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95–124 PDF 2005

STATUS OF RAILROAD ECONOMIC

REGULATION

(108–59)

HEARING

BEFORE THE

SUBCOMMITTEE ON

RAILROADS

OF THE

COMMITTEE ON

TRANSPORTATION AND

INFRASTRUCTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MARCH 31, 2004

Printed for the use of the

Committee on Transportation and Infrastructure

(
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-Chair

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

WAYNE T. GILCHREST, Maryland

JOHN L. MICA, Florida

PETER HOEKSTRA, Michigan

JACK QUINN, New York

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

STEVEN C. LATOURETTE, Ohio

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

GARY G. MILLER, California

JIM DEMINT, South Carolina

JOHNNY ISAKSON, Georgia

ROBIN HAYES, North Carolina

ROB SIMMONS, Connecticut

SHELLEY MOORE CAPITO, West Virginia

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

DENNIS R. REHBERG, Montana

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

BILL SHUSTER, Pennsylvania

JOHN BOOZMAN, Arkansas

CHRIS CHOCOLA, Indiana

BOB BEAUPREZ, Colorado

MICHAEL C. BURGESS, Texas

MAX BURNS, Georgia

STEVAN PEARCE, New Mexico

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

RODNEY ALEXANDER, Louisiana

VACANCY

JAMES L. OBERSTAR, Minnesota

NICK J. RAHALL, II, West Virginia

WILLIAM O. LIPINSKI, Illinois

PETER A. DEFAZIO, Oregon

JERRY F. COSTELLO, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JERROLD NADLER, New York

ROBERT MENENDEZ, New Jersey

CORRINE BROWN, Florida

BOB FILNER, California

EDDIE BERNICE JOHNSON, Texas

GENE TAYLOR, Mississippi

JUANITA MILLENDER-MCDONALD,

California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

LEONARD L. BOSWELL, Iowa

TIM HOLDEN, Pennsylvania

NICK LAMPSON, Texas

BRIAN BAIRD, Washington

SHELLEY BERKLEY, Nevada

BRAD CARSON, Oklahoma

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

JULIA CARSON, Indiana

JOSEPH M. HOEFFEL, Pennsylvania

MIKE THOMPSON, California

TIMOTHY H. BISHOP, New York

MICHAEL H. MICHAUD, Maine

LINCOLN DAVIS, Tennessee

(II)
SUBCOMMITTEE ON RAILROADS

JACK QUINN, New York, Chairman

THOMAS E. PETRI, Wisconsin

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN L. MICA, Florida

SPENCER BACHUS, Alabama

JERRY MORAN, Kansas

GARY G. MILLER, California

JIM DEMINT, South Carolina

ROB SIMMONS, Connecticut

SHELLEY MOORE CAPITO, West Virginia

TODD RUSSELL PLATTS, Pennsylvania

SAN GRAVES, Missouri

JON PORTER, Nevada, Vice-Chair

DON YOUNG, Alaska

(ex officio)

CORRINE BROWN, Florida

NICK J. RAHALL II, West Virginia

PETER A. DEFAZIO, Oregon

JERROLD NADLER, New York

BOB FILNER, California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

LEONARD L. BOSWELL, Iowa

JULIA CARSON, Indiana

MICHAEL H. MICHAUD, Maine

WILLIAM O. LIPINSKI, Illinois

JERRY F. COSTELLO, Illinois

JAMES L. OBERSTAR, Minnesota

(ex officio)

(III)

(V)

CONTENTS

TESTIMONY

Page

Ficker, John President, National Industrial Transportation League .................. 37

Grimm, Curtis, Professor of Transportation and Logistics, University of Maryland ........................................................................................................................ 37

Hamberger, Ed, President, Association of American Railroads ........................... 20

Huval, Terry, Director of Utilities, City of Lafayette, Louisiana ........................ 37

Nober, Hon. Roger, Chairman, Surface Transportation Board ............................ 2

Platz, Charles E., President, Basell North America, Inc. .................................... 37

Rennicke, William J., Managing Director, Mercer Management Consulting,

Inc. ......................................................................................................................... 37

Strege, Steven D., President, North Dakota Grain Dealers Association ............ 37

Timmons, Richard, President, American Short Line and Regional Railroad

Association ............................................................................................................ 20

PREPARED STATEMENTS SUBMITTED BY WITNESSES

Ficker, John ............................................................................................................. 56

Grimm, Curtis .......................................................................................................... 65

Hamberger, Ed ......................................................................................................... 74

Huval, Terry ............................................................................................................. 109

Nober, Hon. Roger ................................................................................................... 118

Platz, Charles E ....................................................................................................... 144

Rennicke, William J ................................................................................................ 158

Strege, Steven D ...................................................................................................... 215

Timmons, Richard .................................................................................................... 240

SUBMISSIONS FOR THE RECORD

Hamberger, Ed, President, Association of American Railroads, responses to

questions from Rep. Corrine Brown of Florida .................................................. 101

Huval, Terry, Director of Utilities, City of Lafayette, Louisiana, responses

to questions from Rep. Corrine Brown of Florida ............................................. 115

Nober, Hon. Roger, Chairman, Surface Transportation Board, responses to

questions from Rep. Corrine Brown of Florida .................................................. 139

Platz, Charles E., President, Basell North America, Inc., responses to questions from Rep. Corrine Brown of Florida .......................................................... 154

Rennicke, William J., Managing Director, Mercer Management Consulting,

Inc., responses to questions from Rep. Corrine Brown of Florida .................... 209

Strege, Steven D., President, North Dakota Grain Dealers Association, responses to questions from Rep. Corrine Brown of Florida ............................... 233

ADDITIONS TO THE RECORD

Air Liquide America, B.K. Chin, Chief Operating Officer, letter, April 16,

2004 ....................................................................................................................... 268

American Farm Bureau Federation, statement .................................................... 246

ATOFINA Petrochemicals, Inc., statements .......................................................... 274

National Grain and Feed Association, statement ................................................. 248

Western Coal Traffic League, statement ............................................................... 253

Portland Cement Association, David S. Hubbard, Director, Legislative Affairs,

letter, April 29, 2004 ............................................................................................ 270

(1)

THE STATUS OF ECONOMIC RAILROAD

REGULATION

Wednesday, March 31, 2004

HOUSE OF REPRESENTATIVES, COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, SUBCOMMITTEE ON

RAILROADS, WASHINGTON, D.C.

The subcommittee met, pursuant to call, at 10:08 a.m. in room

2167, Rayburn House Office Building, Hon. Jack Quinn [chairman

of the subcommittee] presiding.

Mr. QUINN. Good morning, everybody. Thank you for your attention, and I thank Mr. Boswell for joining me this morning to begin

the hearing in a timely way. Ms. Brown is on her way here, she’ll

be here any moment. I appreciate Mr. Boswell sitting in.

This morning’s hearing is part of the Subcommittee’s ongoing

oversight responsibilities, as most everybody in this room probably

knows, regarding the Surface Transportation Board. Last year we

examined the resources and requirements for the agency, and

today we’re going to explore the STB’s authority over the remaining Federal regulations of freight railroad rates, practices, probably

talk a little bit about mergers, various other transactions. As has

been the case since the original creation of the Interstate Commerce Commission in 1887, there always are, it seems, disagreements over the scope and standards of economic regulations for

railroads.

The broad deregulation of railroad rates in the 1980 Staggers Act

is generally credited with saving railroads from bankruptcy. However, there are still some serious differences of opinion about the

effectiveness of Staggers and the ICC Termination Act in 1995. Our

goal this morning at this hearing is to gather testimony and information from all the affected parties on the status of economic regulation of the railroad industry in general. To do that, we’ve assembled a cross-section of conflicting views. That’s not uncommon when

we schedule a hearing.

We’re going to hear first from the STB Chairman, the Honorable

Roger Nober. Our second panel is comprised of Mr. Ed Hamberger

and Mr. Rich Timmons, representing the interests of the Class One

and short line railroads, both gentlemen hardly strangers to this

Subcommittee and the hearing room. We’re glad to have both of

them with us. And our final panel includes rail shippers from the

chemical, industrial and agricultural sectors, also outside experts

who have followed and analyzed economic trends within the railroad industry.

I think we’ve put together a fair and balanced hearing to hear

all those views this morning and all of us look forward to exchang-
2

ing those views. I don’t believe we’ll be interrupted with any votes,

at least for the early part of the morning, and may be able to get

through the hearing, so we’re hopefully going to have the House

Floor cooperate with us.

Mr. Mulvey, I want to mention, I know Ms. Brown will, depending on action on the other side of the Capitol, this may or may not

be your final meeting with us here. You’ll be joining Mr. Nober

over at the STB, and Frank, I think it goes without saying, I don’t

want to steal Corrine’s thunder, but from my point of view on my

side of the aisle, all of us, the staff work that you’ve done for us

on the Subcommittee and the full Committee has been invaluable.

We’ll count you as a friend when you’re over at STB but we know

there’s a line we have to draw somewhere there. But congratulations, and we hope it moves as quickly as possible. Thank you for

your help also out in Las Vegas at our recent field hearing.

I want to recognize Mr. Boswell for some brief opening remarks

before Ms. Brown gets here. Mr. Boswell.

Mr. BOSWELL. Thank you, Mr. Chairman. Thank you for deferring to Ms. Brown, when she shows up, and counsel, I’m glad I

heard that statement, because I did just want to add one comment.

The Surface Transportation Board has a big role to play in a lot

of our States, as you well know, and again, thank you for doing

this hearing. I think in terms of my rural area, I’ve got industrial

areas, Des Moines, Cedar Rapids and so on, but I’ve got a lot of

rural areas, and we really survive on what it costs to move, for example, coal to the power plants and the RACs.

So I’m glad we’re going to have a friend over there. So this is

something that’s weighing on our minds as we think about the

economy and so on and the stresses that are going on across America. I think in my State, we really rely on the rail and there’s limited competition. So it’s a concern. That’s just sort of my opening

ramble on that piece.

Mr. QUINN. Thank you, Mr. Boswell. Thank you very much.

Let’s move to our first panel, the Honorable Roger Nober, the

Chairman of the Surface Transportation Board. I think we all

know that we’d like to ask you, Roger, if you could, to keep your

remarks to about five or ten minutes or so. We’ve received your testimony, thank you very much, as always, well prepared and it becomes part of the record. We’ll hear from you and then move to

questions.

TESTIMONY OF HON. ROGER NOBER, CHAIRMAN, SURFACE

TRANSPORTATION BOARD

Mr. NOBER. Good morning, Chairman Quinn and Mr. Boswell

and other members of the Subcommittee. My name is Roger Nober

and I’m Chairman of the Surface Transportation Board.

I certainly appreciate the opportunity to appear before this Committee on the important issue of railroad economic regulation. I’m

particularly pleased to be here on the day that the Committee is

considering and will take to the Floor its reauthorization of TEA21. I have to say that if six years ago you told me that when the

Committee was taking that bill to the Floor, I’d be here testifying

on rail issues, I wouldn’t have necessarily thought that would be

the case.
3

This is another appearance of mine as the sole board member,

and hopefully my last. I am looking forward to Mr. Mulvey and the

other nominee, Mr. Buttrey, who is also in the audience, hopefully

joining us soon and the other body acting quickly and putting my

11 months as a single board member to a rapid close. That’s my

hope. I’m crossing my fingers like everybody else. We have a lot of

work to do down at the agency, so when these folks get there,

they’re going to get to roll up their sleeves and get to work quickly

on a lot of the issues that we’re going to discuss today.

Now, in my oral statement I will first review the general rate

and service issues faced by shippers, particularly captive shippers.

Next I will discuss the need for railroads to earn adequate revenues, and finally, I’d like to address some potential remedies for

these concerns, including legislation introduced by some members

of this Committee.

Under the Interstate Commerce Act, the Surface Transportation

Board has exclusive jurisdiction to determine whether a rate paid

by a shipper is unreasonable. In rate matters, as in all matters, the

Board must balance what are often conflicting objectives. On the

one hand, it must help railroads earn adequate revenues and on

the other hand, the rate paid by individual shippers must be reasonable and fair.

That balance, as we all know, is not an easy one. Rates that are

too high can harm rail dependent businesses, while rates that are

too low will not allow railroads to pay for new capital. The Board

must do its best to carry out the law in a way that is fair to all.

The Act limits the Board’s rate jurisdiction to those instances

when railroads have market dominance. In other words, when the

railroad is charging a rate above a threshold level and the shipper

is captive, meaning it has no effective transportation alternative.

The statute directed that there be different procedures for handling

large and small rate cases. Let me first start with large cases.

The Board uses the well settled standalone cost method for large rate cases. These are expensive and complicated. They can cost $3

million or more to prosecute, $5 million or more to defend and generate more than 700,000 pages of material. They are time consuming. While the Board has nine months to decide a case after all the

evidence is filed, preparing and filing the evidence could take more

than twice that long.

Recently there has been a significant increase in the number of

these large rate cases. Where in past years we may have had two

or three, today the Board has ten, and I understand several more

will be filed in the next coming year.

Thus, I made streamlining the Board’s large rate case a high priority and did so by instituting a number of reforms. I’m pleased to

say that we have already employed all of these many times, and

they are making the SAC process better, faster and cheaper, and

I think producing clearer and more predictable results.

Now, with respect to small rate cases, the Board has not had a

single one since it first adopted its guidelines in 1996. My top priority is to provide shippers who have smaller rate disputes a regulatory forum for resolving them. The issue is difficult and the

Board must keep in mind the delicate balance between the concerns of shippers and carriers that I spoke of earlier.
4

I spent much of the past 16 months learning why no shippers

have brought any small rate cases. Let me summarize for you what

I’ve learned. First, it’s ambiguous who would qualify for the rules.

Second, there are no limits to the discovery process. Third, the current small rate standard is unclear, ambiguous and under legal

challenge.

I believe we can address many of these concerns. Some certainty

can be brought to who would qualify, so that if a shipper met the

test, he would automatically be eligible. And the discovery and resolution phases can be streamlined by creating a process that mirrors the speed of arbitration while still meeting under the Interstate Commerce Act.

However, identifying an appropriate rate standard is the greatest

challenge. Last year at our hearing, there was universal condemnation of our current standard. But when I asked all the parties to

provide suggestions on ways to revise it, none did so.

I’m pursuing every effort to make progress. A Board team met

with other regulatory agencies, such as FERC, the FCC and the

Postal Rate Commission, to learn how they handle smaller disputes. I’m also exploring whether the Board can enhance and expand its existing and formal dispute resolution function, so we can

be more responsive to shipper concerns.

In sum, despite the importance of the issue, the Board has not

moved forward in this initiative. I’ve decided that a new process for

resolving small rate cases is significant enough that I should not

take action as a single Board member, even though I have the

power to act alone. When the new members here today are confirmed and sworn in, we will swiftly restart the process.

Now, another way captive shippers can improve their situation

is to gain service by building a new line to a second competing railroad. I would like to highlight two such projects. First, the DM&E

Railroad seeks to build into the Powder River Basin in Wyoming

which will provide another rail option for coal shippers in the Midwest. Second, the BNSF Railroad, in partnership with the consortium of singly served chemical shippers, one of whom is testifying

here today, seeks to build into the Bayport industrial area near

Houston, Texas.

While build-ins can provide many benefits, they are not perfect

solutions. Projects can be expensive. Construction projects can be

controversial. Indeed, both the projects I have mentioned have generated extensive local opposition and spawned court challenges. Despite some recent setbacks in court, I believe construction projects

are an important option and will be an important remedy for competitive issues.

Now, as the Board considers the concerns of captive shippers, it

must also keep in mind the concerns of freight railroads, particularly the need for capital investment. Capital investment is a key

part of the conundrum that has faced the rail industry for several

generations, which is how to provide a level of service that will

allow them to grow their business while remaining viable private

entities.

Now, under the statute, railroads may price their services so

they earn a reasonable return on the facilities needed to serve captive traffic. That is a fundamental principle of railroad economics.
5

But some of the legislative proposals to address shipper concerns

would alter that principle. I’d like to turn to those now.

Taken as a whole, this type of legislation would fundamentally

change the economic model of the railroad industry and I think it

is unwise. Not a single one of our major railroads is revenue adequate, and if enacted, these bills would call into question the continued viability of our freight rail system. While some shippers

might realize short term gains from lower rates, in the long run

statutory changes of this type could significantly degrade the

freight rail network to the detriment of all its users.

The supporters of these bills would not be calling for this legislation if the Board had interpreted certain provisions differently. I

understand that. But to me, the individual provisions are less significant than the concerns that give rise to this legislation in the

first place. And I have worked to understand them.

First, many shippers neither have confidence in the Board as a

regulatory body nor feel it is practical to bring a case before it. Recognizing this, I have worked to address these concerns in a number

of ways. I have taken several concrete steps to change the perception of the Board, including restoring regular voting conferences,

holding hearings on significant cases and matters, and oral arguments on large cases.

I have helped railroads and their customers informally resolve

their disputes. In fact, I have had the opportunity to work with

several of the witnesses here today in those efforts, including Mr.

Platz and Mr. Strege. In one situation, I hosted meetings with the

Governor and shippers from North Dakota and the senior management of the railroad to address the delays in moving grain. As a

result, the parties agreed to a number of measures to address the

problem and work off the backlog.

I believe we can do more in this regard and consider this behind

the scenes approach a model for resolving problems. However, the

Board must still be an effective regulatory forum for adjudicating

rate and service issues when informal means won’t work. Because

of the problems with our current small rate case guidelines, arbitration is often suggested as an alternative because of its speed and

simplicity. I oppose arbitration, because those proceedings are outside of the strictures of the Interstate Commerce Act and would

likely produce inconsistent results.

In all of our national network transportation industries, whether

trucking or aviation, we have national rules and arbitration would

alter that. But I think the Board must develop a small rate case

process to address these shippers’ concerns, and as I indicated earlier, I believe we can do so.

But in doing so, we must recognize that the economic relationship between shippers and carriers is complex. Shippers may have

facilities which are both captive and competitively served and ship

to numerous destinations on several railroads. While the legislative

proposals seek to simplify the shipper-carrier relationship, in reality they are enormously complicated and not easily understood.

Many shippers do have economic leverage with railroads when the

totality of their business dealings is considered, and the legislation

takes no account of this reality.
6

Second, many issues between shippers and railroads arise because of the way shippers are treated by their railroads. They assume railroads act this way because they are monopolies, and that

by introducing competition, railroads will be forced to be more responsive to them. I continually impress upon railroads the importance of operating in a more customer responsive fashion. While

their senior leadership understands this, that attitude does not always translate through their entire organizations.

The good news is that the rail networks do work with their customers to improve efficiency and take costs out of the supply chain.

But this is not common enough, and must become the norm and

not the exception.

Finally, the economies in certain areas of the country, in particular the upper midwest, are disproportionately depending on a single rail carrier for economic health. The Board must pay close attention to unique sets of concerns in that part of the country. But

the issues faced there are longstanding, complex and not easily resolved. However, attention and not legislation is the best way to

make progress and while attention may not solve every problem,

significant progress is possible if there is communication and focus

as I talked about earlier.

In conclusion, I believe that the Board can and will do a better

job to address the concerns raised by captive shippers. The reforms

outlined today and not substantive changes to the law are the best

way to address the concerns raised by captive shippers while maintaining a healthy, private freight rail network. It is a difficult balance but one that can be achieved.

I appreciate the opportunity to be here today and discuss these

important issues, and I look forward to any questions that any of

you might have. Thank you very much.

Mr. QUINN. Thank you, Mr. Nober. Thank you very much.

I’d like to get a couple of just housekeeping affairs taken care of.

I’d like to ask unanimous consent to allow 30 days for members to

revise and extend their remarks and to permit the submission of

additional statements and materials by witnesses. Without objection, so ordered.

I’d also like to ask now, even before he arrives, for unanimous

consent to allow Mr. Baker to participate in the hearing this morning. Without objection, so ordered. Thank you very much.

Welcome, Ms. Brown. I’m glad you could be back with us this

morning.

Mr. Nober, thanks for your testimony. This whole idea of captive

shippers is one, of course, that interested me a couple of years ago,

even brought me to the point of introducing legislation. And then

with the help of a lot of people, many of them in this room, we arrived, on the full Committee and the Subcommittee, at some solution, so I’m intrigued by your interest and your action with these

informal discussions that you talk about, the behind the scenes discussions, if you will, that solve some problems, and as you point

out, of some of the people in this very room this morning.

How far can you, well, let me back up a little bit. I think that’s

the best way sometimes to solve these concerns, but I’m always a

little bit concerned about what’s public and what’s private and if

someone wants to know the discussions, the contents of what was
7

discussed, or one of the parties decides it’s not a good solution and

they object, and so on and so forth. I don’t want to tie your hands

or the agency’s hands to not do that kind of thing.

But how much of it is public, how much behind the scenes can

you do without getting into the area where you’re not open enough,

open meetings laws, all those sorts of things? Can you comment on

what you’re doing in that area? Because I think it could be very

successful. I’m not trying to stop it, but I want to make sure maybe

we do more of it and it gets a little bit more formal.

Mr. NOBER. Certainly, Congressman, and that’s a very good

question. I think the answer is, it really depends upon the circumstance and the particulars of the case. If it’s an instance like

we had with North Dakota where we’re meeting with public officials, and I’m a public official, as is the Governor, those are to a

certain extent public. The Governor’s schedule is public, mine is

public. So you can’t hide the fact that we are meeting.

On the other hand, we are allowed, as you are, we are allowed

to have meetings where the discussions are confidential among the

parties. What we did in that situation was the parties discussed

what was going to be said and who was going to say it. The one

ground rule I normally have is that I don’t want to be talking

about things. I don’t feel that if we do them, my putting out a press

release trumpeting what we did is the best way to make progress.

The parties in that circumstance went to North Dakota, they held

a press conference, they talked about the outcome of the case and

I was very pleased about that.

In another circumstance involving some other folks, it was completely private. I called the two CEOs and urged them to speak and

they did and I think were able to address some issues that some

of their staffs weren’t able to. And that was very positive.

I get calls on a daily basis from people asking me to help in these

kinds of things, as you all do. It’s one that, you have to look at it

situation by situation.

On the other hand, sometimes people don’t want to be helped. I

was recently dealing with a group of shippers and one of them

raised what I thought was a very legitimate problem. I asked if

they had called the railroad and they said no, and I offered to do

it on their behalf and they said they didn’t want it. I don’t know

what to do in that circumstance--where if you don’t call the railroad and you don’t want us to intervene on your behalf. Sometimes

you can’t always help people help themselves.

Mr. QUINN. Right.

Mr. NOBER. Not everyone wants to come to the Board, and I understand that. But much of it is personal. When I give a personal

commitment to help, I mean it and I think have done so in every

case.

Mr. QUINN. Here again, I don’t want to discourage this. In fact,

I’m more on the side of trying to encourage it. That’s what you’re

there for, in bigger, larger rate cases where it’s very public and we

need to take minutes and produce a document of records and all

the rest. That’s perfectly fine and that’s the way it should be. And

you’re right, public officials like Governors and yourself and myself

and others, once you’re in a public domain, that is public and it

must be.
8

But I would, maybe this is a discussion for a later time with the

Subcommittee, for example, we’ve discussed the whole issue of security more than once with the Subcommittee. We’ve discussed it

openly here, and we’ve also discussed it where it’s not been in open

forum, if you will, only because it’s talking about security and a lot

of those things shouldn’t be discussed there.

So it’s a fine line, and I don’t want you to think by this line of

questioning I’m discouraging it, in fact, I’m encouraging more to

happen because what you’ve done or what you’re doing is solving

those little problems before they become bigger problems.

Mr. NOBER. Another example, Mr. Chairman, is, I was recently

in Houston and meeting with some officials there about concerns

they have about the Bayport project that I talked about earlier.

While I was down there, it turned out that one of the big problems

Houston is having is with the operation of trains in the city, blocking crossings, idling near schools.

Again, I offered to help facilitate some discussions. I spoke to

senior officials of the two railroads down there and just to set up

a process where the city officials and the railroads can begin to

identify, these are the places where the problems are and what are

the causes of it. There are a lot of causes for it.

But that’s again, not a public function, but just to try to help facilitate those kinds of discussions which really ultimately, we’re not

going to be a part of them. I mean, we’ll be a part of them, but

it’ll be between the railroads and the city to try to address these.

I think that some progress can be made. We’ll see how much.

Mr. QUINN. From my perspective, I think it’s right on, and I

think as an objective third party, many of these situations, that’s

all they really need, is that objective third party. And you have

done it alone, and when you get a couple other board members over

there, who knows, maybe you can solve all our problems out there

with these behind the scenes discussions.

Mr. NOBER. As you see, a lot of times it does just need a little

bit of a push to get a dialogue going.

Mr. QUINN. Exactly right. Well, thank you for doing that. Maybe

after today’s hearing as your full board comes together we can talk

some more about that. I think it’s an important one, and I also

think it’s appropriate, it’s exactly why you’re there, among a whole

host of other reasons. But in my mind, that’s one of the reasons

you’re over there. So thanks very much.

I yield to Ms. Brown now for either opening statements, comments or questions.

Ms. BROWN. Thank you.

First of all, thank you, Mr. Nober. You’re over there by yourself

and hopefully we can soon send you some assistance.

Mr. NOBER. That’s the hope, I hope very quickly.

Ms. BROWN. I want to also thank you for agreeing to convene

with me a town hall meeting in Jacksonville. I think we’re still

working on the date, but I think now more than ever, we need to

have that meeting. Because I’m very concerned about overall security as far as the railroads are concerned, both threats from foreign

sources and also from the results of downsizing the industry, and

whether or not we’re cutting back to the point that we’re jeopardizing safety. So I’m looking forward to that town hall meeting.
9

Mr. NOBER. I am, too, ma’am.

Ms. BROWN. I have a question. In your testimony, you noted that

the stand alone cost method of analyzing railroad rates is both

complex and expensive. Could you explain how this method works

and if there is an easier or less complicated approach?

Mr. NOBER. Sure. Probably any method, I can answer the second

one first, any method would be less complicated.

[Laughter.]

Mr. NOBER. But essentially, a standalone, it’s very, very complex

in its application. But the principle is very simple. When you’re a

captive shipper, what we look at is, the measure is, is the rate

being charged to captive shipper reasonable. And railroads are allowed to charge them more than they would charge other customers, so how do we measure that.

What the stand alone cost test does, it says, can that shipper basically construct and operate its own railroad, serving it and other

related traffic, cheaper than the railroad is providing it. So if you

can build and operate your own railroad for less than the existing

railroad is charging you, the rate gets lowered down to that level.

And then there’s a floor which you can’t go below.

Now, there’s a number of, any number of complexities, almost an

infinite number as to how you build and operate the railroad, because running a railroad is a complicated matter. But the fundamental principle is fairly simple. The problem is that the standalone cost, it addresses certain kinds of concerns. If you have a lot

of volume, like any transportation asset, the more you use it, the

less the cost per use is, because you’ve got to put all this cost into

it.

So for smaller shipments or for shipments that are going a lot

of places, where you don’t have a lot of traffic on a set route, standalone cost isn’t really a good measure, and secondly, it’s very, very

expensive to put one of these together. There are armies of lawyers

and consultants that have to work on these cases. As I said, I think

the $3 million and $5 million estimates of these cases are probably

under. I think they’re probably more than that. I often think I’m

probably on the wrong side of the dais when we hear these cases,

if that’s what they cost.

But it’s very, very expensive. If you’re not looking at relief that’s

going to be imposed for 20 years, like a coal shipper would be, and

it’s only for a year or two, it’s just not practical to spend $3 million

or more to put on one of these. You’ll hear some shippers today talk

about, some of the later panelists will talk about what it means to

put a case on. They’ll tell you, it’s a very unsatisfying process.

Now, there are some different ways of looking at it. One is to

look at different measures, a different rate standard. Right now we

have one that looks at several measures. It’s very unclear as to

how it would be applied, because the standalone cost method is

what the courts like. That’s what the D.C. Circuit has approved,

and that’s what they think is our preferred method, because it allows for differential pricing and not for averaging.

What the courts say we can’t do is come up with something that

looks at the average rate and pushes everybody to it. That doesn’t

take account of the railroads need for differential price, so we can’t

do that.
10

A lot of folks would like to see us do that. The legislative proposals essentially do that. They say, we look at what the average for

competitive rates is and that’s what you get. And if the Congress

does that, it certainly would be legal, but we can’t impose anything

like that.

So we are looking at different ways of either clarifying the different measures and standards to take care of this averaging problem, or looking at simplifying the stand alone cost procedure. We

have internal measures in place that create averages, that look at

the average railroad cost for any number of things, more measures

than anyone can think of. What happens is in the stand alone

cases, everybody likes to adjust those. There’s an enormous amount

of complexity and the cost of it is taking the average measure for

the average railroad and saying, well, what I’m doing is not the average, it’s cheaper than the average, so I want to get an adjustment for that.

If you just went to the average and looked at simplifying this act,

that’s another option. So I think there are a couple of different

ways of looking at it, but you’ve asked a very fundamental and difficult question, Congresswoman, and I think if there was an easy

answer, 20 years later somebody would have figured out a way to

do it.

But I do think there are different things that can be looked at.

I’m looking to the guidance of the two new members to help solve

this. This is what they’re going to put a lot of energy into. But I

do think there are ways of simplifying it. You can’t completely simplify it, because we are limited by what the courts say. I’m sorry

for the long answer.

Ms. BROWN. Thank you.

Mr. QUINN. I want to welcome the other members of the Subcommittee who have joined us here this morning. Mr. Moran, do

you have questions for the witness?

Mr. MORAN. Mr. Chairman, thank you very much. Mr. Nober,

thank you for joining us.

What percentage of shipping actually involves captive shippers?

Mr. NOBER. About 80 percent, I’m going to guess now, about 80

percent of all plants are singly served. But a very small majority

of those are market dominant, they don’t have options with trucking or—but I think about 15 or 20 percent of all movements are

subject to our jurisdiction, meaning they are captive shippers and

there’s market dominance. So even though most are singly served,

truck is a viable option.

Mr. MORAN. Are there characteristics of those circumstances that

exist as a geographic, either located in rural areas, is there a way

to pinpoint where the captive shipper problem exists?

Mr. NOBER. I think there are a few general categories of captive

shippers. The first are power plants, coal-fired power plants, which

use enormous amounts of coal. They’ll have, I was visiting a plant

in Texas that got three 110-car trains, which are a mile and a half

long, every two days. So it’s usually, they’re one category of captive

shipper, and I think you have a witness from a power plant today.

The second are large industrial plants, chemical companies, cement plants, things like that that ship a lot of bulk shipments long

distances. That’s another characteristic of rail movement. Plastics
11

plants, for example, moving plastic pellets, I visited two last week.

Or some types of liquid chemicals. So that category, industrial

plants very often are captive as well.

Then the third category would be agricultural movements. In certain parts of the country, large grain elevators and milling operations, where they’re not near rivers and trucking is really not an

option to move it long distances, to port, for example, where you’re

moving big, big volumes of heavy, relatively low value per pound,

but just large volume is another sort of category.

So I think those are the three basic groups of captive shippers.

Then there are lots of others, you have the occasional auto plant,

and there will be individual types, ports, other types of facilities.

But they’re more on an ad hoc basis.

Mr. MORAN. How serious of a problem is generation of capital for

the rail industry?

Mr. NOBER. I think it’s a very serious problem. The railroads, on

the one hand have too much infrastructure, they are abandoning

lines, and on the other hand have too little. That’s because their

networks were laid out 100 years ago during the Victorian era. The

freight flows in the 21st century don’t necessarily match the freight

flows in the 1890s or the 1880s. In one case I was looking at a line

that was pre-Civil War. And adjusting the modern economy and

modern demands in the rail system to its antiquated, to the networks that were laid out 100 or 150 years ago, that’s the part of

it that’s expensive.

For example, one eastern railroad has quadruple tracks between

the coal fields in Appalachia and the port in Norfolk to move export

coal. The problem is, there’s one-tenth the amount of export coal

that was moving when they built the railroad.

On the other hand, the main intermodal shipments coming from

the Port of Los Angeles on the west coast to the northeast go up

the Shenandoah Valley line, which was built before the Civil War,

that winds through and was never meant to carry heavy volumes.

But that’s the most efficient route to carry intermodal traffic.

Today that railroad would like to have them flipped, they could use

a single track going to the dock and they would like the quadruple

track carrying intermodal traffic. But a railroad costs $2 million or

$3 million a mile to build, and double tracking it is expensive.

Mr. MORAN. Has the passage of the Staggers Act resulted in reduced freight rates?

Mr. NOBER. Oh, it certainly has. Freight rates have come down

in real terms for the past 20 years. In fact, one of the concerns railroad has, one of the problems railroad has is trying to have price

increases match their increase in costs. Freight railroads have gotten very efficient, they’ve passed on their cost increases and almost

all of these, as with many transportation companies, trucking as

well, have been passed directly to their consumers.

Mr. MORAN. And finally, it seems to me your testimony, your

conclusion as I read it and heard it, but just listening to your testimony as well is that you need to change the way you do business

and the way you hear cases and the complexity and the difficulty

in bringing the case. But at this point, have no request of any legislative changes from Congress to address this issue or your ability

to do that. Is that accurate?
12

Mr. NOBER. I don’t think substantive legislative change is the

issue. There are a couple little legislative matters that would help,

but really it’s a matter of our agency working out its process in a

way that passes judicial muster and makes it practical for the parties to bring cases.

Mr. MORAN. And your testimony is that if you had a practical,

if there was a practical way of bringing cases before you that you

could address and resolve to some satisfaction the issue of captive

shipping?

Mr. NOBER. What we could be is a forum of last resort. I wouldn’t

want, every time there was a dispute between two businesses that

they would run to our agency on the one hand. But on the other

hand, if things break down to the point where they cannot be fixed

and it has to be resolved by somebody else, there ought to be a

forum for those to be heard. And right now, you can’t go to court

under the law, you have to come to our agency and we have to provide a forum where that can be. I think large rate cases, while, as

I said to Congresswoman Brown, are very unsatisfactory, they are

a model in that sense, in that when things get so bad, you do have

a place to go. We’ve had about 15 of those cases over the years. The

shippers have won 10, the carriers have probably won 5. So it’s a

crap shoot what happens when you come to us, but there is a place

of last resort, and there isn’t right now for small cases. I think we

need to fix that.

Mr. MORAN. Thank you, Mr. Chairman. Thank you, Mr. Nober.

Mr. QUINN. Thank you very much.

Mr. Simmons, questions for the witness?

Mr. SIMMONS. Yes, Mr. Chairman, thank you and thank you for

your testimony. I apologize for being late, but I think I’ve ready

most of what you had to say about H.R. 2924, which is the Baker

Bill introduced last year, designed to address the issue of bottlenecks and of some rail shipment customers who feel they’ve been

isolated and subject to unreasonable rail rates for a variety of reasons.

As I understand your testimony, you feel this legislation is unwise, I think, to use your word. And obviously speaking for myself,

I have no interest in doing anything to degrade the overall health

of our freight rail system, because I think it’s usually important.

By the same token, representing a New England constituency

where there is not a lot of competition in freight rail, and where

those costs place some of our larger customers at risk of simply

shutting down their operations, because the alternative to rail is

costly and inadequate, I guess I feel I’m caught between a rock and

a hard place.

As I understand your testimony on page 19, you have attempted

to increase the transparency of your operations and to serve as an

‘‘informal facilitator’’ when shippers and carriers have difficulties.

Is that something you’ve done more than just in the Dakotas? Have

you responded to requests from New England folks when they need

a little bit of informal facilitation?

Mr. NOBER. When they’ve made them, we have. We recently had

a matter, last fall in New Hampshire, where a short line and the

sort of large regional railroad in the region were having a dispute

about serving some plants on the short line’s route. I dispatched
13

one of my staff, who’s here today, up to be a mediator in that case.

We thought we had made a lot of progress and had resolved it, but

it turned out in the end that one of the parties didn’t want to settle

it and they brought a proceeding before us.

I don’t think any of the shippers in New England have come to

me, I’m not aware of any with any particular issues, we’ve had a

number of issues in New England looking at trans-load facilities

and they’ve been controversial, particularly in Massachusetts. But

if anyone from New England did come, we certainly would go to address it. I’m from New England myself, so it’s always good to have

to go there.

Mr. SIMMONS. And would your informal facilitation extend to disputes between freight rail and Amtrak or the use of Amtrak lines

by freight rail, again a problem in New England?

Mr. NOBER. It has. We had an issue that did not become a formal

one between VRE and Amtrak. We have had an issue in between

Boston and Portland involving Amtrak on freight rail. And we had

both a formal and informal proceeding. We were taken to court on

that one. So sometimes informal issues go all the way up to the

D.C. Circuit.

But where it’s appropriate, we can do that and we will do that.

Mr. SIMMONS. Are you aware or have you been approached by

Providence and Worcester for their problems with Amtrak rates?

Mr. NOBER. I don’t think that I have. I’ll ask staff if it has gotten

to the board yet. No, it has not.

Mr. SIMMONS. That being the case, let me just say that from

what I’m hearing, the informal facilitation is very useful.

Mr. NOBER. It can be.

Mr. SIMMONS. I appreciate that, and you may be hearing from

my office shortly.

Mr. NOBER. I’d be happy to help.

Mr. QUINN. Tank you, Mr. Simmons.

Ms. Carson, questions?

Ms. CARSON. Thank you very much, Mr. Chairman.

I have to beg naivete here, I’m new to the Committee. I always

use that, even after 40 years. I’m new to the Committee. Maybe if

I hold this up, you can understand what I’m talking about in terms

of the routes and the rates and stuff like that. I get information

that—could you briefly summarize why the small rate cases have

been brought before your board? And why there is a restriction on

competition in terms of a consumer getting a competitive price in

terms of movement—do you know what I’m talking about?

Mr. NOBER. Sure, yes, ma’am. Let me start with the small rate

cases. What I’ve found is there are three reasons why people

haven’t brought small rate cases. The first is that they’re afraid

that the railroads would spend a lot of money and time arguing

over who even gets, whether it’s a small rate case at all. So while

you get to bring a faster, cheaper process, if you’re a small case,

you have to spend a lot of money and time debating whether you

really are a small case or not. And the shippers don’t want to do

that.

Secondly, even if they were a small case, how we would judge it

is unclear, because the standards we have are very fuzzy. So nobody knows how much preparation you’d have to do, and how much
14

information you’d have to get from the other side and how much

analysis, and that that could wind up snowballing into becoming

large and expensive because of the uncertainty of it. Without having a whole lot of cases to look at for guidance, it was a great deal

of uncertainty. That’s another fair point.

The third one is that we have a standard that has three different

measures to it, and we don’t say and have never said what weight

we would give to each and how we would use that. And that’s kind

of a role of the dice. Now, I’ve had other representatives of shippers

sit there and say, well, the reason we’ve never brought a case is

we’re not certain that we would win. And I’ve said, well, you’re

never going to be certain that you would win, so if that’s what

you’re waiting for, you’re going to be here for a while.

What we should have is a fair process, one that gives a reasonable chance of winning, but by no means guarantees anyone is

going to win, and that’s just not what—if you have a good case,

you’ll win, and if you don’t have a good case, you won’t. So that’s

why I think no parties have brought small cases. But you’ll have

several of the parties who contemplated them and didn’t bring

them testifying later. They can rebut what I’ve had to say. But I’ve

spent time with all of them.

Secondly, I think what you are saying is that if a carrier is singly

served and a shipper is singly served and there are two railroads

nearby, how come we don’t let the other railroad on the first tracks

and serve them. Is that the question?

Ms. CARSON. Or at least allow some understanding about price.

Mr. NOBER. I think the reason for that is, these are private networks. What some shippers are after is kind of the best of both

worlds. What they want is from, where two railroads meet and

there’s competition, they want the benefit of that competition. So

the two railroads will compete for the business and come up with

the best price. Then on the remaining portion that only one railroad serves, they say, well, we don’t want the market to set that

rate, we want there to be strict rate regulation and a limit on how

much they can charge on the end piece.

So they want regulation on the part, on one part, and then they

want competition on the other part. Either you have regulation the

whole way or you have market based the whole way. And if you

have market based the whole way, they may not like what they get

charged for the last few miles. I think that’s just a fundamental

principle of how the railroads work.

We don’t prevent any shipper from getting a quote on that part.

What they have to do is show that another railroad is willing to

provide the service and willing to give it to them, and if they have

a contract, fine. And then we’ll require the other railroad to just

quote them a rate on the little part.

But we normally don’t tell—we let the market set these relationships. The one railroad that owns the last few miles doesn’t want

to just carry it the last few miles, because it’s expensive and they

lose money on that. They want to carry it the whole way and that’s

how they want to price it. Our doctrines have let them do that, unless they could show another railroad would carry it.

That’s not a satisfactory answer to a lot of people, and I understand that. But that’s why we do it.
15

Ms. CARSON. Okay, I want to understand, now. You do not permit a potential carrier from finding out how much it would cost on

their track to deliver something to a certain point, unless they already have a contract signed with the other rail?

Mr. NOBER. Correct, ma’am.

Ms. CARSON. Well, why is that? If you are going to go out and

buy a car—and I know that railroads and cars are different—but

if you are going to go out and buy a car, can’t you sort of shop the

market to get some price before you sign a contract to see what is

best for you and your purposes? Isn’t that the marketplace rule of

operation?

Mr. NOBER. Again, I think that the shippers that want to see

that, they don’t want the market to just work, because they want

the market to work from the point where two railroads start—you

know, the two railroads come together—and go forward, and then

they want us, our Board, to strictly regulate the remaining part.

So they don’t want the market to set the remaining part of the

rate. They want that section to be—that small section to be governed by strict price regulation, so that you can’t overcharge, in

their view, overcharge. If shippers just wanted the market to set

the rate, then you get a market rate from the junction point on and

you get a market rate on the small segment, as when you want to

buy something that’s popular and there’s a small supply, you’ve got

to pay more for that. I remember going to buy a car that they said,

adjusted market value, and I said, what the heck is that? They

said, that’s when they charge you more than the sticker price because a lot of people want it.

Ms. CARSON. Do you have the flexibility of not setting the rate

per se and just allowing the consumers to get the best price?

Mr. NOBER. They could, but—

Ms. CARSON. Without you injecting price controls or costs or any

of that?

Mr. NOBER. We do have price controls—

Ms. CARSON. Just allow the consumer to find the best product for

the best price without you saying, if I want to buy a Chrysler product here and there, well, you can’t charge any more for this car

than you can charge for that? That market works for itself. And it’s

perpetuated by consumer demand. And you get what you get, what

you bargain for, right?

I don’t want to belabor the point, but—

Mr. NOBER. It’s a fair question, and deserves a fair answer. If I

haven’t clarified it for you, I should. Under the law, there is rate

regulation on the small piece of it. So even if we said, okay, you’ve

got to get a rate on just the small piece of it, that’s not a market

rate. That’s a rate subject to caps under the law. So the shippers

who are after this are saying, what we want is a market rate from

the point where two railroads come together and there are two railroads serving it. But we want a capped, regulated rate on the small

piece of it.

So if the whole thing is going to be at market, I don’t know how

we would do that, but that would be a different situation than the

current one, which is, if we did what the shippers are asking for,

if our decisions changed it, then they’d be getting a rate subject to
16

a rate cap on one piece of it and then a market competitive rate

on the other. That’s, I think, having it both ways.

Mr. QUINN. Thank you.

Thank you, Ms. Carson.

It’s likely that some of your informal discussions and behind the

scenes discussions might be helpful for Ms. Carson.

Mr. NOBER. We’d be happy to explore it further.

Mr. QUINN. Me too. Good question.

Mr. Nober, I have one more question, at least from my perspective, and it deals with the court case involving the STB licensing

of the new construction lines of the DM&E Railroad. Evidently the

STB was ordered to further analyze the environmental impacts of

the commodity that’s going to be transported. Instead of just studying the environmental impacts of the project itself, you’ve got to

project the amount of coal that’s likely to be transported, and then

whether or not that coal might pollute the air when it gets to its

destination, if I understand it correctly.

So that seems to me almost like trying to predict how many potentially polluting products a truck might haul on a road that

hasn’t been built yet. And I may have missed the point. So I guess

I would ask you, is that—do you think you’ll be able to do that,

number one, and number two, are you able this morning to let us

know if you’re going to appeal the Eighth Circuit ruling?

Mr. NOBER. First of all, Mr. Chairman, you have not misunderstood it. It’s a very disturbing development. If there is any one

thing that I believe in, it’s not letting overly expansive environmental review be the stop of transportation projects. And in this

one, we did a 2,000 page, three-year study of the environmental effects of this rail line. And there was—down the line, it was being

built from near Rapid City, near Mount Rushmore, into northeastern Wyoming. The folks who were very upset about it were 500

miles away, down the line in Rochester, Minnesota, at the Mayo

Clinic, where they were concerned that if this were built and coal

was going to be carried, these trains were going near the Mayo

Clinic, a legitimate concern.

These groups from that part of the country appealed, and essentially raised 50 or 60 different grounds. The court, I think, was

very praising of our environmental review, but sent it back to us

on three issues. The first two were typical for transportation

projects, it was, we didn’t look at train noise and vibration from

going by, and that’s fair and we didn’t look at the effects of blowing

train whistles in Rochester, that’s fair too, and we’ll look at both

of those and we’ll do a better job on those.

But the third issue that you raise essentially goes like this. The

court said, the new rail line will increase the supply of coal coming

out of the Powder River Basin. And if you increase the supply, it

will reduce the price. If you reduce the price, you will increase the

demand, and if you increase the demand, you will increase the

amount burned. If you burn more coal, it will pollute more, and you

go figure out how much that is and model that.

Now, I think we had talked extensively to the Department of

Justice and DOT, and that is the first time any agency has ever

been asked to look at what is the effect of the commodity being carried, as you indicated, as opposed to just the road or the airport
17

or the rail line. We did appeal to the Eighth Circuit already and

we went for reconsideration.

I’m pleased that very many in the industry joined in on that, and

in fact, the Edison Electric Institute and the American Association

of Railroads joined together on a brief, which I don’t think they

agree on anything. But they were able to file on that, which speaks

to the gravity of the situation. Two of the competing railroads that

serve the Powder River Basin now have joined on a brief, even

though this project would compete with that, because the principle

is so important.

We will look at the court’s decision, which I think leaves a little

bit of ambiguity as to exactly how much of this review needs to

happen. It’s ongoing, we’ve been meeting with the Department of

Energy and the Energy Information Agency and EPA to try to get

some folks who are more experienced with air quality modeling

than us to help. It’s one that will be a big drain on our resources,

unfortunately. I think it’s the wrong approach, but I’m sworn to uphold the Constitution, and we’ll do what the court asks us to do.

But it’s not a step forward for transportation.

Mr. QUINN. That’s that way I look at it myself.

How about timing for this now, if you’re in the process of preparing more information? Has the court given you a time line to follow?

Mr. NOBER. They have not. I think that much of the timing is

dependent upon the project proponents, the DM&E has to hire a

consultant and get going. There have been six months and they’re

slow about it. So we want to urge them to get moving, and I’ve

called them in, because it’s an important principle.

Mr. QUINN. Sure.

Further questions for Mr. Nober? Mr. Simmons?

Mr. SIMMONS. One further question. I understand that you regulate the process of giving up certain rail lines that the freight rail

carriers no longer wish to operate, and that in many cases these

move into a rails to trails type of situation. What happens to a land

owner who may own property on both sides of the right of way

who, for perhaps many years has encountered a situating where

there’s been little to no rail traffic, but now is confronted with a

situation where there may be substantial public use of these lines

that encroach on private property, private dwellings? Does that

landowner have some appeal rights under your board to appear

and to testify and request being made whole? That’s question one.

And question two is, in the average of cases that you deal with,

are those rail lines rights of ways or is the land under the rail condemned and purchased by the rail operator, the freight rail operator?

Mr. NOBER. Let me start with the first question, Congressman.

Our role, converting rails to trails is governed by the Rails to Trails

Act, which is, I’m not sure it’s even in this Committee’s jurisdiction. I think it was the Resources Committee. Our role in that is

a ministerial one. When a party wishes to convert, when somebody

wishes to see an abandoned railroad, or a railroad in the process

of being abandoned converted to a trail, they petition to us for a

condition of trail use. And we really don’t have a lot of discretion

in the matter. If they ask us to set that condition, we do.
18

What that gives them, the people who want to make it a trail,

is the right to negotiate with the railroad for a trail use agreement.

And if they are able to reach it, what that does is that rail banks

the line as being held for transportation purposes. And we have

had circumstances where railroads that have been converted to

trails have been reactivated as rail lines. A lot of times people who

use the trail are very unhappy about that, but it’s happened three

or four times, that traffic in a new plant has gone in and they’ve

said, we’ve got this corridor and we’re going to put a rail line back.

So I think the legal status of it is that it is rail banked. Now,

there have been court cases in the court of claims that have said

that once these are turned into a trail, the property owners who

may have owned the land and the railroad had an easement, that

those are still valid and these are no longer rail lines, it’s not being

used for rail purposes and therefore it’s taken, and they can go and

appeal for compensation. That is a somewhat controversial aspect

of it.

Our agency is not the one that would determine whether or not

they are due compensation or not. Under the law all we can do is

say, if somebody wants it to be a trail, we’ll grant the trail use condition, and we do probably on two thirds of the abandonments we

get, we see that. So that’s typically how the trail use works.

Mr. SIMMONS. And typically, do you encounter that those rail

lines are rights of way over private property or are they at some

previous date, is the land on which they operate condemned and

purchased by the rail operator?

Mr. NOBER. Sometimes they are easements. Sometimes the railroad owns it. Sometimes it can be parcel-by-parcel; some of them

they were able to buy, some of them they purchased easements on,

and I think there is no real set pattern to that. It is kind of a mishmash. As I said earlier, these were laid out oftentimes 100 or 150

years ago.

I will say that I think there are very few landowners today who

were alive when the easement was granted, but if there are any,

they should stand up.

Mr. SIMMONS. As you know, I am from New England, where the

rails have been around for a long time. In fact, the first interstate

railroad in America came to my home town in Stonington from

Providence, Rhode Island. But those differences involving the ownership or the terms of the right of way, do those have any impact

on your decision? Or are you saying that those factual details apply

more to the decision of the Rails and Trails Act.

Mr. NOBER. The latter. It wouldn’t make a difference to us in

granting a trail condition whether or not it was an easement or the

property was owned. We are not given that discretion.

Mr. SIMMONS. Thank you.

Thank you, Mr. Chairman.

Mr. QUINN. Thank you.

Ms. Brown?

Ms. BROWN. Thank you. Short line railroads are potential competition for Class I’s, but many are constrained by agreements that

they signed with the large railroads when they were first created.

Aren’t these agreements contrary to the public interest? Don’t you

agree that phasing out these paper barriers, as provided for in H.R.
19

2924, would promote competition and solve many of the problems

that shippers face today?

Mr. NOBER. Congresswoman, I know there are a lot of short lines

and folks who are located on the short lines who would like to see

any restrictions that were placed, when those rail lines were originally sold and purchased by the short lines, very often they contained restrictions saying that you can only give your traffic to the

Class One that it connects to. And many shippers feel that, even

though those short lines may cross another line, that that barrier

prevents them from getting competition. And that’s a legitimate

concern.

However, what you see is that when these short lines were first

sold, they essentially were sold for a much cheaper price, because

those barriers were in place. And very often, what happens is the

short lines are given two options. They can pay more for one without the barrier or less for one with the barrier. And a lot of times,

the short lines say, well, what the heck, we’ll just take the lower

initial cost to get the rail line up and running.

And what you see is sometimes many years later they’ve been

very good businesses and done a very good job and say, well, even

though we paid less for it in the beginning, we’d like to undo that.

So I think that requests to look at transactions that occurred in

the past and undo these barriers would be very, very difficult and

one I would have a great deal of difficulty doing. Now, going forward, you say—I’m sorry.

Ms. BROWN. Just one point. Doesn’t that go to the question that

in many areas there is no competition?

Mr. NOBER. It can. There can be in that circumstance, or usually

the folks who are complaining are just circumstances that Ms. Carson identified, which is, there’s a shipper on the line who’s served

by only that short line, and they want to have the ability to go

from the short line to any of either of the two big Class Ones in

the region. But again, the whole reason that line may be in place

and may be operating is because that short line bought it at a

cheaper price in the beginning.

That’s a market transaction, where the carrier—that’s not the

case in all short lines and all paper barriers. And I confess that

there are the occasional paper barriers that come to me that are

very frustrating. But it’s very hard to go back to contracts and

transactions that are 10 or 15 or 20 years old and change the terms

of them.

Ms. BROWN. Let me ask the question, so it’s open ended, there’s

no ending to it?

Mr. NOBER. Sometimes.

Ms. BROWN. Could that not be a problem?

Mr. NOBER. It depends.

Ms. BROWN. How do you renegotiate? What kind of relief? That’s

part of the problem.

Mr. NOBER. The short line could buy its way out of the paper

barrier. They could pay more for the right to move the other traffic.

It was a free market decision. What happened is many times the

short lines were in such bad shape and the carriers didn’t have a

lot of capital that they were offered a bargain basement price on

the line, if not given away, in exchange for their right to have it.
20

I think Class Ones have many times used short line spinoffs as a

way of creating a feeder network and the short lines get the line

for free.

So in retrospect, looking back, if they did a good job and promoted the business, you say, well, that was wrong. But they might

never have gotten the business off the ground if they had to pay

a higher price in the first place.

Ms. BROWN. The last question in that area is the short lines are

in need of additional funds to help upgrade their tracks, because

the trains are getting heavier. Where are we as far as getting resources to assist those short lines?

Mr. NOBER. I worried about that for a long time. I know there

are legislative proposals to do that. And I know you all are evaluating those and have a bill on the Floor that spends an awful lot of

money on capital and you all are making a judgment as to whether

to include it there or in another forum.

Mr. QUINN. Thank you, Mr. Nober. Thank you, Ms. Brown.

Ms. Carson, do you have a final question? No questions. Mr.

Nober, let me thank you on behalf of the Subcommittee for your

testimony today and for your answers to questions as well.

I also want to take just a quick moment to welcome some students from the Close Up Foundation who are here with us watching today’s proceedings while they’re on the Hill for about a week.

We’re happy to have them stop in to join us and talk about railroads a little bit—although you’re not allowed to talk.

[Laughter.]

Mr. QUINN. You’re allowed to be here, and we’re glad you’re with

us.

Mr. Nober, thank you for being with us, and we’ll go to our second panel.

The second panel that we’ll move to consists of Mr. Ed Hamberger, the President of the Association of American Railroads and

Mr. Richard Timmons, President of the American Short Line and

Regional Railroad Association. Welcome to you both, thanks for

being with us again this morning, gentlemen. We have received

your written testimony, as always well prepared. We remind everybody that we’re going to ask you to keep your oral presentation this

morning to about five minutes each. And after we’ve heard from

both of you, we’ll entertain questions from the Subcommittee.

Mr. Hamberger, you’re on our list first. Would you like to begin,

sir?

TESTIMONY OF ED HAMBERGER, PRESIDENT, ASSOCIATION

OF AMERICAN RAILROADS; AND RICHARD TIMMONS, PRESIDENT, AMERICAN SHORT LINE AND REGIONAL RAILROAD

ASSOCIATION

Mr. HAMBERGER. Thank you very much, Mr. Chairman. Mr.

Chairman, Congresswoman Brown, members of the Subcommittee,

thank you on behalf of the Association of American Railroads for

the opportunity to appear here today to discuss issues related to

freight rail regulation.

Before I begin my prepared remarks, I would like to join you, Mr.

Chairman and everyone else, in offering my congratulations to

Frank Mulvey for his nomination and hopefully his soon to be con-
21

firmation. We have enjoyed working with him here on the Subcommittee, and look forward to continuing that working relationship at the STB.

The current system of economic regulation put in place by the

Staggers Rail Act of 1980 relies on competition and market forces

to determine rail rates and service standards in most cases. Rate

and other protections are provided for those few rail shippers who

truly need them at the STB. Staggers replaced a failed system of

almost total regulation that had lasted more than 80 years, leaving

in its wake bankrupt railroads throughout the northeast and midwest, declining market share, billions of dollars of deferred maintenance, soaring accident rates and scant improvement in productivity.

Since 1980 and Staggers, market share has increased after dec- ades of decline. More than $320 billion in private capital has been

invested to maintain and improve infrastructure and equipment.

Productivity has increased 183 percent and that productivity has

been passed along to our customers since average rail rates have

dropped by 60 percent on an inflation adjusted basis and, as important as any statistic, train accident rates have fallen 68 percent.

H.R. 2924 and its companion bill in the Senate would reinject

Government control over wide areas of freight operations with

what we believe would be disastrous results. Railroads oppose this

legislation and so does rail labor. Five railway labor presidents,

representing over 80 percent of the work force, wrote to the Senate

when the Senate was considering this legislation, saying any further shifting of the regulatory balance toward shippers would result in greater job losses and wage and benefit suppression.

Now, in a way this opposition was to be expected, I suppose. But

what was unexpected was the overwhelming outpouring of opposition to these bills from railroad customers. Almost 400 railroad customers wrote to the Senate since last fall to oppose re-regulation.

I submit to you that this is not a fight between railroads and their

customers, but rather, a fundamental difference between some customers who cling to the belief that Government should dictate the

marketplace and the rest of America’s shippers, who understand

and recognize how deregulation has improved service and lowered

their rates.

On the one hand, there are those customers who believe the

heavy hand of Government regulation should intrude by placing a

cap on prices, imposing uniform pricing by severely restricting use

of differential pricing, take away from the railroads the operational

efficiencies of routing prerogatives, policies all designed to drive

rates down and to make it impossible for railroads to ever earn

their cost of capital.

On the other hand are those customers who oppose re-regulation

because they recognize the strides made by the industry since

1980. They recognize that the level of supply and demand means

there will be differences in pricing and that re-regulating railroads

would rob them, the customers, of their opportunity to continue to

compete in world markets by relying on the best freight rail system

in the world.

Here is what some of our customers have written. The Alliance

for Auto Manufacturers said re-regulation would ‘‘undo the
22

progress made since the Staggers Act deregulated the railroads in

1980.’’ The Port of Los Angeles noted that increased efficiencies

and improved services have enabled the rail industry to divert significant amounts of business from highway to the intermodal option. But to maintain that momentum, the Port warned, railroads

must continue to invest heavily, and re-regulation could make that

impossible. We cannot run the risk of that happening, they said.

The CEO of Kokomo Grain wrote that deregulation has been a

positive experience and that, ‘‘I do not want to see those gains and

benefit thrown aside with a move toward re-regulation.’’ Dyno

Noboy Chemical Company called re-regulation ‘‘remarkably shortsighted,’’ and said that in the long run, all rail users will be losers,

because the inevitable result will be to devastate the ability of the

railroads to continue providing their present levels of service, much

less make vitally needed investments for the future.

Finally, the financial community on whom railroads depend for

capital has consistently stated that re-regulation will lead to capital starvation and disinvestment. Just two months ago, John

Barnes of Deutsche Bank warned, ‘‘In the beginning, there would

be short term benefit for captive shippers through lower rates;

however, instant gratification usually comes with a headache the

next morning, and there would be no Advil strong enough for the

long term damage associated with railroad re-regulation. Over the

long term, everyone would share in the hangover—shareholders,

customers, railroads, the entire transportation system, the U.S.

and global economies. In the worst case scenario, a repeat downward spiral similar to the 1970s could occur with multiple bankruptcies that could cripple the transportation system.’’

In closing, let me refer you to testimony before the Senate Appropriations Committee on September 12th, 2000, from Eric

Asmunstad, then President for the North Dakota Farm Bureau,

who posted the rhetorical question of whether railroads should

even be allowed to operate as for-profit entities. I commended him

then and I commend him today for so succinctly posing the policy

question before Congress. The policy question is, where does the

money come from to meet this industry’s huge capital investment

requirements. There are only two sources, the taxpayer or the private sector.

So I would urge you today, and I’m joining with rail labor, with

the Short Line Association and a large array of freight rail customers to urge you to keep the opportunity and the responsibility

for earning investment capital where it belongs, in the private sector and with the railroads. Thank you.

Mr. QUINN. Mr. Hamberger, thank you very much, and we now

call upon Mr. Timmons.

Mr. TIMMONS. Thank you, Mr. Chairman and members of the

Committee. Let me also echo to Frank Mulvey previous congratulations and wish him a speedy confirmation in the weeks ahead. We

look forward to working with Frank.

My name is Rich Timmons and I’m President of the American

Short Line and Regional Railroad Association, and I surely appreciate the opportunity to be here today and for your interest in the

small railroad industry which you have exhibited so forcefully in

the past. Mr. Hamberger has spoken of the many successes of rail-
23

road deregulation under the Staggers Act. This Act helped spur the

creation of the modern short line railroad industry. In fact, 81 percent of the total short line mileage is operated by railroads that

were established after 1980 when Staggers went into effect.

These railroads have survived and prospered because of the provisions of the Staggers Act and the entrepreneurs who own and operate them. While it has been forgotten in the mists of time, creating a short line railroad industry was not the driving consideration

behind this policy choice. Twenty-four years ago, almost no one envisioned the rapid growth of short lines and the economic benefits

they would deliver to customers and the freight system. The real

driver at the time was the preservation of rail service for thousands of rural customers that would otherwise lose their connection

to the national railroad network. Rail customers were the ultimate

beneficiary of our creation then and our customers today will be

the beneficiary of our success in the 21st century.

Short line railroads serve over 11,500 customers. These customers employ over 1 million workers. For the majority of those

customers, the short line rate is far more economical than the

truck rate they would have to pay if the short line was not there.

Existing truck rates are also depressed for many other customers

because of the threat of a short line competitor. Short lines also

benefit the larger rail network since the Class Ones harvest between 18 to 24 percent of their bottom line revenue from short line

railroad business. This is a testament to the wisdom and the practical consequences of the Staggers Act.

There is no denying the existence of some disagreements between

short line railroads and their large counterparts. Likewise, there

are outstanding issues between some railroads and customers.

Many of those issues do not have simple solutions. These may be

tough issues, but they need not be incendiary issues to the degree

that they impede business growth. Our industries must continue to

work together, because railroads and rail customers have an equal

interest in building the most efficient and safe transportation system possible. Our economy depends on it, and I do strongly believe

that we are all engaged.

Although it is important to focus on areas that need further attention, and we all are, we should not overlook those things that

are going well. Differences and disagreements occur in every industry. What is different in our industry is that short lines and Class

Ones have spent more time than ever improving communications

and relationships between the railroads in ways that result in more

meaningful discussions and positive decision making on rail issues

to the benefit of our customers.

Let me take a moment to briefly summarize the forums for discussion and problem resolution that are in place today which are

addressed in more detail in my written remarks. At the industry

level, the North American Rail Alliance and the Rail Industry

Working Group provide valuable forums for the Short Line Association and the AAR to address major issues between our railroads.

Each quarter, the Safety Operations and Management Committee

and the Network Efficiency Management Committee work through

operational, marketing and equipment questions that impact all
24

classes of railroads. The short lines are deeply enmeshed in these

committees and the process.

Each Class One railroad hosts annual and quarterly meetings

with their short line interchange partners, and the short lines complement this with their own annual and regional meetings. As a

new and evolving initiative, the Association conducts a confidential

survey each year for each Class One railroad related to their operational and marketing performance with the short lines over the

preceding year. This survey then becomes the foundation for high

value problem resolution between the large and small railroad

partners.

The point of all this is to highlight the extensive and continuous

exchange of information between the Class Two, Three and Class

One communities as they strive to develop seamless, reliable and

consistent service for our customers. The American Short Line and

Regional Railroad Association has also engaged groups that represent our customers, such as the National Industrial Transportation League. Indeed, one short line railroad now sits on the NITL

board, and a number of short lines have recently joined that organization. By bringing customers and railroads closer, we hope to

enhance communications to resolve differences and benefit our customers.

One sterling example of this cooperation is support for H.R. 876,

introduced by Representative Moran and co-sponsored by every

Subcommittee member in this organization that we’re testifying before today. This legislation would help short lines overcome the tremendous investment shortfalls that threaten service to our customers and will make possible infrastructure upgrades for future

demands. Only 18 other pieces of legislation in this Congress have

amassed more supporters than the 264 Congressmen co-sponsoring

H.R. 876. This bill has been successful because of the active support of short lines, Class Ones, rail customers, unions and not lastly, this Committee.

H.R. 876 represents the end of a policy journey begun in 1980

with the passage of the Staggers Act. Congress determined that

rural freight service must be preserved, and short lines were the

agents for that preservation. Congress should now take the final

step and ensure the continued survival of these lines, not just for

the benefit of railroads, but for the benefit of our 11,500 customers

and our national economy.

Before I conclude, I ask permission for two articles highlighting

recent improvements in short line, Class One and customer relationships be included in the record of these proceedings. Mr. Chairman, thank you very much for your time and your support. I will

be happy to answer any questions you may have at the appropriate

time, and again, thank you very much.

Mr. QUINN. Without objection, those articles will be included in

the record.

Mr. MORAN. Mr. Timmons, I thank you very much, particularly

for your comments about House Bill 876. I commend my colleagues

on this Committee and throughout Congress for their support and

recognition of the significant issues that the short line rail industry

faces. I also appreciate, Mr. Hamberger, the support for that legislation by Class One carriers, the whole railroad industry.
25

Again, I hope that as we begin debate today on a transportation

bill in the Ways and Means Committee and the House considers

the combination of that transportation bill and the Ways and

Means component that we can be successful, as interested members of Congress in this topic and seeing something is finally done

with regard to preserving and enhancing the short line industry.

So thank you for both of your associations’ support on something

that I think is awfully important not only to Kansans at home, but

to Americans and the rail industry, particularly customers. Thank

you.

Mr. QUINN. Thank you for your leadership. Ms. Brown?

Ms. BROWN. Thank you.

Mr. Timmons, you mentioned your support for H.R. 876, which

we all support. But you failed to mention the short line railroad assistance provision in TEA-LU, which is on the Floor now and we’re

going to vote on it tomorrow. Do you not support those provisions

in Title IX of TEA-LU, which would provide twice as much assistance to your industry as does H.R. 876?

Mr. TIMMONS. Yes, ma’am. As you know, our strategy has been

to go forward with both pieces of legislation, one which is in the

grant process, which is what you’re referring to this morning, and

the other is a tax credit. As many in this Committee will recall, we

ran into obstacles based on Davis-Bacon last year. We decided to

use another approach, while keeping the grant approach—which

was then H.R. 1020—alive. So we do fully support both of those initiatives.

In this constrained budget year, we’re very concerned that even

if we do get the grant approach through that we may not get an

appropriation to support it, whereas the tax credit initiative does

away with an appropriation element.

Ms. BROWN. Don’t you think that’s pretty ludicrous about not

supporting the Davis-Bacon since railroads already adhere to prevailing wages? It sounds like a moot point to me.

Mr. TIMMONS. It’s a very, very difficult thing for the short line

community to understand. The prevailing wage that the railroads

pay is well in excess of a minimum wage, and so it’s an issue that,

while it is a political issue from a practical standpoint, we just

have a very difficult time dealing with it. We were very disappointed last year that we could not get that through, and I know

that you tried very, very tirelessly to make that happen, and we

thank you for that. There may be still some hope for it, but at this

point, we’re probably going to have more success in the tax credit

direction.

Ms. BROWN. Thank you. Did you want to respond to that, Mr.

Hamberger?

Mr. HAMBERGER. All I would add is that we support that provision as well. We supported H.R. 1020 when it was introduced in

the last Congress and we’re anxious to work with, under the leadership of General Timmons and this Committee, to accomplish one

of those two goals.

Ms. BROWN. Mr. Lipinski had a question for me to ask you.

Wouldn’t a railroad trust fund, as proposed by himself, help close

the gap between what railroads earn and what is needed to invest
26

in the railroad infrastructure, so that the railroads can meet the

projected increase in demand over the next 20 years?

Mr. HAMBERGER. I appreciate the opportunity to answer that

question on the record. The short answer is no. Mr. Lipinski’s idea

would be to take the 4.3 cent deficit reduction fuel tax that the railroads currently pay into the general treasury and put that into a

trust fund. It does not add any money to the railroads. What we

would prefer is to get that money back. It’s our money. We believe

we know where to invest best to serve our customers. We know

where to double track, as Chairman Nober was talking about. And

we would prefer to have that money back so that we can address

the needs of our customers directly, rather than running it through

a trust fund and a Government agency here in Washington.

Ms. BROWN. You know, I don’t disagree with you, but presently,

we’re collecting that money. Trust funds work with aviation, they

work in many other areas. Wouldn’t it not be wise if we could follow some of the guidance of Mr. Lipinski?

Mr. HAMBERGER. I am always anxious to work with Mr. Lipinski

and of course, with you, Congresswoman Brown. But in this particular instance, we must disagree. The difference of course between the aviation and highway trust funds is that we are a privately owned network. So we have to raise the capital, we have to

invest it, and we even have the privilege of paying taxes on that

right of way that we operate. And so the difference, I think, is that

we should repeal that 4.3 cents and repeal for that, by the way, is

in the finance title of the TEA-LU bill that passed the Senate. So

we’re hoping that the House will go along with that and that it will

be repealed effective January 1st.

Ms. BROWN. Rest assured I’ll do all I can to support you.

Mr. HAMBERGER. Thank you.

Ms. BROWN. Thank you.

Mr. QUINN. Thank you, Ms. Brown. Ms. Carson, questions for the

witnesses?

Ms. CARSON. I’m almost afraid to ask them a question, they look

so mean this morning. I’m new to the Committee, so I get to be

naive today.

I don’t understand the operation of the railroad in terms of how

you fix it, and that is to say, when you have tracks that are in disrepair, what do you do about fixing them? I have this view that in

order to get America moving forward, one of the ways to do it is

getting people to rebuild the railroads.

Mr. HAMBERGER. Yes, ma’am.

Ms. CARSON. That’s just my little private interest in that regard.

And so if you don’t want to be mean to me about it, could you explain to me whether or not you would sort of consider that as a

possibility of impacting the spiraling unemployment in terms of

getting people to work in this country? Off record, off course, I

know, but I’d like to know the answer.

Mr. HAMBERGER. I apologize if the General looks mean this

morning.

[Laughter.]

Mr. HAMBERGER. The answer to your question, Congresswoman

Carson, is yes, we believe as you do that one of the answers to

America’s ability to compete in world markets, one of the answers
27

to solving America’s congestion problems in our urban areas, one

of the answers to solving clean air, energy demand, is for greater

use of freight railroads.

And we invest, therefore, over the last five years, we have invested 19 percent of our revenues back into the infrastructure.

Nineteen percent is six times more than any other industry or the

average manufacturing industries in this country. They’re around

3 and a half, 4 percent. So we are putting our money where our

beliefs are. We are in fact investing billions and billions of dollars,

$320 billion in the last 24 years.

I was pleased that the American Association of State Highway

and Transportation Officials, last year issued a report called the

Freight Rail Bottom Line Report, which itself called for more investment in freight rail capacity. It made a very important point,

and a point I hope this Subcommittee will focus on. It called for

public-private partnerships where the public sector recognizes that

there are indeed these public benefits, public benefits of cleaner

air, better fuel use, congestion mitigation, getting trucks off the

road. Trucks are our best customers, so I’m not attacking trucks.

But getting those trucks off the road and onto intermodal freight

trains.

And if the public wants to achieve some of those public benefits

working with the freight railroads who should pay for the private

benefits, we’re not looking for a handout, we’re not here for a subsidy, but as in Chicago, a project that Mr. Lipinski is championing,

where we are working with the State of Illinois, we are working

with the city of Chicago and we’re working with Metro and Amtrak, because there are passenger impacts as well, since they operate over our freight rail rights of way. We have put together a public-private partnership in the area of $1.5 billion to try to improve

the fluidity of both passenger and freight to the most critical rail

terminal in the country, Chicago.

Mr. QUINN. Mr. Timmons, response?

Mr. TIMMONS. Ma’am, your question gets at the absolute core of

the short line and regional railroad industry challenge for today. As

many in this room know, when those railroads, as a result of the

Staggers Act, were passed from the Class One railroads to the

small railroads, they inherited systems that had been long neglected, simply, they could not economically support them and they

got rid of them.

Those little railroads did the best they could and have upgraded

and improved those rail networks very, very sufficiently. However,

they’ve done it at their own expense. With the advent of economic

forces driving the 286,000 pound axle weight car, which is now beyond the industry standard and has been currently in production

almost exclusively for the last 10 years, that car is now excessive

in terms of weight for the small railroad system.

So the 50,000 mile Class Two and Class Three railroad system

needs upgrades. The track weight itself needs to be upgraded, some

ballast, and ballast needs to be replaced, ties need to be replaced.

And very old bridges that were certainly suitable for the 263 and

smaller cars are no longer suitable for the 286,000 pound car. What

that really means is that the Class One railroads are short-filling
28

their large capacity cars, which obviously they don’t want to do, nor

do their customers.

So what will happen ultimately in the future if we don’t address

this problem is that incrementally, there’s no point on the calendar

that I can select, but incrementally, small communities, small shippers and small railroads will start to melt away because they just

won’t be able to handle this larger car. Legislation under H.R. 876,

which everyone on this Subcommittee has endorsed, 264 representatives in this Chamber have supported that legislation, tries to address that problem through a tax credit. And we’re very hopeful

that we can bring that forth, and we thank all the members here

and others for the hard work to try to make that come to life. But we have probably $7 billion worth of upgrades in that system. We just completed a very large data study that suggests of the

50,000 miles, we’re probably somewhere around 20,000 to 25,000

miles that demand upgrades. The short lines will pay the majority

of that when all is said and done, but we need that initial shot to

jump start the system. And we believe that about a billion dollars

is what we’re going to try to get over the next five years. That

would be our goal.

So it’s an extremely important initiative. It will preserve the

short line competitive posture against trucks in rural communities,

and it will permit communities and industries to remain connected

in a Class One railroad network.

As a parallel initiative, and we’re optimistic about this, it’s been

in effect for about five or six years, but the RIFF program, overseen

by the Federal Railway Administration, has recently undergone a

very extensive renovation and review by Mr. Rutter, the FRA administrator. We’ve signed a memorandum of agreement. The American Short Line and Regional Railroad Association, along with the

Federal Railroad Administration, signed an agreement that accelerates and moves forward in a much quicker fashion the approval of

loans through that system. And I’m glad to say that we put that

into effect in December and we’ve already seen some of the results

within the last 60 days. Two fairly sizeable loans went through and

we expect to accelerate that over the coming months.

So there’s a parallel track here, one, there is the RIFF loan upgrade, we think that’s moving forward, and then there is this legislation H.R. 876 which we’re very hopeful for this spring.

Mr. QUINN. Thank you. Any further questions, I don’t think, for

this panel. Mr. Moran? Oh, I’m sorry. Good morning, Mr. Oberstar.

How are you? Good to see you. Questions for this panel?

Mr. OBERSTAR. Mr. Chairman, thank you very much for calling

this hearing. It’s refreshing to work on something other than the

18 wheelers and the 4 wheelers and to turn our attention to trucks,

which in the rail industry have a different meaning, as they are

the support for rail cars. I regret that I was so preoccupied with

bringing our transportation bill to the Floor that I was not able to

get here at the outset of the hearing, which I requested to be held

and which I think is very, very important.

Let me ask the distinguished President of the Association of

American Railroads, a graduate of this Committee staff, and one

who is therefore dangerous because he knows how things work, a

question I would have asked another graduate of this Committee
29

staff, Mr. Nober. The stand alone cost method of analysis is complex and expensive. So in your words, how does that work? How

does the stand alone cost analysis work? How do you come to judgments based on that method for understanding how we can compare costs among different railroads?

Mr. HAMBERGER. I will try to answer that, and actually the esteemed Chairman of the STB did address a similar question. I

think he put it quite well, it is a very simple concept but it is one

that is very complex in application. The simplified concept is that

the rate paid by the customer should not exceed what an efficiently

run railroad would cost to build and maintain. And the difficulty

comes because in fact, freight railroads are a very complex operation, so how do you allocate costs and how do you allocate revenues for traffic that might be operating over that railroad. There

are a lot of permutations on that which requires economic analysis

and legal analysis, as the Chairman pointed out, running into the

thousands of pages for those cases.

It is therefore a very complex yet I think economically sound approach that is relevant and appropriate for large rate cases. The

issue that Chairman Nober and hopefully soon your counsel will be

wrestling with is, how does one apply the principles of Ramsey

pricing, the principles of the constrained market price ideas that

are embellished and embodied in the stand alone costs to smaller

rate cases, to smaller shipments. That is something that we are

wrestling with and hopefully in the months ahead the Board will

come up with some approach.

Mr. OBERSTAR. Mr. Hamberger, we don’t really have enough time

to explore in greater depth the full answer to that question. But

your description is right on with my concern and that is, thousands

of pages, complex analysis, often years of waiting for a decision,

challenge in rate cases then takes similar thousands of pages by

those who file an appeal and years more to resolve. In your view,

is there a less surreal way of addressing this matter, something

less complicated to address this admittedly complex subject?

Mr. HAMBERGER. Well, I think Chairman Nober has implemented

certain procedural improvements and has inserted the Board staff

in a much more robust fashion in trying to address many of the

discovery issues, for example, up front and trying to resolve some

of the factual issues that would have been bandied back and forth

between both sides. So I think he and of course under the leadership of the former Chair, who implemented a proceeding for mediation, has made mediation a formal part of the process. It doesn’t

always work, but can move the ball forward.

So I think there are some procedural steps that the Board has

taken to try to lessen the complexity. The short answer to your

question is no, I think it is important that the stand alone costs,

the constrained market pricing approach be maintained for these

large rate cases.

Mr. OBERSTAR. The STB, that’s a matter we’ll have to pursue in

the future, but the STB is required to determine revenue adequacy

for railroads. In my review of cases over the last decade that our

committee has had jurisdiction over this subject matter, the STB

has never found or almost never found railroads to be revenue ade-
30

quate, making enough money. Yet railroads pay dividends to their

shareholders.

How can you have revenue inadequacy and still be making payments to shareholders?

Mr. HAMBERGER. The private sector companies, if they’re going

to raise money which they need, and I would suggest to you the

fact that we have not been found revenue adequate is not a reflection of the Board and the Board proceedings, but rather a reflection

of the incredible amounts of capital that this industry requires. We

have reinvested almost 20 percent, 19 percent to be precise, over

the past 5 years of all revenues and capital expenditures, and that

was matched by about another 20 percent—

Mr. OBERSTAR. Oh, no question at all—

Mr. HAMBERGER. So we need to—

Mr. OBERSTAR. I’m a firm advocate for the railroads as investors

of great amounts of capital for the rolling stock, for improvement

of the track bed.

Mr. HAMBERGER. But that money cannot be raised, we cannot

raise that money from cash flow of the revenues we receive from

our customers, because as you know, we have reduced rates by 60

percent over the past 20 years. And therefore, we need to go into

the debt and equity markets to raise capital to reinvest. If you’re

going to raise capital in the equity markets, people are not going

to invest unless there is at least some return on that investment

for them, hence the need to pay dividends.

Mr. OBERSTAR. You know, the steel industry made that same argument in the 1970s. They were losing scads of money. And at the

very same time they were losing money, they were paying dividends to shareholders and asking workers in the steel industry to

take pay cuts and job cuts. I’m mystified by your discussion.

Mr. HAMBERGER. Then I apologize, let me try to clarify. About

two-thirds of the money—

Mr. OBERSTAR. If you’re not revenue adequate, don’t the shareholders have to share in that inadequacy?

Mr. HAMBERGER. It is a balancing act between whether or not we

can raise the money we need to invest to provide the service we

need to provide to our customers. We cannot get that through the

revenues we charge the customers, therefore, we need to go into

the debt and equity markets to raise that money. One of the requirements of raising money in the equity market is to give those

people who invest some sort of a return.

Mr. OBERSTAR. It may be an accounting matter, maybe there’s a

point in your statement which you take the shareholder dividends

out before other factors are—

Mr. HAMBERGER. I don’t have a precise answer for you to that,

but I could respond on the record.

Mr. OBERSTAR. It would be an interesting exercise to have for the

record.

One final question, Mr. Chairman. What prompts these hearings

and the legislation that I’ve introduced over several Congresses is

complaints from small shippers. They’ve lost LCL shipments, going

back even further in time they lost the U.S. Mail service, you know

my story very well. And the small grain elevators in the upper midwest, particularly in my district and that of my neighboring mem-
31

ber of Congress, Mr. Peterson, have found their minimum requirement of hopper rail cars, grain cars, has been increased to the

point where if a small elevator can’t fill 5, 10 or 1,5 ton hopper cars

the railroad won’t serve it.

What happens it that grain then has to be shipped by truck, Mr.

Chairman. That truck shipment is very costly. I stood at Peterson’s

Mill in North Branch, Minnesota, just two years ago, when a trucker handed to the farmer a check for 86 cents. That was all he returned on a truckload shipment of grain that had to go a couple

hundred miles. If it had gone by rail car, he might have made some

money on that. Which is a great tribute to the railroads.

But the other side of that coin is that the railroads seem to have

lost the sense of public service to small communities and small

grain farmers. They don’t play the same today that they’ve played

in the shaping and making of the nation. That’s what I hear. This

is a story I’m fabricating. It’s what I hear from 200, 300 grain

farmers that I meet with and that my colleagues meet with.

So what has happened to competition? Why isn’t service being

provided to small towns?

Mr. HAMBERGER. Let me answer that in two ways, if I might.

Number one, and I think that General Timmons and his members,

and the reason that they need and merit and deserve the support

that this Committee has given them addresses part of your concern. The other part is the need to have American farmers be able

to compete in the world markets. Those world market prices are set

way beyond the railroad level of participation in the logistics chain.

One of the ways we’re able to help our farmers participate in

global markets is by using shuttle trains and improving the efficiency of getting as much grain as quickly as possible to the Pacific

Northwest, down to the Gulf ports, as efficiently and as cheaply as

we can. That requires, unfortunately, shuttle train elevators that

can load in 15, 18 hours a 110 car train and that has 3, 4 turns

a month, rather than 1 to 1.2.

Mr. OBERSTAR. And the small grain elevator just doesn’t factor

into that economic model.

Mr. HAMBERGER. Well, unfortunately it is the economic model

imposed by the world markets. It is not being imposed by the railroads. And we are trying to work with our customers to enable

them to compete in those world markets, not imposing on them our

desire, but working with them to allow them to compete.

Mr. OBERSTAR. And in that economic model, the only real competition then in the central States of the U.S. is the barge industry.

But from central Minnesota to a barge operator in say, the Twin

Cities, is a truck haul. It used to be by rail. Not to a barge, but

all the way to the Gulf. But the railroad doesn’t call at the Harris

Elevator and the North Branch Elevator. Then the only option is

truck, and truck is too expensive, and the farmer loses money. And

you’re losing opportunities.

Now, if we take your economic model just a step further, if I may

another moment, Mr. Chairman, to develop a short line rail haul

that would be more economical, then we can restore the economic

health of small communities and small grain farmers in the principle of the small family farm. But the Association of American

Railroads doesn’t seem to be coming forward with such proposals.
32

You just suggested something in your comment about aggregating sort of a hub and spoke system of rail shipments that may lead

us in that direction. Mr. Timmons, would you have a comment

about that?

Mr. TIMMONS. Yes, sir. Let me make two observations on that.

One, first off, let me assure you that the small railroad industry

is absolutely dedicated and committed and strives to serve rural

communities. That’s its bread and butter. So it works hard at trying to do that. I would also suggest that this business of grain shipments and the success of grain shipments using small railroads in

rural communities is regionally tied. We have a number of small

railroads that are doing extremely well in interchange with Class

One railroads serving independent elevators throughout certain regions.

In your area, there are some challenges up there. I hear from my

members that they are working hard to try to make this more effective, more efficient. And there are some challenges to work

through. But there are other areas where there is hardly any work

at all, but almost by gravity they’re doing extremely well this year,

even with this bumper crop.

Mr. OBERSTAR. Well, in the model that I just suggested, the short

line could serve these two and other elevators. It doesn’t need to

go into all of them. They would have to roll over main line track

and the cost of doing that is way too expensive. So I’m looking for

some cooperation from the main line railroads with the short lines

to enhance main line business using short lines as part of a hub

and spoke operation.

Mr. TIMMONS. Part of that, as I think you know, is related to this

larger car that we spoke of a little earlier.

Mr. OBERSTAR. Yes, I’m aware of it.

Mr. TIMMONS. And that is part of the issue. I don’t think it’s reasonable to expect a Class One railroad to short fill those cars. They

purchase those cars, there are economic drivers that cause them to

fill them up. And if they cannot run them on the track that is appropriate for the weight of those cars, it’s both a safety issue and

an economic issue, and they shouldn’t do it.

As you well know, we’ve come forward with this legislation, H.R.

876, to try to provide some relief in that regard. As I spoke earlier,

I think we’re on the right track. Whether it comes to pass, I don’t

know. But all those in this Subcommittee had supported it, and we

thank you for that.

Mr. OBERSTAR. Thank you, Mr. Chairman. I think we’re explored

the subject matter, it’s useful to have this opportunity.

Mr. QUINN. Thank you so much. I’m going to yield to Mr. Baker,

if I may, who has been very, very patient. Earlier in the beginning

of the Subcommittee hearing, sir, we by unanimous consent welcomed you to participate. I know you’re between your own hearings. So let me yield my time to you and take your own time now

with the witnesses.

Mr. BAKER. Thank you very much, Mr. Chairman, for your graciousness. Someone may wish to reconsider that unanimous consent request in a few minutes.

I would have been here on time, and make apologies to the witnesses and those here earlier. I had my own subcommittee hearing,
33

which I have had to leave to come over. To that end, I just wanted

to respond to Chairman Nober’s earlier comment. I’m sorry I was

not here to express this to him directly. The question was basically

asked, what’s wrong with the current system and our STB processes that would result in having someone introduce a bill such as

the one I’ve introduced.

Let me give you one small example, Mr. Hamberger, on the

record. I have a chemical company that operates nationally. And in

one particular facility, found that the cost for rail transport exceeded by several orders of magnitude the same movement of the same

product for the same distance in other markets where there was

rail competition. In fact, the costs at this one location for rail transport were exceeding the fixed costs of producing the product. Now,

that becomes rather significant. Naturally they sought some remedy.

Their counsel advised them if they were to pursue a rate approval change at the STB no chemical company has ever won a

rate case at the STB. That kind of makes you think about the process of maybe being successful. Secondly, you have to file with a $62,000 check. It will take a

minimum of two years and legal team estimated costs to basically

litigate through the process to be upward of $3 million. That didn’t

seem to be a viable alternative.

So the STB recommended process, rather than challenging the

competitive rate model, is for the industry to build their own railroad access, which they have started. The STB approved that rather quickly, at an estimated cost of $80 million to have a duplicitous

rail constructed for the transport of commodities of one industrial

facility.

Now, because it is building a new rail corridor, amazingly enough

public fury has developed by some strange process, I can’t imagine

who would imagine to a second rail line being built where someone

has a monopoly, I have to think about it maybe for a while, but

public furor has gone to decibel levels. They have now been mired

in an appellate court in Texas still having neither rate relief nor

the ability to build out an $80 million project to get their product

to market.

Now, the question was asked, do we have a problem? Maybe not

everybody, but I can cite chapter and verse now for some time,

years, where I have met with rail officials, made innumerable request for rate adjustments, we have great meetings, we all feel

good when we leave, but nothing ever changes. And there is no relief afforded in the current regulatory structure.

As Mr. Hamberger, I read with great interest your comment

about 2924, and it brought to mind a shipping commercial that’s

on television now, some package company, and there are two guys

standing there, and one says, ‘‘Doomed.’’ I don’t know if you know

the commercial, it’s really great, in thinking of your testimony, because you say on page 8 of 26, would be doomed, taxpayers would

step in with a bailout. You know how to get my attention. Freight

service would disappear, highways would be overcrowded, environmental degradation would rise, safety would deteriorate. Sounds

like Fannie Mae wrote this stuff.

[Laughter.]
34

Mr. BAKER. I don’t know where you’re coming to that conclusion

to reach those kinds of statements. Let me get to my particular

question for you that’s the most troublesome. You attacked the bottleneck provisions that you say are steeped in laws of the 1920s.

I understand that the bottleneck policy was first articulated in

1996, and contract rates were in fact prohibited until the enactment of the Staggers Act in 1980.

How can you allege that the bottleneck provisions that we now

suffer under are rooted in acts of the 1920s?

Mr. HAMBERGER. It goes back to ICC decisions in that era, where

the ICC ruled that a railroad does not have to shorthaul itself.

Under a bottleneck approach, that would most likely be the result.

That’s the reference.

Mr. BAKER. Well, I appreciate your explanation. It does seem a

little bit murky from my perspective, that the bottleneck policy is

really a little over a decade, not a century old. And return to the

subject Mr. Oberstar raised with you earlier, in which you responded relative to capital inadequacy and dividends to shareholders, that you were precluded from using the revenue stream from

your shipping customers to make capital investment.

Mr. HAMBERGER. No, sir. Not precluded. To clarify, the amount

of money that we have to invest is so great that there is not an

adequate revenue stream from the revenues we receive. We confront about two-thirds from the revenue stream we receive and

then have to go into the debt and equity markets for the additional

third of capital investment that is required.

Mr. BAKER. Well, I just want to address that subject with you a

little further, being on Financial Services, a little familiarity with

debt and equity markets. If the TBA can raise money, the rails can

raise money. My point was, it appeared to be represented that your

revenue stream from fees generated from your customers could not

be utilized to solve your capital inadequacy problems, and on the

record, they can, it’s just that you don’t make enough money, in

your judgment, to meet all the near term identified capital inadequacies, is that correct?

Mr. HAMBERGER. I guess the way I would phrase it is that the

capital demands necessary cannot be met from the revenues generated.

Mr. BAKER. I understand. And those capital adequacy demands

is a number arrived at by your own internal calculations as to

what’s necessary for the long term survivability of your particular

rail line.

Mr. HAMBERGER. Well, I don’t want to confuse capital adequacy

and revenue adequacy. We’re talking about the need to invest.

Mr. BAKER. I got it.

Mr. HAMBERGER. The short answer to your question is yes, and

that is driven by the demands of our customers and the capacity

that they need and the employee base that we need, the locomotives.

Mr. BAKER. So in this current interest rate environment we’re in,

record low rates with a AA rated rail going into the debt and equity market, you’re telling me you couldn’t find enough long term

capital with your current revenue stream to adequately address

your short term construction needs.
35

Mr. HAMBERGER. We are finding that revenue. The question was

whether or not we’re paying dividends at the same time.

Mr. BAKER. Just want to get a handle on it.

Now, as to the bottleneck problem, as I understand it today, if

you’re subject to such a problem, and I come to rail company A and

ask for a rate, there is no requirement for that rail provider to give

me a rate. They can just refuse not to give me one, is that correct?

Mr. HAMBERGER. If we’re talking about an A, B, C traditional

bottleneck case. If the railroad who operates over the bottleneck

also operates to the terminus or the origin point, that is correct.

And the issue is, is the rate from A through B to C reasonable or

not. And that is what the STB then takes a look at to see whether

or not that is a reasonable rate.

Mr. BAKER. So if I’m sitting at a chemical plant below Baton

Rouge and I want to ship a product and I’m subject to the conditions you just recited and ask for a rate, I’m not obligated, they are

not obligated to tell me what it would cost me to use that rail service. What would be wrong with requiring someone just to give me

a rate? I’m not telling you what the rate is, I’m not trying to regulate, I’m just trying to get an answer. Tell me what it would cost

if I used your facility, since it’s the only one around I can use, what

would be wrong in your free enterprise defense of requiring someone to provide me with an honest rate?

Mr. HAMBERGER. Well, of course that rate would be taken to the

Board and challenged. And it is a segment of the entire shipment.

And what is relevant is, what is a reasonable rate from A through

B to C.

Mr. BAKER. So because someone might allege your rate setting

was unreasonable and it might be—

Mr. HAMBERGER. Just on that one segment, not on the entire segment.

Mr. BAKER.—and be taken to the STB, you’re concerned that

you’re going to lose one with the chemical industry?

Mr. HAMBERGER. The issue is, what is the revenue that we need

and what is the rate, is it a reasonable rate from A through B to

C.

Mr. BAKER. But why can’t you tell the customer if it’s a dollar,

$10, whatever per ton mile assessment you want to levy, what is

wrong, I’ll give you the reverse. This is my concern. If I’m in the

chemical business and the neighbor down the street is in the chemical business and we’re both selling the same product and we go

to the diner down the street and have coffee and decided we’re

going to raise our prices in the same amount to the same level,

that’s called price fixing. That’s an anti-trust violation of significance.

Mr. HAMBERGER. Yes, sir.

Mr. BAKER. On the other hand, if two rail companies get together, we’re neither going to quote a rate, that’s fine, because

you’re not doing any rate fixing, you’re just agreeing not to cite a

rate at all. Now, I find that very problematic, because what’s happening is, when you don’t get the rate quote, you then force people

to go to buildouts, which are extremely expensive, or the person

has to ship by truck. And it’s happening in market after market.
36

I haven’t heard clarified a justifiable reason, other than you don’t

want to have to go to court and defend your judgment, as to why

you shouldn’t be required to quote a rate. Just give the man a

price.

Mr. HAMBERGER. I think that the Chairman of the STB actually

said it well, and that is that we are either operating in a market

environment or in a regulatory environment. We are in a regulatory environment. And the issue for protection of the customers

and the shippers is whether the rate from A to B to C is reasonable.

Now, in that environment, we have to be able to earn our cost

of capital, which we are trying to do. And I would like to read into

the record if I might, Mr. Chairman, a letter from David Sopel, who

is chairman and chief executive officer of MidAmerica Fuels. In the

mid-1990s, it was MidAmerica who brought the bottleneck case

against Union Pacific. And he said as part of that, ′′We asked the

ICC, now the STB, to change one of its earlier decisions, known as

the Bottleneck Decision. We were unsuccessful.′′ ′′We currently enjoy an excellent relationship with Union Pacific

Railroad, and we’ve come to understand the terrible ramifications

overturning the Bottleneck Decision would have on the freight rail

industry. We depend on a vibrant and healthy rail industry to

make us competitive. Changing the railroad’s economic regulatory

structure to artificially create competition where the marketplace

would not support it would deprive the rail industry of the revenue

it needs to sustain itself which will ultimately hurt companies like

ours that depend on quality rail service.′′ Mr. QUINN. We’ve got a vote pending, and I’m afraid the Chairman, who is liberal as he’s been, is going to blow the whistle on

me. I know you’ll be disappointed. But when the position is, you’ve

got one way out of town, I call up, I can’t get a rate quote, would

the rail industry oppose having the rails be required to give a customer a rate or is your position the best interest of the consumer

is served by not giving him a rate at all?

Mr. HAMBERGER. He does get a rate. He gets a rate from A

through B to C. But he doesn’t get a rate from A to B, that’s correct.

Mr. BAKER. Well, if I can’t go from A to B, going from B to C

isn’t going to help me much. I’m going to have to use Mr. Oberstar’s trucks or fly it in by cargo plane. That’s not and economic

remedy. Do you or do you not oppose having a rate required to be

disclosed to the customer, regardless of it’s A to B, B to C, Y to X?

Mr. HAMBERGER. The answer is, we do not believe that overturning the Bottleneck Decision is appropriate public policy.

Mr. BAKER. And there we are. Mr. Chairman, I rest my case. We

have come to the end of the track and at the end of the day, a customer who wants to ship is not given a rate. The industry would

oppose requiring the customer to get a rate when the customer has

no options. I’m not for regulating. I think we ought to stay as far

away from board rooms in corporate America as possible. But when

you have a single provider of a service in a market and all you’re

asking is to tell me what it will cost me to use your services as a

regulated public utility, that’s a problem when you won’t respond.

I thank the Chairman for his generous time.
37

Mr. QUINN. Thank you, Mr. Baker. What I’d like to suggest before we recess for a few minutes, we’ve got nine and a half minutes

to get to this vote, are there any questions you’d like to submit for

the record for the third panel?

Mr. BAKER. You’re very gracious to ask. Just a comment, and to

put into the record the comments of the Lafayette Utility System

representative, Mr. Terry Huval, who will later talk about the

transportation costs associated with the local utility service in

southwest Louisiana, a very small community, it is like many other

rural communities having its economic difficulty.

Mr. QUINN. Without objection, so ordered.

Mr. BAKER. And the annual cost passed on by this captured environment in Lafayette is $6 million a year to the end users of utility

systems in Lafayette, Louisiana.

Mr. QUINN. Without objection, so ordered.

We’re going to recess and be right back.

[Recess.]

Mr. QUINN. Good afternoon, and thank you for your patience.

We’re going to begin as we wait for one of our colleagues to attend

who is on his or her way, as you can tell, I don’t know who it is

yet. So I hope he or she is on their way.

But in the meantime, we would like to begin and try to keep to

some sort of the schedule. Gentlemen on the panel, I welcome you

here this morning on behalf of the full Subcommittee and the full

Committee, for that matter. I am impressed that you were here for

the early part to hear the other testimony. It’s helpful to you, I

hope and to all of us.

I think everybody knows our ground rules. We have your written

testimony, all of it. We’d like you to keep your oral remarks to

about five minuets or so. We’re going to start here and work our

way across. Then when everybody has had a chance, we’ll move to

the question period. So we’ll hold our questions to the end.

If that’s okay with you, sir, introduce yourself and begin. We’re

glad to have you here.

TESTIMONY OF TERRY HUVAL, DIRECTOR OF UTILITIES, CITY

OF LAFAYETTE, LOUISIANA; STEVEN D. STREGE, PRESIDENT,

NORTH DAKOTA GRAIN DEALERS ASSOCIATION; CHARLES E.

PLATZ, PRESIDENT, BASELL NORTH AMERICA, INC.; JOHN

FICKER, PRESIDENT, NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE; WILLIAM J. RENNICKE, MANAGING DIRECTOR, MERCER MANAGEMENT CONSULTING, INC.; AND CURTIS GRIMM, PROFESSOR OF TRANSPORTATION AND LOGISTICS, UNIVERSITY OF MARYLAND

Mr. HUVAL. Thank you, Mr. Chairman. My name is Terry Huval,

I’m from Lafayette, Louisiana, and I’m the Director of the Lafayette Utility System, which is a publicly owned utility system owned

by the community.

Mr. QUINN. Excuse me, sir, don’t tell me you’re going to pick up

where Mr. Baker left off.

[Laughter.]

Mr. HUVAL. No, sir, I think he represented it well.

Mr. QUINN. He’s a great member, he really is. You should be

proud to have him.
38

Mr. HUVAL. Very proud, very proud. I’m representing here not

only the Lafayette Utility System but also the Louisiana Energy

and Power Authority, which is a joint action agency of some 20 municipally owned utilities in the State of Louisiana, the American

Public Power Association and of course, Consumers United for Rail

Equity, or CURE.

Let me tell you a little bit about Lafayette, Louisiana. We’re a

community of about 110,000 people who decided in 1896 that they

were going to set their own destiny for providing the commerce of

the future and established their own electric utility system. We

have a city council that sets our rates, sets our policies. And we

have been very successful being able to offer very competitive electric services to our customers, having for many years the lowest

rates in the State of Louisiana.

Most of our power generation came from natural gas until the

early 1980s, at which time we invested in a coal-fired plant which

we co-owned with two other owners. And the issue I’ll bring before

you today is the very clear unfairness we feel there is in the pricing

polices of the rail transportation providers. We are a bottleneck

captive shipper, as was discussed earlier today. I have a map that

kind of indicates to you how we get our coal today, and it’s through

the red line, as was indicated on the map, from the Powder River

Basin in Wyoming to Alexandria, in the center of Louisiana, and

another 19 miles to get to our power plant.

We have a competitive choice between the Powder River Basin

and Alexandria, some 1,506 miles. But that last 19 miles, that last

1 percent of the route it takes to get to our plant, costs us an additional 50 percent in transportation costs, at a minimum. We don’t

understand how national policy can be served in providing the best

thing for the consumer as a whole to build that sort of price impediment.

In order to get relief, of course you’ve heard all the different remedies for relief, really the only true remedy is to build some duplicate sidings to get the coal to our power plant. In our particular

case, building a siding is going to have to go over a navigable river

and an interstate system, some $50 million worth of cost that we

would have to pay to be able to do that. At that time, then we could

have a competitive choice. Until that time, we have none. It just

seems ridiculous to have to expect that a utility system or any entity is going to have to increase its costs to consumers to build

something that may never be used, because it may turn out that

the existing provider then actually comes to realism on the price.

I had the opportunity to testify a couple of years ago to a Senate

committee on the same issue. Shortly after my testimony, I got to

hear the CEO of one of the major railways comment that because

the competitive business was so marginal from a profit perspective,

they had to rely on the captive shippers to bill to make the financial stability of the railroad continue. It almost sounds like price

gouging. It almost sounds like where we have to compete we’re

going to compete and where we don’t have to compete, we’re going

to go for all that we can.

In our particular case, and almost every utility system, passes on

the price of fuel to their customers, which means that every customer that we have, certainly in our system and many other utility
39

systems, is paying the cost for this price gouging. When we talk

about economic development, when we talk about how commerce

remains in the community, the cost of electricity becomes a very

significant part of that. Unfortunately, because of the national policies that we have today, we have a situation again that causes us

to pay a 50 percent increase in cost to the existing rail provider for

1 percent of the track that’s not competitive. That means $6 million

a year lost to our economy locally to do that, and I would expect

it’s in the billions of dollars when you look at it from a national

perspective.

We’re asking for relief. We’re asking for help. We don’t think it’s

fair, we don’t think it’s appropriate. I’ve heard all the arguments

made earlier today, and I would like to see what all the numbers

actually are.

I think there’s two sets of books being kept, one for competitive

and one for non-competitive arenas. And what we’re living in is essentially an unregulated monopoly. Whereas if the pricing can be

charged in such a way that the gain displayed is such that you cannot get a competitive offer from a competitive provider, so that you

can make a reasonable business decision. Who wants to spend $50

million to build another siding when you don’t even know what the

benefits are going to be in the end as far as what the costs are

going to be to the utility system?

We certainly are big supporters of the House Bill 2924, and believe that it’s actually not re-regulating, it’s actually providing for

more competition. It’s providing for more access and so that entities such as our own can make reasonable decision of how to invest

the money of our consumers. Again, this is calling for more competition.

And we certainly appreciate the opportunity to testify before you

today and look forward to your support in trying to get some appropriate resolution to this issue.

Mr. QUINN. Thank you so much. I appreciate your keeping our

time in your mind.

Mr. Platz, I might ask you if as a courtesy you might allow us

to go out of order. We’re joined here this afternoon by our esteemed

colleague, Mr. Earl Pomeroy from the great State of North Dakota,

here to introduce one of our speakers this morning. So we’re going

to ask you if you would hold, Mr. Platz, and I’d like to yield to Mr.

Pomeroy. Welcome.

Mr. POMEROY. I thank the Chair. I’m sorry I was not here a couple minutes ago as the panel started. I’ve been trying to be three

places this morning, as undoubtedly you have.

Mr. QUINN. We’re glad you’re with us any time you can be here.

Mr. POMEROY. Thank you so much.

I’m here to introduce Steve Strege, who is the President of the

North Dakota Grain Dealers Association. He has been with the

North Dakota Grain Dealers Association for 28 years. This is the

association that represents better than 90 percent of the State’s

grain elevators. Just think for a minute about what he has had to

deal with during this time. North Dakota is a State located far

from many major markets. Our major product is bulk commodities.

Our dependence upon rail shipping is significant.
40

So what has Mr. Strege seen during his years as executive vice

president? He has seen diminished competition, he has seen the demise of regulatory oversight, and yet the fundamentals are still the

same. The result has been diminished service, increased complaints, higher rates and a completely unacceptable market situation in North Dakota.

We have this past year, seen our major carrier, BNSF, at times

have as many as 4,000 rail cars past due, leading to grain stacking

up outside the elevators. We hit a milestone with April 1st, now

the company is only 1,000 rail cars past due. Usually, our last

year’s harvest would have long been cleaned up by this time of

year, but this year we are still making our way.

In the middle of all this, the BNSF has run not just one, but two,

rate increase proposals on the already frustrated customers with

grain piled outside their elevators. So--insufficient service, higher

rates for it--this is why we come to the table. Mr. Strege and I are

of one mind, that we need to provide a greater dimension of consumer protection in this area.

The laws of the marketplace are: let competition have its will

and you don’t need much of a regulatory structure, to the extent

that competition is not present, you’d better step up your regulatory oversight. Here we don’t have competition, yet we also don’t

have sufficient regulatory oversight. Mr. Strege’s words to you, I

think, will reflect the grass roots view of North Dakota.

I thank you, Mr. Chairman.

Mr. QUINN. Thank you. I appreciate your being here.

Mr. Strege, would you like to take your five minutes now, after

that introduction? You’re up.

Mr. STREGE. Thank you, Congressman Pomeroy, for being here.

You’ve been a great supporter over the years of country grain elevators. Thank you for inviting me to be a witness at this hearing,

Mr. Chairman. I think Mr. Pomeroy has described our association

as representing country elevators in North Dakota. They receive

grain from farmers, they clean it, blend it and ship it into export

or on to domestic processors.

Our association is also part of the Alliance for Rail Competition,

which is part of the Rail Customer Coalition, which together represents 55 percent of freight rail revenues. Grain shippers who do

not have effective competition alternatives are being taken advantage of on rail rates and service. Many of these customers are being

frozen out of the marketplace because railroads give preference to

other customers.

We have various sizes of grain shippers, those that load up to 24

cars at a time, those that load trains of 25 to 27 cars, others that

load trains of 50 to 54 cars. Now the railroad wants bigger, in the

100 to 110 car range, commonly called shuttle trains. Our recent

experience, particularly with the BNSF, is that it concentrates it

service in the shuttle train segment, while others are left to wait

30 to 50 days, taking them out of the market at great cost to the

elevators and farmers.

Now, here’s an everyday analogy. It would likely be more efficient for grocery stores to sell their potatoes in 100 pound sacks

only. But consumers, customers want 5 pound, 10 pound, 20 pound

sacks. If a grocery store went to a policy of 100 pound sacks only
41

on time and all others 30 days late, its customers would go elsewhere. That’s the benefit of competition. But in the case of these

railroad customers, there is no competitive alternative, so they can

only sit and wait, absorbing associated costs in the process.

The law says shippers are entitled to service on reasonable request. Railroad delivery of unit trains 30 to 50 days late is not reasonable. It is a violation of law. When a violation of law is committed, there should be consequences. The Eighth Circuit Court of Appeals reversed the ICC in 1993, saying that if a particular railroad

car distribution process so reduces the number of cars available for

other shippers that it unduly impairs the railroad’s ability to meet

its common carrier obligation, then the preferential program is unlawful. The STB refuses to follow that decision in this current circumstance.

Just recently, BNSF announced that while it continues auctions

of shuttle trains, it is shutting off orders to its assured service program for all other sizes of trains.

Another example of how farmers and elevators in our region

have been deprived by railroad practices of an opportunity to sell

grain is through inverse pricing. Under this practice, farmers and

captive elevators who are closer to a consumption point and who

should have a natural locational advantage in freight rates are put

out of that market by cheaper rail rates to that market from a

more distant point that is less captive.

Those who cannot obtain service and rates for months on end

will be weakened financially and eventually put out of business.

Branch lines will be abandoned through railroad discrimination

and neglect. And the grain elevator industry will be forced to concentrate into fewer mega elevators. Farmers will lose competition

for their grain and have to truck it farther.

You are considering a highway bill of several billions of dollars.

Add some more as railroads shift grain gathering to the roads and

public sector.

North Dakotans, including our Governor, met last winter with

STB Chairman Nober about this situation. We learned at those

meetings that the discrimination in the distribution of grain cars

between shuttle trains and other train loaders was not of concern

to the STB. This leads our shippers to believe that the agency here

in D.C. that is supposed to be watching out for our interests will

not take assertive action to protect them.

Mr. Nober said here earlier that the parties—the North Dakota

parties and the railroad—agreed to a set of steps. I would describe

the outcome more as the railroad telling us what it was going to

do.

Recently, BNSF said it was caught up on grain cars in North Dakota. Maybe, maybe not. But catching up does not undo the millions of dollars in economic harm done to customers across its

whole system by failure to make timely delivery of pre-booked and

in some place partially pre-paid cars. BNSF also promised us an

ombudsman for our problems to be in place by early March. Nothing has happened in regard to that.

There is a chart on page 10 of my written testimony showing

how we in the northern plains, shippers who are the most captive

and pay the highest rates in the country are also the farthest be-
42

hind in service. Grain in the northern plans and other captive

areas sits until the railroad gets around to moving it. The best

marketing opportunities have often evaporated by then.

Mr. Chairman, I would like to submit copies for the record of an

article from the March 27, 2004 Bismarck, North Dakota Tribune

called Rail Backlog Means Empty Pockets. It describes how BNSF’s

failure to deliver the promised rail cars to shippers, a practice apparently condoned by the STB, costs farmers and grain elevators

hundreds of thousands of dollars.

Mr. QUINN. Without objection, so ordered.

Mr. STREGE. In addition, Mr. Chairman, I have letters of support

here for H.R. 2924 from growers and shippers across the country,

which I too ask be put in the record.

Mr. QUINN. Without objection, that’s ordered as well.

Mr. STREGE. Captive traffic has always paid higher rates and we

don’t disagree with the concept of differential pricing. But when

rates are three or four times the railroad’s variable cost and there

is no effective remedy, something must be done. At present, shippers have to gamble on an uncertain, expensive and arduous process to seek rate relief. And there is no certainty that anything will

change.

Under Staggers, where competition is lacking, regulatory oversight is called for. Unfortunately, that has not happened. Mr. Hamberger said this morning that we have to move to the shuttle trains

to keep our farmers efficient in a world market. Why then do the

major carriers in our State charge rates at 350 percent of variable

costs to move that grain to market? We have called on them to reduce rates, but they do not.

Shippers put up with slow service, high rates and dictatorial

practices. Railroads are huge companies, but most grain shippers

are not. Rail dependent businesses must bend their ways to the

railroad’s will or be put out of business. We urge you to take action

quickly to end such practices.

Let me also make one other comment for the record regarding a

question that was asked this morning. Mr. Moran asked about rate

levels and what had happened since Staggers. I can tell you that

we have not been the beneficiary of 50 percent rate reductions as

Mr. Hamberger commented on.

But let’s also talk about costs. Since 1980, the rail industry has

shifted must cost to the grain industry through the investments

and ongoing additional expense of loading ever larger and larger

trains. Rail lines have been abandoned, saving railroads money,

but also shifting costs to farmers and the public road system.

Some of these changes have been good. But let’s tell the whole

story about rail rates and costs. I know that the railroads want to

talk about Wall Street and their stock prices. Let’s talk about Main

Street and let’s talk about the customers who pay the bills. There’s

a frustration, and I saw it with Mr. Baker—

Mr. QUINN. So did I.

[Laughter.]

Mr. STREGE. I was here 20 months ago today, and three of us,

these three, were testifying over in the Senate. We were told something was going to be done. Nothing gets done. Meanwhile, our

shippers die on the vine. Thank you.
43

Mr. QUINN. Thank you very much, Mr. Strege.

Mr. Platz, we’ll go back to you and get back in order. Thank you

for your patience.

Mr. PLATZ. Mr. Chairman, members of the Subcommittee, my

name is Charles Platz, and I’m President of American Cooperative,

and thank you for the opportunity to testify.

I also have some letters from members of CURE and the ACC

which I’d like to put into the record, and also within the 30 day

period.

Mr. QUINN. Without objection, so ordered.

Mr. PLATZ. I appear no behalf of the employees and shareholders

of my company and the American Chemistry Council and Consumers United for Rail Equity, on which I serve as a co-chair. Basell

North America has its headquarters in Elkton, Maryland, offices in

Lansing, Michigan. We have manufacturing facilities in Texas,

Louisiana and Tennessee. We market and manufacture in Liggon,

New Jersey.

I’m here because our business is wholly dependent upon rail

transportation. I believe if Mr. Nober was still here, he would acknowledge the truth of that fact. We load 100 percent of our products, made at world scale production facilities, directly into rail

hopper cars for transportation to our customers, and by the way,

our customers demand delivery by rail. We are deeply invested in

rail infrastructure. We own or lease and maintain 4,000 hopper

cars with a replacement value of over $260 million.

So as you can see, rail is not just a vital to my business, it’s actually an integral part of how we do business. That’s why I’m here

to talk about the serious flaw that exists in our current national

rail policy, which is devastating the ability of many chemical companies in this Nation to remain competitive. The problem? Current

rail policy allows railroads to deny their customers use of existing

rail competition. I believe this policy will contribute to the export

of the United States manufacturing jobs if it remains unchanged.

In fact, during both 2002 and 2003, for the first time in the history of our industry, the United States spent more money importing chemicals than we earned from exporting chemicals. The trend

lines are not good, and the ramifications are serious. Soon, besides

exporting U.S. dollars, we will be exporting jobs.

Here’s an example of the problem that Basell faces. Only one

railroad line serves Basell at its Bayport, Texas plant. A junction

with competitive rail carriers exists just five miles away. But

amazingly, the STB has given our single line rail carrier the unmatched power to prohibit us from directing delivery of our hopper

cars to a competing carrier at that junction. So instead of being

captive for five miles, the STB policy makes us captive for movements of up to thousands of miles, where competition options exist.

We’re just not allowed to use those options.

Let me explain how the bottleneck impacts Basell. Our railroad

transportation costs at our captive Texas facility have been grossly

out of proportion. In fact, the rail transportation costs were actually equal to or greater than the fixed costs of producing a product.

This meant transportation rose to the level of being the largest cost

component after the cost of our raw materials. This level cannot be

sustained.
44

We have tried everything to keep our Bayport plant viable. Unfortunately, I have learned that the problems created by our rail

captivity cannot be solved by any method available today. But in

an effort to keep our Bayport plant as a viable site, my company

has explored all the options. We’ve tried direct negotiations with

the railroads, but to no avail. They were not even compelled by the

potential loss of business in the event the site was no longer viable.

We’ve considered bringing a rate case to the STB, but that’s a

non-starter. No chemical company has ever succeeded, and all of

our advisors told us we would lose. Even Mr. Nober has said they

aren’t viable because they cost $60,000 plus to file, more than $3

million to try and take years to decide.

We even played the role of good citizen and tried a buildout. But

that’s not working either. The local community was upset with the

prospect of a redundant line which they viewed as a waste and as

disruptive to the local community. Now three years later, we find

ourselves mired in a State court with no progress towards competition.

For me, all of this leads to only one conclusion, that in all aspects, the current STB policies are designed to keep captive customers captive and to increase the level of captivity. The only alterative for businesses subjected to those policies is to close down

plants and move. And that cannot be what Congress had intended.

Congress must act because no other way for change exists. This

is my fourth time testifying on this issue in the past two years, and

my company has been here over the last 10 years on this issue. So

twice in the Senate I’ve testified and now twice in the House. During this time, we’ve tried to talk to the CEOs of the railroads and

we’ve addressed some very business specific issues. But they have

made it clear, as railroad CEOs, that they will not discuss policy

change.

We’ve also pressed the STB to act, but the STB has made it clear

that it too will not act. Indeed, Mr. Nober believes his agency must

take a position against any policy change.

Now, I do support and applaud the effort he’s making that he

talked about today, but it’s not sufficient. Therefore, Mr. Chairman,

it is left squarely in the hands of Congress, and we believe that it

is imperative that this Congress address the problem immediately.

And why should you act now? I think the answer is relatively simple. Congress will deal with this issue sooner or later. It may

choose to deal with it now through policy change that puts it back

in the hands of business and industry to sort it out and work

through. Or it will have to deal with it later when captive shippers

have fled, the jobs are gone and the current railroad business

model has failed.

Since railroads are an integral part of our economy, you will then

have to conduct a bailout at great expense to taxpayers. Clearly,

the better course is to act now. At a minimum, Congress should immediately require railroads, when requested by customers, to provide in writing a rate to a point on the railroad system where the

customer can gain access to rail competition. The provision does

not dictate the level of the rate or even require that the rate would

be reasonable, but only that a rate be provided so that the rail customer can gain use of existing rail competition.
45

Correcting this fundamental flaw will go a long way toward preserving the competitive viability of American manufacturing facilities and help keep manufacturing jobs in the country.

Thank you, Mr. Chairman and members of the Subcommittee for

the opportunity to bring this vital issue to our attention.

Mr. QUINN. Well, Mr. Platz, we appreciate your return to the

Subcommittee and, as we said to Mr. Pomeroy, we appreciate your

input at all times.

Mr. Ficker.

Mr. FICKER. Thank you, Mr. Chairman.

This is my first time testifying before the Committee, and I do

want to congratulate Frank on his position as well, and good luck

in the confirmation process.

I’m currently the President of the National Industrial Transportation League, which is the oldest and largest association representing those involved in the movement of freight. On behalf of

the 600 members of our organization, I’d like to commend the Committee for holding these important hearings and giving me the opportunity to testify.

In a few weeks, I’ll be celebrating 34 years in the transportation

industry. Of those 34 years, I spent 13 actively working in the railroad industry. In fact, I just was acquainted with my co-presenter,

co-testifier here, we actually worked in the same railroad at the

same time. So we’re going to share some stories later.

Following that, I spent 20 years operating in various transportation management functions for shippers across the country, using

all sorts of modes of transportation, including rail. So I’ve had a

chance to see the entire rail industry and the transportation industry and the challenges faced and met over the last 30 years.

I’d like to direct my comments today to the importance that has

already been stated of the rail industry to our economy and ways

for the rail industry to increase their portion of the freight carrying

business of our country. I will also show that there need to be

changes made to the rail transportation policy and to the rail’s current economic model. Specifically, the infusion of greater competitive forces in the rail industry to more effectively meet the growing

needs of the transportation of our country.

Before I start that, I’d like to make one thing very clear. Shipper

members of the National Industrial Transportation League are

some of the staunchest supporters of the rail industry in the

United States. Our members understand this industry very well,

and understand especially the large capital requirements that are

necessary to maintain their networks.

However, shippers will move their freight and move their cargo

in a way that most expeditiously meets their business needs. Those

who have an option to choose between rail and other forms of

transportation will utilize that mode of transportation that best

provides them the combination of service and price to meet their

customers’ needs. Even shippers who are served by only a single

railroad and who must, because of the nature of their commodities—and we’ve heard this mentioned earlier—use rail in the

short-to medium-term, if the service and price is unsatisfactory,

may over the long term, and again we’ve heard this this morning,

reduce their use of rail service by shifting production potentially
46

overseas or totally redesign their manufacturing and distribution

patterns to meet those needs.

In the course of this debate, a great deal has been made about

the captive shipper. And I won’t go into any more detail, because

I think the fellow panelists here have made a very good case about

that. But the important thing to understand about a captive shipper is it’s not just one end of the chain that is required to be competitive. Both ends of the chain must be competitive. The origin

must have options and the destination must have options. Or in

fact, the bottleneck process comes into play and shippers are stymied in their ability to get a competitive alternative.

I’d like to make a quote from Senator Kay Bailey Hutchison, who

last October in the Senate Subcommittee on Surface Transportation and Merchant Marine, made the following statement, and I

quote: ‘‘Today there is a severe shortage of competition in the

freight rail industry.’’ But competition is at the heart of the American economy. It’s the engine of innovation, creativity, efficiency

and ultimately profitability. It might be characterized as the engine

that could.

One of America’s most famous management consultants, Tom Peters, in his new book, Reimagine, which I recommend to all of you,

makes the following statement about competition: ‘‘There is no

greater blessing than an extraordinary competitor. Great competitors keep you on your toes. Alas, none of us improves without

someone who pushes us.’’ I think most members of Congress can

appreciate that when election time rolls around.

The need for a strong and more competitive retail system has

never been more important than now. Although the country needs

an expanding rail industry, there are some very disturbing signs

which concern us and point to the direction that maybe we’re not

growing int eh right direction. From 1993 to 2001, the trucking industry grew from $90 billion in annual revenue to a little less than

$310, or 63 percent growth. In that same time frame, the rail industry grew from $3 billion to $36 billion, just 19 and a half percent. In that same period, the rail dependence on one single commodity, coal, grew from 38 to 44 percent, or a 14 percent increase.

And I was delighted to see that Mr. Hamberger brought forward

the AASHTO report, the Association of State Highway and Transportation Officials report, called the Freight Rail Bottom Line report. In that report, the estimates are that freight transportation

in this country will increase by 50 percent by the year 2020.

If you take that volume and project that volume based on the

1993 to 2002 numbers that we just mentioned, that would indicate

the trucking volume in this country will more than double by 2020.

And frankly, I think you’re voting on another bill in a few minutes,

I don’t believe that the infrastructure of this country can handle

that growth.

It’s clear that the status quo for railroads does not describe a

model that will result in the rail industry growing to meet the

transportation needs of our country, and frankly, there must be

change. In all other modes of transportation, shippers have service

providers competing strongly for their business. The Motor Carrier

Act of 1980 freed the trucking industry from unnecessary competition and fostered intermodal competition. These competitive forces
47

have been of benefit to both the shippers and the carriers as the

industry became more efficient and more customer focused.

These competitive forces did not result in stagnation or financial

disasters for the trucking industry, but rather growth and efficiency. It’s now time to put those same competitive forces into the

rail industry. The proposals outlined in H.R. 2924 and S. 919 allow

for such change and will foster growth by instilling competition.

Such change also encourages transportation suppliers and their

customers to become partners, to eliminate inefficiencies. I’m delighted that Chairman Nober has taken a positive step to open the

regulatory process and begin to streamline processing of cases. But

while these changes are necessary and welcome, Congress itself

needs to act to set a more proactive, pro-competitive, rail policy for

the United States and to provide substantive change to the governing statutes and the policy directions of the agency.

Finally, since assuming my current position in September, I have

stressed the importance of collaboration among all transportation

interests, and here is the perfect chance for collaboration. I know

there’s been frustration in the past by those who have attempted

this, but I think that effort still needs to be made. It will require

hard work, it will require openness to innovative ideas, and most

importantly, it will require a willingness to compromise.

The NIT League standards ready to dialogue any time, any place

and with any one to open these discussions up. I look forward to

the opportunity to answer any questions. Thank you.

Mr. QUINN. Thank you, Mr. Ficker. Thank you very much.

Mr. Rennicke.

Mr. RENNICKE. Thank you. My name is Bill Rennicke and I’m a

Managing Director at Mercer Management Consulting and I thank

you for the opportunity to come and make some comments today.

Just a little bit of background, I worked in the railroad business

since the early 1960s, back in the days when the New Haven Railroad was an entity, bankrupt at the time, but that’s where I started the business. In the last 20 years at Mercer, we’ve worked extensively not only in North America but restructuring railroads

around the world. In most cases, those were railroads who wanted

to move from being public or taxpayer funded properties into the

private sector. So whether it’s the Mexican system, which is probably the biggest success we have, or the ones in Australia, or at

the present time, we’re actually privatizing the Hong Kong subway

system and commuter system. There is a real envy of our private

sector system, it’s something that I think we should try to as much

as possible preserve.

I’ll make references to the document I passed out, I don’t think

anybody needs to actually refer to them, but I can just cross reference the page numbers. I think one of the interesting points, if

you look at page four where it shows the operating ratios for the

railroads and the larger class railroads in the U.S. in 2002, most

of them were in the low 80s. That is a really impressive factor. In

fact, when you work in this business and you work in a private sector economy, and I will throw Canada into the pot, too, because

they have probably the best performing railroad right now in North

America, CN, sometimes you take for granted what a low operating

ratio does for you.
48

The interesting factor is that the North American railroads

produce the transportation services they do for something less than

100 cents on the dollar. So they’re making money. That is rare in

the world. There are very, very few places where you can find positive, profitable and in many cases positive cash flow railroads. It’s

changing, some in Australia, as I mentioned, and in Mexico. But

I think that’s something that has to be looked at.

What’s even more amazing is if you look at the page I had on,

Roman number II-12, and it shows that since Staggers Act, there

has been almost a 200 percent increase in the unit cost of everything that railroads have purchased. A t the same time, whether

you use nominal dollars, there’s been roughly a 10 percent decrease

in revenue in cents per ton mile, and there’s a 60 percent decrease

if you look at that in real dollars. Some of that occurs from shifting

responsibility for providing rail cars to the customers, but the fact

that there’s a 200 point spread between what inflation is doing and

what the railroads are charging their customers is a unique phenomenon to the U.S. In fact, we use this all over Europe with the

freight railroads over there who are trying to establish themselves

as viably commercial businesses.

I think if you look page II-6, where we show what have been the

productivity changes that have occurred, and we just picked four.

If you look at 2002, which is the last year we have totally full numbers, the productivity of a mile of railroad has gone up 162 percent.

So that means if you consider a mile of railroad as a pipe, you’re

pumping 162 percent more traffic through it. If you look at the individual productivity of the work force, it’s gone up 380 percent, locomotive productivity, fleet productivity, the use of rail cars, 56

percent.

Now, that productivity in the figures I mentioned before with inflation and the fact that inflation has gone up 200 percent, it creates an environment where certain difficult decisions which I think

are the subject of a lot of the comments that have to be made, you

need bigger rail cars, you need to find massive amounts of cost savings if you’re going to stay ahead of inflation, and it leads you

sometimes to operating practices that sometimes are more difficult,

or it means larger trains, larger cuts of cars, in some cases larger

cars, period.

The industry itself, from recent research we’ve done, and I think

the overall growth in transportation factors is important, but even

things like intermodal, if you compare 1990 to 2005, just the intermodal growth of the industry might even be 2.5 percent. That’s

without a massive transfer of traffic off the highway to the railroads from changes in work rules.

I think as the AAR pointed out, collectively there’s been about

$300 billion of private investment, the railroads each year put

about 15 to 20 percent of every dollar that comes in the door into

capital. We’ve done research and work in many other businesses,

steel, electricity, retail, and nobody is putting that level of private

capital into the business.

I also have mentioned just to demonstrate some other issues and

challenges that will come up in terms of requirements that there’s

going to be a whole revolution in communication and data that the

shippers are going to force, and it’s going to call RFID, it’s called
49

RFID, Wal-Mart, Target, the big companies right now are making

that a method of communication. Somewhere along the line the

railroads have RFID tags on their rail cars today. That’s a process

that works in essence like an easy pass on your automobile going

through a toll booth. Probably by the year 2010 or 2020, every

product that goes into a store anywhere will have some kind of

RFID coding, and it will have to be tracked, and that means if the

railroads want to participate in that business, they’re going to have

to even get into what’s called new classes of technology.

One of the things we also do is spend a lot of time working with

banks and financial institutions assessing the risks on investments

and railroad cars and just basic equity investments in railroads. I’ll

just add some comments to the questions this morning about dividends. The dividends or interest are nothing more than the cost of

money. You could, if there wasn’t such a thing as leverage, it’s not

inconceivable that you could have 100 percent debt on a railroad,

and I don’t know whether they would complain about the amount

of interest rates that they’re paying.

But in looking at the ability of Wall Street and investors to put

their money into railroads, there are many risks that they look at.

One of them is drastic change in regulation. I think there’s more

private money interested in the railroads since 1980, I think Wall

Street investors will go along with reasonable levels of changes in

regulation, things that get very complex and become very different.

If the playing field gets changed, I think some of this private capital that has supported the industry may go away.

And I’ll just add a couple of other comments. For other reasons,

we have looked over the years at the prices, not only railroads but

trucking companies, airlines and truck load carriers charge their

customers. We have a process where we look at yield management.

In looking at those prices, it is interesting that while there may be

an appearance, and there are certainly cases under the philosophy

of Ramsey pricing or differential pricing that people pay different

rates.

From the research we did, and it wasn’t 100 percent across every

railroad, and it was actually several years ago and again, for a different reason, we did not find a significant pattern of discrimination against either big shippers or small shippers, or big shipments

or small shipments. And when you plot them out, and I have provided some disguised exhibits in there that albeit are several years

old, it’s a very interesting phenomenon. You always find somebody

that’s paying more, you always find somebody that’s paying less.

And these are people who under the same circumstances have in

many cases similar circumstances.

The last comment I will make is on the effect of something that

has been affecting the banking industry, and I think there have

been some comments today. There is a process called Basel Two,

where a whole new set of international regulations on banking are

going to affect the capital reserves for people who lend to railroads.

There is a very high probability that the cost and risk to railroads,

which is in the same bucket as airlines under this process, will get

much higher.

So this morning I heard comments about today’s interest rates.

The railroads are going to have to do, and people how invest in
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railroads are going to have to pay very close attention to how they

bring their capital projects document and validate their capital

projects, so that they wind up in a cheaper risk bucket than the

airlines.

I thank you.

Mr. QUINN. Thank you very much, Mr. Rennicke.

Dr. Grimm.

Mr. GRIMM. Good afternoon. My name is Curt Grimm, and I’m

Dean’s Professor of Supply Chain and Strategy at the University

of Maryland.

I appreciate the opportunity to meet today and provide my views

on this very important issue. And I note that I’m not testifying

today on behalf of any group or organization.

My remarks draw on my almost 30 years of experience in rail

policy matters, including extensive academic research in this area.

Rail deregulation has clearly been a very successful policy. However, in my view there are two problems which remain, and these

problems need attention. One, in the aftermath of the 1990s rail

merger wave, the industry is now dominated by four large carriers.

These four now dwarf smaller Class Ones, regional railroads and

short line railroads. This size disparity has created a competitive

imbalance amongst U.S. railroads, in many cases limiting the ability of the smaller railroads to provide effective competition.

The second problemis that approximately 20 percent of rail customers are captive to a single railroad, and they don’t have effective competition from other modes. These captive shippers pay on

average about 21 percent higher rates. Both of those numbers are

drawn from work that I’ve done with Cliff Winston of Brookings Institute.

The solution to both problems: empower smaller railroads and

provide competition to captive shippers. A variety of means are

available to accomplish these dual objectives and a variety of

means could accomplish these objectives in ways that would impose

very little administrative burden on regulators or anyone else. For

example, removal of paper barriers would provide meaningful competition for many captive shippers, while extending the competitive

reach of short line railroads. Requiring railroads, particularly the

four large ones, to quote rates to points of competition would also

be a positive step. Mandatory interswitching within a prescribed

radius, as has been practice in Canada since 1908, also merits consideration.

Importantly, I believe that stimulating rail competition would

strengthen, not weaken, the rail industry. First, resolving the captive shipper issue will ease railroad shipper tensions. It’s not

healthy for the railroad industry to be at war with many of their

best customers year in and year out. Resolution of the captive shipper issue would allow railroads and shippers to focus on achieving

logistics efficiencies as partners.

Today these mutually beneficial supply chain collaborations,

which are very effective throughout the economy, are far more

prevalent between shippers and trucking firms, where economic deregulation is complete. Second, resolving the captive shipper issue

would extend the success of the Staggers Act. Why was the Staggers Act successful? Railroad deregulation has had positive effects
51

on the rail industry because it substituted competition for Government regulation for most rail customers. Staggers stimulated competition and gave the railroads freedom to compete.

When faced with new competition, railroads cut costs, increased

productivity and improved service quality. Additional moves to increase rail competition will further strengthen the industry. Competition provides a built-in accountability mechanism. Firms and

managers who are best able to compete by cutting costs and improving service quality will emerge with a more prominent role in

the industry.

Now, importantly concern about short term rail revenue diminution is no reason to accept the status quo. First of all, railroad estimates of this diminution are exaggerated, to say the least. Based

on my Brookings work again, the total transfer from captive shippers to railroads is about $1.3 billion annually. That’s multiplying

the total captive shippers, shipper traffic, times the 21 percent differential between competitive rates and captive shipper rates.

The measures that are being contemplated would only give partial competition to some of these captive shippers. So the number

would be well below $1.3 billion, even before we start talking about

the adjustments of cutting costs and improving service and increasing productivity that would appear if we stimulated competition.

In any case, even if there is concern about a modest short term

revenue loss, policy makers could dovetail increased competition for

captive shippers with financial assistance for railroads in the form

of infrastructure grants or tax policy changes. Both these options

have been proposed, but not yet linked to the captive shipper issue.

I’m sympathetic to railroad industry arguments that other modes

are unfairly subsidized to the detriment of rail. I propose that we

level both playing fields; couple assistance to rail with competitive

relief for captive shippers.

Now, importantly, extending competition to captive shippers

would be deregulation, not re-regulation. Railroads have consistently characterized these changes, of course, as re-regulation, and

it’s clearly a misnomer. The core of remaining STB regulation involves a determination of maximum rates for captive shippers. Reducing the number of captive shippers and concomitantly reducing

the purview of the STB would further deregulate, not re-regulate,

the rail industry. And it would of course have the added benefit of

easing the very large STB work load with all these maximum rate

cases, as we heard about earlier.

To conclude, rail deregulation is now 80 percent complete, and

it’s clearly been a success. Policy makers should move further down

the deregulatory road by extending competition wherever feasible

to captive shippers. Railroads and shippers should be encouraged

to work together on this, try to come up with a win-win solution

to this issue themselves if at all possible; that would be the ideal,

with public assistance potentially available as part of the package.

In my view, addressing the captive shipper issue is essential if

railroads are to continue their vital role in our Nation’s economy.

Thank you.

Mr. QUINN. Thank you, Dr. Grimm, and let me thank all of our

witnesses this afternoon. The presentations, both the ones we received in here and at the table were very, very helpful.
52

Just a couple of questions for clarification, and then I’ll yield to

my good friend who’s joined us, Mr. Blumenauer. Dr. Grimm, you

talked about the 20 percent number of shippers that are considered

captive. That seems a little lower than what we might sense from

some of the testimony we’ve heard. And might I add, while Mr.

Baker was here earlier, I had a similar situation in Buffalo, New

York, the district I represent, over the years. So it’s nothing new

to me, either.

How recent is your research where you arrive at the 20 percent

number captive and 21 percent differential?

Mr. GRIMM. This was based on research originating with a survey, an extensive survey of railroad shippers. It was done in 1998.

And we asked shippers all kinds of questions, including about their

rates and their competitive circumstances. There are different

ways, of course, to define captive shippers, and you’re going to get

different percentages based on that. We chose a definition of, if a

customer was served by one railroad, had no other railroad within

50 miles and had no access to or feasible access to truck or water.

So again, it’s a little bit arbitrary what is and isn’t a captive shipper, and it’s possible that one could get a larger number if you defined captivity a little bit differently.

Chairman Nober talked about 15 to 20 percent was his estimate

of the amount of captive shippers. So our number is consistent with

that, but again, a little bit different definition.

Mr. QUINN. That’s why I asked the question, because when

Chairman Nober was here, his response was about 15 or 20. So

you’re in the ballpark, at least.

Mr. GRIMM. Right.

Mr. QUINN. And those numbers would be, if Mr. Nober’s information is more recent than your survey in 1998, that those numbers

hold?

Mr. GRIMM. I don’t know, the industry has been pretty static, at

least in terms of the degree of competition since 1998. It’s also

worth noting that there was a GAO study a few years back that

estimated about 30 percent of traffic moved from shippers who

were captive. Again, that’s also a consistent number in that these

20 percent of the shippers do tend to be large shippers, shipping

bulk commodities like coal or chemicals.

Mr. QUINN. Sure. Thank you very much.

And Terry, a question for you on your original chart that’s here.

The last 19, I think it’s 19 miles, in order to get to where it needs

to get, created an increase of about 50 percent. Can you put some

real life numbers to those for us, giving an example of the cost

you’re looking at?

Mr. HUVAL. For some of the information is, confidentiality issues

are raised. But just to kind of explain how we came up with that,

our experts have told us that if we had a competitive rail provider

that we could probably save at least 50 percent on our cost of rail,

or we’re paying 50 percent more than what we should be paying.

So what I’m saying is that if we had that 19 miles, if we had a

duplicate set, another rail provider or another way to get to them,

that that would affect our rates by, I guess if it was 50 percent

higher, it would be 33 percent less. So that’s how we come up with
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the numbers. And in the end, it comes up to about $5 million or

$6 million a year.

Mr. QUINN. Thank you. Again, in my situation in my own district

that I represent, we talked to a number of shippers about some

numbers and what it means to the bottom line. I understand how

some of that is confidential, corporate confidential I guess. But in

a sense, when all of you say you’ve testified before, you’ve been

here and what happens or nothing has happened, that’s why people

like Mr. Baker and others sponsor the legislation, that’s why

there’s a bill over in the Senate. I think Senator Coleman has sponsored it. That’s the reason that legislation is there.

And I’m always interested to put numbers to that, to give us a

sense of just what this means at the end of the day. It’s substantial, is what you’re all saying, and I would feel safe to paraphrase

all of you. Thank you very much.

Earl?

Mr. BLUMENAUER. Thank you, Mr. Chairman.

Dr. Grimm, talking for a moment about the mandatory interswitching in Canada, you indicated it had been in operation for 95

years or something of that nature, how would that be implemented

here and what do you think the consequences would be?

Mr. GRIMM. The provision in Canada calls for mandatory interswitching within a 30 kilometer radius, which is of course about 20

miles. The idea is, mandatory inter-switching within an urban area

or when there is a competitive railroad somewhat nearby. That actually has worked very well in Canada and could be implemented

here very easily. One of the beauties of the system is that all you

need to do because the inter-switching is over a relatively small

segment and it’s pretty consistent in terms of just the number of

cars, the distances, the cost structure is not real complex for working that out.

And much of the inter-switching in Canada would also be the

same case here, it’s reciprocal. In other words, one of the major

railroads switches 100,000 cars, e.g. the BN switches 100,000 for

UP, UP switches was 100,000 for BN. So if you don’t have the costs

100 percent exactly right, a lot of this washes out.

The cost structure in Canada is determined on a simple matrix

of cost per car based on the number of cars. It’s based on providing

coverage and compensation, fair compensation in terms of variable

cost, plus a return to investment. And it’s just a simple matrix

which is revisited once a year for updating for any changes in rail

costs, inflation and so on.

And I participated in those proceedings in Canada where those

costs were updated. So you can get the inter-switching, which

would just eliminate many, many of our captive shippers very easily with no administrative burden, minimal administrative burden

and a far less administrative burden, of course, than what now is

happening with these captive shipper rate cases, as we’ve heard,

are $3 million a pop. So there’s no question that you could do something modeled after the Canadian inter-switching that would be

very effective, little administrative burden and would move us in

a direction of deregulation, not re-regulation.
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Mr. BLUMENAUER. I’m curious, Mr. Chairman, if any of the other

witnesses have observations about the implementation of an approach like this State-side.

Mr. FICKER. If I could, Congressman, the one comment I would

make is I believe the doctor is right in his assessment, this would

be a low administrative burden. In fact, in my view and in some

counsels’ view, this can be done by the agency today if they so

chose. There is not a requirement that Congress would pass legislation to do this, however, Congress should direct the agency to move

in that direction.

I think the reality of it is, when you look at the return on investment and the operating ratios of the Canadian railroads, they are

the best in North America, period. Canadian National clearly has

the outstanding railroad with scheduled railroad service that operates very successfully. And the economic fallout that is predicted

as a result of this kind of change just is not true in that model.

Mr. PLATZ. I’d just like to make one comment. The system actually in Canada, we have two plants in Canada, that actually has

a number of elements. One is competitive line rates, where traffic

can in fact move over a line, there’s a system behind it, a method

for arbitrating rates as well as arbitration. A lot of these systems

are in place, but they’re actually not used, because there is a

backup to the kind of negotiations that would take place directly

between the customer and the railroads, the customer and the supplier.

That’s really what we want. Everybody wants to have that kind

of relationship between their supplier and their customer. But

without that type of structure behind it, as the situation we have

here in the United States, you can’t get that kind of relationship

going.

In one case, we were thinking about using the arbitration process

in Canada, but when we went and talked with the railroad about

it, we found a solution. Because we had this kind of backup behind

us, something that we could all fall back on. Here we don’t have

that, and that’s what creates a lot of this tension that’s taking

place here in North America, in the United States.

Mr. GRIMM. If I might just clarify, there are a number of structures in place to provide rail competition in Canada. Mandatory

inter-switching only applies if you have competitive rail service

within 30 kilometers. That particular structure does work very well

and is used to switch several hundred thousand cars a year.

Now, there are also other provisions if you don’t have a competitive railroad within 30 kilometers. That’s where we get into the

competitive line rates and the final offer arbitration and so on. And

it is true that those other mechanisms, which generally require the

collaboration of the competitive railroad to take effect, don’t work

very often and don’t work very well except as a backup. But I do

want to contrast that to the mandatory inter-switching, which

works automatically and is very effective at providing rail competition.

Mr. BLUMENAUER. Other thoughts or observations from our

panel?’

Mr. Chairman, I’ve been dealing with people in the Pacific

Northwest wrestling with some of these questions on the local
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level. I do think that there are some simple, common sense steps

that with your help and that of the Subcommittee we may be able

to give a nudge. I think this is an example of one that I think has

great appeal, and I would invite any of our witnesses to submit further observations, examples, that would help inform and refine the

thinking on this.

Mr. QUINN. Thank you, Earl, and thanks for joining us this afternoon.

I have no further questions, but would observe along the lines

that you have that we said when we began this afternoon that we

would keep the record open for 30 days. I know there were at least

two or three members who were here for a while who will have further questions. If we could get that information back from you,

there are probably going to be some meetings scheduled following

today.

So I think it was a good session all in all, to get the ball rolling,

get it started. And if we have to have you back, Mr. Platz, a fifth

time, we’ll somehow make it happen.

So from all of us here, Dr. Grimm, thank you for your—you probably should have been at a separate table over there, I understand,

but we appreciate your objective academic view on all this, and appreciate the time. I know that all of you spent an awful lot of time

preparing for today, traveling from all parts of the country to get

here. It happens to be where we work. I always like to mention

that all of us, from staff on to the members, appreciate your efforts

to get here to Washington, to take time out of your busy schedule

from your companies and your families to be with us. So thanks

for doing that, and we’ll get to work on it.

Hearing no further business, I am going to adjourn the meeting.

[Whereupon, at 1:35 p.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]
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