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88–036 PDF 2004

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

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JOHN MCCAIN, Arizona, Chairman

TED STEVENS, Alaska

CONRAD BURNS, Montana

TRENT LOTT, Mississippi

KAY BAILEY HUTCHISON, Texas

OLYMPIA J. SNOWE, Maine

SAM BROWNBACK, Kansas

GORDON SMITH, Oregon

PETER G. FITZGERALD, Illinois

JOHN ENSIGN, Nevada

GEORGE ALLEN, Virginia

ERNEST F. HOLLINGS, South Carolina

DANIEL K. INOUYE, Hawaii

JOHN D. ROCKEFELLER IV, West Virginia

JOHN F. KERRY, Massachusetts

JOHN B. BREAUX, Louisiana

BYRON L. DORGAN, North Dakota

RON WYDEN, Oregon

MAX CLELAND, Georgia

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

CONRAD BURNS, Montana

TRENT LOTT, Mississippi

KAY BAILEY HUTCHISON, Texas

OLYMPIA J. SNOWE, Maine

SAM BROWNBACK, Kansas

PETER G. FITZGERALD, Illinois

JOHN ENSIGN, Nevada

DANIEL K. INOUYE, Hawaii

JOHN D. ROCKEFELLER IV, West Virgina

JOHN F. KERRY, Massachusetts

JOHN B. BREAUX, Louisiana

BYRON L. DORGAN, North Dakota

RON WYDEN, Oregon

MAX CLELAND, Georgia

BARBARA BOXER, California

JEAN CARNAHAN, Missouri

(III)

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

(1)

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, includVerDate 03-FEB-2003 14:30 May 28, 2004 Jkt 088036 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\COMMERCE\88036.TXT SSC2 PsN: SSC2
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ing 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 longterm 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

3

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 satVerDate 03-FEB-2003 14:30 May 28, 2004 Jkt 088036 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 D:\COMMERCE\88036.TXT SSC2 PsN: SSC2
4

isfied 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.

5

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.

6

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

7

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 carrierspecific 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

8

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

9

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 railrelated 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 Boardimposed 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,

10

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 protecVerDate 03-FEB-2003 14:30 May 28, 2004 Jkt 088036 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 D:\COMMERCE\88036.TXT SSC2 PsN: SSC2
11

tions 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

12

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.

13

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.*

14

1The 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.

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.

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.

15

2Should 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.

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

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

16

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.

* The addenda referred to have been retained in the Committee files.

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 Acquisition3 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 Carmen4 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.*

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.

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

17

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

18

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

19

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 problemsolving 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.

20

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?

21

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?

22

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 exVerDate 03-FEB-2003 14:30 May 28, 2004 Jkt 088036 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 D:\COMMERCE\88036.TXT SSC2 PsN: SSC2
23

actly 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

24

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, beVerDate 03-FEB-2003 14:30 May 28, 2004 Jkt 088036 PO 00000 Frm 00028 Fmt 6633 Sfmt 6601 D:\COMMERCE\88036.TXT SSC2 PsN: SSC2
25

cause 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.]

(27)

APPENDIX

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 enduse 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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