The Commonwealth of Pennsylvania, which has long been known as the
"Keystone" state, is geographically situated such that it forms the
major passageway where the main East-West and North-South highway and
rail routes converge to access our nation's Northeastern / New England
economic centers. That reality starkly magnifies the anticipated effect,
for Pennsylvania and the entire Northeast region, of the massive freight
growth predicted in the coming decades. Pennsylvania's transportation
planners must begin to identify and implement solutions to the current
condition of the transportation system that cannot adequately
accommodate today's traffic volumes, let alone handle projected capacity
demands. The expansion of the freight-rail system may be a
cost-effective way of alleviating congestion-associated highway costs
and increase the capacity of the total transportation system.

Nationally, domestic freight tonnage will increase 57% by 2020 across
all modes of transportation. Since 1990, rail traffic density has risen
over 100%. The freight rail system, which plays an integral part in the
movement of goods across the country, currently carries 16% of domestic
tonnage. The American Association of State Highway and Transportation
Officials (AASHTO), in their Freight Rail Bottom Line Report, states
that by 2020, the rail system must carry an additional 888 million tons
to maintain its current share of freight flows -- an increase of 44%.

Capacity constraints on the Pennsylvania railroads have rapidly
increased over the past several years. Currently there are fourteen
identified choke points and congested line segments on three of the four
Class One Railroads in the Commonwealth. It is important to understand
these locations, as they create slow downs on the primary corridors
traversing the State. Of course, these are the same routes that our 62
short line and regional railroads use to access their markets, as well
as receive raw materials.

The Class One choke points and slow down areas include the following:

**CSX:**

1.  The Trenton Line from Philadelphia to Morrisville

2.  South Broad St. Clearance Project in Philadelphia

3.  The inability to get double stack traffic from Pittsburgh to
    Cleveland

> **NS:**

1.  The Lemoyne Connector in Harrisburg, from the Lurgan Branch to the
    Port Road Branch.

2.  The Port Road Branch.

3.  The NS Main Line (Lebanon Valley) from Harrisburg to Philadelphia.

4.  South Broad St. Clearance Project in Philadlephia.

5.  The Port Perry Branch in Pittsburgh

6.  The NS Main Line from Harrisburg to Pittsburgh and West.

> **CP:**

1.  The New Milford Passing Siding in Susquehanna County

2.  The Taylor Yard Siding in Scranton

3.  The Buttonwood Siding

4.  The Bloomsburg Siding

5.  The Sunbury and Nescopek Sidings

It should also be pointed out that increases in freight activity are
further accentuated by passenger service on some of these same lines.
For instance, Amtrak and SEPTA have some of their heaviest traffic on
Class 1 freight lines in the Philadelphia area. Additionally, NS
operates on the Keystone Corridor, the busy Amtrak Line from Harrisburg
to Philadelphia. As the Philadelphia to Harrisburg NS Main Line becomes
more congested, some of the single stack traffic is being shed from this
route to the Keystone Corridor, causing even greater capacity problems.
Also, Amtrak traffic from Harrisburg to Pittsburgh and west is along the
busy NS double stack Main Line.

As previously indicated, freight railroads have been experiencing one of
their busiest times in decades. Several commodities/trends that are
contributing to this are the re-emergence of coal in electric power
generation and the recent explosion of ethanol production and
distribution facilities. Given Pennsylvania's strategic location in the
Northeast and Mid-Atlantic, much of this traffic traverses the
Commonwealth. We have projections that several of the proposed ethanol
facilities will double car-loadings on several of our short lines. Of
course most of this traffic will travel over the Class Ones to reach
these facilities. This additional freight will put increased strain on
the limited capacity and finances of the nation's and Pennsylvania's
railroads, and the industry is expected to have difficulty absorbing its
share of the growth at current investment levels.

Class I railroads spend approximately \$2 billion annually on
infrastructure, above and beyond repair and maintenance. More than 17%
of the railroad industry's revenue is spent on capital investments, and
railroad investment in infrastructure and equipment is the largest
private investment in the transportation system. The fact that the rail
industry is extremely capital intensive puts strains on the amount the
railroad industry has available to spend on capital investments. If
current levels of investment continue, the rail system will continue to
carry the same volumes of freight in 2020 as it carries today, but
little more. The freight volume forecasts published by AASHTO, FHWA and
other agencies and researchers make it clear that if the freight rail
system cannot keep pace with the growing capacity need, the excess
tonnage will be shifted to the nation's roadways, causing more
congestion and costing more money for maintenance.

Yearly, Pennsylvania funds rail freight projects through the Rail
Freight Assistance Program (RFAP) and the Capital Budget Transportation
Assistance program. In 2006, the state awarded 45 RFAP and 21 Capital
Budget grants to railroads and businesses served by rail, totaling
\$30.5 million. The state annually receives requests for more than
double the amount of money available for funding these projects. This
disparity between the amount the Commonwealth is able to fund and the
amount of requests received speaks to the overall funding needed for
freight projects, both through the state and federal governments and the
railroad companies themselves. With total freight-rail shipments to
Pennsylvania expected to double by 2035, the Commonwealth can anticipate
increasing requests for financial support in the not-too-distant future.

If a higher level of investment can be achieved, the freight rail system
could not only maintain its current traffic level, but accommodate its
fair share of forecasted growth, and potentially more. Funding, however,
would have to come from a combination of railroad investments (above and
beyond what currently can be funded from revenues and borrowing) and
public sector participation. AASHTO has estimated that this scenario
will cost between \$175 billion and \$195 billion over 20 years, with
70-80% of the funding provided by the railroads themselves.

In order for the freight rail system to meet the forecasted demand in
the coming years, public policy and public participation strategies will
need to clearly reflect the importance of rail in the alleviation of
highway capacity. Strong public sector financial support will be needed,
as AASHTO estimates that the rail system needs an additional \$2.6 to
\$4.0 billion in annual capital investment to meet future capacity
needs. Some recommended strategies for increasing public support for the
rail industry include increasing loan and credit enhancement programs,
expanding the state's ability to invest where rail freight improvements
will have significant highway and public transportation benefits, and
instituting inter-state partnerships allowing investment and policy to
reach across state borders to address the nation-wide freight capacity
issue. Additionally, the use of innovative tax-expenditure financing
programs, including accelerated depreciation, tax-exempt bond financing,
and tax credit bond financing are invaluable tools in ensure the ability
of the rail system to handle future tonnage increases.

Additionally, the Federal government can continue to support the
freight-rail industry by encouraging private investment in railroads and
resisting attempts to reregulate it. Government policies that discourage
the large private investment needed, such as limiting the ability to
price to the market and limiting railroad earnings, may be shortsighted.
The health of the nation's rail system can be seen as a measure of the
health of the entire transportation system, and if rail capacity is not
increased in the coming years, the strain will be felt on the nation's
highways as additional freight is shifted to trucks. Public policy
encouraging capacity increases in the system are necessary, and the
proper steps to implement programs and strategies reflecting this
necessity should be undertaken as soon as possible.

In view of the critical implications of burgeoning domestic freight
growth, for Pennsylvania and for the nation as a whole, the policy
approach to addressing the freight capacity issue must include specific
provisions for rail freight and a formula for public rail investment.
Our railroads alone cannot supply the capital investment needed to
increase capacity sufficiently to meet the demands of the future. Only
through a workable policy of public-private investment can the railroads
be encouraged to reinvest the revenue dollars at the level that will be
required for capacity to keep pace with exploding freight volumes.