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S. HRG. 109–1159 

ECONOMICS, SERVICE, AND CAPACITY IN THE 

FREIGHT RAILROAD INDUSTRY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SURFACE TRANSPORTATION 

AND MERCHANT MARINE 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

JUNE 21, 2006 

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

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

TED STEVENS, Alaska, Chairman 

JOHN MCCAIN, Arizona 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

DANIEL K. INOUYE, Hawaii, Co-Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

LISA J. SUTHERLAND, Republican Staff Director 

CHRISTINE DRAGER KURTH, Republican Deputy Staff Director 

KENNETH R. NAHIGIAN, Republican Chief Counsel 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

SAMUEL E. WHITEHORN, Democratic Deputy Staff Director and General Counsel 

LILA HARPER HELMS, Democratic Policy Director 

SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT 

MARINE 

TRENT LOTT, Mississippi, Chairman 

TED STEVENS, Alaska 

JOHN MCCAIN, Arizona 

CONRAD BURNS, Montana 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

DAVID VITTER, Louisiana 

DANIEL K. INOUYE, Hawaii, Ranking 

JOHN D. ROCKEFELLER IV, West Virginia 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

(III) 

C O N T E N T S 

Page 

Hearing held on June 21, 2006 ............................................................................... 1 

Statement of Senator Burns ................................................................................... 2 

Prepared statement of the Alliance for Rail Competition (ARC) .................. 3 

Joint prepared statement of the National Barley Growers Association 

and American Malting Barley Association ................................................. 4 

Prepared statement of the Montana Wheat & Barley Committee ............... 5 

Statement of Senator Dorgan ................................................................................. 42 

Statement of Senator Lautenberg .......................................................................... 45 

Prepared statement .......................................................................................... 45 

Statement of Senator Lott ...................................................................................... 1 

Statement of Senator Pryor .................................................................................... 51 

WITNESSES

Buttrey, W. Douglas, Chairman, Surface Transportation Board ......................... 31 

Prepared statement .......................................................................................... 32 

English, Hon. Glenn, CEO, National Rural Electric Cooperative Association ... 60 

Prepared statement .......................................................................................... 63 

Ficker, John B., President, The National Industrial Transportation League .... 75 

Prepared statement .......................................................................................... 77 

Hamberger, Edward R., President/CEO, Association of American Railroads .... 80 

Prepared statement .......................................................................................... 82 

Hecker, JayEtta Z., Director, Physical Infrastructure Issues, U.S. Government 

Accountability Office ............................................................................................ 10 

Prepared statement .......................................................................................... 17 

McIntosh, John L., President, Chlor-Alkali Products, Olin Corporation; on 

behalf of the Olin Corporation and the American Chemistry Council (ACC) . 69 

Prepared statement .......................................................................................... 70 

Schuler, Dale, President, National Association of Wheat Growers (NAWG); 

on Behalf of NAWG, the National Barley Growers Association (NBGA), 

the USA Dry Pea & Lentil Council (USDP&LC) and Elenbaas Company ...... 55 

Prepared statement .......................................................................................... 58 

APPENDIX

Burlington Northern Santa Fe Railway (BNSF), prepared statement ............... 111 

Buttrey, W. Douglas: 

Letter, dated June 26, 2006, to Hon. Trent Lott ........................................... 109 

Response to written questions submitted by Hon. Conrad Burns ................ 116 

Capon, Ross B., Executive Director, National Association of Railroad Passengers, prepared statement ............................................................................... 109 

Portland Cement Association (PCA), prepared statement ................................... 111 

(1) 

ECONOMICS, SERVICE, AND CAPACITY IN THE 

FREIGHT RAILROAD INDUSTRY 

WEDNESDAY, JUNE 21, 2006 

U.S. SENATE, SUBCOMMITTEE ON SURFACE TRANSPORTATION AND

MERCHANT MARINE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:05 a.m. in room 

SD–562, Dirksen Senate Office Building, Hon. Trent Lott, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. TRENT LOTT, 

U.S. SENATOR FROM MISSISSIPPI 

Senator LOTT. The Committee will come to order. 

Welcome. Looks like we’ve got a great deal of interest in our 

hearing today. And we have two outstanding panels that we’re 

going to hear from. So, I’m pleased that we are going to have an 

opportunity to get the results from a study of freight railroad 

issues conducted by the Government Accountability Office. These 

are preliminary results, but it is our first opportunity to hear some 

details and be able to ask some questions. 

There were three major questions that we asked the GAO to examine: What changes have occurred in freight railroad industry 

since the passage of the Staggers Act, including rail rates and competition in the industry? Two, what do these changes suggest about 

different approaches to regulating freight railroads? And, three, 

what are the projections of freight traffic demand over the next 15 

to 25 years, the freight railroad industry’s projected ability to meet 

that demand and the potential for federal policy responses? 

I strongly believe in the need for a sturdy, dynamic, and economically viable freight rail industry. It’s absolutely essential for 

the future. I’ve said that privately and publicly, and I’m working 

on some ideas to contribute positively in that direction. I’ve started 

to ask the questions, how many lanes and how many planes can 

we put on the roads and in the air? The answer to what our needs 

are is clearly in the freight railroad industry, and we need to encourage that. We need to have a viable industry. And we need to 

make sure that we don’t do anything that’s going to slow down or 

undermine that. 

On the other hand, we often hear from rail shippers that are 

very frustrated about the cost of rail service. They complain about 

poor service. They deserve to have a recourse that is fair and accessible. And I’ve met with the Chairman of the Surface TransporVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
2 

tation Board, Doug Buttrey, to discuss these problems. He has a 

number of initiatives underway I hope he’ll be aggressive about in 

that area, and, you know, that he perhaps will have some recommendations to us in the future. 

But there has to be a proper balance here. I talk to shippers. I 

also talk to the railroad industry. I continue to urge both sides to 

look for common sense answers. However, I’ve also made it very 

clear, if some of the problems are not realistically addressed, we 

will do whatever is necessary to make sure it happens. For instance, if I find any evidence that railroads are using fuel surcharge as a way to make a little extra money, there’s going to be 

a real problem. And I’ve made that clear, privately; and I’m making 

it clear publicly now, because that just cannot be what happens on 

fuel surcharges. We’ve got enough of a problem in this country now 

with ridiculous fuel costs and charges, and we can’t have people 

taking advantage of the opportunity to make even more money 

under difficult circumstances. 

So, I don’t want to prejudice anything that’s going to be said in 

the hearing, but I wanted to get that marker down early. And I’d 

be glad to yield to my good friend, the Senator from Montana, Conrad Burns, who has been pursuing this hearing and has been very 

careful in laying the necessary groundwork. And I’m delighted to 

see him here. 

I would be glad to hear from you, Senator Burns. 

STATEMENT OF HON. CONRAD BURNS, 

U.S. SENATOR FROM MONTANA 

Senator BURNS. Thank you very much, Mr. Chairman. And 

thank you for this hearing today. I appreciate that very much, as 

we’ve been kicking this thing around for the last 2 or 3 years. And 

so, I thank you for this hearing. This is the first time that this 

Committee has taken a step, and what I think is a very positive 

step, in just having this hearing. 

I don’t have much of an opening statement this morning, but I 

want to—there are a couple of items that I want entered into the 

record. The Alliance for Rail Competition, they have—I want their 

full statement entered into the record, because we want to get to 

the questions. We’re kind of dealing with a little bit of time limit 

here, and I don’t like that. 

Senator LOTT. Senator Burns, let me just say that for you and 

others that might come in, your entire statement will be made a 

part of the record, and any additional statements that you’d like 

entered at this point, we’ll put them right in behind your statement. 

Senator BURNS. Thank you very much. Appreciate that. And 

there’s a statement by the National Barley Growers Association, 

and the Montana Wheat & Barley Committee, up in my state, 

where we have a particular situation that I think needs remedying. 

[The information previously referred to follows:] 

3 

PREPARED STATEMENT OF THE ALLIANCE FOR RAIL COMPETITION (ARC) 

Mr. Chairman and members of the Committee, this statement is submitted for the 

record on behalf of the members of the Alliance for Rail Competition. 

The Alliance for Rail Competition was founded in 1997 by shippers who believe 

that the shipper community must present a unified front made up of diverse industries across the country in order to garner support for policy reform and balanced 

solutions to America’s freight rail challenges. In ARC, the leaders of the largest 

chemical companies, the largest carload electric utilities and largest railroad shippers of an incredible variety of goods, have united with the largest group of agricultural interests in the search for responsible solutions. 

Of the testimony you will hear today ARC endorses in particular the testimony 

of Mr. Dale Schuler, President of the National Association of Wheat Growers. Mr. 

Schuler well represents the agriculture members of ARC in his testimony today. 

Freight rail shippers today would face daunting enough challenges in their quest 

to compete in the global marketplace even if they did not also find themselves captive to a ravenous monopoly. Yes, in many parts of the country whole industrial and 

agriculture sectors are in the clutches of a monopoly which has been either created 

or tolerated by misguided Federal policy for decades. 

Shippers do not believe that this monopoly is made up of evil people bent on evil 

purposes. This situation is driven instead by pure, cold economics which has produced a set of incentives counter to both the interests of shippers, the long-term interests of consumers and the country as a whole. 

Let’s take the issue of capacity. 

Today we are told that the system is straining at the seams to move freight. At 

the same time the railroads are enjoying record profits and are all rated by Wall 

Street as ‘‘buy’’ items. Well, let’s think about that. 

It seems that there is financial incentive for railroads to keep capacity down 

therefore keeping prices high . . . and rising. It’s like the hot new toy at Christmas. 

Everyone knows there won’t be enough to go around, so they clamor for the available supply and bid up prices. This is really simple economics. And we just wonder 

how anyone could expect any business to expand its product . . . or service . . . 

knowing that the incremental price of that service would immediately fall. 

Seeing this force at work every day, shippers have banded together for years now 

and asked for help from elected policymakers in Washington. For several years shippers have been united in support of S. 919, the proposed Rail Competition Act, sponsored by Senators Burns, Rockefeller and Dorgan on this Committee as well as eight 

additional Senators. Shippers have rallied behind this bill not because we believe 

it to be perfect, but because we believe it is a positive starting place for finding solutions to the country’s freight rail transportation problems. 

Yes, this is the country’s problem. 

Yet, shippers have felt that their interests and their efforts to seek positive policy 

changes have been ignored by our leaders in Washington. Why? Is it because it’s 

too hard? Is it because there isn’t a real problem? 

This is a time of turmoil in Washington and, in all candor, shippers are discouraged when they see lavish parties provided by the railroads at each of the major 

political conventions. Shippers are discouraged when they see on internet sites that 

railroads are very high on the list of providers of privately funded trips. Shippers 

are discouraged when they do not find any relief at the Surface Transportation 

Board for years running, yet they watch STB commissioners fly off into the sunset 

joining law firms representing and lobbying for the same railroads they formerly 

regulated. Shippers are discouraged when they watch staff members of the same 

STB go to work directly for the railroads and subsequently show up at STB regulatory hearings representing Class I railroads. We suppose this is all legal . . . all 

within the rules . . . but it surely is discouraging. 

Shippers believe that the intent of Congress in enacting the Staggers Act in 1980 

was good. But we also believe that a series of unfortunate decisions made by appointed government functionaries has usurped the intent of elected officials like 

those who serve on this Committee. We are only asking our elected officials to correct these inequities and assert their primacy as the people’s representatives. We 

are asking you to work with us, and the railroads, to find solutions which will propel competitive U.S. commerce through this new century. But it is imperative that 

you act. 

This problem will not solve itself. The financial incentives are working in favor 

of a status quo that cannot be maintained. Sooner or later this will wind up at your 

doorstep. The only question is how much it will cost to solve. This is a burgeoning 

crisis that grows larger each day. So we ask you to act now, even incrementally, 

to avert crisis and improve the future. 

4 

ARC members continue to look to this Congress to provide the leadership and impetus for needed change. 

It has become clear to Dow Chemical (Dow) Worldwide that domestic competitiveness is being hindered by the lack of competitiveness in the North American rail 

market. Dow Chemical, according to Brad Gray, Director of Global Purchasing, . . . 

‘‘views the world as a single market, rather than an aggregation of regions and 

blocs. In a single world market, companies from every corner of the world are competing with one another. The current state of the rail market, with unreasonable 

fuel surcharge practices, unreliable service and limited capacity will continue to 

hinder Dow’s competitiveness in the world market. Railcar transit time has increased significantly. On the U.S. Gulf coast where Dow is the most captive chemical company, a rail executive has indicated to Dow that improvements won’t occur 

until 2010 or beyond. The current service problems, in Dow’s opinion, have been 

magnified by lack of competitive alternatives.’’ 

A large Midwestern utility member echoes the captive rail customer concern when 

it states, ‘‘Scarcity increases the price of a commodity and rail transportation is no 

exception to this. It is preposterous for an industry to act in a monopolistic manner 

while the regulator, whose job it is to protect the rail customer from monopolistic 

behavior stands by and does nothing. A regulated monopoly should always face 

standards of performance that are not abusive to customers in order for that regulated entity to be allowed the ‘‘privilege’’ of being able to receive a regulated rate 

of return.’’ 

Rail shippers are the canary in the coal mine. Seeing us in distress should send 

an alarm throughout the economy. The only question, it seems, is when you will respond to the alarm. We know that the problem is difficult, but the consequences of 

inaction are dire indeed. 

The members of the Alliance for Rail Competition will meet with any parties, at 

any venue if it will further this debate and move in a positive direction. But we understand that railroads will continue to vociferously defend the ‘‘now’’ . . . even if 

it means eating their own future. Our elected policymakers must intervene for the 

good of the country . . . for the good of us all. 

Come let us reason together. 

MICHAEL E. GRISSO, 

Executive Director. 

JOINT PREPARED STATEMENT OF THE NATIONAL BARLEY GROWERS ASSOCIATION AND

AMERICAN MALTING BARLEY ASSOCIATION

Mr. Chairman and members of the Committee, the National Barley Growers Association (NBGA) and American Malting Barley Association (AMBA) are pleased to 

submit this written testimony on behalf of their barley producer and processing 

members concerning impacts of rail rates and service on the U.S. barley industry. 

We estimate more than half of the U.S. barley crop moves to marketing positions 

by rail. The majority of our barley production region is now captive to one railroad 

and we pay freight rates well above those rates paid by other grain suppliers who 

have competitive transportation options. For example, rail rates in North Dakota 

(largest barley producer) and Montana (third largest producer) are between 250 to 

450 percent of the railroad’s variable cost—far in excess of the Surface Transportation Board’s threshold of unreasonableness of 180 percent. Because of these higher 

rates and often unreliable service, it is very difficult for barley from our traditional 

production areas to compete with other suppliers in both domestic and foreign markets. 

We pride ourselves on producing some of the highest quality barley in the world, 

but if we cannot get our product to market competitively then our quality advantages won’t matter. U.S. negotiators are trying to help us be more competitive in 

world markets through the WTO trade negotiations, but again it won’t matter if we 

get the best trade deals if we can’t ship our products competitively. 

The following are specific rail issues that have directly impacted U.S. barley competitiveness. 

Ten years ago, barley comprised about 20 percent of the grain fed to dairy cattle 

in the large California and western U.S. dairy shed. However, we have lost these 

once large barley markets to corn because of deliberate decisions by the two dominant western railroads to price unit trains of Midwestern corn into these western 

feed markets at rail profit levels well below the 180 percent threshold of variable 

cost. 

Captive rates and service have prevented the movement of western U.S. malting 

barley east to malt processing plants, forcing these plants to source a portion of 

5 

their needs from Canada. These processing plants need specific varieties of malting 

barley that are only grown in the western states and Canadian provinces due to agronomic factors. Furthermore, Canadian barley currently moves to West Coast export points at about two-thirds the cost of similar westbound movements in the U.S. 

Loss of short lines has become a significant factor in Washington barley competitiveness. 

We believe that the unrestrained monopoly power that exists in the U.S. rail industry today has led to inferior service and excessive freight rates, particularly in 

captive areas. This lack of competition has allowed monopoly railroads to shortchange both feed and malting barley, which typically move in smaller volumes to 

multiple destinations, in favor of large movements of a single grade crop (like corn) 

from a single origin to a single destination. 

Without a doubt, the U.S. economy relies on a healthy and competitive rail industry. However, we believe that both shippers and railroads will directly benefit from 

competition in the marketplace. Therefore, we support provisions in Senate Bill 919 

that address current abuses of monopoly power in the rail industry and promote a 

competitive balance between shippers and railroads without increasing regulation. 

Thank you for your consideration of our concerns with rail service in the U.S. barley industry. 

PREPARED STATEMENT OF THE MONTANA WHEAT & BARLEY COMMITTEE

Thank you for the opportunity to present this testimony for the record of this 

hearing. 

The Montana Wheat & Barley Committee wishes to thank Senator Lott for holding this important hearing and the Montana Wheat & Barley Committee appreciates his valued leadership in seeking solutions to these important issues affecting 

rail transportation and the rail shippers all over the Nation. 

We also want to especially thank Senator Conrad Burns for his tireless leadership 

on efforts to solve the captive rail customer’s problems on the Nation’s railroad system. His unceasing and consistent work coupled with an unrelenting push to find 

solutions to the ‘‘railroad problems’’ has earned Senator Burns a great deal of respect among the Nation’s rail shipping communities in agriculture, chemicals, utilities, glass, manufacturing and production plus the consumers that rely on rail for 

commerce. 

You are going to hear from rail customers (shippers) about continuing capacity 

and service issues. Some will testify about the economics of railroading. The railroads will come to you espousing the virtues of spending more money on infrastructure and that they are doing the best they can. The Surface Transportation Board, 

after Congress passed the Staggers Rail Act in 1980, allowed and oversaw the most 

massive concentration of rail power to amass in this country since its formation in 

1867. Now is the time for Congress to revisit the Staggers Rail Act after 25 years. 

We have had more or less continuing railroad capacity and service issues without 

interruption for almost two decades—ever since the railroads started their march 

to gobble up all of their competitors. 

The rail captive areas of this country see service and capacity issues as symptomatic of the more basic problem—over-concentration of the railroad industry. When 

four of the five Class I railroads control over 94 percent of the freight revenue generated in this country—Congress should not only be interested, they should be 

alarmed. 

It has never been in the public interest to allow the growth of monopoly industrial 

base without some form of economic oversight. 

I. Introduction 

The Montana Wheat & Barley Committee (MWBC) represents the wheat and barley producers of the state of Montana. Montana is a natural resources state with 

the main economies built upon products of mines, lumber and agriculture, as well 

as tourism. In order for our bulk products of the mine, lumber and agriculture to 

have value, they require bulk transportation (rail) to points outside Montana and, 

in many cases, outside the U.S. 

Therefore, the State’s economic survival depends on having access to good, affordable, and adequate rail transportation and attendant facilities, with reasonable published notice of rates and rules, so that its shippers can deliver a competitively 

priced product outside the state boundaries. 

Montana wheat and barley producers do not have economic alternatives to rail 

transportation. They are held captive and tied to rail with no viable alternatives to 

movement by rail. The Montana wheat and barley producers are unique because they 

6 

are the bearers of the freight and cannot pass on increased transportation costs. The 

farmer must absorb all freight costs. Virtually all other industries have some capability of passing on some or all of its increased costs to their consumers or customers. The farm producers are unique because they operate in an environment 

where they do not have any control over the price they receive for their crop and 

they must bear every increase, in all costs, including transportation costs, without 

any possibility to pass those higher costs on to anyone else. The farm producers who 

are captive are thus truly without alternative. 

II. Montana’s Primary Transportation Is a Single Railroad 

Montana is a base industry state. In the 1800s, its chief industries were mining, 

lumber and agriculture. Today, and in the future, Montana’s chief industries will 

be the same three industries: mining, lumber and agriculture, with the addition of 

tourism. Today, we, in Montana, have one major railroad, the BNSF Railroad, operating as a monopoly in the transportation of bulk commodities from the farm to 

market. 

Outline of Industry in Montana 

1. The wheat industry in Montana is characterized by an export-dominant rail 

movement. 

2. The barley industry in Montana is characterized by both an export and domestic market dominated by rail. 

3. The lumber industry in Montana is characterized by both an export and domestic market dominated by rail. 

4. The coal industry in Montana is characterized by domestic rail movement. 

5. The vast majority of these commodities must be shipped out of state. 

III. Montana Is an Export State 

Montana’s top four industrial activities are agriculture, tourism, mining and lumber. Montana’s economy and wealth is thus highly dependent upon the production 

and shipment of commodities. In order for these commodities to have value to Montanans, they must be shipped to points outside the state or country to market. It 

is this absolute reliance upon good, affordable, and efficient transportation that 

brings me to this hearing today. We hope for a better day, where fairness in regulatory oversight and more rail competition will rule the land. Meanwhile, we struggle every day trying to survive under monopoly domination. Montana grain producers are being required to pay more for this BNSF merger than their counterparts 

in the grain producing industry where effective rail-to-rail competition exists. That 

payment has come in the form of increased transit times, increased rail rates and 

low car supplies. 

Montana ranks third among the states in all wheat production. More specifically, 

it ranks 3rd in spring wheat production and 2nd in durum production. Montana also 

ranks 3rd in barley production, 3rd in lentils production, 3rd in dry edible peas production, 2nd in Austrian pea production, and 2nd in flax production. Montana originates over 37 million tons of rail traffic, which ranks it 17th in the Nation. At the 

same time Montana bridged over 78,000,000 tons of rail traffic. 

For the farm producer, the cost of transporting grain can represent as much as 

one-third (1/3) the overall price received for the grain. Basically the Montana farmer 

works for BNSF every 3rd year. 

IV. Montana Rail Transportation Is Predominated by One Carrier 

Montana is dominated by a single railroad, the BNSF, which controls 94 percent 

of the Montana rail system. This makes Montana the #1 rail-dominated state in 

country. After Montana at 94 percent is Delaware at 83 percent, followed by Idaho 

at 80 percent, North Dakota at 66 percent, and South Dakota at 54 percent. The 

BNSF controls over 91 percent of the actual tonnage hauled out of Montana and 

92 percent of the rail revenue generated in the state. Since 1975, Montana has seen 

over 1,900 miles of rail line abandoned (over 37 percent of the rail miles) because 

there is no rail-to-rail competition. And the distances are large—very, very large. 

To put this vastness in perspective, if one were to place one corner of Montana over 

Washington, D.C., the other corner would cover Chicago, IL. 

7 

Annually, the Montana producers move about 150 million+ bushel production that is handled by rail from Montana and bear about $200+ million in freight transportation charges per year. 

Our Montana concerns are founded on four points: 

1. Rail transportation is vitally important to Montana’s raw commodity-based 

economy. 

2. Montana’s rail system increasingly serves simply as a bridge for long-distance 

traffic. 

3. Increasing numbers of short lines and abandonments have reduced Montana 

shipper access to Class I rail service. 

4. Dominance of one Class I railroad continues as the #1 freight issue in Montana. 

V. Service and Capacity 

Many have stated that Congress ‘‘deregulated’’ the railroads in the Staggers Rail 

Act of 1980. Let there be no mistake—Congress DID NOT ‘‘deregulate’’ the railroads, but rather relaxed many of the economic regulations, because Congress 

feared that many railroads were going bankrupt! Today, however, the landscape has 

changed. Railroads aren’t going bankrupt, rather they have combined into a few, 

large, monopolistic carriers controlling large areas of the economic vitality of this 

country, and forcing captive shippers to pay for this ‘‘relaxed’’ regulatory environment. This ‘‘relaxed’’ regulatory environment allows railroads to insulate themselves 

from accountability. 

When the Staggers Rail Act became law in 1980, Congress recognized the need 

to give more pricing freedoms to the railroads to stem the tide of rail bankruptcies 

occurring in the U.S. Congress also recognized, that with the newly found pricing 

freedoms the railroads would enjoy, some shippers would potentially be subject to 

dominant activities by carriers with less regulatory oversight protection from abuse. 

Simply put, less economic regulatory oversight would result in less protection for 

those shippers who were captive and had no economic alternative to move their 

goods except by rail. The result would be that some shippers would become ‘‘captive’’ 

to ‘‘market dominant’’ railroads. The Staggers Rail Act also instructed the Interstate 

Commerce Commission (ICC) to set up rate guideline procedures to adjudicate the 

rate issues that would come before it. Congress even set up, under Section 229, procedures whereby shippers who felt they were captive could request adjudication of 

their rate levels, on a one time basis. 


wheat.eps
8 

The Montana Wheat & Barley Committee’s experience with the ICC/STB in litigation has been less than stellar. Shippers used to take cases to the Surface Transportation Board expecting to get fair and balanced treatment, but shippers haven’t 

found any relief at the STB for a long, long time. They have instead become so discouraged by the precedents of the past few years that only a very few have the 

funds, or the confidence, to bring a case. Faced with the effects of a railroad monopoly that was withering away a key element of the state’s economy, Montana in 1980 

filed a class-action and formal complaint (under Section 229 of the Staggers Rail 

Act). We pursued the McCarty Farms case for 17 years. In this case the ICC on December 14, 1984 found that the BN had market dominance and that its rates were 

unreasonable. The Administrative Law Judge (ALJ) further found that the rates were higher than 300 percent of variable cost! The State of Montana spent $3.2 million, yet the STB in 1997 found that these rates were not excessive! The Board ruled 

against the farm producers of Montana after changing the regulatory standards 

twice. 

As we stated earlier and it bears repeating, the truly rail captive areas of this 

country see service and capacity issues as symptomatic of the more basic problem— 

over-concentration of the railroad industry. 

It has never been in the public interest to allow the growth of monopoly industrial 

base without some form of economic oversight. 

In 1980, when Congress passed the Staggers Act, the last major piece of railroad 

legislation, we had 42 Class I railroads in the U.S. Today, after mergers and acquisitions, we are down to about 5. This has led to more and more businesses being 

served by only one railroad, exercising virtual monopoly power to price according to 

its needs, not according to market value and competition. Along with this massive 

concentration there has been a serious degradation of service and quality. And it 

has led to rate escalations that threatens American productivity and jobs. Freight 

rail is the only industry in the country that operates with this lack of 

competition... and exemption from most anti-trust law. 

The strength and vitality of America’s freight railroads is of vital importance to 

the Montana wheat and barley producers and to the Nation and its business’ ability 

to remain competitive in the world. We want more railroads... not fewer. 

But we believe that marketplace conditions would improve both shippers and railroads alike with more competition in the railroad industry. Indeed the current 

scheme of things where railroads rely on their ability to differential price solely on 

the basis of captivity is a one-legged stool approach that is doomed to fail. This 

country can ill-afford the failure of this vital industry. Railroads are not a luxury. 

Railroads are essential to the American marketplace and our national security. 

Therefore, it is necessary that public policymakers address this problem and work 

with all parties toward solutions before a larger crisis presents itself to us all. Left 

on our present course, we are sure to see a final round of mergers proposed to leave 

the entire country with only two Class I railroads. 

This is an issue that is vital to American competitiveness and productivity and 

to the retention and creation of American jobs as well as the health of our economy. 

This lack of competition is like an invisible tax, tolerated if not sanctioned by Federal policy, that works its way into the costs of goods and services across the country. All because the arcane nature of the arguments have baffled and frightened 

elected officials into inaction. 

Oh, there are a lot of confusing arguments being made by opponents of balance. 

But we in Montana are from the country and we have a simple way of looking at 

it. The farm producers of Montana and the Members of Congress have been bamboozled. The railroad cry is similar to that of Chicken Little that the sky will fall 

if ANY changes are made by Congress to their monopoly rail system. No legislator 

wants to take action that might cause the failure of one of our railroads. Neither 

do Montanans. No one has a greater interest in sound railroads than shippers, not 

even the railroads themselves. We do not believe for a moment that proposals to 

increase competition would cause harm. Indeed, we believe quite the opposite to be 

true. We don’t believe that this mighty 100 year old industry cannot survive in a 

world where competition is the driver of innovation and progress like every other 

industry in America. In testimony before the House Transportation Committee in 

2005, Dr. Curtis Grimm of the University of Maryland delivered compelling testimony to that effect. 

VI. Congress Needs To Look At More Than Just Capacity and Service 

Issues To Address The Public Interest 

The Montana Wheat & Barley Committee is calling upon Members of Congress 

to address this unhealthy imbalance in the freight rail marketplace. To look at just 

capacity and service issues without addressing the real problem does little to help 

9 

the public interest. Capacity and Service issues while severe are only the symptoms 

and results of a problem of too much concentration in the railroad industry and too 

little competition. 

This Surface Transportation Subcommittee is charged with finding solutions and 

has many members that have dedicated themselves to seeking real solutions to the 

massive concentrations issue in American railroading. 

This Subcommittee does not have to reregulate the railroad industry nor mandate 

trackage rights for one railroad over another nor cap rates in order to develop solutions, but it must address that massive concentration that affects over 1/3 of this 

Nation’s rail shippers. 

Congress must address a bill which would finish the job of deregulation and take 

off armor that now protects freight railroads from the real world marketplace that 

all of us compete in every day. 

Indeed, what we in Montana now have is a federally protected monopoly. And it 

has been our experience that monopolists do not voluntarily embrace change and 

competition. 

VII. The Problems Rail Shippers Face Are Getting Worse Every Year 

We know this has been a problem for years... but it is getting worse as freight 

rail consolidation and contraction continue. You only have to look at the car shortage reports on grain shipments the past three harvest seasons that made the front 

page of the Wall Street Journal, or this new change back to tariff-like rates on coal 

with prices increases up to 100 percent, or the incredible fact that one of our major 

railroads is paying customers to ship by truck because they can’t get their act together and honor standing contracts. The railroads are citing as ‘‘force majeure’’ reasons for their capacity shortfalls thereby barring rail shippers from enforcing legal 

contract and penalties for late delivery. 

With the STB in a state of irrelevance and the railroad industry as seemingly the 

only party not engaged in the search for constructive solutions, the choices for Congress are clear. DO SOMETHING to prevent a railroad monopoly from further 

harming the American farm producer, miner, lumber worker and consumers. 

The something that is available right now is for Congress to consider and move 

legislation and changes in public policy. The cost of trying is trivial compared to the 

astronomical cost of doing nothing and accepting an ever worsening status quo. 

The Montana Wheat & Barley Committee believes and trusts that Congress can 

restore balance to this marketplace. 

VIII. Congressional Action is Required 

We in Montana didn’t ask to become captive shippers! We in Montana didn’t want 

to suffer economically under the highest freight rates in the Nation! 

The ICC created this monopoly environment mess in Montana and has ignored 

their responsibility in creating the economic nightmare. There is an urgent need for 

Congress to come to grips with the ever-increasing monopolistic power of the national railroads and its effects on the agricultural economy. Today Class I railroads 

control the agricultural economy. 

The Surface Transportation Board is charged with protecting ‘‘captive shippers’’ 

under current law emanating out of the Staggers Rail Act. The record indicates that 

the STB and its predecessor, the ICC. have not protected the captive shipper from 

discriminatory pricing. Indeed, the STB has gone so far afield, that they have renamed the pricing mechanism utilized by the railroads. They call it ‘‘differential’’ 

pricing! It is simply a rename for ‘‘what the traffic will bear.’’ Discriminatory pricing 

is both unfair to the captive shipper and immoral. Since the merger of the BNSF 

and the UP/SP, we have NOT seen increased competition in the state reflecting the 

proportional rate agreements agreed to in the UP/SP merger. Indeed, we have not 

been able to find one single shipper, grain or otherwise in Montana, that have experienced a single new solicitation by the UP/SP anywhere in Montana. The cycle 

times on UP and BNSF in Montana are inching up, not what the BNSF nor the 

UP predicted. The captive shippers are continuing to pay more than their fair share 

for these mergers. 

Any major Class I can, today, control development of any ‘‘value-added’’ grain industry development, simply by not allowing (with monopolistic pricing) any construction of ‘‘in-land’’ value added processing, choosing instead, to move the raw 

grain to ports. Do they have to reduce the price of moving the grain to the ports 

in order to keep a ‘‘value added’’ plant from being built? No, they simply, over-price 

monopolistically the value added plant. That is a true monopoly power that is being 

sanctioned by the current regulatory system. It must be changed. 

10 

IX. Solutions 

The solution is very simple. Either control the monopoly pricing or introduce competition. If the national agricultural policy is effective in increasing exports of grain, 

what is to stop the railroads from ‘‘taking’’ their monopolistic share of these gains? 

A National Transportation Policy should be developed that requires the STB to consider for comparison, when reasonable rates are prescribed for shippers for whom 

effective competition does not exist, similar rates produced by rail-to-rail competition for shipment of the same or similar commodities. Our preference at the Montana Wheat & Barley Committee is for more competition among the monopoly railroads, but secured with adequate protection for the truly captive shippers of this 

country. After all, that is simply good, sound government policy. 

Senator BURNS. And I’ve—we’ve been working on this for quite 

a while, so I appreciate you allowing those statements to be made. 

And thank you for holding this hearing. And I think we should get 

to the questions. 

Senator LOTT. All right. Let’s have our first panel come forward, 

Ms. Hecker and Mr. Buttrey. Thank you very much. 

Ms. Hecker is the director of the Physical Infrastructure Team, 

Government Accountability Office, Washington, D.C. And Mr. 

Buttrey is Chairman, Surface Transportation Board. 

And so, if we could, we’ll go to you first, Ms. Hecker. 

STATEMENT OF JAYETTA Z. HECKER, DIRECTOR, 

PHYSICAL INFRASTRUCTURE ISSUES, 

U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. HECKER. Thank you very much, Mr. Chairman. It’s a great 

honor to be here. 

This is, indeed, a critical juncture for this industry and these 

issues. They really represent issues that are of national economic 

significance, and not only to the railroads, but to producers, to 

users and the general population. And I, too, applaud the Committee both for holding this hearing and giving us the opportunity 

and the honor of having an opportunity to really examine in-depth 

these really critical issues. 

As you said, I’ll be presenting very preliminary observations 

today. I do have a small slide presentation, with a number of 

charts, and I think a copy was given to each of you. So, hopefully 

that will assist in my being able to cover the enormous breadth of 

the issues before us. 

As you outlined, there are three topics that you asked us to address, and we will give you some preliminary observations on all 

three today. The first was the changes since the Staggers Act—industry performance, rates, and competition issues; the second is 

what those changes suggest for regulation, and what kind of alternative approaches have been posed to deal with open competition 

and captivity issues; and, finally, what some potential responses 

are to future freight demand and capacity issues. 

Now, the first chart I have—and I also have a visual that’s a little easier to look at—really captures the economic performance of 

the industry and the changes both before the Act—that middle 

point in everything is geared to 1980—and after the Act. And, basically, these lines are productivity, price, revenue, and volume. And 

it is so profoundly telling how the—this industry stagnated under 

the regulatory environment. You did not have innovation. You did 

not really have any growth in volume. And mostly you didn’t have 

11 

productivity and efficiencies and improvement. And that’s really 

the hallmark of the failure of regulation. It has a perverse effect 

on that kind of innovation that’s so important. 

If you look at the explosion after 1980, the most important one 

is really that first line, going way up top, and that’s productivity. 

That’s the costs being cut, investments being made, new technology, new markets. The second one is volume; you have an enormous increase in volume. And what’s good news for the economy 

and consumers is—prices was the red line—prices are going down. 

A little bit more on that, though, the second chart is overall review of industry rate changes. As you know, we’ve taken a 20-year 

view. And this basically starts in 1985, goes to 2004, when the 

most comprehensive data is still available. And the yellow line is 

basically the changes in rates, using a—an industry price package 

so that it standardizes and controls for the type of commodity. So, 

the type can change, and the size of movements can change. And 

we have developed an index, so you get a more reliable view of 

changes. So, what we, here, have is that yellow line showing industry rate changes consistently going down. 


621GAO1.eps
12 

Now, what I’ve broken out in the yellow and red line is that it’s 

quite different for different commodities. The yellow—the blue line 

is—these are reversed—coal is actually the blue—the yellow line on 

this one. So, that’s below the industry average. The red line is 

grain, and that is clearly above the industry average. But the key 

thing is that the green line is what’s happening to prices overall 

in the economy. So, you have either relatively steady or declining 

nominal prices, while you have a 60-percent overall increase in 

prices in the economy. 


621GAO2.eps
13 

The next one is a map trying to give you a capture of a—an overview of competition. This one basically uses the BEA economic 

areas. And those yellow areas basically are the number—27 BEA 

economic areas that are served by only one railroad. 


621GAO3.eps 621GAO4.eps
14 

Now, that doesn’t give you a complete view of captivity, so we 

turned to another thing, and that’s chart number 7. And, as you 

remember, the Staggers Act defined a threshold of captivity as paying rates 180—where there was a ratio of 180 of revenue over variable cost. And the concern we have here is, while there has been, 

actually, a reduction of traffic traveling under a 300-percent mark, 

there has been a 50-percent increase in the amount of traffic that 

travels over 300 percent of that ratio. So, while captivity overall by 

this indicator, is decreasing, those who are captive are paying even 

more significantly higher rates than they were 20 years ago. So, 

that’s why those average figures are really important to get a way 

to, to examine the central issue. 

I see my time is up, but the bottom line, I know you want to 

hear. I will—— 

Senator LOTT. Feel free to keep going. 

Ms. HECKER. Oh, thank you very much. 

Senator LOTT. Your statements—— 

Ms. HECKER. I’ll still try to be—— 

Senator LOTT.—are very important. 

Ms. HECKER.—brief, because I know you want a dialogue here. 

Slide 8 is then, so what do you do about it? That balance was 

in the Act. It was carefully crafted and called for. And basically it 

provided two major things, in our view, for STB—or ICC, originally. It was very broad authority, in our view, for the agency to 

prevent concentration, to ensure competition. And we have some 

comments about how that’s been addressed. And then, there was 

the—all the authority to set up an effective relief process for those 

who were captive. 


621GAO5.eps
15 

Now, in our view, neither of those protections in the Act have 

been effectively implemented. So, the original balance, in our view, 

has not really come into its own. 

The first one is an area that is rarely discussed. And, basically, 

in our view, as I said, the agency really has broad authority to assess the performance of the market, not just in response to a merger request, not just in response to a complaint or a specific filed 

complaint, but really to be—one of the original acts is promoting 

competition, and, in our view, and, frankly, in response to many 

recommendations we’ve made in the past, the STB largely says 

that they’re adjudicatory. And I think your own statement, Mr. 

Buttrey, makes clear that there’s a primary role in reviewing cases 

and adjudicating or mediating disputes. The second area, everyone, 

I think, largely agrees that the relief process has turned out to be 

largely inaccessible. The alternatives that are under discussion are 

really along these two areas, either to streamline the relief process—and there are a number of proposals—and to promote competition and reduce captivity. These really are more trying to prevent the problem, rather than—the procedural ones are trying to 

improve the relief after you’ve presumably been made captive and 

not been able to have the benefits of competition. The other one is 

really getting to the root case and trying to promote competition. 

Now, the concern that we have is, because there isn’t this rigorous analysis of the whole market and the failures of competition 

and where there really may be an abuse of market power, as opposed to a real response to very tight conditions in this industry, 

we believe more analysis is needed of the root problem here to be 

able to fully evaluate the costs and benefits of alternative approaches. And an enormous shift that’s occurred is that we’re on 

the cusp of most railroads becoming revenue-adequate, which is a 


621GAO6.eps
16 

very good thing, but that is a central component of the evaluation 

and the process and the regulatory approach. And so, that we’re at 

a turning point of how that may change the regulatory approach. 

The freight demand issue, on slide 9, most projections are for significant increases. Railroads are making significant investments. 

And there is a recognition that there are probably public benefits 

from rail investments, beyond what rail will invest on their own. 

We’ve done a lot of work on these issues. I’ve studied public/private partnerships in many sectors. And we have two overriding 

concerns. One is that the policy response should preserve the central role of the market in the rail sector, and not unduly distort the 

benefits we have from a—an industry driven by a competitive environment. And the other concern is that we have a grave fiscal crisis. There is no money. And you all know that very well. New assistance is borrowing to provide new assistance. So, there’s a very 

high standard to really try to identify new assistance or support 

programs. 

And then, we have three bullets, that it clearly has to be in a 

broader intermodal context of national freight policy. There have to 

be demonstrable public benefits, and at a national level. There are 

local benefits, and a Federal role to capture local benefits may not 

be justified. And then, in public partnerships, the critical thing is 

getting an effective allocation of costs between the public and private sector, and between national, State, and local interests. 

That concludes this preliminary report. As you’ve noted, our final 

report will be out in September, and we hope to more fully explore 

all of these issues. 

But I’d be pleased to take any questions that I can address 

today. 


621GAO7.eps
17 

1 As of 2004, a Class I railroad is any railroad with an operating revenue above $277.7 million. 

[The prepared statement of Ms. Hecker follows:] 

PREPARED STATEMENT OF JAYETTA Z. HECKER, DIRECTOR, 

PHYSICAL INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Mr. Chairman and members of the Committee: 

We appreciate the opportunity to testify on our preliminary observations on the 

impact of deregulation of the freight railroad industry. As you know, over 25 years 

ago, Congress, with the leadership of this Committee, transformed Federal transportation policy. After almost 100 years of economic regulation, the railroad industry 

was in serious economic trouble in the 1970s, with rising costs, losses, and bankruptcies. In response, Congress passed the Railroad Revitalization and Regulatory 

Reform Act in 1976 and the Staggers Rail Act in 1980 that substantially deregulated the railroad industry. The 1980 Act encouraged greater reliance on competition to set rates and gave railroads increased freedom to price their services according to market conditions, including using differential pricing—that is, recovering a 

greater proportion of their costs from rates charged to shippers with a greater dependency on rail transportation. Furthermore, the Act anticipated that some shippers might not have competitive alternatives, and gave the Interstate Commerce 

Commission (ICC), and later the Surface Transportation Board (STB), the authority 

to establish a rate relief process so that shippers could obtain relief from unreasonably high rates. 

At the request of several Members of this Committee, we have ongoing work providing a retrospective on the performance of the rail industry since the Staggers 

Rail Act. My comments today focus on (1) the changes that have occurred in the 

freight railroad industry since the enactment of the Staggers Rail Act, including 

changes in rail rates and competition in the industry, (2) what alternative approaches have been proposed and could be considered to address remaining competition and captivity concerns, and (3) the projections for freight traffic demand over 

the next 15 to 25 years, the freight railroad industry’s projected ability to meet that 

demand, and potential Federal policy responses. 

To fulfill our objectives, we examined STB’s Carload Waybill Sample from 1985– 

2004 (the latest data available at the time of our review). This document includes 

data on rail rates, tonnage, Federal regulation, and other statistics but disguises 

some revenues to avoid disclosing confidential business information to the public. 

We obtained a version of the Carload Waybill Sample that did not disguise revenues. We also interviewed, and reviewed information from representatives of each 

Class I railroad in North America, 1 shipper groups, economists, and experts in the 

rail industry, and held an expert panel consisting of individuals with expertise in 

the freight railroad industry and the economics of transportation deregulation, 

interviewed shipper groups, railroads, and economists, and reviewed pending legislation and literature. We also reviewed forecasts of future freight rail demand and 

capacity, including synthesizing forecasting, and transportation planning literature, 

and interviewed Federal and state transportation officials, financial market analysts, national association representatives, and transportation experts. While we are 

aware that service issues such as on time performance and the supply of railcars 

by the railroads are of concern to many people here today, service issues are not 

included in the preliminary observations I will present today. Instead, we will leave 

comments about service to other individuals testifying. My comments today are 

based on our past body of work on the freight rail industry as well as our ongoing 

work, which we are conducting in accordance with generally accepted government 

auditing standards (see Appendix I for a list of our past reports on the freight railroad industry). 

In summary: 

• The changes that have occurred in the railroad industry since the enactment 

of the Staggers Rail Act are widely viewed as positive, as the financial health 

of the industry has improved and most rates have declined since 1985, although 

concerns about competition and captivity in the industry remain. The freight 

railroad industry’s financial health improved substantially as railroads cut costs 

through productivity improvements, streamlined and ‘‘right-sized’’ their rail networks, implemented new technologies, and expanded business into new markets 

such as the intermodal market, which consists of containers and trailers that 

can be carried on ships, trucks, or rail. Between 1985 and 2000, rates generally 

18 

2While rate data are not available for 2005 and 2006, shippers, railroads, and financial analysts we spoke with told us that rates have generally increased during those years. 

declined, but have increased slightly from 2001 through 2004. 2 Several factors 

could have contributed to recent rate increases, including continuing consolidation in the industry and broad changes in the domestic and world economy and 

emergence of a capacity constrained environment, where demand exceeds supply. Concerns about competition and captivity in the industry remain because 

traffic is concentrated in fewer railroads and, although rates have declined for 

most shippers since the enactment of the Staggers Rail Act, rates have not declined uniformly and some shippers are paying significantly higher rates than 

others. It is difficult to precisely determine the number of shippers who are 

‘‘captive’’ to one railroad because proxy measures that provide the best indication can overstate or understate captivity. However, our preliminary analysis 

indicates that while the extent of potential captivity may be dropping, the share 

of potentially captive shippers who are paying the highest rates—those substantially above the threshold for rate relief—has increased. Whether this increase 

reflects an exercise or possible abuse of market power or is simply a reflection 

of rational economic practices by the railroads in an environment of excess demand remains uncertain. 

• A number of alternative approaches have been suggested by shipper groups, 

economists, and other experts in the rail industry to address remaining concerns about competition and captivity—however, any alternative approaches 

should be carefully considered. While a number of approaches have been suggested, I would, based on our preliminary work, like to focus on two areas that 

are particularly integral to further improvement. First, while STB has broad 

legislative authority to investigate industry practices and has assessed competition practices—generally in reviewing railroad merger cases—there has been little assessment of competition nationally by any Federal agency of the state of 

competition nationally and where specific areas of inadequate competition and 

the inappropriate exercise of market power might exist. Given widespread disagreement about the adequacy of competition in the industry and the fact that 

proxy measures can understate or overstate captivity, such an assessment 

would allow decisionmakers to identify areas where competition is lacking and 

to assess the need for and merits of targeted approaches to address it. These 

approaches include requiring reciprocal switching arrangements, which allow 

one railroad to switch railcars of another railroad, and/or terminal access agreements, which permits one railroad to use another’s terminals. Second, although 

the Staggers Rail Act recognized that some shippers might not have access to 

competitive alternatives and might be subject to unreasonably high rates, there 

is widespread agreement that the rate relief process does not provide expeditious handling and resolution of complaints, is expensive, time-consuming, and 

complex, and that, as a result, it is largely inaccessible to most shippers. A 

number of different approaches have been suggested by shipper organizations 

and others that could make the process less expensive and more expeditious, 

and thus more accessible, such as arbitration and increased use of simplified 

guidelines. Each of the proposed approaches has both advantages and drawbacks. Any alternative approaches to address competition and captivity should 

be carefully considered to ensure that the approach will achieve the important 

balance set out in the Staggers Rail Act of allowing the railroads to earn adequate revenues and invest in its infrastructure while assuring protection for 

captive shippers from unreasonable rates. 

• Significant increases in freight traffic over the next 15 to 25 years are forecasted, although many factors can affect the accuracy of these forecasts, and the 

railroad industry’s ability to meet future demand is largely uncertain. Although 

railroads have reported significant increased investment and have told us that 

they plan to continue making infrastructure investments, they also expressed 

uncertainty as to their ability to keep pace with some of the higher projections 

of future freight rail demand. Besides securing benefits for private rail networks, investments in rail projects can produce benefits for the public—for example, shifting truck freight traffic to railroads can reduce highway congestion. 

As a result, the Federal and state governments have been increasingly participating in freight rail improvement projects—for example, a number of states are 

involved in joint projects with the railroads and, in 1997, the U.S. Department 

of Transportation provided a $400 million loan to the Alameda Corridor Transportation Authority for the Alameda Corridor project to consolidate rail and 

other freight traveling to and from the ports of Los Angeles and Long Beach. 

19 

In addition, in 2005, Congress authorized $100 million for the Chicago CREATE 

project to improve the rail network in Chicago. Congress is likely to face additional decisions in the years ahead regarding Federal policy toward the Nation’s 

freight railroad system. While our work continues, we would note, based on our 

past work, that Federal involvement should only occur where demonstrable 

public benefits exist, and where a mechanism is in place to appropriately allocate the cost of financing these benefits between the public and private sectors, 

and between national, state, and local interests. 

Background 

Freight rail is an important component of our Nation’s economy. Approximately 

42 percent of all inter-city freight in the United States, measured in ton miles, 

moves on rail lines. Freight rail is particularly important to producers and users of 

certain commodities. For example, about 70 percent of automobiles manufactured 

domestically, about 70 percent of coal delivered to power plants, and about 32 percent of grain moves on freight rail. 

Beginning in 1887, the Interstate Commerce Commission (ICC) regulated almost 

all of the rates that railroads charged shippers. Congress passed the Railroad Revitalization and Regulatory Reform Act in 1976 and the Staggers Rail Act in 1980, 

and these acts greatly increased the reliance on competition in the railroad industry. Specifically, these acts allowed railroads and shippers to enter into confidential 

contracts which set rates and prohibited the ICC from regulating rates where railroads had effective competition or if the rates had been negotiated between the railroad and the shipper. The ICC Termination Act of 1995 abolished the ICC and 

transferred its regulatory functions to STB. Taken together, these acts anchor the 

Federal Government’s role in the freight rail industry and have established numerous goals for regulating the industry, including the following: 

• to allow, to the maximum extent possible, competition and demand for services 

to establish reasonable rates for transportation by rail. 

• to minimize the need for Federal regulatory control over the rail transportation 

system and to require fair and expeditious regulatory decisions when regulation 

is required. 

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

• to ensure effective competition among rail carriers and with other modes to 

meet the needs of the public. 

• to maintain reasonable rates where there is an absence of effective competition 

and where rail rates provide revenues which exceed the amount necessary to 

maintain the rail system and to attract capital. 

• to prohibit predatory pricing and practices, to avoid undue concentrations of 

market power; and: 

• to provide for the expeditious handling and resolution of all proceedings. 

Two important components of the current regulatory structure are the concepts 

of revenue adequacy and demand-based differential pricing. Congress established 

the concept of revenue adequacy as an indicator of the financial health of the industry. STB determines the revenue adequacy of a railroad by comparing the railroad’s 

return on investment with the industrywide cost of capital. If a railroad’s return on 

investment is greater than the industry-wide cost of capital, STB determines that 

railroad to be revenue adequate. Historically, the ICC and STB have rarely found 

railroads to be revenue adequate, which many observers relate to characteristics of 

the industry’s cost structure. Railroads incur large fixed costs to build and operate 

networks that jointly serve many different shippers. While some fixed costs can be 

attributed to serving particular shippers, and some costs vary with particular movements, other costs are not attributable to particular shippers or movements. Nonetheless, a railroad must recover these costs if the railroad is to continue to provide 

service over the long run, and, to the extent that railroads have not been revenue 

adequate, this may indicate that they are not fully recovering these costs. 

Consequently, the Staggers Rail Act recognized the need for railroads to use demand-based differential pricing in the deregulated environment. Demand-based differential pricing in theory permits a railroad to recover their joint and common costs 

across its entire traffic base by setting higher rates for traffic with fewer transportation alternatives than for traffic with more alternatives. This means that a railroad might incur similar incremental costs in providing service to two different shippers that ship similar tonnages in similar car types traveling over similar distances, 

but that the railroad may charge quite different rates. In this way, the railroad recovers a greater portion of its joint and common costs from the shipper that is more 

20 

dependent on railroad transportation, but, to the extent that the railroad is able to 

offer lower rates to the shipper with more transportation alternatives, the other 

shipper makes a contribution toward those costs. 

The Staggers Rail Act further required that the railroads’ need to differentially 

price its services be balanced with the rights of shippers to be free from, and to seek 

redress from unreasonable rates. Railroads incur variable costs—that is the costs of 

moving particular shipments—in providing service. The Staggers Rail Act stated 

that any rate that was found to be above 180 percent of a railroad’s variable cost 

for a particular shipment was potentially an unreasonable rate and granted the 

ICC, and later the STB, the authority to establish a rate relief process. In response, 

the ICC established two criteria for allowing a rail rate case. First, as stated in law, 

the rate had to be above 180 percent of the revenue-to-variable-cost (R/VC) ratio. 

Second, the shipper had to demonstrate that it had no other reasonable transportation alternative. Such a shipper is referred to as a ‘‘captive shipper.’’ 

Railroad Industry Increasingly Healthy and Rates Down Since Enactment 

of the Staggers Rail Act, but Competition and Captivity Concerns 

Remain 

The changes that have occurred in the railroad industry since the enactment of 

the Staggers Rail Act are widely viewed as positive. The railroad industry’s financial 

health improved substantially as it cut costs, boosted productivity, and ‘‘right-sized’’ 

its networks. Rates generally declined between 1985 and 2000 but increased slightly 

from 2001 through 2004. Concerns about competition and captivity in the industry 

remain because traffic is concentrated in fewer railroads and, although rates have 

declined for most shippers, some shippers are paying significantly higher rates than 

others. While it is difficult to precisely determine the number of shippers who are 

‘‘captive’’ to one railroad, our preliminary analysis indicates that while the extent 

of potential captivity may be dropping, the share of potentially captive shippers who 

are paying the highest rates—those substantially above the threshold for rate relief—has increased. 

Railroad Industry Financial Health Improved Substantially 

There is widespread consensus that the freight rail industry has benefited from 

the Staggers Rail Act. Specifically, various measures indicate an increasingly strong 

freight railroad industry. Freight railroads’ improved financial health is illustrated 

by increases in productivity, volume of shipments, and stock prices. Freight railroads have also cut costs by streamlining their work force and ‘‘right-sizing’’ their 

rail network, through which the railroads have reduced track, equipment, and facilities to more closely match demand. These measures are shown in Figure 1. 

Freight railroads have also expanded their business into new markets—such as 

the intermodal market—and implemented new technologies, including larger cars, 

and are currently developing new scheduling and train control systems. Some obVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE

621h1.eps
21 

3We constructed rate indexes to examine trends in rail rates over the 1985 to 2004 period. 

These indexes define traffic patterns for a given commodity in terms of census region to census 

region flows of that commodity, and we calculate the average revenue per ton mile for each of 

these traffic flows. The index is calculated as the weighted average of these traffic flows in each 

year, expressed as a percentage of the value for 1985, where the weights reflect the traffic patterns in 2004. By fixing the weights as of one period of time, we attempt to measure pure price 

changes rather than calculating the average revenue per ton mile in each year. Over time, 

changes in traffic patterns could result in a substitution of lower priced traffic for higher priced 

traffic, or vice versa, so that a decrease in average revenue per ton mile might partly reflect 

this change in traffic patterns. The rate index for the overall industry was defined similarly, 

except that the traffic pattern bundle was defined in terms broad commodity, census region of 

origin, and mileage block categories. For comparison purposes, we also present the price index 

for gross domestic product over this period. 

servers believe that the competition faced by railroads from other modes of transportation has created incentives for innovative practices, and that the ability to enter 

into confidential contracts with shippers has permitted railroads to make specific investments and to develop service arrangements tailored to the requirements of different shippers. 

Rates Declined From 1985 through 2000 and Rose Slightly from 2001 through 2004 

Rail rates across the industry have generally declined since enactment of the 

Staggers Rail Act. Because changes in traffic patterns over time (for example, hauls 

over longer distance) can result in increases in lower priced traffic and a decrease 

in average revenue per ton mile, it can present misleading rate trends. Therefore, 

we developed a rail rate index 3 to examine trends in rail rates over the 1985–2004 

period. These indexes account for changes in traffic patterns over time which could 

affect revenue statistics but do not account for inflation. As a result, we have also 

included the price index for the gross domestic product. 

Although there has been a slight upturn in rates from 2001 through 2004, the 

industry continues to experience rates that are generally lower than they were in 

1985. During this time some costs have also been passed on to shippers, such as 

having shippers provide equipment. There was a steep decline in rates from 1985 

to 1987 when rates dropped by 10 percent. Rates continued to decline, although not 

as steeply, through 1998. Rates increased in 1999, then dropped again in 2000. In 

2001 and 2002 rates rose again. Rates were nearly flat in 2003 and 2004, finishing 

approximately 3 percent above rates in 2000, but 20 percent below 1985 rates. This 

is shown in Figure 2. 

These data include rates through 2004. According to freight railroad officials, 

shippers, and financial analysts, since 2004 rates have continued to increase as the 


621h2.eps
22 

4 In addition to consolidation, which is the main reason for the reduction in the number of 

Class I railroads, other reasons were carrier bankruptcies and a 1992 ICC change in the threshold for qualifying as a Class I railroad (from $5 million in annual revenue in 1976 to $250 million in 1992). 5 A short line railroad is an independent railroad company that operates over a short distance. 

demand for freight rail service has increased, rail capacity has become more limited, 

and as a result, freight railroad companies have gained increased pricing power. 

A number of factors may have contributed to recent rate increases. Ongoing industry and economic changes have influenced how railroads have set their rates. 

Since the Staggers Rail Act was enacted, the railroad industry and the economic environment in which it operates have changed considerably. Not only has the rail industry continued to consolidate, potentially increasing market power by the largest 

railroads, but after years of reducing the number of its employees and shedding 

track capacity, the industry is increasingly operating in a capacity-constrained environment where demand for their services exceeds their capacity. In addition, the industry has more recently increased employment and invested in increased capacity 

in key traffic corridors. Additionally, changes in broader domestic and world economic conditions have led to changes in the mix and profitability of traffic carried 

by railroads. 

Competition and Captivity Concerns Remain 

Concerns about competition and captivity in the railroad industry remain because 

traffic is concentrated in fewer railroads and even though rates have declined for 

most shippers since the enactment of the Staggers Rail Act, some shippers are paying significantly higher rates than other shippers—a reflection of differential pricing. There is significant disagreement on the state of competition in the rail industry. In 1976, there were 63 Class I railroads operating in the United States compared with 7 Class I railroads in 2004. 4 As Figure 3 shows, 4 of these Class I railroads accounted for over 89 percent of the industry’s revenues in 2004. While some 

experts view this concentration as a sign that the industry has become less competitive over time, others believe that the railroad mergers and acquisitions actually increased competition in the rail industry because STB placed conditions on the mergers intended to maintain competition. These experts also point to the hundreds of 

short line railroads 5 that have come into being since the enactment of the Staggers 

Rail Act, as well as other increased competitive options for shippers from other 

modes such as trucks and barges. 

According to our preliminary analysis, some commodities and shippers are paying 

significantly higher rates than other shippers. This can be seen in rates charged to 

commodities and at specific routes. Figure 4 compares commodity rates for coal and 


621h3.eps
23 

6 Economic areas are those areas defined by the Bureau of Economic Analysis which define 

the relevant regional economic markets in the U.S. 

grain prices from 1985 through 2004 using our rail rate index. As Figure 4 shows, 

all rate changes were below the rate of inflation and thus all rates declined in real 

terms. However during that period, coal rates dropped even more sharply than industrywide rates, declining 35 percent. Grain rates initially declined from 1985 to 

1987, but then diverged from industry trends and increased, resulting in a net 9 

percent nominal increase by 2004. 

It is difficult to precisely determine the number of shippers who are ‘‘captive’’ to 

one railroad because proxy measures that provide the best indication can overstate 

or understate captivity. One way of determining potential captivity in our preliminary analysis was to identify which Bureau of Economic Analysis (BEA) economic 

areas were served by only one Class I railroad. 6 In 2004, 27 of the 177 BEA economic areas were served by only one Class I railroad. As shown in Figure 5, these 

areas include parts of Montana, North Dakota, New Mexico, Maine, and other 

states. We also examined specific origin and destination pairs and found that in 

2004, origin and destination routes with access to only one Class I railroad carried 

12 percent of industry revenue. This represents a decline from 1994, when 22 percent of industry revenue moved on routes served by one Class I railroad. This decline suggests that more railroad traffic is traveling on routes with access to more 

than one Class I railroad. 


621h4.eps
24 

While examining BEA areas provides a proxy measure for captivity, a number of 

factors may understate or overstate whether shippers are actually captive. The first 

two of these factors may work to understate the extent of captivity among shippers. 

First, routes originating within economic areas served by multiple Class I railroads 

may still be captive if only one Class I railroad serves their destination, meaning 

the shipper can use only that one railroad for that particular route. Second, some 

BEA areas are quite large, so a shipper within the area may have access to only 

one railroad even though there are two or more railroads within the broader area. 

Two additional limitations may work to overstate the number of locations captive 

to one railroad. First, this analysis accounts for Class I railroads only and does not 

account for competitive rail options that might be offered by Class II or III railroads 

such as the Guilford Rail System, which operates in northern New England. Second, 

this analysis considers only competition among rail carriers and does not examine 

competition between rail and other transportation modes such as trucks and barges. 

To determine potential captivity during our preliminary analysis, we applied another proxy measure—the definition of potentially captive traffic used in the Staggers Rail Act. The Act defines potentially captive traffic as any that pays over 180 

percent of the revenue-to-variable cost (R/VC) ratio. As a percentage of all rail traffic, the amount of potentially captive traffic traveling over 180 percent R/VC and 

the revenue generated from that traffic have both declined since 1985. 

However, our preliminary analysis indicates the share of potentially captive shippers who are paying the highest rates—those substantially above the threshold for 

rate relief—has increased. While total tons have increased significantly (from about 

1.37 billion in 1985 to about 2.14 billion in 2004), Figure 6 shows that tons traveling 

between 180 and 300 percent R/VC but have remained fairly constant—an increase 

from about 497 million tons in 1985 to about 527 million tons in 2004. However tons 

traveling above 300 percent R/VC have more than doubled—from about 53 million 

tons in 1985 to over 130 million tons in 2004. 


621h5.eps
25 

This pattern can also be seen in the share of traffic traveling above and below 

180 percent R/VC between 1985 and 2004. As Figure 7 illustrates, the percent of 

all traffic traveling between 180 and 300 percent R/VC decreased from 36 percent 

in 1985 to 25 percent in 2004. In contrast, the percent of all traffic traveling above 

300 percent R/VC increased from 4 percent in 1985 to 6 percent in 2004. 

Our preliminary analysis indicates that this overall change in traffic traveling 

over 300 percent R/VC can be seen in certain states and commodities. For example, 

39 percent of grain originating in Montana and 20 percent of coal in West Virginia 

traveled over 300 percent R/VC in 2004. As shown in Figure 8, this represents a 


621h6.eps 621h7.eps
26 

significant increase from 1985, when 14 percent of grain in Montana and 4 percent 

of coal in West Virginia traveled over 300 percent R/VC. 

As with BEA areas, examining R/VC levels as a proxy measure for captivity can 

also understate or overstate captivity. For example, it is possible for the R/VC ratio 

to increase while the rate paid by a shipper is declining. Assume that in Year 1, 

a shipper is paying a rate of $20 and the railroad’s variable cost is $12. The R/VC 

ratio—a division of the rate and the variable cost—would be 167 percent. If in Year 

2 the variable costs decline by $2.00 from $12 to $10, and the railroad passes this 

cost savings directly on the shipper in the form of a reduced rate, the shipper would 

pay $18 instead of $20. However, as shown in Table 1, because both revenue and 

variable cost decline, the R/VC ratio increases to 180 percent. 

Table 1: Possible Changes in R/VC Ratios 

Year Revenue collected Variable costs R/VC 

Year 1 $20.00 $12.00 167% 

Year 2 $18.00 $10.00 180% 

Source: GAO. 

Although proxy measures have inherent limitations, they can serve as useful indicators of trends in railroad pricing, how the railroads may be exercising their market power to set rates, and where competition and captivity concerns remain. 

Whether these trends reflect an exercise or possible abuse of market power or is 

simply a reflection of rational economic practices by the railroads in an environment 

of excess demand remains uncertain. 

Proposed Alternative Approaches to Address Remaining Competition and 

Captivity Concerns Should Be Carefully Considered 

A number of alternative approaches have been suggested by shipper groups, 

economists, and other experts in the rail industry to address remaining concerns 

about competition and captivity—however, any alternative approaches should be 

carefully considered. Two areas—an assessment of competition and addressing problems with the rate relief process—are particularly integral to further improvement. 

Any alternative approaches to address competition and captivity should be carefully 

considered to ensure that the approach achieves the important balance set out in 

the Staggers Act of allowing the railroads to earn adequate revenues and invest in 

its infrastructure while assuring protection for captive shippers from unreasonable 

rates. 

Assessment of Competition Has Been Limited 

Our preliminary work shows there has been little assessment by the Federal Government of where areas of inadequate competition might exist or how changes in 

industry concentration might be resulting in the inappropriate exercise of market 

power. Although the STB has broad legislative authority to investigate industry 

practices, it has generally limited its reviews of competition to merger cases. STB 


621h8.eps
27 

is responsible for reviewing railroad merger proposals, approving those that it finds 

consistent with the public interest, and ensuring that any potential merger-related 

harm to competition is mitigated. STB’s mitigation efforts have focused on preserving competition, such as granting the authority for one railroad to operate over 

the tracks of another railroad (called trackage rights). As we reported in 2001, STB 

found little competition-related harm during its oversight of recent mergers. However, rail mergers can have different effects on rail rates. For example, using an 

econometric approach that isolated the specific effects of the Union Pacific/Southern 

Pacific merger on rail rates for certain commodities in two geographic areas—Reno, 

Nevada, and Salt Lake City, Utah—we found that the merger reduced rates for four 

of six commodities, placed upward pressure on rates for one commodity, and left 

rates relatively unchanged for one commodity. In analyzing rail rates as part of 

merger oversight, STB examines the merger oversight record, which generally focuses on the overall direction and magnitude of rate changes, rather than specific 

commodities or geographic areas. According to STB officials, in general, the records 

have not permitted STB to reliably and precisely isolate the effects of mergers on 

rates from the effects of other factors (such as the price of diesel fuel). 

STB is not unaware of concerns about competition. In addition to reviewing competition in terms of mergers, STB has also instituted proceedings to review rail access and competition issues. For example, in April 1998, STB commenced a review 

at the request of Congress to review access and competition issues in the rail industry. In an April 1998 decision on these issues, STB agreed to consider revising its 

competitive access rules. However, in its December 1998 report to Congress, STB 

declined to take further action on this issue because it had adopted new rules allowing shippers temporary access to alternative routing options during periods of poor 

service. In addition, STB observed that the competitive access issue raises basic policy questions that are more appropriately resolved by Congress. Furthermore, in a 

December 1998 ruling on a Houston/Gulf Coast oversight proceeding, STB recognized the possibility that opening up access could fundamentally change the Nation’s rail system, possibly benefiting some shippers with high-volume traffic while 

reducing investment elsewhere in the system and ultimately reducing or eliminating 

service for small, lower-volume shippers in rural areas. Finally, STB adopted new 

regulations for rail mergers in 2001. These new regulations require the applicant 

to demonstrate that the merger would enhance, not just preserve, competition. 

Given the disagreement about the adequacy of competition in the industry and 

the fact that proxy measures can understate or overstate captivity, an assessment 

of competition and how changes in industry concentration might be resulting in the 

inappropriate exercise of market power would allow decisionmakers to identify areas 

where competition is lacking and to assess the need for and merits of targeted approaches to address it. The targeted approaches most frequently proposed by shipper groups and others include reciprocal switching arrangements, which allow one 

railroad to switch railcars of another railroad, and terminal access agreements, 

which permits one railroad to use another’s terminals. We will discuss the potential 

costs and benefits of these approaches further in our final report. Use of these approaches should be carefully considered to ensure that the approach achieves the 

important goals set out in the Staggers Rail Act. For example, if these approaches 

expand competitive options and decrease the number of captive shippers, which 

could decrease the need for Federal regulation and the need for a rate relief process. 

On the other hand these approaches could also reduce rail rates and thus railroad 

revenues and affect the ability of the railroads to earn adequate revenues and invest 

in its infrastructure. 

Rate Relief Process Is Largely Inaccessible, but Different Approaches Should Be 

Carefully Considered 

The principal vehicle through which shippers seek relief from unreasonable rates 

is the rate relief process. The Staggers Rail Act recognized that some shippers may 

not have access to competitive alternatives and may therefore be subject to unreasonably high rates. For these shippers, the Act gave ICC, and later STB, the authority to establish a rate relief process so that shippers could obtain relief from unreasonably high rates, as well as more general powers to monitor the railroad industry. 

Under the standard rate relief process, the Board requires a shipper to demonstrate 

how much an optimally efficient railroad would need to charge that shipper. Therefore, the shipper must construct a hypothetical, perfectly efficient railroad that 

would replace its current carrier. 

There is widespread agreement the rate relief process is inaccessible to most shippers and does not provide expeditious handling and resolution of complaints. The 

process is expensive, time consuming and complex, and, as a result, several shipper’s organizations told us that it is unlikely they would ever file a rate case. Since 

28 

2001, only 10 cases have been filed, and these cases took between 2.6 and 3.6 

years—an average of 3.3 years per case—to complete. In addition, while STB does 

not keep records of the cost of a rate case, shippers we interviewed agreed that the 

process can cost approximately $3 million per litigant. As a result, shippers told us 

that, for them to bring a case, the case would need to involve several million dollars 

so that it was worthwhile to spend $3 million on a case that they could possibly 

lose. The process is complex because the legal procedures requires that (1) the shipper construct a model of a hypothetical, perfectly efficient railroad and (2) the railroad and shipper have opportunities to present their facts and viewpoints as well 

to present new evidence. 

Congress and STB have recognized the problems with the rate relief process and 

taken actions to address them. First, Congress required STB to develop simplified 

guidelines. STB developed guidelines to streamline the process when the value of 

traffic at stake did not make it feasible to incur the costs of conducting a full rate 

case. Under these simplified guidelines, shippers do not have to construct a hypothetical railroad and can instead rely on industry averages to try to prove that their 

rate is unreasonable. Although these simplified guidelines have been in place since 

1997, the process set out by the guidelines has not been used. Second, STB worked 

to improve the standard rate relief process. Specifically, STB now holds oral arguments to begin cases and, according to STB officials, these oral arguments help to 

clarify disagreements without adding any time to the process. In addition, STB has 

added staff to process cases. 

According to shippers and railroad officials we spoke with, the simplified guidelines are confusing regarding who is eligible to use the process and how it would 

work. In addition, several shippers’ organizations told us that shippers are concerned about using the simplified guidelines because since they have never been 

used, they believe it will be challenged in court and result in lengthy litigation. STB 

officials told us that they—not the shippers—would be responsible for defending the 

guidelines in court. STB officials also said that, if a shipper won a small rate case, 

STB could order reparations to the shipper before the case was appealed to the 

courts. 

During our preliminary work we identified a number of different approaches that 

have been suggested by shipper organizations and others that could make the rate 

relief process less expensive and more expeditious, and therefore potentially more 

accessible. Each of the proposed approaches has both advantages and drawbacks. 

These approaches included the following: 

• Increased use of arbitration: Under arbitration, the two parties would present 

their case before an arbitrator, who would then determine the rate. This approach would replace the shipper’s requirement to create a hypothetical railroad. Proponents of this system argue that it provides both the railroads and 

the shippers with an incentive to suggest a reasonable rate (because otherwise 

the arbitrator could select the other’s offer) and that the threat of arbitration 

can induce the parties to resolve their own problems and limit the need for Federal regulation. However, critics of this approach suggest that arbitration decisions may not be based on economic principles such as the revenue and cost 

structure of the railroad and that arbitrators may not be knowledgeable about 

the railroad industry. 

• Increased use of simplified guidelines: The simplified guidelines use standard 

industry average figures for revenue data instead of requiring the shipper to 

create a hypothetical railroad. This approach would reduce the time and complexity of the process; however, it may not provide as accurate and precise a 

measure as the current process. However, as noted above, the use of STB’s simplified guidelines has not been fully reviewed by the courts, and many railroad 

industry experts believe the first use of the guidelines will result in lengthy litigation. 

• Increased use of alternative cost approaches: For example, STB could use the 

long-run incremental cost approach to evaluate and decide rate cases. This process, which is used for regulating pipelines, bases rates on the actual incremental cost of moving a particular shipment, plus a reasonable rate of return. 

This approach allows for a quick, standard method for setting prices, but does 

not take into account the need for differential pricing or the railroad’s need to 

charge higher rates in order to become revenue adequate. Structuring rate regulation around actual costs can also create potential disincentives for the regulated entity to control its costs. 

Again, these alternative approaches should be carefully considered to ensure that 

the approach achieves the important balance set out in the Staggers Act. A signifiVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
29 

7 Congressional Budget Office Freight Rail Transportation: Long Term Issues January 2006. 8 According to STB, some portion of this $8 billion investment is focused on maintenance as 

opposed to capacity expansion. 

cant factor in evaluating each of these alternatives is the revenue adequacy of the 

railroads. The Staggers Rail Act established revenue adequacy as a goal for the industry and allowed the railroads to use differential pricing to increase their revenues. The act further gave the ICC (and later STB) the authority to determine the 

revenue adequacy of the railroads each year. While the specific method for determining revenue adequacy has been controversial, the overall trend in revenue adequacy may be more important. In its last report in 2004, STB determined that one 

railroad is revenue adequate and that others are approaching revenue adequacy. 

While it is too early to determine that the industry as a whole is achieving revenue 

adequacy, this is a significant shift in the rail industry because for decades after 

enactment of the Staggers Rail Act, the railroads were all considered revenue inadequate. 

Different approaches to addressing remaining competition and captivity concerns 

will likely recognize to some degree the railroads’ continued need to more consistently recover their cost of capital and become revenue adequate. The railroads need 

additional revenue for infrastructure investment to keep pace with increased demand. On the other hand, different approaches also raise the question as to what 

degree the railroads should continue to rely on obtaining significantly higher prices 

from those with greater reliance on rail transportation in a revenue adequate environment where total railroad revenues are increasingly sufficient to meet the railroad’s investment needs. 

Significant Growth in Freight Rail Traffic Demand Is Forecast But 

Continued Capacity Building Is Uncertain 

The demand for freight and freight rail is forecast to increase significantly in the 

future, although many factors can affect the accuracy of these forecasts. Freight 

markets are volatile and unpredictable and thus freight demand forecasts may 

prove to be off the mark. For example, much freight demand is determined by trade 

that originates outside the United States. Many of the data used to develop these 

freight demand forecasts are proprietary and a result, we could not assess the validity or reasonableness of the assumptions used to develop the predictions. However, 

forecasts of freight and freight rail demand are useful as one possible scenario of 

the future. As the Congressional Budget Office (CBO) observed in a January 2006 

report, forecasts of future demand can be viewed as more illustrative than quantitatively accurate. 7

Major freight railroads have reported that they expect to invest about $8 billion 

in infrastructure during 2006—a 21 percent increase over 2005—and have told us 

that they plan to continue making infrastructure investments. 8 Although railroads 

are sufficiently profitable to be investing at record levels today, it is not certain 

whether in the future investments will keep pace with the projected demand. Railroads secure private benefits by investing in their infrastructure and have many 

considerations in making new infrastructure investments such as the need to obtain 

the highest return on their investment, optimize the performance of their network, 

and respond to other significant capital needs of rail operations. The railroads we 

interviewed were generally unwilling to discuss their future investment plans with 

us as this is business proprietary information. We are therefore unable to comment 

on how companies are likely to choose among their competing investment priorities 

for the future. 

In addition to securing private benefits for railroad networks, investments in rail 

projects can produce benefits for the public—some of these public benefits are, as 

CBO’s report pointed out, large in comparison to anticipated private railroad benefits. For example, shifting truck freight traffic to railroads can reduce highway congestion and reduce or avoid public expenditures that otherwise would be needed to 

build additional highway capacity or provide additional maintenance to accommodate growth in truck traffic. These and other public benefits can be realized at the 

national, state, and local levels. For example, rail investment may generate benefits 

to the national economy by lowering the costs of producing and distributing goods. 

Since rail uses less fuel than trucks, energy use and emissions may be reduced. In 

contrast, a rail project that eliminates or improves a highway-rail crossing could deliver primarily local public safety benefits by reducing accidents, time lost waiting 

for trains to pass, and pollution and noise from idling trains and lessening the risk 

of delays for emergency vehicles at crossings. 

In pursuit of these public gains, the Federal and state governments have been increasingly participating in freight rail improvement projects. For example, the State 

30 

of Delaware spent about $14 million to rehabilitate a bridge in exchange for receiving a fee for each railroad car that crosses the bridge. The Federal Government has 

also become more involved in freight rail partnerships. Specifically, in 1997 the U.S. 

Department of Transportation provided a $400 million loan to the Alameda Corridor 

Transportation Authority for the Alameda Corridor project, which included a number of rail and road improvements to consolidate freight traveling to and from the 

ports of Los Angeles and Long Beach. These ports are a significant gateway for 

freight that is imported from Asia and distributed throughout the U.S. In addition, 

in 2005, Congress provided $100 million to the Chicago CREATE project to improve 

the rail infrastructure and ease congestion in and around Chicago—the busiest 

freight rail center in the U.S. 

In the years ahead Congress is likely to face additional decisions regarding potential Federal policy responses and the Federal role in the Nation’s freight railroad 

infrastructure. Based on our ongoing and past work, I would like to make three observations. First, any potential Federal policy response should recognize that subsidies can potentially distort the performance of markets and that the Federal fiscal 

environment is highly constrained. Second, any such response should occur in the 

context of a comprehensive National Freight Policy that reflects system performance 

based goals and a framework for intergovernmental and public-private cooperation. 

DOT initiated this effort by publishing a draft Framework for a National Freight 

Policy this year for comment. Third, Federal involvement should only occur where 

demonstrable wide-ranging public benefits and a mechanism to appropriately allocate the cost of financing these benefits between the public and private sectors exists and, to the extent possible, focuses on benefits that are more national than local 

in scope. Although new freight rail investment tax credits have been suggested, our 

past work has pointed out that it is difficult to target this approach to desired activities and outcomes and ensure that it generates the desired new investments as 

opposed to subsidizing investment that would have been undertaken at some point 

anyway. This approach can also have problematic fiscal impacts because it either 

lowers tax revenues or leads to higher overall tax rates to offset revenue losses. We 

will be discussing these areas in greater detail when we issue our report. 

Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other members of the Committee may have at this 

time. 

APPENDIX I—RELATED GAO PRODUCTS

Regulation: Changes in Freight Railroad Rates from 1997 through 2000. GAO–02– 

524. Washington, D.C.: June 7, 2002. 

Freight Railroad Regulation: Surface Transportation Board’s Oversight Could 

Benefit From Evidence Better Identifying How Mergers Affect Rates. GAO–01–689. 

Washington, D.C.: July 5, 2001. 

Railroad Regulation: Current Issues Associated With the Rate Relief Process. GAO/ 

RCED–99–46. Washington, D.C.: April 29, 1999. 

Railroad Regulation: Changes in Railroad Rates and Service Quality Since 1990. 

GAO/RCED–99–93. Washington, D.C.: April 6, 1999. 

Railroad Competitiveness: Federal Laws and Policies Affect Railroad Competitiveness. GAO/RCED–92–16. Washington, D.C.: November 5, 1991. 

Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 

1980. GAO/RCED–90–80. Washington, D.C.: May 16, 1990. 

Railroad Regulation: Shipper Experiences and Current Issues in ICC Regulation 

of Rail Rates. GAO/RCED–87–119. Washington, D.C.: September 9, 1987. 

Railroad Regulation: Competitive Access and Its Effects on Selected Railroads and 

Shippers. GAO/RCED–87–109. Washington, D.C.: June 18, 1987. 

Railroad Revenues: Analysis of Alternative Methods To Measure Revenue Adequacy. GAO/RCED–87–15BR. Washington, D.C.: October 2, 1986. 

Shipper Rail Rates: Interstate Commerce Commission’s Handling of Complaints. 

GAO/RCED–86–54FS. Washington, D.C.: January 30, 1986. 

Senator LOTT. Let’s go ahead and hear from Mr. Buttrey, and 

then we’ll ask questions of the both of you. 

So, Mr. Doug Buttrey, Surface Transportation Board chairman, 

thank you for your service, and we’ll be glad to hear from you. 

31 

STATEMENT OF W. DOUGLAS BUTTREY, CHAIRMAN, 

SURFACE TRANSPORTATION BOARD 

Mr. BUTTREY. Good morning, Mr. Chairman, Ranking Member, 

members of the Subcommittee. 

My name is Douglas Buttrey. I’m Chairman of the Surface 

Transportation Board. I appreciate the opportunity to appear before this Subcommittee today to discuss the economics of the 

freight railroad industry as it relates to current service and capacity issues. 

This is my first appearance before this Committee since I became 

Chairman of the Surface Transportation Board on January 5. I’m 

glad to report that the Board has undertaken several important 

new initiatives since January in an effort to be proactive and responsive to concerns that have been raised. I will outline these initiatives for you in a moment, but first I’d like to comment briefly 

on rail capacity and service issues. 

At least some of today’s issues differ from those that prevailed 

when the Board last appeared before this Subcommittee. Historically, railroads had excess capacity. However, the U.S. economy has 

expanded, and the railroad industry, like other transportation sectors, has become capacity-constrained in some areas. The Board 

has a process in place to help railroads and their customers resolve 

service and/or rate disputes informally before availing themselves 

of the Board’s formal processes. The Board favors private-sector solutions, but when informal processes cannot produce a solution, the 

Board is available to provide an adjudicatory forum. 

Turning now to the new initiatives since January 1, I would first 

like to emphasize that the Board has begun a rulemaking to reform 

the large rate case process in an effort to make it as fair, efficient, 

and user-friendly as possible. Preparing the evidence that is required in a large rate case and presenting it to the Board can be 

very time-consuming and expensive for the parties. The Board’s 

staff reviewed the formal rate proceedings that have come before 

the agency over the past few years, and, in February, the Board 

issued a Notice of Proposed Rulemaking in an attempt to improve 

how we handle certain difficult substantive issues that have come 

in large rate cases. Comments and replies have been filed, and 

rebuttals are due very shortly. 

Because of the scope of these proposed rule changes, the Board 

has put its pending large rate cases in abeyance. Things are not 

standing still, however. Recently, the Board issued compliance orders in two of the pending cases to obtain additional evidence that 

will be needed to resolve those cases regardless of whatever rules 

are ultimately adopted. 

The Board is also committed to improvements in the small rate 

case area. The Board’s staff is continuing to develop new ideas to 

improve the existing small rate case procedures where we can. I 

cannot today give you a particular date on which a rulemaking on 

small rate case issues will be initiated, but I assure you that we’re 

making every effort to come up with better guidance in this area. 

I expect the proposal to be issued later this summer. 

Another matter that has been a serious concern to shippers in recent months is railroad fuel surcharges. Recently, unpredictability, 

volatility, and spikes in fuel costs are well known. To give parties 

32 

on both sides an opportunity to address these matters, the Board 

held a public hearing—an all-day public hearing—on May 11. The 

hearing was very well attended, but I personally found the shippers and railroads to be worlds apart in their testimony, even as 

to factual matters. The Board is presently considering what action 

would be appropriate and helpful in this area. 

The Board has also scheduled a public hearing to hear views on 

the issue of paper barriers. This hearing, on July 27, will explore 

the pros and cons of these limitations on interchanges that have 

been imposed in connection with some railroad line sales and 

leases. After the hearing, the Board will consider claims that such 

limitations are anticompetitive and what, if any, action is appropriate. 

The Board has also instituted a rulemaking proceeding proposing 

to change the timing for class exemptions that provide an expedited process for obtaining authority for some rail-line acquisitions, 

leases, and similar transactions. 

The Board proposed these changes in order to ensure that the 

public is given adequate notice of a proposed transaction before the 

exemption can become effective. Comments and replies have just 

recently been filed. 

Finally, the Board has issued an advance notice of proposed rulemaking and sought comments on a proposed filed by the shortline 

and regional railroads. They seek a new expedited process for 

abandonment of rail lines owned by the smaller railroads. Comments and replies have been filed, and the Board will now consider 

what action, if any, is appropriate. 

I hope it is clear from this summary that the Board is listening 

and sensitive to concerns raised by stakeholders, and has taken 

several important steps since January that are intended to explore 

how best to address those concerns within the bounds of our statutory authority. Reforms such as these are, in my view, the best way 

to address these concerns while maintaining a healthy freight rail 

network. 

I’m glad to be participating on this panel today with Ms. Hecker 

of GAO, who has presented certain preliminary results of GAO’s 

ongoing railroad study. The Board has been assisting GAO with 

this study and will continue to work with GAO as it moves forward 

to complete the study. 

I look forward to any questions that you might have. Thank you, 

Mr. Chairman. 

[The prepared statement of Mr. Buttrey follows:] 

PREPARED STATEMENT OF W. DOUGLAS BUTTREY, CHAIRMAN, 

SURFACE TRANSPORTATION BOARD

Good morning Chairman Lott, Ranking Member Inouye, and members of the Subcommittee. My name is Douglas Buttrey, and I am Chairman of the Surface Transportation Board (Board or STB). I appreciate the opportunity to appear before this 

Subcommittee today to discuss the economics of the freight railroad industry as it 

relates to current service and capacity issues. 

This is my first appearance before this Subcommittee since I became Chairman 

of the STB on January 5, 2006. The issues that are the subject of this hearing are 

vitally important to the freight railroads, their customers and employees, and the 

Nation’s freight transportation system as a whole. I commend the Subcommittee for 

holding this hearing to look into these important matters. 

33 

I understand that a representative of the Government Accountability Office (GAO) 

is also scheduled to testify at this hearing, to present preliminary findings from 

GAO’s study of recent rate changes in the freight rail industry. The Board has been 

cooperating with GAO on this study, and several meetings have been held between 

GAO and Board staff on this subject, to discuss the background and exchange information. Board staff has shared with me the contents of a preliminary draft statement of facts from GAO’s study. Board staff is currently analyzing that preliminary 

draft. Once they have completed their analysis they will share it with GAO. 

First, I will provide an overview of the Board and its responsibilities, and then 

I will discuss steps the Board is taking to address the issues that are the focus of 

this hearing. 

Overview of the STB 

The STB was created over 10 years ago by legislation initiated by this Committee. 

The ICC Termination Act of 1995 (ICCTA) established a three-member Board and 

charged it with the fundamental missions of resolving railroad rate and service disputes and reviewing railroad restructuring transactions (mergers, line sales, line 

construction, and line abandonments). In addition, the Board was given limited jurisdiction over certain trucking, bus, household goods, ocean shipping company (noncontiguous domestic trade), and pipeline matters. It is important to note that the 

substantial deregulation effected in the Staggers Rail Act of 1980 was continued 

under ICCTA. ICCTA empowers the Board, through its exemption authority, to promote deregulation through administrative action. The Board’s staff is limited to no 

more than 150 employees by appropriation. 

Two of the Board’s main functions are to provide a regulatory forum to address 

rate disputes between railroads and captive shippers, and to assist shippers with 

service issues. The Board has created a number of mechanisms to help railroads and 

their customers resolve disputes before availing themselves of the Board’s formal 

processes. For example, the Office of Compliance and Enforcement operates the Rail 

Consumer Assistance Program. That program is intended to provide assistance to 

rail consumers in addressing those issues that have not been resolved through private negotiations. When informal processes cannot produce a solution, however, the 

Board is available to provide an adjudicatory forum. 

Although rates throughout the rail industry have generally declined significantly 

since the Staggers Act, many shippers believe the Board has not done enough to 

address shipper concerns in the areas of rate and service disputes. I understand 

those concerns, and I will next relate the steps the Board is taking to address them. 

Shipper Issues 

1. Undercapacity 

Before I discuss rate and service issues in more detail, I would like to express 

my view of what it is that makes at least some of today’s problems somewhat different from the issues that prevailed when the Board last appeared before this Subcommittee. Historically, railroads were burdened with excess capacity, which made 

it difficult for them to operate efficiently and earn a profit. In recent years, railroads 

have become more efficient by rationalizing their systems. At the same time, however, the U.S. economy has expanded, and the railroad industry, like other transportation sectors, has become capacity-constrained in some areas. Unlike some other 

sectors, however—trucking companies, for example, which can buy new equipment 

or hire more drivers—railroads cannot as readily respond to capacity constraints by 

quickly building new track and other facilities. Not only are rail construction 

projects expensive and time-consuming, but—as I will discuss later—these projects 

often are extremely controversial and can be the subject of court challenges on environmental issues in particular. 

For those reasons, and others that may be beyond their control, railroads have 

experienced intermittent service problems throughout their systems. To mitigate the 

effects of their undercapacity, they have reportedly begun rationing service occasionally. According to some shippers, they do this by either embargoing large classes of 

traffic or by raising rates selectively. Neither of these alleged practices has been 

brought formally before the Board, and whether the Board could afford relief would 

depend on the circumstances of any formal complaint that might be brought. If a 

particular shipper has access to truck service—even if that service might be more 

expensive or less convenient—it might be unable to meet the market dominance requirement that is a statutory prerequisite to rate relief. And although the statute 

requires railroads to provide service on ‘‘reasonable request,’’ what is reasonable is 

a case-specific inquiry. Railroads must prioritize competing requests for service, and 

I cannot say in advance how the Board would rule on any particular complaint alVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
34 

leging that a particular railroad’s prioritization was so unreasonable as to be unlawful. 

In any event, these concerns might be mitigated if railroads were able to expand 

their capacity. Such capital planning decisions depend on a variety of factors, such 

as the cost of new facilities, the likely returns on investment in new facilities, the 

availability of Federal and state programs to support and/or incentivize infrastructure capacity expansion by freight railroads, and so forth. 

2. Rate Disputes 

Under the statute, the Board has exclusive jurisdiction to resolve rate disputes 

in those instances when a railroad has market dominance—in other words, when 

the railroad is charging a rate higher than the regulatory floor and the shipper has 

no effective transportation alternative. Under the Interstate Commerce Act, the 

Board must balance the often conflicting objectives of assisting railroads in attaining revenue adequacy, on the one hand, and ensuring that the rates that individual 

shippers pay are reasonable, on the other. The balance, as we all know, is not an 

easy one. Rates that are too high can harm rail-dependent businesses, while rates 

that are held down too low will deprive railroads of revenues to pay for the infrastructure investments needed to give shippers the level and quality of service that 

they require. The Board has one set of procedures for handling ‘‘large’’ rate cases 

and another for ‘‘small’’ cases. 

a. Large Rate Cases 

The first step in a rate case is a two-part inquiry to determine whether the railroad has ‘‘market dominance’’ over the transportation to which the rate applies. The 

first part of the inquiry is to determine the ‘‘variable costs’’ of providing the service. 

The statute establishes a conclusive presumption that a railroad does not have market dominance over transportation if the rate that it charges produces revenues 

below 180 percent of the variable costs of providing the service, which means that 

this 180 percent revenue-to-variable cost (R/VC) percentage is the floor for regulatory scrutiny. 

If the rate the railroad charges exceeds the 180 percent R/VC threshold, the second part of a market dominance inquiry involves a qualitative assessment in which 

the Board must determine whether there are any feasible transportation alternatives that could be used for the traffic involved. The Board considers whether 

there is actual or potential direct competition—that is, competition either from other 

railroads (intramodal competition) or from other modes of transportation such as 

trucks, pipelines, or barges (intermodal competition) for transporting the same traffic moving between the same points. If there are effective competitive alternatives 

for the transportation, then the Board does not have jurisdiction to regulate the 

rate, even if the rate charged yields an R/VC ratio greater than 180 percent. 

If the shipper can show that the railroad is market dominant, then the Board applies its court-approved methodology for rate review known as constrained market 

pricing (CMP) to assess whether the rate being charged that shipper is in fact unreasonable. CMP provides a framework for the Board to regulate rates while affording railroads the opportunity to cover their costs. CMP is premised on differential 

pricing, that is, pricing based on the demand for the service provided. CMP principles recognize that, in order for railroads to earn adequate revenues, they need 

the flexibility to charge different customers different prices based on each customer’s 

demand for rail service. But CMP principles also impose constraints on a railroad’s 

ability to price. Despite the complexity of CMP, the courts have held that it is the 

most desirable available approach to railroad rate review and that the Board must 

use it whenever it is feasible. 

The most commonly used CMP constraint is the stand-alone cost (SAC) test. 

Under SAC, a railroad may not charge a shipper more than what a hypothetical 

new, optimally efficient carrier would need to charge the complaining shipper if 

such a carrier were to design, build, and operate—with no legal or financial barriers 

to entry into or exit from the industry—a system to serve only that shipper and 

whatever group of traffic that shipper selects to be included in the traffic base. The 

ultimate objective of the SAC test is to ensure that the complaining shipper is not 

charged for carrier inefficiencies or for facilities or services from which the shipper 

derives no benefit. As with CMP in general, this assures the complaining shipper 

that it is not required to pay for inefficiencies or to unfairly subsidize other customers of the railroad. 

I am aware that some shippers believe that the deck is stacked against them in 

rate cases brought under SAC. Yet, the Board’s rate decisions historically have divided about evenly in terms of shipper wins versus carrier wins. I have attached 

a table setting forth this information as Exhibit A. Furthermore, nearly all of the 

35 

Board’s rate decisions that have been challenged in court—whether challenged by 

railroads or by shippers—have been affirmed. 

Nevertheless, the Board is working very hard to reform the large rate case process, in an effort to make it as fair, efficient and user-friendly as possible, given the 

somewhat competing statutory objectives. It is undeniable that deciding large rate 

cases is time consuming and costly for both the parties involved and the Board. The 

Board by statute has 9 months after the close of the record to decide a large rate 

case, and 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 can be very time-consuming and expensive for the parties, and the Board devotes a significant amount of staff time and resources to these 

cases as well. 

In recent years, the Board has developed new ways to simplify and speed up the 

rate review process. It has provided for: non-binding mediation at the beginning of 

the case, under the Board’s auspices, between the shipper and the railroad; expedited procedures to resolve disputes, using Board staff, over what information the 

parties can be required to give to each other during discovery; technical conferences 

to resolve, before the actual evidence is filed, certain factual disputes between the 

parties using the expertise of Board staff; and public versions of all filings with the 

Board that can protect confidential information but still be read and understood by 

all parties and the public. These new procedures have for the most part improved 

the process by helping to move large rate cases forward. 

Since I became Chairman, our staff has reviewed the rate proceedings the agency 

has processed over the past few years, and the Board has issued a Notice of Proposed Rulemaking (NPR) in an attempt to improve how we handle certain difficult 

substantive issues that have come up. In particular, we are seeking comments on 

six proposed changes to large rate case procedures. Those changes would focus on 

how the SAC process ought to arrive at the maximum reasonable rate once it is determined that an existing rate is too high; how the SAC process can better reflect 

economies of density; how the SAC process can better reflect carrier productivity 

gains when forecasting future carrier costs; how to simplify the costing process; how 

to improve the ‘‘discounted cash-flow’’ analysis used to calculate the need for rate 

relief; and better procedures for reopening or vacating a prior Board decision in SAC 

cases. 

Comments and replies have already been filed, and rebuttals are due shortly. Because of the scope of these proposed rule changes, the Board has put its pending 

large rate cases in abeyance. Things are not standing still, however. Recently, the 

Board issued compliance orders in two of the pending SAC cases, to obtain additional evidence that will be needed to resolve those cases regardless of whatever 

rules are ultimately adopted. 

In sum, while major litigation of the type involved in large rate cases is expensive 

and may appear to be slow, the Board has made progress in helping to ensure that 

the rate cases before it can proceed faster, cheaper and better. I will make it a priority to continue to make more improvements in this area. I expect significant 

progress when the pending rulemaking is completed. 

b. Small Rate Cases 

In 1996, in response to a Congressional directive, the Board adopted simplified 

guidelines for assessing the reasonableness of challenged rail rates in cases in which 

a full SAC presentation is too costly. Under these guidelines, the reasonableness of 

a challenged rate is determined by examining the carrier’s overall revenue needs, 

how the railroad prices its other captive traffic, and how railroads in general price 

comparable traffic. 

Shippers have expressed various concerns over how these procedures would play 

out in a particular case. They say that the ambiguity of who would qualify to use 

the small rate case procedures is a serious hurdle that has kept them from bringing 

cases. They have expressed concerns about how railroads might use the discovery 

process to unreasonably draw out a case. And shippers (and railroads) have urged 

the Board to adopt a more precise and predictable rate standard for small cases. 

The agency held public hearings on this matter, and its staff met with staff from 

other economic regulatory agencies to gather information on how they handle smaller disputes. When a small rate complaint was filed last year—the ‘‘BP/Amoco’’ 

case—we modified some of our processes to make the case move more smoothly. We 

also provided for agency mediation. We were pleased to see that, largely as a result 

of these measures, the parties were able to settle the BP/Amoco case at an early 

stage. 

But I know that more needs to be done in the small rate case area, and our staff 

is continuing to work hard to improve the existing procedures where we can. I canVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
36 

not give you a particular date on which an NPR will be issued, but I assure you 

that we are trying to come up with better procedures in this area. I have directed 

staff to work up a recommendation and would expect a proposal to be issued later 

this summer. 

3. Fuel Surcharges 

One matter that has concerned shippers in recent months relates to railroad fuel 

surcharges. Recent unpredictability, volatility, and spikes in fuel costs are well 

known. As fuel is a substantial component of railroad costs, carriers have sought 

to recover their increased fuel costs through surcharges. Many in the shipper community, however, have expressed concern with the way in which these fuel surcharges have been implemented. To give parties on both sides an opportunity to address these matters, on May 11, 2006, the Board held a public hearing. The hearing 

was well attended, and I found the testimony to be very thoughtful and enlightening. The Board is presently considering what action would be appropriate and 

helpful in this area. 

4. Competitive New Services 

Many shippers would like to obtain service from a second, competing railroad. 

Sometimes rail customers may work with a second railroad to apply for authority 

to construct a new rail line. The Board’s experience over the past several years has 

shown that new line construction—and there have been several new line constructions over the past few years—can bring competition while maintaining the privatesector characteristics of our rail system. But it can also be costly, and rail constructions, more than almost any other rail activity, generate community concerns that 

can delay and complicate the process. 

The Board must take two regulatory steps before the construction of a new rail 

line can occur. First, the Board’s environmental staff must conduct the necessary 

environmental review of the project. Second, the Board must consider and balance 

environmental concerns and the transportation-related merits of the proposed addition to the rail network. The Board has worked hard to expedite consideration of 

requests to construct rail lines whenever possible, and to approve them when appropriate. 

Three of the most controversial projects that the Board has recently addressed are 

the ‘‘DM&E,’’ ‘‘Bayport Loop,’’ and ‘‘Tongue River’’ cases. In DM&E, the Board, after 

an extensive environmental review, approved the construction by the Dakota, Minnesota and Eastern Railroad of a line into the Powder River Basin in Wyoming, 

which, if constructed, will provide enhanced rail transportation options for coal shippers, particularly in the Midwest. The United States Court of Appeals for the 

Eighth Circuit found on judicial review that the Board had done ‘‘a highly commendable and professional job,’’ but it nonetheless remanded the matter to the agency 

for limited additional consideration of four environmental issues. In a decision 

issued a few months ago, the Board addressed the issues remanded by the court. 

The Board’s most recent decision has again been challenged in court by environmental and local groups, and construction of the line has not yet begun. 

In Bayport Loop, the Board approved the construction of a line to provide BNSF 

Railway Company access into the Bayport industrial area near Houston, to bring 

competition to the service provided by Union Pacific Railroad Company (UP) to the 

large concentration of chemical companies located there. After the project was approved, it was tied up in Texas state courts by zoning and other land use objections 

raised by the city of Houston. Ultimately, the construction became unnecessary 

when UP and BNSF announced that they had reached agreement to provide these 

shippers with access to both railroads over the existing UP line. 

In Tongue River, the Board is now considering the latest version of a longstanding 

construction case designed to provide a more efficient route for coal from the Powder 

River Basin to electric utilities. Two portions of the Tongue River Railroad’s project 

to construct and operate a new railroad line in Montana were approved several 

years ago by the Board’s predecessor agency, the Interstate Commerce Commission, 

and then the Board. However, the project did not go forward as originally proposed, 

and the carrier presented the Board with an amended proposal for part of the construction. The Board’s environmental staff is currently completing its final environmental document. The agency will then determine whether it should approve the 

redesigned project. 

While build-ins can increase competition and provide many benefits, we have seen 

that at times the construction of new rail lines can be controversial in the communities where the construction would take place. Indeed, both DM&E and Bayport 

Loop generated extensive local opposition and spawned court challenges by various 

37 

citizen and other groups, and environmental issues have also been raised in Tongue 

River. 

5. Service Issues 

As with other industries, railroads and shippers sometimes have disputes over 

service. The Board has a very active consumer assistance program that handled a 

total of 121 disputes during 2005. We cannot always resolve the issues, but we are 

often successful at bringing the parties closer together and getting them to talk to 

each other. 

The Board has rules that allow us to temporarily substitute a new carrier for an 

existing carrier that is unable to provide adequate service. We have used those rules 

several times in the past few years, and we will use them again when appropriate. 

But I must point out that those rules are not a viable remedy for many of the service issues we see today, because if a line is already clogged up with too much traffic, 

putting another railroad on the line will not fix the problem and may even present 

problems of its own. Therefore, while our substituted carrier rules may be very helpful in certain circumstances, probably the best way to address service problems 

long-term is for new infrastructure to be added to the rail system. 

6. Preemption 

As you all know, in ICCTA, Congress strengthened the statutory preemption provision that protects railroads from most state and local regulation. Although it may 

not be the subject of this hearing, I know that preemption is an issue that has concerned many Members of Congress in recent months. I will not go into the preemption issue in much detail here, but I would like to emphasize a few important 

points. 

First, concerned parties always have avenues of recourse if they think Federal 

preemption is being improperly asserted. They can raise their concerns before the 

Board in a proceeding that requires a license, or through the Board’s declaratory 

order process where no license is required; or they can choose to go directly to a 

court. Emergency relief can be, and has been, sought and obtained promptly in each 

forum. 

Second, Federal preemption applies only to rail activities that are conducted by 

a railroad or its agent, and that are part of ‘‘railroad transportation’’ as defined in 

the statute. The Board has demonstrated its vigilance in making these fact-specific 

determinations in the individual cases that have been brought before it, to ensure 

that only those operations that qualify for the Federal preemption will benefit from 

it. 

Third, even where Federal preemption applies, Federal environmental laws remain applicable, including those that are implemented in part by the states such 

as the Clean Air Act, the Clean Water Act, and the Solid Waste Disposal Act. In 

addition, states and local entities clearly retain their reserved police powers. 

7. Paper Barriers 

The Board has also scheduled a public hearing to hear views on the issue of 

‘‘paper barriers.’’ This hearing, on July 27, 2006, will explore the pros and cons of 

these limitations on interchange that have been imposed in connection with some 

railroad line sales. After the hearing the Board will consider what, if any, action 

should be taken. 

8. Initiatives Concerning Abandonments and Exemptions 

Lastly, I want to briefly inform the Subcommittee about some other initiatives 

that the Board is pursuing that may improve the regulatory process. 

The Board instituted a rulemaking proceeding proposing to change the timing for 

‘‘class exemptions’’ that provide an expedited process for obtaining authority for 

some rail lines acquisitions, leases, and similar transactions. The Board proposed 

the changes to extend the opportunity for the public to raise concerns before the 

Board in these types of cases. Comments and replies have just recently been filed. 

Additionally, the Board issued an Advance Notice of Proposed Rulemaking and 

sought comments on a proposal filed by a group of short line and regional railroads. 

They seek a new, expedited process for abandonment of rail lines owned by Class 

II and Class III railroads. Comments and replies have been filed, and the Board will 

now consider what action, if any, is appropriate. 

Neither of these proposals, if adopted, would dramatically change the fabric of 

transportation regulation, but both proceedings have been initiated to address areas 

of concern. The abandonment proceeding was instituted after small carriers raised 

concerns that the current procedures impose undue hardships on them, while the 

timing changes to the exemption process were proposed to ensure that the public 

is given notice of a proposed transaction before the exemption can become effective. 

38 

Conclusion 

The Board is striving to address the concerns raised by captive shippers, and has 

several important initiatives underway that are intended to do just that. Reforms 

such as these are, in my view, the best way to address the concerns raised by captive shippers while maintaining a healthy freight rail network. It is a difficult balance, but one that can be achieved. 

I appreciate the opportunity to discuss these issues today, and look forward to any 

questions you might have. 

EXHIBIT A—JUNE 2006 

STB Rail Rate Case Results 

• Shipper showed rate unreasonable (Board ordered reparations for shipments 

moved while case pending & prescribed rate for future shipments): 

1. Arizona Pub. Serv. Co. et al. v. Atchison, T.&S.F.R.R., 2 S.T.B. 367 (1997), 

modified, 3 S.T.B. 70 (1998)—reparations (approx. $23 million) & rate prescription (approx. 40 percent reduction); rate prescription lifted in 2004 due to 

changed circumstances (earlier-than-expected depletion of coal reserves at 

mine). 

2. West Texas Util. Co. v. Burlington N. R.R., 1 S.T.B. 638 (1996), reparations 

calculated, 2 S.T.B. 683 (1997), aff’d sub nom. Burlington N.R.R. v. STB, 114 

F.3d 206 (D.C. Cir. 1997)—reparations (approx. $11.4 million) & rate prescription; prescription revised in 2003 to correct for error. 

3. FMC Wyo. Corp. et al. v. Union Pac. R.R., 4 S.T.B. 699 (2000)—reparations 

& rate prescription (approx. 15 percent reduction) (minerals). 

4. Wisconsin Power & Light v. UP, 5 S.T.B. 955 (2001), modified, STB Docket 

No. 42051 (May 14, 2002), aff’d, Union Pacific R.R. v. STB, No. 02–1198 (D.C. 

Cir. Apr. 30, 2003)—reparations & rate prescription (approx. 11 percent reduction). 

5. Texas Municipal Power Agency v. Burlington N.&S.F.Ry., STB Docket No. 

42056 (STB Mar. 24, 2003), modified (STB Sept. 27, 2004)—reparations & rate 

prescription (approx. 1–3 percent reduction). 

6. Public Serv. Co. of Colo. d/b/a Xcel v. BNSF, STB Docket No. 42057 (STB 

June 8, 2004), modified (STB Jan. 19, 2005), aff’d sub nom. BNSF Ry. v. STB, 

No. 05–1030 (D.C. Cir. June 16, 2006)—reparations (approx. $14 million) & rate 

prescription (approx. 16 percent reduction). 

• Shipper failed to show rate unreasonable: 

1. McCarty Farms, Inc. et al. v. Burlington N., Inc., 2 S.T.B. 460 (1997), modified, 3 S.T.B. 102 (1998), aff’d, McCarty Farms, Inc. v. STB, 158 F.3d 1294 (D. 

C. Cir. 1998) (grain). 

2. PPL Montana, LLC v. Burlington N.&S.F.Ry., STB Docket No. 42054 (STB 

Aug. 20, 2002), reaffirmed after reviewing supplemental evidence (STB Aug. 31, 

2004), aff’d, PPL Montana, LLC v. STB, No. 04–1369 (D.C. Cir. Feb. 17, 2006). 

3. Duke Energy Corp. v. Norfolk Southern Ry., STB Docket No. 42069 (STB Nov. 

6, 2003), modified (STB Oct. 20, 2004), dismissed based upon voluntary settlement (STB July 8, 2005). 

4. Carolina Power & Light Co. v. Norfolk Southern Ry., STB Docket No. 42072 

(STB Dec. 23, 2003), modified (STB Oct. 20, 2004), dismissed based upon voluntary settlement (STB July 8, 2005). 

5. Duke Energy Corp. v. CSX Transp. Inc., STB Docket No. 42070 (STB Feb. 

4, 2004), modified (STB Oct. 20, 2004), dismissed based upon voluntary settlement (STB July 8, 2005). 

6. Arizona Elec. Power Coop., Inc. v. Burlington N.& S.F. Ry., STB Docket No. 

42058 (STB Mar. 15, 2005), pet. for judicial review pending, Arizona Elec. 

Power Coop., Inc. v. STB, No. 05–1136 (D.C. Cir. filed Apr. 22, 2005). 

7. Otter Tail Power Co. v. BNSF Ry., STB Docket No. 42071 (STB Jan. 27, 

2006), modified (STB May 26, 2006), pets. for judicial review pending sub nom. 

Otter Tail Power Co. v. STB, No. 06–1962 et al. (8th Cir. filed Apr. 10, 2006). 

Senator LOTT. Thank you very much. Just a couple of questions. 

First, Ms. Hecker, your testimony indicates that the rate relief 

process at STB is slow and expensive. And I don’t see how there 

39 

can be any debate about that. Mr. Buttrey here has outlined a 

number of initiatives that they’re working on at the Board. Do you 

have any reaction to those initiatives? And do you have any suggestions of what more could be done to deal with these obvious problems? 

Ms. HECKER. I do observe that most of the areas that have been 

proposed are issues that are being studied. The few that we highlight are the simplified guidelines, looking at alternative cost approaches, streamlining the process. So, I think they are generally 

being examined. We have not really reviewed those proposals, 

though, and perhaps we’ll continue to work together to be able to 

share what we’ve learned so that that can be a component of their 

review. 

Senator LOTT. Well, I hope you would review them and have 

some input into what they should consider doing. 

Now, Mr. Buttrey, GAO has pointed out, and others have pointed 

out, that small shippers can’t use the process used by the larger 

shippers to challenge a rate because of the cost and the difficulties 

of the process. What is your position on creating a process that 

would make it more accessible to the smaller shippers? 

Mr. BUTTREY. Well, Senator, the simplified guidelines for small 

rate cases came out of a request from Congress to actually do that. 

And so, the Board put its hand to that task and, frankly, thought 

we had done a pretty good job of that. And so, we were pretty 

proud of those rules. But, as it turns out, those rules have only 

been used once since going into effect. 

Senator LOTT. Well, what does that mean? Does that mean that 

they are not effective, or does that mean that maybe there wasn’t 

as much need to have that access as maybe had been indicated? 

Mr. BUTTREY. It probably means that we didn’t do quite as good 

a job as we could have or should have perhaps in designing them 

to make them more accessible. The filing fee is very low. There are 

expedited procedures in place. But they have been used only once. 

When that case actually came before the Board, we required the 

parties to go into mediation prior to the case being prosecuted, and 

that case was settled between the two parties within about 3 days. 

And so, we really don’t have any example, of a case going forward. 

So, what we have concluded is that we need to sit down and go 

over this whole process again and come up with more simplified 

rules and better processes, and make the system even simpler to 

use than we had earlier done. And we are in the process of doing 

that right now. 

Senator LOTT. If a shipper wins a case before the STB, and the 

losing railroad appeals the decision of the courts, who’s responsible 

for defending the position of the STB? Would the shipper bear any 

of the cost of that appeal? 

Mr. BUTTREY. Senator, when the case is decided at the STB, and 

a party sues, the STB becomes the defendant in that case, and we 

have to defend that case on appeal. 

Senator LOTT. Then the shipper doesn’t have to incur cost as a 

result. 

Mr. BUTTREY. No, we do that. 

Senator LOTT. Right. 

Mr. BUTTREY. We defend our decision. 

40 

Senator LOTT. I just have a feeling that there are some entities, 

perhaps, that are taking advantage of this fuel surcharge issue. 

And you had a hearing. Based on that hearing, you said that there 

was a huge divide between, you know, what the shippers are saying of the fuel surcharges and what the railroad’s saying. It’s kind 

of like people trying to give you a lecture on supply and demand; 

I’ve heard all that before. But usually there’s a pretty easy, common sense answer. Either you are or you aren’t. Now, I realize 

you’ve got to deal with fluctuations, but there’s a way to do that. 

The line is like that. The lines don’t go like that. [Indicating.] You 

know, is this a real problem? And what are you going to do about 

it? 

Mr. BUTTREY. The word I use to describe the testimony that I 

heard was a total disconnect between what the parties were saying. 

Senator LOTT. Basically your job’s to try to discern the truth between the two. 

Mr. BUTTREY. Pardon me? 

Senator LOTT. Your job should be to try to discern the truth between the two disconnects. 

Mr. BUTTREY. We need to separate the wheat from the chaff, yes, 

sir. 

Senator LOTT. Yes. 

Mr. BUTTREY. And that’s what we intend to do. The concern, of 

course, as you stated in your opening statement, is that—the claim 

is that the carriers may be using fuel surcharges as a profit center. 

And it’s up to the regulatory process to determine whether that’s, 

in fact, the case or not, and that’s exactly what we plan to do. It 

could be that the methodology used by the shipping public and by 

the railroads to arrive at these numbers is not uniform. And it 

could be that there may be some need for uniformity in how these 

charges are calculated over time. And so, that’s one of the things 

we’re going to be looking at. We’re going to pursue this very aggressively. 

Senator LOTT. I hope you will. I don’t want to accuse anybody, 

but, if anybody is finding a way to make money off this, I consider 

that to be cheating, flat out, and would be highly offended that that 

would occur. So, I hope that your effort and my comments and 

those of others will influence conduct to make sure that’s not the 

case. 

Senator Burns? 

Senator BURNS. Thank you very much, Mr. Chairman. 

I’m really troubled, Mr. Buttrey, by, ‘‘Well, that’s what we’re 

going to do,’’ and, ‘‘That’s what we’re pursuing,’’ and we’ve had a 

year of this, and nothing has been done. I don’t know whether 

you’re working 5 days a week down there, and give the full 8 

hours, but this is serious. And I—and I’m troubled by that kind of 

testimony here today. There’s no excuse why this hasn’t been handled already. There is no excuse whatsoever, in my mind, in watching all this. And I’m going to get very cranky about that. 

A statement of future—on your—Ms. Hecker, on your display 

this morning, ‘‘Railroads reporting significant increased investment 

for future is uncertain. Enhancing captive-shipper protection can 

affect resources for investment.’’ Would you explain that statement 

to me? 

41 

Ms. HECKER. Well, the first half of it is that there has been a 

substantial increase by railroads in capital investment, reportedly 

over $8 billion. There are issues about where that’s going and the 

percent of that that’s really just maintenance, as opposed to capacity expansion. So, part of the question that you all asked was—is, 

‘‘Capacity needs are growing. What are the railroads doing?’’ So, 

the first answer was, yes, they are increasing their capital investment. How much of it is going to capacity expansion is an open 

issue. 

The second half of it was to recognize the nexus that clearly exists between any changes in shipper protection. Most of these policy reforms, whether it’s reciprocal switching or terminal access, 

and potentially even a simplified process that has a more expedited 

settlement that may not be economic-based, but just an arbitrator, 

for example, those are likely to all increase cost to the railroads. 

We’re not saying they’re not justified. Part of our analysis is that 

what we need is a more fine-tuned assessment of the nature of the 

captivity, the problem, and what the appropriate remedies are to 

potentially impose increased costs on railroads, but to recognize 

that those increased costs will reduce their capacity to invest for 

the future. 

Senator BURNS. Well, I thank you for explaining that to me. In 

your testimony, you noted the Staggers Act was generally designed 

to create a healthy revenue-adequate railroad, as well as to provide 

for competition and shipper protections. You also note that the 

Staggers Act has been very positive for the railroads. And railroad 

revenue adequacy is becoming more of a reality—you’ve already 

stated that—which I think we all agree is a good thing. But you 

also note that the shipper complaints about lack of competition are 

on the rise. And that situation for captive shippers is getting worse 

in many areas. Now, is it fair to say, then, that the Staggers Act 

has not achieved the right balance between railroads and shippers, 

that perhaps the focus on revenue adequacy has overshadowed the 

need for competition and for shipper protection when there is no 

competition? Do you think that the Staggers Act has met its goals? 

Ms. HECKER. I think you rightly point out that there were a mix 

of goals. And there’s no doubt that it’s met its goals in improving 

the stability and revenue adequacy of the railroads, and, in fact, 

their growth and dynamic importance for our economy. I’ve been 

doing work on railroads, and traveling the world, and the U.S. 

freight rail system is the envy of the world. There is no other system that is as efficient and that contributes to our economic growth 

because of its contribution to efficiency in our logistics system. 

On the other hand, I think there is some real concern about 

whether the goals regarding the protection of truly captive shippers 

has been achieved. It is very, very costly. It is not an accessible 

system. The data is mixed. And that’s our concern, why more analysis is needed, of where the captivity is, because there is not one 

bit of evidence. We see some evidence, and some of it I shared 

today, that the amount of traffic traveling under 300 percent of 

that ratio is substantially increased. So, a lot more shippers are 

paying relatively less than they were, and that’s borne out by the 

overall rate-decline data. 

42 

Our concern is with a very small portion of shippers, who appear 

to be increasing—it’s a small number, but it’s increasing—who are 

paying very substantially above what may be their fair and justified share of railroad costs. 

Senator BURNS. So that you and I can discuss this in another 

venue, how do you define—how would you define ‘‘captive shipper’’? 

Ms. HECKER. Well, it’s really—the law says the threshold trigger 

is the—rate—is over the 180-percent degree, and then it’s no available options, either by rail or by other mode, so you’re just stuck. 

You have that one railroad, and that’s your only option. The difficulty is in really measuring that and then also coming up with 

what the right response is. And then, I think—that’s why I tried 

to say that some of the responses that really will promote competition and really increase competition between railroads, and provide 

more viable options, may justify as much examination as fixing the 

process after the fact, really trying to focus more on achieving the 

goals of Staggers that were about ensuring there was more competition. 

Senator BURNS. Well, I wish you’d—and my time is up, and I’ll 

move on, but I wish you’d just give me a simple, everyday, manon-the-street definition of ‘‘captive shipper,’’ so you and I can discuss some of these problems, because we hear all this legalese and 

all this other stuff that runs out, and then you want to add numbers and graphs and all of this. That doesn’t make any difference 

to a farmer in Montana when he thinks he’s getting hammered, or 

people that are shipping coal to powerplants around the country. 

Let’s define what a ‘‘captive shipper’’ is, and then we can address 

the problems. 

Thank you very much, Mr. Chairman. 

Senator LOTT. Senator Dorgan? 

STATEMENT OF HON. BYRON L. DORGAN, 

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, thank you very much. 

I’m familiar with cranky Montanans, by the way. 

[Laughter.] 

Senator DORGAN. We’re neighbors. But we’re cranky, as well. I 

mean, we’re damn mad about what’s going on with rail rates in 

North Dakota. 

Let me give you an example. And I don’t know whether these 

numbers are current, but they were accurate not very long ago. If 

you were to put a carload of wheat on the tracks in Bismarck and 

run it over to Minneapolis, you’d pay about $1,000, put it on a— 

excuse me, you’d pay $2,400—put it on in Minneapolis, run it to 

Chicago, about the same distance, you’d pay $1,000. And North Dakota farmers wonder, ‘‘Why do we pay twice as much—two and a 

half times as much?’’ What’s the justification for that? 

Ms. Hecker, you indicated there’s a question of whether we’ve 

truly protected captive shippers. There’s no question about that. 

We truly have not protected captive shippers. I think you were just 

musing a rhetorical question. And we have not done that. And I 

would say, with respect to what my colleague from Montana just 

said, if there’s ever an Olympic event for studying, clearly the Surface Transportation Board is a Gold Medal winner here. They have 

43 

studied and studied and—they’ve been studying this since I showed 

up in Congress over two decades go. We’ve had ten rail rate cases 

filed since 2001. Before then, it was even more dismal. Ten rail 

rate cases since 2001, average $3 million apiece to do them, three 

and a third years apiece. I mean, clearly there’s a failure here. 

Clearly, a failure. 

And when you talk about captive shippers, it may be hard for 

academics to define, but it’s not hard for a shipper that’s held captive to define, I’ll tell you that. I’ve got people in Dickinson, North 

Dakota, that are trucking wheat with an 18-wheel truck almost 

200 miles east in order to put it on a railcar to run it right back 

through the farmstead on the track going to the West Coast. And 

they think that’s stupid, that they’re required to do that because 

of the way the system is set up. 

But, having said all that, you know, they remixed an Elvis Presley tune 25 years after he was dead. They remixed it and put it 

out, and it hit the chart—hit number one in the charts 25 years 

after he died. And it was, ‘‘A little less conversation, a little more 

action, please.’’ He probably wasn’t talking about the Surface 

Transportation Board, but that sure applies. A little less conversation, a little more action, please. 

Now, a quick question. Ms. Hecker, you said that the Surface 

Transportation Board has, quote, ‘‘broad legislative authority to investigate rail industry practices,’’ unquote. And yet, I believe you 

say they have limited their reviews to merger cases, by and large— 

competition and merger cases. 

Ms. HECKER. And rate cases. 

Senator DORGAN. Yes. Mr. Buttrey, do you agree with that statement? And, if so, why has the Surface Transportation Board been 

so reluctant to take action on almost any of the issues that are the 

thorn under the saddle of folks out there that are held captive? 

Mr. BUTTREY. Well, Senator, our charge, as we understand it 

under the Staggers Act, is to be an adjudicatory body and to hear 

cases that are brought to us by captive shippers or in large rate 

cases or service issue cases, or in small rate cases. And we do not 

believe that we have the authority to go out and set rates on our 

own. 

Senator DORGAN. So, you disagree—— 

Mr. BUTTREY.—A case is brought to us, evidence is adduced, and 

you try these matters in the crucible of an adversary proceeding. 

Senator DORGAN. So, you disagree with Ms. Hecker that you, 

‘‘have broad legislative authority to investigate rail industry practices’’? You disagree with that? 

Mr. BUTTREY. We can have hearings to look into practices that 

are going on in the industry, and we are doing that. 

Senator DORGAN. But my—but the point I was making, and I 

think the point my colleagues were making, is, cases aren’t coming 

to you, because the system is broken. The small shippers don’t feel 

like they get a fair shake. First of all, it costs way too much, takes 

too much time, and, when it gets there, they don’t think they’re 

going to get a fair result. So, if cases aren’t coming to you, and 

we’re hiring an STB—and I—you know, I know I’ve said the STB 

is dead from the neck up. I know that’s not true. It’s just a—your 

44 

evidence—your being here in person today is evidence that’s not 

true. 

[Laughter.] 

Senator DORGAN. But the fact is—but the fact is, I’ve said that 

because I am so enormously frustrated by this—a regulatory agency that says, ‘‘You know what? We’re going to sit here. When somebody comes to us, then we’re going to wake up and deal with it. 

But, until then, we’re sorry, tough luck.’’ Ms. Hecker says you have 

broad legislative authority to investigate rail industry practices. 

My feeling is, if that’s the case, if that’s her interpretation of the 

law, and that is the law, then why would you not be aggressively 

evaluating this issue of competition and taking action, rather than 

just sitting and waiting until someone brings a case to you? 

Mr. BUTTREY. We have rulemaking authority. We only have authority that’s given to us by the Congress. And we are trying to administer that, as we understand it to be. And that’s the reason 

we’re going through the rulemaking proceedings that we’ve instituted since January. Many of these regulatory rulemakings that 

we’re pursuing right now, which are, by the way, on a very aggressive schedule, are to address the issues that all of you have raised 

this morning. 

Senator DORGAN. But, do you know what? I heard that 10 years 

ago, and I heard that 20 years ago. Nothing’s changed. It’s like 

Groundhog’s Day; we wake up, same day again. And I just—I think 

what Senator Burns and others are saying, you know, it’s time, 

really, to get serious. This is not a rhetorical question, ‘‘Have we 

truly protected captive shippers?’’ The answer is, no. No, of course 

we haven’t. And we need to get about the business of doing that. 

And I’m telling you, Ms. Hecker, the captive shippers in my state 

would not—whether it’s coal or wheat—would not take a look at 

that rail line and say that, ‘‘Yes, we’re the beneficiaries of lower 

rates.’’ That is simply not the case in our area. In fact, they feel 

they’re paying rates that are outrageous, far above that which is 

justifiable. And so does our state regulatory agency, the Public 

Service Commission of North Dakota. 

Mr. Chairman, I have an Indian Affairs hearing that I’m cochairing with Senator McCain. I have to leave, but I want to thank 

you for holding this hearing. 

And thank both of you for testifying. I hope you understand, we 

really—at least I really want action. Those of us that have introduced the legislation in our Committee—Senator Burns, Rockefeller, myself, and others—we really want to see something done 

here that fixes the problem, not have another decade go by and 

then we have another hearing, and we say, ‘‘You know what? We’re 

studying this.’’ 

Senator LOTT. Thank you, Senator Dorgan. 

Senator Pryor was next to arrive, but he has agreed to yield to 

Senator Lautenberg, because he has a conflict also. 

Senator Lautenberg, we’d be glad to hear from you. 

45 

STATEMENT OF HON. FRANK R. LAUTENBERG, 

U.S. SENATOR FROM NEW JERSEY 

Senator LAUTENBERG.—I thank my friend from Arkansas for allowing me this statement. Since I was reelected, there are not 

many people I am senior to in rank, so I—— 

[Laughter.] 

Senator LAUTENBERG.—have to pick on Senator Pryor. And I 

thank you, Mr. Chairman. 

I ask unanimous consent that my full statement be included in 

the record. 

Senator LOTT. It certainly will be included at this point. 

[The prepared statement of Senator Lautenberg follows:] 

PREPARED STATEMENT OF HON. FRANK R. LAUTENBERG, 

U.S. SENATOR FROM NEW JERSEY

Good morning Mr. Chairman. Thank you for calling this hearing. 

Some people think of railroads as a mode of transportation that emerged in the 

19th century, dominated the early part of the 20th century, and then slid toward 

irrelevance. 

But the reality is that rail service remains vital to our economy and our way of 

life in the 21st century. 

Freight rail lines handled 1.7 trillion ton-miles of goods in 2005—a 19 percent increase from just 2 years before. And railroads posted record profits. 

The public benefited as well. Rail remains a cost-effective way to move goods, 

which means lower prices for consumers. And every container that is hauled by rail 

means one less truck on our crowded highways, less pollution in our air, and less 

oil consumed. 

Rail has remained relevant because it is seamlessly integrated into our transportation system. Last month the Senate adopted my resolution to commemorate the 

50th anniversary of the intermodal shipping container, which first sailed from the 

U.S. from the Port of Newark. 

Today, shipping containers are the backbone of our transportation system. More 

than 8.7 million containers moved by rail in the United States last year. 

It is projected that by the year 2020, freight moved by rail will increase 44 percent, while freight moved by truck is projected to increase more than 60 percent. 

With highways operating at capacity in many regions, some transportation officials 

are asking if it would make sense to direct more traffic from the roads to the rails. 

But railroads are operating at capacity as well, so this won’t be possible without 

greater investment in the rail infrastructure. 

Although this infrastructure is privately owned, the railroads continue to ask Congress for help in maintaining and improving their tracks and yards. 

If we can justify these expenditures, there is no reason why we shouldn’t also 

make similar investments in passenger rail infrastructure. Senator Lott and I have 

a bill that will begin to create a passenger rail system for the 21st Century, and 

I hope we are able to bring it to the floor soon. 

I want to mention that there is one aspect of our current freight rail regulator 

system that troubles me—the failure of the Surface Transportation Board to actively 

enforce environmental standards. 

Congress never intended for solid waste processors to get a ‘‘free pass: on environmental standards by claiming to be ‘‘railroads.’’ 

The Surface Transportation Board should act to correct this misinterpretation, before Congress is forced to act. 

Thank you Mr. Chairman. 

Senator LAUTENBERG. The one part that I’m, kind of, focused on 

this morning—and we all are aware of the fact that rail is continuing to pick up its obligations to carry freight and so forth, and 

we’re not discussing the details, but it’s—we can’t fit another truck 

or—out there on the highways without noticing that things are 

jammed up. And rail is also, in my view, or I think in the view of 

many experienced people, that there isn’t enough capacity in rail 

46 

to carry what is anticipated to be a great jump in freight traffic. 

So, we—that investment has got to come along. But Senator Lott 

and I have also made a recommendation that we invest in passenger rail service. It has the same beneficial result, and that is 

getting cars off the highway, reducing pollution, reducing dependency on imported oil. So, we’re working hard to get that up front 

in the—in our agenda. 

And I—but I do want to mention one aspect of the current freight 

rail regulator system that troubles me, and that is the failure of 

the Surface Transportation Board to actively enforce environmental 

standards. Now, Congress never intended, for instance, for solid 

waste processors to get a free pass on environmental standards by 

claiming to be railroads. And I think that the Surface Transportation Board should act to correct this misinterpretation before 

Congress is forced to act. 

So, Mr. Buttrey, I ask, is the Surface Transportation Board doing 

anything about companies that are essentially focused on solidwaste handling, as it is in New Jersey, who are pretending to be 

railroads—and I use that comment, kind of, cynically—in order to 

avoid state environmental laws? Are you familiar with that kind of 

a condition? 

Mr. BUTTREY. Yes, Senator, I am familiar with that situation. It’s 

been brought to our attention, not only informally, but formally at 

the Board. Just a few days ago, I testified in the House on this very 

issue of entities of one kind or another trying to hide behind the 

pre-emption provisions of the Act. I assured the Transportation and 

Infrastructure Committee at that time—and, by the way, I happen 

to have a copy of my testimony with me today, and if it’s permissible, I could submit that for the record, if that’s OK with the 

chairman, and get that in the record, since you asked a specific 

question about it. 

[The information referred to follows:] 

Testimony of W. Douglas Buttrey, 

Chairman of the Surface Transportation Board 

House Committee on Transportation and Infrastructure 

Subcommittee on Railroads 

Hearing on Impacts of Railroad-Owned Waste Facilities 

10 a.m. May 23, 2006 

Good morning, Mr. Chairman. My name is Douglas Buttrey, and I am the Chairman of the Surface Transportation Board. I appreciate the opportunity to testify before you today about Federal preemption for rail-related facilities. I would first like 

to provide the Subcommittee with an overview of the Board’s role, and the role of 

state and local authorities with regard to such facilities. Next, I will discuss the 

state of the law on this complex issue which is still being fleshed out by the Board 

and the courts in individual cases that arise. Finally, because there has been a lot 

of concern lately about the potential for misuse of Federal preemption in cases involving facilities on rail lines, I will outline how interested parties can raise concerns before the Board and in the courts regarding individual proposals that arise. 

I will not focus today on the individual cases that have addressed Federal preemption for rail-related facilities, but I have included as part of my written testimony 

a summary of the relevant case law. 

1. The Scope of the Federal Preemption 

As all of you are aware, the Surface Transportation Board was created in the ICC 

Termination Act of 1995 (ICCTA). The express Federal preemption contained in the 

47 

Board’s governing statute at 49 U.S.C. 10501(b) gives the Board exclusive jurisdiction over ‘‘transportation by rail carriers.’’ Congress has defined the term ‘‘transportation’’ broadly, at 49 U.S.C. 10102(9), to include all of the related facilities and activities that are part of rail transportation. The purpose of preemption is to prevent 

a patchwork of otherwise well intentioned local regulation from interfering with the 

operation of the rail network to serve interstate commerce. 

Both the Board and the courts have made clear, however, that, although the scope 

of the section 10501(b) preemption is broad, there are limits. While a literal reading 

of section 10501(b) would suggest that it preempts all other law, neither the Board 

nor the courts have interpreted the statute in that manner. Rather, where there are 

overlapping Federal statutes, they are to be harmonized, with each statute given effect to the extent possible. This is true even for Federal statutory schemes that are 

implemented in part by the states, such as the Clean Air Act, the Clean Water Act, 

and the Solid Waste Disposal Act. 

When states or localities are acting on their own, certain types of actions are categorically preempted, regardless of the context or basis of the action. This includes 

any form of permitting or preclearance requirement-such as building, zoning, and 

environmental and land use permitting-which could be used to deny or defeat a railroad’s ability to conduct its rail operations or to proceed with activities that the 

Board has authorized. Also, states or localities cannot regulate matters directly regulated by the Board, such as railroad rates or service or the construction, operation, 

and abandonment of rail lines. 

Otherwise, whether the preemption applies depends on whether the particular action would have the effect of preventing or unreasonably interfering with rail transportation. Types of state and local measures that have been found to be permissible, 

even in cases that qualify for the Federal preemption, include requirements that 

railroads share their plans with the community when they are undertaking an activity for which a non-railroad entity would require a permit, or that railroads comply with local electrical, fire, and plumbing codes. 

In cases involving facilities that require a license from the Board and an environmental review under the National Environmental Policy Act (NEPA), the Board addresses both the transportation-related issues and any environmental issues that 

are raised. The environmental review is managed by the Board’s Section of Environmental Analysis. 

Even where no license is needed from the Board, there are several avenues of recourse for interested parties, communities, or state and local authorities concerned 

that the section 10501(b) preemption is being wrongly claimed to shield activities 

that do not rightly qualify for the Federal preemption. Any interested party can ask 

the Board to issue a declaratory order addressing whether particular operations constitute ‘‘rail transportation’’ conducted by a ‘‘rail carrier.’’ Alternatively, parties are 

free to go directly to court to have that issue resolved. Some courts have chosen to 

refer that issue to the Board; others have decided the matter themselves. It is worth 

noting, however, that the Board and court cases on the boundaries of the section 

10501(b) preemption have been remarkably consistent, and that the Board and the 

courts have never reached a different conclusion regarding the availability of the 

preemption for particular activities and operations. 

Finally, in some cases, environmental and safety concerns have been successfully 

resolved through consensual means, by the railroad and the community working together to address their respective interests. 

2. Relevant Precedent on Facilities 

Given the strength and breadth of the section 10501(b) preemption, the potential 

for misuse is a definite concern. Thus, both the Board and the courts have made 

clear that an entity is not entitled to Federal preemption to the extent it is engaged 

in activities other than rail transportation. In some cases, solid waste and other 

businesses have located close to a railroad and claimed to be a rail facility exempted 

from state and local laws that would otherwise apply, but have been found by the 

Board or a court not to be entitled to the Federal preemption because the operation 

did not actually constitute ‘‘rail transportation’’ by a ‘‘rail carrier.’’ In other cases, 

activities and operations at facilities have been found to qualify for the Federal preemption, as part of the transportation conducted by a rail carrier. 

Cases involving solid waste transfer, storage and /or processing facilities proposed 

to be located along rail lines are especially controversial and often raise concerns 

that the operations could cause environmental harm. In every case, however, interested parties, communities, and state and local authorities concerned about a proposal have recourse to the Board or the courts. 

Rail carriers need approval to construct a new rail line under 49 U.S.C. 10901. 

During the Board’s licensing proceedings, parties concerned that all or part of the 

48 

project is not entitled to preemption have the opportunity to present their views to 

the Board for consideration in the proceeding. In rail construction cases, the Board 

also routinely conducts a detailed NEPA review, allowing all interested parties the 

opportunity to raise any environmental concerns. The Board then takes the entire 

environmental record into account in deciding whether to grant the license. The 

Board can, and often does, impose appropriate environmental conditions to address 

the environmental concerns that are raised. Thus, the Board’s existing process has 

proven to be sufficient to allow the agency to address any issues related to proposed 

solid waste or other facilities along the line. 

If the project involves the acquisition and operation of an existing rail line, or the 

acquisition of a rail carrier by another carrier or carrier-affiliate, authority from the 

Board also is required, and NEPA is applicable. Normally, however, a proposal to 

change the owner or the operator of a line will not have any significant effects on 

the environment. Therefore, the Board does not always conduct a case-specific environmental analysis. But where there is a potential for significant impacts, and that 

is brought to the Board’s attention, the Board may decide to undertake a full environmental review. 

Finally, some activities at facilities on or along rail lines may qualify for the preemption in section 10501(b) but not require Board approval and review, so that 

there is no occasion for the Board to conduct an environmental review. For example, 

under the statute, carriers may make improvements and add new facilities (including a solid waste facility) to an existing line without seeking Board approval. Even 

in these types of cases, however, parties concerned that section 10501(b) is being 

used to shield activities that do not qualify for the Federal preemption under section 

10501(b) can ask the Board to issue a declaratory order, or a stay, or go directly 

to court to address the status of the facility. 

The inquiry into whether and to what extent the preemption applies in a particular situation is naturally a fact-bound question. There have been only a few 

cases that have come before the Board involving solid waste facilities. The Board 

and the courts will continue to explore where the boundary may lie between traditional solid waste activities and what is properly considered to be part of ‘‘rail transportation,’’ and what kinds of state and local actions are federally preempted, in the 

individual cases that arise. 

Conclusion 

In conclusion, it is important to reiterate that, although both the Board and the 

courts have interpreted section 10501(b) preemption broadly, there are limits on the 

preemption, which is harmonized with other Federal laws. The question of what 

constitutes ‘‘transportation by rail,’’ according to the statute and precedent addressing the rights of railroads and of state and local authorities under section 10501(b), 

is still being fleshed out by the Board and the courts in the individual cases that 

arise. However, it is clear that not all activities are entitled to preemption simply 

because the activities take place at a facility located on rail-owned property. Of 

course, cases involving preemption for railroad facilities are likely to remain controversial. But even in cases that do not require review and approval by the Board, 

parties concerned that the section 10501(b) preemption is being misused in a case 

involving a facility have ways to raise their concerns at the Board or in the courts. 

I appreciate the opportunity to discuss these issues with you today, and would be 

happy to answer any questions you may have. 

ATTACHMENT

Section 10501(b) Preemption 

1. Section 10501(b) 

• Gives Board exclusive jurisdiction over ‘‘transportation by rail carriers’’ and expressly preempts any state law remedies with respect to rail transportation; ICA 

defines ‘‘transportation’’ broadly to include all of the related facilities and activities that are part of rail transportation (section 10102(9)) 

• Purpose of section 10501(b) is to prevent patchwork of local regulation from unreasonably interfering with interstate commerce 

2. Reach of the Section 10501(b) Preemption 

• Statute not limited to ‘‘economic’’ regulation (City of Auburn v. United States, 

154 F.3d 1025 (9th Cir. 1998)) 

• While most state and local laws are preempted, overlapping Federal statutes (including environmental statutes) are to be harmonized, with each statute given 

49 

effect to the extent possible (Tyrrell v. Norfolk Southern Ry., 248 F.3d 517 (6th 

Cir. 2001) (there is no ‘‘positive repugnancy’’ between the Interstate Commerce 

Act and the Federal Railway Safety Act); Friends of the Aquifer et al., STB Finance Docket No. 33396 (STB served Aug. 15, 2001) (Congress did not intend 

to preempt Federal environmental laws such as the Clean Air Act and the 

Clean Water Act, even when those statutory schemes are implemented in part 

by the states)) 

• Two types of state and local actions are categorically preempted: 

(1) any form of state and local preclearance or permitting that, by its nature, 

could be used to deny or defeat the railroad’s ability to conduct its operations 

(City of Auburn v. United States, 154 F.3d 1025 (9th Cir. 1998) (environmental and land use permitting categorically preempted); Green Mountain 

R.R. v. State of Vermont, 404 F.3d 638 (2d Cir. 2005) (preconstruction permitting of transload facility necessarily preempted by section 10501(b)) and 

(2) state or local regulation of matters directly regulated by the Board (CSXT 

Transportation, Inc.—Pet. For Decl. Order, STB Finance Docket No. 34662 

(STB served March 14, 2005), reconsideration denied (STB served May 3, 

2005), petitions for judicial review pending, District of Columbia v. STB, No. 

05–1220 et al., (D.C. Cir. filed June 22, 2005) (any state or local attempt to 

determine how a railroad’s traffic should be routed is preempted); Friberg v. 

Kansas City S. Ry., 267 F.3d 439 (5th Cir. 2001) (state statute imposing limitations on a railroad expressly preempted); Wisconsin Cent. Ltd. v. City of 

Marshfield, 160 F. Supp.2d 1009 (W.D. Wis. 2000) (attempt to use a state’s 

general eminent domain law to condemn an actively used railroad passing 

track preempted)) 

• Otherwise, preemption analysis requires a factual assessment of whether that action would have the effect of preventing or unreasonably interfering with railroad transportation (Dakota, Minn. & E.R.R. v. State of South Dakota, 236 F. 

Supp.2d 989 (D. S.D. 2002), aff’d on other grounds, 362 F.3d 512 (8th Cir. 2004) 

(revisions to state’s eminent domain law preempted where revisions added new 

burdensome qualifying requirements to the railroad’s eminent domain power 

that would have the effect of state ‘‘regulation’’ of railroads)) 

• Notwithstanding section 10501(b), it is permissible to apply state and local requirements such as building, fire, and electrical codes to railroad facilities so 

long as they are not applied in a discriminatory manner; however, need to seek 

building permit is preempted (Flynn v. Burlington N. Santa Fe. Corp., 98 F. 

Supp.2d 1186 (E.D. Wash. 2000); Village of Ridgefield Park v. New York, Susquehanna & W. Ry., 750 A.2d 57 (N.J. 2000); Borough of Riverdale—Pet. for 

Decl. Order—The New York Susquehanna & Western Ry., STB Finance Docket 

No. 33466 (STB served Sept. 10, 1999, and Feb. 27, 2001)). 

• Railroads are encouraged to work with localities to reach reasonable accommodations (Township of Woodbridge v. Consolidated Rail Corp., STB Docket No. 

42053 (STB served Dec. 1, 2003) (carrier cannot invoke section 10501(b) preemption to avoid obligations under an agreement it had entered into voluntarily, where enforcement of the agreement would not unreasonably interfere 

with interstate commerce)) 

3. Who Interprets Section 10501(b)? 

• Board in cases that require a license & environmental review 

• Either the Board in a declaratory order or a court (either with or without referral to the Board) in other cases 

• When class exemption was invoked to lease and operate 1,600 feet of track for 

use in transferring construction and demolition waste between truck and rail, 

the Board stayed the proceeding to obtain additional information (Northeast 

Interchange Ry., LLC-Lease & Oper. Exem.-Line in Croton-on-Hudson, NY, STB 

Finance Docket No. 34734 et al., (STB served August 5, 2005)) 

• Board has discretion to decide whether to institute a declaratory order proceeding and denied request that it do so to address solid waste operations on 

property owned by the New York, Susquehanna and Western Ry. in North Bergen, NJ, and other similarly situated solid waste operations, because the North 

Bergen facility is permanently closed, petitioners failed to point to an alternative 

site that would warrant continuing with the proceeding, and the railroad and 

the New Jersey Department of Environmental Protection are involved in ongoing 

court litigation related to the facility (National Solid Wastes Management AssoVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
50 

ciation, Et Al.—Petition for Declaratory Order, STB Finance Docket No. 34776 

(STB served March 10, 2006)) 

4. Case Law on Facilities 

• Preemption applies to proposals to build or acquire ancillary facilities that assist 

a railroad in providing its existing service, even though the Board lacks licensing 

authority over the projects 

i. Nicholson v. ICC, 711 F.2d 364 (D.C. Cir. 1983) 

ii. Borough of Riverdale—Pet. for Decl. Order—The New York Susquehanna 

& Western Ry., STB Finance Docket No. 33466 (STB served Sept. 10, 1999, 

and Feb. 27, 2001) 

iii. Flynn v. Burlington N. Santa Fe. Corp., 98 F. Supp.2d 1186 (E.D. Wash. 

2000) 

iv. Friends of the Aquifer et al., STB Finance Docket No. 33396 (STB served 

Aug. 15, 2001) 

• No preemption where the operation does not constitute transportation by a rail 

carrier 

i. High Tech Trans, LLV v. New Jersey, 382 F.3d 295 (3d Cir. 2004); High 

Tech Trans, LLC—Pet. For Decl. Order—Hudson County NJ, STB Finance 

Docket No. 34192 (STB served Nov. 20, 2002) (both agreeing with New Jersey 

Dept. of Environ. Protection that there is no preemption for truck transportation of construction and demolition waste en route to transloading facility, 

even though a railroad ultimately uses rail cars to transport the debris) 

ii. Grafton and Upton R.R. v. Town of Milford, Civ. No. 03–40291 (D. Mass. 

Feb. 14, 2006); Town of Milford, MA—Pet. For Decl. Order, STB Finance 

Docket No. 34444 (STB served Aug. 12, 2004) (no preemption for planned 

steel fabrication facilities that are not part of ‘‘transportation’’) 

iii. Florida East Coast Ry. v. City of West Palm Beach, 266 F.3d 1324 (11th 

Cir. 2001) (no preemption for aggregate distribution plant because the plant, 

although located on railroad property, was not railroad-owned or operated 

and thus was not part of rail transportation) 

• Activities That Do Qualify for Federal Preemption as Transportation Conducted 

by a Rail Carrier 

i. Green Mountain R.R. v. State of Vermont, 404 F.3d 638 (2d Cir. 2005) (preemption for cement transloading facility in Vermont) 

ii. Joint Pet. For Decl. Order—Boston & Maine Corp. v. Town of Ayer, MA, 

STB Finance Docket No. 33971 (STB served May 1, 2001), aff’d, Boston & 

Maine Corp. v. Town of Ayer, 206 F.Supp.2d 128 (D. Mass. 2002), rev’d solely 

on attys fee issue, 330 F.3d 12 (1st Cir. 2003) (preemption for automobile loading facility in Massachusetts) 

iii. Norfolk S. Ry. v. City of Austell, No. 1:97–cv–1018–RLV, 1997 WL 1113647 

(N.D. Ga. 1997) (local zoning and land use permitting regulation for railroad 

facility preempted) 

iv. Canadian National Ry. v. City of Rockwood, No. 04–40323, 2005 WL 

1349077 (E.D. Mich. 2005) (county zoning laws and permitting and 

preclearance requirements preempted for a railroad’s transload facility in 

Michigan) 

I assured the Committee at that time that if entities think 

they’re going to be able to escape environmental review by trying 

to hide behind the pre-emption provisions of the Act, they have a 

real surprise in store. 

Senator LAUTENBERG. Good. Well, then—— 

Mr. BUTTREY. I can assure you of that. 

Senator LAUTENBERG. Well, I’m here—happy to hear that the 

STB is examining its position—legal position, that it has the sole 

jurisdiction to regulate the processing of solid-waste action. So— 

and that pre-empt states—so, if you would submit—or make that 

available to my staff, I’d appreciate that. 

51 

Senator LAUTENBERG. And, with that, I return the next position 

to my friend from Arkansas and thank him for very much for permitting me to intervene at this point. 

Senator PRYOR. Thank you. 

Senator LOTT. Senator Pryor? 

STATEMENT OF HON. MARK PRYOR, 

U.S. SENATOR FROM ARKANSAS 

Senator PRYOR. Thank you, Mr. Chairman. 

Ms. Hecker, let me ask you, to start. As part of your report here, 

you mentioned capacity problems in the future in our rail system. 

Given your investigation and your time that you’ve spent looking 

at this, do you have any thoughts on what we can do to address 

the capacity problems in the future, or is that something that you 

tend to stay out of? 

Ms. HECKER. No, sir. It’s actually a part of our review. It’s an 

enormous question, on its own. So, in addition to trying to do 25 

years of post-industry performance and all of the relief options, we 

are addressing that issue. In my opening remarks, what I said is, 

we are concerned about sweeping proposals. We think that they 

won’t be targeted enough. So, I think a lot of our work in advising 

the Congress on a potential role to enhance and facilitate and promote increased investment that will generate public benefits is that 

they be very carefully tailored so that they, in fact, do generate 

those public benefits and don’t just substitute for investments that 

either the railroads or states would have made anyway. 

Senator PRYOR. So, the—if you take an idea like investment tax 

credits, is that too sweeping, or is that—— 

Ms. HECKER. In my statement, I do raise concerns about that. I 

do believe it has the significant potential to just substitute for investments that railroads would have made, and not target it to—— 

Senator PRYOR. OK. 

Ms. HECKER.—where we would generate public benefits. 

Senator PRYOR. Great. Well, I’d like to continue that dialogue 

with you at some point. 

Let me ask about your finished report. The report today is a 

draft report. Is that right? 

Ms. HECKER. We don’t publicly release draft reports. 

Senator PRYOR. OK. 

Ms. HECKER. These are preliminary results on a report that’s not 

completed. So, we have more analysis ongoing, but we stand by everything we’re saying today. 

Senator PRYOR. Do you anticipate that your final report will 

specify ways in which the STB can improve its procedures and 

maybe even include recommended legislative changes? Will your 

final report do that? 

Ms. HECKER. The questions that you and others have posed certainly ask us to come up with recommendations. GAO, of course, 

doesn’t make them unless we feel there’s enough evidence to really 

support them. At this point in time, we believe the absence of real 

understanding and analysis of the captive shipper and the prices 

they’re paying and other factors that may be affecting those really 

require more evaluation before we’re comfortable settling on one solution or another. The point is, we want to make sure a solution 

52 

targets and solves a problem so that it justifies the costs and inefficiencies that that solution may impose. 

Senator PRYOR. OK. Let me ask this. In your review, and given 

your experience, have you seen any evidence that railroads are not 

investing in infrastructure in order to limit capacity and, thereby, 

drive up rates on their customers? Have you seen that? 

Ms. HECKER. We’ve seen no evidence of that. 

Senator PRYOR. OK. Let me ask this. As I understand at least 

part of your report, if I can distill it down, not to put words in your 

mouth, but it seems to me there is a maxim here that less competition may lead to higher prices. Is that fair to say? 

Ms. HECKER. That nails it. 

Senator PRYOR. OK. That’s—if—I thought I was tracking what 

you were saying earlier, and I think that’s pretty much it. And did 

you spend a lot of time in the shortline railroad industry? Did you 

look at that, or did you primarily look at the large rail? 

Ms. HECKER. No, unfortunately, given the broad scope of this, we 

have not spent a lot of time on that issue. And it may be that the 

issue of their role is part of a fundamental long-term vision of how 

to improve the competitive state of this industry overall. 

Senator PRYOR. Yes. And we—I hear stories about the contracts 

with the bigger railroads and the short lines and getting from point 

A to point B, sometimes the way those contracts are structured can 

move prices up, where, otherwise, they may not. But, again, I 

think—— 

Ms. HECKER. And that’s an area Mr. Buttrey says—— 

Senator PRYOR. Yes. 

Ms. HECKER.—has been open for review. 

Senator PRYOR. Mr. Buttrey, let me—I just have a few seconds 

left—let me ask, just in general, Do you think your agency needs 

more statutory authority? 

Mr. BUTTREY. Senator, we do not believe that’s the case. We believe that we have the statutory authority to do the job. It’s just 

a matter of fine-tuning our rules and our procedures and policies 

so that they become more user-friendly, so they become simpler, 

less time-consuming, less expensive. And we’re in the process of 

trying to do that right now. 

Senator PRYOR. That’s interesting, because, you know, based on 

what you said earlier, and some of the other questions, maybe I 

misunderstood, but my impression was that you felt like that there 

were lots of room for improvement, and that might include more 

statutory authority, and even more clarity and direction from the 

Congress. Is that not the case? 

Mr. BUTTREY. We don’t believe it’s the case, at the moment, no, 

sir. 

Senator PRYOR. OK. 

Thank you, Mr. Chairman. 

Senator LOTT. Thank you very much. 

I’d like to ask some more questions. Maybe I’ll have a chance to 

do that privately, but we do have another panel. We really want 

to hear from them. So, we—— 

Senator BURNS. I—could I—— 

Senator LOTT. Did you want to do a followup? 

Senator BURNS. I want to—I want—yes, I do. 

53 

[Laughter.] 

Senator BURNS. I sure do. 

Senator LOTT. Sorry about that. 

[Laughter.] 

Senator BURNS. That’s all right. And I appreciate the—I’ve got 

a couple of questions for Mr. Buttrey, and it’s just to kind of clear 

up and lay the groundwork on what our problem is. 

The scope of the STB jurisdiction—and I see right now where 

we’ve got a couple of differing opinions. First, if a railroad and a 

shipper negotiate a contract, movement of freight, is that contract 

under your jurisdiction? 

Mr. BUTTREY. No, it’s not, Senator. 

Senator BURNS. Does the answer change if the shipper is captive, 

and, thus, can’t truly negotiate at arm’s length with a single provider of that service? 

Mr. BUTTREY. If it’s a contract between a shipper and a railroad, 

whether it’s captive or not, it’s not subject to our jurisdiction. 

Senator BURNS. It doesn’t make any difference. 

Mr. BUTTREY. We do not have the authority to go in and undo 

a contractual relationship between contracting parties. 

Senator BURNS. How much freight is moved under contract in 

this country, percentagewise? Do you have any idea? 

Mr. BUTTREY. I have some staff with me. I could just see if I 

could get you an answer right now, possibly, from the staff. 

Senator BURNS. Well—— 

Mr. BUTTREY. We could provide that for the record. 

Senator BURNS. OK. Well, I’d like—respond to me and the Committee, both. 

If you don’t have jurisdiction over rail-service issue, what Federal 

agency or department would have that jurisdiction? 

Senator BURNS. Damn good question, huh? 

[Laughter.] 

Mr. BUTTREY. It is a good question. The short answer to that 

question is that if there are problems with that contract, those 

matters would be litigated at the state or federal court level, not 

the STB level. 

Senator BURNS. OK. And I am—and I hear a lot of concern from 

rail customers about two rulings of the STB that are perceived as 

preventing competition, in—and in direct conflict with what Congress directed the STB to do, which was to work toward competitive markets, and, of course, protect those shippers. One concern is 

the bottleneck decision. It essentially says that a railroad does not 

have to provide the customer a rate to a point where a movement 

may move onto a competing railroad. Second, both the STB, and 

the ICC before it, have approved what I believe are anticompetitive 

contracts known as ‘‘paper barriers’’ in track lease arrangements 

between major railroads and short lines, meaning that the short 

lines may only do business with the railroad leasing the track. 

Even the short line might connect to another major carrier. Your 

agency has the authority to take the administrative action to promote competition, yet these decisions just do the opposite. Can the 

STB act on its own initiative to change these rulings, or must 

someone bring a request to the STB that it change the rulings of 

these issues? Do they have to be resubmitted or rechallenged? 

54 

Senator BURNS. If they don’t have to, why can’t you do something 

about it? 

Mr. BUTTREY. The bottleneck decision to which you refer was— 

and you stated the facts absolutely correctly about how that 

works—was a case that was affirmed by the U.S. Court of Appeals 

(Cert, denied). That’s the law of the land until someone changes 

the law of the land. And so, we abide by that. 

Senator BURNS. All that was a decision by nine lawyers. 

Mr. BUTTREY. That was a decision by nine lawyers, yes sir. 

[Laughter.] 

Mr. BUTTREY. The second question you asked, about possibly 

anticompetitive effects as a result of line sales or leases or possibly 

a merger, and the so-called paper-barriers issue is a concern of 

ours as well, and that’s the reason we scheduled a hearing for July 

27, to look into that issue, the prevalence of those agreements, and 

the possibly anticompetitive effects of those matters. 

Senator BURNS. Well, see, my legislation in my bill is addressed 

to three different areas. If it were not for antitrust exemption given 

to the railroads, I think this would be a—there would be an entirely different landscape and an entirely different approach to 

what you can do and what Congress has to do. 

And I’d—and I will ask you another question. Does the STB take 

its duty, to provide for competition and protect shippers, seriously, 

or does it simply sit back and wait for the shippers to jump in? 

What does it cost—I’m a small shipper—let’s say I’m an elevator 

in Montana. How much does it cost me to file a case with the STB? 

Mr. BUTTREY. Well, Senator, in a small rate case, the filing fee is $150, but that does not represent the cost of prosecuting the 

case, of course. The cost of prosecuting the case is considerable. 

Senator BURNS. Do I bear that cost? 

Mr. BUTTREY. Pardon me? 

Senator BURNS. Do I bear that cost? 

Mr. BUTTREY. The plaintiff bears that cost. But if you win that 

case, you get reparations back over the period of that rate that’s 

being challenged. You get reparations from the railroad, directly 

from the railroad if you win that case, which could be in the hundreds—maybe not hundreds of millions, but certainly in the millions of dollars for a small shipper, and a lot more for a large shipper. 

Senator BURNS. I know you’re just racing along with some of 

these things. It only took, what, 17 or 18 years to clear the 

McCarty Farms case. And, of course, that was under a new regime. 

I’d hope we could get more efficient than that. But—— 

And I’ve got a couple of other questions. In the essence of time, 

Mr. Chairman—but I think there are areas that we have to change. 

And I think it—whenever we define ‘‘captive shipper,’’ in other 

areas where there’s competition, the STB, in my notion, doesn’t 

have any jurisdiction at all under those cases. But where we’re captive, I think you do. And I think we have to deal with those particular areas. 

And I thank the Chairman. And I’ve got a couple more questions, 

but we’ll get them to him. 

The STB hasn’t taken action to address the captive-shipper 

issues on rates, service, and capacity, but it has routinely protected 

55 

the railroads with regard to the exclusive revenue adequacy. 

What’s the difference? 

Mr. BUTTREY. Senator, I’m not sure I understand your question. 

I’m sorry. 

Senator BURNS. Well, you haven’t taken any action, as far as— 

with captive shippers, anyway—on rates, on service, or on capacity. 

But you’ve routinely protected railroads on revenue adequacy. I 

mean, we’ve heard this from both of you. And I want to know what 

the difference is. I think this is a double-bit—I think it’s a doublebitted ax, and it cuts both ways. So, we’ve got a little discussion 

to do about that. 

Thank you, Mr. Chairman. 

Senator LOTT. Thank you very much to this panel. We appreciate 

your time and your service. 

Now let’s go to the second panel. We will have before us Mr. Dale 

Schuler, president, National Association of Wheat Growers, from 

Carter, Montana; The Honorable Glenn English, my former colleague from the House of Representatives, corporate executive officer, National Rural Electric Cooperative Association, Arlington, 

Virginia; Mr. John McIntosh, president of products of Olin Corporation, from Clayton, Missouri—you know about that, don’t you, Conrad?; Mr. John Ficker, president of The National Industrial Transportation League, from Arlington; and Mr. Ed Hamberger, president and CEO, Association of American Railroads, Washington, 

D.C. 

If you all would—we’ll get you set up here. 

[Pause.] 

Senator LOTT. Gentlemen, while you’re taking your seats, we’ll 

be glad to include in the record your complete statements, if you’d 

like to sum them up. We do have a vote beginning at 11:15. That’s 

why I was trying to move to the second panel. But if you could all 

stay within 5 minutes or less, we can hear from all of you before 

we would have to leave to go vote. I’d like to have an opportunity 

to ask some questions, but we particularly want to be able to get 

your testimony on record. 

So, if you would, let’s begin with Mr. Schuler. Please proceed. 

STATEMENT OF DALE SCHULER, PRESIDENT, NATIONAL 

ASSOCIATION OF WHEAT GROWERS (NAWG); ON BEHALF OF 

NAWG, THE NATIONAL BARLEY GROWERS ASSOCIATION 

(NBGA), THE USA DRY PEA & LENTIL COUNCIL (USDP&LC) 

AND ELENBAAS COMPANY 

Mr. SCHULER. Thank you, Mr. Chairman. Can you hear me fine? 

Senator LOTT. I don’t think it’s on. 

Mr. SCHULER. OK. 

Thank you, Mr. Chairman, Members of this Committee. My 

name is Dale Schuler. I’m a wheat farmer from Montana, and I’m 

currently serving as president of the National Association of Wheat 

Growers. Today, I’m also honored to be representing NAWG and 

the National Barley Growers Association, the National—or the U.S. 

Dry Pea & Lentil Council, and Elenbaas Company. 

One of agriculture’s top priorities continues to be working with 

Congress to find solutions to the problems caused by the massive 

concentration of the railroad industry, and specifically finding relief 

56 

for our members who are captive shippers. I’m very pleased to be 

here today to participate in this hearing on capacity, economics, 

and service. 

The agriculture industry believes that a viable railroad industry 

is necessary for our continued success. Since the passage of the 

Staggers Act in 1980, however, the degree of captivity in many agriculture regions and industry areas has increased dramatically, 

and America’s farmers continue to experience both unreliable service and higher rates. 

We have had more or less continuing rail equipment shortages 

since the railroads started aggressively consolidating and merging 

in the early 1990’s. Twenty years ago, there were multiple transcontinental railroads servicing the farming regions of the country. 

Today, however, whole states, whole regions, and now whole industries have become completely captive to single railroads as a result 

of many railroad mergers. 

In the wheat industry alone, there are substantial pockets of captivity in Texas, Oklahoma, Arizona, Colorado, Kansas, Nebraska, 

Wyoming, Idaho, South Dakota, Minnesota, North Dakota, Washington, and Montana. These states make up a majority of the 

wheat, barley, and pulse-crop growing/producing land in this country. Also, as ethanol production continues to increase, corn producers are seeing continuing service and capacity problems with 

rail movements of dried distillage grains and ethanol. The barley, 

dry pea, lentil, and chickpea industries continue to see the railroad 

industry’s efforts to minimize less-than-trainload shipments. In 

Idaho, pulse crops and barley markets—or marketers—continue to 

see greater equipment shortages at less-than-shuttle-loading facilities, even when their facilities are adjacent to these shuttle loading 

facilities. 

Farm producers know that increasing the breadth of crop production on their farms can lead to greater efficiency and productivity 

and higher income, but the Nation’s railroad industry does not 

have the same goal. Instead, its view of efficient movement is moving larger and larger movements of a single-grade crop from a single origin to a single destination. Rail investment in grain movement has been shifted to the grain merchandiser and farm producer, while the service level for less-than-trainload movements 

continues to deteriorate. 

We see value-added agriculture having to invest in rail rolling 

stock to ensure adequate equipment supply, yet when railroad 

service levels do not meet railroad-supplied schedules, agriculture 

is being called upon to continually increase investment in railroad 

rolling stock. 

Because of these pockets of captivity, the cost of transporting 

grain can represent as much as one-third of the overall price a producer receives for his grain. The cost comes directly from a producer’s bottom line. Producers, unlike most other businesses, cannot pass these costs on. Grain producers are price-takers. The market sets the price, and we have no way to influence that price. 

We’re price-takers, not price-makers. Producers bear all of the 

transportation costs, both to and from the farm, and from the local 

country elevator to the processor or to the export terminal. 

57 

The effect of this rail captivity is that rail rates in the northern 

plains have increased 40 percent faster than the rail cost adjustment factor, including productivity unadjusted. Where I farm, rail 

rates as a percentage of the price of wheat have risen from 16 percent in 1980 to more than 30 percent today. Rail rates in Montana 

and North Dakota are between 250 and 450 percent of variable 

cost, far above the Surface Transportation Board’s rate of 

unreasonableness, which is currently at 180 percent. These are 

among the highest freight rates in the Nation, though agriculture 

rates in excess of 250 percent more than variable cost can be found 

in virtually all of the states that have captivity issues. 

Throughout the Corn Belt and pulse crop areas, rail rates have 

hit all-time highs as the service continues to be sub-par. In addition to the high cost of rates, rail service has continued to deteriorate. Captive shippers continue to suffer car and service disruptions. Shippers that order railcars well in advance are still experiencing delays of 3 or 4 weeks from the promised delivery dates. 

This can, and does, cause major problems during and after harvest. 

The high rates and lack of service I have just described continue 

to be especially frustrating for producers in my region who need 

only to look across the northern border and see where rates for Canadian grain moving westbound, right across the border, are only 

two-thirds the rates that we pay in Montana. We grow some of the 

highest-quality grain in the world, yet we’re rendered residual suppliers against our Canadian counterparts, and find ourselves at a 

significant competitive disadvantage in both domestic and foreign 

markets because of these shipping issues. 

Agricultural producers all over the country, however, are concerned that there is currently no regulatory body to address our 

frustration and complaints. The Surface Transportation Board does 

not balance these needs of shippers and railroads. The STB has— 

in the opinion of those I represent here today, have abandoned 

their lawfully designated role as a regulator of the railroads. The 

STB continues to allow the railroads to set rates and service practices for captive shippers, and, therefore—for captive shippers that 

force them to subsidize all other rail shippers. In 2004, car shortages on the BN Northern—the Burlington Northern Santa Fe, by 

BNSF’s own numbers, were more than 70 percent of all of its pastdue cars, where in North Dakota, Minnesota, South Dakota, and 

Montana, which accounts for only about a quarter of their system— 

the STB, after repeated complaints from grain shippers in Montana 

and North Dakota, sided with BNSF, allowing them to continue to 

single out areas of their system that are most captive. 

Our members believe that a healthy and competitive rail industry is essential for our continued viability; however, poor service, 

lack of available cars, increased rail rates, and a regulatory agency 

that does not meet our needs of shippers are making it difficult for 

our agricultural producers to remain competitive in a world marketplace. 

We believe that the government needs to be the facilitator and 

the catalyst for increasing competition in this historically strong 

100-year-old industry. We believe the railroad industry can survive 

and prosper in a competitive environment. And, indeed, we know 

from history that competition breeds innovation and efficiency. 

58 

In light of the horrific situation that U.S. grain producers are 

facing, with major railroads unable to meet common-carrier obligations all over the Nation, it is time for public policy in this area 

to be re-examined. Agriculture producers believe that both railroads and shippers would be better off with more competition in 

the marketplace, and many of them, including those organizations 

I am representing today, support revision—or provisions in Senate 

919, which calls for increasing competition without increasing regulation. If enacted into law, we believe this legislation will improve 

rail transportation by providing fairness and openness in negotiation between railroads and our customers. 

I’d like, again, to thank you for this opportunity to be here before 

this Committee. 

[The prepared statement of Mr. Schuler follows:] 

PREPARED STATEMENT OF DALE SCHULER, PRESIDENT, NATIONAL ASSOCIATION OF

WHEAT GROWERS (NAWG); ON BEHALF OF NAWG, THE NATIONAL BARLEY

GROWERS ASSOCIATION (NBGA), THE USA DRY PEA & LENTIL COUNCIL

(USDP&LC) AND ELENBAAS COMPANY

Mr. Chairman and members of the Committee, my name is Dale Schuler. I am 

a wheat farmer from Montana and am currently serving as President of the National Association of Wheat Growers. I am honored to be here representing the National Association of Wheat Growers (NAWG) and testifying on behalf of NAWG, the 

National Barley Growers Association (NBGA), the USA Dry Pea & Lentil Council 

(USDP&LC) and Elenbaas Company. 

One of agriculture’s top priorities continues to be working with Congress to find 

solutions to the problems caused by the massive concentration of the railroad industry, and specifically finding relief for our members who are captive shippers. I am 

very pleased to be here today to participate in this hearing on capacity, economics 

and service. 

The agriculture industry believes that a viable railroad industry is necessary for 

its continued success. Since the passage of the Staggers Rail Act of 1980, however, 

the degree of captivity in many agriculture regions and industry areas has increased 

dramatically, and America’s farmers continue to experience both unreliable service 

and higher rates. We have had, more-or-less, continuing rail equipment shortages 

since the railroads started aggressively consolidating and merging in the early 

1990s. 

Twenty years ago, there were multiple transcontinental railroads servicing the 

farming regions of the country. Today, however, whole states, whole regions and 

now whole industries have become completely captive to single railroads as a result 

of many railroad mergers. In the wheat industry alone there are substantial pockets 

of captivity in Texas, Oklahoma, Arizona, Colorado, Kansas, Nebraska, Wyoming, 

Idaho, South Dakota, Minnesota, North Dakota, Washington and Montana. These 

states make up the majority of the wheat, barley and pulse crop producing land in 

this country. As ethanol production continues to increase, corn producers are seeing 

continuing service and capacity problems with rail movements of dried distillers’ 

grains and ethanol. The barley, dry peas, lentils and chickpea industries continue 

to see the railroad industry’s efforts to minimize less than trainload shipments. In 

Idaho, pulse crop and barley marketers continue to see greater equipment shortages 

at less-than-shuttle loading facilities even when they are adjacent to shuttle loading 

facilities. 

Farm producers know that increasing the breadth of crop production on farms can 

lead to greater efficiency and higher income, but this Nation’s railroad industry does 

not have the same goal; instead, it views efficient movement as moving larger and 

larger movements of a single grade crop from a single origin to a single destination. 

Rail investment in grain movement has been shifted to the grain merchandiser and 

farm producers while the service level for less-than-trainload movements continues 

to deteriorate. We see value added agriculture having to invest in rail rolling stock 

to ensure adequate equipment supply, yet when railroad service levels do not meet 

railroad supplied schedules, agriculture is being called upon to continually increasing investment in railroad rolling stock. 

Because of these pockets of captivity, the cost of transporting grain can represent 

as much as 1⁄3 of the overall price a producer receives for his or her grain. This cost 

59 

comes directly from a producer’s bottom line. Producers, unlike other businesses, 

cannot pass their costs on; as price takers and not price makers, producers bear all 

transportation costs both to and from the farm and from the elevator to the processor or export terminal. 

The effect of this rail captivity is that rail rates in the Northern plains have increased 40 percent faster than the Rail Cost Adjustment Factor including productivity unadjusted. Where I farm, rail rates as a percentage of the price of wheat 

have risen from 16 percent in 1980 to more than 30 percent today. 

Rail rates in Montana and North Dakota are between 250–450 percent of variable 

cost—far above the Surface Transportation Board’s ‘‘rate of unreasonableness,’’ 

which is currently 180 percent. These are among the highest freight rates in the 

Nation though agriculture rail rates in excess of 250 percent more than variable cost 

can be found in virtually all of the states that have captivity issues. Throughout the 

Corn Belt and pulse crop areas, rail rates have hit all time highs as the service continues to be sub par. 

In addition to the high cost of rates, rail service has continued to deteriorate. Captive shippers continue to suffer car and service disruption. Shippers that order rail 

cars well in advance are still experiencing delays of three to 4 weeks after promised 

delivery dates. This can and does cause major problems during and after harvest. 

The high rates and lack of service I have just described continue to be especially 

frustrating for producers in my region who need only look across the Northern border to see a much more effective system. Canadian freight rates on wheat westbound—right across the border—are only 2⁄3 of the rail rates we pay in Montana. 

We grow some the highest quality wheat in world, yet we are rendered residual suppliers against our Canadian counterparts and find ourselves at a significant competitive disadvantage in both domestic and foreign markets because of these shipping issues. 

Agricultural producers all over the country, however, are concerned that there is 

currently no regulatory body to address our frustrations and complaints. The Surface Transportation Board does not balance the needs of shippers and the railroads. 

The STB has, in the opinion of those I represent here today, abandoned its lawfully 

designated role as a regulator of railroads. 

The STB continues to allow the railroads to set rates and service practices for captive shippers that force them to subsidize all other rail shippers. In the 2004 car 

shortage on the Burlington Northern Santa Fe, by BNSF’s own numbers, more than 

70 percent of all its past due cars were in North Dakota, Minnesota, South Dakota 

and Montana, which accounts for less than a quarter of the BNSF system. The STB, 

after repeated complaints from grain shippers in Montana and North Dakota, sided 

with BNSF, allowing them to continue to single out the areas of their system that 

are the most captive. 

NAWG members believe that a healthy and competitive railroad industry is essential for our continued viability, however, poor service, a lack of available cars, 

increased rail rates and a regulatory agency that does not meet the needs of shippers are making it difficult for agriculture producers to remain competitive in a 

world marketplace. 

We believe that the government needs to be the facilitator and the catalyst for 

increasing competition in this historically strong, 100-year-old industry. We believe 

the railroad industry can survive and prosper in a competitive environment and, indeed, we know from history that competition breeds innovation and efficiency. In 

light of the horrific situation U.S. grain producers are facing with major railroads 

unable to meet common carrier obligations all over the nation, it is time that public 

policy in this area needs to be reexamined. 

Agricultural producers believe that both railroads and shippers would be better 

off with more competition in the marketplace and many of them, including those 

organizations I am representing today, support provisions in S. 919 which calls for 

increasing competition without increasing regulation. 

If enacted into law, we believe this legislation will improve rail transportation by 

providing fairness and openness in the negotiations between railroads and their customers over rates and service. By simply requiring railroads to provide rates to their 

customers between any two points on their system, many additional rail customers 

will gain access to rail transportation competition. In addition, providing for ‘‘final 

offer’’ arbitration and the removal of ‘‘paper barriers’’ will restore balance to the 

commercial relationship between the railroads and their customers. 

I would like to thank you again for this opportunity. I am ready to answer any 

questions you may have. 

Senator LOTT. Thank you very much, Mr. Schuler. 

60 

Mr. English? Old House member, you know about the 5-minute 

rule, or less. 

[Laughter.] 

Mr. ENGLISH. I seem to recall the 5-minute rule, Mr. Chairman, 

thank you very much. Appreciate that. 

[Laughter.] 

STATEMENT OF HON. GLENN ENGLISH, CEO, 

NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION 

Mr. ENGLISH. Mr. Chairman, I’m here today, not as head of the 

electric cooperatives, but as Chairman of the Consumer’s United 

for Rail Equity, which is a number of different organizations that 

have ‘‘joined’’ or ‘‘banded’’ together; namely, known as ‘‘captive 

shippers.’’ We’re 20 percent of the rail freight market. 

Mr. Chairman, as you’ve heard from the members of the Committee itself, they’re very familiar with the fact that in recent years 

we’re finding that railroad service is becoming less reliable and 

more expensive, particularly for those who are known as captive 

shippers. Those of us in the electric utility industry are extremely 

aware of this. We have seen, in the last 2 years, our coal stockpiles 

deplenished to a point that was dangerously low. Normally we like 

to keep a 30-day supply of coal on hand for the utilities. Those utilities, however, that fall in the category of being captive shippers, 

many of those have found their stockpiles depleted down to a position of less than 10 days. This has improved somewhat in the last 

few months; mainly because of a mild winter and because of the 

normal spring maintenance that takes place as far as generators 

are concerned. I might also say, Mr. Chairman, I think it’s partly 

due to the fact that the Congress is showing increasing attention 

with regard to this issue and this difficulty. 

As far as the problem itself, it is a problem today, but may be 

a much larger problem for the future. As I think you’re aware, Mr. 

Chairman, the electric utility industry is going to have to build a 

huge amount of new capacity in the coming years. It has been estimated, over the next 10 to 20 years the capacity for the electric 

utility industry is going to have to increase over a third. That’s a 

massive amount of construction. And much of that needs to be coalfired if, in fact, we’re going to use the resources we have here at 

home and to use those resources that are best suited for the generation of electric power. And certainly that is coal. But we’re finding a question as to whether it makes sense to build those coalfired generating plants if we cannot rely on America’s railroads to 

deliver that coal in a timely manner. If they can’t do it today, Mr. 

Chairman, there’s a real question whether they’re going to be able 

to do it in the future. 

The railroad industry, when we bring these issues to their attention, when issues are asked by the Congress and by the Federal 

Energy Regulatory Commission, who’s also looked into this matter 

last week, we find the railroads blame the customers, ‘‘It’s your 

fault.’’ It’s the customer’s fault. With regard to the utilities, say, 

‘‘Well, we’re using more natural gas.’’ However, at the same time, 

the rail industry points out that they’re in constant communication 

with the customers of coal, and they’re ensuring adequate supplies 

are available. And it’s hard for me to understand, if they’re in conVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00064 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
61 

stant contact, why they wouldn’t know there’s increasing use of 

coal in this country. And if they didn’t know it from talking to the 

customers, then they need to talk to Department of Energy, which 

makes this information regularly available. As you can see, here is 

the DOE. Energy Information Administration’s use of coal. [Chart] 

You can see the bottom line, Mr. Chairman, the steady growth. 

And it takes it on out to the year 2030. So, if there’s any doubt in 

anybody’s mind, here it is, provided by the Department of Energy, 

for all to see. 

[The information referred to follows:] 

Energy Information Administration/Annual Energy Outlook 2006 

Table 25. Comparison of coal forecasts, 2015, 2025, and 2030 

(million short tons, except where noted) 

Projection 2004 

AEO2006 Other forecasts 

Reference 

Low 

economic 

growth 

High 

economic 

growth 

PIRA EVA GII 

2015 

Production 1,125 1,272 1,251 1,318 1,250 1,234 1,149 

Consumption by sector 

Electric power 1,015 1,161 1,145 1,199 1,171 1,140 1,071 

Coke plants 24 22 21 23 NA 29 19 

Coal-to-liquids 0 22 19 27 NA NA NA 

Industrial/other 65 71 69 72 88 a 65 66 

Total 1,104 1,276 1,254 1,321 1,259 1,234 1,156 

Net coal exports 20.7 –4.8 –4.8 –4.8 –8.0 –17.3 –7.7 

Exports 48.0 22.0 22.0 22.0 NA 28.0 28.6 

Imports 27.3 26.7 26.7 26.8 NA 45.3 36.3 

Minemouth price 

(2004 dollars per short ton) 20.07 20.39 20.04 20.67 NA 19.69 b 17.82 d

(2004 dollars per million Btu) 0.98 1.01 0.99 1.02 NA 0.99 c 0.86 d

Average delivered price 

to electricity generators 

(2004 dollars per short ton) 27.43 28.12 27.74 28.50 NA 29.45 b 28.17 e

(2004 dollars per million Btu) 1.36 1.40 1.39 1.42 NA 1.48 b 1.36 

2025 

Production 1,125 1,530 1,394 1,710 NA 1,404 1,296 

Consumption by sector 

Electric power 1,015 1,354 1,248 1,486 NA 1,329 1,226 

Coke plants 24 21 19 23 NA 26 16 

Coal-to-liquids 0 146 115 192 NA NA NA 

Industrial/other 65 71 68 73 NA 60 67 

Total 1,104 1,592 1,450 1,774 NA 1,415 1,309 

Net coal exports 20.7 –62.8 –57.9 –65.5 NA –29.2 –15.1 

Exports 48.0 19.6 19.6 18.4 NA 30.1 23.4 

Imports 27.3 82.4 77.4 84.0 NA 59.3 38.5 

Minemouth price 

(2004 dollars per short ton) 20.07 20.63 19.40 21.73 NA 20.15 b 16.12 d

(2004 dollars per million Btu) 0.98 1.03 0.98 1.09 NA 1.02 c 0.78 d

Average delivered price 

to electricity generators 

(2004 dollars per short ton) 27.43 29.02 27.48 30.87 NA 30.12 b 25.84 e

(2004 dollars per million Btu) 1.36 1.44 1.37 1.52 NA 1.53 b 1.25 

2030 

Production 1,125 1,703 1,497 1,936 NA NA 1,395 

Consumption by sector 

Electric power 1,015 1,502 1,331 1,680 NA NA 1,330 

Coke plants 24 21 19 23 NA NA 14 

Coal-to-liquids 0 190 153 247 NA NA NA 

Industrial/other 65 72 68 75 NA NA 67 

Total 1,104 1,784 1,571 2,025 NA NA 1,411 

Net coal exports 20.7 –82.7 –69.3 –89.0 NA NA –18.7 

Exports 48.0 16.7 16.4 16.8 NA NA 22.3 

Imports 27.3 99.4 85.7 105.8 NA NA 41.0 

62 

Table 25. Comparison of coal forecasts, 2015, 2025, and 2030—Continued 

(million short tons, except where noted) 

Projection 2004 

AEO2006 Other forecasts 

Reference 

Low 

economic 

growth 

High 

economic 

growth 

PIRA EVA GII 

Minemouth price 

(2004 dollars per short ton) 20.07 21.73 19.91 23.05 NA NA 15.65 d

(2004 dollars per million Btu) 0.98 1.09 1.00 1.15 NA NA 0.76 d

Average delivered price 

to electricity generators 

(2004 dollars per short ton) 27.43 30.58 28.28 32.79 NA NA 25.23 e

(2004 dollars per million Btu) 1.36 1.51 1.41 1.61 NA NA 1.22 

Btu = British thermal unit. NA = Not available. 

a Includes coal consumed at coke plants. 

bThe average coal price is a weighted average of the projected spot market price for the electric power sector 

only and was converted from 2005 dollars to 2004 dollars to be consistent with AEO2006. c Estimated by dividing the minemouth price in dollars per short ton by the average heat content of coal delivered to the electric power sector. dThe minemouth prices are average prices for the electric power sector only and are calculated as a weighted 

average from Census regionprices. e Calculated by multiplying the delivered price of coal to the electric power sector in dollars per million Btu by 

the average heat content of coal delivered to the electric power sector. 

Sources: 2004 and AEO2006: AEO2006 National Energy Modeling System, runs AEO2006.D111905A (reference case), LM2006. D113005A (low economic growth case), and HM2006.D112505B (high economic growth 

case). PIRA: PIRA Energy Group (October 2005). EVA: Energy Ventures Analysis, Inc., FUELCAST: Long-Term 

Outlook (August 2005). GII: Global Insight, Inc., U.S. Energy Outlook (Summer 2005). 

I would suggest, Mr. Chairman, that the real reason that we’re 

running into these kinds of difficulties has to do with a remark 

that was made by the chairman of Union Pacific, back before the 

Surface Transportation Board a few years ago. He states to the 

Surface Transportation Board, ‘‘Year after year, the railroads have 

been increasing their traffic volumes without adding commensurately to their physical capacity.’’ In other words, they’re following the same strategy that the airlines have been following for 

some time, Mr. Chairman, and that is to limit the capacity. With 

the airlines, it may be some folks can’t get a ticket, or they may 

get bumped off their flight. To them, it’s an inconvenience. When 

it happens as far as our Nation’s railroads are concerned with regard to providing supplies for the generation of electric power, 

what it’s going to mean, Mr. Chairman, is that the lights are either 

going to dim, or they may go out altogether. The impact that that 

has on this Nation’s economy obviously is very severe. 

Now, we also have the interesting situation where the railroads 

are coming before the Congress asking for additional assistance. 

They’d like a tax credit to help them deal with some of the capacity 

problems, problems that they say they want to limit in the first 

place. And that, too, raises some very serious questions for us, Mr. 

Chairman, particularly when we—in light of the fact that the reported profits for this last year, 2005 over 2004, are very significant, a 30-percent increase in one year for the industry itself. And 

particular railroads, some railroads that are serving those of us 

who are captive shippers, I would point out, the Burlington Northern Santa Fe, had, 2005 over 2004, a 93-percent increase in the 

profits. CSX is reporting a 237-percent increase over the year. And, 

Mr. Chairman, according to the Wall Street Journal, they’re saying 

the ride isn’t over yet. 

Now, Mr. Chairman, stranded shippers, our cost in the recent 

time, we’re seeing an increase of 350 to 450 percent, in the form 

of profits. Now, who is paying for this increase, these huge profits 

that are being made by the railroads? Obviously it’s the captive 

63 

shippers. It’s coming out of our hide. But, since it is a monopoly, 

we obviously aren’t receiving the service for what we’re paying an 

excess for. 

In the electric utility industry, Mr. Chairman, we have what’s 

known as an obligation to serve. We’re obligated to serve the people 

of this country and provide them with electric power. I would ask 

you, Mr. Chairman, don’t the railroads have an obligation to deliver for the electric utility industry and for the rest of America and 

our economy? 

Thank you very much. 

[The prepared statement of Mr. English follows:] 

PREPARED STATEMENT OF HON. GLENN ENGLISH, CEO, 

NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

Mr. Chairman and members of the Committee: 

My name is Glenn English, and I am the Chief Executive Officer of the National 

Rural Electric Cooperative Association (NRECA). I also serve as Chairman of Consumers United for Rail Equity (CURE), a captive rail customer advocacy group representing a broad array of vital industries—chemical manufacturers and processors; 

paper, pulp and forest products companies; agricultural commodities producers and 

processors; cement and building materials suppliers; and many more. 

I appreciate this opportunity to appear today to discuss railroad issues that have 

rapidly risen to the top of the policy agenda for members of NRECA, a trade association consisting of 930 cooperatives providing electricity to more than 39 million 

consumers living in 47 states. As member-owned, not-for-profit organizations, the 

obligation of cooperatives is to provide a reliable supply of electricity to all consumers in our service areas at the lowest possible price. We take our obligation to 

serve very seriously—the wellbeing, safety, and economic health of our members, 

our communities and our Nation depends on it. Electric cooperatives serve primarily 

the more sparsely populated parts of our nation, but cover roughly 75 percent of the 

land mass of the Nation. 

Today I want to emphasize for the Subcommittee the very critical issues currently 

facing rail freight shippers throughout the country, especially those shippers who 

are ‘‘captive’’ because they are only served by one rail carrier and have limited or 

no access to competition. 

Since the enactment of the Staggers Rail Act in 1980, the railroad industry has 

dramatically changed. Despite their claims to the contrary, the structure and the 

practices of the railroads under current law are detrimental to the economic survival of many domestic U.S. businesses and industries. Left unchecked, the status 

quo jeopardizes our national economy and even our national security capabilities. 

Consider the following: 

• In 1980 there were 41 Class I railroads, but today six remain with four of 

them—two in the east and two in the west—carrying about 94 percent of all 

rail freight. 

• More than 20 percent of all rail freight shipments are ‘‘captive’’ to the monopoly 

market power of only one rail carrier. 

• The four major carriers have been allowed under current law to artificially 

tighten their monopolistic stranglehold over ‘‘captive’’ shippers through practices that restrain competition and deny shippers the ability to freely seek access at points where competition might otherwise be available. 

• ‘‘Captive’’ rail shippers are forced in an arbitrary ‘‘take-it-or-leave-it’’ fashion to 

face enormously higher rail transportation costs than those shippers that have 

access to competition. 

• In areas where competition is minimal or does not exist, the Federal regulatory 

watchdog established under the Staggers Act to protect ‘‘captive’’ rail shippers— 

the Surface Transportation Board (STB)—has failed to fulfill its responsibility 

to ensure that rail rates and practices are fair and equitable and in the overall 

national best interest. 

• Similar to the availability and reliability of adequate electric power, a robust 

and efficient rail transportation system is critically important to the Nation’s 

economy and security, and requires a common carrier obligation to adequately 

serve the broader public interest. 

64 

I want to recognize the efforts of Senators Burns, Rockefeller, Dorgan—and others 

who have gone on record—for their keen interest in resolving two major issues facing the rail industry and its customers: the need to mandate regulatory reforms in 

the industry; and the shortfall in U.S. railway capacity. Any legislation moving forward must address both problems. 

We commend Senator Burns for introducing S. 919, the Railroad Competition Act 

of 2005, along with Senators Rockefeller and Dorgan. The legislation would reform 

many of the anti-competitive practices that the railroads currently exert over captive shippers. S. 919 also recognizes the need to provide some mechanism or incentive to stimulate the capital investment needed to address the current capacity 

shortfall. 

The Captive Shipper/Railroad Monopoly Problem 

Mr. Chairman, about 50 percent of the Nation’s electricity is generated from coal. 

In the electric cooperative community, about 80 percent of the electricity generated 

by our plants is from coal. Very few of our generating facilities are located at coal 

mine sites, so most of the coal consumed by our plants is delivered by rail. 

Under most circumstances, co-ops buy the coal at the mine site and arrange for 

its transportation, so the shipping agreements are between the railroad companies 

and the cooperative. Generally, our co-ops provide and maintain the ‘‘train sets’’— 

the unit trains that today normally number from 120 to 130 cars. We also provide 

unloading facilities and make other capital investments related to rail transportation of coal to our plants. Most of these costs were previously borne by the carrier 

and factored into rates. Today, in the movement of coal to our plants, the railroads 

basically provide only the locomotives, tracks, crews, and the diesel fuel. 

Increasingly, our members must deal with substandard service and higher costs 

for their coal transportation than ever before. Consolidation of the rail industry has 

resulted in many of our generators being held ‘‘captive’’ to one single railroad for 

coal transportation. As a result, these electric generators are subject to railroad monopoly power over price and service with no access to competition. The railroads 

have extensive exemptions from the Nation’s antitrust laws. Under the Staggers 

Rail Act, the Interstate Commerce Commission (now Surface Transportation Board) 

mission was to deregulate competitive rail traffic, while also protecting against monopoly abuse of ‘‘single served’’ or ‘‘captive’’ traffic. That protection is not being provided. 

Application of the Antitrust Laws. Railroad spokespersons have recently represented in hearings before the House Transportation & Infrastructure Committee 

and the Senate Energy & Natural Resources Committee that the railroads are subject to ‘‘most’’ antitrust laws. Two quick examples rebut this claim. First, section 16 

of the Clayton Act, 15 U.S.C. § 26, prohibits private parties from seeking antitrust 

law-based injunctions against ‘‘any common carrier subject to the jurisdiction of the 

Surface Transportation Board.’’ Second, the Supreme Court’s decision in Keogh v. 

Chicago & Northwestern Ry., 260 U.S. 156 (1922), generally prevents shippers from 

obtaining treble damages in matters involving railroad freight rates that might be 

found discriminatory. Following enactment of Staggers, the Keogh decision continues to preclude most shipper actions for treble damages against the railroads. 

Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409, 422 (1986). 

Given the general unavailability for private injunctive actions and treble damages, the recent claims by the railroads that they are fully subject to the antitrust 

laws is misleading at best. 

Compounding the problem, the STB has interpreted Staggers in a manner that 

allows railroads to deny shippers access to competing railroads, has allowed other 

anticompetitive practices, and has a rate challenge process so complex, costly and 

time consuming as to provide virtually no protection to rail customers. For example, 

freight rates nearly doubled this year for Dairyland Generation and Transmission 

Co-op in Wisconsin. Unfortunately, given the complexity, the cost, and the history 

of futile challenges before the STB, Dairyland had no realistic option other than to 

accede to the ‘‘take-it-or-leave-it’’ demands of the railroad. 

Railroads Claim ‘‘Rates’’ Are Down—Shippers Find ‘‘Costs’’ Are Up 

In addition to the rail capacity concerns and monopolistic rail business practices 

being examined by the Subcommittee, Congress should also be concerned about the 

cost of coal transportation to electric generating facilities that must depend on a single railroad for coal delivery. Coal transportation costs flow straight through to electricity consumers, many of whom—farmers, chemical producers and processors, 

manufacturers, providers of forest products, paper and pulp, and many more—are 

already being forced to pay high rail transport costs on the movement of their products because they are also ‘‘captive’’ to a single provider. When co-ops must rely on 

65 

a single railroad to move coal to our plants, and there is no recourse for a fair rate 

review, we are in no position to negotiate a mutually acceptable price. Rather, the 

railroad carrier dictates both price and service. With the railroads largely exempt 

from the Nation’s antitrust laws, the only option available to customers served by 

a single railroad is to petition the Surface Transportation Board for relief. 

Members can refer to the following chart showing a close approximation of the 

rail rates that apply to ‘‘captive’’ shippers of products versus shippers of those products who are not held hostage to just one Class I rail carrier. 

On a Per Ton Basis, Difference Between Captive and Competitive Rates 

by Commodity & Major Railroad 

The following information was calculated by Escalation Consultants, Inc. of Gaithersburg, Maryland. This ‘‘per ton’’ information is calculated from the 2003 STB ‘‘Revenue Shortfall Allocation Methodology’’ (RSAM) study, the latest study available 

from the Board. 

NS CSX BN UP 

Farm Products Captive Rate $21.37 $36.74 $45.28 $37.99 

Farm Products Non-Captive Rate $11.88 $20.83 $26.09 $21.29 

Coal Captive Rate $17.56 $17.22 $16.77 $17.00 

Coal Non-Captive Rate $9.76 $9.76 $9.66 $9.53 

Chemicals Captive Rate $36.98 $34.33 $42.57 $38.94 

Chemicals Non-Captive Rate $20.56 $19.46 $24.52 $21.82 

Lumber or Wood Captive Rate $29.43 $36.13 $59.19 $59.49 

Lumber or Wood Non-Captive Rate $16.36 $20.48 $34.10 $33.34 

Pulp, Paper Captive Rate $39.48 $40.82 $62.14 $55.40 

Pulp, Paper Non-Captive Rate $21.95 $23.14 $35.80 $31.05 

The railroads have all but perfected the art of using ‘‘global’’ data and statistics 

to obscure the true impact of their ‘‘rates’’ and their practices in different regions 

of the country and especially as applied to ‘‘captive’’ rail customers. They will tout 

graphs demonstrating how ‘‘rates’’ have steadily declined for shippers... what 

they don’t tell you is that much of the ‘‘cost’’ of rail transportation that was previously built into the ‘‘rate’’ (the costs of trainsets, maintenance, loading and other 

trackside facilities) has been shifted over the period onto the backs of the shippers. 

While ‘‘rates’’ have indeed come down, the ‘‘cost’’ to shippers in many cases has dramatically increased. 

Although the railroads suggested they are subject to regulation and that shippers 

have a right to file complaints, it is important to understand the very limited extent 

to which railroad rates are subject to review at the STB. Contracts are outside of 

the STB’s jurisdiction altogether (49 U.S.C. § 10709), and the STB has exempted 

much other traffic (including intermodal traffic) from its rate regulation. 

For the small remaining category of traffic that is subject to regulation, the railroads have the initial flexibility to establish any rate they want (49 U.S.C. 

§ 10701(c)). Shippers may challenge a rate, but bear the burden of showing that the 

carrier has market dominance in both qualitative (an absence of effective competition) and quantitative (the rate exceeds the jurisdictional threshold of 180 percent 

of variable costs) terms (49 U.S.C. § 10707). The shipper must also prove that the 

rate exceeds a reasonable maximum under ‘‘Constrained Market Pricing,’’ which 

largely means stand-alone cost (a variant of replacement cost). In recent years, it 

has been impossible for shippers to get meaningful relief at the STB. In addition, 

the cases take a long time (at least 2 years to get the first decision on the merits) 

and are very expensive ($3–5 million at a minimum). 

At the end of a twenty-year contract with Laramie River Station, BNSF more 

than doubled the coal-hauling rate for the plant. On October 19, 2004, a complaint 

was filed with the STB to review BNSF’s rate increases. Rate complaints at the STB 

are costly, lengthy, complex, and rarely result in any relief for the rail customer. 

The cost simply to file the LRS/Western Fuels complaint was $102,000, but that filing fee since has been increased to $140,600. By contrast, the cost of filing a similar 

case in the Federal district court is $150. 

In contrast to most other regulatory systems in the nation, the customer must 

prove first that it is subject to a railroad monopoly, and then must carry the burden 

of proving that the rate is unreasonably high. In a normal regulatory process, the 

burden of justifying a rate falls on the monopoly that is being regulated. The rate 

reasonableness standard under the STB is not the normal ‘‘cost plus a reasonable 

rate of return’’ test. 

66 

The rate reasonableness standard employed by the Surface Transportation Board 

requires the customer to prove that it can build and maintain its own railroad to 

move its product at a price less than the rate that is being challenged. This requires 

the rail customer to employ economists to construct a highly efficient ‘‘virtual’’ railroad that roughly follows the route and bears the same costs at the incumbent railroad. Not surprisingly, this proof is complicated and expensive. To date, LRS and 

its co-owners have spent nearly $5 million on the prosecution of the rate case, which 

has been pending almost 2 years. A final judgment is not expected in this case for 

at least another year. 

The situation facing us today goes far beyond just the very high prices being 

charged captive shippers—both directly and indirectly—by the railroads. Currently, 

the Nation faces a situation wherein the railroads are either unable or unwilling 

to deliver reliable supplies of coal to our generators in a timely fashion. So, in a 

very real sense, our members are paying much more and receiving far less when 

it comes to rail transportation. Policies must be changed to address a rapidly worsening situation that is harming critical industries. The fact is that electric generation is now threatened by the railroads’ poor performance and their lack of reliability. 

Current Coal Delivery Problems Adversely Impact Electricity 

In a world suffering from shortages of energy supplies, our Nation is blessed with 

enormous reserves of coal that can provide for electricity and other uses for many 

decades in the future. Our coal resources are sufficient to meet our energy needs 

for more than 250 years. Some have referred to the United States as the Saudi Arabia of coal. In a 2001 speech, Vice President Dick Cheney pointed out that the overall demand for electric power is expected to rise by 43 percent over the next 20 

years, and that just meeting the demand would require between 1,300 and 1,900 

new power plants. That averages to more than one new power plant per week, every 

week, for the next 20 years. ‘‘We all speak of the new economy and its marvels,’’ 

he said, ‘‘sometimes forgetting that it all runs on electric power.’’ 

What the Vice President might not have recognized at the time of his speech was 

that the railroads responsible for moving this strategically important fuel supply 

were already in the process of making America’s most abundant and affordable energy supply scarce and expensive. Electric co-ops are forced to look to South America, Indonesia, and other foreign coal sources because the railroads cannot make 

timely domestic deliveries. 

The delivery system for half the Nation’s electricity consists of coal mines, rail 

transportation, generators, and transmission and distribution systems. Due to rail 

delivery problems, many of the electric cooperative generators have been concerned 

as they prepared for this year’s summer cooling season. Some generating facilities 

were dangerously close to a point where continued operation could not be sustained. 

Let me focus on the coal delivery problem confronting just one very large coalfired electric generator in Wyoming—the Laramie River Station (the same plant embroiled in a rate case at the STB). In the spring of 2005, there were two derailments 

on tracks coming from the Powder River Basin (PRB), reducing rail coal deliveries 

to 80 percent of previous levels. Deliveries have not yet fully recovered. A BNSF 

spokesman was recently quoted in CQ Weekly saying that it is just ‘‘not feasible’’ 

to rebuild the LRS stockpile with current demand for coal so high. It is unclear 

whether those reductions have been imposed across-the-board, or whether the reductions and related matters, including ‘‘parking’’ of trainsets, have been imposed selectively or accidentally, but the result is the same. It enables the railroads to pick 

‘‘winners and losers’’ among generating utilities, and to potentially punish and retaliate against those who seek to invoke whatever protections may be ostensibly 

available. 

The three unit (1650 MW) Laramie River Station is located only 170 miles from 

the coal source and was down to a 3 to 4 day supply of coal in January. This plant 

is operated by Basin Electric Power Cooperative for 6 not-for-profit utilities. Loss 

of this major block of generation could create severe reliability problems for its regional grid. Basin provides electricity to its members in 9 states serving over 1.8 

million consumers. Because of reliability concerns, Basin notified DOE and the 

North American Electric Reliability Council of the stockpile situation when coal reserves dropped below 50 percent of normal levels and developed a generation curtailment plan to conserve coal. 

Fortunately, the winter was relatively mild, coal deliveries improved during the 

last few months, and Unit 1 entered a 7-week maintenance outage, which reduced 

consumption of coal. Since the outage began on April 15, Basin’s stockpile has increased to almost 700,000 tons—a 30 day reserve. However, if the plant had been 

operating at full load during this period, the stockpile would have gained only 

67 

100,000 tons to a total of 276,000 tons; a 10 day supply of coal. Now that the plant 

is once more in full operation, Basin is concerned about coal deliveries for the summer months. 

Other co-ops have experienced similar problems and have cut production at those 

coal plants that are normally the least costly to operate. Electricity generators have 

resorted to burning more expensive natural gas, purchasing higher cost electricity 

from the grid, or purchasing more expensive foreign coal and higher sulfur local 

coal. Arkansas Electric Cooperative estimated that its coal conservation program, 

using alternate-fuel power generation, cost its customers over $100 million because 

of the shortage of coal deliveries over the past 12 months to its power plants. 

The shortfall in rail coal deliveries has many far-reaching consequences. It is 

widely acknowledged that there will be at least a 20 million ton shortfall in PRB 

coal deliveries in 2006. Making up for this shortfall will require the use of about 

340-billion cubic feet of natural gas costing about $2.6 billion more than the coal 

it replaces. The additional use of natural gas instead of coal to generate electricity 

has also significantly driven up the price of gas across the country, and has increased the costs to those using natural gas as a feedstock for manufacture of their 

products. Over the past year, restriction in the supply of PRB coal has also resulted 

in a tripling of the coal spot market price, increasing those prices from roughly $6 

per ton to more than $20 per ton. 

So, in addition to the market power and rate-setting problems not being addressed, neither does the Surface Transportation Board assert jurisdiction over railroad customer service issues. The STB has been completely passive during the current coal delivery problems. For example, when the CEO of Arkansas Electric Cooperative sent a letter on this subject to the STB last August, not only did he never 

receive a response from the STB, his letter was answered by a Vice President of 

the Burlington Northern Railroad—the railroad about whom he was complaining! 

Railroad Obligation to Serve—Wall Street vs. Main Street 

We believe that an overriding national public interest applies to the railroad industry as it does with our electric utility industry. No electric utility—whether a 

rural electric cooperative, a municipal power system or an investor owned utility— 

is free to conduct business in any manner it likes, including ‘‘maximizing’’ profits. 

city officials overseeing municipal utilities are subject to the vote of the people; rural 

electric co-op boards must earn election by their member-owners; and investor 

owned utilities are subject to the oversight of both state public service commissions 

and the Federal Energy Regulatory Commission. 

Railroad companies tell only one side of the story, emphasizing freight railroad 

traffic ‘‘constraints’’—the ‘‘capacity crunch’’—while alleging a need for financial incentives to lure the additional capital necessary to modernize and expand America’s 

rail infrastructure and capacity. 

We know the infrastructure and the capacity of our railroads need significant expansion and improvement. Railroad constraints—coupled with their exercise of monopoly power over captive customers—have led to ever growing profit levels for the 

major rail corporations. The railroads and Wall Street have been focused on making 

large profits while Main Street Americans are focused on the ‘‘big picture’’ of growing and expanding our overall economy—not just one sector. 

Morgan Stanley Equity Research N.A. recently released a periodic analysis of railroad financial performance. This analysis was produced for its intended audience, 

the investor community. The report noted that the major railroads are enjoying robust financial health based on ‘‘pricing freedom’’ and lack of railroad capacity. According to the report, ‘‘the six major North American railroads (Kansas City Southern is not included) will see their stocks appreciate 50 percent–100 percent over the 

next 4 years.’’ (‘‘Air Freight and Surface Transportation,’’ Morgan Stanley Equity 

Research North America, January 23, 2006, James Valentine). 

Since rising stock prices are an indicator of financial health that will attract and 

retain capital, this analysis clearly suggests that, according to Wall Street the railroads will be ‘‘revenue adequate’’ over the next 4 years. Furthermore, the analyst 

said that there is little or no regulatory risk in the current Washington environment—an indication that he believes the current STB, Congress and Administration 

are unconcerned about the ‘‘secular pricing’’ power and other actions of the railroads. ‘‘Secular pricing’’ is the code for the ability of a monopoly to exercise market 

power in exacting cash from those dependent on the monopoly’s goods or services. 

We contend that the railroad industry also has—like electric utilities—an obligation to serve the national public interest. This obligation may sometimes be called 

a ‘‘common carrier’’ obligation, but in the end it means the duty to provide reliable 

transportation service to all customers at fair and reasonable prices. Without mandating an obligation to serve by the railroads, the economy of this Nation cannot 

68 

move forward. Adequate, dependable, and reasonably priced rail service is almost 

as critical to our national and economic security interests as electricity, and the public interest cries out for the imposition of a formal ‘‘obligation to serve’’ mandate in 

order to correct the current arrogant and abusive tendencies of the railroads. 

Some tell us that the economic self-interest of the railroads will solve the railroad 

service and capacity problems over time. That certainly was the premise of the Staggers Rail Act—deregulate the railroads and they will become healthy and provide 

the rail service needed by the Nation at fair and reasonable prices. Railroad customers have good reason to doubt that assertion. 

In the absence of strong signals from the government about service and capacity 

to meet the needs of ‘‘Main Street’’ America, the railroads will take their signals 

only from ‘‘Wall Street.’’ Financial analysts today rate railroad stocks high because 

the railroads possess ‘‘pricing power’’ based on the fact that demand for rail transportation exceeds capacity. Moreover, Wall Street tends to grade railroad stocks 

down when the railroads make heavy investments in their systems. So, Mr. Chairman, there is significant concern among the rail customer community that actually 

providing sufficient capacity and reliable service for them will be perceived by Wall 

Street as adverse to the economic interests of the rail industry. 

Questions about future reliable rail service at fair prices are a significant concern 

to the electricity industry as it attempts to provide the additional coal-fired power 

plants the Nation will need in the future. Can we depend on reliable rail transportation of coal in the future at a fair and reasonable price? 

Assistance to Help Ensure Rail Profits Requires an Obligation to Serve 

Finally, Mr. Chairman, we understand the railroads are now seeking legislation 

to provide a 25 percent investment tax credit and ‘‘expensing’’ provisions for investments in railroad infrastructure. We might very well support such a Federal incentive, but only so long as it includes a package of legislation that also addresses the 

concerns of rail customers that are subject to railroad monopoly power, and only so 

long as the tax credit and other benefits are also available to rail customers when 

they make similar investments in infrastructure to improve overall rail capacity. 

Moreover, we recommend that certain conditions should be imposed on the investments that would be eligible for the tax credits and expensing benefits. For example, 

the investments that qualify should be limited to first prioritize improving the infrastructure that currently provides insufficient service to captive or single-served rail 

customers. Eligible investments should be focused first on infrastructure improvements that benefit the movement of domestic products and commodities as opposed 

to infrastructure that benefits imports. Finally, any infrastructure that benefits 

from the tax credit should be deployed in a pro-competitive manner as suggested 

in S. 919, rather than further expanding the monopoly market power of the railroads. 

The rationale for providing any level of assistance to the railroads is because of 

the important role they play in our Nation’s overall economy. Electric utilities are 

viewed as absolutely critical not only to the economy, but also indispensable in helping to ensure our homeland security. Railroads obviously occupy a similar role. All 

reasonable assistance should be provided to ensure the rail transportation system 

is robust and efficient. However, benefits to help ensure the profitability of the rail 

industry should come with a clear ‘‘obligation to serve’’ the best interests of Main 

Street America—not just Wall Street. 

NRECA Supports S. 919—The Right Direction for Reform 

I mentioned earlier the legislation that Senators Burns, Rockefeller, and Dorgan 

have introduced that will begin to address many of the current problems facing rail 

shippers—especially captive rail shippers—as they try to deal with the railroads. S. 

919 is a good starting point for discussions among those who truly want to improve 

the current rail transportation system in this country. We strongly urge this Subcommittee to give a high priority to legislation this year. 

Conclusion 

Mr. Chairman, thank you for conducting this hearing today. We support a strong 

and viable rail industry that will provide reliable service to its customers at fair and 

reasonable prices. The status quo will not result in this type of rail system for the 

Nation. The kinds of reforms suggested in S. 919 must be adopted as Federal policy, 

and the public benefits that result from competition in the marketplace must be applied to the rail transportation system by removing the rail industry’s exemptions 

from the Nation’s antitrust laws. 

I can assure the Subcommittee that the 39 million consumer-owners of the 

NRECA electric cooperative family look forward to working with you, and with all 

69 

of the other stakeholders involved, in resolving these critical rail transportation 

issues in an objective and constructive manner. 

Senator LOTT. Thank you, Congressman English. 

Mr. McIntosh? 

STATEMENT OF JOHN L. MCINTOSH, PRESIDENT, CHLOR– 

ALKALI PRODUCTS, OLIN CORPORATION, ON BEHALF OF 

THE OLIN CORPORATION AND THE AMERICAN CHEMISTRY 

COUNCIL (ACC) 

Mr. MCINTOSH. Chairman Lott, Senator, I’m pleased to be here 

today on behalf of Olin Corporation and the American Chemistry 

Council. 

With 5,800 U.S. employees, Olin is a leading producer of copper 

alloys, ammunition, chlorine, and caustic soda. We ship two and a 

half million tons of products by rail each year. ACC represents the 

Nation’s leading chemical manufacturers. 

Today, I want to deliver three essential messages about American competitiveness: 

First, my company, my industry, other rail shippers, and the millions of customers we serve, need reliable rail service. Sadly, when 

it comes to reliability, that train has stalled. 

Second, the captive rail customer—that is, the customer with 

service from a single monopoly railroad, is completely at the mercy 

of the carrier. Free and fair market forces no longer ride the American rail. 

And, third, the Federal oversight process centered on the STB is 

not working, and, in fact, has harmed rail competition. The system 

is broken, and Congress needs to fix it by producing—by providing 

a clear signal to the STB, passing S. 919 and switching the rail industry back onto the antitrust main line. 

Let me make this clear. What we are talking about today is our 

survival and the industry’s ability to provide and create jobs. 

The chemical industry’s customers require a constant flow of 

high quality products produced and delivered on time at competitive prices. Railroad reliability and service are critical to our economic success; however, that is not what the Nation’s railroads are 

providing, especially to captive shippers. And we see no light at the 

end of the tunnel. 

For a captive customer, the efficient movement of traffic—of its 

traffic, in some cases, is—in some cases, even the very survival of 

its business depends upon the rates and services provided by that 

single railroad. Yet by virtue of being captive, we have no way to 

negotiate, beg, or buy reliability. 

Railroads are experiencing capacity constraints, and tell us that 

demand exceeds their ability to provide reliable service in key 

chemical traffic corridors. Yet the U.S. rail industry is financially 

healthy. In the 1970s, the rail industry was on its last legs when 

Congress wisely passed the Staggers Rail Act. That legislation led 

to the success of the U.S. rail industry today. Staggers was intended to protect captive shippers and promote competition. Congress wanted to avoid the captive-shipper penalty that exists today, 

but the STB has not lived up to that responsibility. Its regulatory 

interpretations have skewed the Act’s intent to bring free market 

70 

forces to bear on shippers and railroads. And Staggers has left no 

forum, other than the STB, to address these issues. 

Most ACC member facilities have no alternatives to using rail— 

no alternative to using rail transportation. Sixty-three percent of 

those facilities have access to only one rail carrier, making them 

captive. 

How did this come about? Rail competition has changed dramatically since 1977, when there were 63 Class I railroads in America. 

Today, there are just seven, and 90 percent of the Nation’s rail 

traffic is handled by only five. In conjunction with other ICC/STB 

policies that curtail competition between railroads, mergers have 

generally harmed the captive shipper. As the inevitable result, entire states, regions, and industries are now captive to a single railroad. You can imagine the difficulty in negotiating a rail contract 

or a rail rate for a captive facility. 

This explains why captive rail rates have reached or exceeded 

twice the amount of competitive rates. Captive shippers also pay 

higher fuel surcharges based on those freight rates. For captive 

chemical shippers, the iron horse has, in fact, become the greedy 

cash cow. Regrettably, the freight rail marketplace doesn’t behave 

like a free market. A long line of STB policy determinations is 

harming the competitiveness of the U.S. chemical industry. Staggers did not mandate anticompetitive policies, and the agency has 

acknowledged that it has the authority to reverse its interpretations, but almost invariably declines to exercise its discretion in 

favor of pro-competition solutions. 

It’s time to tear down the barriers to competition, and ACC supports Senate 919, the Rail Competition Act of 2005, a bipartisan 

bill whose provisions would promote competition and lead to reliable service. I urge you to carefully consider S. 919. And ACC recognizes and thanks Senators Burns, Dorgan, and Rockefeller for 

their leadership. 

Congress should also consider putting the rail industry fully 

under the Nation’s antitrust laws. In our free-market economy, monopolies and the poor service and high prices they foster belong in 

a museum. Unfortunately, rail impedes our Nation’s global competitiveness. We are interested in the financial and operational 

health of Americans’ railroads, but captive customers are—might 

be forced to close U.S. plants or forego expansion. In the future, 

where will new chemical jobs be created? 

For Olin and our ACC colleagues, railroad monopolies are driving 

a golden spike through the heart of American competitiveness. 

That’s why Congress must intervene. 

Thank you for the—— 

Senator LOTT. Thank you—— 

Mr. MCINTOSH.—opportunity—— 

Senator LOTT.—Mr. McIntosh. 

[The prepared statement of Mr. McIntosh follows:] 

PREPARED STATEMENT OF JOHN L. MCINTOSH, PRESIDENT, CHLOR-ALKALI PRODUCTS, OLIN CORPORATION; ON BEHALF OF THE OLIN CORPORATION AND THE AMERICAN

CHEMISTRY COUNCIL (ACC) 

Chairman Lott, Senators, I’m pleased to be here today on behalf of the Olin Corporation and the American Chemistry Council (ACC). Olin, headquartered in Clayton, Missouri, is one of the world’s best basic materials companies and a leading 

71 

North American producer of copper alloys, ammunition and chlorine and caustic 

soda. In 2005, Olin posted sales of approximately $2.4 billion. The company has approximately 5,800 employees working in the United States. Olin consists of three 

businesses: 

Olin Brass—the world’s leading developer of high performance copper alloys 

and the U.S. market share leader in copper and copper alloy strip. 

Winchester—North America’s leading small caliber ammunition producer with 

powerful global brand name recognition. 

Chlor-Alkali Products—the largest producer of chlorine and caustic soda in the 

eastern United States and the fourth largest nationwide. 

I am here today on behalf of Olin’s Chlor-Alkali Products business, which is the 

leading producer of chlorine and caustic soda in the eastern U.S. and one of the 

largest in North America. Besides chlorine and caustic soda, Olin produces Reductone and Hydrolin sodium hydrosulfite and hydrochloric acid. 

As one of the Nation’s leading producers of chlorine, the company produces an essential chemical that has played a key role in dramatically reducing infant mortality 

rates and eliminating waterborne diseases around the world. Our chlorine is also 

used in the manufacture of swimming pool and spa sanitizers. The biggest end use 

for chlorine, however, is as an ingredient in polyvinyl chloride (PVC) plastics, including everything from vinyl siding and PVC blood bags to vinyl plumbing pipes. 

Another work-horse industrial chemical, our caustic soda is used in household and 

institutional cleaning products, the pulp and paper industry, and the fabric industry. An agent that aids the dyeing of denim and other fabrics, Olin’s Reductone

‘‘helps put the blue in blue jeans.’’ Our Hydrolin sodium hydrosulfite is principally 

used in treating kaolin clays, which provide filler material for white paper and other 

paper products. Our hydrochloric acid is used in the process of making aspartame 

which sweetens products from diet Coke to snack foods and other consumer products. 

Chlor-Alkali Products is headquartered in Cleveland, Tennessee and includes 

manufacturing sites in New York, Georgia, Tennessee and Alabama. Each of these 

plants offers a low cost base, highly skilled workers and convenient delivery. 

Olin and ACC appreciate the Committee’s invitation to participate in this hearing 

on economics, service, and capacity in the freight railroad industry. ACC represents 

the companies that make the products that make modern life possible, while working to protect the environment, public health, and the security of our Nation. The 

member companies of ACC depend on the U.S. rail industry for the safe, secure and 

efficient transportation of approximately 170 million tons of chemical products to 

customers each year, accounting for more than $5 billion in annual railroad industry 

revenues. 

For a substantial proportion of the shipments from chemical manufacturing facilities operated by ACC members, there is no alternative to using the rail mode. For 

63 percent of those facilities, the shipper has access to only one rail carrier. Those 

shipments are subject to what the Staggers Act refers to as ‘‘market dominance,’’ 

which is often described as being ‘‘captive’’ to a single railroad. (Additional monopoly 

conditions exist when even a non-captive shipper wishes to supply a customer location that is captive to a single railroad.) For a captive shipper, regardless of its size 

or location, the efficient movement of its traffic—in some cases even the very survival of its businesses—depends on the rates and service provided by that single 

railroad. 

The chemical industry’s customers require a constant flow of high-quality products—produced on time—delivered on time—where they want them—at competitive 

prices. Railroad reliability and service are critical to our economic success. However, 

that is not what the Nation’s railroads are providing, especially to captive shippers. 

Railroads are experiencing capacity constraints. They’re telling us that demand 

exceeds their ability to provide reliable service in key chemical traffic corridors. We 

believe them because chemical shippers have seen increases in transit time for our 

shipments. Slower train speeds and increased dwell times for cars in terminals have 

led companies to add cars to their fleets at considerable cost to hedge against shipment delays. 

It’s remarkable that this situation exists in the context of a financially healthy 

U.S. rail industry. In the 1970s, the rail industry was on its last legs. Regulation 

had hobbled its ability to respond to competitive forces and cover costs. Railroads 

lacked the capital to properly maintain their tracks. Eight large railroads went 

bankrupt during that decade. Many more faced extinction. Policymakers gave serious thought to nationalizing the rail freight system. 

72 

But cooler heads prevailed. Instead of nationalization, which would have involved 

a continuing cost of untold billions, Congress wisely chose deregulation. It passed 

the Staggers Rail Act of 1980. The legislation, in good measure, led to the success 

of the U.S. rail industry today. 

Yet the competitive landscape in the rail industry has changed dramatically since 

1980. As a result, shippers have paid a very high price for U.S. rail industry gains. 

That’s because competition—the hoped-for result sparked by Staggers—has largely 

fizzled out. Under the Interstate Commerce Commission and later its successor, the 

Surface Transportation Board (STB), the regulatory agency that has authority to address these issues has not done the job. 

One reason is that consolidation in the rail industry has reduced the number of 

Class I railroads (those meeting the STB definition of having operating income exceeding $277.7 million). To be competitive, railroads require competitors. In 1977, 

there were 63 Class I railroads in America. In 1980, there were about 40. Today, 

because of massive consolidation, there are just seven Class I railroads serving all 

of North America. And 90 percent of the Nation’s rail traffic is handled by only five 

major railroads. 

Although STB has not been presented with another transaction involving two or 

more Class I carriers since revising its merger guidelines in 2001, railroad mergers 

inevitably reduce shipper options, regardless of the conditions that are applied by 

the agency. Bottlenecks are extended when lines serving captive shippers are acquired by connecting carriers. Efficient service from independent ‘‘bridge’’ carriers 

disappears. Competition for service to new industrial sites is reduced or eliminated. 

In conjunction with other ICC–STB policies that curtail competition between railroads, mergers have generally harmed captive shippers. 

As the inevitable result, whole states, regions, and industries are now captive to 

a single railroad. 

You can imagine the difficulty we face when it comes time to negotiate a rail contract or a rail rate for a captive facility. Lacking the negotiation flexibility and bargaining power that competition provides, freight rates from the monopolistic railroads continue to rise unchecked. 

That explains why captive rail rates may reach or exceed twice the amount of a 

competitive rate. In 2003, Escalation Consultants, Inc., which provides consulting 

services to the energy and rail shipper industries, studied captive versus non-captive 

rail rates for several commodity groups. For chemical companies the average noncaptive rate for each railroad was about $16 to $20 per ton. In comparison, captive 

chemical rail shipments averaged $33 to $48 per ton—more than twice as much. 

Heightening ACC’s concern is that there is no forum other than STB in which to 

address issues involving railroads and captive shippers. In Staggers, Congress left 

those issues in the jurisdiction of the regulatory agency and did not de-regulate rail 

service in non-competitive situations. But STB has not lived up to that responsibility. 

Captive shippers are at a disadvantage in a variety of ways. For example, when 

basic freight rates are established, fuel surcharges are often calculated and applied 

as a percentage of those rates. As a result, captive shippers pay more in fuel surcharges because there was no competition when the basic freight rates were established. On May 11, STB held a public hearing on railroad fuel surcharges. ACC’s 

analyst found that those surcharges greatly exceed actual fuel costs due to flaws in 

the methodologies used in calculating the surcharges. Railroad fuel surcharge practices are unreasonable because of five crucial factors: 

• Fuel surcharges often are not based on actual fuel consumption: Surcharges 

should be related to the amount of fuel consumed to provide a specific service 

to a shipper. Instead, they are based on other, often unrelated factors. 

• Fuel surcharges are inappropriately linked to freight rates: Rates are based on 

a wide range of competitive factors, and their differences are not relevant to the 

amount of fuel consumed for a particular trip. 

• Higher fuel costs are often covered by other means: Railroad fuel costs are captured through several mechanisms, such as the Rail Cost Adjustment Factor. 

Adding a fuel surcharge often means fuels costs are recovered more than once 

by the railroad. Such double jeopardy is unfair. 

• Some shippers are overcharged because others are not subject to fuel surcharges: 

Due to certain contracts or other circumstances, some railroads can not impose 

a surcharge on some customers. But it is unfair and unreasonable to ‘‘make up 

the difference’’ by unduly raising the charge for customers that do pay surcharges. 

73 

• The reasonability of fuel surcharges can only be determined if there is complete 

data transparency: Railroads should report their actual fuels costs in a consistent, comprehensive and uniform manner so that the STB, shippers and Congress can accurately and readily determine the revenue obtained from surcharges. 

The flaws in rail fuel surcharge practices are significant. According to the analysis 

prepared at the request of ACC by the economic and management consulting firm 

of Snavely King Majoros O’Connor and Lee, Inc., the manner in which fuel surcharges have been calculated and applied by the railroads to all customer traffic has 

resulted in an ‘‘over recovery in the range of $1 billion for 2005. This is the amount 

by which Class I fuel surcharge revenues collected by U.S. railroads exceed the increased fuel costs incurred by the railroads.’’ 

While we believe the issue of railroad fuel surcharges requires prompt action, STB 

has set no date for a decision. 

The irony is that Staggers was intended to protect captive shippers and promote 

competition. Congress wisely wanted to avoid the captive shipper conditions that 

exist today. That Act directed ICC (now STB) to ‘‘maintain reasonable rates where 

there is an absence of effective competition.’’ Again, the STB has not lived up to its 

responsibility, and its regulatory interpretations have skewed the Act’s intent to 

bring free market forces to bear on shippers and railroads. 

Regrettably, the freight rail marketplace of today doesn’t behave like a marketplace at all. Instead, it’s dominated by five powerful monopolies. It’s time to tear 

down the barriers to competition. Accordingly, ACC supports legislation that would 

reform railroad regulation: S. 919, the Railroad Competition Act of 2005, is a bipartisan bill whose provisions would promote competition leading to better service at 

competitive prices. 

• S. 919 would eliminate ‘‘bottlenecks’’ that allow monopoly carriers to take advantage of their pricing power to prevent competition over a short, competitive 

portion of a route. 

• S. 919 would overturn STB’s anti-competitive ‘‘Midtec’’ decision. Staggers allows 

captive shippers with facilities located in terminal areas to seek STB’s approval 

for competitive access to another carrier that also serves that same terminal 

area. But ICC’s regulatory action in Midtec has effectively prevented shippers 

from even requesting, let alone obtaining, such relief. 

• S. 919 would eliminate so-called ‘‘paper barriers’’ to competition. These are contractual agreements that require a short-line railroad to deliver all or most of 

its traffic to the major carrier that originally owned the short-line facilities. 

Such agreements prevent shippers from obtaining competitive service from 

other Class I carriers that connect to the same short-line. 

I urge you to carefully consider these and the other provisions of S. 919. 

We also believe Congress should consider putting the rail industry fully under the 

Nation’s antitrust laws. The railroads assert that such legislation is unnecessary, 

given the ‘‘extensive economic regulation’’ of their industry by STB. But the same 

railroads claim that S. 919 would be ‘‘re-regulation.’’ They can’t have it both ways. 

In our free market economy, monopolies—and the poor service and high prices 

they foster—belong in the museums of past history. Major rail customers like Olin 

see no reason why the rail freight industry can’t thrive in a competitive American 

marketplace. The shelter from competition the freight rail industry now enjoys is 

unfair to rail customers and to consumers who ultimately pay the bills. It’s time for 

Congress to end unfair and uncompetitive market practices. It’s time to return to 

the original intent of the Staggers Act. 

A long line of STB policy determinations is harming the competitiveness of the 

U.S. chemical industry and other key sectors of the American economy. Unless reversed, those policies will ultimately impair the ability of the U.S rail industry to 

serve all of its customers. 

Congress wrote Staggers to clearly and carefully de-regulate those rail rate and 

service matters that take place in circumstances where shippers really do have competitive transportation alternatives. Because the marketplace works for such rail 

customers, Congress appropriately removed unnecessary regulatory involvement. 

ACC believes that Staggers has been successful in that regard. 

But Congress also wisely recognized that railroads have what the law calls ‘‘market dominance’’ over certain shippers. In fact, were it not for those situations, there 

would have been no need for a Federal regulatory agency with exclusive jurisdiction 

over rail industry rates and commercial practices, the construction and abandonment of rail lines, railroad mergers, etc. Staggers was clearly meant to de-regulate 

only those aspects of shipper-carrier commercial relationships that take place in 

74 

competitive markets. ICC was retained in 1980—and STB exists today—to deal with 

the non-competitive situations. 

The anti-competitive policies implemented by ICC and STB are not included in 

statutory language. Staggers did not mandate such policies, and the agency has acknowledged that it has the statutory authority to reverse its interpretations. But 

STB almost invariably declines to exercise its discretion in favor of pro-competitive 

solutions to railroad issues, unless so directed by Congress. 

We are at a critical point. Unless Congress acts to reverse STB’s policies, they 

will ultimately weaken the U.S rail industry, to the detriment of rail-dependent domestic industries and the Nation as a whole. 

As businesses dependent on the railroad industry, we are vitally interested in the 

financial health of America’s railroads. We simply cannot operate successfully in 

this country without a financially viable railroad industry and a secure railroad infrastructure. Indeed, I believe that the ability of American manufacturers and producers to compete in today’s global market is highly dependent on the rail freight 

industry. Today, unfortunately, the rail freight industry impedes—rather than enables—our Nation’s global competitiveness. American manufacturers and producers 

find it more and more difficult to remain competitive against manufacturers and 

producers outside the United States. 

After many years of discussion with representatives of the Class I railroads, ACC 

is convinced that the carriers will not budge from the status quo in which they have 

complete market dominance over their captive customers—unless Congress acts. We 

believe the current business model being followed by the railroads will inevitably 

lead to their financial brink, costing not only railroad shareholders, but also taxpayers and rail-dependent American enterprise. Even the railroads agree that the 

gap between their annual income needs and their annual income is expanding, not 

shrinking. This is despite the fact that they have been allowed to consolidate to 

achieve cost synergies. These synergies should have allowed them to operate more 

efficiently and in a fashion that permits them to recover their cost of capital. 

They’ve also had the opportunity to transfer less profitable track to short line railroads and they have been able to increase the burden on captive rail customers. The 

result is simply that those customers with no alternative pay the most. 

Pursuing a strategy of continually loading more costs on captive rail customers 

is not a business model that will result in healthy American railroads in the long 

run. Captive rail customers will try to escape and the universe of captive rail customers is likely to be reduced over time. Some captive customers will construct rail 

line ‘‘build-outs.’’ Some captive customers will shift their manufacturing activities to 

facilities that have transportation competition. Some captives will shift their manufacturing to foreign countries, exporting American jobs overseas. Some companies 

might be forced to close a U.S. plant or to forego an expansion without even having 

an offshore alternative. Under this business model, the rail industry will be required 

to load up even more costs on the remaining captives, thus accelerating the cycle. 

When considering railroad service, it is important to recognize the ‘‘common carrier obligation,’’ under which railroads are required to transport commodities for 

their customers. The Interstate Commerce Clause of the Constitution grants power 

to the Congress to write the laws that govern our Nation’s commerce. Congress recognized the common carrier obligation as the framework on which the entire national railroad transportation system was founded [49 U.S. Code, Subsection 

11101(a)]. And it remains crucial today. Railroads are chartered to operate in the 

public interest because the public depends on safe and reliable service in the delivery of a wide range of products on which we all depend. The common carrier obligation underlines the role of railroads as a service industry that supports so many 

critical sectors of the U.S. economy. 

Let me be very clear: we do not seek a return to the ‘‘bad old days’’ of the 1970s, 

when several of the major railroads were in bankruptcy and the industry lacked the 

capital necessary to maintain their systems. Unfortunately, more than a quarter of 

a century after passage of the Staggers Act, the rail industry apparently continues 

to fall short of the revenue needed to provide a first class rail system for the Nation. 

In fact, the railroads are proposing a 25 percent investment tax credit and first 

year expensing for infrastructure investments. While some level of investment tax 

credit for infrastructure may be appropriate, it must be part of a comprehensive solution to rail reliability problems. 

There must be a better way for the railroad industry to achieve long-term financial viability while providing efficient, reliable service at prices that will allow 

American business to compete successfully in the global market. We believe that 

balanced, fair legislation is needed to bring about a positive relationship between 

the railroads and the captive customers. 

75 

ACC would not ask Congress to resolve issues that could be resolved by railroads 

and their customers working together to benefit their own industries. But railroad 

monopoly, supported by STB decisions, is the basic impediment. This dilemma can 

only be resolved with the intervention of Congress. 

Thank you for allowing the American Chemistry Council to present its views, and 

I would be glad to respond to any questions. 

Senator LOTT. Mr. Ficker? 

STATEMENT OF JOHN B. FICKER, PRESIDENT, 

THE NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE 

Mr. FICKER. Thank you, Mr. Chairman. It’s a pleasure to be here 

this morning and to talk about this important issue that’s not only 

essential to our membership, but also essential to the economy as 

a whole. 

The National Industrial Transportation League is America’s oldest and largest association of companies engaged in freight transportation. Our 600-plus members are some of the largest companies 

in the United States, as well as some of the smallest enterprises, 

and represent over $50 billion in transportation spending annually. 

The League has actively participated with GAO during their 

analysis, and we’ve met with their staff and provided information 

to them in the study. And, actually, several of the members of the 

League actually participated in the panel of experts that the GAO 

convened earlier this year. We looked at the GAO testimony this 

morning, before the hearing, and found it to be right on mark, and 

we commend their efforts to date. 

First, the GAO noted that, while the STB has broad legislative 

authority to investigate industry practices, there has been little assessment of competition nationally, including areas of inadequate 

competition. The League agrees that the study of competition and 

areas of inadequate competition would be very useful to you, as 

policymakers, and we urge the Committee to consider such a study. 

Second, the GAO, as clearly indicated, said that the relief process—the current rate relief process is expensive, time-consuming, 

complex, and largely inaccessible to most of our members. I have 

often said that if I was still working in the shipping industry, 

which I spent 20 years doing, if I had ever decided to bring a rate 

case before the STB, and I brought that to the management of my 

company, I ought to be fired. It doesn’t work. It’s not accessible. 

And it’s not effective. The League strongly agrees with this. 

The League presented to the STB, along with 26 other industry 

associations, numerous suggestions for improving the agency’s 

small-shipment rate complaint process. To date, however, they 

have not acted on that, although Chairman Buttrey, this morning, 

indicated there should be something forthcoming later this year. 

And, to that, we are excited. 

In addition, the League concurs that the GAO—with the GAO assessment that there should be alternative approaches considered to 

mediating disputes, and including and especially emphasize the importance of an expedited, mandatory arbitration process for rate relief and rail—and service disputes. The League believes such a 

process would offer great potential for resolving disputes between 

rail users and carriers, both to expediting the dispute process and 

encouraging settlements. I might point out also that the National 

76 

Feed and Grain—Grain and Feed Association has such a process, 

and it has worked quite effectively for the last 7 or 8 years. 

As we all know, the rail industry is laboring under significant capacity constraints for the first time in over 50 years. It’s caused 

congestions across the system. And if you look at the AAR figures, 

the average train speed has decreased by—from 23 miles an hour 

in 1993 to 20 miles an hour in 2003. And meaningful service provisions in a contract are virtually impossible to obtain today. 

Some service-sensitive rail users, such as UPS, who so stated in 

a recent GAO panel discussion, has shifted their traffic back to 

truck, in order to meet the needs of their customers, further exacerbating the congestion we already face on our highways. And this 

capacity constraint has also substantially increased the pricing leverage of the carriers, which is evident in substantial rate increases across all commodities in the demarketing of less-than-profitable traffic. Most rail users have faced, or are facing, double-digit 

rate increases along with reduced and deteriorating service. Rate 

negotiations, as others have mentioned, have become a ‘‘take it or 

leave it’’ proposition. 

Just on Monday of this week, the Council of Supply Chain Management Professionals released its 17th annual State of Logistics 

Report. That report stated that, between 2004 and 2005, transportation costs jumped by 14.1 percent, a staggering figure and a 

record, according to the Council. Rail users understand the dynamics of a supply and-demand market environment. They live in it 

every day. The concern is that they are paying more and getting 

less. 

The inability of the rail industry to meet the demands caused by 

this is even greater concern for the future. Any projection put out 

by any organization, whether it’s a Government agency, such as 

DOT, or the association—American Association of State Highway 

and Transportation Professionals, known as AASHTO, indicates 

that growth between now and 2025 could be as much as 60 to 70 

percent of freight volumes in that period of time. And according to 

the AASHTO Bottom Line Rail Report, which is often quoted by my 

associate and friend over here, Mr. Hamberger, rail tonnage is expected to grow by 44 percent, which is, unfortunately, significantly 

less than what the growth of the economy and freight movement 

will be. That needs to be addressed. 

In order to meet current and future demand, the rail industry 

must expand its existing capacity. The critical need for infrastructure is clear, yet it is not the only way to improve capacity. The 

application of technology, such as positive train control, is estimated to add as much as 10 to 15 percent to the current structure. 

Processes for working with shippers and carriers together will also 

improve that. 

With the financial health of the rail industry no longer an immediate issue, and with enhanced leverage, the railroads have—in a 

capacity-constrained market—it is a time for deteriorating service—emphasis must shift toward creating value for the shipping 

public. The creation of value will occur only if railroads and rail 

users, spurred by incentives in the marketplace, work together to 

identify sources of productivity gains, cost reductions, in order to 

77 

provide a consistent level of service and fully utilize existing capacity. 

The League believes that the solutions to these problems must 

come from the private sector and that the League has, over the 

past years, initiated several efforts. The chairman indicated, earlier, his concern over fuel surcharges. Over the past 9 months, the 

National Grain and Feed Association, along with the National Industrial Transportation League, has met privately with each of the 

Class I carriers in North America to present a fuel surcharge 

study, which I would be happy to make available for the record. 

And in that effort, we have reached—we are pleased to say that the 

BNSF and the Canadian National and Canadian Pacific have responded positively, while the eastern carriers have refused. 

Additionally, the League, in 2005, chose to remain neutral on 

Senate bill 919, and, instead, has entered into discussions with the 

AAR to identify ways that rail users and carriers can work together 

to find value through the productivity gains and cost reductions 

that could address the concerns. The League and the AAR have 

formed a number of tasks for us to examine and address issues 

concerned with local rail service, capacity, infrastructure, and office 

administration. 

Senator LOTT. Mr. Ficker, I apologize, but we are getting under 

a real time constraint here. We want to—— 

Mr. FICKER. I—let me—— 

Senator LOTT.—hear from Mr. Hamberger. 

Mr. FICKER. If I can make one—— 

Senator LOTT. He deserves a chance to respond to the four-to-one 

odds here. 

Mr. FICKER. If I can make one more comment. 

Mr. HAMBERGER. Does that mean I get 20 minutes, Mr. Chairman? 

Senator LOTT. Yes. 

[Laughter.] 

Mr. FICKER. If I can make one final comment, Mr. Chairman, I 

appreciate it. 

We want to work—continue to work with the AAR and the railroads to resolve these problems. We’ve often heard from you and 

Congress, ‘‘Bring us a solution. Work together. Come—bring the 

parties together.’’ We intend to do that. And we’d urge the Committee to look at the work that we’re doing with the AAR and help 

us and guide us in that direction so that those efforts can provide 

the kind of value and direction that this country needs. 

Thank you. 

[The prepared statement of Mr. Ficker follows:] 

PREPARED STATEMENT OF JOHN B. FICKER, PRESIDENT, 

THE NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE

The National Industrial Transportation League is pleased to have been invited to 

present testimony on economic, service, and capacity issues in the freight railroad 

industry. The League is the Nation’s oldest and largest association of companies interested in transportation. Its 600-plus members range from some of the largest 

companies in the Nation to much smaller enterprises. Many members of the League 

ship via rail, and are vitally interested in the capacity, service, and competitiveness 

of the Nation’s rail industry. But League members also substantially ship via other 

modes, both domestically and internationally, and the problems of capacity must 

78 

1 AAR, ‘‘Railroad Ten-Year Trends 1993–2002,’’ p. 132; and ‘‘Railroad Ten Year Trends, 1994– 

2003,’’ p. 132. 

also be looked at in this broader context, as many modes are facing capacity constraints. 

The League actively participated in the General Accountability Office (GAO) study 

which is in part the subject of this hearing. League staff and the incoming League 

Chairman met for several hours with GAO staff to discuss rail issues, and provided 

information developed by the League to assist GAO in its study. Much of the 

League’s discussion with GAO centered on the problem of the rail industry’s capacity constraints. Also, the League referred GAO staff to League members for additional information. Finally, in March 2006, the League and several of its members 

appeared before a panel organized by the GAO to consider the current state of the 

rail industry and to advise GAO on its study. 

As requested by the Committee, the League has reviewed the draft testimony of 

the GAO, which describes that Office’s ongoing work on the performance of the rail 

industry since the Staggers Act. The League compliments the GAO on its work to 

date, and concurs with a number of the tentative conclusions set forth in GAO’s testimony. The GAO testimony discusses two areas that are particularly integral to 

further improvement for rail industry policymakers, both of which deserve comment. 

First, GAO notes that, while the STB has broad legislative authority to investigate industry practices, there has been little assessment of competition nationally, 

including areas of inadequate competition. GAO notes that such an assessment of 

competition would allow decisionmakers to identify areas where competition is lacking and to assess the need for and merits of approaches to address it. The League 

agrees that a study of competition and areas of inadequate competition would be 

useful to policymakers, and urges the Committee to consider such a study. In that 

connection, the League notes that, in its experience, rail competition, in order to be 

effective, must be present at both the origin and the destination of a rail movement. 

For example, if an agricultural shipper at origin is served by a single rail carrier, 

the fact that the export grain elevator at destination might be served by more than 

one railroad does not create rail-to-rail competition under current law, since the 

shipper at origin cannot require its sole-served origin carrier to interchange with a 

competing rail carrier for the movement to destination. 

Second, GAO indicates that the current rate relief process is expensive, time-consuming, complex, and largely inaccessible to most shippers. The League strongly 

agrees. The League has presented to the STB, along with 26 other industry organizations, numerous suggestions for improving the agency’s small shipment rate complaint process. To date, however, the STB has not acted on these suggestions. In 

addition, the League concurs with GAO that alternative approaches should be investigated, including (and especially) the use of expedited, mandatory arbitration for 

rail rate and service disputes. The League believes that such an arbitration process 

has great potential for effectively resolving disputes between shippers and carriers, 

both through expediting the dispute process and in encouraging settlements. 

The rail industry is laboring under significant capacity constraints for the first 

time in over 50 years. Since 1980, demand for rail transportation has steadily increased while rail capacity has declined. We have reached a point where demand 

has exceeded the industry’s capacity to haul all of this traffic. This has caused congestion over significant parts of the national rail system, resulting in a substantial 

deterioration in service levels. The AAR’s own figures show that average train speed 

declined between 1993 and 2003, from about 23 miles per hour to a little over 20 

miles per hour. 1 Monthly service statistics published by the AAR show that average 

train speed for the total U.S. shows a decline from 23 miles per hour in 2000 to 

less than 22 miles per hour in the twelve-month period ending in September 2005. 

Meaningful service provisions in contracts are virtually impossible to obtain. Some 

service-sensitive shippers such as UPS, who so stated in the recent GAO panel discussion, have shifted their traffic to truck, further exacerbating the congestion and 

wear on the Nation’s highways. 

These capacity constrains have also substantially enhanced the pricing leverage 

of the rail industry, which is evident in substantial rate increases across all commodities and the de-marketing of less profitable traffic. As stated by GAO in its testimony, four large Class I carriers control almost 90 percent of the industry’s revenue. Many shippers are facing double digit rate increases along with reduced or 

deteriorating service. Rate negotiations have become a ‘‘take it, or leave it’’ proposition for many shippers. We believe that the effects of these capacity constraints 

in the rail industry on prices is felt across modes. Just 2 days ago, the Council of 

Supply Chain Management Professionals released the 17th annual ‘‘State of Logistics Report.’’ That report stated that, between 2004 and 2005, transportation costs 

79 

2 ‘‘17th Annual State of Logistics Report,’’ sponsored by the Council of Supply Chain Management Professionals, June 19, 2006, p. 4. 3 AASHTO Report, p. 50. 

4See, http://www.polb.com and http://www.portoflosangeles.org 5 James Valentine and Michael Manelli, Morgan Stanley Equity Research, ‘‘All Aboard! Reiterating Bulling Vies Toward Freight Railroads,’’ Sept. 20, 2005, p. 1 (Valentine Report). 

jumped 14.1 percent—a staggering figure, and a ‘‘record high,’’ according to the 

Council. 2

The inability of the rail industry to meet current demand causes even greater concern for the future. Any projection of future economic growth indicates that the need 

for transportation will grow dramatically in the next 15 years. For example: 

• The American Association of State Highway and Transportation Officials 

[AASHTO Report] projects that, with moderate economic growth, U.S. domestic 

and international freight tonnage will grow by 67 percent between 2000 and 

2020. 3

• According to the AASHTO Report, rail tonnage is expected to grow by 44 percent, which is significantly less than the overall growth in freight tonnage. 

• The Port of Los Angeles/Long Beach estimates that containerized imports 

through that port will grow by 44 percent from 2005 to 2010, by another 34 percent in 2015; and by another 34 percent in 2020—in total more than doubling 

the traffic through this key facility in just 15 hours. 4

In order to meet current and future demand, the rail industry must expand existing capacity. This will require both the industry and the policymakers to shift radically from a mind-set of cost control and downsizing, to one of growth and expansion. 

Rail users are vitally dependent upon a financially healthy rail system, as there 

is no way for many of them to efficiently transport their goods to market except via 

rail. Fortunately, the railroad industry is thriving financially for the first time since 

the Staggers Act, and well before. 

The financial markets have been ‘‘bullish’’ on the rail industry for several years. 

In a recent Morgan Stanley report, 5 respected analyst James Valentine expressed: 

even greater conviction that the industry will consistently earn its cost of capital over the next few years (a feat not achieved in decades), led by secular upward pricing initiatives that should continue into 2006 and beyond. 

This is strong evidence that the financial strength exhibited by railroads is not 

a temporary phenomenon, but a paradigm shift in rail transportation markets 

brought about in large part by capacity constraints. 

Such statements also suggest that the STB’s measure of revenue adequacy significantly overstates the financial returns needed for ‘‘real-world’’ revenue adequacy. 

For example, despite the financial success of the rail industry over the past several 

years and reflected in the previously quoted Wall Street assessment of the industry, 

the STB determined that only one Class I railroad (Norfolk Southern) was revenue 

adequate in 2004, and that is expected to be the case for 2005 as well. The balance 

intended in the Staggers Act between allowing competition to establish reasonable 

rates ‘‘to the maximum extent possible’’ and the policy of fostering a financially 

healthy rail industry, has been upset by the agency’s over-reliance on a questionable 

methodology of calculating revenue adequacy. 

Competition is at the heart of our Nation’s economic system. It creates a sense 

of urgency that enables companies to thrive. It spurs efficiency. It allocates resources in the most efficient manner. Competition, therefore, is essential to encourage the most efficient use of today’s capacity constrained rail infrastructure and to 

spur investment in additional infrastructure. Competition encourages the most efficient use of limited capacity by ensuring that goods are moved over the most efficient route available. Competition also ensures that the capital for capacity expansion flows to the most economically beneficial projects for the rail transportation 

system. Indeed, increasing capacity would likely lead to increased competition, as 

rail carriers sought to attract valuable traffic to their system. 

With the financial health of the rail industry no longer an immediate issue, and 

with the enhanced leverage of railroads in a capacity-constrained market at a time 

of deteriorating service levels, it is time for a more balanced approach. Direct government regulation seldom has been as effective as the marketplace at increasing 

efficiency. Emphasis must shift toward the creation of value to the shipping public. 

The creation of value will occur if railroads and shippers, spurred by the incentives 

of the market place, work together to identify sources of productivity gains and cost 

reductions in order to provide a consistent level of service that fully utilizes existing 

80 

capacity to the maximum extent possible and encourages the addition of more capacity. 

The League believes that solutions to these problems must come from the private 

sector, and the League has over the past year has initiated several efforts at private-sector solutions to various problems. 

One set of discussions concerned rail fuel surcharges. This issue has become extremely important to our members, who believe that many of the carriers’ fuel surcharge programs have significantly over-recovered the increased cost of fuel as applied to individual movements. Over the past 9 months, the League met, along with 

the National Grain and Feed Association (NGFA), with representatives of each of 

the major Class I carriers, to present the results of a Fuel Surcharge Study which 

the League, NGFA and other groups sponsored, and to discuss areas where individual carriers might consider improving their fuel surcharge programs. Some carriers, specifically the BNSF, the Canadian National, and the Canadian Pacific, responded positively to these discussions with changes in their individual fuel surcharge programs. Other carriers, especially the Eastern carriers, declined to respond. 

Additionally, in 2005, the League chose to remain neutral on S. 919, and instead 

entered into discussions with the AAR to identify ways that shippers and carriers 

can work together to find value through productivity gains and cost reductions that 

could address the issues and concerns between them. The League and the AAR have 

formed a number of task forces to examine and address issues connected with local 

rail service, capacity and infrastructure, and office administration. For about a year 

now, these task forces have met several times to identify issues and plan improvements. The League continues to pursue these discussions diligently, and remains 

hopeful that they will yield positive results. However, the League remains mindful 

that the status quo—a trifecta of deteriorating service, double-digit rate increases, 

and serious questions as to whether there are sufficient means and incentives to 

meet future demand—is unacceptable. 

These are matters of significant importance to rail users and it is essential that 

solutions are found and that resolutions are reached between rail users and carriers. 

We believe that League membership will need to see some concrete results flowing 

from the League’s discussions with the AAR within a reasonable timeframe. If that 

does not occur, it is likely that the League’s membership would insist that the 

League review its current position. We urge the Committee to insure that rail carriers and users are moving forward in a serious, focused and positive effort in the 

development of effective mutual solutions. We would urge the Committee to provide 

oversight to this process. We would be very pleased to report back to the Committee 

on the progress of the League’s discussions with the AAR and its carriers. 

Senator LOTT. Thank you very much. 

Mr. Hamberger? 

STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT/CEO, 

ASSOCIATION OF AMERICAN RAILROADS 

Mr. HAMBERGER. Thank you, Mr. Chairman. I will try to be brief. 

On behalf of the members of the AAR, thank you for the opportunity to discuss freight railroad capacity and others issues here 

this morning. 

Over the years, comprehensive, reliable, and cost-effective freight 

rail service has been critical to our Nation’s economic prosperity. 

Looking ahead, the United States cannot prosper in an increasingly 

competitive global marketplace if our freight railroads are unable 

to meet our growing transportation needs. Railroads must be able 

to both maintain their extensive existing infrastructure and equipment and build the substantial new capacity that will be required 

to transport a substantial portion of the predicted 70-percent increase in freight traffic. 

Unlike many utilities, which have peak demand capacity built 

into their asset base for ratemaking purposes, railroads cannot afford to have spare capacity on hand ‘‘just in case.’’ Before they invest in new capacity, they must be confident that traffic and revVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00084 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
81 

enue will remain high enough to support the capacity in the long 

term. 

Profits, therefore, are critical to meeting capacity demand, as the 

Congressional Budget Office has observed. According to the CBO, 

quote, ‘‘As demand increases, the railroad’s ability to generate profits from which to finance new investments will be critical. Profits 

are key to increasing capacity, because they provide both the incentive and the means to make new investments,’’ end quote. 

Today, I’m pleased to say that after—25 years after the Staggers 

Act, freight railroads are finally beginning to show tangible signs 

of financial stability might be within reach. Rail earnings over the 

past year, while still below the average and median for all companies within the United States, are significantly higher than they 

have been in the past. This welcome development means that railroads can justify and afford the massive investments and capacity 

enhancements that will be required to meet future demand. In fact, 

this year the industry is investing $8.3 billion in infrastructure and 

investment, up from $5.7 billion just 4 years ago. 

Looking ahead, I respectfully suggest that Members of this Committee and your colleagues in Congress do have a critical role to 

play: 

First, heed the findings of the CBO and allow railroads to make 

the profit necessary to sustain investment in necessary capacity. 

And as CBO—GAO testified here this morning, all rate changes 

over the last 15 years were below the rate of inflation, and, thus, 

all rates have declined, in real terms. Reject any policy that unreasonably restricts future rail earnings and capital cost recovery. 

Second, an infrastructure tax incentive would help bridge the gap 

between what the railroads can afford to invest in infrastructure 

from a business standpoint and what might bring more benefit to 

our society. As AASHTO has declared, shipping more freight by 

rail yields public benefits of clean air, congestion mitigation, and 

energy conservation, which the public should, therefore, be willing 

to pay for. This is not a subsidy. 

In light of the role that we have played in the development of 

the economy, Mr. Chairman, I was very disappointed in some of 

the testimony I heard here earlier this morning on this panel. 

For example, in the chemical industry you will see that, over the 

past 10 years, railroad rates have stayed the same. They haven’t 

gone up in 10 years. What has gone up overall for chemical companies? A 30-percent increase in the producer price index. Everything 

has gone up 30 percent, led by natural gas and chemical feedstocks. And yet, the gentleman to my right has the temerity and 

the gall to say that his companies are moving overseas because of 

rail rates. That’s not what his president says. Jack Gerard, President of ACC, says Dow Chemical had a facility that they were 

going to build in Texas. That facility is now being moved to Oman, 

in the Middle East. ‘‘Why?’’ Jack asks. Because of natural gas 

prices, almost solely because of natural gas prices. Jack went on to 

say, ‘‘The high price of natural gas is driving the global chemical 

industry’’—it’s a global chemical industry—‘‘out of the U.S.’’ The 

high price is driving it out of the U.S. I’ll accept his apology later. 

Moving on to coal. Let’s take a look at electricity rates, up 38 

percent. GAO says our rates were down 35 percent. We have them 

82 

down to 32 percent since 1981. I’ll take 32 or 38 percent. Our rates 

are down. Electricity rates are up. We are a retardant on increased 

electricity rates, not a driver of those rates. And notwithstanding 

what Mr. English says, according to the Coalcast Stockpile data 

from energy ventures analysts, dated May 2006, the rail powers 

stock increase, ‘‘the inventory crisis,’’ in parenthesis, in quotation 

marks, is over. And the report goes on to say that this is not because of a shutdown in the burning. Coal burn recovered in May 

was 3.7 percent over normal, and stock share—not stock prices— 

coal stockpiles are still up. 

Finally, with respect to agriculture, the input for agriculture 

prices paid by farmers, 4 percent decline in railroad rates—4 percent decline. The GAO says it was a 9 percent—nominal 9 percent 

increase since 1985. We have a 4 percent decline since—again, in 

nominal rates—since 1994, while every other price paid by them to 

produce their farm outputs has gone up. And I find it very interesting that, just last week, dated June 6, 2006, the National Association of Wheat Growers recommended—represented by my friend 

down at the other end of the table—put out a white paper addressing the crisis in wheat. And you’ve talked about—it talks about six 

or seven different issues, government programs, wheat diseases, 

the need for new biotechnology. Doesn’t mention railroads, doesn’t 

mention transportation costs. Talks about the fact that bread can 

last longer on the shelf in supermarkets, and, therefore, demand is 

down. At the end, they announce that a wheat summit has been 

called for the fall for members of all parts of the wheat chain to 

come together to develop ideas and policies to address this concern. 

And I offer our participation in that wheat summit. We are part 

of your chain, Mr. McIntosh. We want to be part of your economy. 

It does us no good when chemical plants go to Oman. We don’t run 

railroads in Oman. Jack goes on to say that, of the 120 new chemical plants being planned around the world, 50 are being built in 

China. We don’t run trains in China either, Mr. Chairman. 

And I commend Mr. Ficker and the leadership that he has exerted at NIT League, to recognize that working together we can address issues of service. Working together. We have tried to do that 

with representatives of EEI. We have done it with the short lines. 

We have done it with the National Grain and Feed Association. We 

are pleased and honored to do it with NIT League. And we suggest 

that is the way to address any service issues, working together. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Hamberger follows:] 

PREPARED STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT/CEO, 

ASSOCIATION OF AMERICAN RAILROADS

Introduction 

On behalf of the members of the Association of American Railroads (AAR), thank 

you for the opportunity to discuss freight railroad economics, service, and capacity. 

AAR members account for the vast majority of freight railroad mileage, employees, 

and traffic in Canada, Mexico, and the United States. 

Comprehensive, reliable, and cost-effective freight railroad service is critical to our 

Nation. Today, freight railroads serve nearly every industrial, wholesale, retail, agricultural, and mineral-based sector of our economy. And in the words of the former 

World Bank Railways Adviser, ‘‘Because of a market-based approach involving minimal government intervention, today’s U.S. freight railroads add up to a network 

83 

1Some utilities, in fact, receive regulatory permission to begin recouping the costs of new generation assets years before those assets actually come on line. 2 Congressional Budget Office, Freight Rail Transportation: Long-Term Issues (January 2006), 

p. 11. 3Doug Tilden, CEO, Marine Terminals, quoted in The Financial Times, March 14, 2006. 4 Randy Schaeffer, Manager of Rail Fleet Procurement, Air Products and Chemicals, quoted 

in Traffic World, May 16, 2005. 5Michael L. Eskew, Chairman and CEO, UPS, in a speech to the World Affairs Council of 

Philadelphia, April 6, 2006. 

that, comparing the total cost to shippers and taxpayers, gives the world’s most costeffective rail freight service.’’ 

Looking ahead, the United States cannot prosper in an increasingly competitive 

global marketplace if our freight railroads are unable to meet our growing transportation needs, and having adequate railroad capacity is critical to meeting those 

needs. Railroads must be able to both maintain their extensive existing infrastructure and equipment and build the substantial new capacity that will be required to 

transport the significant additional traffic our economy will generate. 

Although I’m sure that most rail customers agree with this sentiment, not all of 

them seem to recognize that if they want added rail capacity, they must be willing 

to pay for it. Unlike utilities, which have peak-demand capacity built into their 

asset base for ratemaking purposes, 1 railroads cannot afford to have spare capacity 

on hand ‘‘just in case.’’ Consequently, before they invest in new capacity, railroads 

must be confident that traffic and revenue will remain high enough to support the 

capacity in the long term, and that the investment will produce benefits greater 

than the scores of alternative uses of the funds. 

Profits, therefore, are crucial, as the Congressional Budget Office (CBO) recently 

noted. According to the CBO, ‘‘As demand increases, the railroads’ ability to generate profits from which to finance new investments will be critical. Profits are key 

to increasing capacity because they provide both the incentives and the means to 

make new investments.’’ 2

Today, some 25 years after the Staggers Act was passed, freight railroads are finally beginning to show tangible signs that financial sustainability might be within 

reach. Rail earnings over the past year, while still below average within the universe of all industries, have been significantly higher than their historical norm. 

This welcome development means that railroads can more easily justify and afford 

the massive investments and capacity enhancements that will be required if railroads are to continue to play their proper role in meeting our freight transportation 

needs. 

I respectfully suggest that Members of this Committee, your colleagues in Congress, and other policymakers also have critical roles to play. Indeed, a primary obligation of policymakers is to take steps that assist—and, just as importantly, not 

take steps that hinder—railroads in making the investments needed to provide the 

current and future freight transportation capacity our Nation requires. 

Any policy that unreasonably restricts future rail earnings and capital cost recovery—and especially a swing in the regulatory or legislative environment back to 

heavy-handed government interference in rail operations—would take railroads 

away from the sustainability they need. Such an outcome would be harmful at any 

time, but it would be especially harmful today, given that as a nation we are in dire 

need of more railroad investments and more railroad capacity, not less. 

Capacity is a Challenge Everywhere in Transportation Today 

‘‘Every aspect of the supply chain is stretched. It’s not a question of whether [a 

congestion crisis] is going to happen. It’s a question of when,’’ notes a West Coast 

port terminal operator.’’ 3 ‘‘In 23 years, I have never seen a situation where the supply chain is at capacity. It’s busting at the seams,’’ an executive with a major chemicals firm notes. 4 ‘‘Our highways, waterways, railroads and aviation networks are 

simply not keeping up with ordinary demands,’’ says the head of UPS. 5

To be sure, freight is still being delivered, and there is a tremendous amount of 

strength and flexibility in our Nation’s transportation systems. But as these statements make clear, all freight modes in the United States are facing capacity challenges today. 

For U.S. freight railroads, year-over-year quarterly carload traffic has risen in 

nine of the past ten full quarters, and intermodal traffic has increased in each of 

the past 16 full quarters, year-over-year. As a result, U.S. railroads today are hauling more freight than ever before. These traffic increases have resulted in capacity 

constraints and service issues at certain junctions and corridors within the rail network. In fact, excess capacity has disappeared from many critical segments of the 

national rail system. 

84 

The reality that rail assets are being used more intensively is reflected in rail 

traffic density figures. From 1990 to 2005, traffic density for Class I railroads—defined as ton-miles per route-mile owned—more than doubled. (Other measures of 

traffic density, such as car-miles per mile of track, have also shown substantial increases.) Of course, different rail corridors differ in their traffic density and their 

change in density over time, and individual railroads differ in the degree to which 

their capacity is constrained overall. Still, there is no question that there is significantly less room to spare on the U.S. rail network today than there was even a couple of years ago. 

Railroads work closely with their customers on a regular basis to determine expected traffic levels well in advance in order to help ensure that the railroads have 

appropriate assets in place. Sometimes, though—as occurred in 2005—actual demand for rail service exceeds expectations. 

When this has happened, some shippers and others have inappropriately blamed 

railroads for not having enough infrastructure, workers, or equipment in place to 

handle the surge in traffic. But to contend that railroads can afford to have significant amounts of spare capacity on hand ‘‘just in case’’—or that shippers would be 

willing to pay for it, or capital providers willing to finance it—is completely unrealistic. Like other companies, railroads try to build and staff for the business at hand 

or expected to soon be at hand. ‘‘Build it and they will come’’ has rarely been a winning strategy for freight railroads. 

Over the past couple of decades, Class I railroads have shed tens of thousands 

of miles of marginal trackage. They had no choice, because they could not afford to 

keep it, and it freed resources for use on higher priority core routes. Most of the 


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6This may seem like a long period of time, but it compares favorably with the decade (or 

more) it can take to build a typical stretch of highway. 7 U.S. Department of Transportation, Freight Analysis Framework, October 2002. 8 U.S. Freight Transportation Forecast to 2016, produced for the American Trucking Associations. 

miles that were shed were transferred to short-line operators, and most of these remain part of our rail network. Even if railroads could have afforded to retain this 

mileage—and again, they could not—most of it was in locations that would not be 

useful in ameliorating today’s capacity constraints. 

In part, this is because long-lived rail infrastructure installed many decades ago 

was often designed for types and quantities of traffic, and origin and destination locations, that are dramatically different than those that exist today. For example, 

only within the last two decades has Powder River Basin coal taken on the enormous importance it currently enjoys. Similarly, the explosive growth of intermodal 

traffic is mainly a phenomenon of the past 20 years. 

When business is unexpectedly strong, railroads are unable to expand capacity as 

quickly as they might like. Locomotives, for example, can take a year or more to 

be delivered following their order; new entry-level employees take 6 months or more 

to become hired, trained, and qualified; and it can take a year or more to plan and 

build, say, a new siding. 6 And, of course, before investments in these types of capacity enhancements are made, railroads must be confident that traffic and revenue 

levels will remain sufficiently high to justify the enhancements for the long term. 

Again, in this regard railroads are no different than the vast majority of their customers. 

Freight Transportation Demand Will Increase Sharply in the Years Ahead 

No matter the mode, capacity constraints exert a substantial economic toll. As 

Secretary of Transportation Norman Mineta has noted, ‘‘Congestion and inefficiency 

in transportation are, in effect, hidden taxes that burden every business and every 

individual, and we must find ways to lighten that load.’’ That ‘‘load’’ could become 

much worse over the next 15 years if demand for freight transportation grows as 

quickly as expected. 

The U.S. Department of Transportation (DOT) has projected that overall demand 

for freight rail service (measured in tons) will increase 55 percent (1.3 billion tons) 

by 2020 from 1998 levels, equal to 2.0 percent per year. The DOT projects a 69 percent increase (10.6 billion tons) in total freight transportation demand. 7

In a 2005 forecast, economic consultants Global Insight predicted that rail carload 

and intermodal tonnage will increase by 29 percent (650 million tons) from 2004 to 

2016, or 2.1 percent per year. Global Insight expects total freight transportation demand to rise 31 percent by 2016. 8

If Class I ton-mile growth from 2005 through 2020 does nothing more than match 

the rate of growth from 1990 through 2005, rail ton-miles in 2020 will total 2.35 

trillion, up 38 percent (or 2.2 percent per year, on average) from the 1.70 trillion 

in 2005. 


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86 

9 As discussed beginning on page 26, [89 of this document] railroads favor more pronounced 

use of public-private partnerships for rail infrastructure improvement projects where the fundamental purpose of the project is to provide public benefits or meet public needs, and support 

tax incentives for rail investments that enhance capacity. 10For non-Class I railroads, improving infrastructure to handle 286,000 pound cars is a major 

issue. The AAR urges Congress to extend the three-year short line infrastructure tax credit, 

which expires in 2007. 

These projections for increases in freight transportation demand should give all 

of us pause. At full or near-full capacity, transport systems become more fragile. 

With inadequate redundancy, there are fewer alternative routes and facilities, 

breakdowns and back-ups proliferate faster and further, and recovery from disruptions takes longer. Ameliorating capacity constraints across modes will entail significant costs, but in the long run the cost is likely to be far less than if we do not 

adequately address the issue now. 

Railroads Are Working Hard on a Variety of Fronts to Increase Capacity 

For their part, U.S. freight railroads are well aware that capacity constraints have 

led to service-related problems on parts of their networks, and they are committed 

to solving these problems by addressing the host of factors that influence the fluidity and resiliency of freight rail operations. 

Spending on Infrastructure and Equipment 

Of the many different factors that affect how well a rail network functions, the 

basic amount and quality of infrastructure and equipment is probably the most important. That is why U.S. freight railroads have been expending, and will continue 

to expend, enormous resources to improve their asset base. As traffic grows, railroads will have to concentrate increasingly on building new capacity to accommodate that growth—while continuing to maintain existing capacity. But if a railroad 

is not financially sustainable over the long term, it will not be able to attract the 

capital necessary to maintain its existing network in top condition, or make additional investments in the replacement or expansion of infrastructure required by 

growing demand. 

This point is especially relevant for railroads relative to other modes. In contrast 

to the extensive government funding for truck, barge, and airline infrastructure over 

the past 25 years, freight railroads have historically received little government financial assistance for infrastructure construction or maintenance. Instead, freight 

railroads have financed infrastructure improvements (and equipment investments, 

such as locomotives) almost exclusively through their own earnings and by borrowing. 9

From 1980 through 2005, Class I freight railroads alone invested some $174 billion in capital and maintenance expenses related to infrastructure, and another 

$183 billion in capital and maintenance expenses related to equipment. (Non-Class 

I railroads have invested additional billions of dollars.) 10 Class I railroads typically 

devote approximately 45 percent of their operating revenue, or $15 billion to $17 


ham4.eps
87 

billion per year, toward these purposes, which have been trending higher since 1990 

on a per-mile basis. 

Moreover, rail spending, which is already substantial, is expected to rise sharply. 

Based on an analysis of recent railroad financial presentations, press releases, and 

other sources, it appears that Class I capital expenditures on infrastructure and 

equipment are set to rise in 2006 to around $8.3 billion, up sharply from around 

$5.7 billion just 4 years earlier. This huge increase demonstrates the diligence with 

which railroads are responding to the capacity issue. 

The following is just a sampling of the diverse types of capacity-enhancing investments individual railroads have recently made or will soon make: 

• BNSF Railway double-tracked 76 miles of main line between Chicago and Los 

Angeles in 2005, and another 56 miles will be double- or triple-tracked this 

year. Within a couple of years, the entire 2,200-mile route will be doubletracked. In 2005, BNSF also took delivery of some 400 centerbeam cars (for 

hauling lumber); 3,700 high-capacity covered hoppers for carrying grain and 

other commodities; 1,300 rapid-discharge coal cars; and 650 intermodal flatcars 

with capacity to carry 6,500 intermodal double-stack containers. BNSF also took 

delivery of 288 new locomotives in 2005 and will add more than 300 more in 

2006. 

• In 2006, Canadian National will spend $1.2 billion to $1.3 billion on capital programs in the United States and Canada. Included are the reconfiguration of the 

key Johnston Yard in Memphis, a gateway for CN’s rail operations in the Gulf 


ham5.eps ham6.eps
88 

of Mexico region; siding extensions in Western Canada; and investments in 

CN’s Prince Rupert, British Columbia, corridor to capitalize on the Port of 

Prince Rupert’s potential as an important traffic gateway between Asia and the 

North American heartland. 

• In 2005, Canadian Pacific finished its biggest capacity enhancement project in 

more than 20 years by expanding its network from Canada’s Prairie region to 

the Port of Vancouver. The project increased the capacity of CP’s western network by 12 percent and improved the route structure from Canada’s Pacific 

coast to the United States. Like other carriers, CP has added new sidings on 

congested corridors; taken delivery of dozens of new locomotives and newer, 

higher-capacity freight cars; and hired and trained hundreds of new employees, 

many of whom will be in the United States. 

• CSX recently announced plans to spend $1.3 billion to $1.4 billion per year on 

capital expenditures in 2006 and 2007, up from approximately $1 billion over 

the previous few years. In addition to improvements elsewhere, installation of 

sidings, signals, and other infrastructure on lines between Chicago and Florida 

and between New York City and Albany will expand capacity and improve service reliability. CSX will also add several hundred new locomotives over the next 

few years. 

• Kansas City Southern is busy integrating its Kansas City Southern de ́ Mexico 

subsidiary fully into the railroad’s other operations. KCS plans to spend some 

$120 million in the United States and another $96 million in Mexico in 2006. 

Particular attention will be given to the construction of new tracks and other 

improvements at the railroad’s Shreveport, Louisiana hub; improvements on the 

‘‘Meridian Speedway’’ between Shreveport and Meridian, Mississippi to augment the new rails, new sidings, and new drainage system installed in 2005; 

and the expansion of rail yards, track upgrades, and new sidings on its ‘‘TexMex’’ subsidiary. 

• Norfolk Southern (NS) will purchase more than 220 new locomotives from late 

2005 through mid-2006 to augment the hundreds purchased over the past few 

years. NS is also in the midst of its largest-ever locomotive rehabilitation program—in 2005, 491 locomotives were overhauled and 29 were rebuilt; another 

420 will be overhauled and 52 rebuilt in 2006. NS is also beginning its ‘‘Heartland Corridor’’ project, which, among other things, will entail raising clearances 

at 28 tunnels in Virginia, West Virginia, and Kentucky to allow double-stack 

intermodal service over the entire route from the Port of Norfolk to Columbus, 

Ohio and Chicago. 

• In 2006 alone, Union Pacific will spend some $1.5 billion to replace track and 

hundreds of millions more to increase fluidity and capacity. Much of UP’s current and recent spending is coal-related, including adding a third mainline from 

Reno to West Nacco on the PRB Joint Line; constructing a third run-through 

mainline to speed coal trains through North Platte; and a $35 million 

Marysville, Kansas bypass to expedite PRB coal trains. Another focus of UP’s 

capacity expansion programs for 2006 is its 760-mile Sunset Route between Los 

Angeles and El Paso. Today, more than 42 percent of the Sunset Route is double tracked, including 69 miles that were completed in 2005 at a cost of some 

$100 million. UP plans to double track another 50 miles this year and most of 

the remainder within a few years. Since 2004, Union Pacific has purchased 713 

new locomotives and will purchase an additional 200 in 2006. 

The massive investments railroads must make in their systems are a reflection 

of the extreme capital intensity of railroads. By any of a variety of measures, railroads are at or near the top among all U.S. industries in terms of capital intensity. 

For example, from 1995 to 2004, the average U.S. manufacturer spent 3.5 percent 

of revenue on capital expenditures. The comparable figure for U.S. freight railroads 

was 17.8 percent, or more than five times higher. Likewise, in 2004 railroad net investment in plant and equipment per employee was $667,000—more than eight 

times the average for all U.S. manufacturing ($78,000). 

89 

11 James McClellan, ‘‘Railroad Capacity Issues,’’ background paper for Research to Enhance 

Rail Network Performance: A Workshop, Transportation Research Board, April 5–6, 2006. 

The bottom line is that railroading is extraordinarily expensive, and simply cannot be done ‘‘on the cheap.’’ And because when they make major investments, railroads are committing capital to assets that can have a life span of 30 years or more, 

adding rail capacity can be accompanied by substantial financial risk. That’s why 

railroads, as noted earlier, need to be sure that the market will support additions 

to capacity over the long-term. As a former NS official remarked in comments to 

the Transportation Research Board, ‘‘Any capacity enhancing project (be it fixed 

plant or locomotives or cars) has to be compared to all of the other demands on corporate capital and the returns must be attractive. Further, all investments must be 

consistent with a company’s ability to raise capital. However ‘worthy’ a capacity 

project might be, it must, in the end, lead to improved financial returns.’’ 11

Aggressive Hiring 

Rail capacity is a function of personnel in addition to infrastructure, and railroads 

have been aggressively hiring and training crews to expand capacity. After decades 

of steady decline, rail employment has been on the increase since 2004. According 

to STB data, overall Class I employment in April 2006 (the most recent month for 

which data are available) was 3 percent higher than in April 2005 and 7 percent 

higher than in April 2004. 


ham7.eps ham8.eps
90 

12 Rail grinding is a maintenance procedure for removing rail corrugations and surface defects, 

and for restoring the shape of rail to improve wheel and rail interaction and extend rail life. 

Infusion of Technology 

Technology has always played a key role in expanding rail capacity. Control systems have become more sophisticated; trains have become longer and heavier; locomotives have become more powerful and more reliable; and track structures have 

become more robust and thus less prone to outages for maintenance or because of 

failure. 

Many of the dramatic technological advancements that have increased railroad efficiency (and safety) by helping to protect freight cars, locomotives, track, and cargo 

before damage, costly repairs, traffic holdups, and derailments occur have been developed and/or refined at the Transportation Technology Center Inc. (TTCI) in Pueblo, Colorado, a wholly-owned subsidiary of the AAR that is generally considered to 

be the finest rail research facility in the world. Just a few of these technological advancements include: 

• Wayside detectors that identify defects on passing rail cars—including overheated bearings and wheels, dragging hoses, deteriorating bearings, cracked 

axles and wheels, and excessively high and wide loads—before structural failure 

or other damage occurs. Some of the newest wayside detectors being developed 

use machine vision to perform higher-accuracy inspections through the use of 

digitized images, which are then analyzed using computer algorithms. 

• Trackside acoustic detector systems use ‘‘acoustic signatures’’ to evaluate the 

sound of internal bearings to identify those likely to fail in the near term. These 

systems supplement or replace existing systems that identify bearings already 

in the process of failing by measuring the heat they generate. 

• Advanced track geometry cars use sophisticated electronic and optical instruments to inspect track conditions, including alignment, gauge, and curvature. 

TTCI is developing an on-board computer system that provides an even more 

sophisticated analysis capability of track geometry, predicting the response of 

freight cars to track geometry deviations. This information will better enable 

railroads to determine track maintenance needs and help improve the safety of 

day-to-day rail operations. 

• One of the most straightforward ways to add capacity to a rail network is to 

pack more freight on each train, and railroads have been doing that ever more 

aggressively. In 1995, for example, the average coal car carried on a Class I 

railroad held just under 103 tons of coal. By 2005 that figure had risen to nearly 112 tons, a 9 percent increase. But heavier loads are far more damaging to 

track structures than lighter loads. Researchers at TTCI and elsewhere are engaged in efforts related to this heavy-axle load (HAL) service. HAL-related work 

is underway on rail steels, insulated joints, bridges, welding, maintenance practices, and more. 

Freight railroads have always been at the forefront in the use of computers and 

information technology, and today railroads are rapidly expanding their use of these 

technologies to improve overall efficiency and the fluidity of their operations, thereby adding capacity without adding infrastructure. 

For example, advanced computer modeling software is used in a wide variety of 

rail applications, from automating rail grinding schedules 12 and improving customer demand forecasting to optimizing yard operations. CN, for example, is implementing what it calls ‘‘SmartYard,’’ complex computer software that identifies and 

analyzes every possible combination and outcome for sequencing cars in a large classification yard and simultaneously updates and communicates the car processing 

plan. The result is more efficient, faster yard operations. Other railroads are engaged in similar efforts. 

Recognizing that another way to add capacity is to move more trains faster over 

the same length of track, railroads are also working with their suppliers to design, 

implement, and improve innovative computerized ‘‘trip planning’’ systems. These 

highly-complex systems automatically incorporate and analyze a mix of ever-changing variables (e.g., crew and locomotive availability, terminal congestion, the different priority status of loads of freight, track conditions, maintenance plans, weather, etc.) to optimize how and when cars are assembled to form trains and when 

those trains depart. 

Trip-planning systems are just one way that railroads are trying to improve 

equipment ‘‘cycle time’’—i.e., the total time it takes for a freight car to be loaded, 

hauled to destination, unloaded, returned to the same or a different shipper, and 

loaded again. 

91 

The benefits of increased efficiency explain rail efforts to ‘‘supersize,’’ automate, 

and increase the velocity of traffic flows where practical. For example, railroads and 

their grain customers collaborate to consolidate grain loading at high-speed ‘‘shuttle 

loader’’ elevators. Railroads gain by improving the efficiency of their operations; 

shippers gain because the efficiencies produce railroad cost savings that are passed 

through in the form of lower rates. The efficiencies of shuttle operations can be 

striking. At BNSF, for example, a typical grain car in shuttle service hauls approximately three times more grain over the course of a year than a typical grain car 

in non-shuttle service. 

Expanded over a network, operational efficiency can free up substantial capacity 

for other uses. At one major railroad, for example, a one mile-per-hour increase in 

system-wide velocity could mean that 250 locomotives, 5,000 freight cars, and 180 

train and engine employees would be freed up to move additional traffic. 

Cooperative Alliances and Collaborations 

Railroads are also entering into operational alliances with each other which often 

rely on non-standard techniques to achieve desired results. These innovative collaborations lead to improved capacity utilization, lower costs, and better service. For example: 

• A recent BNSF and CN track-sharing agreement will improve network fluidity 

and infrastructure capacity, principally in Vancouver, Chicago, and between 

Memphis and southern Illinois. Under the agreement, the railroads will exchange track and rail infrastructure, and CN will grant trackage, haulage, and 

other access rights to BNSF. 

• CSX and UP are now operating their ‘‘Express Lane’’ service to haul fruits and 

vegetables by refrigerated rail car from California and the Pacific Northwest to 

population centers on the East Coast. UP and CSX also offer a similar ‘‘Wine 

Connection’’ service for wine movements. These joint ventures improve the utilization of rail assets and enhance the efficiency of coast-to-coast transportation. 

• A KCS–NS joint venture will increase capacity and improve service on the ‘‘Meridian Speedway,’’ a rail line between Meridian, Mississippi and Shreveport, 

Louisiana, that is crucial for transporting freight between the Southeast and 

the Southwest. KCS will contribute a 320-mile rail line between the cities, while 

NS will invest $300 million in cash, substantially all of which will be used for 

capital improvements to increase capacity over a four-year period. The capital 

improvements will include signal systems, extended sidings and stretches of 

double track. 

• UP and CN have reached a routing protocol agreement to streamline their exchange of rail traffic at major gateways and reduce rail congestion in the Chicago area. Under the protocol, CN and UP are directing rail traffic flows 

through the most efficient interchange locations, thereby improving transit 

times and asset utilization. 

• NS and CP recently began a partnership under which NS runs trains on CP 

trackage in New York state and then hands off the trains to CP, which hauls 

them across the border for further interchange or final delivery in Canada. The 

agreement allows NS to replace the inefficient and circuitous route it previously 

had to use for trans-border operations. In addition, NS hauls CP trains between 

other points in New York, thereby allowing CP to improve the efficiency of its 

own operations. 

• UP and CP recently strengthened their alliance at Eastport, Idaho, where CP 

hands off grain trains to UP for delivery to Pacific Coast ports. Working with 

customs authorities, the railroads have improved the customs clearance process, 

eliminating a major bottleneck that had been backing up trains at the border. 

The result has been a significant decrease in dwell time and a sharp increase 

in daily train count at the interchange. 

Railroad Rate Trends Since Staggers 

With passage of the Staggers Rail Act of 1980, U.S. freight railroads were generally freed to price their services in the open marketplace, with government price 

regulation (which had been pervasive prior to Staggers) remaining only where it 

was determined that railroads did not face effective competition. Staggers allowed 

railroads to enter into confidential rate and service contracts with shippers and gave 

railroads freedom to operate over routes they found to be most efficient. Railroads 

responded to their new pricing freedoms by sharply increasing productivity and 

competing more effectively. 

92 

Most rail productivity gains have been passed on to shippers in the form of lower 

rates. In inflation-adjusted terms, rail revenue per ton-mile (RPTM) was relatively 

flat prior to Staggers, but has fallen 57 percent since then. Similarly large rate reductions have occurred over nearly all commodity types (including coal, agricultural 

products, and chemicals) and across geographical areas. 

RPTM is often used as a surrogate for rail rates because it measures both the 

actual payments made by rail customers and the bases for which the rates are assessed—weight and distance. Although RPTM can be affected by changes in length 

of haul, commodity mix, equipment ownership, and other shipment characteristics, 

studies that have controlled for such factors have confirmed that the decline in 

RPTM reflects a real drop in rail rates. 

Numerous studies confirm the sharp drop in freight rail rates. For example: 

• In September 2004, the U.S. Department of Energy’s Energy Information Administration (EIA) released a report on rail rates for coal delivered under contract from 1979 through 2001. The report found that contract rail coal rates 

peaked in 1984 at $17.52 per ton, then declined by nearly 42 percent, to $10.19 

per ton, by 2001. On a revenue per ton-mile basis, the EIA reported that rail 

rates declined 60 percent in real terms from 1979–2001, compared with a decline in barge coal rates of 38 percent and an increase in truck coal rates of 

73 percent over the same period. 

The September 2004 EIA report was an update to a similar October 2000 study 

covering 1988 to 1997. In that study, the EIA found that ‘‘Although the share 

of coal transported by railroads increased, the average rate per ton to ship contract coal by rail fell steadily (a 25.8 percent decline) during the study period 

. . . The general finding of declining rates was also substantiated when the 

rates were calculated as a rate per ton-mile, a rate per million Btu, or rates 

between specific supply and demand regions.’’ According to the EIA, on a RPTM 

basis, the average contract coal rate fell 41.4 percent from 1988 to 1997, and 

‘‘the decline . . . was a response to competitive markets.’’ 

• In a June 2002 report, the U.S. General Accounting Office (now the Government 

Accountability Office) released a rail rate analysis covering 1997 to 2000. The 

GAO found that ‘‘From 1997 through 2000, rail rates generally decreased, both 

nationwide and for many of the specific commodities and markets that we examined.’’ The June 2002 report was an update to a similar April 1999 GAO report covering 1990 to 1996. In the June 2002 study, the GAO noted that ‘‘[t]hese 

decreases followed the general trend we previously reported on for the 1990– 

1996 period and, as before, tended to reflect cost reductions brought about by 

continuing productivity gains in the railroad industry that have allowed railroads to reduce rates in order to be competitive.’’ 

• In December 2000, the Surface Transportation Board (STB) released the latest 

in a series of periodic reports entitled ‘‘Rail Rates Continue Multi-Year Decline.’’ 

The STB found that ‘‘inflation-adjusted rail rates have fallen 45.3 percent’’ from 

1984 to 1999. The STB continued, ‘‘[T]he very significant rate reductions . . . 

imply that shippers would have paid an additional $31.7 billion for rail service 


ham9.eps
93 

in 1999 if revenue per ton-mile had remained equal to its 1984 inflation-adjusted level. . . . It is important to note that all types of rail customers, and 

not just those with competitive transportation alternatives, must have received 

some portion of the rate reductions we have measured here.’’ The STB also 

found that ‘‘an increase in the average length of haul is not responsible for the 

preponderance of the rate declines that we have identified. We find that real 

railroad revenue per ton has fallen 43.7 percent since 1984, nearly identical to 

the decline of 45.3 percent obtained when using ton-miles.’’ 

• A study published in September 2000 by scholars at the University of Maryland 

and The Brookings Institution noted that ‘‘[D]eregulation was not just a boon 

for the rail industry. Shippers benefited too. Based on the first decade of deregulation, one study found that the annual benefits to shippers from lower 

rates and improvements in service time and reliability amounted to at least $12 

billion (1999 dollars). And, . . . shippers have generally continued to benefit 

from lower rates.’’ 

Competitive rail rates help rail users control the prices of their goods. 

For example, from 1981 to 2004, average railroad coal rates (as measured by coal 

RPTM in nominal terms) fell 32 percent, while average electricity prices rose 38 percent. 

Over the same period, rail RPTM for chemicals rose less than 1 percent. During 

this same period, prices paid by chemical companies for liquefied refinery gases, 

which are a major chemical industry feedstock, rose 147 percent, while the producer 

price for chemicals themselves (many chemicals are intermediates for other chemicals) rose 33 percent. 


ham10.eps
94 

13 Anthony Hatch, ‘‘Six for 06: Trends To Watch in Rail,’’ The Journal of Commerce, January 

2006. 

Likewise, from 1994 to 2004, the prices paid by farmers for most farm inputs rose: 

up 46 percent for seed, up 34 percent for fertilizer, and up 83 percent for fuel. During this same period, the average rail rate for grain (as measured by grain RPTM) 

fell 4 percent. Clearly, railroads have been doing their part to help keep U.S. agriculture competitive. 

Railroads Must Be Financially Healthy to Expand Capacity 

Since Congress passed the Staggers Act, railroads have only slowly made progress 

toward the goal of long-term financial sustainability. Financial sustainability is essential if railroads are to have any hope of meeting future rail capacity needs. 

This slow progress is documented in the STB’s annual revenue adequacy determinations. A railroad is ‘‘revenue adequate’’—i.e., it is earning enough to cover all 

costs of efficient operation, including a competitive return on invested capital—when 

its rate of return on net investment (ROI) equals or exceeds the industry’s current 

cost of capital (COC). This standard is widely accepted, approved by the courts, and 

similar to that used by public utility regulators throughout the country. It is also 

consistent with the unassailable point that, in our economy, firms and industries 

must produce sufficient earnings over the long term or capital will not flow to them. 

As a prominent Wall Street rail analyst recently noted, ‘‘Earning the cost of invested 

capital is not the end goal, but the entry ticket to the race... without which Wall 

Street will squeeze investment.’’ 13


ham11.eps ham12.eps
95 

14Spokesman for Florida Power & Light, quoted in The Palm Beach Post, January 16, 2005. 15 Rich Lorraine, SVP and CFO, Eastman Chemical Co., at the Morgan Stanley Basic Materials Conference, February 21, 2006. 16Steve Rogel, Chairman, President & CEO, Weyerhaeuser Co., Q4 2005 Weyerhaeuser Co. 

Earnings Conference Call, February 3, 2006. 17 EEI, Rising Electricity Costs: A Challenge For Consumers, Regulators, And Utilities, May 

2006. 

During the more than 25 years in which railroad revenue adequacy determinations have been made, railroads have significantly narrowed the COC vs. ROI gap, 

but a gap still remains. 

Rail customers certainly understand the importance of earning the cost of capital 

over the long term. A spokesman for a major Florida electric utility noted, ‘‘If we 

can’t make an attractive investment for the shareholder, then we are going to have 

a very difficult time going in the marketplace and competing for dollars.’’ 14 The 

CFO of a major U.S. chemical company stated, ‘‘We want to create spread above the 

cost of capital through the cycle.’’ 15 And the CEO of a major U.S. forest products 

company recently stated ‘‘Each of our businesses continues to assess the ability of 

their individual facilities and product lines to earn the cost of capital. Those that 

cannot make the grade do not belong in our portfolio.’’ 16

Railroads agree with this sentiment, which is echoed by firms in every sector of 

the economy. Without the ability to cover total costs and earn adequate returns, 

railroads—like electric utilities, chemical companies, forest products firms, or any 

other firm—would be unable to maintain (much less increase investment in) their 

networks and could not sustain themselves over the long term. 

Last month, the Edison Electric Institute (EEI) released a document that defends 

the sometimes substantial price increases electricity consumers are facing in many 

parts of the country. EEI writes: 

‘‘Clearly, electricity is an indispensable commodity that is crucial to our daily 

lives and to our Nation’s continued economic growth. And the costs needed to 

reinforce the Nation’s electric power system are worthy long-term investments. 

The bottom line is that we are living in a rising cost environment, and electricity prices have been a great deal for many years. Even with expected rate 

increases, electricity prices are projected to remain below the rate trends of 

other goods and services. In fact, the national average price for electricity today 

is significantly less than what it was in 1980, adjusted for inflation. Of course 

that is small comfort to customers who will be opening costlier electric bills in 

the coming months. And no one—utility, regulator, or customer—is eager to see 

electricity prices increase. The unavoidable reality, however, is that we all must 

address the fact that in order to ensure that electricity remains affordable and 

reliable, we must help shoulder the expense of reinforcing and upgrading our 

electricity infrastructure. It is the only way to be certain that electricity will be 

there when we need it, and at a price we can afford over the long term’’ 17

Railroads wholeheartedly agree with this sentiment too. It is critical to our Nation’s economy and standard of living that we upgrade and reinforce our electricity 

infrastructure. 

We also think that EEI’s statement above is just as valid, if not more so, if the 

word ‘‘electricity’’ were changed to ‘‘freight railroading.’’ Looking ahead, the United 

States cannot prosper in an increasingly competitive global marketplace if our 

freight railroads are unable to meet our growing transportation needs, and having 

adequate railroad capacity is critical in meeting these needs. Like utilities, railroads 

must be able to both maintain their extensive existing infrastructure and equipment 

and build substantial new capacity. Railroads could not do this if their earnings 

were unreasonably restricted, any more than utilities could. 

Even in 2005 Railroads Had Substandard Profitability 

Without question, 2005 was a good year for railroads financially—revenue and net 

income were both up substantially. Frankly, it’s about time the rail industry had 

a year like 2005, and they require them going forward. Improved rail earnings 

should be viewed as a welcome development because it means that railroads are better able to justify and afford the massive investments in new capacity and upkeep 

of their existing systems that need to be made. 

That said, no one should get carried away regarding railroads’ relative profitability in 2005, because the fact is, in 2005—when railroads were hauling record 

levels of traffic and had sharply higher-than-historical profitability—rail industry 

earnings were still substandard compared with other industries. 

96 

Return on equity (ROE) is commonly used as an indicator of short-term profitability. According to Business Week data covering the S&P 500, in 2005 the average 

ROE for the four largest U.S. railroads was 12.3 percent—a substantial improvement over the 7.8 percent recorded in 2004, but still well below the 16.1 percent 

average for all firms in the S&P 500 for 2005. The railroad ROE was well below 

the median for chemical companies in the S&P 500 (18.7 percent) and only moderately higher than the median for electric utilities (10.8 percent) in the S&P 500. 


ham13.eps ham13a.eps
97 

18The median railroad ROE for Business Week and Fortune 500 differs because different definitions were used. Business Week uses net income excluding discontinued operations; Fortune 

uses net income including discontinued operations. Business Week uses average shareholders’ equity for a year; Fortune uses end-of-year shareholders’ equity. 

Data from the Fortune 500 tell a similar story. In 2005, the median ROE for the 

railroads in the Fortune 500 was 14.1 percent, less than the Fortune 500 median 

of 14.9 percent and well below the ROE of numerous major rail customer groups. 18

Fortune 500 Return on Equity: 2005 

Industry ROE (in percent) 

Household & Personal Prod. 41.5 

Petroleum Refining 25.8 

Mining, Crude-Oil Prod. 23.6 

Pharmaceuticals 23.4 

Food Consumer Products 21.8 

Industrial & Farm Equip. 21.1 

Computers, Office Equip. 19.7 

Oil & Gas Equip., Services 18.9 

Metals 18.3 

Chemicals 18.1 

Medical Products & Equip. 17.3 

Beverages 16.4 

Aerospace and Defense 16.3 

Fortune 500 Median 14.9 

Motor Vehicles & Parts 14.6 

Railroads 14.1 

Pipelines 13.5 

Electronics, Electrical Equip. 12.1 

Engineering, Construction 11.8 

Utilities: Gas & Electric 10.4 

Energy 7.4 

Food Production 6.2 

Packaging, Containers 4.6 

Telecommunications 4.2 

Source: Fortune 500 

In each of the 20 years from 1986 to 2005, the median ROE for Class I railroads 

was less than the median for all Fortune 500 companies, and in 15 of the 20 years, 

the median railroad ROE was in the lowest quartile among Fortune 500 industries. 

Thus, even the improved rail earnings in 2005 are generally no more than (and 

in most cases less than) what non-regulated companies and industries earn. 

In any case, whatever may be the minimum level of earnings, profitability, or solvency considered adequate to declare a railroad ‘‘healthy’’ for short-term investment 

purposes, the primary point to remember is that only a return on investment in excess of the cost of capital over a sustained period can signify that railroads are financially healthy. 

Reregulation is Not the Answer to Railroad Capacity and Service Problems 

Unfortunately, rail critics have wrongly seized upon railroads’ ‘‘record profits’’ in 

2005 to support their claims that railroads should be forced to reduce their rates 

to certain shippers. This viewpoint—that short-term increased railroad profitability 

to moderate levels justifies a reinstatement of onerous restrictions on rail earnings—is exceedingly shortsighted and should be rejected. 

Railroads have had to battle efforts to reregulate the industry since the Staggers 

Rail Act partially deregulated railroads in 1980. It is beyond the scope of this testimony to discuss in any detail the many ways in which reregulatory legislation (like 

S. 919, the ‘‘Railroad Competition Act of 2005’’) is misguided. 

It should be noted, though, that the primary objective of those who call for rail 

reregulation is lower rail rates, even though, as discussed above, railroads are not 

earning excessive profits. Lower rail rates would translate directly into lower rail 

earnings. But proponents of reregulation ignore the fact that rail investments in infrastructure and equipment, like most private investment decisions in our economy, 

are driven by expected returns. The hundreds of billions of dollars invested in U.S. 

freight railroads since Staggers would not have been provided if not for the investors’ expectation that the opportunity for a competitive return promised by Staggers 

would remain. 

Under reregulation, rail managers could not commit, and rail stockholders would 

not supply, investment capital needed to improve service and expand capacity, because the railroads considering such investments would not have a reasonable opVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00101 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
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19Statement on behalf of the Edison Electric Institute by Alan J. Fohrer, CEO, Southern California Edison, to FERC, April 22, 2005. 20 Comments of the National Rural Electric Cooperative Association Proposed Rulemaking 

Promoting Transmission Investment Through Pricing Reform,’’ FERC Docket No. RM06–4–000, 

January 11, 2006, p. 17. 21 AASHTO, Freight Rail Bottom Line Report, p. 3. 

portunity to capture the benefits of those investments Disaster might not occur 

overnight, but there would be little or no capacity expansion—something that certainly would have a near-term and significant adverse effect. 

The financial community, on whom railroads depend for access to the capital they 

need to operate and expand, has consistently supported the view that, under reregulation, an era of capital starvation and disinvestment would return. They understand that no law or regulation can force investors to provide resources to an industry whose returns are lower than the investors can obtain in other markets with 

comparable risk. 

Proponents of reregulation cannot avoid the fundamental fact that shippers must 

be willing to pay for the rail service and rail capacity they say they need, and the 

market is far superior to the government in determining who should pay. 

Some in the electric power industry are among the most vocal proponents of restrictions on rail earnings. Their advocacy of restrictions on railroads are not consistent with their claims regarding the need for cost-recovery and regulatory certainty in electricity transmission—a sector of the electricity industry with some parallels to railroading. 

A representative of the Edison Electric Institute, for example, wrote ‘‘I cannot 

overemphasize the need for FERC to establish and put into effect a durable regulatory framework that says if I prudently invest a dollar in transmission infrastructure, that I will be able to fully recover that dollar, along with my cost of capital, 

through electricity rates. Such a framework is essential to raising the substantial 

and nearly unprecedented amount of capital necessary to construct needed, cost-effective transmission facilities.’’ 19

Likewise, the National Rural Electric Cooperative Association has noted that it 

‘‘believes that the best way to attract capital to transmission at reasonable rates is 

to give investors greater certainty that they will receive a return on their investment.’’ 20 The rail industry can think of no better way to create uncertainty for their 

own capital providers ‘‘that they will receive a return on their investment’’ than proposals such as S. 919. Such legislation is bad economics and bad public policy and 

should be rejected. It would mean less rail capacity when we need more. 

Public Involvement in Freight Rail Infrastructure Investment 

Freight railroads will continue to spend massive amounts to improve and maintain their systems. But even with their improved financial performance, funding 

constraints will likely prevent railroads from meeting optimal future rail infrastructure investment needs entirely on their own. As AASHTO noted in its Freight Rail 

Bottom Line Report, ‘‘The rail industry today is stable, productive, and competitive, 

with enough business and profit to operate but not to replenish its infrastructure 

quickly or grow rapidly.’’ 21


ham14.eps
99 

22 AASHTO, Freight Rail Bottom Line Report, p. 1. 23 Congressional Budget Office, Freight Rail Transportation: Long-Term Issues (January 2006), 

p. 22. 24Transportation Research Board, Critical Issues in Transportation (January 2006), p. 3. 

In its analysis, AASHTO estimated that railroads will need to carry an additional 

888 million tons of freight annually by 2020 just to maintain their current market 

share. AASHTO also found that railroads will need $175 billion to $195 billion of 

infrastructure investment over this period to accommodate this traffic growth, and 

projected that railroads will be able to fund the majority of this investment—$142 

billion—from their own retained earnings and borrowing. Unfortunately, according 

to the AASHTO analysis, the $142 billion will be enough to enable railroads to handle only half of their expected increase in traffic. 

This funding shortfall means that many rail projects that would otherwise expand 

capacity and improve the ability of our Nation’s farms, mines, and factories to move 

their goods to market; speed the flow of imports and exports; relieve highway congestion; reduce pollution; lower highway costs; save fuel; and enhance safety will be 

delayed—or never made at all. 

I respectfully suggest that it is in our Nation’s best interest to ensure that optimal 

freight railroad capacity enhancements are made. Two ways that policymakers can 

help make this happen is by taking greater advantage of public-private partnerships 

for freight-railroad infrastructure projects and by introducing tax incentives for rail 

infrastructure projects that enhance capacity. 

Public participation in freight rail infrastructure projects is justified because the 

extensive benefits that would accrue to the general public by increasing the use of 

freight rail would far exceed the costs of public participation. For example: 

• Highway congestion—Highway congestion costs the U.S. economy more than 

$63 billion per year, but trying to eliminate it by focusing solely on highways 

is not practical because building more highways is becoming prohibitively expensive and time-consuming. Given budget constraints, environmental concerns, 

and other factors, we will be unable to simply build our way out of highway 

gridlock. Freight railroads, though, significantly reduce the costs of highway 

congestion and the need to build costly new highways. A single intermodal train 

takes up to 280 trucks (equivalent to more than 1,100 cars) off our highways. 

Trains carrying other types of freight take up to 500 trucks (equal to around 

2,000 cars) off our highways. 

• Fuel efficiency—Railroads are three or more times more fuel efficient than 

trucks. On average, in 2004 railroads moved a ton of freight nearly 410 miles 

per gallon of fuel. If just 10 percent of the intercity freight that moves by highway moved by rail instead, fuel savings would approach one billion gallons per 

year. 

• Pollution—The Environmental Protection Agency (EPA) estimates that for 

every ton-mile of freight carried, a locomotive emits substantially less nitrogen 

oxides, particulates, and carbon dioxide than a typical truck. 

• Safety—Fatality rates associated with intercity trucking are four times those 

associated with freight rail transportation. Railroads also have lower employee 

injury rates than other modes of transportation. Railroads and trucks carry 

roughly equal ton-miles of hazardous materials, but trucks have 16 times more 

hazmat releases than railroads. 

This point was also made by AASTHO, which that ‘‘Relatively small public investments in the Nation’s freight railroads can be leveraged into relatively large benefits 

for the Nation’s highway infrastructure, highway users, and freight shippers.’’ 22 The 

Congressional Budget Office has also concluded that public investment in rail infrastructure should be considered: ‘‘Another way of addressing the underpayment of infrastructure costs by railroads’ competitors is to provide financial assistance to the 

railroads.’’ Echoing AASHTO, CBO observed that, ‘‘[p]roviding Federal aid for a rail 

investment might be economically justified if the net social benefits were large but 

the net private benefits to railroads were insufficient to induce them to make such 

an investment.’’ 23 The Transportation Research Board has reached a similar conclusion, noting that ‘‘Greater public investment to relieve bottlenecks may improve efficiency—perhaps even in facilities that formerly were exclusively private . . . ’’ 24

Public-Private Partnerships 

As Members of this Committee know, U.S. freight railroads are, with few exceptions, privately owned and operated, and have traditionally financed their infraVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00103 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
100 

structure investments overwhelmingly through their own earnings and by borrowing 

from outside capital providers. 

Capital providers, however, insist that railroads focus their limited investment 

funds on projects that promise a direct financial benefit to the investing railroad. 

While these projects may well provide substantial public benefits—such as reduced 

highway congestion, cleaner air, improved safety, and enhanced mobility—from a 

railroad’s and capital provider’s point of view, these are secondary to the project’s 

financial return. This kind of imposed discipline by the financial markets is necessary and appropriate in a market economy, but it discourages investments that 

would yield significant public benefits but only limited financial benefits to the railroad. 

A way to help states and localities improve rail networks that generate public 

benefits is through a more pronounced use of public-private financing partnerships 

for rail infrastructure improvement projects. Partnerships are not ‘‘subsidies’’ to 

railroads. Rather, they are an acknowledgement that private entities should pay for 

private benefits and public entities should pay for public benefits. 

Partnerships reflect the fact that cooperation between interested entities is far 

more likely to result in timely, meaningful solutions to transportation problems 

than a go-it-alone approach. Without a partnership, projects that promise substantial public benefits in addition to private benefits are likely to be delayed or never 

started at all because it would be too difficult for either side to justify the full investment needed to complete them. In contrast, if a public entity shows it is willing 

to devote public dollars to a project equivalent to the public benefits that will accrue, the private entity is much more likely to provide the private dollars (commensurate with private gains) necessary for the project to proceed. 

Going forward, the best-known public-private partnership involving freight railroads is the Chicago Region Environmental and Transportation Efficiency Program, 

or CREATE. Conceived in June 2003, CREATE is a $1.5 billion program involving 

the State of Illinois, the city of Chicago, and the major freight and passenger railroads serving Chicago designed to modernize and improve Chicago’s highway and 

rail transportation networks. Installing grade separations between tracks and highways will speed vehicle travel and reduce congestion and delays for motorists; updating track connections and expanding rail routes will reduce rail transit times; 

and adding separate, passenger-only tracks in key locations will remove numerous 

bottlenecks that have slowed passenger and freight movements in the region for decades. 

Investment Tax Incentives 

Another way to bridge the funding gap between the level of investment that will 

bring the most benefit to our economy and what railroads are likely to be able to 

afford on their own is to implement an investment tax credit for rail capacity enhancement projects. 

Under an investment tax incentive program for rail infrastructure, projects to expand freight rail capacity—by increasing the volume, weight, or speed of freight that 

can be carried—would be eligible for a 25 percent tax credit. Examples of qualifying 

capacity-expanding investments include raising tunnel clearances to accommodate 

double-stacked intermodal containers; upgrading single track lines to double or triple tracks; adding and lengthening sidings; strengthening bridges to carry heavier 

loads; and constructing intermodal terminals. In addition, new locomotives could 

also qualify for the credit if they met certain capacity-enhancement and other requirements. 

Eligibility for the credit would extend to any taxpayer that makes a qualifying 

expenditure, not just railroads. For example, a shipper that built a rail spur from 

a distribution center to a main line would be eligible, as would the builder of a rail 

intermodal terminal. 

Infrastructure capital expenditures that do not qualify for tax incentives would be 

expensed (the expensing option would not apply to locomotives). This would place 

capital cost recovery for rail infrastructure on the same basis as competing modes 

of freight transportation (i.e., highway and waterway), which ‘‘expense’’ their infrastructure costs. 

For a railroad considering whether to fund a new infrastructure project, the tax 

incentive would effectively reduce the cost of the project and thus lower the risk 

that the project will not generate the level of return needed to make it economically 

viable. Thus, the incentive would be enough to help worthwhile projects get built 

sooner, but would not be enough to cause economically unjustified projects to go forward. 

101 

Conclusion 

U.S. freight railroads do a remarkable job in meeting the needs of an extremely 

diverse set of shippers. Railroads move tens of thousands of railcars to and from 

thousands of origins and destinations every day. The vast majority of these shipments arrive in a timely manner, in good condition, and at rates that shippers elsewhere in the world would love to have. 

Still, it is clear that transportation capacity will have to increase as the economy 

expands. The railroads are committed to meeting these increased capacity needs primarily through private capital, but only if the regulatory structure gives the railroads an incentive to make the necessary investments. Policymakers can help ensure that rail capacity is adequate to meet our future freight transportation needs 

by ensuring that harmful economic reregulation is not instituted, engaging in more 

public-private partnerships for rail infrastructure projects, and instituting targeted 

tax incentives for projects that expand rail capacity. 

Senator LOTT. Thank you, Mr. Hamberger. 

We’ll have a cooling-off period now. 

[Laughter.] 

Senator LOTT. The Committee will recess, so I can go vote. We 

do have two votes, back to back. But we’ll be able to get those and 

come right back. Senator Burns may be able to get back before I 

do, and there will be an opportunity then for some questions. 

Thank you all very much. 

We’ll be at recess for the next 15 minutes. 

[Recess.] 

Senator BURNS. [presiding] We’ll get—go back to the fire here— 

firing line. And I want to apologize. We can schedule everything in 

this body but votes, you know. 

And had you concluded—Mr. Hamberger, had you concluded 

your—— 

Mr. HAMBERGER. I believe I more than—— 

Senator BURNS.—statement? 

Mr. HAMBERGER.—concluded, yes, sir. 

[Laughter.] 

Senator BURNS. You more than concluded? 

Mr. HAMBERGER. Thank you. 

Senator BURNS. And I would—I’d go into a little question-and-answer, then. I think it—Trent is coming back. I hope he does, anyway. And we’ll get this rounded up. But I just happen to believe 

that this happens to be a very, very important issue. It is important enough that to give it just a brush-by is just wrong. And I 

think there are some things that have to be brought out on the 

table and talked about it. And I like what Mr. Ficker said, that we 

have to work together. 

I am not interested in re-regulating the railroads. I’m not interested in that at all. I’m interested, however, in dealing with those 

areas where we only have one railroad. We weren’t sent to this 

Congress to stand idly by and see what monopolies do in certain 

areas. 

Mr. Hamberger, your case of—rates have gone down, and your 

efficiency has increased a little, but not the greatest. But that is 

not the case in captive areas. And that’s what we’re talking about 

here, is where the STB could not, probably, deal with something 

where you have competition, but they do have the authority to deal 

when there’s only one railroad or you have captive shippers. And 

they have not done that. And that’s the reason for this hearing. 

That’s the reason that we have S. 919, is to point out to America 

102 

that we’ve got some very serious problems in some areas. We have 

the same thing when we start talking about telecommunications up 

here, in this same committee, of a—which—a committee that I 

used to chair and had quite a lot to do with writing the telecommunications policy and to force out new technologies and this 

type thing. 

Now, there are also new technologies, as far as running the railroad. I can’t run a railroad. My dad wanted me to go to school to 

be an engineer, and I told him I didn’t want to drive no train. 

[Laughter.] 

Senator BURNS. But we’ve got serious problems in those areas. 

And I—to be right honest with you, the big railroads have failed 

to come to the table. And so, we’re going to forge on with this piece 

of legislation, if we can. But we’re going to deal with those areas 

that we think we can deal with. 

Now, I’ve got a question for this panel, and I want to hear some 

discussion on it. I’ve seen a dramatic increase, over the next year, 

of shipper concerns on rates and service. I will tell you, we’re headed for—in this fall—and get ready for it—we are seeing more grain 

contracted for delivery from the combine this year than ever before. 

And there’s a reason for that. Our stocks are about half what 

they’ve been. Mr. Schuler knows about this. And we’re seeing a 

price increase, as far as the farm is concerned. What I want to do 

is get all that increase back to the farm, as much as we can. But 

we’re going to run into a car shortage this fall, I think, because our 

crop looks fairly good. If the big white combine doesn’t go down 

across our farm, I think we’re going to do that. 

Congress seems unwilling to take action to address these legitimate and very serious complaints. And we’ve seen more of them. 

Everywhere I travel across this country, I hear these complaints. 

So, I know that where there’s smoke, there’s fire. 

I’d just like for anybody, in this question—can they tell this committee why—why now? Why is our competitiveness and job creation over the long term in question now? Why are we seeing these 

pockets of captive shippers? Why are we seeing them now? Have 

we exhausted all remedies outside of legislative action? And are 

there alternatives to Congressional answer—action—that you, or 

we, should pursue? I think those are legitimate questions, and I 

think they’re the questions this committee has to address. 

Who’d like to take the first shot? Congressman English? 

Mr. ENGLISH. Thank you very much, Senator. I appreciate that. 

The—I think there are several reasons for it. And I can certainly 

speak to the electric utility side as it affects our members’ electric 

cooperatives. I think a lot of this has to do with—there were longterm contracts that were agreed to some time ago, and those contracts are running out. And we’ve also seen the situation, no question about it, as I quoted earlier, there is an effort on the part of 

the railroads to get rid of their capacity. They testified before the 

Surface Transportation Board as to that’s the objective, and they’ve 

managed to do that. So, the other part of it comes down to the 

question of reduced capacity. They’ve also reduced the number of 

employees on the railroads themselves. That started in 2000. And 

now we’ve got the old contracts running out, these new contracts 

coming on. And, as far as it applies to the stranded shippers, the 

103 

people who find themselves hostage to monopolies, they’re getting—they’re the ones that are catching it in the shorts, and those 

are the people that you’re hearing from. 

And you can take a look at that chart. Let’s put that chart back 

up there, if we could. The one that deals with stranded shipper 

costs. The point that I would make here, Senator, is the fact that 

it’s very obvious, when you look at these rates, that—what are 

being charged captive shippers today. New contracts that are being 

made. When you’ve got people that are paying 350 to 450 percent 

of what—in the way of profits, compared to 6 to 8 percent where 

there’s competition, it’s pretty obvious where the money’s coming 

from. It’s coming from those 20 percent of the shippers, and they’re 

being taken advantage of. And I’ll be very candid with you, my 

folks feel like they’re being ripped off. 

Now, Senator, there’s one other point, too. The Surface Transportation Board’s supposed to take care of these problems. You made 

that point earlier. And you’re absolutely right. But when my members—and I’ve got letters here from a member who wrote the chairman of the Surface Transportation Board, and the letter gets answered by the head of the railroad. There’s a serious question in 

the minds of my members as to who in the world’s running the 

Surface Transportation Board and who is it that they are supposed 

to go to for some kind of relief from abuse? And—— 

Mr. HAMBERGER. You know, Senator, you asked a very thoughtful question. Maybe we should try to answer it. 

Mr. ENGLISH. The Surface—the—— 

Mr. HAMBERGER. And, in my opinion, you—the—— 

Senator BURNS. Hang on, now. Let’s let—we’ll let Mr. English 

finish, and then you can make your point, Mr. Hamberger. 

Mr. HAMBERGER. Thank you. 

Mr. ENGLISH. So, I think you have a convergence of these kinds 

of issues, Senator, that’s bringing about the kinds of complaints 

that you’re hearing about, and certainly the kinds of concerns that 

I’m hearing about from our membership, if, in fact, we’re going to 

be building all this generation to meet our members’ needs for the 

future. So, I think all this is converging at this time. 

Senator BURNS. Mr. Hamberger? 

Mr. HAMBERGER. You asked a very thoughtful question, Senator, 

about why is there a capacity constraint now. And I would suggest 

to you that it is not just a capacity constraint on freight railroads, 

it is a capacity constraint on the highways, it is a capacity strain 

on the pipelines, the inland barge and towing industry, the ports 

of our Nation. All are feeling the effect of increased economic activity, increased imports and exports. With respect to the freight rails 

themselves, we have seen a spike in demand for coal, dramatic increases. As I testified before the Senate Energy Committee—I believe you were there last week—in 2002, 2003, and 2004, demand 

for coal was less than in 2001. It’s—it shot up dramatically in 

2005. It’s still up now, in 2006, because natural gas went to $16 

a million-cubic-feet. It’s now back down to about $6, and it’ll be interesting to see whether or not that demand for coal is still there. 

At the same time, the trucking industry experienced a 136-percent turnover in drivers. So everybody quit once, and then a third 

104 

of them quit again—136-percent turnover, $3 a gallon for diesel 

fuel. Demand for freight rail went up there, as well. 

So, with the intermodal growth, the demand in coal, the booming 

economy, there was a demand—not just in railroads, but across all 

of the modes of transportation. That’s why we’re investing $8.3 billion this year, to try to expand our capacity to deal with that demand. 

Senator BURNS. Mr. Ficker? 

Mr. FICKER. I could just add a couple of points. And I would, first 

of all, concur with my colleague, Mr. Hamberger, about the economy, as a whole, is—impacted transportation. Our organization 

represents companies that ship via all modes of transportation— 

rail, barge, ocean freight, and highway freight, as well—and virtually in every mode, there is capacity constraints. Whether it’s 

driver shortages, whether it’s railroad operating crew shortages, 

whether it’s diesel fuel prices, whatever it is, all of these have impacted the movement of goods in this country. And the staggering—and I have to use the word ‘‘staggering’’—growth in imports, and the focus that’s happened, especially when you look at 

the ports of L.A./Long Beach, the enormous amount of activity 

down there, and growing to almost 9,000—or 9 million TEUs a 

year—that’s the containers a year—it’s becoming difficult to take 

it away. And the rail industry has struggled to meet that need. 

And the pressure to meet that need comes from the retailers, 

which, in turn, comes from you and I, when we want to go to the 

store and buy whatever it is we want to buy. Unfortunately, there 

was not the capacity built into that infrastructure initially to make 

that happen. If you’d have told me 15 years ago that we would be 

importing stuff from China to the extent we are today, I’d a looked 

at you and suggested that maybe you were thinking something was 

a little weird. 

We have experienced a dramatic economic change in 

globalization that’s impacted all of us. And what’s happened, the 

way we see it, is that the railroads have focused on that and left 

some of the other carload freight, which—I represent primarily, the 

carload world—and some of the freight that’s domestically—they focused on getting their act together on the international side, and— 

to deal with that capacity constraint, and probably left a little of 

the other information—or a little work on the other side of the capacity to a later date. This not means they’re not going to address 

it, but they’re focused on getting that intermodal demand met right 

now. 

And that’s where the conflict comes. That’s where the challenge 

comes in. There is just not enough capacity out there to move it. 

As the AASHTO report clearly points out, you’re going to have 

growth in the 60- to 70-percent area over the next 20 years, and 

they projected that the railroads will only grow by 44 percent. 

I would assert to the Committee that the rail industry section of 

the pie must grow in percentagewise, not just grow as the pie 

grows. That’s the critical nature of what’s going on here. The answers are not easy. They’re difficult. They’re going to be—require 

the input of government, both at the local and Federal level. 

They’re going to require the input of the users of transportation. 

105 

And they’re going to require the input of the users of—the providers of rail transportation. 

And I would encourage the railroads to sit down with all of us, 

as we’ve done already, and start trying to come up with solutions 

for these problems. They’re not going to be easy. It’s going to take 

leadership across the board. And without that sort of effort, we’re 

going to find ourselves in a very difficult position. 

Mr. HAMBERGER. We concur. 

Senator BURNS. Mr. McIntosh? 

Mr. MCINTOSH. Senator, I’d like to respond to your question 

about remedies that have been pursued outside of congressional action, because I think there’s a telling story there. 

Industry—the chemical industry has tried to create a solution to 

this service reliability problem in the same way we would attempt 

to resolve other commercial issues with other suppliers, vendors, 

other people we deal with. Many years of work and attempts to 

change the environment and the accountability with STB have 

been unsuccessful, as has been alluded to several times. 

What’s important to the industry—the chemical industry and to 

our customers are predictability and repeatability, both in our costs 

and our service level. Recognizing that we are captive shippers, we 

have approached the railroads directly, and acknowledged that we 

would be willing to pay higher freight for a level of service and reliability that would be guaranteed. We have been told no. No discussion, no interest. There are no contracts that I have been a party 

to where any kind of performance guarantee on service or reliability has been entertained by any railroad that I do business 

with. And so, consequently, having been unable to affect the environment in any other way, and without the benefit of competition 

as a captive shipper, our only recourse, at this point in time, we 

believe, is to turn to Congress. 

Senator BURNS. Mr. Schuler? 

Mr. SCHULER. Thank you, Senator Burns. 

In the GAO report, they’ve clearly stated that railroads have, 

over the years, attempted to shift their industry to what they’re 

calling right-sizing, where they’ve reduced both—or all—they reduce track, equipment, and facilities. This has made them more efficient, this has made them more productive, without a doubt; but 

yet, they fail to pass those savings on to the shippers, especially 

those who are captive. And also, in that report it is said that rail 

rates are increasing in areas because of excess demand. Well, the 

railroads voluntarily created that excess demand by reducing their 

supply of cars and tracks and other facilities. 

And also, grain rates have increased across the country, 9 percent nominally, and that’s adjusted for gross domestic product. 

Other industries may have declined, but grain sees—continues to 

see increasing rates, especially those captive shippers who are, 

more and more, paying even higher rates. 

Responding to claims that we aren’t inviting the railroad to visit 

with us, we have sat down with the railroad, pleading for rate relief, especially for our captive shippers. We are holding a wheat 

summit this fall, in September, to address the crisis that we see 

in agriculture, where our costs are increasing above where our 

profits will—or our revenues will provide us a profit. One of the 

106 

invitees is Burlington Northern Sante Fe Railroad to participate in 

that conference. They’re also attending our board meeting this coming October in Denver to visit with us. So, we are having negotiations with the railroad to try to find relief. 

We’ve been trying to find relief for 25 years, with the McCarty 

Farms versus BN case that drug on for 17 years in the courts, with 

no relief for farmers. We have visited with the railroads, we’ve 

pleaded with the railroads to provide us better service and fairer 

rates, with no—to no avail. We’ve talked with the Surface Transportation Board, trying to get an effective mechanism that’ll provide relief for these higher rates. And yet, no relief. We feel, and 

it’s my personal opinion, that this—it’s long overdue that we have 

some mechanism. And if it’s legislation, that’s what it needs to be, 

with this Senate 919 bill, to provide relief for our producers. 

Thank you. 

Senator BURNS. Mr. English? 

Mr. ENGLISH. I just want to make one other comment, too, Mr. 

Chairman. For many our members, stranded shippers, we’re paying 

more now for the freight to move the coal to the generating plant 

than the coal itself costs. The difficulties in reliability our members 

have run into have become so bad that in some locations they’re 

now importing coal from Indonesia, as opposed to buying coal in 

this country, simply because of the fact they can’t rely on the railroads and some exorbitant issues that surround the cost of that 

shipment. This doesn’t make any sense. 

And while we talk about, ‘‘Well, we ought to sit down and talk 

together and work this stuff out,’’ you know, that’s what the Surface Transportation Board’s supposed to do. And if the Surface 

Transportation Board isn’t doing the job, it’s broken. And I would 

argue, if there’s no one that seems to be debating that issue, that 

they’re seriously broken, then the Congress ought to fix it. That’s 

the job of the Congress, is to fix that. And until we get that resolved, captive shippers are going to be abused. There’s just no two 

ways about that. There’s no logical way in which you can say that 

the railroads should be able to make 350–450 percent profit off of 

captive shippers and, at the same time, leave the captive shippers 

at the tail end of the bus. We get the last deliveries, because that’s 

where the monopoly is. 

We heard about the investment the railroad’s going to be making 

in the future. I’d like to know how much of that investment is 

going to be made on the coast, as opposed to the interior part of 

the United States. I’d like to know how much of that is going to 

be invested to delivering goods from China, as opposed to delivering goods internally here in the United States. I would suggest, 

and strongly suspect, that that’s where the investment’s going to 

be made. It’s on the coast, delivering imported goods, not taking 

care of deliveries here in this country. 

Senator LOTT. [presiding] Well, I might say that, representing a 

coastal state, it sounds good to me. 

[Laughter.] 

Senator LOTT. They invest along the Mississippi Gulf Coast, 

that’d be fine. 

107 

Thank you all for being here, again. Mr. Hamberger, since you 

have been outnumbered by a high percentage here, would you like 

to respond to anything that’s—— 

Mr. HAMBERGER. Mr. Chairman—— 

Senator LOTT.—been said about—— 

Mr. HAMBERGER.—thank you. And let me just observe that, in 

the immediate parlance, I may have gotten a little hot earlier. I 

may have—frustration bubbled over, and I apologize to you—— 

Senator BURNS. I’m glad I wasn’t here. 

Mr. HAMBERGER.—and to the Committee, and certainly no affront was intended either to the dignity of this Committee nor to 

the respect we owe to all of our customers. And so, I would just 

like to get that on the record. 

There are several issues I guess I would like to respond to. Let’s 

start with grain. And Mr. McIntosh indicated that grain rates have 

gone up. That is correct. From 1985 to 2004, they’ve gone up 9 percent, in nominal terms; which means, adjusted for inflation, they 

have gone down. Meanwhile, the consumer price index, according 

to the GAO, has gone up 60 percent. So, we are a good deal. We 

recognize that we need to keep our customers competitive in world 

markets. 

Let me address the issue of where the investments are going to 

be made. We are a private sector industry. And, in fact, the investments must be made where the returns warrant those investments. 

And, in some cases, that means that the revenue-to-variable-cost 

ratio may have to be higher to warrant investment, to make sure 

that there is, indeed, a network there, that there is, indeed, service 

to all parts of the country. It is our intent, and from what I can 

tell, the Union Pacific and Burlington Northern Sante Fe just announced an additional hundred-million dollars to be spent tripletracking the joint line coming out of Wyoming. So, the investments 

will be made exactly where the traffic warrants it and where the 

demand is. And that’s the way it should be. We are a private sector 

industry. 

Senator LOTT. Anything else, Conrad? 

Senator BURNS. Well, I’m sure going to write out your statement, 

and then we’re going to have a little visit about it. 

Mr. HAMBERGER. Yes, sir. 

Senator BURNS. I have no other questions, but I just want to say 

that we’ve got a greater problem here. We may have identified 

where part of that problem is today, but I think we’re in a position 

now where it’s going to take some legislative fix. And I’ve got to 

be talked out of that, one way or the other. And right now, I’m not 

in that mode. 

Mr. HAMBERGER. We’ll be in to see you. 

Senator BURNS. OK. But I’ve just got to believe just this. I’ve 

picked up two or three reports in the last, oh, probably 6 months 

that says, even though they look at their efficiency and their proficiency in the railroads—and darn if I can find any of them that 

goes above 65 percent. We know that the trains are running slower. We know we’re down from around 24 miles an hour to around 

20 miles an hour in some—in most cases. That tells me that we’ve 

got some bed problems. And—or whatever—but, nonetheless—and 

I see those coal trains roll out of Wyoming and Montana. You say 

108 

you want to triple track in Wyoming, we’d take a little triple track 

in Montana, too. But you don’t see that happening where there is 

no competition. That’s the point we’ve got to make. You’ve got UP 

and Burlington running a common bed. And we know common 

beds, in some circumstances, work. But we don’t see that kind of 

improvement in the infrastructure where there’s only one railroad. 

So, I thank the witnesses today. And I thank them for their information. I thank them for being very frank, because I think it’s 

going to take some very, very frank talk in order to fix this situation for these areas that were up there in yellow. I’ve got to get 

a color code on this guy’s printer, because I have a hard time delineating all that. 

But I want to thank every one of you for coming. This has been 

a very important hearing. 

Thank you. 

Senator LOTT. Thank you very much—— 

Mr. HAMBERGER. Thank you, Mr. Chairman. 

Senator LOTT.—to the panel and the previous panel. We appreciate it. We’ll look forward to working with you in the future. 

The hearing is adjourned. 

[Whereupon, at 12:20 p.m., the hearing was adjourned.] 

(109) 

A P P E N D I X 

SURFACE TRANSPORTATION BOARD

Washington, DC, June 26, 2006 

Hon. TRENT LOTT, 

Chairman, 

Senate Subcommittee on Surface Transportation and Merchant Marine, 

Commerce, Science, and Transportation Committee, 

Washington, DC. 

Dear Mr. Chairman: 

Thank you for the opportunity to testify on June 21, 2006, before your Subcommittee on economics, service, and capacity issues in the freight railroad industry. This was a very important hearing and, because of its importance, I would like 

to correct, for the record, certain troubling statements made by two of the witnesses. 

First. Mr. Dale Schuler, testifying on behalf of the National Association of Wheat 

Growers, stated that the Board, ‘‘after repeated complaints from grain shippers in 

Montana and North Dakota, sided with BNSF, allowing them to continue to single 

out the areas of their system that are the most captive.’’ While I have personally 

heard complaints on my two trips to Montana, I am aware of no such complaints 

to the Board, either formally or informally. 

Second, the Honorable Glen English, testifying of behalf of the National Rural 

Electric Cooperative Association, stated that with regard to rates ‘‘[i]n recent years, 

it has been impossible for shippers to get meaningful relief at the STB.’’ I would 

point to Exhibit A of my written testimony, which illustrates that shippers over the 

last 10 years have prevailed in almost half of the rate cases, and each of these decisions has been upheld on judicial review. With respect to issues concerning coal 

shipping to power plants, I would note that the Board, which has exclusive jurisdiction over rail transportation, has not received even one complaint from any power 

company in recent months. 

Sincerely, 

W. DOUGLAS BUTTREY, 

Chairman. 

PREPARED STATEMENT OF ROSS B. CAPON, EXECUTIVE DIRECTOR, 

NATIONAL ASSOCIATION OF RAILROAD PASSENGERS

Thank you for the opportunity to submit comments for the record in your June 

21 hearing on ‘‘Economics, Service and Capacity in the Freight Railroad Industry.’’ 

Thank you also for holding a hearing on such an important topic. 

Beyond that, we appreciate your strong support for intercity passenger rail, particularly as reflected in S. 1516, and S.A. 1627. 

The National Association of Railroad Passengers has both a specific and a general 

interest in a healthy, reliable railroad network where average speeds are increasing, 

not decreasing, and where high profile customers like UPS are adding traffic to the 

network, not moving it from rails to trucks out of frustration over slow rail service. 

Our specific interest, of course, is to see that railroads do a good job of running 

Amtrak and commuter trains. Amtrak’s current and recent experience is not good. 

In addressing our Association’s board of directors on April 28, Amtrak Acting President and CEO David Hughes said that, where Amtrak uses freight railroads, ontime performance dropped over 50 percent from 1999 to 2005. It appears that things 

have gotten still worse this year. 

Capacity problems are a major factor. If an Amtrak train is delayed on a singletrack railroad while a fleet of freight trains are allowed to run in the opposite direction, that likely is a reasonable decision by the dispatcher, though perhaps also an 

indication that the railroad should be double-tracked. 

110 

Another major factor, however, is bad dispatching, for example, when a slow 

freight is dispatched just ahead of Amtrak, or when a freight train is switching on 

the mainline in front of Amtrak. On June 10 at Terrell, Texas, Amtrak’s northbound 

Texas Eagle (Train 22) was delayed over 30 minutes while a rock train switched on 

the mainline. Some of these sorts of delays appear to reflect contempt for Amtrak 

higher up in railroad management. We urge the Committee to take whatever action 

it can to improve Amtrak on-time performance in the near term. The rest of this 

statement is devoted to longer term track capacity issues. 

The Association’s general interest in rail reflects our belief that greater reliance 

on freight and passenger rail would serve the national interest. This belief is widely 

shared by the general public, as reflected in a Harris poll conducted in December 

(before the more recent run-up in gasoline prices). Rail is widely recognized as maximizing energy and economic efficiency, minimizing environmental damage, and increasing the safety of our overall transportation system. 

Regarding energy, the recently-published Transportation Energy Data Book: Edition 25 (2003 data) again shows the extent to which railroads are more energy efficient than both domestic water carriers and trucks. Rail averaged 344 British Thermal Units (BTUs) per ton-mile compared with 417 for water carriers. ‘‘Heavy singleunit and combination trucks’’ consumed 23,461 BTUs per mile, while railroads’ averaged 15,016 BTUs per freight car mile. 

Unfortunately, the U.S. faces a huge challenge just for rail to maintain its existing market share. As Association of American Railroads (AAR) President and CEO 

Edward Hamberger explained at page 26 of his prepared statement: 

‘‘AASHTO [in its Freight Rail Bottom Line Report released in January, 2003] 

estimated that railroads will need to carry an additional 888 million tons of 

freight annually by 2020 just to maintain their current market share. AASHTO 

also found that railroads will need $175 billion to $195 billion of infrastructure 

investment over this period to accommodate this traffic growth, and projected 

that the railroads will be able to fund the majority of this investment—$142 billion—from their own retained earnings and borrowing. Unfortunately, according 

to the AASHTO analysis, the $142 billion will be enough to enable railroads to 

handle only half of their expected increase in traffic. This funding shortfall 

means that many projects that would otherwise expand capacity and improve 

the ability of our Nation’s farms, mines, and factories to move their goods to 

market; speed the flow of imports and exports; relieve highway congestion; reduce pollution; lower highway costs; save fuel; and enhance safety will be delayed—or never made at all.’’ 

In other words, even if we can achieve the policy shifts needed to allow rail to 

maintain its market share, truck traffic would continue to increase in absolute 

terms as the economy grows. [The AASHTO report was issued by its Standing Committee on Rail Transportation, which at the time was chaired by Joseph Boardman, 

the current Federal Railroad Administrator.] 

AAR favors public-private partnerships and investment tax incentives. As an example of the former, he cites the $1.5 billion Chicago ‘‘CREATE’’ project (Chicago 

Region Environmental and Transportation Efficiency Program) ‘‘involving the State 

of Illinois, the city of Chicago, and the major freight and passenger railroads serving 

Chicago.’’ The difficulty CREATE has had getting adequate funding, especially the 

small share Federal contribution to date, reminds us how tough the needed ‘‘policy 

shifts’’ will be. If Chicago has this much trouble, what will come of a similar, badly 

needed project for New Orleans that is under development? 

The AASHTO figures Hamberger cites suggest public funding needs for freight 

rail are between $33 billion and $53 billion through 2020. Some of the legitimate, 

capacity-enhancing investments that will depend on public support may be not lend 

themselves so obviously to specific ‘‘publics’’ for the ‘‘public-private partnership’’ to 

work. Indeed, there may not be enough ‘‘CREATEs,’’ that is, projects with benefits 

that draw in public partners, to yield public funding anywhere near $33–53 billion. 

Thus, there needs to be consideration of how to develop a Federal program that 

identifies and addresses other projects. Developing such a program potentially involves traversing a minefield of objections—from railroads that oppose any Federal 

action with the slightest impact on the competitive positions of different railroads, 

and from shippers that want Federal investment on railroads conditioned on provisions the railroads would consider unacceptable ‘‘re-regulation.’’ 

The investment tax credit AAR supports presumably also would help close the big 

gap AASHTO identified, by stimulating more private sector investment than 

AASHTO projected. NARP’s supports the investment tax credit, but believes that 

there should be an emphasis on capacity that also benefits intercity and commuter 

passenger trains or that improves the efficiency of publicly supported entities. ConVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00114 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
111 

tinued tax benefits should be tied to reliable operation of passenger trains—at least 

90 percent on-time performance. The magnitude of the benefits could be increased 

where the investment speeds up scheduled running times and/or permits more frequent passenger train operation. 

Obviously, we strongly support the on-time performance provisions in S. 1516. 

Finally, having cited AASHTO’s freight report and its spending recommendations, 

I need to highlight two items related to rail passenger investments. 

• AASHTO’s other January 2003 report, Intercity Passenger Rail Transportation, 

said about $17 billion needs to be invested in intercity passenger rail corridors 

over the next 6 years, and $43 billion over the next two decades. 

• Amtrak’s Fiscal 2007 Grant Request recommends, as a ‘‘strategic investment 

option,’’ a $50 million capital matching program aimed at ‘‘chokepoints’’ on the 

freight network, and says the program could be administered by DOT, in cooperation with Amtrak, the freight railroads and the states. 

Both of the above would benefit freight operations, just as many passenger-inspired investments already have benefited freight—notably, in California, capacity 

improvements for the Los Angeles Metrolink (commuter rail) system and on BNSF’s 

San Joaquin Valley line, and restoration of double-track west of Sacramento on 

Union Pacific. 

Thank you, Mr. Chairman, for your yeoman efforts to create a funding mechanism 

that would let the Nation begin to address these needs. 

Thank you for considering our views. 

PREPARED STATEMENT OF THE BURLINGTON NORTHERN SANTA FE RAILWAY (BNSF) 

BNSF believes that the GAO study finding with regard to grain rates in Montana 

to be overstated in at least two respects: 

1. The data relied upon by GAO in its study did not take into account various 

discounts and other allowances from BNSF’s published grain rates that were 

being paid by BNSF in 2004. There are three separate discounts paid on a regular basis on each shuttle train movement of grain originating in Montana. 

First, under its Origin Efficiency Program, BNSF pays the shipper a discount 

of $100 per car provided that the shuttle train is loaded within 15 hours. Second, under its Destination Efficiency Program, BNSF pays the receiver of the 

shuttle train $100 per car provided that the shuttle train is unloaded within 

15 hours. Third, the holder of the shuttle train certificate is paid $100 per car 

for each trip made pursuant to the holder’s volume commitment under the shuttle certificate. These discounts amount to $300 per carload of grain moving in 

shuttle trains originating in Montana and are paid on the vast majority of shuttle train movements in Montana. Any accurate calculation of the revenue/variable cost ratio must take account of these discounts. 

2. Also, since 2004 BNSF has taken significant rate reductions to its shuttle 

train rates for wheat originating in Montana. For example, at the beginning of 

2005, the per car rate on wheat moving in a shuttle train from Collins and 

Macon, Montana, was $2,811 and $3,629 for movement to the Pacific Northwest. Through a series of rate decreases during 2005 and 2006, the current per 

car wheat rates in shuttle trains are $2,481 for Collins and $3,175 for Macon. 

These reductions amount to about 12 percent. Similar rate reductions have 

taken place from other Montana origins. The GAO study, because it used earlier 

data, does not reflect these very significant rate reductions. 

The impact of the first point indicates that the GAO finding that 39 percent of 

grain tonnage moving in Montana at a Revenue/Variable Cost (R/VC) ratio in excess 

of 300 in 2004 is substantially overstated. The second point shows that today the 

amount of tons moving in Montana producing a R/VC ratio in excess of 300 would 

be even smaller. 

PREPARED STATEMENT OF THE PORTLAND CEMENT ASSOCIATION (PCA) 

The Portland Cement Association (PCA) appreciates the opportunity to submit 

testimony to the Subcommittee regarding economics, service and capacity issues in 

the freight railroad industry. The current national rail policy and lack of capacity 

impedes portland cement manufacturers from effectively and efficiently delivering 

an essential commodity needed to build our Nation’s vital infrastructure and 

strengthen our Nation’s economy. With more than 80 percent of portland cement 

112 

manufacturing plants served by (or ‘‘captive’’ to) a single Class I railroad the current 

rail policy is unnecessarily contributing to higher construction costs. 

What Is Portland Cement? 

The term ‘‘portland’’ cement is not a brand name—rather, it is a generic name 

for the type of cement used in concrete, just as stainless is a type of steel. Portland 

cement is a manufactured powder that acts as the glue or bonding agent that forms 

concrete. As an essential construction material and a basic component of our Nation’s infrastructure, portland cement is utilized in numerous markets, including the 

construction of highways, streets, bridges, airports, mass transit systems, commercial and residential buildings, dams, and water resource systems and facilities. The 

low cost and universal availability of portland cement ensures that concrete remains 

one of our Nation’s most essential and widely used construction materials. 

Portland Cement Association 

PCA is a trade association representing cement companies in the United States 

and Canada. PCA’s membership consists of 31 companies operating 102 manufacturing plants in 36 states. PCA members account for 98 percent of cement-making 

capacity in the United States. The cement industry is a crucial component of one 

of the largest segments of our Nation’s economy—the more than one trillion dollar 

construction industry. Nearly every construction project requires portland cement. 

In 2005, 127 million metric tons of portland cement were consumed in the United 

States; in fact, cement is the second most consumed commodity on the planet, second only to water. 

U.S. Cement Industry Demographics 

The cement industry operates manufacturing plants in 36 states, producing nearly 

96 million metric tons of portland cement in 2005. Cement manufacture is a highly 

capital-intensive industry. Cement companies invest millions of dollars annually to 

upgrade manufacturing equipment and phaseout more costly and less energy efficient operations. Between 1994 and 2003 the cement industry invested $7.542 billion in new capital investment. The construction and permitting costs of a new 

greenfield cement plant can easily exceed $250 million. Only two greenfield plants 

have been constructed within the past 10 years. 

Cement is produced from various abundant raw materials including limestone, 

shale, clay and silica sand. These minerals are ground and heated in large rotary 

kilns to temperatures as high as 3,400 degrees Fahrenheit. The heat of the combustion fuses these materials into clumps of an intermediate material called clinker. 

When the clinker is discharged from the kiln, it is cooled and later ground with a 

small amount of gypsum to produce the gray powder known as portland cement. Different types of portland cement are manufactured to meet various physical and 

chemical requirements. 

Portland cement manufacturing facilities use an enormous amount of energy. In 

fact, energy is the largest cost component in the manufacture of portland cement. 

The U.S. cement industry is largely coal fired with 81.3 percent of all plants using 

coal, coke, or some combination of the two as primary kiln fuel in 2004. The domestic cement industry is the largest industrial consumer of coal. Much of the coal utilized to heat cement kilns on a 24/7 basis is delivered by rail. 

The cement industry is regional in nature. Most cement manufacturing plants are 

located in rural areas near large limestone deposits, the principal ingredient in producing cement. However, at the same time plants also must be located near markets 

because the cost of shipping cement quickly overtakes its value. As such, customers 

traditionally purchase cement from local sources. Texas, California, Florida and 

Pennsylvania, are the leading cement manufacturing states, respectively, producing 

nearly 36 million tons in 2005 or 37.4 percent of domestic cement production. 

U.S. Cement Manufacturers Rely on Railroads 

Considering the regional nature of the cement industry, it is critical that there 

are reliable and cost-effective transportation options available. Average cement shipments range between 250 to 300 miles. Truck transportation is not economical beyond 125 miles. As such, the cement industry is reliant on railroads to deliver our 

product beyond the economical range of trucks. Several cement plants have access 

to water transportation for domestic shipments. The railroads have sometimes argued that these cement facilities are not captive since there are alternative modes 

of transportation available. This simply is not the case. Domestic portland cement 

manufacturers rely on rail transportation to move 50 percent of all shipments between cement plants and distribution terminals, according to 2004 U.S. Geological 

Survey data, the most recent independent figures available. About 95 million tons 

of cement was produced domestically in the same year. Most bulk cement shipments 

113 

are from the manufacturing plants to the more than 400 regional distribution terminals, where the cement is then delivered by truck to local contractors and ready 

mixed producers. It is vitally important to our industry that the railroads provide 

reliable, efficient and cost-effective service to meet the widespread demand for our 

product. As mentioned earlier, more than 80 percent of U.S. cement manufacturing 

plants are captive to a single railroad. Due to the absence of competition, these 

plants are charged substantially higher rates and usually receive poor service. On 

the other hand, dual rail-served facilities typically have lower rates and more reliable service. 

The railroads also transport millions of tons of inbound coal shipments to fuel cement manufacturing plants each year. There are examples within the industry in 

which cement plants that are served by two railroads receive coal from a supplier 

that is captive to a single railroad. There are also instances where both the cement 

plant and the coal supplier are captive to a single railroad. These situations result 

in unnecessarily high rail rates that add to the cost of cement and, ultimately, to 

construction costs. PCA members have also reported situations in which they were 

forced to transport coal to the cement plant by truck, at a substantial cost, due to 

delivery failures by the railroad. In these instances, the situation confronting the 

cement plants were desperate: they had only a day or two of coal supply on hand. 

U.S. Cement Industry Largely ‘‘Captive’’ and Service Suffers 

The Staggers Act of 1980, which removed regulations of the railroad industry 

where transportation competition exists, has improved the industry’s efficiency and 

financial stability. However, since deregulation, there has been a sharp decline from 

63 Class I railroads in 1976 to just four major Class I railroads today handling 90 

percent of the Nation’s rail traffic. This consolidation has contributed to diminished 

competition as well as ineffective and inconsistent rail service for the cement industry and many others. 

Inconsistent and unreliable service from the Class I railroads is one of the most 

serious problems the portland cement industry confronts in our efforts to bring an 

affordable and essential product to market. Service encompasses many aspects of 

rail transportation, including picking up rail cars (typically covered hoppers), ontime delivery of rail cars, providing empty rail cars, handling issues, questions 

about the condition of the rail cars, and settling claims for service failures. The cars 

supplied by the railroads are typically old, poorly maintained and frequently a safety concern. Our members report that as many as 15 percent of the empty rail cars 

delivered to manufacturing plants in a given week are being rejected. 

In recent years, several cement companies have been forced to purchase private 

rail cars since the Class I railroads have refused to add cement rail cars to their 

fleets. This, in addition to the declining and inconsistent service, has increased the 

need for more rail cars to deliver the same tonnage. Meanwhile the railroads have 

added tariff provisions charging for the storage (demurrage) of private rail cars. 

This results in further increased costs to the cement shipper while providing no incentive to the rail carriers to improve their service. 

Further compounding the problem is the fact that at some locations, the railroad 

will only quote freight rates to the cement company if the cement company uses 

their (system) rail cars. In short, no product will move from that origin unless the 

railroad is collecting revenue for the use of their rail cars. In other instances, the 

railroads quote rates such that the difference in cost of a movement in a private 

rail car is so great that private rail car transports are not economical. Rail car supply is a classic Catch 22 situation that adds unnecessarily to the cost and inefficient 

shipment of our product and, ultimately, to construction costs. 

While service continues to decline, cement manufacturers are experiencing sharp 

rail freight rate increases. For example, some rates increased more than 23 percent 

in 2005, according to some cement companies. Indeed, transit times on empty return 

cars have increased by more than 13 percent in some instances, increasing fleet 

storage costs. 

PCA Supports Service Provisions in Legislation 

The cement industry has no recourse regarding rates since cement (officially ‘‘hydraulic cement’’) is classified as an exempt product from rate regulation by the Surface Transportation Board (STB). Since the STB has done little to address service 

issues, we believe Congress should enact legislation expanding the STB’s authority 

in this area. The STB should be required to post a description of each complaint 

from a customer about rail service. The legislation should also require the Board 

to submit an annual report to Congress regarding rail service complaints and describe the procedures the Board took to resolve them. Further, either party should 

be allowed to submit a dispute over rail service to the STB for ‘‘final offer’’ arbitraVerDate Nov 24 2008 10:37 Feb 16, 2012 Jkt 071842 PO 00000 Frm 00117 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\71842.TXT SCOM1 PsN: JACKIE
114 

tion. These provisions are included in bipartisan legislation (S. 919), the Railroad 

Competition Act of 2005. These service provisions contained in S. 919 do not constitute ‘‘re-regulation,’’ a term coined by the railroad industry to overstate the perceived negative impact of the legislation. 

We believe strongly that the lack of rail competition is the fundamental issue associated with these problems. PCA believes it is important to strike a balance between regulation of the railroad industry while also assuring rail competition. PCA 

believes that the intent of Congress in the Staggers Act was only to deregulate the 

railroads where competition exists. Unfortunately, the implementation of the Act 

has resulted, often, in deregulation even where there is no transportation competition—with predictable results such as those we are reporting. 

The following example further illustrates the unintended consequences of the 

Staggers Act, as implemented, on a captive shipper. 

PCA member Holcim (US) Inc. established HolRail, a limited liability corporation, 

to construct and operate a two-mile rail line that would provide competitive rail 

service to the Holcim cement manufacturing plant in Holly Hill, South Carolina. 

Presently, Holly Hill is served only by CSX Transportation, Inc. (CSX). The proposed line would connect to a rail line owned by the Norfolk Southern Railroad 

Company (NSR). 

Holcim is one of the largest suppliers of portland and blended cements and related 

mineral components in the United States. It ships more than 20 million tons of cement and related materials each year, of which 16 percent moves by railroad. 

Holcim has 14 manufacturing facilities and approximately 70 distribution terminals 

across the country and employs approximately 2,500 people in the United States. 

The Holly Hill production facility manufactures a variety of cement and masonry 

products and relies on rail transportation to receive inbound raw materials and to 

ship outbound products. In August 2003, Holcim completed a plant expansion 

project that increased the size of the facility and doubled output capacity to two million tons of cement per year. A substantial portion of Holly Hill’s production is 

shipped by rail to Holcim distribution terminals to serve markets that are over 100 

miles from the facility. Because trucking cement over distances greater than 100 

miles is uneconomic and impractical, Holly Hill requires reliable, economic, and efficient rail transportation to reach optimal plant utilization. 

When the Holly Hill plant operates at full capacity, the plant annually receives 

3,500 inbound rail cars with fuel and raw materials and ships out 10,000 rail cars 

with cement. As the only rail carrier with direct access to the Holly Hill plant, CSX 

transports all inbound raw materials and outbound products that move by rail. 

CSX’s service track record is weak. Its service is unreliable and inadequate, and 

CSX appears to be completely indifferent to Holcim’s requirements and requests for 

service improvements. For example, CSX has refused to allow Holcim to use its private railcar fleet to transport Holly Hill’s products even when CSX cannot provide 

its own cars to meet the needs of the plant! CSX recently eased its objection to this 

practice. The CSX equipment is in poor condition and is routinely rejected at the 

Holly Hill facility. By contrast, two other cement plants in the Holly Hill area that 

are not captive to a single railroad are freely allowed to ship product in private cars 

without the restrictions that CSX imposes on Holcim. 

In addition to CSX’s inadequate railcar service and its restrictions on private cars, 

CSX charges Holcim rates that exceed those paid by the two nearby cement manufacturers that have competitive rail service. By obtaining rail competition, through 

its ‘‘build out’’ to NSR, Holcim will place Holly Hill on equal footing with other comparable cement facilities that have access to more than one railroad. 

CSX’s consistently poor service, which has caused Holcim to lose business opportunities in the past, simply cannot meet the needs of Holly Hill’s expanded production capacity. Holcim believes that competition between CSX and NSR at Holly Hill 

will produce more responsive, more reliable, and better rail service. Improved rail 

service will support the facility’s increased production and allow Holcim to supply 

distant markets and to compete in new markets. 

Additionally, rail-to-rail competition will lead to a reduction in rail rates, making 

Holly Hill more competitive with non-captive producers. Accordingly, HolRail, the 

Holcim subsidiary, has filed a petition with the STB to construct a two-mile rail 

line, running south from the Holly Hill plant to the NSR line. The petition is currently pending before the STB. 

Another example of the unintended consequences of the Staggers Act involves a 

captive east coast cement company that must transport cement 300 miles by rail 

to its distribution terminal to meet customer demand. The applicable rail rate is so 

outrageously high the cement company concluded that importing cement from China 

to the east coast is less expensive than shipping it 300 miles by rail. 

115 

Demand for Cement to Increase 

United States cement consumption reached a record high during 2005, peaking 

at 127 million metric tons and reflecting growth of 5.6 percent over strong 2004 levels. The near term outlook for the cement market remains strong. Growth in cement 

consumption is expected to materialize due to continued increases in construction 

activity as well as increases in the use of concrete and cement per construction dollar spent. Despite the likelihood that the growth boom in residential housing construction may be nearing an end, gains in nonresidential and public construction are 

emerging as new sources for growth in construction activity. Gains in these areas 

are expected to outweigh modest declines in residential construction—resulting in 

a continuation of growth in construction activity. Furthermore, various influences 

suggest that the increases in concrete and cement usage per dollar of construction 

activity will continue. The combination of sustained strength in construction activity 

and cement usage per dollar of construction activity is expected to result in new cement consumption records in 2006 through 2007 and beyond. From 2005’s record 

levels, cement consumption is expected to grow 3.5 percent in 2006 and another 2.5 

percent in 2007. 

Cement and concrete are literally one of the building blocks of our Nation’s economic growth. Strong cement demand reflects the need for business to expand commerce by way of increasing its physical properties, whether it be retail shops, warehouses or office buildings. It also reflects the need for Federal, state and local governments to build new schools, improve its road systems and general infrastructure. 

It also reflects the need to build new housing to meet growth in population and 

household formation. Furthermore, according to the Bureau of Census, the United 

States population is expected to grow by 68 million persons in the next 25 years. 

As a result, new demand for commercial, public and residential construction activity 

will increase. According to PCA’s long term forecast, cement consumption is expected to grow from 127 million metric tons in 2005 to 200 million metric tons in 

2030. 

To meet the future U.S. cement and concrete requirements, the United States cement industry currently is engaged in its most aggressive capacity expansion in the 

industry’s history. Based on announced and permitted plans, by 2010 the industry 

will add 18.6 million metric tons (20.6 million short tons) of clinker capacity—representing a 19.8 percent increase over 2005 capacity levels and a $4.1 billion commitment. The capacity expansion reflects a mix of greenfield sites, plant modernizations, and expansions of existing facilities. In addition, the industry is committed 

to the expansion of its import facilities—amplifying the industry’s commitment to 

expand all sources of supply to meet the national economy’s rising need for cement 

and concrete. At least 63 percent of the new capacity expansion and modernizations 

underway at existing facilities are captive to a single railroad. Although three 

greenfield facilities are scheduled to start production during this period, the cement 

industry is largely limited to modernizing and expanding its capacity at existing facilities because of high construction and permitting costs to build a greenfield cement plant. Since cement industry capacity expansion must follow projected market 

demographics largely based on population growth, much of the expansion will occur 

in the southern and western regions of the United States where the vast majority 

of the cement facilities are captive to a single railroad. In short, the cement industry 

is forced to expand capacity where it is captive to a single railroad—despite our industry’s concern about that captivity. 

While the industry has proven it commitment to providing reliable and adequate 

supplies of cement and concrete to meet U.S. needs, these efforts are partially offset 

by existing rail constraints. The existing lack of adequate rail capacity impedes portland cement manufacturers from effectively and efficiently delivering its product to 

the marketplace. The rail capacity shortfall relative to existing requirements of the 

economy is reflected in a rapid run-up in rail freight rates—rising by 11.7 percent 

in 2005 according to the Bureau of Labor Statistics. As the economy grows and more 

cement capacity is put in place, it is likely that existing rail constraints will be exaggerated, potentially leading to a repeat of the large rate hikes experienced in 

2005. Furthermore, it is important to recognize that other essential building materials rely heavily on the railroads to move product to market—amplifying the adverse consequences of rail constraints on overall economic growth. 

Construction currently accounts for approximately 6.7 percent of total economic 

activity. One out of every 18 jobs in the U.S. is directly employed by the construction industry. Since 2000, growth in construction employment has accounted for 30 

percent of the United States’ total employment growth. Very little construction activity can materialize without utilizing concrete at some stage of the construction 

project. Impairment in the ability to deliver cement to market efficiently, impairs 

116 

construction activity and represents an issue that could impede future growth in 

this important sector of our Nation’s overall economic activity. 

Freight Railroad Infrastructure Tax Credit 

The Class I railroads state that they are committed to expanding capacity and im- proving service, spending an estimated $6.6 billion for capital expenditures in 2005 

and projecting to spend a record $8 billion in 2006. To further enhance capital improvement and increase capacity, the Class I railroads are seeking a 25 percent Federal tax credit to leverage private investment in rail infrastructure improvements 

and other capital expenses. The proposal reportedly would also make the tax credit 

available to certain shipper funded rail projects. 

PCA supports increasing investment in the Nation’s rail infrastructure to meet 

the current and future freight transportation needs. As the Class I railroads report 

profit increases, now is the time for the railroad industry to bolster investment to 

expand capacity and improve service, especially for captive shippers that typically 

pay much higher rates and experience poor to marginal service. 

PCA would be inclined to support a tax credit if Class I railroads are required 

to invest in rail capacity projects that would provide relief to captive shippers. This 

requirement would have the benefit of reducing highway congestion, creating a more 

efficient freight rail system for all shippers, including particularly domestic shippers 

who generally are the ones that are captive, and heavy truck traffic on our highways and local streets, thus reducing highway maintenance cost. Requiring that the 

tax credit for rail capacity enhancements be focused on the infrastructure needed 

to serve captive rail customers would be the most prudent and sound use of taxpayer dollars. The cement industry also believes that Congress should further study 

the concept and feasibility of a railroad trust fund, similar to the Highway Trust 

Fund, to finance rail capacity and capital projects. Finally, we want to see any tax 

benefit for the railroad industry coupled with legislation that addresses the concerns 

of railroad customers that the rail industry be more competitive. 

The higher rates and unreliable service often associated with captive cement 

plants often forces our industry to transport cement by bulk tank truck to distribution terminals and customers at a much higher cost. It is critical that cement manufacturers maintain adequate inventories of product to meet contractor demand. Contractors utilizing portland cement in large-scale concrete paving projects, for example, need a constant and reliable supply of cement to meet construction time tables 

and to plan for weather delays and other construction complications. Just as contractors expect timely shipments of cement from the cement company, it is the obligation of the railroad, we believe, to deliver shipments of cement in a timely manner. 

Conclusion 

U.S. manufacturers need a vibrant and profitable rail industry to support our Nation’s economic growth. The portland cement industry is a vital component of our 

Nation’s construction industry, which supports the backbone of our Nation’s growing 

economy. It is essential that the portland cement industry have access to a competitive rail transportation system to ensure that our product is delivered in a timely 

and efficient manner to our customers who build our Nation’s critical infrastructure 

fostering economic expansion. With more than 80 percent of the cement manufacturing plants and a similar ratio of the industry’s 400 distribution terminals held 

captive to a single railroad, combined with the inadequate service at these facilities, 

only adds to our Nation’s construction costs. Demand for cement is forecast to increase for the foreseeable future, only exacerbating this problem. 

PCA strongly urges the Subcommittee to further examine S. 919, the Railroad 

Competition Act of 2005, especially provisions that would expand STB’s authority 

over service-related issues. This provision, among others, would help provide some 

relief for captive industries, such as the cement industry. 

Thank you for the opportunity to submit testimony to the Subcommittee on this 

important issue. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. CONRAD BURNS TO

W. DOUGLAS BUTTREY

Question 1. I hear a lot of concern from rail customers about two rulings of the 

STB that are perceived as preventing competition—in direct conflict with what Congress directed the STB to do, which was work toward competitive markets and protect shippers where there is no competition. One concern is the ‘‘bottleneck’’ decision 

that, essentially, says that a railroad does not have to provide a customer a rate 

to a point where a movement may move onto a competing railroad. Second, both 

117 

the STB and the ICC before it have approved what I believe are anti-competitive 

contracts—known as ‘‘paper barriers’’—in track lease agreements between the major 

railroads and short lines meaning that short lines may only do business with the 

railroad leasing the track, even though the short line might connect to another 

major carrier. 

Your agency has the authority to take administrative action to promote competition, yet these decisions do just the opposite. Can the STB act on its on initiative 

to change these rulings or must someone bring a request to the STB that it change 

its ruling on these issues? If you can, then why don’t you? 

Answer. The STB has the authority to initiate hearings and rulemaking proceedings to address issues like those described above. As an illustration, we are having a hearing on July 27 to examine the role of ‘‘paper barriers’’ in the rail industry. 

That hearing will explore questions such as whether the agreements are anticompetitive, whether they are harmful/beneficial, the extent of such agreements in 

the industry and the agency’s remedial powers. 

The Board has not acted to modify the bottleneck decision, which was premised 

on pronouncements by the Supreme Court in Great N. Ry. v. Sullivan, 294 U.S. 548 

(1935). Since the 1980 Staggers Act and the 1995 ICCTA did not disturb any portion 

of the Court’s ruling in the 1935 decision, the Board has concluded that that decision is settled law. 

Question 2. To what extent can the STB initiate investigations of railroad practices in markets where it sees abuses of pricing power, or severe deficiencies in service? 

Answer. The STB has broad authority to issue emergency service orders for a 

total of up to 270 days to address clearly emergency situations in freight rail service. Under 49 U.S.C. 11123, our emergency powers can be used to address serious 

rail service disruptions whether they result from damage to rail tracks and facilities, from serious congestion of the rail network, or from the inability of a carrier 

to meet its transportation obligations for whatever reason. The STB can exercise 

these powers on its own initiative. 

In contrast, under 49 U.S.C. 11704, we cannot investigate the reasonableness of 

common carrier rates unless the shipper files a formal complaint with the Board. 

Question 3. Does the STB take its duty to provide for competition and protect 

shippers seriously, or does it simply sit back and wait for shippers to jump through 

all the hurdles and expense of filing an actual rate case? 

Answer. We take our duty to protect captive shippers very seriously. In the last 

6 months, we have initiated a series of proceedings to investigate general complaints 

from the captive shipper community, addressing such issues as fuel surcharges, 

paper barriers, and the complexity and expense of our rate cases. But if a complainant wants rate relief, the statute requires that it first file a complaint with the 

Board. For a large rail rate dispute, a captive shipper would seek relief under our 

Constrained Market Pricing guidelines, which is an expensive process. If, however, 

the value of its case cannot justify the expense of a full stand-alone cost presentation, the captive shipper may use our simplified guidelines, and pay only a $150 

filing fee. 

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