John T. Gray **June 3, 2011**

**Senior Vice President - Policy & Economics**
**The Honorable Cynthia T. Brow n**  **Chief, Section of Administration Office of Proceedings**  **Surface Transportation Boar d**  **395 E Street, SW. Washington, DC 20423-0001** 
**Dear Ms. Brown: This submission is the AAR forecast of the third quarter 2011 All-Inclusive Index an**  **d Rail Cost Adjustment Factor, filed in Ex Parte No. 290 (Sub-No. 5) (2011-3)**  Quarterly Rai l Cost Adjustment Factor. **The versions of RCAF-related indices covered in this filing are: the All-Inclusive Index (initiated in the second quarter of 1985), the Unadjusted RCAF (produced**  **since October 1982), the Adjusted RCAF (first published in the second quarter of 1989), and the RCAF-5 (created by the STB in its Ex Parte No. 290 (Sub-No. 7) decision served October**  **3, 1996). The table below summarizes the third quarter 2011 results on the fourth quarte r**  **2007 base, and shows the percentage changes from the previous quarter**

**. 2011Q2**  **2011Q3 % Change**  **All-Inclusive Index 115.7 118.6 2.5 Preliminary RCAF 1.157 1.186 2.5**  **Forecast Error Adjustment 0.019 0.020 RCAF (Unadjusted) 1.176 1.206 2.6**  **Productivity Adjustment Factor 2.2487 2.2566 RCAF (Adjusted) 0.523 0.534 2.1**  **PAF-5 2.3752 2.3823 RCAF-5 0.495 0.506 2.2** 

**425 Third Street, SW** ! **Suite 1000** ! **Washington, DC 20024 Phone (202) 639-2319**  ! **Fax (202) 639-2499** ! **jgray@aar.org**

## Third Quarter 2011 All-Inclusive Inde x
Ex Parte No. 290 (Sub-No. 5) (2011-3) Quarterly Rail Cost Adjustment Facto r Surface Transportation Board

Policy and Economics Department Association of American Railroads

June 3, 2011

## Table of Contents

Subject Page
**Introductio n**  **. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Index Weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2**  **All-Inclusive Index - Third Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Forecast vs. Actual All Inclusive Index - First Quarter 2011 . . . . . . . . . . . . . . . . . 4** 
**Productivit y** 

**. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Rail Cost Adjustment Factor - Third Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 6**  **Appendices A Labor**  **B Fuel C Materials & Supplies**  **D Equipment Rents E Depreciation**  **F Interest G Other Expenses**  **H Railroad and Union Abbreviations**

Quarterly RCAF Association of American Railroads

## Introduction

**On January 2, 1985, the Interstate Commerce Commission (ICC) [now the Surface Transportation Board (STB)] adopted the All-Inclusive Index of Railroad Costs as the basis for the Rail Cost**  **Adjustment Factor (RCAF). The quarterly projection of railroad costs, as documented herein, emplo y**  **the All-Inclusive Index as required by the regulations. Also presented in this submission is the RCAF ,**  **b oth Adjusted and Unadjusted, as required by the ICC in its decision in Ex Parte No. 290 (Sub-No. 4)**  **,** R ail Cost Recovery Procedures - Productivity Adjustment, **served March 24, 1989. In addition, th e**  **AAR has included (but does not endorse) the RCAF-5, which was instituted by an STB decisio n**  **served October 3, 1996 in Ex Parte No. 290 (Sub-No. 7),** Productivity Adjustment - Implementation. **This quarter's projection of railroad costs is for the third quarter 2011.**

Quarterly RCAF Association of American Railroads Page 1

## Index Weights

RCAF Weights

Previous Current 2008 2009 Labor 30.2 % 34.7 % Fuel 25.2 14.9 Materials & Supplies 5.1 5.1 Equipment Rents 6.3 7.1 Depreciation 10.4 13.9 Interest 2.3 3.0 Other 20.5 21.3 **In the Ex Parte No. 290 (Sub-No. 2) final rules, issued in A pril 1981, the Interstate Commerce**  **Commission mandated that the weights of each major cost component be updated annually . These**  **"external" weights are calculated using data from Sc hedules 410 and 210 of the R-1 annual report**  **filed with the Surface Transportation Board by the Class I ra ilroads. The weights are typically**  **updated with the fourth quarter projection.**

**Reweighting of the index is accomplished by calculating bo th the current quarter (normally the**  **fourth) and prior (normally the third) quarter indexes w ith the new weights. The relative change**  **between the two quarters is then multiplied times the prior quarter (usually the third)**  linked **index. Use of this method ensures that the weight change, by i**  **tself, does not cause a change in the level of the All-Inclusive Index.**  **Internal weights in the labor and equipment rents compone nts are updated at the same time as the**  **external weights. When these weights are changed, they ar e also linked using the procedure**  **desc ri** **bed a**  **bove in**  **o r** **de r t**  **o e liminat**  **e th**  **e e ff**  **ec t**  **o f th**  **e c han**  **ge in**  **we i**  **g htin**  **g. The 2009 (current) and 2008 (previous) weights are sho**  **wn below. The previous (2008) weights were used for the fourth quarter of 2009 through the third quar** **ter of 2010. Beginning with the fourth quarter of 2010, the 2009 weights are used. The year 200**  **9 was different from recent years. Instead of increases in the expenses used for the calculation of wei**  **ghts, declining demand for freight service caused the variable portion of expenses to decrease. Fuel** **is probably the most variable expense category, and fuel expenses dropped even more because o**  **f a lower cost per gallon and improving efficiency for locomotives. Not surprisingly, Fuel's we**  **ight decreased from 25.2 percent to 14.9 percent. Labor expenses decreased, but did not decrease**  **as much as many of the other categories. Thus, Labor's weight increased from 30.2 percent to 3**  **4.7 percent. Depreciation and Interest expense have little or no variability, and those expenses actual**  **ly increased. Weights for those two categories increased. Changes for the remaining categories were less**  **than one percentage point.**

Quarterly RCAF Association of American Railroads Page 2

## All-Inclusive Inde x Third Quarter 2011

Forecast 2009 Previous Current Percent Weights 2011Q2 2011Q3 Change 1. Labor 34.7% 379.6 382.1 0.7 % 2. Fuel 14.9% 368.4 392.3 6.5 3. M&S 5.1% 249.0 257.8 3.5 4. Equipment Rents 7.1% 203.1 208.8 2.8 5. Depreciation 13.9% 204.6 206.1 0.7 6. Interest 3.0% 84.5 84.5 0.0 7. Other 21.3% 212.9 222.3 4.4 8. Weighted Average a. 1980 = 100 290.1 297.5 b. 1980 = 100 (linked) 284.4 291.7 1 c. 4Q07 = 100 115.7 118.6 2 2.5

1 To calculate the 1980 = 100 Linked Index: Index80 = (Current Index / Previous Index) * the Previous Quarter Linked Index = (297.5 / 290.1) x 284.4 = 291.7

2 To calculate the 4Q07 = 100 index: Index4Q07 = (Current Linked Index / 4Q07 Linking Factor) * 100 = 291.7 divided by 245.9 times 100 = 118.6
Indexes based on other periods: 4Q02 based index = 291.7 / 192.1 x 100 = 151. 8 4Q97 based index = 291.7 / 173.2 x 100 = 168. 4 4Q92 based index = 291.7 / 156.9 x 100 = 185. 9 4Q87 based index = 291.7 / 132.2 x 100 = 220. 7 **The components and values of the current and previous Al l-Inclusive Indexes are shown below.**  **Details of the construction of each component of the ind ex are contained in the Appendices.** 

Quarterly RCAF Association of American Railroads Page 3

## Forecast vs. Actual All-Inclusive Inde x First Quarter 2011

**Because of data availability, the forecast error adjustment has a two-quarter lag from each filing**

**. As shown below, the first quarter actual index of 112.8 is 2.0 index points above the forecas**  **t value of 110.8. Therefore, the forecast error adjustment for third quarter 2011 is 2.0 index points.**  2009 First Quarter 2011 Amt Weights Forecast Actual Difference 1. Labor 34.7% 378.3 378.3 2. Fuel 14.9% 296.5 324.6 3. M&S 5.1% 248.1 248.1 4. Equipment Rents 1 7.1% 203.9 206.2 5. Depreciation 13.9% 204.2 204.6 6. Interest 3.0% 84.5 84.5 7. Other 21.3% 208.6 212.6 8. Weighted Average a. 1980 = 100 277.9 283.2 b. 1980 = 100 (linked) 272.4 277.4 2 c. 4Q07 = 100 3 110.8 112.8 2.0 Forecast error 2.0 index points

1 2009 First Quarter 2011 W e i g h ts F orecast A ctua l C ar- Hi re 42

. 2% 186

. 3 18 5. 6 L ease R enta l s 57. 8% 208

. 6 212

. 6 W e i g h te d Average 199

. 2 201

. 2 W e i g h te d Average (li n k e d) 203

. 9 206

. 2

2 Linked actual index = (actual index / previous actual index) x previous linked actual index.

277.4 **=** 283.2 / 273.1 x 267.5

3 The 4Q07 based indexes are 1980 based indexes divided by the 4Q07 linking factor (245.9/100). O t h er li n ki ng factors are: 4Q02 = 192

. 1 ; 4Q9 7 = 1 7 3

. 2 ; 4Q92 = 1 5 6

. 9 ; an d 4Q8 7 = 132

. 2

.

Quarterly RCAF Association of American Railroads Page 4

## Productivity

Comparison of Output, Input, & Productivity

2005 - 2009 Output Input Productivity 1 Yea r Index Index Chan g es

( 1 ) ( 2 ) ( 3 ) 2005 1.021 0.956 1.068 2006 1.018 1.024 0.994 2007 1.000 0.996 1.004 2008 0.990 0.970 1.021 2009 0.847 0.861 0.984 Average 1.014 Corrected Previous Avg. (2004-2008) 1.012

Calculation of PAF and PAF-5
For 2005-2009, use fourth root of av g . productivitychan g e = 1.0035 For 2004-2008, use fourth root of av g . productivitychan g e = 1.0030

Quarter Yea r PAF PAF-5 Q1 2011 2.2409 2.3681 Q2 2011 2.2487 2.3752 Q3 2011 2.2566 2.3823 Q4 2011 2.2645 2.3894 Q1 2012 2.2724 2.3978 **On February 7, 2011, the Surface Transportation Board (STB ) served a decision in Ex Parte 290 (Sub**  **No. 4) which added the year 2009 to the Productivity Adju stment Factor (PAF) and removed the year**  **2004. This creates a geometric average annual product ivity change, for the five-year period 2005**  **through 2009, of 1.4 percent per year. The components of this average annual value are shown on the**  **following table in ratio format – therefore, 1.014 is th e same as an increase of 1.4 percent.**  **Productivity changes are calculated by multiplying each of the five productivity changes together and**  **taking the result to the one-fifth power. The quarter p roductivity adjustment factors (PAF) are**  **calculated by increasing the previous quarter's PAF b y quarterly versions of the annual rate, which are**  **the fourth root of the geometric average annual growth r ate. The difference between the PAF and the**  **PAF-5 is the timing of the five-year productivity trend.**

2004-2008

2005-2009 1 The values shown in Column 3 are based on full floa t calculations and may not exactly match numbers calculated using the rounded numbers display ed in Columns 1 and 2.

Quarterly RCAF Association of American Railroads Page 5

## Rail Cost Adjustment Facto r Third Quarter 2011

Previous Current Percent 2011Q2 2011Q3 Chan g e All-Inclusive Index 1 115.7 118.6 2.5 PreliminaryRCAF 2 1.157 1.186 2.5

Forecast Error Adjustment 3 0.019 0.020 RCAF ( Unad j usted ) 4 1.176 1.206 2.6

ProductivityAd j ustment Factor 5 2.2487 2.2566 RCAF ( Ad j usted ) 6 0.523 0.534 2.1

PAF-5 7 2.3752 2.3823 RCAF-5 8 0.495 0.506 2.2

1 See All-Inclusive Index on pa g e 3. 2 All-Inclusive Index divided b ythe All-Inclusive Index in the base period ( 100.0 )

. 3 The current fi g ure is from Forecast vs. Actual All-Inclusive Index in this filing (page 4). The previous quarter figure is shown in a similar section of the previous quarter's filing. 4 PreliminaryRCAF plus the forecast error ad j ustment. 5 See Productivityon pa g e 5. 6 RCAF ( Unad j usted ) divided b ythe ProductivityAd j ustment Factor ( PAF )

. 7 See Productivityon pa g e 5. 8 RCAF ( Unad j usted ) divided b ythe PAF-5. **Four RCAF values are presented in this filing. Two are not modified for productivity (Preliminary**  **RCAF and RCAF Unadjusted), and two incorporate a produc tivity calculation (RCAF Adjusted and**  **RCAF-5). The All-Inclusive Index and all four RCAF value s, plus the percent change for each, are**  **shown below. Note that the All-Inclusive Index is on a 2007 Q4=100 basis.** 

Quarterly RCAF Association of American Railroads Page 6

# AppendixesQuarterly Rail Cost Adjustment Factor Appendix A Page 1 of 3 

## Labo r Third Quarter 2011 **The third quarter 2011 Labor Index is forecast to incre ase 0.7 percent. Three items caused much of**  **the increase: cost-of-living allowance increases for thr ee national unions; cost-of-living allowance**  **increases for numerous independent unions; and much hig her annual profit sharing payments for one**  **railroad.**
Wage Rate Index **The Wage Rate Index portion of the Labor Index increase d 0.8 percent from the previous quarter.**  **Cost of living allowances and profit sharing caused the incre ase.**  Wage Increases: **There are only three national labor agreements in effec t that have any type of wage**  **increase scheduled for the third quarter, and those th ree unions will receive a cost-of-living**  **allowance increase of 28 cents effective July 1. Numerous independent agreements also have a**  **similar cost-of-livng allowance increase. One independe nt labor agreement has a 5 percent general**  **wage increase scheduled for July 1.** Lump Sums: **The third quarter lump sum rate increased 0.3 cents. This i ncrease was caused by**  **independent bonus payments paid by two railroads to qu alifying employees of unions that signed**  **new labor agreements between 2005 and 2010 – all of these agreements delayed the bonus payment**  **until July 1, 2011. An additional independent bonus was pa id by one railroad to selected employees**  **of one union that signed a new labor agreement, and thi s bonus varied depending upon employee**  **service years.** Back Pay: **The third quarter back pay rate increased 0.1 cents b ecause of a newly-received**  **independent labor agreement that included back pay as par t of the agreement.** 
Other: **In wages, "Other" contains the amortization of incentive compe nsation payments that a large**  **railroad makes each year to its dispatchers, yardmaster s, and engineers. Last year's payment has now**  **been completely amortized and removed from the labor rate. This year's payment, which is based on**  **profits in 2010, is much higher than the previous year, cau sing the hourly rate to more-than double.** 
Supplements Index **The Supplements Index increased 0.5 percent from the pre vious quarter. Almost all of the increase**  **was caused by a railroad's independent employee stock p lan contribution to employees of one of the**  **largest unions.** Health & Welfare: **The Health & Welfare rate was unchanged. Changes cause d by the addition of**  **one labor agreement to the index were too small to have an impact on this rate.** 

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix A Page 2 of 3 

## Labo r Third Quarter 2011

Railroad Retirement: **The Railroad Retirement rate increased 0.6 percent, as taxable income was**  **up slightly.** Unemployment Insurance: **The unemployment insurance hourly rate was unchanged**

**.** Other: **The "Other" category is a reflection of all other fring e benefits, and currently contain known**  **employer contributions to employee 401(k) accounts an d employer contributions to employee stock**  **plans that are recorded as fringe benefits. The hourly rate increased 4.4 cents, caused by one**  **company's annual match and another company's extra bo nus match included in the startup of a new**  **plan.**

Labor Index Calculation **As shown in Table A-1 on the next page, the 0.8 percent inc rease in the Wage Index and the 0.5**  **percent increase in the Supplements Index had a comb ined effect of a 0.7 percent increase in the**  **Labor Index. The linked third quarter 2011 index is 382. 1.** 

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix A Page 3 of 3 

## Labo r Third Quarter 2011

Table A-1 Labor Index Change 2011Q2 2011Q3 Percent A moun t Base Wa g e – Strai g ht Time & Pa yFor Time Not Worked $36.039 $36.203 0.5% $0.164 Ad j ustments: Lump Sum 0.225 0.228 1.3% 0.003 Back Pa y 0.037 0.038 2.7% 0.001 Other 0.087 0.199 128.7% 0.112 Total Wages 36.388 36.668 0.8% 0.280 Health & Welfare Benefits 8.631 8.631 0.0% 0.000 RR Retirement & Medicare 6.963 7.002 0.6% 0.039 Unemplo y ment Insurance 0.606 0.606 0.0% 0.000 Other 0.173 0.217 25.4% 0.044 Total Supplements $16.373 $16.456 0.5% 0.083 Total Labor $52.761 $53.124 Wage Index 1 311.4 313.8 0.8% Supplements Index 2 605.1 608.1 0.5% Total labor Index, 2009 Wei g hts 3 399.2 401.8 Labor Index (linked) 4 379.6 382.1 0.7%

1 1980 wage rate $11.685 2 1980 supplements rate $2.706 3 2009 weights: wages, supplements 70.1% 29.9% 4 2011Q3 linked Index = 2011Q2 linked x (2011Q3 / 2011Q2) = 379.6 x 401.8 / 399.2

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix B Page 1 of 1 

## Fuel Third Quarter 2011

Forecast Fuel Index 392.3 Chan g e from previous quarter forecast 6.5% Chan g e from previous quarter actual -3.9%

*** Diesel fuel used by locomotives is made from refined crude oil, and therefore usually has some price correlation.**   Heating oil and locomotive diesel fuel are part of a group of closely related products, commonly labeled as distillates, that differ mostly by their**  **sulfur content. Because of these similarities, these fuels are produced together and have similar pricing trends. The forecast for fuel is based on: (1) a survey of railro**  **ad fuel purchasing officers concerning current price and volume levels, (2) expectations of railroad pu** **rchasing officers based on their own forecast models and discussions with their major suppliers, and (3**  **) a consensus of petroleum industry experts and general business publications.**  **Crude oil futures prices were above $100 per barrel for the month of April, but fell below $100 in**  **May.* Inventories were above the average range duri** **ng that period. In early June, disappointing news relating to the U.S. economy contributed more downward**  **pressure on oil prices. Locomotive diesel fuel prices have trended upward (wi**  **th a few "dips") since a March 2009 "trough". April 2011 is the latest month available for locomotive dies**  **el fuel prices, but data for diesel fuel, heating oil and other distillates – which have a reasona**  **ble degree of correlation with locomotive diesel fuel – are available for later periods** . Data provide** **d by the U.S. Energy Information Administration show lower prices in recent weeks and inventories at the hi**  **gh-end of the average range. Railroads believe locomotive diesel fuel prices for July**  **2011 (Q3) will be 3.9 percent lower than the second quarter's (represented by April in the Fuel Inde**  **x) average price actually paid. However, because the second quarter**  forecast **was much too low, the third quarter 2011 forecast is 6.5 pe rcent**  **higher than the second quarter forecast.**

100 200 300 400 500 600 700 800

Jul Jan Jul Jan Jul Jan

Locomotive Diesel Fuel Prices

2009 2008 Index 7/15/90 = 100

2010 2011

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix C Page 1 of 1 

## Materials & Supplies Third Quarter 2011

2011Q3 Materials & Supplies Index = 257.8 2011Q2 Materials & Supplies Index = 249.0

Difference 8.8 basis points or 3.5 % **The third quarter 2011 Materials & Supplies Index incr eased 3.5 percent from its second quarter**  **value. The increase was caused by higher prices paid for t wo of the three major materials categories:**  **Metals and Miscellaneous products. The index is still below its all-time high of 258.8 set for the first**  **quarter of 2009.**

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix D Page 1 of 1 

## Equipment Rents Third Quarter 2011

2009 Percent Wei g ht 2011Q2 2011Q3 Chan g e Car Hire 42.2% 178.6 178.9 0.2 % Lease Rentals 57.8% 212.9 222.3 4.4 Wei g hted Avera g e 198.4 204.0 2.8 Wei g hted Avera g e ( Linked ) 203.1 208.8 2.8 **The Equipment Rents Index consists of two components – ca r hire and lease rentals. The**  **methodology used to create these two components and the final Equipment Rents Index are explained**  **below.** Car Hire **The car hire component is indexed using data from the Car Hire Accounting Rate Master (CHARM)**  **file. Car hire rates for the forecast quarter are esti mated based on data for the most recent month**  **available. For the first quarter, December 1 of the prev ious year is used. For the second, third and**  **fourth quarters; March 1, June 1, and September 1 are u sed, respectively. Using data retrieved from**  **the latest CHARM file, an average rate per car is develo ped. Next, those average rates are grouped**  **into car type categories to create an overall summary of c ar hire rates. The summary rates are then**  **compared from quarter to quarter to determine the Car Hi re Index.**  Lease Rentals **The lease rentals portion of the Equipment Rents Index us es the Producer Price Index for Industrial**  **Commodities less Fuel and Related Products and Power (PP I-LF). The Commission adopted this**  **surrogate in its decision served March 13, 1987. The AA R uses six years of historical data to derive**  **its forecast for the PPI-LF. The forecast is used not on ly for lease rentals, but also for the "Other"**  **component of the All-Inclusive Index. Appendix G discus ses the forecast in more detail.**  Equipment Rents Index Calculation **The table below calculates the Equipment Rents Index, which increased 2.8 percent. The third quarter**  **Car Hire portion of the Index increased 0.2 percent, cau sed by small increases (since March) for**  **privately-owned cars. A 4.4 percent increase for t he PPI-LF (see Appendix G) used as a proxy for**  **Lease Rentals, combined with the 0.2 percent increase fo r Car Hire, caused the Equipment Rents**  **Index to increase 2.8 percent.**

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix E Page 1 of 2 

## Depreciation Third Quarter 2011

Forecast of Depreciation Index ( 1982=100 ) 186.3 Forecast of Depreciation Index ( 1980=100 ) 206.1 Chan g e from previous quarter forecast 0.7% Chan g e from actual first month of previous quarte r 0.6% Chan g e from same quarter of prior y ear ( actual ) 1.0% **The Producer Price Index for Railroad Equipment (PPI-RE ) is used to index depreciation expense.**  **The PPI-RE is forecast using an ARIMA (Auto-Regressive Integrated Moving Average) process where**  **a statistical package picks the model that best fits the histo rical data set (see next page), and that model**  **is then used for the forecast. The historical data set conta ins 6 years of monthly data (a sample size of**  **72), where the most recent available data point is the fir st month of the quarter prior to the forecast**  **quarter. For a first quarter forecast, the most recent mon th of data available would be for October of**  **the prior year. For a second quarter forecast, Januar y would normally be the most recent period**  **available. April and July would be the most recent months a vailable for third and fourth quarter**  **forecasts, respectively. The output from the forecast m odel is shown on page 2 of this appendix on a**  **1982=100 basis. The figure forecast by the model reflec ts monthly PPI-RE figures that changed by**  **only small amounts during 2010, but had some bigger inc reases in 2011.** 

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix E Page 2 of 2 

## Depreciation Third Quarter 2011

PPI RAILROAD EQUIPMENT **Recommended model: Exponential Smoothing Forecast Model for PPIRE**  **Holt exponential smoothing: Linear trend, No seasonality** Smoothing Final C omponent We i ght Value **Level 0.91182 185.22 Trend 0.01997 0.27406**  Within-Sample Statistics **Sample size 72 Number of parameters 2 Mean 177 Standard deviation 7.584**  **R-square 0.9812 Adjusted R-square 0.981 Durbin-Watson 2.015 Ljung-Box(18)=20.03 P=0.6691**  **Forecast error 1.046 BIC 1.094 MAPE 0.004123 RMSE 1.031**  **MAD 0.7289**

Actual Values for the Most Recent 6 Periods: Date Actual **2010-11 184.200 2010-12 184.200**  **2011-01 185.000 2011-02 184.900**  **2011-03 185.200 2011-04 185.200** 
Forecasted Values Date 2.5 Lower Forecast 97.5 Upper **2011-05 183.354 185.499 187.644 2011-06 182.843 185.773 188.702** 
**2011-07 182.503 186.047 189.591 2011-08 182.254 186.321 190.388**  **2011-09 182.065 186.595 191.125** QTR AVG 182.274 186.321 190.368

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix F Page 1 of 1 

## Interest Third Quarter 2011

Interest Expense (Schedule 210) **Line 42 Total Fixed Charges**  **44 Contingent Interes t**  **less 22 Release of Premium on Funded Deb**  **t**
Average Total Debt (Schedule 200) **Line 30 Current Loans and Notes Payabl**  **e 39 Equipment Obligations and Other Long Term Debt Due Within One Yea** **r 41 Funded Debt Unmatured - Non-Curren** **t 42 Equipment Obligations - Non-Curren** **t 43 Capitalized Lease Obligatons - Non-Curren** **t 44 Debt in Default - Non-Curren** **t 45 Accounts Payable: Affiliated Companies - Non-Curren** **t 46 Unamortized Debt Premium - Non-Curren** **t**

2009 Interest Rate 6.63% 1980 Interest Rate 7.85% 2011Q3 Interest Index 84.5 2011Q2 Interest Index 84.5

Percent Change 0.0% **The Interstate Commerce Commission, in its decision ser ved February 28, 1989, revised the All**  **Inclusive Index methodology to include a specific intere st component, which is to track changes in**  **the average interest rate from year to year. The intere st rate is essentially the embedded cost of**  **debt, i.e., total interest expense divided by average to tal long term debt. The interest rate is**  **calculated for the most recent year and used until the next year's figures are available. Typically in**  **the fourth quarter filing, the interest rate is updated to the new level. The source for interest expense**  **is Schedule 210, column b, from the R-1 annual report. The lines used from current R-1 annual**  **reports are listed below. The source for average tot al debt is Schedule 200 from the R-1 annual**  **report. The sums of data from columns b and c (ending and beginning balances) are combined and**  **divided by 2 to compute an average balance. The line numbe rs are listed below. Beginning with**  **fourth quarter 2010, the Interest Index is based on data for 2009.** 

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix G Page 1 of 2 

## Other Expenses Third Quarter 2011

Forecast of Other Expense Index ( 1982=100 ) 198.3 Forecast of Other Expense Index ( 1980=100 ) 222.3 Chan g e from previous quarter forecast 4.4% Chan g e from actual first month of previous quarte r 3.1% Chan g e from same quarter of prior y ear ( actual ) 8.3% **The Producer Price Index for Industrial Commodities less F uels and Related Products and Power (PPI**  **LF) is used to index purchased services, casualties and ins urance, loss and damage, taxes (other than**  **income and payroll), general and administrative expense s, and lease rentals. These expenses, when**  **grouped together, are usually called "Other" expens es.**  **Like the PPI-RE, the PPI-LF is forecast using an ARIMA pr ocess on 6 years of monthly data (a sample**  **size of 72) with the most recent available monthly data b eing the first month of the quarter prior to the**  **forecast quarter. For a first quarter forecast, the most recent month of data available would be for**  **October of the prior year. For a second quarter foreca st, January would normally be the most recent**  **month available. April and July would be the most recent mon ths available for third and fourth quarter**  **forecasts respectively. The output from the foreca st model is shown on page 2 of this appendix for**  **1982=100. The figure forecast by the model for the third quarter reflects monthly PPI-LF figures that**  **are increasing at higher rates in 2011. Preliminary ind ications are (see chart) that recent forecasts may**  **have been slightly low, which would exacerbate the increase from the prior quarter forecast.** 

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix G Page 2 of 2 

## Other Expenses Third Quarter 2011

PPI INDUSTRIAL COMMODITIES LESS FUELS AND RELATED PRODUCTS AND POWER **Recommended model: Exponential Smoothing Forecast Model for PPILF**  **Multiplicative Winters: Linear trend, Multiplicative seasonality Confidence limits proportional to indexes**  Smoothing Final Component Weight Value **Level 1.00000 192.30 Trend 0.99847 1.4992**  **Seasonal 0.00396 Seasonal Indexes**  **January - March 1.00000 1.00000 1.00000 April - June 1.00000 1.00000 1.00000**  **July - September 1.00000 1.00000 1.00000 October - December 1.00000 1.00000 1.00000**  Within-Sample Statistics **Sample size 72 Number of parameters 3 Mean 174.5 Standard deviation 9.042**  **R-square 0.993 Adjusted R-square 0.9928 Durbin-Watson 1.952 **  Ljung-Box(18)=16.57 P=0.4472** **Forecast error 0.7657 BIC 0.8194 MAPE 0.003201 RMSE 0.7495**  **MAD 0.5624**

Actual Values for the Most Recent 6 Periods: Date Actual **2010-11 185.400 2010-12 186.300**  **2011-01 188.100 2011-02 189.800**  **2011-03 190.800 2011-04 192.300** 
Forecasted Values Date 2.5 Lower Forecast 97.5 Upper **2011-05 192.193 193.799 195.405 2011-06 191.710 195.298 198.887** 
**2011-07 191.983 196.798 201.612 2011-08 192.511 198.297 204.083**  **2011-09 193.179 199.796 206.413** QTR AVG 192.558 198.297 204.036

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix H Page 1 of 1 

## Railroad and Union Abbreviation s

Third Quarter 2011

Railroads **BLE Bessemer & Lake Erie Railroad (Part of CN's Grand Trunk Corp.) BNSF BNSF Railway Company**  **CC Chicago, Central & Pacific (Part of CN's Grand Trunk Corp. Sometimes noted as CC&P.) CN Canadian National Railway (Commonly known as CN, owns Grand Trunk Corporation.)**  **CNGT AAR's abbreviation for Grand Trunk Corporation (Almost all of CN’s U.S. operations.) CP Canadian Pacific (Also noted as CPR. Owns the U.S. Class I railroad Soo Line.)**  **CSX CSX Transportation D&H Delaware & Hudson (Canadian Pacific's U.S. operations, to be included beginning 2011Q4.)**  **DME Dakota, Minnesota & Eastern (Canadian Pacific's U.S. operations, to be included beginning 2011Q4.) DMIR Duluth, Missabe & Iron Range Company (Part of CN's Grand Trunk Corp.)**  **DWP Duluth, Winnipeg & Pacific Railway (Part of CN's Grand Trunk Corp.) EJE Elgin, Joliet & Eastern Railway (Part of CN's Grand Trunk Corp.)**  **GTW Grand Trunk Western Railroad (Part of CN's Grand Trunk Corp.) IC Illinois Central Railroad (Part of CN's Grand Trunk Corp.)**  **KCS Kansas City Southern Railway NS Norfolk Southern Combined Railroad Subsidiaries (a.k.a. Norfolk Southern Railway or NS Rail)**  **SOO Soo Line Railroad (the largest of Canadian Pacific's U.S. operations.) UP Union Pacific Railroad**  **WC Wisconsin Central and subsidiaries (Part of CN's Grand Trunk Corp.)** Major Unions Involved with Railroads **ATDA American Train Dispatchers Association BLET Brotherhood of Locomotive Engineers and Trainmen Div. of the International Brotherhood of Teamsters**  **BMWED Brotherhood of Maintenance of Way Employees Division of the International Brotherhood of Teamsters BRS Brotherhood of Railroad Signalmen**  **IAM International Association of Machinists and Aerospace Workers IBBM International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers & Helpers**  **IBEW International Brotherhood of Electrical Workers NCFO National Conference of Firemen and Oilers**  **SMW Sheet Metal Workers’ International Association TCU Transportation Communication International Union**  **TCU-Carmen Brotherhood of Railway Carmen Division of the Transportation Communications International Union UTU United Transportation Union**  **UTU-Yard United Transportation Union Yardmaster Department (also noted as UTU-YMD)** Predecessor Unions (Some AAR databases use these old abbreviations.) **BLE Brotherhood of Locomotive Engineers (predecessor to BLET) BMWE Brotherhood of Maintenance of Way Employees (predecessor to BMWED)**  **BRC Brotherhood of Railway Carmen (predecessor to TCU-Carmen) IBFO International Brotherhood of Firemen and Oilers (predecessor to NCFO)** 

Association of American Railroads