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[Senate Hearing 107-1049]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 107-1049

         OVERSIGHT HEARING ON THE SURFACE TRANSPORTATION BOARD

=======================================================================

                                HEARING

                               before the

       SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE

                                 of the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 21, 2001

                               __________

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

88-036              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon                 BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  MAX CLELAND, Georgia
GEORGE ALLEN, Virginia               BARBARA BOXER, California
                                     JOHN EDWARDS, North Carolina
                                     JEAN CARNAHAN, Missouri
                  Mark Buse, Republican Staff Director
               Ann Choiniere, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                              ----------                              

                SUBCOMMITTEE ON SURFACE TRANSPORTATION 
                          AND MERCHANT MARINE

                     GORDON SMITH, Oregon, Chairman
TED STEVENS, Alaska                  DANIEL K. INOUYE, Hawaii
CONRAD BURNS, Montana                 JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virgina
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
SAM BROWNBACK, Kansas                BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  MAX CLELAND, Georgia
                                     BARBARA BOXER, California
                                     JEAN CARNAHAN, Missouri

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 21, 2001...................................     1
Statement of Senator Brownback...................................    22
Statement of Senator Smith.......................................     1

                               Witnesses

Morgan, Linda J., Chairman, Surface Transportation Board.........     2
    Prepared statement...........................................     4

                                Appendix

Rockefeller IV, John D., U.S. Senator from West Virginia, 
  prepared statement.............................................    27

 
         OVERSIGHT HEARING ON THE SURFACE TRANSPORTATION BOARD

                              ----------                              

                       WEDNESDAY, MARCH 21, 2001

                               U.S. Senate,
Subcommittee on Surface Transportation and Merchant 
                                            Marine,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:35 a.m., in 
room SR-253, Russell Senate Office Building, Hon. Gordon Smith, 
Chairman of the Subcommittee, presiding.

            OPENING STATEMENT OF HON. GORDON SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Good morning, ladies and gentlemen. I am 
pleased to call to order the first Surface Transportation and 
Merchant Marine Subcommittee hearing of the 107th Congress. I 
am very honored to be chairing this Subcommittee, and I fully 
intend for us to have an active and productive agenda.
    This Subcommittee has enjoyed a long history of bipartisan 
cooperation, and I assure my colleagues, who I am sure will 
soon arrive, that I will work to continue that bipartisanship.
    As the new Subcommittee Chairman, I am most eager to begin 
addressing the many challenges and important issues under the 
jurisdiction of this Subcommittee. In addition to holding 
hearings on matters of importance to the Members, we will be 
working to assist the Full Committee Chairman and Ranking 
Member in developing and moving legislation to reauthorize a 
number of important Federal agencies and programs that have 
expired.
    These reauthorizations include the Surface Transportation 
Board, the rail safety program, the hazardous materials 
transportation program, the Federal Maritime Commission, and 
the U.S. Maritime Administration. I will note the Committee is 
already off to a good start with the successful passage of 
pipeline safety improvement legislation, which passed the 
Senate in February. Last week, Chairman McCain and I announced 
the Subcommittee would begin holding a series of hearings on 
rail transportation, starting with today's oversight hearing on 
the Surface Transportation Board.
    I wanted our Subcommittee's first hearing to address rail 
issues, because rail transportation is such a critical element 
of our nation's rail transportation system. Rail freight issues 
are complicated whether considering rail service or capacity or 
competition. Moreover, given the Committee has a number of new 
Members, including myself, I believe it would be helpful to all 
of us if we held a series of hearings to explore the many 
complex issues involving rail transportation.
    In addition to today's hearing, future hearings will focus 
on the rail industry, including its financial condition, 
capacity, and long-term capital infrastructure needs. We will 
also have another hearing which will focus on rail shipper 
concerns, including reliability, rates, and competition.
    Let me say up front I am conducting this series of hearings 
from an information-gathering approach. Most of us already know 
there is a line drawn in the sand on certain issues when it 
comes to rail shippers and the industries, but I am approaching 
these hearings and topics with an open mind and look forward to 
hearing the many differing points of view of the interested 
parties. My goal is to try and find common goal on some of the 
problems and collectively develop reasonable solutions to those 
problems, whether through a meeting of the minds or perhaps 
through legislation.
    I know that Chairman McCain shares my strong view that the 
only way such legislation is going to be advanced is if it is a 
consensus product, one that can be supported at least in part 
by both shippers and industry. If I have learned one thing in 
my public life, it is hard to pass legislation and it is easy 
to kill legislation, and that is why what I hope to do is 
foster this consensus-building so we can make progress on 
critical issues.
    I am pleased to kick off this series of hearings with an 
overview from the Surface Transportation Board chairman, Linda 
Morgan. Established just over 5 years ago, the Board has issued 
several thousand decisions affecting our nation's surface 
transportation system and its users. While the Board's decision 
may not please all the people all of the time, I think we can 
all agree that it has demonstrated well what a small agency 
with limited resources can accomplish with dedicated Board 
members and a capable staff, and that, Linda, I think is very 
much a tribute to you.
    Let me note that the Board is in the process of rewriting 
its rules on major consolidations. The Board's proceeding, 
initiated March 17, 2000, is of great interest to this 
Subcommittee. I understand, under Senator Hutchison's 
leadership, a hearing was held last March, just after the 
Board's merger moratorium announcement. Since that time, the 
Board has issued its notice of proposed rulemaking and has 
scheduled an oral argument for early next month.
    In light of the attention our Committee has been paying to 
the issue of aviation mergers in recent weeks, we will all be 
interested in hearing first-hand the direction the Board is 
taking with respect to major consolidation transactions under 
its jurisdiction and, should other members join us soon, and we 
do expect several of them, we will ask them for their opening 
statements should they have them, but Chairman Morgan, we 
welcome you, and thank you for taking time to be with us to 
prepare for this hearing. We are anxious to hear what you have 
to tell us. The mike is yours.

         STATEMENT OF HON. LINDA J. MORGAN, CHAIRMAN, 
                  SURFACE TRANSPORTATION BOARD

    Ms. Morgan. Thank you, Mr. Chairman. I am appearing here 
today at the request of the Committee to discuss the Board and 
its achievements. I have some oral remarks, which I will make 
brief. I also have submitted written testimony, which I would 
ask be included in its entirety in the record.
    Senator Smith. Without objection, it will be included.
    Ms. Morgan. My written testimony reviews the Board's 
accomplishments, particularly in the rail area, since its 
establishment in 1996, as well as the Board's budget and its 
ongoing proceeding to examine its major rail merger policy and 
rules.
    My written testimony, I believe, demonstrates that the 
Board has acted responsibly but aggressively when necessary, 
and that we have been a positive force in addressing the 
concerns brought to our attention.
    I believe that the Board has been a model of common sense 
Government, looking for creative solutions to the serious 
regulatory issues entrusted to it, promoting private sector 
initiative and resolution where appropriate, and undertaking 
vigilant governmental oversight and action in accordance with 
the law where necessary. And I believe that the Board has been 
a model of efficient and effective Government, doing more with 
less, tackling hard issues, and resolving cases fairly and 
expeditiously, and being upheld in court over 90 percent of the 
time.
    My testimony highlights how the Board has handled its 
responsibilities in this regard. It discusses the service 
crisis in the West, the 1998 access and competition proceedings 
that the Board conducted at the request of this Committee, rate 
and service issues, formal and informal dispute resolution, 
mergers, and employee matters.
    A key focus of the law that the Board implements is to 
permit the freight rail industry to operate in the marketplace 
without regulatory interference unless regulatory oversight is 
necessary to address marketplace imperfections for which the 
law provides relief.
    An important part of the Board's regulatory oversight 
involves the ability of captive shippers to have real access to 
a process for challenging unreasonably high rail rates. I know 
that concerns remain about the burden and the complexity of 
this process. The Board has responded to these concerns within 
the context of the law.
    We have set deadlines, established procedures, and 
developed a rate review methodology that works, and under which 
large shippers that have brought complaints have been 
successful. We have changed the market dominance rules for rate 
complaints to make the process simpler, less burdensome, and 
more accessible for all shippers, and although the court, upon 
challenge of the railroads, has ordered us to take another look 
at that case, we will continue to make all of our processes 
workable and accessible whenever we can.
    I know that concerns remain about the ability of the 
smallest shippers to bring rate challenges. As I pointed out in 
my letter to this Committee in 1998, I believe that we have 
done what we can under the statute in this regard. I would be 
happy to work with the Congress further on this issue.
    Another matter that has concerned all of us has been the 
service problems experienced throughout the rail sector in 
connection with the recent round of mergers. Although I have 
not always been satisfied with where the industry service 
record has been, I believe that the Board has been a positive 
force in helping on both a formal and an informal basis to fix 
problems that have arisen while averting new ones, and not 
taking actions that would help some and hurt others.
    And I feel that our recent action, which was affirmed in 
court, imposing a 15-month moratorium while we revisit the 
Board's merger policy was an important step to ensure that the 
then-existing service problems were not further aggravated.
    By June, we will have held our oral argument and completed 
our reexamination of our merger policy and rules. I cannot be 
too specific yet, but given the current configuration of the 
industry at the Board we are looking to raise the bar for 
approval so that applicants will bear a substantially heavier 
burden in demonstrating that a merger proposal is truly in the 
public interest.
    We are looking at requiring merger applicants to 
affirmatively show that the transaction will enhance 
competition and improve service. We are looking at requiring 
more accountability for benefits that are claimed, and a 
showing that such benefits could not be realized by means other 
than a merger. We are looking at requiring more details up 
front regarding service that would be provided, as well as 
contingency planning and problem resolution in the event of 
service failures. And we are looking at dealing with a 
collective bargaining agreement issue that has concerned rail 
labor in the past.
    I know that, regardless of how much we have done at the 
Board, and how much we can do in the future at the Board, there 
are those who will say that we have done nothing of substance 
unless we somehow provide for a regulatory scheme that 
guarantees every shipper the opportunity to be served by at 
least two carriers, the so called ``open access'' approach to 
regulation.
    I hope that the Members of the Committee can appreciate 
that the Board has acted responsibly to address in a manner 
consistent with the statute the concerns that have been raised 
about the rail sector, and to drive change and to otherwise 
carry out its responsibilities in a way that has moved the 
industry in a positive direction. I also hope that as we move 
forward we take the long view and act so as to ensure that the 
steps that we take will produce the type of rail network we 
want into the future.
    I would be happy to answer any questions that you might 
have.
    [The prepared statement of Ms. Morgan follows:]

           Prepared Statement of Linda J. Morgan, Chairman, 
                      Surface Transportation Board

                              INTRODUCTION

    My name is Linda J. Morgan, and I am Chairman of the Surface 
Transportation Board (Board). I am appearing today at the 
Subcommittee's request to provide an overview of the Board's activities 
since its inception, with a particular focus on actions taken by the 
Board on various rail transportation issues. The Subcommittee also has 
asked for information regarding the Board's budget, as well as the 
Board's proceeding to reexamine its major rail merger policy and rules.
    I have testified numerous times before Congress since the creation 
of the Board. My testimony here attempts to capture the essence of the 
prior testimony and provide an update on Board activities since my 
Congressional appearances last year.

                         OVERVIEW OF THE BOARD

    The Board came into being on January 1, 1996, in accordance with 
the ICC Termination Act of 1995 (ICCTA). Consistent with the trend at 
that time toward less economic regulation of the surface transportation 
industry, the ICCTA eliminated the Interstate Commerce Commission (ICC) 
and, with it, certain regulatory functions that it had administered. 
The ICCTA transferred to the Board core rail adjudicative functions and 
certain non-rail adjudicative functions previously performed by the 
ICC. Motor carrier licensing and certain other motor functions were 
transferred to the Federal Highway Administration within the Department 
of Transportation (DOT). And Congress provided the Board with more 
limited resources.
    The Board is a three-member, bipartisan, decisionally independent 
adjudicatory body organizationally housed within DOT. The rail 
oversight conducted by the Board encompasses, among other things, 
maximum rate reasonableness, car service and interchange, mergers and 
line acquisitions, line constructions and abandonments, and labor 
protection and arbitration matters. The jurisdiction of the Board also 
includes limited oversight of the intercity bus industry and pipeline 
carriers; rate regulation involving noncontiguous domestic water 
transportation, household goods carriers, and collectively determined 
motor rates; and the disposition of motor carrier undercharge claims. 
The substantial deregulation effected in the Staggers Rail Act of 1980 
(Staggers Act) and the laws governing motor carriers of property and 
passengers was continued under the ICCTA. The ICCTA empowers the Board, 
through its exemption authority, to promote deregulation through 
administrative action.
    The period after the passage of the ICCTA presented many logistical 
challenges. Fewer than half of the personnel who had worked for the ICC 
were retained by the Board. Yet, the case load remained heavy, and 
indeed increased in complexity and degree of challenge, particularly 
with the significant restructuring taking place in the rail industry 
and the focus of parties on testing the law in certain areas. The Board 
had to find ways to do more with less.
    We hit the ground running, and quickly became what I believe to be 
a model Federal agency. We were given many rulemaking deadlines in the 
ICCTA, and we met each and every one of them. We revamped the old ICC 
regulations to reflect the new law; we streamlined the regulations that 
remained relevant to make them work better; and we issued new 
regulations so that we could move cases to resolution more quickly. We 
have continued to meet our deadlines and to look for ways to handle 
matters more efficiently. And we have moved cases faster, and as a 
result have made great strides in clearing up the older docket.
    Many of the cases that we have tackled at the Board--some of which 
had been pending at the ICC for many years, and some of which have been 
new--have been extremely difficult and controversial. But a principal 
focus of the Board's work is the belief that parties who bring disputes 
to the Board want and should have the certainty of resolution and that 
the Board is here to make decisions in hard cases. Not everyone will 
like every decision we issue, but our job is to take the controversies 
that come our way, review the records carefully, and then put out 
decisions as expeditiously as possible that implement the law to the 
best of our ability. The competence of our staff and the integrity of 
our decisionmaking process are reflected in our record of success in 
court: since I became Chairman (at that time of the ICC) on March 24, 
1995, several hundred ICC and Board cases have been decided, about 170 
cases have been challenged in court, and well over 90% of those cases 
have been upheld. Fair and expeditious case resolution and the 
certainty and stability that come from success on appeal should be key 
objectives for an adjudicative body such as the Board.

                         THE BOARD'S RESOURCES

    When the Board was created, it was authorized for 3 years, through 
September 30, 1998. Because of the controversy surrounding the law that 
the Board implements, the agency has not been reauthorized. However, it 
continues to be funded on an annual basis, operating at essentially the 
same resource level since its establishment in 1996.
    Current Fiscal Year. The Board's current appropriation for fiscal 
year (FY) 2001 provides $17.916 million for 143 staff-years. (This 
resource level is the result of an across-the-board rescission of 
$38,000 from the amount originally enacted.). The appropriation 
provides that up to $900,000 in user fee collections may be credited to 
the $17.916 million appropriation, thereby allowing the Board's 
resources to be derived from both funding sources. This credit 
provision also means, in essence, that our funding this year is 
guaranteed regardless of the level of user fees actually collected.
    The Budget for the Next Fiscal Year. In the Board's FY 2002 budget, 
we requested $18.889 million and 145 staff-years. The President's 
budget provides for $18.457 million and 143 staff-years, which is only 
a slight decrease from our request and essentially represents a status 
quo budget allowing for relatively constant staffing and funding 
levels. The FY 2002 budget also includes $950,000 in user fee 
collections offsetting the $18.457 million request under the same 
appropriation crediting provisions contained in the FY 2001 
Transportation Appropriations Act. This provision means in essence that 
our funding would also be guaranteed in FY 2002.
    User Fees. Congress continues to expect that some of the Board's 
funds will come from user fees. Significantly, however, the FY 2002 
budget is the first one in which the Administration has not requested 
full funding by user fees for the Board. And recently Congress through 
the user fee credit provision has guaranteed the Board's funding level 
up front.
    In this regard, particular concern has been raised about the level 
of user fees associated with the filing of rail rate complaints. In 
light of this continuing concern, the Board has held down the user fee 
levels for these cases for the last 2 years to 20% of the full cost of 
processing one of them, even though a DOT Inspector General report 
urged the Board to assess fees that more closely adhere to full costs.
    The Board regularly revisits its user fee schedule. Further, we 
have fee waiver procedures in place to ensure that parties seeking 
adjudication of matters under our jurisdiction are not precluded access 
to the Board because of the level of user fees.
    Workload. The Board continues to accomplish much with limited 
resources. Although there have been some shifts among workload 
categories, the Board projects a relatively level overall workload 
through FY 2002. For example, while we have resolved all of the cases 
in the motor carrier undercharge docket, there has been a significant 
increase in rail rate case filings, as well as rail restructuring 
activity in FY 2001. We project that this trend will continue through 
FY 2002.
    Future Needs. In connection with future Board resource needs, I 
should note two issues. First, the Board must continue to focus on 
hiring new employees in sufficient time to be prepared to replace the 
many experienced employees that will be retiring in the next few years. 
Second, the Board must have the resources necessary to accommodate any 
legislative changes that Congress might approve.

          THE BOARD'S OVERALL APPROACH TO ITS RESPONSIBILITIES

    I believe that the Board has been a model of ``common sense 
government,'' looking ``outside of the box'' for creative solutions to 
the serious regulatory issues entrusted to it, and promoting private-
sector initiative and resolution where appropriate while undertaking 
vigilant government oversight and action in accordance with the law 
where necessary to address imperfections in the marketplace. In many 
circumstances, private-sector initiative can provide for better 
solutions because it can be tailored to the needs of the individual 
parties, can go beyond what government is able to do under the law and 
with its resources, and can create a dynamic in which all the parties 
to the initiative have been involved in its development and thus are 
invested in its success. And government can use its presence and its 
processes to encourage such results and bring parties together in new 
and constructive ways. At the same time, there are circumstances in 
which more direct government action is necessary, and in such 
situations, the Board has used its authority appropriately, creatively, 
and to the fullest extent in accordance with the law.
    The work of the Board has exemplified the balance of private-sector 
and government action. This balance, for example, was demonstrated in 
the Board's handling of the rail crisis in the West. In that matter, 
under the umbrella of an unprecedented 9-month emergency service order, 
the Board required significant operational reporting, engaged in 
substantial service monitoring, and redirected operations in a focused 
and constructive way. The Board was successful in working on an 
informal basis with affected shippers to resolve service problems, and 
it was careful not to take actions that might have helped some shippers 
or regions but inadvertently hurt others. And the Board proceeded in 
such a way as not to undermine, but rather to encourage, important 
private-sector initiatives that facilitated and were integral to 
service recovery, such as the unprecedented creation of the joint 
dispatching center near Houston, TX, and the significant upgrading of 
infrastructure.
    In addition, responding to the concerns of Members of this 
Committee, and in particular Chairman McCain and Senator Hutchison, we 
held extensive hearings on access and competition in the railroad 
industry, which resulted in a broad mix of private-sector and 
government initiatives, summarized in my attached letter to Senators 
McCain and Hutchison dated December 21, 1998 (December 21 letter). 
Those initiatives included the revision of the ``market dominance'' 
rules to eliminate ``product and geographic competition'' as 
considerations in rate cases and the adoption of formal rules providing 
for shipper access to a new carrier during periods of poor service. 
They also included the formal railroad/shipper customer service 
``outreach'' forums, which produced the public dissemination for the 
first time ever of carrier-specific operational performance data by the 
major railroads, based on the data collection that the Board had 
initiated during its handling of the service crisis in the West and 
continued in its monitoring of the acquisition of Conrail by CSX and 
Norfolk Southern (NS). And the initiatives included the unprecedented 
formal agreement between large and small railroads addressing certain 
access issues of concern to the smaller carriers and to various members 
of the shipping public, the implementation of which the Board continues 
to closely monitor.
    My letter to Congress also highlighted areas in which the Board 
believed legislation would be required if Congress wanted to fully 
address certain concerns that had been raised. These areas included 
small shipper rate relief, certain labor matters, and more open access 
that, unlike the current law, would not require a threshold showing 
that the serving carrier acted in an anticompetitive way. Regarding 
open access, the Board did direct interested parties as part of this 
rail access and competition proceeding to meet to see if common ground 
could be found. Those discussions were not successful.
    The balance of private-sector and government action is also 
exemplified by the Board's informal dispute resolution process that it 
used during the service crisis in the West and more recently in 
addressing service problems that have arisen from the implementation of 
the Conrail acquisition. And this process has now been formalized 
through the establishment of the Rail Consumer Assistance Program, 
discussed later on, and enhanced through monitoring by the Board of the 
various customer service programs at the various Class I railroads. 
Also, the Board has been active in focusing the Class I railroads on 
improving the operations of the Chicago terminal, a major gateway 
between the East and the West.
    At the same time, the Board has promoted purely private-sector 
dispute resolution. It imposed as a condition to its approval of the 
Conrail acquisition the establishment of a privately agreed-to Conrail 
Transaction Council made up of shipper and carrier representatives for 
the purpose of discussing implementation problems. With the 
encouragement of the Board, the National Grain and Feed Association and 
the Association of American Railroads (AAR) and the National Mining 
Association and the AAR reached groundbreaking agreements on issues of 
concern to their respective memberships that provide dispute resolution 
procedures that are more tailored to the interests of the individual 
parties. These agreements will hopefully provide a model for other such 
carrier/customer agreements. Furthermore, the Board has attempted to 
move in the direction of private negotiation rather than government 
fiat as the way of resolving employee matters, a trend which I discuss 
later in my testimony.
    In individual cases brought to it, the Board has used its authority 
fully and creatively. For example, in a case in which Amtrak sought to 
carry certain types of non-passenger traffic, we interpreted the 
statute in such a way as to bring about a private agreement between 
Amtrak and individual freight railroads on the matter after the Board's 
decision was rendered. In railroad consolidation and construction 
proceedings, our process has encouraged private-sector solutions with 
respect to environmental and other issues, but where the private 
parties have been unable to reach resolution, the Board has imposed 
conditions to remedy the concerns expressed in a way that preserves the 
benefits of the transaction under consideration. And with respect to 
the ``bottleneck'' rate complaint cases (involving rates for a segment 
of a through movement that is served by a single carrier), while 
shipper parties argued that the Board should have gone farther in its 
rate review, the Board's decisions do provide for rate relief where 
there is a contract for the non-bottleneck segment, based on a 
pragmatic reading of the statute that was affirmed in court upon 
challenge by both the railroads and the shippers.
    The Board has tackled many difficult issues effectively by 
balancing private-sector resolution and governmental action. This 
approach has ensured that, in the spirit of the ICCTA, available 
resources are put to the best use and government does not interfere 
inappropriately.

                      RAIL RATE AND SERVICE ISSUES

    Since I became Chairman of the ICC and then of the Board, the 
agency has tackled several important rail rate and service matters, and 
in this regard I believe that we have been responsive to shipper and 
other concerns in accordance with the law. In particular, we have been 
committed to resolving formal and informal shipper complaints 
expeditiously, clarifying applicable standards for resolution of formal 
complaints, and leveling the playing field to ensure that the formal 
process is not used simply to delay final resolution and that it 
encourages private-sector resolution where possible. I believe that our 
record reflects those objectives.
    Rail Rate Matters. The Board has jurisdiction to adjudicate 
complaints challenging the reasonableness of a railroad's common 
carriage rates only if the railroad has market dominance over the 
traffic involved. Market dominance refers to ``an absence of effective 
competition from other rail carriers or modes of transportation for the 
transportation to which a rate applies.'' Under the law, the Board 
cannot find that a carrier has market dominance over a movement if the 
rate charged results in a revenue-to-variable cost percentage that is 
less than 180%. If this ratio is over 180%, then the Board determines 
whether there is effective competition (historically, by considering 
whether there was effective intramodal, intermodal, geographic or 
product competition, but more recently, since the Board eliminated 
product and geographic competition as considerations in market 
dominance cases, by considering only intramodal or intermodal 
competition). If there is no effective competition, then there is 
market dominance. Thus, in considering any rate reasonableness 
challenge, the first finding that the Board makes is whether the 
carrier has market dominance over the traffic involved.
    To assess whether rates are reasonable, the Board uses a concept 
known as ``constrained market pricing'' (CMP) whenever possible. CMP 
principles limit a carrier's rates to levels necessary for an efficient 
carrier to make a reasonable profit. CMP principles recognize that, in 
order to earn adequate revenues, railroads need the flexibility to 
price their services differentially by charging rates that reflect 
higher mark-ups over variable costs on captive traffic, but the CMP 
guidelines impose constraints on a railroad's ability to price 
differentially.
    The most commonly used CMP constraint is the ``stand-alone cost'' 
(SAC) test. Under the SAC test, a railroad may not charge a shipper 
more than it would cost to build and operate efficiently a hypothetical 
new railroad, tailored to serve a selected traffic group that includes 
the complainant's traffic. The Board typically uses this test to 
resolve the large rail rate complaints that are presented to it.
    With respect to rate cases, the Board has established deadlines and 
procedures to expedite the decisional process, and decisions resolving 
large rail rate complaints have refined the standards for developing 
the record in these cases. We have resolved the old cases (such as the 
``McCarty Farms'' case that was pending at the ICC for some years) 
and--although we have recently been flooded with new rate cases that 
could tax our resources--we have kept up with our statutory deadlines 
in putting out decisions in the newer cases that have been filed. We 
have sought to improve the rate review process by, for example, 
eliminating the product and geographic competition elements from the 
market dominance rules and by establishing evidentiary procedures 
(including a decision issued just recently) to allow us to process 
large rate cases more efficiently. The reviewing court has told us to 
take another look at the product and geographic competition case after 
it was challenged by the railroads, but in that case and in other 
respects, we will continue to try to find ways to make the process work 
better.
    From a substantive perspective, the CMP procedure for determining 
whether a rate is reasonable or not is now a well accepted way of 
measuring rate reasonableness for larger rate cases, and of the 4 large 
rail rate cases that have been decided by the Board, the shippers have 
won in 3, while the defendant railroad won 1. Our ``bottleneck'' 
decisions, which construed the statute as permitting challenges to 
bottleneck rates (rates for a segment of a through movement that is 
served by a single carrier) when the shipper has a contract over the 
non-bottleneck segment, were, as noted, affirmed by two courts after 
they were challenged by both shippers and railroads. A number of 
shippers have taken advantage of the opportunity afforded by the 
bottleneck decisions and have filed ``bottleneck'' rate complaints with 
the agency. Consistent with the Board's philosophy favoring private 
sector resolution, several rate cases have been settled before the 
agency reached a decision.
    The Board at the end of 1996 adopted simplified rules for small 
rail rate cases. However, no such cases have been brought to date under 
those rules. Concerns remain that those rules are still too complex. In 
my December 21 letter, I explained that the Board's rules reflect the 
statute and the standards that must be balanced, but I also recommended 
that Congress consider adopting a single benchmark test or some other 
simplified procedure for small rate cases to address those process 
concerns. I am prepared to continue to work with Congress on this 
matter.
    Service Issues. Over the past few years, we have used our general 
oversight and specific legal authority, as well as reporting and 
specific merger-related monitoring, to promote service improvements and 
resolve service problems. As I discussed previously, the Board applied 
its formal emergency service order and informal powers judiciously in 
dealing with the rail service crisis in the West. In addition, we 
adopted rules that permit a shipper to obtain the services of an 
alternative railroad when service is poor. Those rules require prior 
consultation among all of the involved parties to ascertain whether the 
problem can be readily fixed by the ``incumbent'' carrier, and, if not, 
to make sure that the proposed service will solve the problem without 
creating new problems. Board representatives are continually in 
communication with carrier management about general service issues, and 
they work on an ongoing basis with carriers and shippers to address 
individual service problems on an informal basis.
    More recently, in connection with the Conrail acquisition in the 
East, we have engaged in extensive pre- and post-implementation 
monitoring, including the review of significant operational metrics and 
plans, and have continued to work constructively with carriers and with 
shippers to resolve service problems. And the Board in November of last 
year formalized its informal dispute resolution process by establishing 
a Rail Consumer Assistance Program through which individuals with rail-
related problems can contact the Board's Office of Compliance and 
Enforcement by way of a toll-free number, an e-mail address, or a web 
site page. I believe that the Board has effectively addressed and can 
continue to address service issues.

                      RAIL MERGERS AND COMPETITION

    Background on Past Rail Mergers. One of the areas in which the 
Board has issued some high-profile decisions involves major rail 
mergers. Although mergers and other changes in corporate structure have 
been going on in the rail industry for many years, there has been 
substantial rail merger activity since the Staggers Act was passed, 
reflecting what has been occurring throughout the Nation's economy.
    On the basis of the governing statute, under my Chairmanship of the 
ICC and the Board, four Class I rail mergers have been approved, with 
substantial Board-imposed competitive and other conditions. During this 
period, the Board evolved in a creative and constructive way in 
applying its conditioning authority, also incorporating private-sector 
agreements into the process. The conditions in a variety of ways 
provided for significant post-merger oversight and monitoring that have 
permitted us to stay on top of both competitive and operational issues 
that might arise. They provided for the protection of employees and the 
mitigation of environmental impacts, and our recent decisions employed 
a ``safety integration plan'' that draws on the resources of the Board, 
the Federal Railroad Administration, and the involved carriers and 
employees. And all of our decisions have assured that no shipper's 
service options were reduced to one-carrier service as a result of a 
merger.
    In varying degrees, these mergers have had the support of segments 
of the shipping public, as well as employees and various localities, 
and were considered by a number of interested parties to be in the 
public interest. A variety of shippers actively supported the 
Burlington Northern/Santa Fe (BN/SF) merger, the inherently 
procompetitive Conrail acquisition, and the Canadian National/Illinois 
Central (CN/IC) merger. The Union Pacific/Southern Pacific (UP/SP) 
merger was opposed by some segments of the shipping community, although 
it was supported by others. However, the Board believed it was 
necessary, not only to aid the failing SP, but also to permit the 
development of a second rail system in the West with enough presence to 
compete with the newly merged BN/SF.
    Some have said that rail mergers are inherently anticompetitive, 
that they cause service problems, and that we should be discouraging 
them. In approving these mergers, the Board (and the ICC before that) 
considered the statutory criteria and concluded that, with all the 
conditions imposed, they would not diminish competition and in fact 
could enhance competition; would produce significant transportation 
benefits; and were otherwise in the public interest. The Board will 
continue to exercise its oversight authority in accordance with these 
objectives.
    In this regard, in connection with the UP/SP merger, the Board has 
issued four general oversight decisions and one related to service in 
Houston (in addition to its actions with regard to the service crisis 
in the West); it has issued one oversight decision concerning the CN/IC 
merger; and in connection with the Conrail acquisition proceeding, it 
has issued one general oversight decision and two decisions regarding 
Buffalo, one on rates and the other on infrastructure, in addition to 
the ongoing operational monitoring of the Conrail acquisition.
    New Major Rail Merger Policy and Rules. These recent mergers have 
changed the way the rail system now looks. In 1976, there were, by our 
calculations, 30 independent ``Class I'' (larger railroad) systems; 
nine of those systems have since then dropped down to Class II or III 
(smaller railroad) status because the revenue thresholds for Class I 
status were raised substantially some years ago; two large carriers 
went into bankruptcy; and the remaining 19 systems have been reduced to 
6 large independent North American systems in the past 23 years (Kansas 
City Southern remains a smaller independent Class I system). In the 
United States, these include two competitively balanced systems in the 
West and two competitively balanced systems in the East.
    Given the changes in the make-up of the rail system in the past 
several years and developments associated with the most recent round of 
mergers, when the BNSF and CN rail systems announced their intention to 
merge in late 1999, the Board, after four days of hearings, issued a 
15-month ``moratorium'' directing large railroads not to pursue further 
merger activities until the Board has adopted new rules governing large 
rail merger proceedings. The Board noted that recent merger 
implementation had not typically gone smoothly, and that the railroad 
industry and the shipping public had not fully recovered from the 
service disruptions associated with the previous round of mergers when 
the BNSF/CN announcement was made. Additionally, the testimony at the 
hearing confirmed the Board's perception that a BNSF/CN combination 
would more than likely instigate, in the very near future, responsive 
mergers involving each of the other four large systems. Therefore, the 
Board, like numerous parties that testified before it during its 
hearing, concluded that it needed to revisit its merger rules for large 
rail mergers in light of the current transportation environment and the 
prospect of a North American transportation system composed of as few 
as two transcontinental railroads. I appeared before this Committee a 
year ago to discuss the moratorium and the merger policy rulemaking.
    In instituting its rulemaking to revise the rules for considering 
large rail mergers, the Board noted the increased concentration in the 
rail industry, along with the only limited opportunities remaining for 
significant merger-related efficiency gains. It concluded that the time 
has come to consider whether the rail merger policy should be revised, 
as many have suggested, with an eye towards more affirmatively 
enhancing, rather than simply preserving, competition and ensuring that 
the benefits of a future merger proposal truly outweigh any potential 
harm. More specifically, the Board is reexamining its approach to 
competitive issues; ``downstream'' effects; the important role of 
smaller railroads in the rail network; service performance issues; how 
benefits should be examined and accounted for; how alternatives to 
merger, such as alliances, should be viewed; employee issues such as 
the override of collective bargaining agreements (CBAs); and 
international trade and foreign control issues that would be raised by 
any proposal of a Canadian railroad to combine with any large U.S. 
railroad.
    The Board issued an Advance Notice of Proposed Rulemaking (ANPR) in 
March 2000 instituting its rulemaking to revise its rules for large 
rail mergers. Following the receipt of public comments on the ANPR and 
replies to the comments, the Board issued a Notice of Proposed 
Rulemaking (NPR) in October 2000, proposing new rules for major rail 
mergers. Over 100 parties are involved in the proceeding, and the Board 
has given the public the opportunity to file three rounds of comments 
(initial comments, replies, and rebuttals) on the proposed rules. In 
addition, the Board has scheduled an oral argument for April 5, 2001, 
and will hear from over 30 parties. The Board intends to issue its 
final rules by June 11, 2001, at which time the moratorium is scheduled 
to expire.
    In its NPR, the Board has proposed a new policy statement and rules 
for future major rail mergers that raise the bar for approval. I have 
attached a copy of the press release describing the proposed policy and 
rules. The proposed new rules would require applicants to bear a 
substantially heavier burden in demonstrating that a merger proposal is 
in the public interest. Key provisions in the proposed rules would 
require applicants to affirmatively show that the transaction would 
enhance competition and improve service. They would require more 
accountability for benefits that are claimed and a showing that such 
benefits could not be realized by means other than a merger. And they 
would require more details up front regarding the service that would be 
provided, as well as contingency planning and problem resolution in the 
event of service failures.

                          RAIL EMPLOYEE ISSUES

    Background. Under the law, the Board becomes involved in rail 
employee issues as a result of its approval of various types of rail 
transactions. Certain significant employee issues are raised by Class I 
consolidations. When larger railroads consolidate, the individual CBAs 
and protective arrangements into which the merging railroads earlier 
entered are not always compatible.
    The law that the Board administers provides for imposition of the 
so-called New York Dock conditions upon such transactions. The New York 
Dock conditions have their origins in the negotiated Washington Job 
Protection Agreement of 1936 (WJPA), which sets up the framework within 
which consolidations are to be carried out. New York Dock provides (1) 
substantive benefits for adversely affected employees (including moving 
and retraining allowances, and up to 6 years of wage protections for 
employees dismissed or displaced as a result of the consolidation), and 
(2) procedures under which carriers and employees are to bargain to 
effectuate changes to their CBAs if necessary to carry out the 
transaction, with resort to arbitration and, as a last resort, limited 
Board review if bargaining is not successful.
    When the parties go to arbitration, the arbitrator must make a 
determination in all areas of disagreement, including the extent, if 
any, to which it is necessary to override a particular CBA where a 
change in a CBA is being proposed. In 1991, the Supreme Court confirmed 
that the law provides that agency approval of a consolidation overrides 
all other laws, including the carrier's obligations under a CBA, to the 
extent necessary to permit implementation of the approved transaction.
    Employee interests have argued that the override of CBAs is purely 
an administrative remedy that the Board could administratively reverse, 
and that the Board in its consideration of appeals from arbitral 
decisions has too broadly construed when a CBA may be overridden. The 
override of a CBA, however, cannot be viewed as simply an 
administrative remedy that the Board could administratively reverse. 
The 1991 Supreme Court decision (often referred to as the 
``Dispatchers'' case, rendered before I arrived at the ICC) and other 
court decisions have made that clear. The Supreme Court found that, 
once the consolidation is approved and the labor protection 
requirements are met, the law ensures that obligations imposed by 
contracts such as CBAs, or by other laws such as the Railway Labor Act, 
``will not prevent the efficiencies of consolidation from being 
achieved.''
    In short, given its view of the statutory scheme, the Supreme Court 
did not simply hold that the ICC had the ``discretion'' to decide 
whether to find that CBAs could ever be overridden, but rather stated 
that CBAs are to be overridden, when necessary to do so, because that 
is what the law and Congressional intent require. Case law since then 
has clarified the conditions under which CBAs can be overridden. Thus, 
short of an agreement between labor and management, a change in the law 
would be required to alter this overall approach and to prevent any 
override of a CBA. Accordingly, in my December 21 letter, I suggested 
that Congress consider addressing these issues through legislation if 
it is concerned about CBA overrides.
    Agency Approach. The Board over the last few years has attempted to 
make the playing field more level in this entire area to promote more 
private-sector resolution. The Board has worked to move away from 
taking affirmative actions to break CBAs, has taken action to limit 
overrides in the decisions that it has rendered, and has encouraged 
private negotiation as a preferred way of resolving related issues. The 
Board's specific emphasis on negotiation as the preferred way of 
resolving labor implementation matters has led to an increased number 
of negotiated agreements in BN/SF, UP/SP, CSX/NS/Conrail, and CN/IC.
    More specifically, in its landmark 1998 Carmen III decision, the 
Board held that the authority of arbitrators to override CBAs is 
limited to that which was exercised by arbitrators giving effect to the 
WJPA and ICC labor conditions derived from that agreement during the 
years 1940-1980, a period marked by labor-management peace regarding 
rail merger implementation. The Carmen III decision was not appealed 
and is now binding on all arbitrators in addressing CBA override 
issues.
    As to review of labor arbitration awards in general, the Board has 
strictly interpreted its authority to review these awards consistent 
with the law, has generally deferred to the expertise of arbitrators, 
and has declined to review and overturn arbitral awards to the extent 
possible, regardless of whether the arbitral award favored management 
or labor. It has, however, where appropriate, used the appeal process 
to encourage private-sector resolution, sometimes through its decision 
on appeal or other times by staying arbitration awards to provide time 
for the parties to negotiate further. Disputes impacted by those stays 
have been ultimately settled by the parties.
    The Board is considering the matter of CBA overrides as part of its 
reexamination of its major merger rules. Along these lines, the United 
Transportation Union, the Nation's largest rail union, has negotiated 
its own agreement with the U.S. rail systems to resolve the CBA 
override issue. The Board has urged that similar agreements involving 
other employee groups be negotiated.

                           OTHER RAIL MATTERS

    I will now mention briefly a few other rail matters that may be of 
interest to Members of the Committee.
    1. Mergers. The application of Canadian National Railway to merge 
with Wisconsin Central Railroad system is anticipated.
    2. Construction Cases. Pending are the application of the Dakota, 
Minnesota and Eastern Railroad to extend coal-hauling capability by 
that carrier into the Powder River Basin, and several other rail 
construction cases geared to produce new competition where the market 
will support it.
    3. Amtrak. Amtrak has asked the Board to become further involved in 
the proceeding in which the agency acted earlier to facilitate 
restoration of passenger service between Boston, MA, and Portland, ME.

                            NON-RAIL MATTERS

    Certain issues involving modes other than rail also fall within the 
Board's jurisdiction. I will briefly describe the Board's jurisdiction 
and some of the significant pending cases involving other modes.
    1. Motor Freight Carriers. Apart from the Board's jurisdiction over 
motor carrier undercharge matters (a docket that the Board recently 
closed out), the Board's principal involvement with respect to trucking 
companies relates to rate bureaus. Under the law, interstate motor 
carriers may enter into agreements under which competitors may discuss 
certain matters related to rate setting, and if these ``rate bureau'' 
agreements are approved by the Board, then activities conducted 
pursuant to them are immunized from the antitrust laws. The Board is 
reviewing the records compiled to determine the conditions under which 
the various motor carrier rate bureau agreements could be approved.
    2. Intercity Bus Industry. Intercity bus carriers require Board 
approval for mergers and similar consolidations, and for pooling 
arrangements between carriers. In recent years, the Board has seen a 
rise in the number of consolidations within the bus industry. We are 
watching the bus industry closely in light of the issues that have 
surfaced in recent months regarding the financial condition of 
Greyhound and its parent, Laidlaw.
    3. Noncontiguous Domestic Trade. Before the ICCTA, the ICC 
regulated inland water carriage, while regulation of the noncontiguous 
domestic trade (service between mainland points and points in Alaska, 
Hawaii, or the U.S. territories and possessions such as Puerto Rico or 
Guam) was bifurcated: the ICC regulated joint water-motor or water-rail 
rates, while the Federal Maritime Commission regulated ``port to port'' 
transportation. The ICCTA transferred all jurisdiction over 
noncontiguous domestic trade to the Board, requiring carriers to file 
tariffs, and giving the Board jurisdiction over the reasonableness of 
rates for service in the noncontiguous domestic trade. A variety of 
noncontiguous domestic trade cases are pending at the Board, including 
a formal rate complaint involving the water carriers serving Guam.
    4. Pipeline Rate Regulation. The Board regulates the rates charged 
for interstate pipeline transportation of commodities other than water, 
gas, and oil. In October 1996, in a decision responding to a complaint 
filed against Chevron Pipe Line Company, the Board found that, at 
certain volume levels, the tariff rates filed by Chevron for the 
transportation of phosphate slurry from Vernal, Utah, to Rock Springs, 
Wyoming, were unreasonably high and had to be reduced. In response to a 
complaint filed against Koch Pipeline Company, the Board recently found 
that the rates charged for pipeline movements of anhydrous ammonia from 
production facilities in southern Louisiana to several Midwestern 
States were unreasonably high, and it awarded several million dollars 
in reparations. The Board's decision has been challenged in court.

                               CONCLUSION

    Since its inception, I believe that the Board has been proactive 
and constructive in its approach to the matters that have come before 
it, and has tried to affect in a positive way those issues over which 
it has direct jurisdictional control. Taken overall, the Board has 
produced a significant body of decisions, handled its caseload 
expeditiously, and resolved complex matters before it in an effective 
and responsible manner in accordance with the ICCTA. The Board has 
approached its work with fairness, balancing the many varied and often 
conflicting interests under the statute in reaching its decisions on 
the record.
    I recognize that there are those who believe that the Board has not 
done enough in certain areas, particularly in the matters of small 
shipper remedies, labor matters, bottleneck relief, and open access. As 
I have outlined in my testimony today, and as I stated in my December 
12, 1998 letter to this Committee, I believe that the Board has done 
what it can under its current statutory authority and has moved issues 
in new and positive directions. Until the law is changed, the Board 
will continue to implement current law as we believe Congress intended, 
using its existing authority fully and fairly, in accordance with the 
goals of common sense government that I have outlined. I look forward 
to continuing to work with this Committee, other Members of Congress, 
and all other interested parties as we tackle the many important 
transportation issues that continue to confront us.
                                 ______
                                 
      ATTACHMENT 1.--LETTER FROM THE SURFACE TRANSPORTATION BOARD
                              Surface Transportation Board,
                                 Washington, DC, December 21, 1998.
Hon. John McCain, Chairman,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC

Hon. Kay Bailey Hutchison, Chairman,
Subcommittee on Surface Transportation and Merchant Marine,
United States Senate,
Washington, DC
    Dear Chairman McCain and Chairman Hutchison: In our letter of June 
30, 1998, Vice Chairman Owen and I reported to you on the Board's 
recent informational hearings to examine issues of rail access and 
competition in today's railroad industry. After summarizing the 
testimony, the Board responses to the testimony (including the Board's 
April 17 decision, copy attached hereto as Addendum A*), and further 
actions that might be taken by Congress, our letter reported on certain 
ongoing private-sector initiatives. The purpose of this follow-up 
letter is to inform you of the outcome of the Board's proceedings and 
the private-sector initiatives undertaken as a result of the hearings; 
and to suggest possible ways in which related issues that are still 
outstanding might be addressed.
    1. Board Proceedings. As we pointed out in our prior letter, the 
Board initiated rulemaking proceedings addressing market dominance and 
service inadequacies. The Board has completed those proceedings. In 
Market Dominance Determinations--Product and Geographic Competition, 
STB Ex Parte No. 627 (STB served Dec. 21, 1998), the Board repealed the 
product and geographic competition tests of the market dominance rules. 
This change applies to both large and small rail rate cases. In Relief 
for Service Inadequacies, STB Ex Parte No. 628 (STB served Dec. 21, 
1998), the Board issued rules giving shippers and smaller railroads 
opportunities to obtain service from alternate carriers during periods 
of poor service, using either the emergency service or the access 
provisions of the law. Copies of these decisions are attached as 
Addenda B* and C.*
    2. Railroad Industry Discussions. One of the issues that arose at 
the Board's hearings was the desire of smaller railroads to eliminate 
industry restrictions on their ability to compete. The Board directed 
the railroads to address this issue through private-sector discussions. 
As our earlier letter noted, the large and small railroads separately 
indicated that they were having some difficulties in reaching 
agreement, but the Board encouraged them to continue their dialogue, 
and indicated that it would take action, as appropriate, if they did 
not reach agreement. We are pleased to report that in September, an 
agreement was reached, portions of which were formally approved by the 
Board. A copy of the Board's press release announcing the agreement is 
attached as Addendum D.*
    3. AAR/NGFA Agreement. In our June 30 letter, we advised you that, 
consistent with the Board's preference that private parties seek non-
litigative dispute resolution mechanisms, the railroads were meeting 
with the National Grain and Feed Association (NGFA) in an effort to 
arrive at an agreement on a mandatory arbitration program to resolve 
certain disputes. The Association of American Railroads (AAR) and the 
NGFA recently announced such an agreement. A copy of the AAR/NGFA press 
release describing the agreement is attached as Addendum E.*
    4. Formalized Dialogue Among Railroads and Shippers. Another issue 
that arose at the Board's hearings involved the concern of some 
shippers that railroads had not been adequately communicating with 
them. To address this concern, the Board directed railroads to 
establish formalized dialogue with their shippers and their employees, 
particularly about service issues in general, small shipper issues, and 
any other relevant matters. The railroads have organized and conducted 
discrete and formalized meetings with various shippers and shipper 
groups throughout the Nation. The meetings, which have been attended by 
Chairman Morgan, were held in Chicago, IL; Houston, TX; Atlanta, GA; 
Newark, NJ; and Portland, OR. AAR's letter to the Board describing the 
meetings and the follow-up actions to be taken--including, among other 
things, issuance of performance reports by each of the large railroads, 
development of a plan for facilitating interline movements, and 
continuation of the outreach meetings is attached as Addendum F.* The 
Board, which supports the continued dialogue that the AAR letter 
promises, will be closely monitoring all of these follow-up steps. In 
addition to the AAR letter, a letter from various shippers regarding 
those meetings, and Chairman Morgan's response to that letter, are 
attached as Addenda G* and H.*
    5. Additional Railroad/Shipper Discussions. Other shipper concerns 
that were raised at the Board's hearings involved railroad ``revenue 
adequacy'' and the Board's competitive access rules in general. 
Concluding that each of these issues could be better addressed 
initially in a private-sector rather than governmental forum, the Board 
directed railroads to meet with shipper groups to address the issues 
under the auspices of an Administrative Law Judge. Although extensive 
meetings were conducted, the parties could not reach agreement on these 
issues. Attached as Addendum I* are copies of the reports that the 
parties submitted to the Board on their recommendations as to these 
issues.
    Revenue Adequacy. Although the concept of revenue adequacy has thus 
far had minimal real-world impact, the existing judicially approved 
revenue adequacy measurement, which focuses on a railroad's return on 
investment, has been a source of controversy. Based on suggestions from 
railroad and shipper representatives at the Ex Parte No. 575 hearing, 
the Board directed railroads to meet with shippers with a view toward 
selecting a panel of three disinterested experts to make 
recommendations as to an appropriate revenue adequacy standard, and to 
name a panel and report back to the Board by May 15, 1998. The panel 
was then to report back with final recommendations on July 15, 1998.
    Shippers opposed this approach, contending that it would be 
expensive and inefficient for them to pay part of the costs of the 
expert panel, while also paying for litigation associated with the 
conduct of the proceeding before the panel and the Board (and, 
presumably, if either side wanted to litigate further, the courts). 
Ultimately, most of the participating shippers recommended that the 
Board itself initiate a new rulemaking looking to adoption of a revenue 
adequacy approach that would permit the Board to consider a variety of 
financial indicators in determining whether railroads are revenue 
adequate.\1\ By contrast, contending that the multiple indicator 
approach advanced by the shippers would not provide enough certainty or 
predictability, the railroads supported the expert neutral panel 
approach.
---------------------------------------------------------------------------
    \1\ The shippers indicated that, given the Board's own resources 
and their own priorities, they would not object if the Board deferred 
this rulemaking until a later date.
---------------------------------------------------------------------------
    Competitive Access. The Board directed railroads and shippers to 
attempt to find common ground, and to meet, negotiate, and report back 
to the Board by August 3, 1998. After extensive meetings, the parties 
reached an impasse. The principal areas of concern involved the 
definition of terminal areas; the scope of reciprocal switching; 
appropriate compensation to an incumbent carrier; and, perhaps most 
fundamentally, whether access to other carriers ought to be required 
only when an incumbent carrier has acted in some sort of an 
anticompetitive way, or whether it ought to be provided whenever 
additional competition is determined to be in the public interest.
    6. Possible Resolutions of Revenue Adequacy, Competitive Access, 
and Small Rate Case Issues. The Board appreciates the opportunity to 
assist Congress in addressing the transportation issues that face the 
Nation during these important times and believes that it has 
appropriately addressed matters of concern within the scope of the 
authority given to it by Congress. Nevertheless, it is likely that 
certain legislative proposals will be discussed in Congress during the 
next session. Following are some thoughts on some of the issues as to 
which legislative proposals are likely.
    Revenue Adequacy. The revenue adequacy issue, in our view, has 
unnecessarily polarized the transportation community. The underlying 
policy objective that the Board's regulatory approach among other goals 
permit railroads to earn adequate revenues is a laudable one that 
should be retained. As we see it, however, and as we have testified 
before, the revenue adequacy status of any particular railroad has 
little practical effect. Revenue adequacy is not a factor in maximum 
rate cases prosecuted under the ``stand-alone cost'' (SAC) methodology. 
It is not a factor in construction, merger, or abandonment proceedings. 
Revenue adequacy does play a small role in rate cases brought under the 
``small case'' guidelines, but to date, no such cases have been 
brought. Therefore, Congress may wish to consider legislatively 
abolishing the requirement that the Board determine on a regular basis 
which railroads are revenue adequate.
    That is not to say that Congress should abandon the concept of 
revenue adequacy. As we have testified before, in order to oversee the 
industry, the Board needs to have some indication of how the industry 
is faring financially. Moreover, revenue adequacy is one of the non-SAC 
constraints in the Board's ``constrained market pricing'' (CAMP) 
methodology for handling larger maximum rate cases. Although, thus far, 
all railroad rate cases brought under CAMP have been handled under SAC 
procedures, if a ``revenue adequacy'' case were brought, the Board 
would need a basis on which to address it.
    For those reasons, and because Congress may not wish to abolish the 
revenue adequacy requirement immediately, the questions that have been 
raised about the Board's current revenue adequacy methodology cannot be 
ignored. With its credibility on the issue under challenge by several 
shippers, however, the Board, with its limited resources, does not plan 
to undertake the shippers' proposed rulemaking at this time. Rather, 
given the benefits, the Board continues to support the expert panel 
approach that was suggested by both shipper and railroad interests 
during the Board's Ex Parte No. 575 hearings. The shippers are correct 
that someone would need to provide funding for the expert panel; that 
costs rise as layers of litigation are added to the regulatory process; 
and that it is the Board, and not a private expert panel, that is 
charged with establishing regulatory procedures. Nevertheless, the 
Board is willing to make a commitment to give great deference to the 
expert panel, which would be a competent body that would be perceived 
as neutral if selected after agreement among the private parties. If 
the private parties were also to give the expert panel deference, 
rather than to litigate should they disagree with its (and the Board's) 
conclusions, then not only would the parties' confidence in the 
objectivity of the process likely be enhanced, but the overall costs 
also would likely be contained.
    Competitive Access. In its Ex Parte No. 575 decision served April 
17, 1998, the Board addressed in some detail the implications of the 
competitive access debate. The differences between the railroads and 
the shippers on the Board's competitive access rules are fundamental, 
and they raise basic policy issues--concerning the appropriate role of 
competition, differential pricing, and how railroads earn revenues and 
structure their services--that are more appropriately resolved by 
Congress than by an administrative agency. Moreover, the so-called 
``bottleneck cases,'' which involve issues related to competitive 
access, are still being reviewed in court. For those reasons, although 
the Board has moved aggressively to adopt the new rules described above 
to open up access during times of poor service, the Board does not plan 
to initiate administrative action to otherwise revisit the competitive 
access rules at this time.\2\
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    \2\ Should Congress choose to review the issue, we would note, as 
we did in our April 17 decision, that the shape and condition of the 
rail system that open access would produce is a significant but 
unresolved issue. Certain shippers assume that the replacement of 
differential pricing by purely competitive pricing would reduce the 
rates paid by shippers, and that added competition would result in 
increased infrastructure investment. The railroads, by contrast, argue 
that, because their traffic base would shrink, the rates paid by those 
shippers that would continue to receive service would actually 
increase, even as overall revenues received by railroads would decline, 
because the overall traffic base from which costs could be recovered 
would be reduced. Additionally, as the Board noted in the April 17 
decision, carriers could be expected to seek to maintain an adequate 
rate of return by cutting their costs, which could include shedding 
unprofitable lines and reducing new investment in infrastructure. Thus, 
while certain shipper representatives believe that an open access 
system would ensure better service, concern has been raised that, 
unless smaller railroads were able to fill in service gaps that could 
be created, open access could produce a smaller rail system that would 
serve fewer shippers, and a different mix of customers, that are served 
today, with different types and levels of, and perhaps more selectively 
provided, service.
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    Small Rate Cases. As you know, the Board has adopted small rate 
case guidelines, which apply in cases in which CAMP cannot be 
practicably used. Under these small case guidelines, the Board reviews 
the profits that the carrier obtains from the challenged rate from 
three perspectives: it compares them with the profits that railroads in 
general earn from comparable traffic; it compares them with the level 
of profits that the carrier would need to obtain from all of its 
potentially captive traffic in order to become ``revenue adequate''; 
and it compares them with the profits that the defendant carrier earns 
on all of its potentially captive traffic. Taken together, these three 
comparisons are designed to permit carriers to price ``differentially'' 
as provided under the law, in a way that will promote their financial 
health, while still protecting individual shippers from bearing an 
unfair share of a particular carrier's revenue needs. Although the 
procedures may sound complex, in fact the information needed to make 
this sort of a case is readily available at reasonable cost. Moreover, 
the Board concluded, after reviewing many years of debate, that these 
guidelines are the only procedures that have been identified that 
readily address each of the concerns that the Board must consider under 
the statute.
    Nevertheless, we are aware that certain shippers are concerned 
that, for small cases, anything other than a single benchmark test 
could unreasonably impede access to the regulatory process. If Congress 
agrees, it could adopt specific small rate case standards. As an 
example, it could provide that, for certain types of cases, all rates 
above a specified revenue-to-variable cost ratio, or series of ratios, 
would be considered unreasonable. If this approach were to follow the 
tenets of the existing statute, the specifics of such an approach--for 
example, the cases to which it would apply, and the level or levels at 
which rates might be capped--would have to balance issues such as 
differential pricing and railroad revenue need against the fairness in 
requiring captive shippers to pay substantially higher prices than 
competitive shippers.
    7. The Override of Railroad Collective Bargaining Agreements. 
Another matter that may be presented to Congress next year is the 
question of limiting the authority of arbitrators under the standard 
labor conditions imposed by the Interstate Commerce Commission (ICC) or 
the Board to modify existing collective bargaining agreements (CABS) in 
the process of implementing approved rail consolidations. This process 
has become extremely controversial since a decision of the Supreme 
Court in 1991. That decision, Norfolk & Western Ry. v. American Train 
Dispatchers Ass'n, 499 U.S. 117 (1991) (N&W), held that the exemption 
from all other laws to carry out approved rail consolidations provided 
by former 49 U.S.C. 11341(a) and carried forward as 49 U.S.C. 11321(a) 
extends to existing CABS and operates automatically to permit the 
override of CBA provisions as necessary for implementation of an 
approved rail consolidation.
    Present practice for implementing Board-approved rail 
consolidations is for the unions and the railroads involved to 
negotiate agreements to enable implementation of the Board-approved 
transaction. If they are unable to agree, the matter is submitted to an 
arbitrator selected by the parties or the National Mediation Board if 
the parties cannot agree on the choice of an arbitrator. Because the 
arbitrator is acting under section 11321(a), he or she has the 
authority and the obligation to modify existing CABS as necessary to 
carry out the transaction.
    In the recent Conrail Acquisition\3\ decision, at the request of 
the various labor organizations, the Board specifically declined to 
make a finding in its decision approving the transaction that 
overriding provisions in Conrail CABS was necessary to carry out the 
transaction. Rather, the Board specifically left the determination of 
necessity to the process of negotiation and, if necessary, arbitration. 
Even more recently, in the Carmen\4\ decision, the Board elaborated on 
the limitations on arbitrators' authority to modify CABS as permitted 
by the Supreme Court's N&W decision. In Carmen the Board held that 
overrides of CABS by arbitrators are limited, among other things, to 
the override authority exercised by arbitrators during the period 1940-
1980, an era marked by labor/management peace regarding the 
implementation of rail consolidations. A copy of the Carmen decision is 
attached as Addendum J.*
---------------------------------------------------------------------------
    \3\ CSX Corporation and CSX Transportation, Inc., Norfolk Southern 
Corporation and Norfolk Southern Railway Company--Control and Operating 
Leases/Agreements--Conrail Inc. and Consolidated Rail Corporation, STB 
Finance Docket No. 33388, Decision No. 89 (STB served July 23, 1998).
    \4\ CSX Corporation--Control--Chessie System, Inc. and Seaboard 
Coast Line Industries, Inc. (Arbitration Review), Finance Docket No. 
28905 (Sub-No. 22), and Norfolk Southern Corporation--Control--Norfolk 
and Western Railway Company and Southern Railway Company (Arbitration 
Review), Finance Docket No. 29430 (Sub-No. 20) (STB served Sept. 25, 
1998). This decision was not appealed by any party.
---------------------------------------------------------------------------
    Nonetheless, the Board is aware that labor representatives oppose, 
and are understandably dissatisfied with, any provision or action that 
permits overriding any existing CBA provisions. If Congress were to 
agree with their position, given the Supreme Court decision in N&W, 
some modification of section 11321(a) so as to exclude CABS, or some 
other legislative expression, could address labor's concerns in this 
area.
    8. Conclusion. Again, we appreciate the confidence that Congress 
has shown by allowing us to play a role in this important process, and 
we remain committed to providing a forum for constructive dialogue and 
appropriate regulatory relief. If we can be of further assistance in 
this or any other matter, please do not hesitate to contact us.
---------------------------------------------------------------------------
    * The addenda referred to have been retained in the Committee 
files. 
---------------------------------------------------------------------------
            Sincerely,
                                                   Linda J. Morgan.
                                 ______
                                 
                      ATTACHMENT 2.--NEWS RELEASE
 Surface Transportation Board Issues Notice of Proposed Rulemaking on 
                  New Rules for Major Railroad Mergers

    Surface Transportation Board (Board) Chairman Linda J. Morgan 
announced today that the Board has issued a Notice of Proposed 
Rulemaking (NPR) proposing new rules for major railroad mergers and 
consolidations (those involving two or more ``Class I'' railroads, that 
is, railroads each with annual revenues of at least $250 million). The 
new rules would significantly increase the burden on applicants to 
demonstrate that a proposed merger transaction is in the public 
interest, reflecting what Chairman Morgan notes as an awareness of the 
great risk of failure and the competitive, service, and financial 
concerns raised in connection with what could be the final round of 
consolidation in the rail industry. In particular, the new rules would 
require applicants to show that the transaction would enhance 
competition, and they would require much more accountability with 
respect to claimed merger benefits and service. At the same time, in 
proposing these new rules, the Board indicated that it does not intend 
to prevent transactions genuinely in the public interest and would 
continue to look with favor upon private-sector initiatives in the 
public interest.
    Overall Approach. A key element of the Board's proposal is a new 
policy statement that, together with the proposed rules, represents a 
major shift in basis from the pro-merger approach that has guided 
agency merger decisions for the last 20 years. The Board noted that 
there is no longer the pressing need that the Nation's largest 
railroads once had to consolidate their operations to reduce excess 
capacity because that rationalization has largely been accomplished. 
Moreover, the Board emphasized that recent consolidations have brought 
significant transitional service problems that have harmed rail 
customers and delayed full realization of the merger benefits that were 
anticipated from those transactions. Accordingly, the Board found it 
appropriate to propose new rules requiring applicants to bear a 
substantially heavier burden in demonstrating that a merger proposal is 
in the public interest.
    Enhancement of Competition. The Board recognized that any further 
consolidations in the rail industry are likely to result in some 
competitive harms, such as the loss of geographic competition, that are 
difficult to remedy directly. Because of this problem, and because of 
the likelihood based on past experience of harms from service 
disruption during the integration period, the Board proposed that it 
would require merger applicants in the first instance to include 
provisions for enhanced competition as an essential aspect of their 
proposals. The Board would give substantial weight to this enhanced 
competition in making its public interest determination.
    At a minimum, the Board would require applicants to propose 
specific remedies to keep open major existing gateways, retain build-
out and build-in options, and preserve the opportunity of shippers in 
the so-called bottleneck situation to obtain a contract rate for one 
segment of a movement in order to separately challenge a rate for the 
remainder of the movement. The Board also would look for other 
competition-enhancing proposals, such as those related to paper 
barriers, emphasizing that it encourages innovative ways of enhancing 
competition throughout the network. The Board noted that, given the 
import of future consolidation, it was no longer appropriate to limit 
the focus of its conditioning power to preserving competition and 
essential services, and that it would impose conditions as necessary to 
mitigate or offset all types of harm to the public interest, including 
conditions that would enhance competition. In this regard, it would 
look carefully at the proposals made by the applicants to enhance 
competition.
    Assessment of Benefits. The new rules recognize that there can be 
economic efficiencies associated with consolidations. However, because 
claimed benefits in recent mergers have often been delayed or 
frustrated by transitional service problems, the Board would carefully 
scrutinize future claims of merger benefits and associated timeframes 
to ensure that they are well-documented and reasonable projections. The 
Board would expect applicants to propose additional measures that the 
Board could take if the anticipated public benefits should fail to 
materialize in a timely manner. Additionally, the Board would view 
proposals to enhance competition as public benefits, and the Board 
would consider whether the benefits of the particular consolidation 
claimed by the applicants could be realized by means short of a merger 
through private-sector initiatives, such as joint marketing agreements 
and interline partnerships.
    Downstream Effects. The Board also noted that, with only a handful 
of major railroads remaining, any further merger proposals could 
trigger other applications that the Board would have to consider. The 
Board recognized that a transaction involving two Class I rail carriers 
will affect the entire transportation system, including regional and 
shortline railroads, highways, waterways, ports, and airports. The 
Board cautioned that ``we must be confident that at the end of the day 
a balanced and sustainable rail transportation system is in place.'' 
Thus, the Board would assess the likely outcome of any major proposal 
on the future structure of the industry through an examination of its 
downstream effects.
    Service and Oversight. Applicants would be required to submit up 
front detailed service assurance plans, including contingency plans, to 
permit the Board's staff to assess proposed consolidated operations 
prior to approval. As part of this process, the Board would expect a 
discussion of specific service levels to be attained from the proposed 
transaction. The Board would expand its post-approval monitoring of the 
implementation of mergers to help ensure that adequate service is 
provided during the crucial transitional period and beyond. 
Additionally, applicants would have to establish problem resolution 
teams and specific problem resolution procedures to ensure that post-
merger service problems are promptly and appropriately addressed. The 
Board would anticipate the establishment of a Service Council 
consisting of shippers, railroads and other interested persons in each 
merger proceeding to provide an ongoing forum for the discussion of 
implementation issues for that transaction. And the Board's proposal 
would formalize the role of oversight in the merger approval process, 
with successful applicants required to submit reports on no less than 
an annual basis, subject to comment by the public, for a period of at 
least 5 years.
    Employee Concerns. The Board emphasized that it strongly supports 
early notice and consultation between the railroads and their 
employees, and that it prefers negotiated solutions to merger 
implementation problems. The Board also said that it ``respects the 
sanctity of collective bargaining agreements'' and that these should 
not be changed ``except to the very limited extent necessary'' to 
implement a particular transaction. In this regard, the Board urged the 
railroads and the various rail unions, building upon prior efforts, to 
negotiate systemwide agreements concerning these issues, and to report 
back to the Board as soon as possible.
    Transnational Issues. The proposed rules also reflect additional 
attention to international issues related to applications involving 
Canadian and Mexican railroads. The Board would require applicants to 
cooperate with the Federal Railroad Administration concerning safe 
implementation of those transactions, and would require applicants to 
show that any applications approved by the Board are consistent with 
the North American Free Trade Agreement and would not undermine the 
Nation's defense needs.
    The NPR was issued today in the case entitled Major Rail 
Consolidation Procedures, in STB Ex Parte No. 582 (Sub-No. 1). Vice 
Chairman Burkes and Commissioner Clyburn commented with separate 
expressions. The NPR follows the Board's March 31, 2000 Advance Notice 
of Proposed Rulemaking (ANPR) in that docket. In the ANPR, the agency 
instituted a rulemaking and sought public comment on modifications to 
its regulations governing proposals for major railroad consolidations. 
The ANPR followed March 7-10, 2000 public hearings held by the Board in 
the case entitled Public Views on Major Rail Consolidations, in STB Ex 
Parte No. 582.
    Comments in response to the NPR are due on November 17, 2000, 
replies are due on December 18, 2000, and rebuttal comments are due on 
January 11, 2001. The Board will issue its final rules by June 11, 
2001.
    Printed copies of the NPR are available for a fee by contacting Da-
To-Da Office Solutions, Room 405, 1925 K Street, N.W., Washington, DC 
20006, telephone(202) 466-5530. The NPR also is available for viewing 
and downloading via the Board's website at www.stb.dot.gov.

    Senator Smith. Thank you, Chairman Morgan. First, so I 
understand your agency a little more, you have 143, roughly, 
employees, and is the issue of authorization affecting your 
ability to keep current with staffing and workload?
    Ms. Morgan. Well, despite the fact that we have not been 
reauthorized, we have been funded on an annual basis, 
essentially a level funding.
    Senator Smith. So that is not an impediment to your 
continuing?
    Ms. Morgan. It is not an impediment unless people decide to 
stop funding us because there is no authorization.
    Senator Smith. And I think you indicated in your testimony 
you win 90 percent of the decisions that are taken to court.
    Ms. Morgan. Over 90 percent, that is correct.
    Senator Smith. Which ones didn't you win?
    [Laughter.]
    Ms. Morgan. Well, I referenced, of course, the market 
dominance decision, which we won in part, but it has been 
remanded to us for further review. We have lost a couple of 
cases in the trails use area. If you abandon a line, then that 
particular line can go for trails use. There is a conflict 
between landowners who do not want trails and those who want 
trails, and some of those cases we have not managed to win on 
appeal, but the big cases we have won on appeal.
    Senator Smith. I know, given how few railroad companies 
remain, that shippers are certainly looking to you for your 
intervention and help, I assume. Do you feel that pressure all 
the time?
    Ms. Morgan. All the time.
    Senator Smith. I figured you would.
    Ms. Morgan. I feel pressure from many quarters all the 
time.
    [Laughter.]
    Senator Smith. You know, I cannot remember a time with more 
intensity of complaint from the northwest. When the UP and the 
Southern Pacific merged and there was a serious deterioration 
of service, there was literally mills and plants that were 
laying off people just simply because they could not move 
inventory.
    Is there--I mean, I do not know how many more rail mergers 
there could possibly be, there are so few railroads left, but 
in the event that there were, is there a way to better mitigate 
those kinds of impacts that are just felt very keenly and 
personally by folks, and they certainly ring our phones off the 
hook. Can you speak to that particular instance, and I do not 
think it is a stretch to say that other mergers have had 
similar problems. Is that accurate?
    Ms. Morgan. Well, certainly with this last round of mergers 
we have experienced service problems. Obviously, some have been 
more associated with particular mergers than with others, but 
as a whole this last round has been difficult, and I certainly 
understand what the customers in your communities have gone 
through.
    One of the reasons that we are reexamining our rail merger 
policy and rules is to try to reflect the lessons that we have 
learned in this last round, and obviously one of the lessons 
learned has been the difficulty in operational integration when 
you have a melding of systems that creates integration 
problems, whether it be with computers or personnel or 
whatever. The other lesson learned has been the impact of 
inadequate infrastructure on service, and that was part of what 
you experienced in your area of the country.
    So the proposed rules that we put out in October, on which 
we will be having an oral argument in April, focus very 
specifically on getting more details about the service that 
would be provided in a proposed merger. We want that up front. 
We want the details up front. We are also looking for more 
accountability. What is put forth up front, the applicants 
would be held accountable for it. We also are looking up front 
for contingency planning and problem-solving in the event that 
there are service problems.
    Senator Smith. And absent those things, those mitigating 
factors, you would not allow a merger to go forward?
    Ms. Morgan. We would be looking for the applicants to bring 
to us very specific details on service, and if those details 
are not there, then the application would not be able to go 
forward.
    Senator Smith. Since the Board's creation, how many rail 
mergers have there been?
    Ms. Morgan. Four. I have overseen four.
    Senator Smith. Suffice it to say you have learned from 
those four some things that could be very helpful should there 
be further mergers.
    Ms. Morgan. Yes, and as a matter of fact, when we had the 
service situation in the West we learned from that, and we 
carried our lessons into how we established our monitoring for 
the Eastern merger, and how we have handled that since then. 
And of course many times I have been asked, have you learned 
from what has gone on, and I am proud to say that yes, we have, 
and any agency that does not learn is not doing its job.
    Senator Smith. Are there any mergers on the table right 
now, and which ones are likely to be anticipated by your 
agency?
    Ms. Morgan. Well, in terms of major rail mergers, I do not 
know of any out there being discussed. I certainly would not 
know what is being discussed in rooms that I am not in at the 
moment, and I really would not want to prejudge whether we will 
see any, and what I would do with those.
    I would say, though, that I am asked this a lot--will there 
be more mergers, and I think a lot will depend upon the 
economy, how our rules are viewed, what the customer view of 
more mergers is, and finally, what the investor community feels 
about more consolidation. So I think all those things will come 
together to answer that question.
    Senator Smith. Linda, I remember from my own business 
experience when I was selling a big volume of peas to 
Campbell's Soup in Camden, New Jersey, I could get a pretty 
good rail price for that volume going across the country, and 
if I had to, I could take it to Burlington Northern on a 
different spur.
    I also know that when I wanted to ship to Boise, Idaho, for 
a few pallets it was pretty expensive, but I am wondering how 
you evaluate those kinds of volume differences, and how you 
assuage the feelings, if you attempt to at all, of captive 
shippers, people unlike in my experience, where we are on a UP 
line, if we had to we could truck to a Burlington line. What do 
you say to a captive shipper that just does not have any 
option, and he is paying a lot more to go to Boise than he 
would to go to Camden, New Jersey?
    Ms. Morgan. Well, the law that the Board implements is 
based on the assumption that there, first of all, are customers 
out there who are only served by one rail carrier, which has 
been the case for a while, and secondly, that prices will 
differ between various customers, and that for competitive 
customers, customers where there is more competition, more 
competitors, those prices might be lower than captive customer 
rates, which is called differential pricing. Those are the 
assumptions made in the law that we implement.
    So as to what we do in terms of our responsibilities vis-a-
vis captive shippers, the law says that where there is no 
effective competition, the Board is to step in and regulate. As 
I said in my oral comments, an important part of that is our 
regulation of rail rates and allowing for a process for captive 
customers to challenge rates based on the argument that they 
are reasonably high.
    Senator Smith. And are those challenged on an ongoing 
basis? Is that one of your biggest workloads?
    Ms. Morgan. Well, in recent years the Board has handled 
about four of those cases, and recently we have had several 
filed, so we now have up to 7, I believe, rail rate cases 
pending.
    Senator Smith. How do they normally come out? What factors 
would say, this is injurious here and it would not work?
    Ms. Morgan. Under the law there is a certain threshold 
below which we do not look at a rate and above which we do, and 
in this regard, we look at the revenue-to-cost ratio, variable 
cost ratio, and whether there is market dominance or not. Once 
you get beyond those thresholds, then we evaluate whether the 
rate is unreasonable based upon what we call the stand-alone 
cost methodology, which is, create the most efficient railroad 
and figure out what its costs would be and its revenue flow 
would be, and then from that you determine whether this 
particular rate that is at issue is too high or not.
    Senator Smith. And do the railroads understand those 
formulas pretty well that you follow?
    Ms. Morgan. I think everyone understands the stand-alone 
cost methodology well. It has evolved, and during the Board's 
tenure we have refined the standard so that people know what 
these cases should look like going forward, and we are 
continuing to do that with each case, so for large shippers the 
stand-alone cost methodology is well-known and understood.
    Senator Smith. And observed?
    Ms. Morgan. And observed.
    Senator Smith. That then brings me to--I wish he were here. 
Senator Dorgan has a bill that shifts some of this 
responsibility to the Department of Justice, as I understand. I 
do not know all the details of the bill, but I am wondering, in 
light of what you just told me, how do you factor in the 
prospect of his bill and what it would do?
    Ms. Morgan. Well, as I understand his bill, it would 
involve the Justice Department more in the merger process, the 
rail merger review process. It would also remove any antitrust 
immunity that would attach once a rail merger is approved, 
which is the case today. It also would remove immunity for 
certain other railroad activity. That obviously is a change 
from where we are today.
    This has been a discussion that we have had in the past, 
should we have the Justice Department more involved in the 
review of rail mergers, and what I have said on that is that 
the Justice Department is a party in our processes. They have 
filed in all of the mergers that they have cared to file in. We 
have disagreed on one merger, and that was the Union Pacific-
Southern Pacific merger. Yes, we disagreed on that. The Board 
felt strongly that the SP would not survive without a merger 
with the Union Pacific. So I guess I question what of the 
current process is broken in that regard.
    I think with respect to eliminating antitrust immunity 
otherwise the question for this Committee would be whether that 
somehow creates a duplicative agency involvement that perhaps 
is not necessary. That would be how I would analyze that.
    Senator Smith. I am very pleased to be joined by the 
Senator from Kansas, Senator Brownback. Do you have a statement 
or a question?

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Senator Smith. Linda, welcome 
to the Committee. You have been here a number of times before. 
I have worked with you on a number of issues, and I appreciate 
your willingness to work with a number of us. If you have 
already covered this, I apologize, and you may need to cover it 
again, but I want to go to the rail merger issue and discuss 
that a little bit with you if I could.
    I noted in your testimony, in 1999 the Surface 
Transportation Board stepped in on the BNSF merger with 
Canadian National and put a 15-month moratorium in place at 
that time before proposing some new rules and regs on that. I 
wonder what do you see now in the offing, of large railroad 
mergers, or what are you anticipating coming down or toward the 
Surface Transportation Board on some of these larger railroad 
mergers?
    Ms. Morgan. Well, as I indicated before you came in, 
certainly I do not want to prejudge what might come to me and 
how to handle that, but in terms of whether there will be more 
mergers, as I indicated to Chairman Smith a minute ago, a lot 
of it will depend upon how our rules are viewed, our final 
rules once they come out in June, how the economy is, how 
customers view more mergers, how investors view more mergers. 
Whether there are discussions going on about more mergers right 
now, obviously I do not know that one way or the other.
    What I did not say to Chairman Smith, but I will say to 
you, is that I certainly hope that we will have a period here 
where we focus on operations, focus on day-to-day business, 
focus on running the rail network, and providing better service 
with the system we have today. And of course one of the reasons 
for the moratorium was to create some stability in the industry 
while we reviewed our rail merger policy and rules.
    Senator Brownback. Do you feel like the rules you have in 
place now are sufficient to handle another round of potential 
large mergers if they were to come down the road in a year or 
two?
    Ms. Morgan. Well, the rules that we now have in place we 
determined are not sufficient, and that is why we have a 
moratorium in place and are reexamining our policy and rules. 
Obviously, we hope that the final rules that we issue in June 
of this year will be appropriate for whatever may come to us in 
terms of a final round of mergers.
    And as I discussed earlier, the proposed rules we put out 
in October raised the bar, and put a burden, a substantially 
heavier burden, on the applicants as it relates to competition 
and service and accountability for benefits.
    Senator Brownback. I am sorry you are having to cover 
terrain over a second time.
    Ms. Morgan. That is OK. Maybe I said it better the second 
time. It gives me a second bite at the apple.
    Senator Brownback. I am sure you said it great both times, 
and I apologize for that, but that has been a big issue in my 
State, is to watch that, and watch what takes place.
    I think a number of people were very happy with the 
moratorium put in place last time, just let us put a pause 
here, we are not exactly sure what all of this is going to lead 
toward, and I thought pause was the right way to put it, not 
say no, we are not going to do this, and we are going to 
prevent these, but more of a pause, and taking some time.
    One other narrower, State-specific issue for me is that we 
are trying to get some of these short-line railroads to expand 
into the State instead of track being abandoned, and there is 
an ongoing effort in the States to try to put together public 
financing to help upgrade some of the short line railroads. We 
have got a big one in central Kansas. Are you familiar with 
this issue?
    Ms. Morgan. Yes.
    Senator Brownback. There is a substantial mileage of track 
with heavy agriculture and a fair amount of manufacturing, so 
that it sits well within a rail service, and it needs rail 
service, but the financing on it has been tough to come up with 
for a short-line operator to come in and upgrade the track 
sufficiently to run it on an economically competitive basis.
    I just want to make sure you are aware of it, and that we 
are going to try to do what we can to get the help to be able 
to upgrade these facilities to be able to maintain that 
trackage. Any suggestions you have, ways that this can be done, 
or that it can be handled better or more likely to be 
successful would obviously be appreciated.
    Ms. Morgan. Well, the Board staff has been working with 
some of the customers in Kansas on this whole issue of 
abandonments in Kansas, and so that is why I am intimately 
familiar with some of what you have been experiencing in the 
State, and I know there was a discussion of a moratorium on 
abandonments in the State, and we will continue to work with 
you on that.
    Many times when we get into these issues we are able to 
bring parties together on an informal basis, get the right 
people together to make the right thing happen, which does not 
necessarily require regulation on our part, but is more of an 
informal process and an intervention in the private sector way 
to move the issue.
    Senator Brownback. It has been my perspective over time 
that one of the best things Government can do is create the 
right atmospherics, create the right atmosphere for this to 
move forward and to try to encourage it so that the private 
sector looks at it and says, well, we do not think we are going 
to have impediments from Government because they are trying to 
encourage and facilitate this, and whereas if it is more 
standoffish from Government a lot of times they might say, 
well, this is going to take us more time, it is going to take 
us more effort, more resources to do this because we do not 
have that encouragement, that atmosphere that is encouraging, 
and so I appreciate your helping us out with that. We could 
sure use that line.
    We are glad to see you still on the task, and focused on 
keeping our railroads running.
    Ms. Morgan. Thank you.
    Senator Brownback. Thank you, Mr. Chairman.
    Senator Smith. Thank you, Sam.
    Linda, just a couple more things. We have talked around the 
open access issue, something that shipper groups often 
advocate. I wonder if you can speak to how differential pricing 
could be carried out in an open access environment. Does that 
work?
    Ms. Morgan. Well, as I indicated before, the basis for the 
law that is in place now is that there would be differential 
pricing so that some rates would be higher than others, 
depending upon the marketplace.
    If legislation were to pass to provide for open access, a 
guarantee of two rail carriers for every shipper, then the net 
effect of that presumably would be to bring rates down, which 
of course I know customers want, and in the short term that 
would happen, but then as I have indicated before, that would 
have an impact on the revenues coming into the system and you 
would not have the differential pricing impact that you have 
today, because all the rates would come down. Then you would 
create a revenue shortfall problem, which over the long term 
could result in a smaller network than what we have today, with 
less investment going into the infrastructure.
    Senator Smith. I would like to focus on that last point you 
are making, because I think it is really somewhat unique to the 
rail industry. The amount in investment and infrastructure, I 
mean, is absolutely enormous. If you went to a system like 
that, or a statutory requirement, what does that likely mean to 
the willingness of a railroad to invest in its infrastructure 
for the future?
    Ms. Morgan. Well, I think as I said there would be two 
issues. One would be, of course, the amount of money that is 
available to do whatever is necessary, and that, of course, was 
the genesis of the Staggers Act originally, that we had an 
industry that was not financially sound, and we needed to 
create a system in which it could get sounder through a revenue 
flow that made more sense in terms of needs.
    But the second issue is one of incentive, I think, and that 
is what you are also getting to, and that is, if someone is 
brought onto the tracks of a particular carrier, you would 
obviously have the issue of price, how much should that access 
be worth to the carrier onto whose track someone has entered to 
ensure reinvestment. You also have issues of private property, 
and someone else using private property, and so that creates 
possibly a disincentive for investment. And I think what we 
have seen in Britain, where you have a split between operations 
and the infrastructure, is that the incentive to invest in the 
infrastructure is not there the way it would be if the 
operations and the infrastructure were together in the same 
operation.
    Senator Smith. What kind of shape is the rail 
infrastructure in?
    Ms. Morgan. Here in the United States today?
    Senator Smith. Yes.
    Ms. Morgan. Well, the industry has put a lot of money over 
the last several years into infrastructure in general, and also 
in the context of the mergers that have been approved. We are 
now seeing a slowing in that, and that, of course, has to do 
with the economy, and it has to do with the view on Wall Street 
investors that perhaps the investment to date have not produced 
the kind of returns that it should have.
    In any event, we are seeing a slowing in the investment, 
and we need to always be concerned about a slowing in the 
investment, because in order to ensure that you have good 
service into the future and the potential for improved service 
into the future, you need to make sure that investment in the 
infrastructure can continue.
    Senator Smith. So any effort to go statutorily to an open 
access concept would have to allow a user fee, or some sharing 
of infrastructure burden, and that is a given, is it not?
    Ms. Morgan. Well, you would have to make sure that both the 
marginal cost and the fixed cost of the network are covered, 
and that is the challenge, really, in the rail industry. And 
then, of course, otherwise I guess you could go to a system of 
federally funding the infrastructure, but again I am not sure 
that that is necessarily something that anybody is embracing 
today.
    Senator Smith. I have not heard anybody propose it around 
here.
    [Laughter.]
    Senator Smith. Linda, you have been very, very helpful, and 
I would note that you are joined by two members of your Board, 
and I would like to introduce them. They are Wayne Burkes--
Wayne, if you would stand--and William Clyburn as well. We 
welcome you both, and thank you for your service, and Linda, we 
thank you for the job you are doing. You are always in the 
cross-hairs, and it is not easy, but it is necessary, and you 
handle it very, very capably.
    We thank you for that, and we thank all of you for 
attending this morning. It has been helpful. It is a good 
start, and there are many more hearings to come of the 
competing interest in this issue, so thank you all, and with 
that, we are adjourned.
    [Whereupon, at 10:15 a.m., the Subcommittee adjourned.]

                            A P P E N D I X

          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia

    Thank you Mr. Chairman. Welcome to the Committee and to the Surface 
Transportation Subcommittee. I look forward to working with you on 
issues of importance to my constituents, and to the entire nation, that 
will come before this subcommittee. I commend you for beginning to 
address the state of our country's railroad system so early in your 
chairmanship, and I applaud you for committing to three hearings on the 
various issues involved.
    Good morning, Chairman Morgan, and welcome back.
    As Ms. Morgan knows, and as I suspect Chairman Smith has heard, in 
the past I have been primarily interested in the workings of the STB, 
and its predecessor the Interstate Commerce Commission, with regard to 
these agencies' oversight of the freight rail industry, and in 
particular, the efforts both agencies have taken to ensure that 
railroads and rail shippers, not to mention the frequently forgotten 
end-use consumers, each enjoy the benefits of the competitive rail 
market that Congress believed it was setting up with the passage of the 
Staggers Act more than twenty years ago.
    I have had the opportunity to discuss this issue with and before 
Ms. Morgan on a number of occasions. Given that history, I am quite 
sure she will be happy to hear that after a brief description of the 
Board's responsibilities regarding rail competition and the current 
merger moratorium and rulemaking, I intend to refrain from belaboring 
the point, at least for today.
    Mr. Chairman, it is important for all of our Members, especially 
our new Colleagues, to understand what the STB is called upon to do. 
When the 104th Congress terminated the ICC, we were careful to not 
leave the rail freight industry operating in a vacuum. We entrusted the 
STB with the authority to regulate the nation's freight rail carriers, 
including authority over rail mergers and responsibility for protecting 
the rights of rail labor. Many people who have followed this issue 
during the past few Congresses know that I have not always been 
convinced that the STB has acted with the broadest possible 
understanding of the power I believe Congress intended it to have.
    Two relatively recent actions by the Board that I believe may 
demonstrate the appropriate level of concern for rail competition are 
the moratorium and subsequent rulemaking regarding rail mergers. As the 
industry has moved rapidly toward corporate consolidations that may 
further reduce the competitive nature of the rail freight hauling, the 
STB took action that may result in the Board giving a more searching 
and appropriate inquiry to railroads seeking approval of their mergers. 
With the rulemaking proceeding set to conclude later this year, I 
expect to give the Board's recommendations a searching inquiry of my 
own, and I look forward to discussing the matter further with Ms. 
Morgan.
    Once again, I want to express my thanks to Chairman Smith for 
devoting his time and intellect to these important issues. I know that 
in the months to come, as the Subcommittee considers oversight and 
reauthorization of the STB, we will continue to look to you for 
leadership on the issues that will come before us.
  

                                  
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