[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
__________
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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.