**Roger Nober**

**Chairman, Surface Transportation Board**

**Speech to National Industrial Transportation League**

**Spring Forum**

**March 23, 2004**

Good afternoon and thank you for the kind introduction. I appreciate the
opportunity to speak to you today about the Surface Transportation Board
and our agency's agenda for 2004.

1.  **[Overview of the STB]{.underline}**

As most of you already know, the Surface Transportation Board is an
independent, three member bi-partisan economic regulatory agency. The
Board was created in 1996 as the successor agency of the Interstate
Commerce Commission. Prior to Congress enacting motor carrier and rail
deregulation in 1980, the ICC reviewed and approved every rate for every
interstate shipment in the U.S. as well as entry and exit into the
market for every firm. In the heyday of regulation, the agency's
regulatory reach was so large that by the late 1970's it had over 2500
employees. Currently, the Board has about 140 employees and a budget of
about \$20 million, although it may grow some as the Congress continues
to vest our agency with new responsibilities.

The Board is administratively affiliated with the Department of
Transportation, but is independent by statute for all substantive
decisions. The Board's mission is to carry out the remaining economic
regulation of our surface transportation system, including exclusive
review and approval of rail mergers; review of rail rates to ensure they
are reasonable and rail service to ensure it is not discriminatory;
approval, including environmental review, of construction of any new
rail line or abandoning existing lines; motor carrier collective
activities; rates for non-contiguous domestic trade; and rates for
pipelines not carrying water, oil or gas.

I should also note that although the Board is supposed to have three
members, since last May I have been its only sitting Member. I will tell
you that any novelty that there may have been in being a solo Board
member has long since faded. The current vacancies, however, have not
significantly impeded the business of the Board. The Board has acted on
matters when governing statutory deadlines necessitated it. But, that
being said, the Board has postponed major policy initiatives (such as
reforming the small rate process, which I will discuss later) because I
believe that such policy decision should be made by a full compliment of
Board members.

Two new members were nominated in November and their confirmation
hearing has been held. There are still a few more hurdles until they are
confirmed and sworn in, but I hope to have them in place at the Board
soon so that decisions and policy initiatives can move along promptly.

With that as background, I would next like to review some of the Board's
accomplishments during my first eighteen months as Chairman, and to
outline my priorities for 2004.

2.  **[Accomplishments in 2003]{.underline}**

    a.  [Openness]{.underline}

My top priority upon coming to the Board has been to make its processes
more open, transparent and responsive to its stakeholders. During my
nomination and confirmation process, stakeholders almost uniformly
expressed concern that the Board had become closed and its processes
poorly understood.

To promote openness, I have adopted a policy of holding public hearings
or oral arguments on any significant matter that comes before the Board.
This was a departure from the past, when hearings were held only in the
most extraordinary of cases. For the first time I scheduled oral
arguments in large rate cases, beginning with what have come to be known
as the three eastern cases -- two cases brought by Duke Energy
Corporation, one against Norfolk Southern Railway and one against CSX
Transportation, and one brought by Carolina Power and Light against
Norfolk Southern. Until these three cases were filed, nearly all of the
large rate cases brought before the Board involved movements of western
coal and commodities rather than eastern coal and commodities. Just last
week, the Board held an oral argument in *Public Service Company of
Colorado d/b/a/ Xcel Energy v. The Burlington Northern and Santa Fe
Railway Company*, a western rate case. The Board recently held a hearing
on the merger proceeding between the Canadian National Railway Company
and Great Lakes Transportation Company. And, the Board has scheduled a
field hearing in Trenton, New Jersey and a hearing in Washington, D.C.
concerning the agency\'s fifth and final round of oversight of the
Conrail merger approved by the agency in July 1998.

My belief in the importance of open, public meetings is mirrored in my
open-door policy for scheduling personal meetings as well. Since
becoming Chairman, I have visited with almost all major agency
stakeholders.

While I do have an open door policy in Washington, I also believe that
to be a good regulator, one has to leave their desk and see actual
people involved in actual transportation work. To that end, I have
traveled extensively meeting with stakeholders. I have visited numerous
shipper facilities, including a grain elevators in North Dakota, a
coal-fired power-plant in Texas, a Chemical facility in Louisiana and
tomorrow I will tour the Bayport Chemical complex outside of Houston. I
have also visited many carriers, spending days with the four largest
class one railroads and on a regional railroad, as well.

Finally, I instituted regular, open voting conferences to decide cases
ending the Board's practice of deciding almost all matters based on
written notation votes. The Board had several voting conferences in 2003
before they were suspended due to the departures of the other two
Commissioners. I look forward to holding them again once new members are
in place.

# Recently Decided Rate Cases

Since I have been Chairman, the Board has decided four rate cases. While
I find there is a tendency on the part of stakeholders to attempt to
draw general principles from each decision, in reality each case stands
on its own, and I think the results demonstrate that litigation can be a
mixed bag. The three Eastern cases show that even with very similar
traffic, the results of the rate case process vary depending upon the
evidence put in, as well as the design of the system and the traffic
group.

One of my primary goals with respect to the Board's large rate case
decisions is that they be clear and that there is consistency in the
application of the standards. The Board worked hard to ensure that
individual decisions made within the Eastern cases were consistent,
wherever possible, throughout the three cases. To that extent, I would
say that the cases represent a high water mark for the agency. The Board
will strive to bring this type of clarity and consistency to all rate
cases.

I also recognize that, despite the high quality of our work, the Board's
decisions sometimes contain technical mistakes. While the Board does all
it can to avoid technical errors, it will address them when they are
brought to the agency's attention.

With that said, I recognize that there are those in the shipper
community who are not pleased with the most recent rate case decisions.
I can only say that the rules of constrained market pricing and
stand-alone cost were applied consistently and thoroughly -- and that
the outcome of these cases should not be taken as a predictor of the
results of future cases. Each case is decided individually based on the
facts and evidence in that case, in accordance with Board precedent.

b.  [Streamlining Large Rate Cases]{.underline}

Now having experience with the Board's rate case process, I understand
how time consuming and costly it is for both the parties involved and
the Board. Although the Board by statute has nine months after all
evidence is filed to decide a large rate case, it can take more than
twice that long after the shipper files its complaint for the parties to
file all their evidence with the Board. Preparing that evidence and
presenting it to the Board are very expensive -- parties have testified
that a stand-alone cost case can cost \$3 million (or more) to
prosecute, \$5 million (or more) to defend, and generate more than
700,000 pages of material.

During my term as Chairman, the Board has sought to simplify and speed
up this process. A number of streamlined measures were introduced in a
proceeding which the Board calls *STB Ex Parte No. 638*. These new rules
call for technical conferences with staff, mandatory mediation by the
parties within 60 days of filing a rate case, expedited resolution of
discovery requests and filing of public versions of confidential
documents.

One great benefit of the new procedure is the increased involvement of
Board staff in the process through technical conferences and regular
meetings with the parties. The Board established technical conferences
because the parties were spending time and attorney and consultant fees
fighting about -- and the Board was expending resources to resolve --
technical matters over which there should be no dispute, such as the
number of miles between a coal mine and a power plant. In the first
technical conference (held in the *Otter Tail v. The Burlington Northern
and Santa Fe Railway* case), disputes over 200 pieces of data were
settled in just over an hour. In the past, these disputes would have led
to protracted litigation that would have cost the parties thousands of
dollars in fees and could have substantially slowed resolution of the
case.

Now parties have started to request technical conferences even when they
are not required by the procedures set forth in *Ex Parte 638*.
Recently, in *Arizona Electric Power Cooperative, Inc. v. The Burlington
Northern and Santa Fe Railway Company and Union Pacific Railroad
Company*, the parties were able to resolve an evidentiary dispute that,
in the past, would have resulted in delays in the case and the
expenditure of considerable time and money. In addition to saving all
participants time and money, the resolution of these disputes at
conferences results in clearer evidence getting filed in rate cases. The
Board encourages parties to request these conferences and is ready and
able to make staff available to assist. The Board will continue to look
for ways to streamline the large rate case process and looks forward to
working with the parties on further refinements.

c.  [Some Setbacks for the Board]{.underline}

The Board did have a couple of setbacks in Court this year. The United
States Court of Appeals for the Eighth Circuit partially vacated and
remanded -- which means it sent it back to the Board for further
proceedings -- a small portion of the Board's decision approving Dakota,
Minnesota & Eastern Railroad Corp.'s new rail line to coal mines of
Wyoming's Powder River Basin. Primarily, the Court was concerned that
the Board's environmental analysis had not taken into account the
effects that might occur as a result of what it concluded was a
reasonably foreseeable increase in coal consumption.

I am concerned with the possible implications of this ruling -- which
for the first time asked the agency to look not only at the entity and
project it regulates, but raised the possibility that the agency would
need to examine the effects of transporting a certain commodity carried
by the regulated business. I know many of you in the stakeholder
community are also concerned about this ruling, and several stakeholder
groups -- including the NITLeague \-- filed amicus briefs with the Eight
Circuit similarly urging that they reconsider the ruling. Unfortunately,
the petitions for rehearing were denied, and the Board will address the
remanded issues consistent with the decision of the Court of Appeals.

There has also been a delay in a rail construction project approved by
the Board which gave San Jacinto Rail Limited, a subsidiary of The
Burlington Northern and Santa Fe Railway Company, and four chemical
shippers approval to construct a 12.8-mile railroad line near Houston,
Texas and for BNSF to provide service over the line. While the Board
approved the rail line construction, in order for the rail line to be
built, some of the property must be obtained through the state's eminent
domain statute. A state court in Texas has prevented the construction
from going forward because it has ruled that Texas's eminent domain
statutes preclude the taking of the land required for the project. While
the matter is presently going through the state court appellate process,
I am concerned about the possible effects of the state court ruling and
the Board may express those concerns in a filing with the state court.
Our primary interest is the resolution of the matter so that the rail
construction can begin.

Stepping back for a moment, I am concerned about the larger implications
that these rulings may have on the decisions of railroads and shippers
to try to improve their competitive positions through building-in. Since
these types of projects are privately-funded, I worry that companies may
decide that it is too risky to tie up capital on a build-in project and
no longer look to these as private-sector solutions to railroad
competition.

3.  **[Priorities for 2004]{.underline}**

Let me next turn to some issues the Board will be focusing on in 2004.
The major issues presently before the Board arise from the fundamental
schism between shippers and carriers since the passage of the Staggers
Act. Shippers perceive rates as too high and service as inadequate,
while the railroads are concerned that they become, and remain, revenue
adequate.

Many shippers, including many members of the NITLeague, believe that
legislation is the answer to their concerns about railroad rate and
service issues. To help achieve their goals, these shippers have become
proponents of legislation to re-structure the statutory balance between
railroads and shippers. It is no secret that I have opposed this
legislation, and have testified before Congress to that end. Let me try
to explain why.

Taken as a whole, this legislation would fundamentally change the
economic model of the railroad industry, calling into question the
continued economic viability of our freight railroad system. While some
shippers may realize a short-term gain from lower rates, in the long run
this legislation, if passed, could significantly degrade our nation's
freight rail network, to the detriment of all of its users. Although the
nation's privately funded railroad system may have some problems, it is
the best freight railroad system in the world, and the United States is
the only country with a national freight rail network that does not need
taxpayer subsidy.

But while I am opposed to the legislation, I am sympathetic to the
concerns of shippers that have led them to support this type of
legislation. Rather than legislation, though, my approach is to address
the issues that underlie the legislation. The Interstate Commerce Act
sets the parameters for resolving rate and service disputes between
railroads and their shippers, and pre-empts any private relief. Yet
certain of our doctrines have made it practically impossible for
shippers, particularly shippers of smaller than unit train quantities,
to obtain meaningful rate relief.

a.  [Small Rate Cases]{.underline}

Since I became Chairman, my top priority has been to provide shippers
who have smaller rate disputes an effective forum for resolving such
disputes. No cases have ever been brought under our small rate
guidelines. This may be because there are no smaller rate disputes, or
because there is something in the Board's rules that discourage shippers
from bringing such cases. If no small cases are brought, this means that
in practice, only about 75 coal shippers have a meaningful opportunity
to challenge rail rates. This is unacceptable. The Board must resume
efforts to reform small rate cases.

I understand the concern that the Board's small rate case process it too
uncertain and complicated, particularly as to who qualifies as a small
shipper and how the guidelines would be applied to decide a case. I
intend, through rulemaking procedures, to establish a meaningful process
to resolve small rate cases quickly and with less cost. Towards that
goal, the Board has held an oral hearing on this matter, where we heard
testimony from a number of shipper groups, including the NITLeague.
Board staff has met with staff from other economic regulatory agencies
to gather information on how those agencies handle small rate disputes,
and there is an agency team developing proposals to address the small
rate case process.

The Board seeks to bring some level of certainty to the issue of
eligibility by constructing a safe harbor that is consistent with
Congress's intent. If a shipper fell within the safe harbor, the shipper
automatically would be eligible to use the small case process. If a
shipper fell outside the safe harbor, it would need to demonstrate why
the Board should use the small rate case process, rather than the large
rate case process, to resolve its complaint.

I also expect that the Board will develop procedures to ensure the
expedited consideration of small rate cases. One concept that could be
accomplished administratively is to create an expedited process
conducted by an Administrative Law Judge. The ALJ's decision on the
merits would be subject to an expedited appeal to the Board. Another
option is to modify the Board's stand-alone cost method used in large
rate cases to work in smaller ones. I expect to move forward on this
initiative once new Board members are appointed.

b.  [Resolution of Disputes Between Shippers and Railroads]{.underline}

I believe another issue giving rise to the proposed legislation is that
many disputes between shippers and railroads often take on a life of
their own because of the way shippers feel they are treated by the
railroads. Rail customers often conclude that while rates are high, the
railroads' service and attitude are bigger problems. Railroads need to
work harder to operate in a more customer-friendly fashion, and I am
working with all of our major rail carriers to impress upon them the
importance of doing so. Railroads must be nimble competitors in the
transportation marketplace to increase their business and grow their
revenues. While the leadership of each of the major railroads
understands this, that attitude does not always translate through their
entire organizations.

Helping railroads improve their operations to provide better service is
one goal that carriers, shippers and policy makers all share. The Board
has been instrumental in bringing the railroads, the city and the state
together to improve operations and devise a capital plan for improving
operations in the Chicago terminal area. Approximately one-third of all
rail shipments go through Chicago at some point in their journey.
Improving Chicago and other rail gateways will allow for faster, more
reliable shipments, to the benefit of all.

The Board also has recently done some good behind-the-scenes work to
improve rail service for grain shippers in the upper mid-west. After
receiving specific complaints from the Governor of North Dakota, the
Board facilitated a private meeting at the Board's offices among the
Governor and shippers in North Dakota and the railroad. As a result of
the meeting, the railroad and the Governor agreed to a series of actions
to address rail service for grain shippers. This process is a model for
the resolution of other specific service problems. The Board already has
in place an informal service complaint process, the Rail Consumer
Assistance Program, through its Office of Compliance and Enforcement. If
shippers bring their complaints to the Board, we will work diligently to
help the shippers resolve them.

I have also heard that shippers believe greater transparency in railroad
service metrics would help resolve some of the disputes between shippers
and railroads. The Board already reviews the railroads' service metrics
on a regular basis to assess and monitor the railroads' performance. The
Board will consider this suggestion to see if it is feasible and, if so,
in what ways the metrics could be used to ease shippers' concerns.

## Upcoming Cases of Significance

The Board will be deciding two large rate cases this year, *Xcel* and
*Otter Tail*. *Otter Tail* is one of the first cases to go through the
new streamlined rate case process. As I have discussed, the Board will
be addressing the end of the five-year Conrail oversight with the
hearings and a decision to follow, as well as the DM&E remand.

The Board will also be addressing a matter involving TTX, which provides
many of the railcars that are used by carriers today. TTX's pooling
authority, which was most recently extended in a 1994 ICC order, is set
to expire next October. TTX has asked the Board for a 15 year extension
of its pooling authority.

There is also some activity this year in some of the non-rail areas the
agency regulates. On the motor side, the southern rate bureau has
requested that it be permitted to expand its rate-setting authority to a
nationwide scope. Shippers, other rate bureaus, and the Department of
Transportation have expressed interest in this matter which will move
forward soon. The Board also has a pending pipeline case which it will
be deciding and two cases involving non-contiguous domestic trade.

There are also two items potentially requiring Board action that, if
they were both to come to pass, would be quite a strain on the Board's
resources. First, I testified earlier this month at a hearing involving
the potential construction of a rail line to move spent nuclear fuel to
the Yucca Mountain nuclear waste storage facility in Nevada. Now, the
Department of Energy has not yet decided how it will move the spent
nuclear fuel, and, even if it moves by rail whether the railroad would
be private or common carrier. If the railroad is common carrier, the
construction would be a rail construction project within the Board's
jurisdiction which we would have to review, including performing an
environmental review and analysis.

Congress has also given the Board authority to direct service of Amtrak
should Amtrak cease service. The purpose of this directed service would
be to ensure that commuter operations and freight service continued to
function in the face of an Amtrak shutdown. The Board is working with
the Federal Railroad Administration to prepare a report to Congress on
the issues involved in this directed service.

Finally, I will note that one of the greatest challenges I see for the
rail industry is that the railroads face a capacity conundrum -- they
have too much and too little capacity at the same time. Many railroads
have triple track in very low density areas while having only single
track in a highly utilized corridor. Basically, a railroad system which
was built in the Victorian Era is simply not set up to deal with 21^st^
Century transportation demands. As the railroads seek ways to make this
system work in the present day commercial environment, they will need to
make substantial capital investments. Ultimately, bringing the U.S. rail
system into the 21^st^ Century will be a benefit to all.

The American Association of State Highway and Transportation Officials
recently issued a freight bottom-line report, which found that with
moderate growth in the economy, "domestic freight tonnage will increase
by 57 percent by 2020 and import-export tonnage will increase by nearly
100 percent." The demand for freight rail services will increase
commensurately. If freight railroads are to carry even the same
proportion of freight that they carry now, then significant strains will
be placed on their systems and this will require significant capital
investment. If our freight rail system adds capacity and takes some the
strain of increased freight movements off of our highways, then our
freight railroads'need for new capital investment will grow even larger.

4.  **[Conclusion]{.underline}**

Ultimately, I am a proponent of transportation, and my top priority as
Chairman is to help our nation's transportation system -- particularly
our freight transportation system \-- remains the best in the world. In
my meetings and travels, I am often reminded by manufacturing companies,
agricultural producers or retailers that while it is almost always
cheaper to produce goods overseas, the one competitive advantage held by
the United States is our transportation network. I am mindful that our
freight rail transportation network, while at times frustrating, is
privately-financed, national in scope and the world's best. It remains
an integral part of our nation's transportation network, and it is my
hope that freight railroads can adapt and grow to meet the demands of
the 21^st^ century.