourth, I will continue my efforts to reinvent the agency 
into an engaged problem-solver instead of a board that simply 
responds to a docket of filings and complaints. We've already 
bolstered the Board's Rail Customer Assistance Program, 
emphasized mediation, and started a process to breathe life 
into our arbitration process. We must continue to do more.
    Finally, I will continue to look for more ways to make the 
agency more accessible, open, and transparent. In making any 
changes to the STB's regulatory framework, I want to be both 
proactive and responsible, making every effort to avoid 
unintended consequences.
    As I said earlier, finding the proper Federal role means 
finding the right balance. That is the approach this committee 
took in fashioning the reauthorization bill, and one I will 
follow, going forward.
    Thank you for your time, and I would be pleased to answer 
any questions.
    [The prepared statement of Mr. Elliott follows:]

      Prepared Statement of Hon. Daniel R. Elliott III, Chairman, 
                      Surface Transportation Board

    Good Morning, Chairman Rockefeller, Ranking Member Hutchison and 
members of the Committee. My name is Daniel Elliott, and I am Chairman 
of the Surface Transportation Board (STB or Board). I appreciate the 
opportunity to appear before this committee today to address the 
Board's regulation of the freight railroads and how it is part of the 
Federal Government's role in national rail policy.
    I am also honored to be testifying alongside Deputy Secretary 
Porcari of the Department of Transportation. The Preliminary National 
Rail Plan that the Deputy Secretary will address today is an important 
step in developing a comprehensive approach to rail transportation in 
the United States. As we look out over the next several decades, those 
of us engaged in transportation policy must be dedicated to ensuring 
that this Nation has a world class transportation system for freight 
and passengers. Railroads are an important part of this vision. While 
the Board's primary role is one of impartial adjudicator of disputes, I 
commend the Department of Transportation on the work they have 
undertaken to plan for the future.
    This is my first appearance before the Committee since I became 
Chairman last August. It has been a busy and productive year for the 
Board. In addition to the day-to-day business of judging cases and 
issuing decisions, I have spent the year learning about the Board, its 
staff, and processes. I have also spent a great deal of energy reaching 
out to stakeholders to learn how the railroad industry affects nearly 
every sector of the American economy. I believe that this foundation 
will allow me to lead the Board in a proactive and effective way in the 
coming years.
    During this period, this committee has been working very hard on 
reauthorization legislation for the Board. I commend the Committee for 
the approach it has taken: seeking bipartisan consensus among all 
stakeholders to reach solutions to difficult policy problems in 
economic regulation. There are many important pieces contained in the 
legislation that would greatly enhance the agency's ability to fulfill 
its mission. For example, the Board generally lacks the ability to 
launch an investigation on its own initiative. Moreover, the agency has 
not been reauthorized since it was created in 1996.
    I should also note that the past year has presented extremely 
challenging times for all segments of American industry. Significant 
changes in the economy have often occurred quite rapidly. These 
macroeconomic trends inevitably affect the dynamics of railroad/
customer relationships and the allocation of labor and resources 
throughout the transportation industry. As conditions continue to 
improve in the coming months, the Board will need to monitor how and to 
what degree it should reexamine and tailor its regulatory policies to 
meet new conditions.
    I will begin my testimony by providing a brief overview of the 
Board and its responsibilities; then lay out my vision for moving the 
agency forward in the coming year; and conclude with a summary of the 
Board's recent activities and accomplishments.
Overview of the STB
    Congress created the Surface Transportation Board in the ICC 
Termination Act of 1995 (ICCTA). At its inception, the STB assumed 
many, but not all, functions of its predecessor, the Interstate 
Commerce Commission (ICC). While the Board is administratively-housed 
within the Department of Transportation, the STB is a bipartisan, 
decisionally-independent regulatory agency. The Board is composed of 
three members nominated by the President and confirmed by the Senate 
for five-year terms. The Board's Chairman is designated by the 
President from among the three members.
    Assisting the Board in carrying out its responsibilities is a staff 
of approximately 150 employees, with extensive experience in economics, 
law, accounting, transportation analysis and logistics, environmental 
matters, finance and administration. For the second straight year, the 
Board was named the best place to work in the Federal Government in the 
small agency category by the Partnership for Public Service. The 2010 
rankings were based on a U.S. Office of Personnel Management Federal 
Employee Viewpoint Survey, undertaken in February-March 2009 and issued 
in July 2010. An engaged and energized staff is critical to the success 
of an agency in achieving its mission.
    The Board is charged by statute with broad economic regulatory 
oversight of railroads, including rates; service; the construction, 
acquisition and abandonment of rail lines; mergers between rail 
carriers; and interchange of traffic among carriers. While the majority 
of its work involves railroads, the STB also has certain oversight of 
pipeline carriers, intercity bus carriers, moving-van companies, 
trucking companies involved in collective activities, and water 
carriers engaged in non-contiguous domestic trade. In addition, the 
Board has limited but important regulatory authority involving Amtrak. 
That authority has been expanded by the Passenger Rail Investment and 
Improvement Act (PRIIA) of 2008.

Moving the Agency Forward
    This hearing coincides with the one year anniversary of my 
appointment as Chairman of the Surface Transportation Board. The STB 
remains a fair and evenhanded forum for regulatory oversight, and we 
are taking steps toward creating a more open and accessible agency. At 
the same time, as Chairman I have committed myself to expanding the 
culture at the agency from one of merely judicial decisionmaker to one 
of engaged problem solver, as well. Instead of devoting all of our 
tremendous human resources to pushing cases through the administrative 
process, the agency can be equally effective in applying its 
considerable expertise to solving disputes and other problems before 
they result in formal case filings. We are well-suited to successfully 
mediating disputes because we have neutral experts on staff who 
understand the rights of shippers and the responsibilities of the 
carriers. This year, the agency has taken a number of positive steps 
toward becoming a more proactive problem-solving agency.
    Continuing in that same direction, I intend to focus my second year 
at the agency on the following projects:

        1. Reexamine Key Regulatory Policies. There are three key 
        regulatory policies that I believe merit reexamination, if for 
        no reason other than it has been many years since they were put 
        in place. Needless to say, enormous changes have taken place in 
        the industry since passage of the Staggers Act in 1980, as well 
        as ICCTA in 1995. A map of the national rail system reveals 
        significant consolidation of Class I railroads and the 
        development of an expansive short line railroad industry. In 
        addition, railroads have become more productive and shippers' 
        needs and their roles in the shipping process have evolved. The 
        result has been a very different state of economic health in 
        the rail industry than was true in 1980.

        First, I plan to examine the rules the agency has in place 
        regarding rail-to-rail competition. The ICC adopted these rules 
        in the early 1980s before waves of consolidation rippled 
        through the railroad industry. In the Spring of 2009, the 
        agency considered beginning such a reexamination, but deferred 
        in light of the comprehensive review being conducted by the 
        Congress in connection with reauthorization legislation. This 
        process should be launched anew.

        Second, I believe it is time to explore the commodity exemption 
        system, also created in the 1980s, which removed the Federal 
        protections of reasonable service and rates from shippers of 
        numerous different types of commodities. These exemptions were 
        not cast in stone and can be revoked by a petitioning party. It 
        may be that the assumptions underlying some of those exemptions 
        are no longer current.

        Third, I plan to take steps to make the agency more accessible 
        to parties that need to file a complaint because of a violation 
        of the law. In a recent decision, the Board stated that it 
        would review the level of filing fees in all complaint cases. 
        It is vitally important to ensure that all valid claims are 
        brought before the agency. Therefore, filing fees should not 
        deter parties from bringing disputes to the Board.

        2. Continue Active Monitoring of Industry. Let me note that the 
        mission of the STB--to balance the needs of shippers for low-
        cost, reliable rail service with the needs of railroads for 
        revenues adequate to encourage investment in our Nation's rail 
        network--remains just as critical in challenging economic times 
        as in good. With the recovery of the economy underway, but a 
        great deal of uncertainty ahead, we will continue to monitor 
        the health of the railroad industry and the service it provides 
        to its customers.

        In 2009, the number of carloads carried by the freight 
        railroads was at its lowest level since 1989. This was a 
        reflection of the severe and broadly felt economic downturn 
        affecting railroad customers, resulting in significant 
        dampening of shipping demand. Despite hauling the least amount 
        of traffic in two decades, the Class I railroads still managed 
        to weather the storm, due in large part to cost-cutting. Cost-
        cutting included layoffs, furloughing employees and storing 
        rail cars and locomotives. Carload numbers for 2010 have begun 
        to improve, and I hope that we will see continued economic 
        recovery and a better year for shippers and railroads alike. 
        The industry must remain poised and ready to handle a return of 
        traffic that will be the best sign of renewed economic growth. 
        But most of all, I look forward to the industry bringing all 
        these furloughed workers back to the job and adding workers to 
        grow the railroad workforce as traffic rebounds.

        3. Continue Reexamination of URCS Costing Model. The Board is 
        extensively reviewing its Uniform Railroad Costing System, or 
        ``URCS.'' URCS is the agency's general purpose costing model, 
        which estimates the variable cost of transporting goods by 
        rail. It is used in many Board proceedings, but most 
        prominently in rate cases. Yet the model has not been updated 
        significantly since it was adopted in 1989. Updating URCS is 
        important because shippers and railroads need to have 
        confidence that the Board will issue rulings that are based on 
        accurate and reliable data.

        In May of this year, the Board responded to a Congressional 
        request to submit a report on three different options--basic, 
        moderate, and comprehensive--for updating URCS. The Board 
        advocated implementation of the moderate option. The Board 
        estimated that these changes to URCS would cost the agency 
        approximately $625,000 beyond normal operating expenditures and 
        would take approximately 2 years to complete. Many of these 
        suggested changes to URCS would be subject to rulemaking 
        procedures. While the task is technical and complicated, it is 
        also important and will continue to be a priority for the 
        agency in 2011.

        4. Continue to Improve Transparency. No goal has been more 
        important to me during my first year than to respond to 
        President Obama's call for government leaders to establish a 
        system of transparency, public participation, and 
        collaboration. To facilitate better interaction with the 
        public, I have reached out directly to stakeholders by 
        conducting site visits, holding field hearings, giving 
        speeches, and conducting meetings with local communities and 
        elected officials. I have met with the agency's key 
        stakeholders, some on multiple occasions, which has given me an 
        opportunity receive feedback from them on the challenges they 
        face and how the Board can be more responsive to their 
        concerns.

        Having been on the outside looking in at the Board during my 
        time as an attorney practitioner before the Board, I can 
        sympathize with the frustration felt by many stakeholders that 
        what goes on inside the Board is too much of a mystery. 
        Accordingly, I have undertaken several efforts to make the 
        Board more transparent. I have begun the policy of holding 
        regular oral arguments in a number of cases before the Board, 
        so that parties have a chance to talk face-to-face with the 
        Board, and field questions from the Commissioners. I believe 
        that these arguments have been well received and have 
        contributed measurably to our understanding of the issues in 
        the cases. The oral arguments also provide stakeholders with 
        better insight into the Board's decision-making process.

        The Board has also begun a process to make our written 
        decisions more transparent and understandable to the public. 
        Our decisions are often complex and technical in nature. But no 
        one should need a PhD or law degree to understand what the 
        agency is doing. Therefore, the Board has begun to include a 
        ``plain language'' statement to describe the dispute and 
        decision of the agency for all of its major decisions. This 
        statement, which will appear at the beginning of a decision, 
        explains in plain, ordinary language (devoid of legalese) what 
        the decision does and why.

        In the same vein, Board is undertaking a major redesign of its 
        website. The website is a key source of information for 
        stakeholders, legal practitioners, and members of the public, 
        yet it can be difficult to find information on the website and 
        the site can be difficult to navigate. I plan to transform the 
        current website into a state-of-the-art information portal that 
        will be more user-friendly, allow for better interaction, and 
        provide better information. Everything that can be made public 
        will be made public.

        5. Continue to Foster Better Shipper/Railroad Relationships. 
        Railroads and their customers rely upon one another in order to 
        prosper. While the STB represents a strong and neutral forum 
        for adjudicating rail-related and other complaints, I believe 
        that business partners usually reach a more constructive result 
        when they can settle their disputes privately, without 
        litigation. Accordingly, I have made it a priority of my first 
        year as chairman to foster private settlement of rail-related 
        disputes. Toward that end, I have bolstered the Board's 
        informal dispute resolution team, emphasized mediation, and 
        initiated an effort to revitalize the Board's moribund 
        arbitration process.

    I will also continue my efforts to bolster public awareness of the 
Rail Customer and Public Assistance Program (RCPA). As I will describe 
further, the RCPA program provides help and solves problems through 
informal means, and members of the public have availed itself of this 
assistance increasingly over the past few years.
    As a regulator of one of America's most important national assets, 
I appreciate that we must be vigilant that regulatory review be 
conducted carefully, responsibly, and with every effort to consider the 
possibility of unintended consequences. And the Board is a small agency 
with limited resources. We must thus prioritize our efforts carefully.
    Our mission is to ensure that our oversight properly balances the 
interests of all segments of the transportation industry--carriers, 
customers (and their customers), suppliers, and workers. I believe that 
the measured steps described above can be carried out consistent with 
these goals.

Recent Accomplishments
    The past year has been quite active at the STB, with many 
accomplishments in rail regulation. In that time, the Board has issued 
over 1,000 decisions. It has been quite busy internally, as well, with 
many reforms of the agency's administration. Here are some highlights 
of the Board's accomplishments over the last few years.
Alternative Dispute Resolution
    As noted earlier, I have made it a priority of my first year as 
chairman to foster private settlement of rail-related disputes. Toward 
that end, I have bolstered the Board's informal dispute resolution 
team, emphasized mediation, and initiated an effort to revitalize the 
Board's moribund arbitration process.
    The Board's RCPA program represents a highly successful model of 
this approach. No longer ``Washington's Best Kept Secret,'' the RCPA 
program provides an informal venue for the private-sector resolution of 
shipper-railroad disputes and assists Board stakeholders seeking 
guidance regarding Board decisions and regulations.
    The RCPA program provides help and solves problems through informal 
means, and members of the public have availed themselves of this 
assistance increasingly over the past few years. In 2009, the RCPA 
staff addressed more than 1,400 inquiries, about a third of which 
involved disputes between a rail carrier and shipper or member of the 
public. 2010 has seen a similar level of activity. Such help can range 
from a simple answer to a telephone inquiry, to engaging in lengthy 
dispute-resolution efforts between railroads and shippers. The 
program's staff--which includes attorneys and former employees of 
shippers and railroads--brings to the table decades of experience in 
rail shipping, operations, marketing and analysis.
    This program is free and can be confidential at the request of a 
party. In these matters, Board staff receives requests for assistance 
through a special toll-free number or a fill-in form on the Board's 
website. All matters are expeditiously handled on an informal basis and 
involve a wide-range of issues, including rates and other charges; car 
supply; claims for damages; labor concerns; safety; noise; land 
disputes; and many other service-related problems. Very often, informal 
resolution allows both sides to walk away satisfied, and obviates the 
need for litigation before the Board. We have placed information about 
our program prominently on our website and made it available easily by 
phone call or e-mail to encourage its use in resolving disputes at an 
early stage. The program is also now featured on the websites of 
various shipper organizations.
    In addition to promoting use of the RCPA program, I continue to 
encourage the use of mediation where parties have initiated a formal 
proceeding. In all rate cases, in fact, the Board requires mediation at 
the outset of the proceeding. We are pleased that within the last 2 
years, Board staff was able to successfully mediate a settlement in two 
large rate cases, while a settlement has been reached in principle in a 
third case. As a result of these mediated settlements, both the parties 
and the Board avoided the additional expense and time that it would 
have taken to see these cases through to the end.
    The Board has also persuaded parties in other formal, non-rate 
related proceedings to pursue mediation. There are currently several 
such cases where we have put litigation on hold while the parties, with 
the aid of Board staff, discuss private resolutions of their disputes.
    In addition, The Board has begun a project to improve its 
arbitration procedures. These procedures were adopted at the urging of 
the Railroad-Shipper Transportation Advisory Council (RSTAC), an 
advisory committee that is focused on issues of concern to small 
railroads and small shippers. In the decade since this process was put 
in place, however, not a single party has used it. Accordingly, over 
the next year, the Board will receive input from industry stakeholders 
on why they have not used the current process, in the hope of removing 
deterrents and making the process more attractive. We also have sought 
comment on how to build on our successful mediation program and expand 
those efforts.

Passenger Rail
    In October 2008, Congress expanded the Board's jurisdiction over 
the regulation of passenger rail service. The Passenger Rail Investment 
and Improvement Act (PRIIA) authorizes the Board to institute 
enforcement or investigatory action under certain circumstances to 
address a failure by Amtrak to meet on-time passenger train performance 
standards or service quality standards. Based on such investigation, 
the Board is directed to identify reasonable measures and make 
recommendations to improve Amtrak performance and/or service quality, 
and may assess damages against the host rail carrier or provide other 
relief in appropriate circumstances. PRIIA also allows states access to 
Amtrak equipment and services when the state selects an entity other 
than Amtrak to provide intercity passenger rail service. If Amtrak and 
the state or state-sponsored entity cannot agree on terms of use, the 
Board can determine reasonable compensation, liability and other terms 
of use for Amtrak's services.
    Section 209 of PRIIA calls for Amtrak and interested state 
authorities (Governors or representative entities) to jointly develop a 
standardized methodology to allocate operating and capital costs of 
state-supported Amtrak routes between the states and Amtrak. In the 
event that the parties cannot agree on the methodology within 2 years 
of PRIIA's enactment--Oct. 16, 2010--the Board could be asked to decide 
the appropriate methodology. The Board must do so within 120 days and 
require full implementation of its methodology within 1 year of its 
decision. As the parties are permitted to revise the methodology, it is 
possible the Board could be called upon to resolve disputes over 
revisions as well.
    Finally, Board staff has reached out to industry groups to ensure 
they are aware of the new mediation authority the Board received under 
PRIIA. The Board is now authorized to conduct nonbinding mediation 
between commuter and freight railroads where the commuter railroad 
seeks access to the freight railroad's trackage or right-of-way to 
conduct commuter service, but the parties cannot reach agreement on 
this access. Stakeholders are interested in the opportunity to use the 
Board's services, although the Board has not yet received any requests 
for mediation.
    Implementation of PRIIA is still in the early stages, and no party 
has yet sought action from the Board under any provisions of the law. 
However, the Board continues to monitor developments and will be ready 
to act when the time comes.
    In June of this year, the Board issued a report on the liability 
and indemnity provisions contained in agreements between passenger and 
freight railroads, in response to a request from Congress. Liability 
and indemnity issues are two of the most contentious issues between 
passenger and freight carriers that operate over the same lines. As the 
Board noted in its conclusion to the report, the discord is ultimately 
over which sector--public or private--should bear the risk of exposure 
for accidents involving passengers.

Mergers, Acquisitions, and Construction
    As I noted at the outset of my testimony, rail line mergers, 
acquisitions, and constructions are subject to Board approval. A new 
carrier seeking to acquire or operate an existing rail line must obtain 
authority from the Board. Recent years have seen a number of smaller, 
but still important, mergers that have required Board approval. In 
December 2008, the Board issued a decision approving the Canadian 
National Railway's acquisition of the Elgin, Joliet & Eastern Railway 
West Company (EJ&E). The line CN acquired creates, in effect, a rail 
beltway around Chicago and permits CN to divert traffic from its 
congested lines in Chicago to the less congested lines of the EJ&E. The 
Board attached 182 environmental and other conditions to the 
acquisition, an unprecedented number. They include increasing safety at 
crossings, implementing and protecting quiet zones, and adding fences 
near schools and parks. The conditions also call for intensive 
monitoring that includes monthly and quarterly progress reports.
    I take the implementation of the required mitigation measures very 
seriously, and have personally visited the affected communities three 
times. I am committed to ensuring that CN is living up to all of its 
responsibilities in the communities.
    In response to community concerns about extended crossing 
blockages, the Board instituted a third-party audit, which revealed a 
number of significant discrepancies between the data that CN reported 
to the Board and the data that CN had itself collected. On April 20, 
2010, the Board ordered CN to appear for a hearing to address CN's 
failure to report its internal data. The matter is still under active 
consideration by the Board.
    A significant development in the freight railroad industry occurred 
this year when Berkshire-Hathaway acquired BNSF Railway. As a result, 
BNSF became the first Class I railroad in recent memory to be privately 
held. While this acquisition did not require formal Board approval, 
nothing about this purchase will change how the Board regulates BNSF. 
BNSF will still need to seek regulatory approval for line sales, 
constructions, and abandonments and its common carrier rates and 
practices are subject to the same regulation as other railroads.
    The acquisition raises a number of more technical issues. For 
example, because BNSF will no longer be publicly traded, it will have 
no stock price, a component that is needed for the STB's annual 
railroad industry cost of capital calculation. The Board has sought 
public comment on this matter. Parties in the cost of capital 
proceeding have also raised the issue of how this transaction impacts 
the valuation of BNSF's assets. When BNSF submits financial data to the 
Board, it may seek to write up the value of its assets to reflect the 
purchase price, rather than the depreciated book value. These technical 
issues have been raised in pending cases or will be before the agency 
shortly. I therefore can say little more on these subjects, other than 
that I am fully aware of the disputes and the Board will address them 
as they arise in a fair and impartial manner.

Abandonment and Discontinuance
    A carrier may not cease serving a line of railroad without prior 
approval from the Board. In such cases, the Board looks to balance the 
public interest in continued rail service with the needs of rail 
carriers to earn adequate revenues. In February 2010, the Montreal 
Maine & Atlantic Railway (MMA) filed an application to discontinue 
service and abandon the line. The State of Maine opposed MMA's 
proposal, and sought funds--partially through a successful bond 
referendum earlier this year--to acquire the line and preserve service, 
should the Board grant MMA's application. The Board held a public field 
hearing on the application in Maine in July of this year. The Board has 
also made mediation available to the parties. I directed our top 
mediator and our Chief Economist to lead these efforts. This is a 
pending matter, so I cannot comment on the merits of the case. But I 
want to note how this case highlights my approach to regulation: open, 
transparent, and on a full and fair record.

Rate and Practice Regulation
    The Board's governing statute 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.'' In accordance with this 
policy that there be no rate regulation where effective competition 
exists, there are a number of statutory limits on the Board's 
jurisdiction concerning rates charged by rail carriers. Only common 
carrier rates (as opposed to rates contained in a contract) for non-
exempt commodities by market dominant carriers are subject to rate 
review. It is in those instances where it is most important that the 
agency be able to step in: rates for captive shippers that have no 
competitive alternatives. The statute mandates that such rail rates be 
``reasonable.''
    In recent years, the Board has adopted several new rules designed 
to reform, streamline, and improve access to the Board's rate 
procedures. Most significantly, the Board created three options for 
shippers seeking protection from unreasonable rates: a set of 
procedures for large cases and two simplified procedures for smaller 
cases.
    For large, multi-million dollar disputes, the Board has adopted an 
approach called the ``stand-alone cost'' (SAC) test. Under this test, 
the complainant seeks to show that it is paying for facilities or 
services that it does not use, or is paying for inefficient service. 
Major reforms to streamline the SAC test and produce more accurate 
results were completed in 2006.
    For smaller rate disputes, a rail customer can choose from two 
simplified approaches, depending on the amount of relief it seeks, the 
amount of money it wants to spend, and how quickly it wants a result. 
The ``simplified stand-alone cost'' methodology allows shippers to 
recover up to $5 million, spread out over a 5-year period, and the 
Board will issue its ruling no more than 17 months from the filing of 
the complaint. The Simplified-SAC methodology removes the 
``hypothetical'' from the SAC analysis. Many of the aspects of the 
analysis utilize the results of already litigated SAC cases or are 
limited to the actual costs of the defendant railroad. The Board has 
estimated that using the Simplified-SAC test over a full SAC test 
reduces the cost of litigating a rate case by 80 percent.
    Under the simplest approach, the ``Three Benchmark'' methodology, 
shippers can recover up to $1 million in relief, spread out over a 5-
year period, and the Board will issue its ruling no more than 8 months 
from the filing of the complaint. Under the Three Benchmark 
methodology, the Board looks at the carrier's overall revenue needs, 
how the railroad prices its other captive traffic, and how comparable 
traffic is priced.
    Captive shippers immediately began to take advantage of the 
improved simplified procedures for smaller rate disputes. In the decade 
under the old rules, few shippers sought relief under the simplified 
guidelines, but once the simplified procedures were reformed in 2007, 
six complaints were soon filed. Five of those cases settled in 
mediation, while the sixth case resulted in a finding that the rate was 
found to be unreasonable and $1 million in relief awarded to the 
shipper.
    Since all of the revised rules were put in place, there have been 
17 rate disputes before the agency, 4 of which are still pending. Of 
the other 13, the agency fostered settlement in 8 cases, found rates to 
be unreasonable in 4 cases, and found rates to be reasonable in 1 case. 
The breakdown of more recent cases, which is tracked and made available 
to the public on our website, is set forth in Table 2 below. In the 
``Test'' column of that table, the denotation ``R/VC'' are cases where 
the parties stipulated to have the rate established at 180 percent of 
variable cost in lieu of using the SAC test. The ``3-B'' test refers to 
the Three-Benchmark approach, and S-SAC indicates the Simplified-SAC 
approach.

           Table 2.--Rail Rate Cases at the STB (2008-Present)
------------------------------------------------------------------------
  Docket      Case Name      Commodity      Test     Date     Decision
------------------------------------------------------------------------
42095       KCPL v. UP     Coal           R/VC       2008  Rates
                                                            Unreasonable
42088       Western Fuels  Coal           SAC        2009  Rates
             v. BNSF                                        Unreasonable
42112       E.I. Dupont    Chemical       SAC        2009  Settlement
             v. CSX
41191-1     AEP Texas v.   Coal           SAC        2009  Rates
             BNSF                                           Reasonable
42111       Oklahoma Gas   Coal           R/VC       2009  Rates
             v. UP                                          Unreasonable
42099       DuPont v. CSX  Chemical       3-B        2009  Settlement
42100       DuPont v. CSX  Chemical       3-B        2009  Settlement
42101       DuPont v. CSX  Chemical       3-B        2009  Settlement
42114       U.S.           Chemical       3-B        2010  Rates
             Magnesium v.                                   Unreasonable
             UP
42110       Seminole       Coal           SAC        2010  Settlement
             Electric v.
             CSX
42115       U.S.           Chemical       S-SAC      2010  Settlement
             Magnesium v.
             UP
42116       U.S.           Chemical       S-SAC      2010  Settlement
             Magnesium v.
             UP
42122       NRG Power v.   Coal           SAC        2010  Settlement
             CSX
Pending at the STB:
42113       AEPCO v. BNSF  Coal           SAC         TBD
             & UP
42113-1     AEPCO v. UP    Coal           SAC         TBD
42121       Total v. CSX   Chemical       SAC         TBD
42123       M&G Polymers   Chemical       SAC         TBD
             v. CSX
------------------------------------------------------------------------

    In addition to rate cases, the agency has statutory grounds to hear 
complaints that railroad practices are unreasonable. We currently have 
several such cases pending involving matters such as coal dust, fuel 
surcharges, unit train requirements, shipper-owned car issues, routing, 
and demurrage. I believe that the large number of pending complaints 
indicates an understanding by our stakeholders that the agency is and 
is ``open for business'' to hear disputes.

Service Quality and Railroad-Shipper Relations
    The Board takes its duty to monitor railroad industry performance 
very seriously, especially during these difficult economic times. I am 
briefed on the performance of the railroad industry by our staff, which 
tracks the efficiency of carriers by looking at a variety of 
performance metrics. We also examine the railroads' performance goals, 
as well as information on critical capacity-related infrastructure 
needs.
    In addition, I have continued the agency's customary request that 
the Class I carriers, along with the American Short Line and Regional 
Railroad Association, provide the agency with information on how they 
will handle end-of-year peak shipping demands in agriculture, coal, 
chemicals and intermodal traffic. This request is particularly relevant 
this year. With Russia recently announcing a ban on exports of its 
wheat crop, the demand for U.S. wheat is expected to skyrocket, and so 
the railroads' role in the supply chain will be even more vital than 
usual. In addition, with the railroads having significantly reduced its 
number of employees and equipment in use in 2009 due to the poor 
economy, there is concern in some parts of the shipping community as to 
whether the railroads will be able to provide adequate service as 
traffic levels continue to increase. Therefore, I took a further step 
by requesting that the railroads provide more extensive data than in 
past years, including information on the status of their Positive Train 
Control initiatives, the on-time performance by Amtrak trains that 
operate over their lines, and their customer service surveys. The 
railroads' responses are due back no later than today.
    The Board also works with several Federal advisory committees 
formed to enhance communication across the railroad/customer industry, 
which serve the dual functions of bringing together members of 
different segments of the industry to engage in a collegial and 
informative discussion of salient issues, as well as providing valuable 
advice and recommendations to the Board on issues within their mission. 
Last month, the Board announced the creation of a new advisory 
committee, the Toxic by Inhalation Hazard Common Carrier Transportation 
Advisory Committee, regarding issues associated with the transportation 
of hazardous materials. The Rail Energy Transportation Advisory 
Committee, the RSTAC, and the National Grain Car Council all meet 
regularly and have been extremely valuable in coordinating preparation 
of white papers and reports to the Board across a wide range of topics, 
including rail capacity, economic trends, and rail/customer issues. As 
an example, I will work with railroads and shippers on keeping pace 
with service demands when I meet with the National Grain Car Council, 
at the group's annual meeting later this week.

Conclusion
    As I have testified, the past few years have presented many 
changes, both within the industry and at the STB. It is my intent to 
continue the agency on a path of innovation, regulatory responsiveness, 
and fulfilling our statutory mission. In this way, the STB can be a 
productive part of the Federal role in national rail policy.
    I appreciate the opportunity to testify before you today and would 
be happy to answer any questions you might have.

    The Chairman. Thank you, Mr. Elliott, very much.
    I will start. And there are only three of us here, so we 
can do this well.
    I asked my staff, Mr. Elliott, to review the financial 
results of these four big rail companies. When I came here, 
there were 50 class-A railroads, now there are 4. And then 
we've allowed them to establish a virtual monopoly on freight 
transportation in this country. And just done so relatively 
quietly. Most of the time, I think people in Washington, and 
because they're very good at flying below the radar, just 
accept the numbers of the Association of American Railroads. 
Not necessarily you, but people in general, ``If they say so, 
it must be true.'' And that really is the secret to their 
success, because you never hear about them, you don't know what 
AAR is, but it may be the most powerful, effective lobby in 
town. And if Mr. Hamberger is here, I'm sure he'll be happy to 
hear that. But, it's not helpful.
    We looked at these companies and what they file with the 
SEC. And here's what we found. Freight railroads are some of 
the most profitable companies in the world. I mean, to be more 
specific, Fortune 500 companies. There are only four types more 
profitable--the network and other communication equipment is 
one; Internet services, two; pharmaceuticals, three; medical 
products and equipment, four; railroads, number five--among all 
companies. And it doesn't matter if the quarter is bad, if 
there's a recession. In fact, they're doing extremely well 
right now, when other people aren't. They continue to make very 
large profits. Now, this is from the Fortune magazine 2008 
list.
    Mr. Elliott, can you please tell me why the Surface 
Transportation Board--they--you have in your--in the 1980 law, 
that there must be an adequate rate of return, adequate 
revenue. That's the word--``adequate''--which, to me, means 
sufficient to the requirement, I guess. I'm not really sure 
what it means, and I don't know what it does mean, and I think 
that has been one of the problems. But, why is it that the 
Surface Transportation Board doesn't think that BNSF, Union 
Pacific, CSX, and Norfolk Southern are financially sustainable 
companies? Because you don't.
    Mr. Elliott. In response, with respect to the railroads, I 
do believe that they are, as you described them, a very healthy 
and profitable industry, and that, looking at our revenue 
adequacy numbers, while some of the railroads have hit those 
numbers over the past 10 years, there is this concern that the 
railroads are able to use their market dominance in a way that 
causes shippers to pay excessive rates. And that is why, in my 
testimony today, I've stated that I want to take a look at the 
way the system is operating right now, especially with respect 
to competitive access.
    I believe that the arena has changed significantly since 
the Staggers Act was put in place, in 1980. At that time, in 
1980, the railroads were suffering, they were broke. And as you 
described, and as your report describes very well, things have 
changed significantly. And we had the hope to look at something 
as serious as competitive access as a way to look toward 
looking at some of these serious issues with regard to market 
dominance.
    The Chairman. And what's interesting to me--and my time is 
virtually out--is that everybody understands that passenger 
trains are less profitable than freight trains. I mean, you 
have to be good to passengers, and you have to feed them and 
take their tickets. And you don't have to do that with 
containers. But, the profit comes from the freight railroads, 
because those are the moneymakers, because you don't have those 
other concerns. And they focus on the freight railroads.
    But, still you have this term, and it--maybe you're about 
to get rid of it--called ``revenue adequacy.'' Now, I don't 
know what--you know, ``sufficient,'' ``adequate,'' ``revenue 
adequacy'' is, but they have interpreted that to their 
advantage. And because people don't follow these issues, either 
in Congress or generally in the public, they get away with it. 
Wall Street understands, and is very pleased by what they see. 
But, what happens to the shippers gets lost, because when 
people think of railroads, they think of railroads, they don't 
think, ``Oh, well, there are passenger railroads, and there are 
freight railroads, and one's doing very well, and the other is 
a different thing.'' We're focused on the freight railroads and 
what they charge people who have no choice; if there's only one 
railroad into their factory or granary, they have to pay what 
they're told.
    And I've been through this many times. In fact, they make 
deals with you sometimes. They'll say, ``Okay, okay, well, 
we'll forget that.'' I remember, specifically; it was CSX and 
Weirton Steel. They said, ``Oh, well, we'll forget that.'' And 
Weirton Steel saved $8 million. In other words, an effort--and 
I was in the Commerce Committee--and it was an effort to buy, I 
guess, my goodwill or something. But, life can't work like 
that. And it seems to me the STB can't allow that type of 
dealmaking to sort of push off--and I was knowledgeable, 
relatively; others might not be, in the Congress. So, don't you 
have to sort of take that freedom to exploit away from them and 
to get this revenue adequacy down to something which is a 
solid, workable number that you can live with? And are you 
going to?
    Mr. Elliott. I seriously considered looking at the revenue 
adequacy constraint. And in reviewing the possibilities of what 
we would like to look at first, I thought that we would get 
more bang for our buck if we looked at the competitive access, 
as opposed to the revenue adequacy. I think that the 
competitive access affects more shippers that are captive 
shippers, and that--as opposed to revenue adequacy, which I 
think is a barometer that we use, but it is only somewhat 
relevant in rate cases, so it would only really affect the 
shippers that bring the rate cases, which are even a narrower 
group than the captive shippers, themselves.
    So, we thought, going forward, our emphasis should be on 
somewhere where more people would be interested and affected, 
and we thought the competitive access was the way to go. 
Revenue adequacy was also something that I did seriously 
consider.
    The Chairman. My time is up, and therefore, it goes to the 
distinguished Vice Chairman.
    Senator Hutchison. I share many of those concerns. And from 
what you've said in answer to the questions, it does seem that 
you are trying to get the right parameters to be fair and even-
handed.
    The railroads have urged the Board to use replacement costs 
to determine revenue adequacy. What impact do you think 
replacement costs would have on the cost of capital a railroad 
would need to earn revenue adequacy?
    Mr. Elliott. Well, if we used replacement costs, it would 
drive their asset base up, using replacement costs. What we 
really use now is the depreciated cost, because we find it to 
be the only feasible way to measure the asset base. But, if 
they used replacement costs, or if we used replacement costs in 
the accounting of revenue adequacy, it would definitely drive 
up the asset base, allowing them to earn more return on that 
asset--more return on that asset base, and, as a result, they 
would be less likely to become revenue adequate.
    Senator Hutchison. Let me turn to a different area, because 
I think you are trying to do what we're interested in, and that 
is having relief for the captive shippers, with a fair basis 
rate when there is a captive shipper and no competition. So, 
just know that that is my priority, as well as the Chairman's.
    But, I'd like to just ask you a Texas question, and that 
is, When the stimulus money on high-speed rail was awarded--
actually, this would be for you, Mr. Porcari, the Secretary 
criticized the Texas Department of Transportation for not 
having its act together. And I would like to ask you what you 
think the Texas Department ought to be doing to put itself in a 
position to get some of the high-speed rail money. Because I am 
a strong supporter of having high-speed rail in Texas, and 
there are some areas that are very congested, that if you could 
just get pieces of a system bypassed or gone through, then it 
would allow Amtrak to provide, a better service, because it's 
very, very late in its delivery times now in Texas, and there 
are just segments where it could be very helpful to have the 
high-speed rail.
    So, what--does the legislature need to act more 
affirmatively? Does TexDOT need to do something more clear 
about its intentions to be ready for a high-speed rail 
connection? What should they be doing?
    Mr. Porcari. It's an excellent question, ma'am. And Texas 
is in the same position that many other States are, where, 
because there has not been much attention until very recently 
in the President's initiative, there hasn't been much attention 
on high-speed rail. There isn't much capacity within the State, 
and the State Department of Transportation, to actually build 
high-speed rail lines. So, the front of the pipeline, if you 
will--the planning, the design, the environmental approvals, 
through the National Environmental Policy Act, which, in many 
cases, take a number of years--have not been done. And that's 
not at all a knock on Texas or any other State; it's a 
reflection that, from a standing start, like with the 
interstate system, we're trying to build a national network.
    So, what the Secretary was trying to express is that, 
although Texas has an enormous ability to benefit from high-
speed rail--and there are some city pairs and some linkages 
with other States, in particular, that would be, I think, 
extraordinarily well served by high-speed rail, a lot of the 
preparation work in planning and design in partnership 
agreements with the Class I railroads and other railroads, 
short lines, where appropriate, are just not there yet.
    I know that, as a State and as a State DOT, Texas is racing 
ahead to get that capacity. It's very similar to what you're 
seeing in other parts of the country.
    Finally, I'd----
    Senator Hutchison. Are you saying that you think they are 
now focusing better and beginning the processes that would be 
necessary to lay the groundwork?
    Mr. Porcari. Yes, they are. They're very much on the right 
track. Karen Rae, who is with us today, our deputy FRA 
administrator, is very familiar with Texas. She has been 
working directly with them on that, and they're clearly getting 
there. The first winners that you see in high-speed rail--
California, for example--have been at this for 10 years.
    Senator Hutchison. OK, thank you very much.
    The Chairman. Senator LeMieux.

             STATEMENT OF HON. GEORGE S. LeMIEUX, 
                   U.S. SENATOR FROM FLORIDA

    Senator LeMieux. Mr. Chairman, thank you.
    Secretary Porcari, Chairman Elliott, thank you for being 
here today.
    Let me start by saying that I think that rail, both on the 
passenger and freight side, needs to have an ever more 
prominent role in transportation in this country. Just talking 
about high-speed rail, Florida is looking forward to high-speed 
rail between Orlando and Tampa. Like Texas, Florida is a big 
State; it's hard to get around. And in-State air travel is 
challenging. So, the idea that we can create mega-corridors 
between Orlando and Tampa, that's going to create jobs, it's 
going to create great economic synergies. So, I look forward to 
that, and I hope that we can expand upon that.
    Also, on the freight side, freight rail takes trucks off 
the road; it is clean; it is efficient; it's safe; and it plays 
a big part in Florida; it plays a big part, I think, in the 
future of this country. So, I'm glad that you all are focused 
on trying to create the prominence of both freight and 
passenger rail.
    I want to direct some questions, on a narrow topic, to you, 
Mr. Elliott. And you spoke, in your opening remarks, about the 
fact that you've been emphasizing mediation on these rate 
cases. And I want to visit with you about that, because I think 
it's important.
    We just had a successful mediation in Florida between the 
Seminole Electric Cooperative and CSX. My background, before 
coming to the Senate--one of the things that I did was as a 
lawyer. And I know that we saved a lot of costs and heartache 
when we mediate disputes. And I wanted to get you to elaborate 
on your emphasis on mediation and where you see mediation going 
forward on these rate cases.
    Mr. Elliott. Thank you for the question--our rules require, 
in these rate cases, that the parties mediate. So, they always 
are required to come to us. And that's not the case in every 
type of case that comes before the Board, but in rate cases 
it's a requirement.
    So, it has proven to be incredibly successful in the past. 
We've settled probably the biggest case that probably would 
have ever come to the Board, a couple of years ago also, I 
believe, was CSX. And then we were very pleased to see the 
settlement in the Seminole case. We were happy to do that. We 
had the parties come before us and have oral argument.
    And mediation, to me--I come from a labor background, and 
I'm also an attorney--and, to me, I hate to see the litigation 
costs, especially in these large rate cases, expended if they 
can be resolved through a simpler way. And mediation has proven 
to be incredibly successful. So, we're hoping--and, in fact, 
have asked for money, in this situation, to increase our 
mediation staff in order--in the hopes that, in the future, 
that we'll be able to have more qualified mediators. We have an 
excellent mediator, who was involved in the Seminole case and 
the prior DuPont case, and he's getting close to retirement 
age, so we're looking to make sure that we are ready, as we go 
forward, to have other excellent mediators in place.
    Senator LeMieux. Well, I thank you for that. I ask that you 
keep at it, and that you also create even further incentives 
for mediation. Sometimes people have to be pushed, and I think 
that it's for the benefit of all concerned. So, any incentives 
that you can create and make sure that your staff is on the job 
to push for those mediations, I would appreciate that.
    Mr. Elliott. We will do so.
    Senator LeMieux. Mr. Secretary, on the high-speed rail 
piece, Florida is receiving this first tranche of money. It's 
not enough money to complete the rail between Tampa and 
Orlando. I was told, by the Secretary, that there will be 
additional funds that will be made available in the future.
    Can you tell me, and give me some assurances, that the 
money will be there in the future to make sure that we can 
complete these rail lines? You know, the last thing we want is 
to build half of a high-speed rail corridor. We need to make 
sure the work is done.
    Mr. Porcari. It--yes, Senator. It's a good question. And, 
first, Tampa-Orlando is clearly the first leg of, at a minimum, 
Tampa-Orlando-Miami, which would--studies show, have very 
significant ridership. What we've tried to do throughout the 
country is have a competitive process. And that's--Florida was 
obviously one of the early and big winners. It will continue to 
be a competitive process.
    The best assurance that we get to completion together is to 
keep the momentum going on the planning, design, and 
construction side. We're working very closely with the Florida 
DOT staff, and others, on that. It is a singular project, in 
the sense that the right-of-way is there in the I-4 corridor, 
which is an enormous advantage. From day one, it will be 
segregated from freight traffic; it won't have any issues 
associated with that. That positions it very well for the 
future.
    There are no guarantees in this process. The ones that are 
working the hardest and making the tangible improvements are 
likely to be the successful ones in the future. And I do think 
you're well positioned for that.
    Senator LeMieux. Great.
    Well, thank you both for your service.
    And, Mr. Chairman, thank you for this hearing.
    The Chairman. Thank you, Senator.
    Mr. Porcari, it's my impression that the railroads--I think 
we discussed this in my office--generally stipulate that they 
pay for everything, they've done it all, they've borne the 
burden. And it's also my understanding and knowledge that that 
is not the case and that, in fact, the government, at various 
levels, have paid for enormous amounts of that.
    And I'll just give two examples: CSX has something they 
care about very much, and it's called the National Gateway 
Corridor. And it's huge. It's $842 million. It's an 
infrastructure project called the National Gateway Corridor. 
And they're building a new terminal in Ohio, and they're trying 
to improve tracks and tunnels all over the East Coast. My 
understanding is that about half the funding for this project 
comes from public sources--Federal, State, or local--it's a 
terrible thing if you mislead the public in that sense, because 
the public's going to believe you, and therefore, they just 
leave out the Federal Government and States, et cetera. Can you 
sort of elaborate, generally, in your view on this? Because I 
think I felt just a bit of frustration on your part.
    Mr. Porcari. Yes, there is some frustration on that front. 
It's--first of all, we view the freight railroad system in 
America as one of our economic jewels, and it's clearly part of 
the Nation's future prosperity and a foundation for future 
economic development. And I think there's a very real 
reflection of that in the TIGER grant process. As you recall in 
the Recovery Act, there was a $1.5-billion merit-based 
selection process, where, for the first time, freight rail 
projects would be eligible for the funding. Of that $1.5 
billion, the largest single winner of a category was freight 
rail. And I think that's a really--it's important to underscore 
that, because it shows that, one, we all understand how 
important freight rail movement is to the Nation; two, our 
inability to have funded it before; but, three, how much 
significant public funding--it's about $420 million, as I say, 
of the TIGER grant funding for the National Gateway Project, 
the Crescent Corridor, Colton Crossing, in California, the 
CREATE Project. There are very large projects around the 
country that reflect that. And it is our expectation, and it is 
our insistence, that we get--that the public benefits from 
that--and that means, across the board, that the--our public 
benefits from--and that, as well, we make sure that, as we 
rebuild a passenger rail system and build a high-speed 
passenger rail system, that the Nation has not had in the past, 
that we partner with the Class I railroads to do that.
    So, we have worked very hard to acknowledge the freight 
rail movement part of the system, taking a system approach, 
knowing that, 25 years from now, we're going to have 70 million 
more Americans, and most of those will be clustered in existing 
population areas. The interstate system, just as one part of 
the transportation system, simply can't accommodate that kind 
of growth. And it's a very inefficient use of interstate 
capacity to have it skewed toward goods movement.
    So, freight rail is very important, but passenger rail 
equally is, for that. And we want to move forward positively, 
and we're asking our industry partners to embrace the future 
with us. And we'll be happy to continue to report on what 
progress we make along those lines.
    The Chairman. Is it not also the case that--I have in here 
somewhere, that, at one point in our history--and I think that 
continues--that the government--the Federal Government 
basically turned over about 7 percent of the entire land mass 
of the United States to the railroads?
    Mr. Porcari. I believe that's the right number. It's the 
one that I've heard. And in the late 1870s, that was a way to 
build the future economic prosperity of the country. It was a 
grant--a very large grant, by the Government of the United 
States, to spur that development. We certainly see the national 
freight rail system as a national asset that benefits the 
country. We do expect some national benefits from it in return 
for that long-ago generational investment. And making sure that 
both freight and passenger needs are accommodated in the future 
is the bottom line, and that's what we need to do as part of 
this.
    The Chairman. So, in essence, when you do something like 
that, you expect fairness and some return on the public 
investment.
    Mr. Porcari. We do. In return for any public investment, 
there should be a defined public benefit.
    The Chairman. So, we're talking about it now, and we're 
talking about it a long time ago.
    Mr. Porcari. I think it's----
    The Chairman. But, the long-time-ago--imagine the increase 
in the worth of that 7 percent. I mean, I'll guarantee you 
that's several West Virginias.
    [Laughter.]
    Mr. Porcari. I'm sure it is. And it is--again, I think 
it's--it's imperative that we have defined public benefits in 
return for that public investment. Whether it was generations 
ago or today, it's a continued investment. And make no mistake, 
that transportation is economic development, and this is an 
important part of it. We had hoped to be here today with more 
progress on the passenger rail side, in particular.
    The Chairman. And you've had trouble in the relationship--
of railroads making agreements with States, have you not?
    Mr. Porcari. We have. The--most of the high-speed rail 
agreements are between individual States and the Class I 
railroads. I mentioned BNSF as a positive example, with the 
State of Washington. They have a long cooperative relationship. 
That agreement clearly sets the stage for the future, because 
in return for a public investment in high-speed passenger rail, 
and even interim passenger service, there will be defined 
benefits. There are many other examples on the other side of 
the ledger. And you could look at North Carolina and Norfolk 
Southern, New York and CSX. You could--Wisconsin--there are any 
number of other States where we don't yet have that progress. 
It is something that we are going to insist on. And again, I 
think there's a positive way to do this, going forward.
    The Chairman. I just want to tarry briefly on one subject 
and then get back to my main interests, which is captive 
shipper rates and what's going to happen with respect to that, 
because, in an odd way, they really get lost in all of this, 
except if you follow it; then they're a large part of it.
    But, one of the things that's troubling to me is the 
massive use of stock repurchases, as opposed to capital 
expenditures and this kind of thing. And so, you have 
dividends, you have stock repurchases. I think that is very, 
very effective, and eagerly awaited by executives of the 
company. But, I think one would have to look at kind of a 
balance. You'd have to say, ``Well, people have a right to 
reward their shareholders''--and indeed, they have to. But, I 
think we've already made the case today that Wall Street is 
much enamored--because they tell them one story as they tell 
you another--much enamored of their asset value, and it 
encourages people to invest, and Warren Buffett, and many 
others, has made that point very clearly.
    But, along with that is the whole question of captive 
shippers, and that's really why we're here. That's really why 
we're here. I would like to hear from you, Mr. Elliott, a sense 
of your path to fairness in the treatment of captive shippers.
    I mean, I deal with captive shippers; I don't deal with 
railroads. They don't come to see me very often, because it 
doesn't tend to be a very profitable discussion, or useful--
fruitful discussion. But, captive shippers come to see me all 
the time, and they don't just come from West Virginia, they 
come from all over the country; they're profoundly frustrated. 
I'm steeped in the history. I'm not a lawyer, but I feel like 
one when I think about all the cases that have been brought 
before the ICC or the STB, in terms of feeling shortchanged, 
that they had to pay much more than was fair.
    And so, they're always up against--I mean, those are people 
who can talk about revenue adequacy in the most intimate, 
desperate terms; and they either win or lose. Now, they can win 
or lose because you've got a system, which has a formula, which 
kind of works things out; and you've discussed that, at least 
in some of these papers that I'm reading. But, it's also a 
matter of timing. I mean, it's a classic technique, is to 
stall. And the longer you stall, the people just can't afford 
to have lawyers. And I can go back and think of many cases over 
the past 26 years where people have just given up. Doesn't mean 
they're not mad. It doesn't mean that they were offering a 
product for the freight railroads to carry. But, when they felt 
they were being overcharged--and, indeed, they were being 
overcharged; and, indeed, the freight railroads say they have 
to do that, you know, to make up for other expenditures--I 
don't think they include stock options and things of that in 
that.
    But, I need to know of what your personal roadmap is, in 
terms of trying to give captive shippers, one, a chance to--and 
I don't--I just don't mean the categories--5 million and above 
and, you know, 1 million and above--I mean, there's a lot that 
are less than that--but, the--but, how you plan to try and 
work--and it'll take time, it'll take help from us, if we can 
provide that, which we can--to make it work for captive 
shippers, which is why we're here.
    Mr. Elliott. In response, the first thing I've done since 
I've been at the Board, since I was last before you, was to 
reach out to the captive shippers. And in my first week in 
office, I called all the shipper groups and invited them to 
come to my office. And I saw that there was some distress--that 
I hear in your voice, also of the agency. And I wanted to 
invite them in and show them that they had a fair place to come 
and to bring their rate cases, and that they're going to get a 
fair shake when they're before us.
    I've noticed, since I've been at the Board, that more 
people have brought rate cases. It seems like the rate cases 
are coming in. As I said, that's not really my desire. I think 
you're looking at a bigger picture. And I, hopefully, laid out 
some of that in my testimony, as far as the bigger picture, 
where we look at the balance between the railroads' ability to 
earn adequate revenue to make these large investments, versus 
the captive shippers' rates to have reasonable rates. And in 
looking at that balance, the way I look at going forward is 
looking at the competitive access issue.
    I think--when I look through your bill, I see that as one 
of the biggest issues that needs to be looked at. And I will go 
forward, looking at that as something that needs to be 
explored. We have a case regarding reciprocal switching 
interchange agreements from 1985, I believe. Times have 
changed. Times have changed since 1985. The railroad industry 
is a different place. We're in a different landscape.
    Also, like I mentioned, I've talked to a lot of groups that 
are exempt from our rules. Back in the 1980s, exemptions were 
thought to be a good thing to some of these shipping groups. 
And right now, I don't think they think that, some of the 
groups I've talked to. And we are going to explore that to see 
if that is another area to at least explore and decide whether 
or not that our agency should be available to them to regulate 
them.
    And also, last, with respect to service, reasonable 
practices, I'm hoping to take a careful look at reducing that 
filing fee. That seems fairly extreme--$20,000 to file a case 
before us just to determine whether or not it's reasonable. 
Those things, in line with the other things that I mentioned 
about openness and transparency and alternative dispute 
resolution to make some of these things go away before we 
litigate them. But, that's the path that I see, going forward.
    The Chairman. They're not excited about resolution 
arbitration, are they? The railroads.
    Mr. Elliott. I have recently put out a request for comments 
on arbitration. I don't have the railroads' opinion set forth 
yet, because the comment period hasn't expired. So, I don't 
know exactly their feeling on arbitration. I would think 
arbitration would be in everyone's interest, because it does 
reduce litigation costs. So, I would hope--that's always been 
my feeling, that arbitration is a good thing; it takes cases 
that maybe aren't worth spending millions of dollars on 
litigating, and bringing them to us. We need to do a lot of 
work on that to make it a place that you can actually bring a 
case. We haven't done a very good job at that, and I think we 
need to do that, going forward. But, I am looking forward to 
hearing the railroads' opinions, as well as the shippers', to 
see if we can do something. We don't have the power to require 
people to arbitrate before us, but we're aware of other 
arbitration processes that have worked and got the railroads 
involved. So, we're hoping to follow that path.
    The Chairman. I have a great deal of faith in you, Mr. 
Elliott, and I'm really glad you're there. Isn't it a question, 
also, that you're going to have to prove the STB's 
effectiveness? I mean, I'd like to see you with five people 
rather than three people. I mean, there are all kinds of things 
that can be done. But, you have to win the confidence of 
captive shippers, because if you don't, they're just not going 
to bring cases, because, based upon history, there's no reason 
why they should bring cases, because they know they're going to 
lose it by the classic maneuver of delay; to wit your question 
of the railroads, which they haven't answered yet. Well, that 
has been the whole history of the last 2 years, where we've 
really intensively--and, I mean, I--you know, I've had to go 
back in--to the captive shippers, who get furious at me, 
because they say, ``Well, you're giving away too much to the 
railroads.'' And I tell them, ``Well, I mean, the railroads 
have to--they have to sign up to this deal''--and I'm trying 
to, you know, get the railroads over here and the captive 
shippers over here, and the railroads have gotten everything, 
the captive shippers have gotten virtually nothing. And you've 
got to kind of move to a central point. And that's a very hard 
thing to do. But, I mean, these folks sitting behind me spend 
all their days, weeks, years, you know, in these meetings, and 
the railroad people come, and they say, ``Well, they''--first, 
they talk in terms of individual railroad's needs. Well, that's 
not of interest. What's interest is what ``the railroads'' 
want. What are their top five priorities? What are their top 10 
priorities? What are their top 20 priorities?--so we can look 
at them. And we hold them out, we hold out that prospect, and 
they just simply don't reply; they stall--which they also do, 
in terms of expediting cases. And they have the right to do, 
because they have all kinds of lawyers.
    So, I mean, the shippers have to have confidence in you. 
You're going to have to prove yourself to them, or else a lot 
of folks--not the big shippers; they'll continue to bring 
cases--but, the small ones, and often the most, sort of, 
poignant ones, won't, because they've, long ago, realized it's 
just not worth it financially; they can't afford it, so they 
don't. Why would they just lose the money over a losing 
prospect in any event?
    You think you're going to be able to do that?
    Mr. Elliott. I've heard that--those thoughts. When I did 
reach out, and we had the meetings with some of the shipper 
groups. Like I mentioned, I heard a lot of distress--and our 
staff asked, ``Why don't you just bring a case?'' or asked, 
``Why don't you just bring a case?''--the response was exactly 
what you said. And so, it is an uphill battle, but I think 
we've gotten off to a good start in gaining the trust of some 
of these groups, and we will just keep--continue to make our 
process as open and transparent as possible, also by reaching 
out and speaking to these groups. You know, I find that having 
a relationship, an actual personal relationship with people, is 
very helpful, and it has been helpful to me, so far. I mean, 
you--if you have a face to put with the issue, you get to--it--
I think you get a lot more trust that way.
    The Chairman. Well, I'm looking at you, and I'm seeing the 
faces of some of your predecessors in my mind.
    [Laughter.]
    The Chairman. And, you know, they can come in--and there 
are folks from rural West Virginia or rural North Dakota, or 
whatever, and they don't particularly like going to Washington, 
and they wish they didn't have to, but--anyway, they come in, 
and they actually get a lot of their first impressions from 
your body language, from your face, from your expression. Is it 
open? Is it not? And I can name to you just a number of which 
who were very, very closed people, because they were really 
working for the railroads. And that's a nasty thing to have to 
say, but, nevertheless.
    Mr. Secretary, you indicated, when we talked, also, that 
some States have been able to reach agreements, but others have 
not. And the railroads have, I think, four enumerated reasons, 
which are particularly troublesome to them, and one of them is 
climate change. They say if this climate change takes place, 
well, they just can't make a deal. And there are other things, 
too. But, what I would really be grateful for is if you would 
be willing to give me fairly regular reports on how those 
meetings with States go. Because that will tell me a lot about 
what progress is being made. If this hearing, in fact--does it 
amount to something? Does the fact that we're going to have a 
series of hearings--and I think I mentioned--I think you were 
in here when I mentioned that we're going to--a series of 
hearings. We're going to do this.
    You know, I've finally gotten to be Chairman, after 127 
years, and, by golly, I'm going to solve this problem if it's 
the last thing I do on Earth.
    So, having your impressions would be very helpful.
    And, frankly, Mr. Elliott, if you can do that--I mean, if 
it's ethical for you to do it--and I'm not a lawyer, so I don't 
know these things--I'd like to hear from you, even if we just 
meet fairly frequently and it's on an informal basis. Do you 
see a change in the way of their behavior? Do they seem to be 
so oblivious to the possibility of legislation, because they 
may do better in upcoming elections than they thought? And I 
really see that as a specific strategy on their part, just, 
``Let's wait it out, and then we'll have different people 
around, and maybe Jay isn't going to be Chairman.'' But, it's 
not going to work out that way in the Senate. But, you know, 
you can read them, you could read, Is there a change of 
behavior?
    I go back to that original meeting that they asked for, and 
they said--and I went happily to it, and I said, ``I believe in 
railroads.'' I can remember going, as a little boy, to Tucson 
on the railroads. I can still remember the music of the 
clickety-click before a seamless, and all the rest of it. And I 
love railroads. I mean, I--they're wonderful, and they are 
efficient, and they are cleaner, but they also have to be fair 
to everybody. I mean, they just absolutely do. All the rest of 
it is just window-dressing unless they are fair to captive 
shippers. And so, that's a large responsibility on you, and 
we're willing to do everything we can to help you.
    Can either of you think of some other points that you'd 
like to make?
    Mr. Porcari. If I may, Mr. Chair. First, we would be very 
happy to periodically update you on progress, and keep you and 
staff and the Committee informed.
    I do want to go back, just very briefly, to the future and 
what America is going to look like in 25 years from now, 70 
million more people. Twenty-five years is ``the day after 
tomorrow,'' in transportation planning terms. We see that the 
future for railroads, both freight and passenger, is very, very 
bright. Even if, for some reason, we didn't think it was an 
important part of the transportation system, we'd have no 
choice but to really make it part--an important part of a 
balanced transportation system.
    We need to lay the groundwork right now to do that. And the 
sense of urgency that you see from the Administration is 
recognizing the future, and recognizing that the progress we've 
made as a Nation is really because of the sacrifice and the 
generational investments in infrastructure made by our parents 
and our grandparents and our great-grandparents. And if we're 
honest with ourselves, we're not doing the same. So, that's 
where the sense of urgency's coming from.
    The Chairman. Let's say there's a project in West Virginia, 
where they want to have double----
    Mr. Porcari. Double-stack clearance?
    The Chairman.--double-decker, yes----
    Mr. Porcari. Yes.
    The Chairman.--and to go through tunnels that take single-
deckers so that those tunnels have to be made higher; and it's 
happening, and they're paying for part of it, but you're paying 
for half of it, too. I wish there were a way to have more 
public discussion about this problem, that we didn't have to 
confine it just to the members of the Commerce Committee, and 
actually just a few members of the Commerce Committee who, over 
the years, have kind of followed this. Attendance here is not 
what I would have hoped.
    On the other hand, everybody knows the way I feel, but, 
more importantly, Kay Bailey Hutchison feels the same way. I 
mean, this was a bipartisan bill that we passed. John Thune 
feels exactly the same way, as Byron Dorgan does and I do. And 
I like that a lot. We tend to be a very bipartisan committee. 
We pass a lot of things out unanimously, that would seem to 
others to be controversial, that we get unanimous consent 
agreement on the Senate floor because people know that we tend 
to operate in a bipartisan fashion.
    And so, in essence, I'm trying to make that comparison to 
captive shippers and railroads, and each of them giving up, or 
getting, you know, what they need to in order to arrive at 
parity. And that's not subject to a formula; that's subject to 
the will primarily of railroads, because, for the most part, 
I've had to restrain captive shippers from wanting more than 
they can properly get, and expect the railroads to go along. 
But, then when I get that, and then they growl at me a bit but 
they know that I'm for them, the railroads take advantage of 
that. And so, actually what we did--I just called off all 
meetings, in July or something like that, and it was just a 
pause, and it was meant to be a pregnant pause so that people 
would notice that we had called off meetings. And it was a 
signal to the railroads to say, ``Look, we really mean this, 
and you've got to bring your priorities to the table, and we 
will deal with them.'' And we're good at doing that. I mean, 
I've accepted a lot of things from railroads that the captive 
shippers didn't want to happen, but I will gladly do that, in 
the interest of getting an agreement, so that they will 
cooperate, and your job will become easier, and Mr. Porcari can 
worry about 75 years from now. Well, looking at you, I think, 
25, 30 is probably better. But, in any event----
    [Laughter.]
    The Chairman.--you understand what I'm saying. It's a 
desperately important process. Every single shipper who uses a 
railroad is affected by whether this is a fair system, or not. 
And that lies on your hands, and ours.
    So, I'm just going to keep at it, and you're going to keep 
at it. I'm glad you're here, and I'm glad you're there. And, 
you know, fairness is fairness, and that's what makes America 
work.
    Mr. Pocari.  You bet.
    The Chairman. So, with that absolutely unique statement, 
I'm going to adjourn the hearing.
    Mr. Pocari. Thank you, Mr. Chairman.
    The Chairman. I thank you both very much.
    [Whereupon, at 4:35 p.m., the hearing was adjourned.]
                            A P P E N D I X

         Committee on Commerce, Science, and Transportation
     Office of Oversight and Investigations--Majority Staff

    The Current Financial State of The Class I Freight Rail Industry

       Staff Report for Chairman Rockefeller--September 15, 2010

Executive Summary
    Thirty years ago, Congress made sweeping changes to the laws 
regulating freight railroads to give the industry the opportunity to 
improve its finances and its ability to compete against other 
transportation modes. The Staggers Rail Act of 1980 allowed freight 
railroads to get rid of unprofitable lines and to consolidate their 
operations. The law also allowed the railroads to charge lower rates to 
their customers who operated in a competitive environment, and higher 
rates to customers who were ``captive'' to one railroad carrier for 
transportation service.
    A review of the Class I railroads' recent financial results shows 
that the Staggers Act's goal of restoring financial stability to the 
U.S. rail system has been achieved. The restructuring of the industry 
that the Staggers Act set into motion thirty years ago has produced a 
so-called ``rail renaissance.'' The four Class I railroads that today 
dominate the U.S. rail shipping market are achieving returns on revenue 
and operating ratios that rank them among the most profitable 
businesses in the U.S. economy.
    After struggling with declining market share and rates in the years 
after the Staggers Act became law, the railroads have now regained 
their pricing power and begun increasing railroads' share of the 
freight transportation market. Unlike other transportation modes such 
as trucking, the railroads have been able to maintain their high profit 
margins even during the sustained economic downturn of 2008-10. Freight 
railroads have been assuring their investors the companies will take 
advantage of this ``robust pricing environment'' and continue to push 
rate increases on their customers.
    While the freight railroads have been investing record amounts of 
their profits into much-needed capital projects, they have also doubled 
dividend payments to their shareholders and spent billions more dollars 
repurchasing their publicly-traded shares to boost the short-term value 
of their stocks. These large expenditures undermine the railroads' 
argument that they still lack the income to invest in their long-term 
capital needs. In addition to their own capital investments, the 
railroads have recently received hundreds of millions of dollars from 
state governments and the Federal Government to support their network 
improvement activities.
    The companies' strong financial performance has attracted billions 
of new investment dollars, including the unprecedented $34 billion 
purchase of the BNSF railroad by Berkshire Hathaway, the operating 
company of the investor Warren Buffett. Buffett predicts that BNSF and 
the other large Class I railroads will show ``steady and certain 
growth'' over the coming decades.
    In spite of the obvious financial strength of the Class I 
railroads, their industry association, the Association of American 
Railroads (AA R), continues to tell Congress and the Surface 
Transportation Board (STB) that the freight rail industry is not yet 
financially stable and is not yet capable of meeting its capital needs 
without the differential pricing powers the Staggers Act gave the 
railroads in 1980. As the rail industry continues to operate profitably 
and to aggressively exercise its pricing power, these claims need to be 
more carefully scrutinized.
I. Past Financial Problems in the Rail Industry
    Faced with a national railroad system in financial decline and 
physical disrepair, Congress passed the Staggers Rail Act (Staggers 
Act) in 1980.\1\ Citing the railroads' declining share of intercity 
freight transportation and the industry's poor financial performance, 
the authors of the Staggers Act said the purpose of the law was to 
provide ``the opportunity for railroads to obtain adequate earnings to 
restore, maintain, and improve their physical facilities while 
achieving the financial stability of the national rail system.'' \2\
---------------------------------------------------------------------------
    \1\ Staggers Rail Act of 1980, Pub. L. No. 96-448.
    \2\ U.S. House of Representatives, Staggers Rail Act of 1980 
Conference Report, 96th Cong. (H.R. Rep. No. 96-1430) at 80.
---------------------------------------------------------------------------
    The law directed the Interstate Commerce Commission (and its 
successor, the Surface Transportation Board) to shift its regulatory 
focus from rate-making to the financial health of the railroad 
industry. Under this new approach, ``the Commission is required to make 
efforts to ensure that rail carriers earn adequate revenues.'' \3\ The 
Act legalized private transportation contracts, encouraged railroad 
mergers, and accelerated abandonment of unprofitable rail lines.
---------------------------------------------------------------------------
    \3\ Id. at 89.
---------------------------------------------------------------------------
    In order to increase the railroads' ability to earn ``adequate 
revenues,'' the Staggers Act allowed railroads to charge higher rates 
to shippers over which they had ``market dominance.'' \4\ Because 
railroads could not build their fixed business costs into the rates 
they charged shippers who had access to competing transportation 
modes--such as trucks, barges, or other railroads--Congress allowed 
them to charge higher markups on so-called ``captive'' shippers without 
viable transportation alternatives. In order to increase the rail 
industry's revenues, the Act required regulators to accept as 
``reasonable'' even rates with very high captive-shipper markups.\5\ 
According to the authors of the Staggers Act, regulators would have 
greater authority to review this so-called ``differential pricing'' 
when the railroads were once again financially stable businesses.\6\
---------------------------------------------------------------------------
    \4\ Id. zt 90-91; 49 U.S.C.  10707.
    \5\ A captive shipper is not entitled to STB review of the 
reasonableness of a rate unless it can demonstrate that the rate 
produces revenues above 180 percent of the railroad's ``variable 
costs'' in providing the service, and that is has no other 
transportation alternatives. 49 U.S.C.  10707. In the railroad 
industry, ``variable costs'' are the expenses a railroad carrier incurs 
in the course of a particular shipment of goods, while ``fixed costs'' 
(also known as ``joint and common costs'') are the expenses railroads 
incur to maintain their networks, but are not attributable to specific 
customers or shipments.
    \6\ Staggers Rail Act of 1980 Conference Report, supra note 2, at 
91. (``The Conferees have adopted the concept of a jurisdictional level 
that varies according to the performance of the railroad industry. When 
the industry is earning revenues which are adequate, it is appropriate 
for the Commission to have the authority to review rate increases more 
carefully.'').
---------------------------------------------------------------------------
    The pricing and regulatory reforms in the Staggers Act led to wide-
ranging changes in the railroad industry. In 1980, there were 39 Class 
I railroads, employing 458,000 workers, and owning 270,623 miles of 
track.\7\ Thanks to a wave of mergers and consolidation in the 1980s 
and 1990s, today there are only seven Class I railroads. In 2008, these 
companies employed 164,000 workers and owned 160,734 miles of track.\8\ 
In spite of the fact that the Class I railroads own significantly less 
track and employ fewer workers than they did in 1980, their network 
handled almost twice as much cargo in 2008 (1.7 trillion revenue ton-
miles) than it did in 1980 (918 billion revenue ton-miles).\9\
---------------------------------------------------------------------------
    \7\ Association of American Railroads, Railroad Facts, 2009 Edition 
(2009).
    \8\ Id.
    \9\ Id. Railroads measure the total amount of freight they ship 
using the measure ``revenue ton miles,'' which is the weight of paid 
tonnage multiplied by the total number of miles the freight has been 
transported.
---------------------------------------------------------------------------
    Also unlike 1980, today four Class I railroads dominate the long-
haul freight market and function as ``regional duopolies'' in the 
eastern and western United States.\10\ Burlington Northern Santa Fe 
(BNSF) and Union Pacific dominate freight rail transportation west of 
the Mississippi, and CSX and Norfolk Southern dominate the business 
east of the Mississippi. In 2008, these four railroads accounted for 
over 90 percent of Class I freight shipments and over 92 percent of 
Class I railroads' $61 billion in revenues.\11\
---------------------------------------------------------------------------
    \10\ Wolfe Research, A Training Manual. Will Rail Renaissance 
Survive Recession and Re-Regulation? (May 2009), at 10. (hereinafter 
``Wolfe, Training Manual'').
    \11\ Association of American Railroads, Railroad Ten-Year Trends, 
1999-2008 (Feb. 2010).
---------------------------------------------------------------------------
II. Current Financial Picture
    In their official communications with the Surface Transportation 
Board (STB), freight railroad carriers consistently tell their 
regulators that while their industry's financial condition has 
significantly improved since 1980, they have not yet reached the 
``financial stability'' goal established in the Staggers Act. In 2007, 
for example, the Association of American Railroads (AAR), the rail 
industry's trade group, told the STB that since the passage of the 
Staggers Act, Class I railroads have ``only slowly made progress toward 
the goal of long-term financial sustainability.'' \12\ While ``freight 
railroads are finally showing tangible signs that financial 
sustainability might be within reach,'' the AA R concluded, the 
companies have not yet reached that point.\13\
---------------------------------------------------------------------------
    \12\ Comments of the Association of American Railroads, STB Ex 
Parte No. 671, Rail Capacity and Infrastructure Requirements (April 4, 
2007). The STB filings that are cited in this report can be obtained by 
searching the STB's online database by docket number at http://
www.stb.dot.gov/home.nsf/EnhancedSearch?OpenForm&Type=F.
    \13\ Id.
---------------------------------------------------------------------------
    A year later, in April 2008, AAR told the STB in written testimony 
that the railroads' profitability was ``still far from stellar in 
comparison to the many other industries against which railroads compete 
for capital'' and that ``rail industry profitability has consistently 
lagged most other industries--and that is still the case today.'' \14\
---------------------------------------------------------------------------
    \14\ Written Testimony of the Association of American Railroads, 
STB Ex Parte No. 677, Common Carrier Obligation of Railroads (April 17, 
2008).
---------------------------------------------------------------------------
    While the rail industry's regulatory filings with the STB portray 
an industry that is still struggling to attract capital and to compete 
with the other transportation modes, the railroads' public financial 
results tell a different story. According to the four largest rail 
companies' Securities and Exchange Commission (SEC) filings, in recent 
years, these companies have far exceeded the Staggers Act's goal of 
bringing the railroads back from the brink of ruin to financial 
sustainability. In fact, today, the large U.S. rail companies are some 
of the most profitable publicly-traded companies in the world.
    Policymakers, outside analysts, and the railroads themselves agree 
that today's industry bears little resemblance to the financially 
failing, inefficient rail industry of 1980. In 2007, the U.S. 
Department of Transportation told the STB that the Staggers Act has 
been ``profoundly successful,'' noting that the railroads are 
financially healthy, the industry's infrastructure has been modernized, 
productivity is high, and shippers have benefited from lower average 
rates.\15\ According to BNSF's CEO, Matthew Rose, after Staggers passed 
in 1980, the railroads spent two decades going on a ``productivity 
binge, wringing out excess costs, getting rid of inefficient lines, 
finding wage rates that we all could live within, both for employees 
and our companies.'' He told USA Today, ``we think we are a very 
productive institution at this time.'' \16\
---------------------------------------------------------------------------
    \15\ Written testimony of Jeffrey N. Shane, Under Secretary for 
Policy, Department of Transportation, STB Ex Parte No. 671, Rail 
Capacity and Infrastructure Requirements (April 4, 2007).
    \16\ Warren Buffett sees strong rail system as key to U.S. growth, 
USA Today (Mar. 25, 2010).
---------------------------------------------------------------------------
    As a result of these changes, as well as increases in highway 
congestion and fuel costs, the railroad industry is no longer at a 
competitive disadvantage to other transportation modes, as it was when 
the Staggers Act was passed in 1980. According to a financial analyst 
at BB&T Capital Markets, 4 years ago, trucks handled 80 percent of the 
freight hauls between 700 and 1,000 miles, while today trucks and 
railroads split this market.\17\ A well-respected transportation 
analyst, Wolfe Research, predicts that railroads will ``likely continue 
to take market share from the less fuel-efficient and increasingly less 
productive truck industry.'' \18\
---------------------------------------------------------------------------
    \17\ Burned Before, Railroads Take Risks, Wall Street Journal (June 
28, 2010).
    \18\ Wolfe, Training Manual at 6.
---------------------------------------------------------------------------
    A review of the largest four railroads' Securities and Exchange 
Commission (SEC) filings shows just how profitable the large rail 
companies have become over the last decade. Figure I demonstrates that 
the four largest U.S. rail carriers have nearly doubled their 
collective profit margin in the last 10 years to 13 percent.\19\ In 
fact, in 2008, the railroad companies' 12.6 percent profit margin 
placed the industry fifth out of 53 industries on Fortune's list of 
``most profitable industries,'' trailing only the communications, 
Internet, pharmaceutical, and medical device industries.\20\ Between 
2001 and 2008, the railroad industry was ranked in the top ten on 
Fortune's profitability list seven out of eight times. While the 
railroads were telling their regulators that their profitability 
trailed most other U.S. companies, they were actually among the U.S. 
economy's top performers.
---------------------------------------------------------------------------
    \19\ The accounting measure used to measure profitability in this 
report is ``profit margin'' or ``return on revenue,'' which is the 
percentage of a company's revenues that is net income. AAR and other 
industry representatives sometimes selectively use another financial 
ratio, the ``return on shareholders' equity,'' to argue that the 
railroad industry's profits are modest compared to other sectors. 
Return on equity measures not all net income, but only the income a 
company retains from year to year for future growth. Return on equity 
can be negatively affected by paying dividends or buying back stock. 
The Class I railroads' recent stock buyback activities are discussed in 
Section V of this report.
    \20\ Fortune, 2008's Top Industries: Most Profitable, Return on 
Revenues (online at http://money.cnn.com/magazines/fortune/fortune500/
2009/performers/industries/profits/) (accessed Aug. 27, 2010).


III. Investor Interest in the Freight Railroad Industry
    The companies' SEC filings over the past decade do not show that 
the railroad industry is ``lagging behind'' other industries, as AAR 
told its regulators in 2008. In fact, the railroads' growth in earnings 
and profitability has outpaced almost all of the other large industries 
it competes with for capital in the equity markets. Over the last 
decade, the large railroad companies have reported higher revenues and 
stable or only slowly-growing expenses, even during the recent economic 
recession. This relationship between operating expenses and revenues is 
known as the ``operating ratio,'' and is an important indicator of 
financial performance in many transportation sectors, including the 
rail and trucking industries.\21\
---------------------------------------------------------------------------
    \21\ See e.g., Testimony of Michael J. Ward, Chairman and CEO, CSX 
Corporation, U.S. House Committee on Transportation and Infrastructure, 
Subcommittee on Railroads, Pipelines, and Hazardous Materials, Hearing 
on Investment in the Rail Industry, 110th Congress (March 5, 2008) (H. 
Rept. 110-104). (``Operating ratio, which is inverse margin or the 
ratio of operating expenses to operating revenues expressed as a 
percentage, is a widely used performance measurement in the railroad 
industry.'')
---------------------------------------------------------------------------
    As Figure II demonstrates, railroads have been steadily lowering 
their operating ratios over the past decade, reaching a ten-year low in 
2009. This 2009 result is especially impressive, since it was achieved 
in the midst of a severe economic downturn.


    As the railroad industry's profit margins have risen and their 
operating ratios have dropped, investors have taken notice. As Figure 
III shows, the stock value of the four largest rail carriers over the 
past 10 years has far exceeded the average stock value of the large U 
.S. companies that are part of the S& P 500. An index of large railroad 
company stocks monitored by Wolfe Research appreciated 119 percent 
between 2003 and 2009; the S& P index was down 0.3 percent during the 
same period.\22\ Recent quantitative stock reports published by 
Standard & Poor's give quality rankings of ``A,'' ``A-,`` and ``B+'' to 
Union Pacific, Norfolk Southern, and CSX, respectively. Union Pacific 
and Norfolk Southern scored above the 90th percentile on S&P's 
``Investability Quotient,'' a measure of an investment's desirability, 
while CSX received a score of 89 percent.\23\
---------------------------------------------------------------------------
    \22\ Wolfe, Training Manual at 6.
    \23\ Standard & Poor's, Union Pacific, Quantitative Stock Report 
(Sep. 4, 2010); Standard & Poor's, Norfolk Southern, Quantitative Stock 
Report (Sep. 4, 2010); Standard & Poor's, CSX, Quantitative Stock 
Report (Sep. 4, 2010). Since its purchase by Berkshire Hathaway (see 
below), BNSF shares are no longer listed on the New York Stock 
Exchange.


    In November 2009, the investor Warren Buffett expressed his great 
confidence in the financial sustainability of the railroad industry by 
announcing that his company, Berkshire Hathaway, would purchase the 
77.4 percent of the BNSF railroad his company did not already own. The 
deal was valued at approximately $34 billion, making it the largest 
ever acquisition in Berkshire Hathaway history.\24\
---------------------------------------------------------------------------
    \24\ Burlington Northern Santa Fe Corporation and Berkshire 
Hathaway, Inc. Joint Press Release, Berkshire Hathaway Inc. to Acquire 
Burlington Northern Santa Fe Corporation (BNSF) for $100 Per Share in 
Cash and Stock (Nov. 3, 2009).
---------------------------------------------------------------------------
    In discussing his acquisition of BNSF, Buffett said he believed his 
investment in BNSF would deliver ``steady and certain growth'' over the 
coming decades.\25\ He also predicted that the U.S. rail industry has a 
``dynamic and profitable future'' and that all four big freight 
railroads will ``do very well'' in the coming decades because they are 
the only mode of freight transportation that will be able to keep up 
with the American economy's increasing demand for consumer goods and 
raw materials.\26\ Analysts suggest that as much as $18 billion poured 
into the rail industry in the wake of Mr. Buffett's BNSF 
announcement.\27\
---------------------------------------------------------------------------
    \25\ Buffett: Railroad business is `in tune with the future,' USA 
Today (Nov. 4, 2009).
    \26\ Warren Buffett sees strong rail system as key to U.S. growth, 
USA Today (Mar. 25, 2010).
    \27\ Id.
---------------------------------------------------------------------------
    In his annual letter to Berkshire shareholders, Mr. Buffett noted 
the similarities between the capital-intensive railroad industry and 
the regulated electric utilities his company already owned. Like 
electric utilities, railroads ``provide fundamental services that are, 
and will remain, essential to the economic well-being of our customers, 
the communities we serve, and indeed the Nation.'' He predicted that 
Berkshire's investment in BNSF would ``deliver significantly increased 
earnings over time, albeit at the cost of our investing many tens--yes, 
tens--of billions of dollars of incremental equity capital.'' \28\
---------------------------------------------------------------------------
    \28\ Berkshire Hathaway Letter to Shareholders (Feb. 26, 2010) 
(online at http://www.berkshirehathaway.com/letters/2009ltr.pdf).
---------------------------------------------------------------------------
IV. Railroad Industry Pricing Power
    The railroad industry correctly points out that after the Staggers 
Act gave the railroads the ability to negotiate prices with shippers, 
railroad rates dropped significantly. According to the AA R, after 
adjusting for inflation, rail rates are still lower than they were in 
1980.\29\ The railroads' presumed inability to raise rates on freight 
shippers with competitive alternatives has long been the industry's 
justification for its differential pricing practices. Because they 
cannot adequately recover their costs from shippers with transportation 
alternatives, railroads are allowed to charge higher rates to 
``captive'' shippers without alternatives.\30\
---------------------------------------------------------------------------
    \29\ Association of American Railroads, A Short History of U.S. 
Freight Railroads (May 2010) (online at http://www.aar.org/incongress/
/media/aar/backgroundpapers/ashorthistoryofusfre
ightrailroads.ashx).
    \30\ Government Accountability Office, Freight Railroads: Industry 
Health Has Improved, but Concerns about Competition and Capacity Should 
Be Addressed (Oct. 2006) (GAO 07-94). See also the discussion in 
Section I above.
---------------------------------------------------------------------------
    One of the recent structural changes that the railroad industry 
does not highlight is that since 2004, railroads have regained their 
ability to raise prices on their non-captive customers. One leading 
industry analyst, Wolfe Research, refers to this change as the 
industry's ``pricing renaissance.'' \31\ As Figure IV demonstrates, for 
a number of years after the Staggers Act was enacted, rail prices 
measured against inflation fell by an average of 3.6 percent a year. 
Since 2004, however, Class I railroads have been raising prices by an 
average of 5 percent a year above inflation.\32\ And even during the 
recent recession, while other modes of freight transportation have cut 
their rates, the Class I railroads have been able to push year-over-
year price increases onto their customers.\33\
---------------------------------------------------------------------------
    \31\ Wolfe, Training Manual at 33.
    \32\ Id. at 35.
    \33\ Id. at 43.
---------------------------------------------------------------------------
    This new ``pricing power'' has led to significant top-line revenue 
growth for Class I railroads and has resulted in the swelling profit 
margins described in the sections above. And according to Wolfe 
Research, because railroad rates are still below their inflation-
adjusted 1980 levels, the freight rail carriers believe they will have 
a ``solid multiyear glide path to continued strong rail pricing hikes 
regardless of the economic environment.'' \34\ A recent Morgan Stanley 
analysis of the rail industry notes that in the current environment of 
strong railroad pricing power, ``[r]ate negotiations continue to be 
difficult for shippers and competition remains minimal.'' \35\
---------------------------------------------------------------------------
    \34\ Id. at 35.
    \35\ Morgan Stanley Research, North American Transportation, 
Freight Transportation: Rails 2Q10 Review (Aug. 6, 2010).


    In recent conversations with their investors, the rail companies 
have discussed this increase in pricing power and their expectation 
that it will continue in the future. In a recent investor call, Union 
Pacific's CEO, James Young, commented, ``[t] he pricing environment is 
stronger today than it has been in a long time . . . I feel very good 
about the potential in the pricing side going forward.'' \36\ A CSX 
senior executive, Clarence Gooden, made a similar prediction in his 
company's second-quarter 2010 investment call, when he said, 
``[l]ooking forward, we continue to expect core price increases to 
exceed rail inflation.'' \37\
---------------------------------------------------------------------------
    \36\ Union Pacific Corporation 2nd Quarter 2010 Earnings Conference 
Call (July 22, 2010).
    \37\ CSX Corporation 2nd Quarter 2010 Earnings Conference Call 
(July 13, 2010).
---------------------------------------------------------------------------
    A number of factors seem to lie behind the railroads' new ``robust 
pricing environment.'' \38\ Post-Staggers Act industry consolidation 
and capacity reduction slowly eliminated the excess supply of rails and 
rail service, while the railroads invested in making their remaining 
operations more productive. One industry analyst estimates that the 
railroads moved from a position of ``material excess capacity'' to 
``tight capacity'' in the late 1990s or early 2000s and that the 
pendulum has continued to swing further in the industry's favor as 
demand for rail services continues to grow, particularly in the 
intermodal , coal, and grain markets.\39\
---------------------------------------------------------------------------
    \38\ Wolfe, Training Manual at 9.
    \39\ Id. at 34-35.
---------------------------------------------------------------------------
    Another factor that has contributed to the industry's renewed 
pricing power over the past few years is its shift to short-term 
contracts with its customers. After the passage of the Staggers Act, 
during the time they had weak pricing power, the freight railroads 
entered into long-term contracts with many of their customers. As these 
so-called ``legacy contracts'' are expiring, railroads are replacing 
them with shorter-term contracts--sometimes for terms as short as 1 
year--at significantly higher rates. Shippers also report that 
railroads are more frequently offering unilateral ``take-it-or-leave-
it'' contracts to customers, a practice that bears more resemblance to 
setting a tariff rate than establishing a price through 
negotiation.\40\
---------------------------------------------------------------------------
    \40\ These types of arrangements were the subject of a rulemaking 
by the STB that was discontinued because consensus on a new rule could 
not be reached. See STB Ex Parte No. 669 (Interpretation of the Term 
``Contract'' in 49 U.S.C. 10709); STB Ex Parte 676 (Rail Transportation 
Contracts Under 49 U.S.C. 10709).
---------------------------------------------------------------------------
    Analysts view these expiring legacy contracts as an important 
source of pricing gains over the next few years. According to Wolfe 
Research, ``[a]s these rail contracts are repriced over the next 
several years for the first time since the rails gained pricing power 
in 2004, we believe the rails will be recording material rate increases 
that could exceed 100 percent in some cases of very old and underpriced 
business. (e.g., ten-year old coal contracts).'' \41\ Morgan Stanley 
recently rated Union Pacific as its top Class I rail stock based on the 
fact that the company has the largest percentage of ``revenue under 
legacy contract left to reprice.'' \42\
---------------------------------------------------------------------------
    \41\ Wolfe, Training Manual at 45.
    \42\ Morgan Stanley Research, North American Transportation, 
Freight Transportation: Rails 2Q10 Review (Aug. 6, 2010).
---------------------------------------------------------------------------
V. Railroad Industry Capital Investments
    Because they have the primary financial responsibility for their 
rail networks, Class I freight rail companies have both high fixed 
operating costs and constant needs for capital investments. In addition 
to the high costs of replacing and upgrading physical assets such as 
track, ties, and engines, major capital investments are required to 
expand the capacity of the rail network to address the growing demand 
for freight rail transportation in the United States.\43\ While they 
tell Congress that they are still not producing sufficient revenue to 
address their long-term capital needs, a review of the railroads' 
financial filings and their statements to their investors suggests the 
opposite.
---------------------------------------------------------------------------
    \43\ The industry is also working to lower its future capital needs 
by shifting some of its traditional costs to its customers, such as the 
cost of railcars. In 1987, railcars owned by freight railroad companies 
moved 60 percent of tons carried; by 2005, that figure had decreased to 
40 percent of tons carried. Government Accountability Office, Freight 
Railroads, supra, note 30.
---------------------------------------------------------------------------
    According to SEC reports filed by the four largest Class I 
railroads and summarized in Figure V, over the past 10 years, the 
companies made a combined total of $62.5 billion in capital 
expenditures to replace and upgrade equipment and expand their rail 
networks. As the companies' revenues grew over the course of the 
decade, so did their capital investments. The four railroads spent $4.8 
billion in 2000 on capital projects, while they spent $7.8 billion in 
2009. While these capital investment figures are large, in their public 
relations materials, the freight railroad industry misleadingly makes 
them appear larger by adding maintenance costs to capital investments 
and calling the total ``Spending on Infrastructure & Equipment.'' \44\
---------------------------------------------------------------------------
    \44\ See e.g., Association of American Railroads, Rail Earnings 
Today Pay for Rail Capacity and Service Improvements for Tomorrow (May 
2010) (online at http://www.aar.org/incongress//media/aar/
backgroundpapers/
railearningstodaypayforrailcapacityandserviceimprovementsfortomorrow.ash
x).
---------------------------------------------------------------------------
    The railroad industry has consistently testified before Congress 
that while it has heavily invested in its network and will continue to 
do so, it will not be able to completely pay for all of the 
improvements necessary for freight railroads to meet the long-term 
capacity demands of the U.S. economy. These investments include 
upgrading tracks and signal control systems, expanding terminals, and 
improving bridges and tunnels. In testimony he delivered before the 
Senate Commerce Committee in 2009, for example, BNSF CEO, Matthew Rose, 
said that Class I railroads would fall short of paying for their long-
term capital investments by approximately $40 billion.\45\ A few months 
earlier, Union Pacific's CEO, James Young, told the House 
Transportation Committee that ``our industry is only investing about 
half the level DOT studies say is needed to meet the demands on freight 
rail in the future.'' \46\
---------------------------------------------------------------------------
    \45\ Testimony of Matthew K. Rose, Chairman, President and CEO, 
BNSF Railway Company, U.S. Senate Committee on Commerce Science, and 
Transportation, Subcommittee on Surface Transportation and Merchant 
Marine Infrastructure, Safety and Security, Addressing Surface 
Transportation Needs in Rural America, 111th Congress (Aug. 10, 2009) 
(S. Hrg. 111-490).
    \46\ Testimony of James R. Young, Chairman, President, and CEO, 
Union Pacific Corporation, U.S. House Committee on Transportation and 
Infrastructure, Subcommittee on Railroads, Pipelines, and Hazardous 
Materials, Freight and Passenger Rail: Present and Future Roles, 
Performance, Benefits, and Needs, 111th Congress (Jan. 28, 2009).
---------------------------------------------------------------------------
    These statements are inconsistent with statements Class I railroad 
officials make about their capital investments to financial analysts in 
quarterly conference calls. In these calls, company officials routinely 
assure analysts their capital investments are sufficient to address 
future needs. In an investor call in late 2007, for example, the CEO of 
CSX, Michael Ward, told investors that his company was making the 
capital investments necessary ``to prepare for future growth'' and that 
the company would continue to ``generate the cash-flow to be able to 
make capital investment for the future.'' \47\ In an investor call in 
April 2010, Mr. Young, the Union Pacific CEO, assured analysts that his 
company was ``continuing to make the critical, long-term capital 
investments that support the Company's growth strategy.'' \48\
---------------------------------------------------------------------------
    \47\ CSX Corporation 3rd Quarter 2007 Earnings Conference Call 
(Oct. 17, 2007).
    \48\ Union Pacific 1st Quarter 2010 Earnings Conference Call (Apr. 
22, 2010).


    Another indication that the Class I railroads believe they are 
spending sufficient amounts of money on their long-term capital needs 
is that in recent years, they have used growing portions of their net 
income to increase their dividend payments and to repurchase their 
publicly-traded shares. By reducing the number of shares on the market, 
buybacks have the effect of increasing earnings per share and driving 
up share prices. The capital expended to buy back shares provides 
short-term gains in stock value at the expense of investments that 
increase capacity and productivity. As Figure V shows, the four major 
U.S. railroads cumulatively spent over $2 billion in share repurchases 
in 2006, over $6 billion in 2007, and over $5 billion in 2008. Although 
none of these companies repurchased shares in 2009, they have resumed 
their share buyback programs in 2010.\49\ According to their most 
recent SEC quarterly filings, CSX, Norfolk Southern, and Union Pacific 
have already bought back more than $1.6 billion worth of shares in 
2010.
---------------------------------------------------------------------------
    \49\ See, e.g., Morgan Stanley Research, North American 
Transportation, Freight Transportation: Rails 2Q10 Review (Aug. 6, 
2010). (``Share repurchase activity is accelerating at a number of 
Class I's--a trend which is likely to add a few percentage points of 
EPS [earnings per share] growth annually to CNI, CSX, NSC, and UNP'').
---------------------------------------------------------------------------
    Another factor that freight railroads do not highlight in their 
discussions of their long-term capital needs is that several high-
profile railroad capacity projects recently have been financed through 
a combination of public and private funds. Railroads lobby Congress and 
state governments for taxpayer contributions to their rail 
infrastructure improvements and have had a few recent successes in 
establishing such ``public-private partnerships.'' \50\
---------------------------------------------------------------------------
    \50\ See, e.g., Testimony of Matthew K. Rose, Senate Committee on 
Commerce, Science, and Transportation, Addressing Surface 
Transportation Needs in Rural America, 111th Cong. (Aug. 10, 2009) 
(``As an industry, we're currently spending about $10 billion in the 
freight rail network. But, if policy leveraged those investments with 
public partnerships, these investments would happen more quickly, and 
with more certainty.''); Testimony of James R. Young, House Committee 
on Transportation and Infrastructure, Freight and Passenger Rail: 
Present and Future Roles, Performance, Benefits, and Needs, 111th Cong. 
(Jan. 28, 2009) (``Congress should enact and fund programs that allow 
States to partner with freight railroads to move forward with projects 
that benefit both the freight railroad and the public.'').
---------------------------------------------------------------------------
    For example, public money funded almost 50 percent of Norfolk 
Southern's recently completed ``Heartland Corridor'' project.\51\ That 
project enlarged 28 tunnels along an old coal route, creating a faster 
and more direct path for double-stack freight trains carrying 
intermodal freight between the international shipping port in Hampton 
Roads, Virginia, and Columbus, Ohio.\52\ Similarly, Norfolk Southern's 
rival, CSX, is looking to the states and Federal Government to 
contribute more than 50 percent of the cost of its ``National Gateway'' 
project, which will also create a more efficient route for intermodal 
freight between the Mid-Atlantic ports and the Midwest. CSX has 
committed $395 million to this $842 million initiative and has received 
$98 million in Federal funding and over $180 million from the states so 
far.\53\
---------------------------------------------------------------------------
    \51\ Norfolk Southern put up $97.8 million for the project, the 
Federal Government added $83.3 million, and Ohio and Virginia provided 
$9.8 million. Associated Press, Norfolk Southern Opens New $191 Million 
Route to Midwest (Sept. 9, 2010).
    \52\ Id.
    \53\ Railroads Redraw the Intermodal Map, Journal of Commerce (Aug. 
6, 2010).
---------------------------------------------------------------------------
Conclusion
    Thirty years ago, in order to restore the financial stability of 
the U.S. rail network, Congress gave railroads the authority to charge 
captive shippers higher rates than other shippers. Today, the goal of 
restoring the financial health of the rail industry has been achieved. 
Class I freight railroads have regained the pricing power they lacked 
in the 1980s, and are now some of the most highly profitable businesses 
in the U.S. economy. The railroads have high levels of capital 
investment and consistently produce strong results for their 
shareholders throughout the economic cycle. As Congress and the Federal 
Government look to the Nation's rail system to meet the United States' 
future transportation needs, they also need to evaluate whether our 
country's current rail policy needs to be changed to reflect this new 
reality.
                                 ______
                                 
  Prepared Statement of Anne Canby, President, Surface Transportation 
   Policy Partnership (STPP); and Founding Member, OneRail Coalition

    The OneRail Coalition appreciates the opportunity to provide the 
Committee with its views on the importance of rail as a critical part 
of our Nation's surface transportation system.
    Rail offers significant benefits to travelers, shippers, the 
general public, and provides an important link in an integrated 
intermodal system.
    The OneRail Coalition supports expanding the role of rail by 
providing for additional public and private investment in the Nation's 
rail infrastructure to create American jobs, de-congest chokepoints, 
put more freight and passengers on fuel-efficient trains, and reduce 
our Nation's greenhouse gas emissions.
    The Coalition urges that the Nation's transportation policies be 
rebalanced to put rail on an equal footing with highways and other 
transportation modes, and notes that the development of a National Rail 
Plan presents an historic opportunity to align the future of our 
transportation system with critical national priorities. We look 
forward to the Plan laying out a comprehensive long-term view for rail 
transportation in America.
    OneRail believes the Plan should establish a national framework for 
transportation investment in the context of an overall multimodal 
transportation network and specific national goals and performance 
outcomes. Further, OneRail emphasizes maintaining a strong focus on 
safety and security. Relying on common sense and performance-based 
regulations, including a flexible approach to new rail safety 
technologies, would produce a balanced approach to ensuring a safe and 
secure rail network.
    The Coalition believes that the Federal Government must recognize 
the complexities of passenger and freight rail partnerships, and 
recognize that delivering successful new high-speed and intercity 
passenger rail (HSIPR) corridor services will require significant 
capital investment, as well as a new level of analysis and consistent 
communication among and between freight railroads, Amtrak, other 
passenger operators, and the traveling public.
    OneRail supports continued dedicated funding for commuter rail, and 
underscores the need to establish new dedicated funding sources for 
HSIPR including Amtrak. Further, passenger and freight rail 
infrastructure projects should be treated as eligible expenditures to 
the degree that new revenues are provided from sources above the 
existing Highway Trust Fund user payments utilized to fund the current 
Federal surface transportation program. OneRail believes the Plan 
should support policies that provide matching funds and incentives for 
rail expansion.
    The National Rail Plan should foster economic growth and U.S. job 
creation by supporting economic regulatory policies that promote 
continued robust private investment in rail to enable railroads to 
attract and serve the broadest range of freight customers, as well as 
intercity and commuter passengers.
    In order to avoid ``boom or bust'' procurement cycles, support for 
development of a renewed U.S. passenger rail equipment manufacturing 
industry would provide for sustained equipment purchases and the 
creation of a strong domestic supplier base for equipment.
    OneRail urges that greater effort be placed on providing rail 
workforce development and planning leadership to support the growth of 
freight, regional, intercity passenger and high-speed rail corridors, 
and foster the qualified rail workforce of tomorrow.
    Finally, the OneRail Coalition urges the National Rail Plan to 
include 5-, 10- and 20-year milestones to measure metrics such as the 
percent of population with access to intercity passenger rail service, 
growth in market share for rail freight and intercity passenger rail 
and to capture critical public benefits generated from rail investment 
including increased mobility and transportation choice, decreased 
greenhouse gas emissions, improved energy efficiency and less 
dependence on oil, increased safety, job creation and enhanced U.S. 
competitiveness in the global economy.
    We appreciate the opportunity to share our thoughts on the 
importance of rail and the role rail can play in the Nation's 
transportation system.
    The OneRail Coalition includes the American Public Transportation 
Association, American Short Line and Regional Railroad Association, 
Amtrak, Association of American Railroads, Brotherhood of Railroad 
Signalmen, National Association of Railroad Passengers, Natural 
Resources Defense Council, National Railroad Construction and 
Maintenance Association, Railway Supply Institute, States for Passenger 
Rail Coalition, Surface Transportation Policy Partnership, 
Transportation Communications International Union/IAM, and United 
Transportation Union. Alstom and Parsons Brinckerhoff are Associate 
Supporters.
    For more information please visit www.onerail.org or contact Anne 
Canby at 202-466-2641 or [email protected].
                                 ______
                                 
                              Office of Legislative Affairs
                   Office of the Assistant Attorney General
                                      Department of Justice
                                 Washington, DC, September 27, 2004
Hon. F. James Sensenbrenner, Jr.,
Chairman,
Committee on the Judiciary,
U.S. House of Representatives,
Washington, DC.

Dear Chairman Sensenbrenner:

    This responds to your letter of July 15, 2004, to the Department of 
Justice regarding the application of the antitrust laws in the railroad 
industry. You note that the various statutory antitrust exemptions for 
railroad industry activities were enacted many decades ago, and you 
question whether continuing this antitrust immunity serves the public 
interest. The Department appreciates having the benefit of your 
persExperiencethis important issue of competition policy.
    The antitrust laws are the chief legal protector of the fire-market 
principles on which the American economy is based. Experience has shown 
that competition among businesses, each attempting to be successful in 
selling its products and services, leads to better-quality products and 
services, lower prices, and higher levels of innovation. The antitrust 
laws ensure that businesses will not stifle this competition to the 
detriment of consumers. Accordingly, the Department has historically 
opposed efforts to create sector-specific exemptions to the antitrust 
laws. The Department believes such exemptions can be justified only in 
rare instances, when the fundamental free-market values underlying the 
antitrust laws are compellingly outweighed by a clearly paramount and 
clearly incompatible public policy objective.
    In the first decades of the past century, for example, Congress 
enacted antitrust exemptions in industries in which it believed normal 
free-market competition to be unworkable. These industries included the 
railroad, airline, trucking, and telephone industries. In lieu of 
competition protected by the antitrust laws, Congress established 
comprehensive regulatory regimes that regulated prices, service 
offerings, and market entry as well as other aspects of these 
industries. These regulatory regimes often included statutory antitrust 
exemptions for conduct approved by the regulatory agency. And if the 
regulatory regime was sufficiently pervasive, the courts could hold 
that it had implicitly displaced private damages recovery under the 
antitrust laws. See Keogh v. Chicago Northwestern Railway, 260 U.S. 156 
(1922); Square D Co. v. Niagara Frontier Tariff Bureau, 476 U.S. 409 
(1986).
    In the last decades of the past century, policymakers began to 
reconsider whether competition was truly unworkable in these 
industries, and efforts were undertaken to replace market regulation 
with competition where possible. As these industries became 
deregulated, antitrust exemptions no longer made sense. In the case of 
airlines, for example, the antitrust exemption for mergers approved by 
the Civil Aeronautics Board was repealed and, after a transition 
period, merger enforcement in the airline industry reverted to the 
Department of Justice under the antitrust laws.
    In 1995, when Congress abolished the Interstate Commerce Commission 
and created the Surface Transportation Board to retain some of the 
ICC's old regulatory authority, the Department urged Congress to turn 
over review of railroad mergers to the antitrust enforcement agencies, 
as it had done with airlines. See Statement of Steven C. Sunshine, 
Deputy Assistant Attorney General, Antitrust Division, Before the House 
Transportation Subcommittee on Railroads, January 26, 1995 (attached). 
Congress opted instead to leave that responsibility with the Surface 
Transportation Board, with an accompanying antitrust exemption, with 
the Justice Department limited to an advisory role before the Surface 
Transportation Board. See 49 U.S.C.  11321(a).
    Your letter also describes three specific practices in the railroad 
industry about which concerns have been raised about possible 
anticompetitive effects.
    The first practice is the refusal by a railroad that controls one 
segment of a freight movement to quote rates separately for that 
``bottleneck'' segment, instead quoting rates only for the entire 
freight movement. You note that this practice denies shippers the 
benefits of competition on segments of the move where an alternative 
carrier might compete for the business. Because of the Surface 
Transportation Board's involvement in approving these rates, and its 
acceptance of this practice, relief may not be available under the 
antitrust laws. If this practice were subject to the antitrust laws, it 
could be evaluated as a refusal to deal in possible violation of 
section 2 of the Sherman Act, or as a tying arrangement in possible 
violation of section 1 of the Sherman Act. Whether it would constitute 
an antitrust violation would depend on the particular facts.
    The second industry practice you describe is ``paper barriers.'' 
Paper barriers are created when Class I railroads spin off segments of 
their trackage to short-line or low-density carriers with contractual 
terms that prohibit the acquiring carriers from competing with the 
Class I railroads for business. Since these contractual terms are part 
of an underlying sale transaction that is reviewed and approved by the 
Surface Transportation Board, they may be exempted from the reach of 
the antitrust laws, depending on the scope of the approval language in 
each of the Board's relevant orders. If paper barriers were subject to 
the antitrust laws, they would be evaluated under section 1 of the 
Sherman Act. The Department would examine whether the restraint is 
ancillary to the sale of the trackage--i.e., whether the restraint is 
reasonably necessary to achieve the pro-competitive benefits of the 
sale.
    The third industry practice you describe is the practice by both of 
the major western Class I railroads of publicly disclosing tentative 
prospective shipping rate offerings. Under the antitrust laws, the 
public disclosure of pricing information among competitors can, under 
some circumstances, facilitate collusion and result in increased 
prices, in violation of section 1 of the Sherman Act. See, e.g., United 
States v. Airline Tariff Publishing Co., 1994 Trade Cas. (CCH) 1170,687 
(D.D.C. 1994). Publicly announcing prospective rates outside the 
confines of a rate approval proceeding at the Surface Transportation 
Board is likely to be subject to review under the antitrust laws. If 
you know of anyone who has information that you believe might be useful 
for evaluating this practice under the antitrust laws, please encourage 
them to contact the Antitrust Division.
    Thank you for bringing your interest in these issues to our 
attention, and for soliciting our views as you consider these issues. 
If we can be of further assistance, please do not hesitate to contact 
us.
            Sincerely,
                                      William E. Moschella,
                                        Assistant Attorney General.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Bill Nelson to 
                          Hon. John D. Porcari

    Question. Would you please describe the reinvestment requirements 
of other freight transportation modes?
    Answer. Reinvestment requirements for freight transportation are 
complicated by the fact that, for highways (and to some extent for 
rail), the same infrastructure serves both passenger and freight 
vehicles. Overall highway reinvestment requirements for both passenger 
and freight vehicles are estimated in the highway portion of the 
biennial Conditions and Performance Report prepared by the Federal 
Highway Administration. The latest edition of this Report is 2008 and 
it includes a number of alternative definitions of investment needs. 
The average annual investment level required to maintain the system (in 
terms of both physical condition and performance) at its 2006 levels 
through 2026 are estimated to be $24.8 billion for the Interstate 
System, $38.7 billion for the National Highway System, and $105.6 
billion for all roads. There are three different definitions of what is 
required to improve the system, based on what benefit-cost ratio 
threshold is used as a criterion for investment. One such threshold 
assumes that all potential capital improvements with a benefit-cost 
ratio of 1.0 or higher should be funded. Reinvesting based on this 
definition would cost $47 billion for the Interstate System, $76.1 
billion for the National Highway System (NHS), and $174.6 billion for 
all roads. Alternatively, if the threshold benefit-cost ratio is 1.5, 
then the cost would be $39 billion for the Interstate System, $60.7 
billion for the National Highway System, and $137.4 billion for all 
roads. It is important to note that these reinvestment requirements are 
for a mixed-use system that handles both freight and passenger use. 
While trucks carrying freight use all aspects of the system, 75 percent 
of the freight-hauling trucks serving places at least 50 miles apart 
use the Interstate System, 20 percent use the balance of the NHS, and 6 
percent use other highways. The reinvestment requirements for the 
freight component of the highway system can thus be most closely 
approximated by the reinvestment costs for the NHS: $38.7 billion 
annually to maintain the system, $60.7 billion annually to improve the 
system based on a benefit-cost ratio of 1.5, and $76.1 billion annually 
to improve the system with all projects that have benefits at least 
equal to their costs.
    Because we do not provide infrastructure funding for the pipeline 
industry, we do not have any estimates of reinvestment requirements for 
the pipeline industry. However, a report prepared for the INGAA 
Foundation in 2009 projected that pipeline capital expenditures (for 
both replacement of existing assets and for new construction) could be 
expected to total $5 to $7.5 billion annually through 2030. Pipelines 
are very expensive to build, but operate at low cost for long periods. 
In total, pipelines move about 17 percent of U.S. freight ton-miles.
    Waterway reinvestment requirements are predominantly the 
responsibility of the U.S. Army Corps of Engineers (USACE). We are 
working with the Corps to better understand how their reinvestment 
requirements are quantified.
                                 ______
                                 
   Response to Written Question Submitted by Hon. Byron L. Dorgan to 
                          Hon. John D. Porcari

    Question. The Department of Transportation worked with the USDA on 
the recently released study on rural transportation. The study seems to 
agree that in recent rail industry consolidation, consumers and not 
Wall Street are being saddled with paying for billions of dollars in 
railroad merger premiums as ``the railroad industry and the STB are the 
only industry that adds merger premiums into the rate base.'' Can you 
explain why no action has been taken to prevent acquisition premiums 
from impacting rail shippers' rates?
    Answer. The STB has jurisdiction over the economic regulation of 
railroads. Under their requirements for formulating regulatory costs, 
the so called ``acquisition premium'' is included in its assessment of 
these costs. There has been only one railroad consolidation where a so-
called ``acquisition premium'' was questioned: the acquisition of 
Conrail by Norfolk Southern and CSX Transportation, approved in 1998. 
In this case the two carriers bid against each other before agreeing to 
divide Conrail's assets between themselves. Various shipper parties 
alleged before the STB that the ultimate price paid for Conrail 
exceeded the market value of its stock by billions of dollars, and that 
paying off the debt undertaken by the acquiring carriers would: (1) 
force those railroads to raise rates on captive shippers, and (2) allow 
them to evade regulatory oversight because acquisition costs are 
generally included in a railroad's regulatory rate/cost base. These 
parties, therefore, asked the STB to extract this premium from the 
regulatory cost basis. The Board declined to do so on legal and factual 
grounds.
    First, it found that CSX and Norfolk Southern possessed the 
financial wherewithal to service the debt without any need to raise 
rates. Second, the agency noted that because the merger would largely 
increase intramodal competition and significantly reduce the number of 
captive shippers, CSX and Norfolk Southern would be unsuccessful at 
pursuing such a strategy in any event. Third, the STB emphasized that 
the merger synergies reflected in the record and other factors would 
likely lead to a lower regulatory rate/cost base. Finally, the STB 
pointed out that the relief requested would be contrary to generally 
accepted accounting principles that had been judicially affirmed and 
that the purchase price agreed to by the railroads represents by far 
the best evidence of the current market value of Conrail.
    Over the course of a lengthy and detailed oversight period there 
was no evidence that the so called ``acquisition premium'' had resulted 
in increased rail rates. In no other railroad consolidation has this 
issue even arisen.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Mark Warner to 
                          Hon. John D. Porcari

    Question. Virginia applied for and was awarded $75 million of ARRA 
funding for a shovel-ready passenger rail project that would construct 
11 miles of rail line around Quantico, Virginia at a 79 MPH speed 
specification.
    FRA has strongly indicated its goal of a 110 MPH capable track and 
that projects must conform to PRIIA's 110 MPH definition of a high 
speed corridor. Following years of joint study with FRA, this section 
of track and its physical and operational challenges noted by the host 
railroad renders 90 MPH, the maximum speed in a mixed freight and 
higher speed rail environment. FRA has been working with Virginia and 
its partners for over a decade on its corridor plans and is well aware 
of the challenges of this corridor.
    Virginia has been a cooperative partner with FRA in the development 
of this grant. At the persuasion of FRA, Virginia has added rail 
infrastructure to the project at additional cost as a condition for FRA 
agreement to fund the project. CSX and Virginia have come to agreement 
on how the corridor and its project components will be developed and 
maintained. FRA has not accepted this agreement since it does not 
include a performance and penalty for on time performance.
    It is difficult to determine when performance should be delivered 
in a mature, high density rail corridor that will literally be under 
construction for decades. On time performance improvements will be 
difficult to achieve until the corridor is built out in significant 
sections. However, the railroad can ensure the delivery of train slot 
capacity and increased speeds of intercity passenger rail service upon 
completion of the projects appears easier to achieve.
    These two issues (maximum speed in the DC-Richmond Corridor, and 
the performance requirements of a component project that is one of 19 
projects in Virginia's overall corridor development plan that delivers 
a 90 MPH rail corridor) must be resolved.
    Can you assure me that Virginia will be allowed to move forward 
with the project that they applied for and were awarded? Can you commit 
to me that FRA will partner with Virginia to make high speed rail 
connecting the Northeast Corridor to the Southeast Corridor a reality?
    Answer. FRA and Virginia Department of Rail and Public 
Transportation (DRPT) have partnered in planning for the development of 
the I-95 corridor for high-speed rail for nearly 20 years. Multiple 
reports have been prepared through this partnership, resulting in the 
identification of 19 projects that are needed to increase the frequency 
and speed of intercity passenger rail service on the corridor. While 
each project is independent in nature, it is understood that the entire 
list of projects must be completed before any significant time savings 
would be achieved through increased speeds between Richmond and 
Washington. Until the full set of projects is completed, each 
individual project will provide additional capacity that can absorb 
operating delays and incrementally improve the reliability of trains 
across this corridor.
    Considering that the scale of projects on this corridor will amount 
to nearly $1.7 billion, each incremental project is also a rather 
costly investment. As you are aware, DRPT's 11-mile Arkendale to 
Powell's Creek Third Track project was selected for $75 million in 
funding through FRA's High-Speed Intercity Passenger Rail (HSIPR) 
program. This project was selected upon its merits through a 
competitive program that was well over-subscribed. The specific merit 
of this project was to increase capacity on the I-95 Corridor to reduce 
interference between intercity passenger, VRE commuter, and CSXT 
freight traffic. Directly, this project was identified to improve the 
on-time performance of Amtrak service on the corridor from 80.8 percent 
to 82.8 percent. While this improvement may seem slight, committing the 
applicant (DRPT), and the host railroad (CSXT) to 82.8 percent will 
protect the value of this project as an incremental improvement 
building toward the ultimate goal for high-speed intercity passenger 
rail service on this corridor.
    FRA and DRPT are working closely to bring this project closer to 
delivery. DRPT and the host railroad have incorporated a modification 
to the design of this project at FRA's request, which will provide the 
team with a more accurate project budget and schedule. Upon completion 
of the design revisions, an environmental review, and a stakeholder 
agreement between DRPT and CSXT, FRA will issue a cooperative agreement 
for the final design and construction of this important project. A 
cooperative agreement is anticipated for December 2010, with 
construction commencing in the Spring of 2011.
    In October, FRA selected Virginia DRPT for an award of $44 Million 
in FY10 HSIPR funding to prepare a Tier-II EIS for the Richmond-
Washington Corridor, including Preliminary Engineering for the 19 major 
projects in their Corridor Development Plan. This plan envisions 
building a 90 mph corridor through these 19 projects, for which DRPT 
and CSX will perform modeling to determine the ultimate performance 
outcomes of the projects. This commitment is provided in a letter of 
support, but there is not enough information to support an MOU until 
modeling is performed. 110 mph will also be considered for portions of 
the corridor south of Fredericksburg.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Kay Bailey Hutchison to 
                          Hon. John D. Porcari

    Question 1. The National Conference of State Legislatures has 
estimated that the cost to complete the 11 high-speed rail corridors 
designated by Congress will be approximately $90 billion. What 
recommendations do you have for funding a high-speed rail program?
    Answer. The capital investment needed to develop high-speed 
intercity passenger rail service discussed in the recently released 
National Rail Plan Progress Report will be significant. The Department 
is presently working to develop the cost estimates associated with the 
vision in the Progress Report. We believe that we need to build upon 
the cost-sharing principles embodied in PRIIA, but the precise role for 
the Federal Government in undertaking this investment as well as 
investment in other forms of surface transportation, and how we fund 
that capital investment, will evolve as part of the debate on the 
reauthorization of surface transportation programs next year.

    Question 2. What should be the responsibility of the States?
    Answer. State participation is key to the success of high-speed and 
intercity passenger rail development, and over the years State and 
local governments have played a growing role in the development of our 
Nation's railroad system. PRIIA made States eligible to receive grant 
funds for intercity and high-speed passenger rail, but also required 
States to prepare State rail plans. In the future, States will be 
involved in planning, developing, and managing new core, regional and 
feeder high-speed rail services. They will also serve as the principal 
recipients of Federal capital grants in support of such services.

    Question 3. How does the process for approving high-speed rail 
projects compare to the New Starts process for transit projects?
    Answer. New Starts is a program administered by the Federal Transit 
Administration and represents the Federal Government's primary 
financial resource for supporting locally-planned, implemented, and 
operated transit ``fixed guideway'' capital investments. This includes 
rail and highway transit systems, such as commuter, heavy, and light 
rail and bus rapid transit systems. The program has helped to reduce 
congestion and improve air quality in the areas these systems serve; 
they have also fostered the development of more viable, safer, and more 
livable communities.
    While the high-speed and intercity passenger rail (HSIPR) program 
shares certain statutory requirements with New Starts, and has adopted 
a similar phased approach toward structuring Project Development, there 
are nonetheless significant differences between the two programs. Most 
fundamentally, while New Starts emphasizes the centrality of the role 
of local government in planning and implementing transit projects, the 
HSIPR program recognizes the need for a greater role for Federal 
leadership in developing high-speed and intercity passenger rail 
corridors that often cross multiple states.
    Consistent with this more prominent Federal role is the fact that, 
under the HSIPR program, projects receive a Federal ``green light'' for 
implementation far earlier in the project development process than is 
generally the case with New Starts. Whereas in New Starts the Federal 
commitment to a project generally comes only after Final Design has 
commenced, under the HSIPR program FRA can make a commitment to a 
project prior to the commencement of Preliminary Engineering, following 
completion of a rigorous planning and programmatic environmental 
process. The ``early commitment'' approach adopted by the HSIPR program 
allows for a project to be implemented more quickly by bringing to bear 
the combined resources and talents of the project sponsor and FRA as 
early as possible, while removing much of the uncertainty that comes 
when project sponsors must significantly advance a project's 
development prior to receiving the backing of their Federal partner.

    Question 4. Is DOT performing benefit-cost analysis to determine 
which high-speed rail projects should move forward?
    Answer. Economic analysis and a benefit-cost analysis are 
particularly relevant in the evaluation of HSIPR applications. The 
evaluation criteria in the HSIPR Notice of Funding Availability for FY 
2010 noted that it was important for applicants to account for the 
benefits and costs of their proposals based on standard data and 
consistent with Executive Order 12893. Furthermore, FRA requested 
applicants to monetize the transportation and other public benefits 
that result from the Federal investment. Quality of the benefit-cost 
analysis in each of the applications played a crucial role in the 
evaluation process, because public benefits are one of the priority 
selection factors in the decision-making process and final grant award.

    Question 5. How will high-speed rail be integrated with 
conventional services for a cohesive, interconnected National Network?
    Answer. The goal of the high-speed and intercity passenger rail 
program is one of connecting communities where population densities and 
competitive trip times create markets for success. This can be achieved 
through the development of a multi-tiered passenger rail network that 
takes into account the different markets and geographic contexts found 
throughout the U.S. This approach builds on the legislative framework 
established in PRIIA and the financial ``down payment'' committed in 
the American Recovery and Reinvestment Act of 2009 (ARRA). The 
following tiers will create an integrated, interconnected network of 
high-speed rail and conventional rail services:

   Core Express Corridors: These routes would connect large 
        urban areas up to 500 miles apart with 2-3 hour travel time and 
        train speeds of between 125 and 250 mph. Service will be 
        frequent and will operate on electrified, dedicated track that 
        is publicly owned. Based on their operation in and between 
        large, dense metropolitan regions, the Core Express corridors 
        will form the ``backbone'' of the national passenger rail 
        system.

   Regional Corridors: This network would connect mid-sized 
        urban areas, and smaller communities in between, with 
        convenient, frequent, 90-125 mph service on a mix of dedicated 
        and shared track, depending on the particular corridor. In some 
        areas, these corridors could connect to Core Express corridors, 
        with many potential passenger services operating over both the 
        Core Express and Regional routes.

   Emerging Feeder Routes: Emerging routes would connect 
        regional urban areas at speeds up to 90 mph on shared track. In 
        some areas, the Emerging/Feeder routes could connect to the 
        Core Express or Regional corridors, allowing residents of these 
        smaller or more distant areas to have efficient access to the 
        national system.

   Community Connections: For this vision of 21st century 
        passenger rail to be successful, it must be integrated with 
        existing and future policies and investments in public 
        transportation, airports, and other modes to provide convenient 
        options for accessing the passenger rail network. This access 
        is critical to ensuring that passenger rail is a viable 
        alternative to other methods of intercity travel.

    Question 6. What are the implications for the National Rail Plan of 
PRIIA's requirement that the plan be consistent with approved State 
rail plans?
    Answer. PRIIA requires states to develop State rail plans as a 
prerequisite to receiving Federal funding for rail projects. According 
to PRIIA, State rail plans should address State policy involving 
freight and passenger rail transportation, including commuter rail 
operations; establish the period covered by the plan; present 
priorities and strategies to enhance rail service in the State that 
benefits the public; and serve as the basis for Federal and State rail 
investment within the State. State rail plans must be coordinated with 
other State transportation goals and programs. Under PRIIA, only 
projects in approved State rail plans are eligible for a grant award; 
however, this provision was waived by the American Recovery and 
Reinvestment Act of 2009 and by DOT FY 2010 appropriations act for 
projects funded under those acts.
    We have given the states a comprehensive outline, which contains 
the elements that their State rail plans should address. In addition, 
in developing the National Rail Plan we have canvassed States as well 
as reviewed their current State rail plans.

    Question 7. As you know, I have sponsored legislation to address 
clear and present safety problems in the intercity bus industry. There 
have been a number of horrific motorcoach accidents in my State and in 
others in the past few years, and making motorcoach operations safe is 
a top priority for me. I was pleased to see that NHTSA has finally 
issued a proposed rule to require seat belts on motor coaches. But why 
has the agency proposed limiting the requirement to intercity, tour and 
commuter bus service, and not requiring belts on buses used in charter 
service, for special operations such as transportation to casinos, and 
shuttle services?
    Answer. In our notice of proposed rulemaking (NPRM), the definition 
of motorcoach includes buses sold for intercity, tour, and commuter bus 
service. We do not propose to exclude buses used for charter or shuttle 
services or for special operations from the definition of a motorcoach. 
In our proposal, if a charter or shuttle bus has a Gross Vehicle Weight 
Rating (GVWR) greater than or equal to 26,000 pounds, 16 or more 
designated seating positions, and at least 2 rows of passenger seats 
that are forward facing, it would be considered a motorcoach and would 
be required to meet the provisions in the proposed rule, including 
having lap/shoulder seat belts at all forward facing seating positions.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. John Thune to 
                          Hon. John D. Porcari

    Question 1. This past April, the Departments of Agriculture and 
Transportation submitted a report on a joint study of rural 
transportation issues. Among the report's findings were that:

   Almost 75 percent of agricultural areas lost rail 
        competition from 1992 to 2007, and the areas in which a 
        railroad had a monopoly in transporting grain and oilseeds 
        increased from 10 percent to 15 percent;

   Rail rates for grain and oilseeds rose 46 percent from 2003 
        to 2007, while rates for all other products increased 32 
        percent over the period; and

   From 2001 to 2007, fuel surcharges by the railroads were 55 
        percent higher than the incremental increase in the cost of 
        fuel.

    What do you believe needs to be done to address these findings?
    Answer. Since deregulation in 1980, the railroad industry has 
greatly reduced its fixed plant while more than doubling the total 
tonnage carried. This has greatly increased efficiency and, on the 
whole, has lowered rates. At the same time, many railroads have merged 
into larger companies, resulting in only seven large (Class I) 
railroads remaining in the United States.
    Prior to the downturn in the economy, the entire freight 
transportation industry struggled to meet growing demand that strained 
existing capacity. Truckers, in particular, faced with driver shortages 
and highway congestion, were forced to raise rates, leading shippers to 
use other modes where feasible. The railroad industry took advantage of 
tight market conditions to raise rates and increase its returns . While 
shippers have been unhappy with a perceived loss of competition and 
with railroad rates and service, the railroad share of wheat moving for 
export through the Pacific Northwest has actually increased over the 
last 10 years, suggesting that railroad rates and service levels 
continue to be attractive to shippers relative to the available 
alternatives.
    The STB has initiated rules that would make it easier for small 
shippers, including agricultural shippers, to bring a rate case before 
it and has initiated proceedings following shipper complaints regarding 
railroad practices. It has also tightened its regulation of fuel 
surcharges. STB investigated fuel surcharges and issued regulations (on 
January 6, 2007) that require railroads to base any fuel surcharges on 
actual increases in the cost of fuel. We believe that this has largely 
ended abusive fuel surcharge practices. STB has also established a 
mediation program and, most recently, instituted a review of the rate 
exemption process. USDOT believes STB's statutory authority is 
sufficient to address any exercise of market power by railroads.

    Question 2. What needs to be done to make it possible for other 
train operators to compete with Amtrak to operate new high-speed 
trains?
    Answer. Amtrak's monopoly to provide intercity passenger rail 
service was repealed in 1997. Under PRIIA, states are free to select 
operators for high-speed rail (HSR) and other Intercity Passenger Rail 
(IPR) services they develop and whose operations they are willing to 
fund.
    Basically, there are two types of HSR systems. ``New HSR'' systems 
make use of largely or completely new right-of-way. In that case, 
Amtrak and the other potential operators start from an essentially 
level playing field with respect to the rights to operate over the new 
rail infrastructure, as it is specifically designed for HSR use. 
``Incremental HSR'' systems, however, employ upgraded existing freight 
railroad rights-of-way over which Amtrak would ordinarily have access 
rights at incremental cost that other potential operators would not 
possess. For both types of HSR, further exacerbating the cost 
differential is Amtrak's ability to spread its fixed overhead costs 
(for example, the fixed costs of its nationwide reservation/
information/Internet system) over a large number of routes and 
services, while a new operator might have only one or two routes 
available against which to charge its overheads.
    On the other hand, Amtrak's costs are high. Therefore, a new train 
operator that carefully developed operating methods and cost 
containment strategies could overcome some of Amtrak's inherent cost 
advantages as it applies them to a given HSR route. Alternatively, it 
is conceivable that arrangements could be negotiated that would enable 
the new operator to avail itself of Amtrak's nationwide capabilities 
(e.g., the reservation system) at a reasonable cost. Furthermore, out 
of the complex negotiations among the FRA, the States, Amtrak, the host 
railroads, and a prospective new operator, it might be possible to 
develop a method to secure for the new operator trackage rights at a 
cost that might be bearable.

    Question 3. In announcing his latest economic proposal, the 
President stated that the next surface transportation reauthorization 
bill must be deficit neutral. Does the Administration believe the 
surface transportation program should be funded through user fees going 
forward?
    Answer. The Administration is committed to restoring fiscal 
responsibility and to paying for all new infrastructure investments 
made under the President's plan. Traditionally, surface transportation 
infrastructure investments have been fully paid for. This system has 
broken down, and the highway trust fund has been allowed to become 
insolvent. The Administration intends to work with Congress to change 
this--to fully pay for our new infrastructure investments and to 
restore solvency to the highway trust fund.

    Question 4. How does the President plan to pay for a very costly 
high-speed rail program?
    Answer. The development of high speed rail corridors does require 
substantial capital funding. The Administration firmly believes, 
however, that HSR's benefits as part of a larger reformed and 
transformed national transportation infrastructure program will far 
exceed its costs. The precise means of funding high speed rail, along 
with all other surface transportation modes, are under careful 
consideration within the Administration and in the Congress.

    Question 5. What is the Administration's position on having one 
mode--most likely highway users--subsidize other modes of 
transportation such as transit, and freight and passenger rail?
    Answer. The use of Highway Trust Fund revenues to fund transit 
expenditures has been a consensus element of transportation policy 
since the 1982 Surface Transportation Assistance Act. Similarly, 
highway revenues have been used to fund bicycle and walking paths since 
the 1991 Intermodal Surface Transportation Efficiency Act (ISTEA). Some 
expenditures for rail projects, such as under the Congestion Mitigation 
and Air Quality Program (also authorized in ISTEA) have also been 
authorized from the Highway Trust Fund when the Congress has judged 
them either to benefit highway users or to mitigate costs created by 
highway use. So the Administration does not take an absolute position 
on the use of Highway Trust Fund revenues to cover the costs of 
investments in other modes.

    Question 6. The Administration has talked again and again about the 
need to get small businesses borrowing and investing again and has been 
quite critical of the Nation's banks for not lending investment 
capital. Can you tell me what the Administration has been doing to 
promote the $35 billion that's at your disposal under the Railroad 
Rehabilitation and Improvement Financing, or RRIF Program?
    Answer. FRA hired a new program manager for the RRIF program in 
September 2009. During the past year, the RRIF program office has 
visited numerous rail conferences to promote the RRIF program and its 
benefits. More importantly, the Department recently published in the 
Federal Register the first ever policy statement on the consideration 
of RRIF applications that will help prospective applicants better 
understand what they need to do to have a successful application.

    Question 7. How many applications has FRA received since January 
2009, and how many of those applications have been approved?
    Answer. Sixteen applications have been received since January 2009. 
Of these applications, four have been approved as of October 6, 2010, 
three were not approved, three were withdrawn or are on hold at the 
request of the applicant, and the others are still in process.

    Question 8. How many applications have been decided within the 90-
day period mandated by SAFETEA-LU?
    Answer. Since the establishment of the 90-day schedule in SAFETEA-
LU in 2005, only two applications took more than 90 days, and both were 
decided within a few days after the 90-day period expired.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Mark Warner to 
                       Hon. Daniel R. Elliott III

    Question 1. As I am sure you know, it is very important for a 
company not only to meet its cost of capital, but to exceed it. How 
does this principle factor into the STB's decisions? Does the STB want 
railroads to exceed their cost of capital in order to attract the level 
of investment needed to maintain and expand their systems?
    Answer. Railroads should be permitted to exceed their cost of 
capital in a given year. The railroad industry is cyclical, so that 
while a carrier may earn a return above the cost of capital in 1 year, 
the tide may turn and returns may drop below the cost of capital in the 
next. The agency attempts to permit sufficient returns so that, over 
the course of a business cycle, the carriers can sustain a return on 
investment needed to attract capital and maintain their infrastructure. 
The Board factors this principle into its rate setting approaches, 
which all take a long-term view to determine if the carriers are 
earning excessive returns over a 4, 5, or 10 year horizon (depending on 
the complexity of the rate analysis used). This approach is consistent 
with the agency's statutory mandate (49 U.S.C. 10704(a)(2)) to permit 
the carriers sufficient revenues to ``attract and retain capital in 
amounts adequate to provide a sound transportation system in the United 
States.''

    Question 2. The industry says current proposed STB Reauthorization 
legislation could put up to $6 billion at risk annually (about the 
amount of the industry's total net income in 2009). Do you believe that 
this decrease could put at risk the industry's investments in 
maintaining and expanding rail networks? Would there be a risk of 
railroads raising rates on customers to the point that those customers 
would switch back to using trucks to transport their freight?
    Answer. I am aware the industry has made such claims, but fail to 
see how the proposed reauthorization would put $6 billion at risk 
annually. That figure seems to suggest that all rail transportation 
rates would be driven to the statutory jurisdictional floor (180 
percent of variable cost). Such an outcome is implausible, particularly 
given the broad discretion afforded the agency to implement many of the 
key provisions of S. 2889. However, the industry has never shared any 
such analysis with me or the Board, so I cannot assess the validity of 
that position.
    If the bill did in fact reduce railroad revenues by $6 billion a 
year, that would plainly put at risk the health and continued viability 
of the American freight railroad system.
    If the bill were implemented in a reasonable and measured fashion, 
I do not believe it would cause railroads to increase rates and drive 
customers with competitive options back to using truck. A reduction in 
the rates to reasonable levels that railroads can charge captive 
traffic should have no impact on their pricing decision for competitive 
traffic. The carriers price according to market demand. Unless there is 
a change in market demand, or a change in the cost of providing the 
service, I would not expect that the carriers would adjust prices for 
truck-competitive traffic.
    However, if the bill is not implemented in a responsible and 
measured fashion, the new provisions could inject serious operating 
inefficiencies into the rail network. If that happens, then the 
carriers would indeed respond to any increase in operating costs by 
increasing transportation rates and thus driving traffic to the 
highways, a result I do not believe is contemplated by the bill or is 
in the public interest.
                                 ______
                                 
   Response to Written Question Submitted by Hon. Byron L. Dorgan to 
                       Hon. Daniel R. Elliott III

    Question. In 2007, the STB issued a long overdue decision to 
establish standards for shippers to file challenges to paper barriers. 
I understand that since 2007, only one shipper has challenged a paper 
barrier under this standard and that case has been pending for over two 
and a half years. Do you agree that shippers need real avenues for 
relief from paper barriers and do you believe that the current process 
offers shippers the opportunity for relief? Has the delay and inaction 
in the single paper barrier case filed deterred other shippers from 
challenging unreasonable paper barriers at the STB?
    Answer. In the 2007 proceedings to which you refer (Review of Rail 
Access and Competition Issues--Renewed Petition of the Western Coal 
Traffic League, STB Ex Parte No. 575 and Disclosure of Rail Interchange 
Commitments, STB Ex Parte No. 575 (Sub No. 1) (served Oct. 29, 2007)), 
the Board gave thorough consideration to the effect of paper barriers 
and concluded that they should be scrutinized on a case-by-case basis. 
It also concluded that not all paper barriers are anticompetitive in 
nature and that paper barriers can provide a means by which a Class I 
carrier can economically justify selling a marginally profitable line 
to a shortline carrier, rather than abandoning the line, which would 
result in the shipper losing rail service altogether.
    In those instances where a shipper does believe that it has been 
harmed as a result of a paper barrier, I believe that the policies put 
in place by the Board in 2007 provide them with an avenue to relief. In 
that proceeding, the. Board required carriers to disclose when a paper 
barrier is created, so that such arrangements are no longer hidden from 
shippers. The Board also spelled out with greater clarity how 
challenges to paper barriers should be brought and the factors that the 
agency would look at in evaluating whether those paper barriers are 
proper. However, I am open to ways to improve the transparency and 
efficiency of this process going forward.
    The specific case to which you are referring is Entergy Arkansas, 
Inc. and Entergy Services, Inc. v. Union Pacific Railroad Company and 
Missouri & Northern Arkansas Railroad Company, Inc., STB Docket No. 
42104. Although this case has been pending at the agency for some time, 
it is not due to inaction. To the contrary, this case involves several 
complex and novel issues that go beyond a mere challenge to a paper 
barrier. Moreover, there has been a significant volume of evidence 
(over 50 filings) and some of the delay has been the result of the fact 
that the Board has had to request additional evidence to address all of 
the issues that have been raised.
    I do not believe that the length of time that the Entergy case has 
been pending has caused other shippers from challenging paper barriers. 
I believe that the shipper community is aware that the Entergy case is 
complex and unique and that if a challenge to a paper barrier were 
brought under less complicated circumstances, the Board would process 
that case quickly.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Kay Bailey Hutchison to 
                       Hon. Daniel R. Elliott III

    Question 1. As you know, last December, the Committee reported 
legislation to reauthorize the STB and reform certain aspects of 
railroad regulation under the Staggers Act. Is the STB satisfied with 
the proposed reauthorization measure or are there additional areas you 
would like to see addressed?
    Answer. As an independent regulatory agency, the Board does not 
express opinions on the merits of pending legislation; rather the 
agency will be prepared to implement the bill once it is signed into 
law. However, it is clear that the legislation would make the agency 
more proactive and would authorize more resources to allow it to carry 
out its mission more robustly. I would like to note several measures in 
the legislation that would provide the agency with better regulatory 
tools to carry out that mission.
    First, I am supportive of the provision in the legislation that 
would allow the Board to initiate investigations on its own accord 
(except in rate disputes). This would eliminate the need for a party to 
file a complaint before the Board investigates, a requirement that 
serves as a barrier to the Board examining matters that it knows are a 
source of conflict, but which it can do nothing about. Having the 
ability to investigate matters on its own accord, the Board could be 
more proactive--rather than reactive--to problems it spots in the rail 
industry.
    Second, I am supportive of the provisions that would give the Board 
the ability to refer certain disputes to arbitration. As I mentioned 
during my oral testimony, I have initiated a proceeding to explore ways 
to improve our current arbitration process, which has admittedly been a 
failure. Although I am hopeful that this proceeding will ultimately 
lead to an improved arbitration process, use of arbitration will still 
be limited by the fact that it is only voluntary. Providing the Board 
with statutory authority to require arbitration would give the process 
much more leverage. I think use of arbitration would be particularly 
helpful in resolving those isolated disputes that do not have industry-
wide ramifications.
    Finally, I am pleased with the provisions in the legislation that 
require the Board to carry on with its efforts to revamp the Uniform 
Rail Costing System (URCS). As I have repeatedly stated, it is 
imperative that the Board improve URCS so that parties can feel 
confident that the results of our decisions are in fact accurate.

    Question 2. As you know, the rail reform bill reported by the 
Committee last December would require railroads to quote bottleneck 
rates and direct the STB to establish standards for determining the 
reasonableness of such rates. To guide the Board, the bill specifies 6 
elements of a reasonable rate, including the carrier's ability to 
recoup its costs and earn a reasonable return on a bottleneck rate. 
What is the STB's view of the railroads' demand for ``lost 
contribution''? Should the railroads be entitled to all of the profits 
they stand to lose in quoting bottleneck rates, even though they would 
no longer be providing service over a portion of the route?
    Answer. At this time, the STB has no view on the railroads' request 
for lost contribution. This is one of the issues I plan to seek public 
comment on in a proceeding to explore our competitive access rules. 
Such a hearing will give us the opportunity to hear from the industry 
and various experts on the pros and cons of such a request. But until 
the agency has benefited from that input, it would be premature to take 
any position on that issue.

    Question 3. How far can the STB go in opening access without 
additional statutory authority?
    Answer. Again, unfortunately, I can offer no view at this time. The 
Board has statutory authority to order competitive access remedies--
including reciprocal switching (49 U.S.C. 11102(c)), terminal access 
(49 U.S.C. 11102(a)), and alternative through routes (49 U.S.C. 
10705))--in specific situations. The precise scope of that discretion, 
however, is unclear. It is my intent to explore that issue in an 
upcoming hearing on our competitive access rules. But until the matter 
has been fully briefed, it would be premature to offer my views on how 
far the Board can go to open access under the existing statutory 
structure.

    Question 4. As you know, revenue adequacy is one of four 
constraints on a railroad's pricing of captive traffic. The STB has 
long said that ``revenue adequacy is a long-term concept that calls for 
a company, over time, to average return on investment equal to its cost 
of capital.'' How does the Board define ``long-term''? Norfolk Southern 
has been revenue adequate for a number of years, and yet the STB has 
not applied the revenue adequacy constraint to the rates NS charges. 
How does the Board intend to apply the revenue adequacy constraint when 
railroads achieve revenue adequacy for a sustained period?
    Answer. In Coal Rate Guidelines (1985), the rulemaking in which the 
Board's predecessor agency, the Interstate Commerce Commission (ICC), 
created the revenue adequacy constraint, the agency stated ``that 
revenue adequacy is a long-term concept that calls for a company, over 
time, to average return on investment equal to its cost of capital. In 
any industry there are business cycles producing years during which 
earnings exceed projections and years when they fall short of the 
target.'' The ICC then specified in a footnote, ``We will not attempt 
to decide here what period of time may be sufficiently representative 
in every case. This will vary depending upon the carrier's traffic base 
and the relative stability of the economy at the time.''
    Accordingly, there is no bright-line cut-off for the number of 
years that a carrier must achieve revenue adequacy for the revenue 
adequacy constraint to apply. Rather, it will depend on the facts of 
each individual case. However, as the ICC noted, the number of years 
should be representative of a business cycle, so it would be incumbent 
on a complaint to show that the number of years the carrier has 
achieved revenue adequacy are reflective of such a business cycle.
    It is true that Norfolk Southern Railway Co. (NSR) has earned a 
return on investment that exceeds the industry average cost of capital 
over the past several years, though the Board has not yet issued its 
2009 revenue adequacy calculation. However, even if it were assumed 
that this would make the revenue adequacy constraint applicable to NSR, 
the Board does not apply the revenue adequacy constraint on its own 
accord. Rather, as set forth in Coal Rate Guidelines, if a shipper 
believes that it is paying rates in excess of what NSR needs to charge 
to achieve revenue adequacy, that shipper must file a rate complaint 
with the Board.
    There is no formulaic test or methodology for a complaint based on 
the revenue adequacy constraint as there is for the stand-alone cost 
constraint. Accordingly, I cannot specify in detail what evidence the 
complainant must submit, but such evidence would have to show that the 
rail carrier is charging the shipper a rate beyond what the carrier 
needs to charge in order to maintain revenue adequacy. The Board would 
consider this evidence one case at a time.
    If there were a number of revenue adequacy rate complaints over 
time, eventually a body of case law would develop that would guide 
future parties bringing such cases, as happened with the stand-alone 
cost test. The ICC did provide some guidance in Coal Rate Guidelines, 
stating that ``A railroad seeking to earn revenues that would provide 
it, over the long term, a return on investment above the cost of 
capital would have to demonstrate with particularity: (1) a need for 
the higher revenues; (2) the harm it would suffer if it could not 
collect them; and (3) why the captive shippers should provide them.'' 
The Board also processed a rate complaint against a pipeline carrier 
(CF Industries, Inc. v. Koch Pipeline Co., L.P., 4 S.T.B. 637 (2000)) 
in which the complainant successfully used the revenue adequacy 
constraint.

    Question 5. Is the value of a railroad's assets adjusted for 
capital invested by Federal, state, and other government or quasi-
government entities in the determination of revenue adequacy, and if 
so, how? If not, shouldn't it be? Why should railroads be entitled to a 
return on investment for capital invested by government bodies?
    Answer. The value of railroad assets is adjusted to reflect capital 
from public sources. Funds provided by government subsidies have no 
cost to the carriers and are subtracted from the net investment base in 
computing revenue adequacy because railroads should not earn returns on 
increases in asset bases generated from investments that were paid for 
by government subsidies.
    Because of the Department of Transportation's issuance of 
Transportation Investment Generating Economic Recovery (TIGER) grants, 
the Board's accountants earlier this year reminded rail carriers of 
their obligation to account for capital invested in their systems by 
governmental bodies separately, and to exclude such capital from the 
carrier's asset base for the purposes of our revenue adequacy 
determination. Therefore, in the future, Class I railroads should 
disclose the amount of government funding (i.e., Tiger Grants, grants, 
and subsidies) in footnotes to Schedule 250 annual reports. We will 
continue to monitor and audit the carriers' public filings to ensure 
they are in compliance with our reporting requirements.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. John Thune to 
                       Hon. Daniel R. Elliott III

    Question 1. This past April, the Departments of Agriculture and 
Transportation submitted a report on a joint study of rural 
transportation issues. Among the report's findings were that:

   Almost 75 percent of agricultural areas lost rail 
        competition from 1992 to 2007, and the areas in which a 
        railroad had a monopoly in transporting grain and oilseeds 
        increased from 10 percent to 15 percent;

   Rail rates for grain and oilseeds rose 46 percent from 2003 
        to 2007, while rates for all other products increased 32 
        percent over the period; and

   From 2001 to 2007, fuel surcharges by the railroads were 55 
        percent higher than the incremental increase in the cost of 
        fuel.

    What do you believe needs to be done to address these findings?
    Answer. I have reviewed the joint report by the Departments of 
Agriculture and Transportation and it raises a number of important 
issues. I believe it is appropriate for the agency to explore the state 
of competition as part of a broader inquiry into the state of its 
competitive access rules, particularly as the conclusions of that study 
appear to diverge with some of the conclusions of the competition study 
conducted by Christensen Associates for the STB. And, in that inquiry 
of its competitive access remedies, the Board will explore in more 
depth the issues of captivity that many agricultural shippers face. To 
that end, the agency has announced that it will hold a hearing on 
December 9, 2010, to begin re-examining the class exemption for certain 
commodities.

    Question 2. A recent study conducted by Christensen Associates for 
the STB indicates that the percentage of rail tonnage moving at a 
revenue-to-variable cost ratio of less than 100 percent has risen from 
16 percent in 2001 to 25 percent in 2008. The percentage of rail 
tonnage moving at rates producing a revenue-to-variable cost ratio 
above 300 percent has also risen, from 6 percent to 9 percent of total 
tonnage. Is it correct to interpret this trend as showing that where 
competition exists, prices are being driven down, and that where 
competition does not exist, prices are going up? What justification can 
there be for the railroads moving one-quarter of their traffic at rates 
that don't cover their variable costs, let alone contribute to fixed 
costs and a return on investment?
    Answer. The Christensen report found that overall railroad rates 
have been steadily increasing since 2004, with a particularly sharp 
increase in 2008. The report also found evidence that shippers with 
less access to competition paid higher rates while otherwise similar 
shippers with more competition paid lower rates. But the steady 
increase in the short term rates detected by Christensen was attributed 
to cost increases rather than an increase in the exercise of market 
power by the railroad. At this point, I have no basis to disagree with 
the report, but I look forward to exploring the issue in more depth as 
we move forward and reexamine our competitive access rules.
    Concerns about the large amount of railroad traffic with rates 
below ``variable costs,'' as calculated by the Board's Uniform Rail 
Costing System (URCS), are misplaced. For many decades, a significant 
portion of rail traffic has traveled below the ``variable cost'' as 
calculated by the agency. This is true because, as the Board has long 
observed, URCS is not a marginal cost model. Short-run marginal costs 
are the operating costs that would not be incurred but for a particular 
movement. Examples of these directly variable costs include fuel, 
labor, track maintenance, and switching costs. These costs are the 
kinds of expenses that a carrier should consider when setting 
transportation rates for a particular movement in the short run. And 
any rate above marginal cost will make a contribution to the railroad 
network, which in turn reduces the contribution the carrier needs to 
earn from captive traffic to be revenue adequate.
    However, the marginal cost associated with handling particular 
traffic is not readily measurable. So the agency has, for decades 
(dating back as far as the 1930s), used a costing model that seeks to 
include in its estimate the long run variable costs. Expenses included 
in this measure include maintenance-of-way and structures, management 
expenses, depreciation, interest on debt, and return on investment. As 
a result, ``URCS variable costs may include a significant portion of 
what may actually be unattributable joint and common costs.'' 
Simplified Standards, 1 S.T.B. 1004, 1028 (1996). For example, the 
agency's general purpose costing model has long included 50 percent of 
road ownership costs as a ``variable cost'' for regulatory costing 
purposes. Thus, regarding traffic with a revenue-to-variable cost ratio 
less than 100 percent, it is possible that even though this traffic 
would appear, on its face, to be money-losing traffic, because of the 
way URCS accounts for road property investment (a significant cost to 
rail carriers), that is not always the case. In other words, traffic 
with an R/VC ratio of 90 percent may be contributing to the fixed costs 
of the carrier's network, but because of the way URCS accounts for road 
property investment, it is showing up as moving at below cost.
    In addition, it is also true that some traffic moves at rates below 
even the marginal cost of handling that traffic. Movements under 
legacy, long-term contracts, where the escalation clause may not have 
kept pace with rising costs, are a likely candidate. But because our 
costing model was never designed to capture marginal costs, looking at 
the amount of traffic that falls below 100 percent of URCS is not an 
accurate measure of unprofitable traffic.

    Question 3. What impact do you believe caps on carbon emissions as 
part of climate change legislation would have on railroad coal traffic, 
and by extension, on overall railroad revenues?
    Answer. The STB Board Members participate in regular meetings of 
the Rail Energy Transportation Advisory Committee, which was formed to 
provide reports and advice to the Board on issues concerning 
transportation of energy-related cargo, including coal. As part of that 
input, the Board has received two recent presentations by the U.S. 
Energy Information Agency addressing the future outlook for energy 
demand and consumption, ``Outlook for U.S. Coal, Presentation to Rail 
Energy Transportation Advisory Committee of the Surface Transportation 
Board at FERC'' (December 1, 2009), and ``EIA's Outlook Through 2035 
From the Annual Energy Outlook 2010, Surface Transportation Board, 
Washington, D.C.'' (March 23, 2010). These presentations have included 
detailed quantitative analyses of scenarios incorporating a variety of 
possible legislative and regulatory initiatives. These projections 
represent a considerable range, corresponding with the types of 
legislative and regulatory actions that are incorporated into the 
projections. The reports, and links to additional detailed reports 
prepared on these topics, may be found in full at the Rail Energy and 
Transportation Advisory Committee section of the STB's website, 
www.stb.dot.gov. The impact of any proposal would of course depend on 
the particular details of the proposed legislation.
                                 ______
                                 
  Response to Written Question Submitted by Hon. Olympia J. Snowe to 
                       Hon. Daniel R. Elliott III

    Question. As you know, in February, the Montreal, Maine, & Atlantic 
Railway (MMA) submitted an application to abandon a rail line from 
Millinocket north to Van Buren--along which a vast majority of Maine's 
timber and paper industries work. The abandonment process is a 
complicated one; it requires a series of events to occur, all overseen 
and agreed to by the Surface Transportation Board. The State of Maine 
has taken steps to purchase the underlying track and real estate--and 
to negotiate an equitable settlement. But if this fails, losing an 
operating railroad in northern Maine would decimate the economy, 
forcing nearly 100,000 more trucks onto the roads, and driving up 
shipping costs for the lumber and paper manufacturers. There has not 
been a contested abandonment case in more than two decades. Please 
provide this committee with an update on the STB's efforts with respect 
to this case. From your perspective, what can the STB do to find an 
equitable solution that protects jobs and ensures the long-term 
viability of freight rail in this part of the state?
    Answer. The application filed by Montreal, Maine & Atlantic Railway 
(MMA) in STB Docket No. AB-1043 (Sub-No. 1) to abandon several 
different rail lines has presented the Board with significant issues to 
resolve. As a matter still pending before the Board, there is little I 
can say about the merits of that dispute, but I was pleased to see that 
the parties recently filed with the Board a term sheet that outlines a 
deal that would allow MMA to sell the line to the state of Maine for 
continued rail service.
    I would like to detail our efforts to mediate an alternative to 
abandonment that have contributed to this outcome. First, I encouraged 
the parties to enter into mediation to see if they could work out a 
solution that did not involve the abandonment of the MMA lines. To help 
shepherd this process, I appointed the Board's most experienced 
mediator and the chief economist of the agency to this matter. When it 
became clear that the parties would not be able to reach an agreement 
before the deadline for the Board to rule on MMA's abandonment 
application, I directed the Board staff to take the unprecedented 
action of postponing a ruling on the application, so that the parties 
would be able to continue their negotiations.
    Second, at the request of the Maine Congressional Delegation and 
Maine Department of Transportation (Maine DOT), the Board held a field 
hearing in Presque Isle, Maine, on July 7, 2010. Speakers representing 
public officials, the railroad, the State, shippers, business and 
community interests, and rail labor testified at the hearing. The 
purpose of the hearing was so that the Board members and staff could 
hear firsthand from the parties that would be affected if the lines 
were abandoned and from MMA the difficulties it would face if it were 
required to keep the lines in operation. The hearing was also intended 
to serve as an airing of the facts, in order to help the parties in 
their mediated discussions. I believe our decision to take this matter 
to the residents of Maine, rather than ask them to come to Washington, 
served the dual purpose of letting the affected public voice their 
concerns with the transaction and better informing my colleagues and me 
of the impact the abandonment will have on the region.

                                  
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