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41–210 PDF 2008

INVESTMENT IN THE RAIL INDUSTRY 

(110–104) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

RAILROADS, PIPELINES, AND HAZARDOUS 

MATERIALS 

OF THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

MARCH 5, 2008 

Printed for the use of the 

Committee on Transportation and Infrastructure 

( 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE 

JAMES L. OBERSTAR, Minnesota, Chairman 

NICK J. RAHALL, II, West Virginia, Vice 

Chair 

PETER A. DEFAZIO, Oregon 

JERRY F. COSTELLO, Illinois 

ELEANOR HOLMES NORTON, District of 

Columbia 

JERROLD NADLER, New York 

CORRINE BROWN, Florida 

BOB FILNER, California 

EDDIE BERNICE JOHNSON, Texas 

GENE TAYLOR, Mississippi 

ELIJAH E. CUMMINGS, Maryland 

ELLEN O. TAUSCHER, California 

LEONARD L. BOSWELL, Iowa 

TIM HOLDEN, Pennsylvania 

BRIAN BAIRD, Washington 

RICK LARSEN, Washington 

MICHAEL E. CAPUANO, Massachusetts 

TIMOTHY H. BISHOP, New York 

MICHAEL H. MICHAUD, Maine 

BRIAN HIGGINS, New York 

RUSS CARNAHAN, Missouri 

JOHN T. SALAZAR, Colorado 

GRACE F. NAPOLITANO, California 

DANIEL LIPINSKI, Illinois 

DORIS O. MATSUI, California 

NICK LAMPSON, Texas 

ZACHARY T. SPACE, Ohio 

MAZIE K. HIRONO, Hawaii 

BRUCE L. BRALEY, Iowa 

JASON ALTMIRE, Pennsylvania 

TIMOTHY J. WALZ, Minnesota 

HEATH SHULER, North Carolina 

MICHAEL A. ACURI, New York 

HARRY E. MITCHELL, Arizona 

CHRISTOPHER P. CARNEY, Pennsylvania 

JOHN J. HALL, New York 

STEVE KAGEN, Wisconsin 

STEVE COHEN, Tennessee 

JERRY MCNERNEY, California 

LAURA A. RICHARDSON, California 

VACANCY 

JOHN L. MICA, Florida 

DON YOUNG, Alaska 

THOMAS E. PETRI, Wisconsin 

HOWARD COBLE, North Carolina 

JOHN J. DUNCAN, JR., Tennessee 

WAYNE T. GILCHREST, Maryland 

VERNON J. EHLERS, Michigan 

STEVEN C. LATOURETTE, Ohio 

FRANK A. LOBIONDO, New Jersey 

JERRY MORAN, Kansas 

GARY G. MILLER, California 

ROBIN HAYES, North Carolina 

HENRY E. BROWN, JR., South Carolina 

TIMOTHY V. JOHNSON, Illinois 

TODD RUSSELL PLATTS, Pennsylvania 

SAM GRAVES, Missouri 

BILL SHUSTER, Pennsylvania 

JOHN BOOZMAN, Arkansas 

SHELLEY MOORE CAPITO, West Virginia 

JIM GERLACH, Pennsylvania 

MARIO DIAZ-BALART, Florida 

CHARLES W. DENT, Pennsylvania 

TED POE, Texas 

DAVID G. REICHERT, Washington 

CONNIE MACK, Florida 

JOHN R. ‘RANDY’ KUHL, JR., New York 

LYNN A WESTMORELAND, Georgia 

CHARLES W. BOUSTANY, JR., Louisiana 

JEAN SCHMIDT, Ohio 

CANDICE S. MILLER, Michigan 

THELMA D. DRAKE, Virginia 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

ROBERT E. LATTA, Ohio 

(II) 

SUBCOMMITTEE ON RAILROADS, PIPELINES, AND HAZARDOUS 

MATERIALS 

CORRINE BROWN, Florida Chairwoman 

JERROLD NADLER, New York 

LEONARD L. BOSWELL, Iowa 

GRACE F. NAPOLITANO, California 

NICK LAMPSON, Texas 

ZACHARY T. SPACE, Ohio, Vice Chair 

BRUCE L. BRALEY, Iowa 

TIMOTHY J. WALZ, Minnesota 

NICK J. RAHALL II, West Virginia 

PETER A. DEFAZIO, Oregon 

JERRY F. COSTELLO, Illinois 

EDDIE BERNICE JOHNSON, Texas 

ELIJAH E. CUMMINGS, Maryland 

MICHAEL H. MICHAUD, Maine 

DANIEL LIPINSKI, Illinois 

VACANCY 

JAMES L. OBERSTAR, Minnesota 

(ex officio) 

BILL SHUSTER, Pennylvania 

THOMAS E. PETRI, Wisconsin 

WAYNE T. GILCHREST, Maryland 

STEVEN C. LATOURETTE, Ohio 

JERRY MORAN, Kansas 

GARY G. MILLER, California 

HENRY E. BROWN, JR., South Carolina 

TIMOTHY V. JOHNSON, Illinois 

TODD RUSSELL PLATTS, Pennsylvania 

SAM GRAVES, Missouri 

JIM GERLACH, Pennsylvania 

MARIO DIAZ-BALART, Florida 

LYNN A. WESTMORELND, Georgia 

JOHN L. MICA, Florida 

(ex officio) 

(III) 

(V) 

CONTENTS Page 

Summary of Subject Matter .................................................................................... vii 

TESTIMONY 

Amin, Snehal, Partner, The Children’s Investment Fund ................................... 37 

Boardman, Joseph H., Administrator, Federal Railroad Administration, U.S. 

Department of Transportation ............................................................................ 9 

Buttrey, W. Douglas, Surface Transportation Board Member ............................. 9 

Giles, John E., Chief Executive Officer, Rail America ......................................... 37 

Greenwood, Robin, Assistant Professor, Harvard Business School ..................... 37 

Mulvey, Vice Chairman Francis P., Surface Transportation Board .................... 9 

Nottingham, Charles D., Chairman, Surface Transportation Board ................... 9 

Ward, Michael, Chairman, President and CEO, CSX Corporation ..................... 37 

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS 

Costello, Hon. Jerry F., of Illinois .......................................................................... 82 

Rahall, Hon. Nick J., of West Virginia .................................................................. 84 

PREPARED STATEMENTS SUBMITTED BY WITNESSES 

Amin, Snehal ............................................................................................................ 86 

Boardman, Joseph H. .............................................................................................. 132 

Buttrey, W. Douglas ................................................................................................ 138 

Giles, John E. ........................................................................................................... 139 

Greenwood, Robin .................................................................................................... 144 

Mulvey, Francis P. ................................................................................................... 166 

Nottingham, Charles D. .......................................................................................... 180 

Ward, Michael J. ...................................................................................................... 188 

SUBMISSIONS FOR THE RECORD 

Amin, Snehal, Partner, The Children’s Investment Fund, responses to questions from the Subcommittee .............................................................................. 127 

Nottingham, Charles D., Chairman, Surface Transportation Board, response 

to request from the Subcommittee ...................................................................... 187 

Ward, Michael, Chairman, President and CEO, CSX Corporation, response 

to request from the Subcommittee ...................................................................... 207 

ADDITIONS TO THE RECORD 

Aventine Renewable Energy, Inc., Ronald H. Miller, President and CEO, 

written statement ................................................................................................. 209 

Big Bend Agri-Services, Inc., Monty C. Ferrell, President, written statement .. 211 

CEMEX, Cliff Kirkmyer, Vice President, Aggregate Division, written statement ...................................................................................................................... 213 

CONSOL Energy, Inc., Peter B. Lilly, President, Coal Group, written statement ...................................................................................................................... 215 

The Detroit Edison Company, Robert J. Buckler, President and CEO, written 

statement .............................................................................................................. 217 

Eka Chemicals, Inc., Curt H. Warfel, Manager, Logistics and Distribution, 

written statement ................................................................................................. 219 

GROWMARK, Inc., Dan Vest, Manager, Government Relations, written statement ...................................................................................................................... 221 

International Chemical Company, Brad A. Thomas, President, written statement ...................................................................................................................... 222 

Magnum Coal Company, Paul H. Vining, CEO, written statement .................... 224 

Mosaic, Richard Krakowski, Vice President-Supply Chain, written statement . 226 

Page

VI 

Patriot Coal Corporation, Michael V. Altrudo, Senior Vice President, CMO, 

written statement ................................................................................................. 228 

vii 


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viii 


41210.002
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41210.003
x 


41210.004
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41210.005
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41210.006
xiii 


41210.007
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41210.008
(1) 

HEARING ON INVESTMENT IN THE RAIL 

INDUSTRY 

Wednesday, March 5, 2008 

HOUSE OF REPRESENTATIVES

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, SUBCOMMITTEE ON RAILROADS, PIPELINES, AND HAZARDOUS

MATERIALS, Washington, DC. 

The Subcommittee met, pursuant to call, at 11:00 a.m., at 2167 

Rayburn House Office Building, the Honorable Corrine Brown of 

Florida [chairman of the Subcommittee] presiding. 

Ms. BROWN OF FLORIDA. The Subcommittee on Railroads, Pipelines, and Hazardous Materials will come to order. 

The Subcommittee is meeting today to hear testimony on the 

railroad industry. I have traveled on numerous Transportation 

Committee CoDels throughout the world to meet with transportation officials and compare and discuss rail and infrastructure systems. Regardless of where I go, whether it is in Russia or other 

surrounding Eastern European countries, France, Spain, England, 

or Asia, the transportation ministers and local transportation officials always tell me that the freight rail system in the United 

States is the best in the world. We are number one. 

Freight railroads play a critical role in our Nation’s economy, and 

their infrastructure provides vital commuter and passenger rail 

service throughout the Country. They employ over 180,000 people 

and have spent over $10 billion over the last eight years to expand 

tracks and precious rolling stock. Freight railroads are also charged 

with transporting hazardous material and carry valuable cargo for 

the U.S. military. 

Further, they are key solutions to improving the environment 

and dealing with the future growth expected throughout our transportation system. 

I am proud to say that CSX is headquartered in my home city 

of Jacksonville, Florida. They employ over 5,000 people who play 

a vital role in the local and state economy. The company is also a 

community partner making numerous donations to local charities 

and performing community service throughout the city. 

Unfortunately, hedge funds and other short-term investors do not 

often have the long-term interest of the railroad interests in mind. 

Their demands for cuts in capital expenditures and large rate increases will only serve to slow capacity growth and hurt the industry and the economy in the long run. Because they cannot relocate 

railroads to foreign countries for cheap labor, short-term investments will squeeze railroads for quick returns at the expense of the 

2 

long-term health and competition of the companies and its employees. A short-sighted money grab like this recalls memories of the 

action leading up to the crisis as we have today. 

The Children’s Investment Fund, TCI, who has testified that 

they have been referred to as a locust by the German government 

and have met serious resistance from the Japanese government 

where they are trying to force higher energy prices on Japanese 

citizens throughout their partnership with J-Power. 

In the past, Congress has acted to prevent foreign companies 

from managing U.S. ports operations and U.S. airlines because 

they want to protect the critical infrastructure from potential 

harm. The Nation’s freight railroads are of critical importance to 

keeping America’s economy moving, and this critical role can be 

crippled if unknown foreign ownership or short-sighted investors 

take control of any of them. 

I personally believe that unknown and unaccountable hedge 

funds controlling a freight railroad is something that should be 

scrutinized by Congress and the Federal agencies that have jurisdiction over this type of transaction. I hope this hearing will be the 

first step in taking a closer look at the long-term effect on the railroad industry and the economy as a whole. 

With this, I will welcome today’s panelists, and thank you for 

joining us. I look forward to the hearing and the testimony. Before 

I get to Mr. Shuster, I ask that Members be given 14 days to revise 

and extend their remarks and to be permitted to submit an additional statement and material from Members and witnesses. Without objection, so ordered. 

I yield to Mr. Shuster for his opening statement. 

Mr. SHUSTER. Thank you, Madam Chairman. Thank everybody 

for being here today. It is, I think, an indication—we have a full 

room and the national media is covering this hearing—of the importance of this hearing today. 

The last time we had I considered one of the most important 

hearings we had was on how to fund our highway and transportation needs in this Country, but everybody seemed to be down the 

hall listening to Roger Clemens and the Baseball League assessing 

steroids. So I am glad to see that the focus of the attention of the 

media is on an issue like this that is significant, and I am glad to 

have a full room here today listening to the testimony. 

I am, obviously, very interested in this hearing today. Thee are 

some serious issues that we need to address to get answers for, and 

I hope this hearing will go a long way to doing that today. Our Nation’s freight railroads are the envy of the world. They are one of 

the very few that do not receive Government subsidies and, in fact. 

have been built on private capital. They provide cost-effective service, as I said, without Government subsidies, which is extremely 

important; and they have had a great safety record, and it continues to improve. 

Given the efficiencies of our railroads, it is no surprise that they 

have attracted the attention of major investors from in this Country and outside this Country. Recently, there have been differences, 

some questions about the impact of hedge funds on investments in 

our railroads. While not all hedge funds, I think, can be all categorized as bad, there certainly have been some players out there 

3 

that have done some serious damage to some industries, and they 

do raise concerns as to their long-term investments, or are they 

long-term investments? 

But at the end of the day, hedge funds are accountable to their 

bottom line and to their investors, as are the railroads accountable 

to their shareholders. The railroads also have an important distinction, in that they have a common carrier obligation and perform 

many vital services, including national security interests. Some of 

these do not add positively to the bottom line of a railroad, and 

they certainly need to be considered, and we need to have the railroads continuing to perform those services for our Nation. 

Our Nation and the economy depends on the free flow of capital, 

and I think we should encourage private capital to continue to pour 

into our rail system and all transportation entities in our Country. 

We do have many safeguards in place to ensure that the public interest is served, the STB rail rates and service quality; the FRA 

ensures that we have a safe rail system; and the Congress has a 

duty to vigorously oversee and have oversight to these many concerns. 

While I come into this hearing with an open mind to hear what 

everyone has to say, I still have great concerns and am going to 

be very interested in hearing from our panelists. As I said, I want 

to welcome everybody here today and, with that, yield back to the 

Chairwoman. 

Ms. BROWN OF FLORIDA. I am going to yield to Mr. Mica, who is 

the Ranking Member of the Full Committee for opening remarks. 

Mr. MICA. Well, thank you for yielding and also thank you and 

Mr. Oberstar, Mr. Shuster, for agreeing to hold this important 

hearing, and it is on a very critical topic. Investment in our Nation’s rail industry and how we go about it is very critical to the 

future of the industry. 

Unfortunately, right now a lot of our Nation’s infrastructure is 

up for grabs to the highest bidder, and with weak dollar and cashrich nations like China and some of the other oil-producing countries, they have an incredible amount of resources to purchase 

America’s highways, rail, and other key infrastructure, and they 

can be purchased at deeply discounted prices if you just take a 

minute to look at the exchange rates. 

Currently, it is very difficult to assess how much foreign capital 

has actually been invested in our railroads and our infrastructure. 

We do not have a good mechanism of tracking all of that. There 

are some restrictions on investment, as you know, on aviation and 

ownership, but again I think with the amount of money that is 

available and our Nation’s infrastructure up for sale, it raises a 

host of fundamental national policy questions. 

It is also very difficult for Government to actually assess and 

evaluate the sincerity of investments, various investment schemes, 

and whether or not investments are being made for short term or 

long-term investment and many people are differently motivated in 

investing and spending that cash on our discounted infrastructure. 

Today’s hearing, I think, is a good exercise because it will focus 

attention on some of the concerns that have been raised about protecting public interests in our Nation’s rail and infrastructure 

projects. Currently, as I said, there are little or no restrictions on 

4 

investment and rail. We do live in a global economy, and we need 

to secure and also to attract international sources of financing in 

the future to assist in building our Nation’s infrastructure. 

The need to sort out our policy and how that is allowed, permitted, and the rules for the game, also, have to be established. 

But rail, as you know by its nature, requires huge capital investments. It does not have the same pattern of competitiveness of 

other industries, and that is why I think, again, this is a very important hearing. 

While the STB may monitor rail rates and service quality, investments in rail is still a major public policy consideration. Congress 

needs to review what is taking place, and Congress needs to decide 

what terms for investment should be in place to protect pubic interest. But what we do not want to do is stop vital private sector financial investment and capitalization. 

I am also pleased that in the second panel, I will not be here, 

I have to leave shortly, we have Michael Ward, who is the CEO for 

CSX which is headquartered in Ms. Brown’s district and runs 

through my district. He has acquired that railroad and made some 

dramatic improvements, and is in the process of making some dramatic improvements that the investors and stockholders in that 

company have interest in. I have been pleased to work with him 

in that effort to make his railroad even more successful, even more 

safe, and operating in the public interest through our district and 

State and Nation. 

So I thank you again for allowing me a few minutes, and I appreciate your work on this important subject. 

Ms. BROWN OF FLORIDA. Mr. Space? 

Mr. SPACE. Thank you, Madam Chairwoman. Thank you as well 

for calling this hearing. I would like to thank the Ranking Member 

for his efforts as well. 

I come from Southeastern Ohio, an exclusively rural district that 

has been hit very hard by this transitioning economy. We suffer 

from a lot of challenges in this part of Ohio, most of which is encompassed within Appalachia. Lack of access to adequate rail infrastructure is one of those significant challenges. 

This is negatively impacting our ability to bring jobs to the region; it is negatively impacting our ability to maintain many of the 

present jobs we have. The cost of the transportation of goods, 

whether they be raw materials coming in or finished product going 

out, is a very significant part of the production process, whether 

you are a miner, a farmer, or manufacturer. These mounting costs 

are making it more and more difficult for us to compete. 

I think that this body, and certainly the industry itself, has an 

obligation to do more to improve the infrastructure of rail in Ohio. 

I understand that CSX, which has a very large presence in Ohio 

and in my district, is planning two new major and much needed 

infrastructure improvements in Ohio, and according to the Ohio 

Rail Development Commission, CSX’s infrastructure investment 

plan in Ohio is estimated to be about $140 million. That is all good. 

The problem is we have some very significant concerns over 

statements registered by the Children’s Investment Fund, a significant shareholder in CSX, that would seem to indicate its intent to 

undertake a corporate takeover as well as an intent to freeze capVerDate Aug 31 2005 19:13 May 06, 2009 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 P:\DOCS\41210 JASON
5 

ital investments. It seems that the significant rate of return that 

has been accelerating in recent years is not enough. This causes 

grave concerns to me and many of the manufacturers, miners, and 

farmers that I represent. 

A note from an October 16th, 2007 letter that TCI sent to the 

CSX board of directors and which was published on its website indicated its advocation that CSX management make a number of 

changes to its current operations and included among those recommended changes, I find it interesting, were two in particular. 

One was to freeze capital investment and another was to improve 

its relationship with Government regulators, including Congress. 

And I find those two terms mutually exclusive, given the strong 

need to expand rail infrastructure in Ohio, in particular rural Ohio. 

The rail industry, as I mentioned, is critical to our Nation’s infrastructure and economic development and, by way of extension, to 

our national security. As a Member of Congress, I believe we have 

a responsibility to make sure that the rail industry is able to function properly. Certainly, problems that affect rail service do not 

simply affect the rail industry itself but the profit margins of many 

other industries and the livelihood of many people in Southeastern 

Ohio. 

I think this Committee needs to make sure we are looking out 

for the profit margins of everyone, not simply rail, and with that 

I yield back. 

Ms. BROWN OF FLORIDA. Mr. Cummings? 

Mr. CUMMINGS. Thank you very much, Madam Chairlady. I certainly thank you for calling this hearing to consider the increasing 

investments being made by hedge funds in U.S. railroads. 

Our Nation’s railroads have recently been enjoying stronger financial help than they have experienced in decades. Growing interest in the railroads shown by major Wall Street investors is, in 

fact, a testament to that success. However, since railroads are such 

a critical part of our Nation’s transportation infrastructure and because they carry a wide variety of cargoes, including hazardous cargoes through our Nation’s communities, it is imperative that investments in railroads be closely scrutinized to ensure that they 

are in the best interests of the railroads, the safety of our communities, and the transportation needs of our Nation. 

Such scrutiny is exceedingly important when the investments are 

being made by entities like hedge funds that are not subject to the 

same strict regulatory oversight that other types of investors face 

from the Federal Government. Of particular concern to me, and I 

know to Chairwoman Brown, is the apparent effort by the Children’s Investment Fund, a hedge fund registered in the Cayman Islands, to gain substantial measurement control over CSX Railroad 

Corporation for the purpose of making quick returns on stock 

transactions. 

While I certainly have questions about some of CSX’s business 

practices, I am, like many of my colleagues, deeply troubled by the 

possibility of foreign entities owning, or owning significant stakes 

in, major pieces of United States transportation infrastructure 

passing through the heart of our Nation’s communities. 

In this case, the Children’s Investment Fund is known for employing aggressive tactics to maximize shareholder value even to 

6 

the detriment of the growth and success of the underlying business 

concern. The Fund appears now to be attempting to employ these 

tactics with CSX. For example, the Fund has suggested that in 

order to yield short-term stock gains, CSX should freeze capital investments or should conduct stock-related transactions that can 

leave a company with a credit rating at the junk bond status. 

In 2001, my district lived through the terrible Howard Street 

tunnel fire which was caused when a CSX train carrying flammable hazardous material derailed in a tunnel and ignited. The resulting fire burned for days in downtown Baltimore, and the cleanup after the accident cost some $12 million. 

More recently during this past fall, CSX experienced small but 

disturbingly frequent train derailments in the Baltimore area. Like 

any railroad, CSX Corporation must have as a top priority ensuring 

the safety and security of the communities through which its cargo 

travels. Decreased capital investments and declines in corporate 

creditworthiness will not enable CSX to fulfill this duty, and any 

entity and particularly a foreign entity that proposes to increase 

stockholder value at the potential risk of the safety and security of 

my constituents will face my strong and vigorous opposition. 

Similarly, I note that though the railroads have made significant 

economic gains in recent years, any return to former habits of 

under-investing in the railroads will immediately threaten the 

hard-won gains. Today’s hearing, to your credit, Madam Chairlady, 

will give us an opportunity to hear from parties involved in operating and regulating railroads, including CSX Corporation, the 

Federal Railroad Administration, and the Surface Transportation 

Board regarding the potential impact of hedge fund investments 

may have in our Nation’s railroads. 

I look forward to hearing this testimony and to assessing, under 

the leadership of our Chairwoman Congressman Brown, whether 

Congressional action is needed to protect our Nation’s railroads 

from potentially unscrupulous investment practices and, with that, 

I yield back. 

Ms. BROWN OF FLORIDA. Thank you. Now, I would like to yield 

to the Chairman of the Full Committee, Mr. Oberstar, who is really 

the transportation guru of the whole world. 

Mr. OBERSTAR. Oh, my goodness. Thank you, Madam Chair, but 

I don’t know if I want that weight on my shoulders. But you are 

very kind. Thank you for convening this hearing. 

History is important as we consider the subject matter of today’s 

hearing on hedge funds and private equity funds. It reminds me of 

a hearing held in this very room 23 years ago by our former Full 

Committee Chairman and Subcommittee Chairman then of the 

Aviation Subcommittee, Mr. Mineta. The hearing was entitled, To 

Regulate Attempts to Acquire Control of Airlines. Then-Chairman 

Mineta called the hearing in response to efforts of Mr. Carl Ikon 

to control TransWorld Airlines, at the time one of the Nation’s premier air carriers. 

In the course of that hearing, Mr. Ikon, seated right at that hearing, made commitments to the Members of the Subcommittee about 

what he would do once he took control of the airline. Those assurances led the Committee and Congress that, generally—there was 

quite a substantial outcry from among our colleagues about that 

7 

potential takeover—to defer action on the bill. The bill’s title was 

Preservation of International Air Service Act. It would require the 

Department of Transportation to review pending airline acquisitions by Wall Street investors. 

The wheel turns, seems to come around to the same place, a revolution described as a turn in the same direction until you come 

back to the point where you started, the G.K. Chesterton description. Mr. Ikon failed to abide by the commitments. Once he took 

control of TWA he sold off a billion four hundred million dollars in 

assets, gates, aircraft, their trans-Atlantic route. They had a nonstop from St. Louis to London Heathrow, a privileged route, a valuable route. He sold it for $4 million to American Airlines. They 

made the money back by the end of that year, it was so valuable 

a service. 

That eliminated TWA’s ability to compete in the aviation market. 

It took St. Louis out of international service; it diminished the 

value of St. Louis as a hub, as a city that could compete in the national/international marketplace. 

And then, what did he do with that? Did he reinvest it in TWA? 

No. He took the cash, diverted the assets to other investments that 

Mr. Ikon owned, Texaco, and other private investments of Ikon’s. 

And while he committed to improving his relationship with labor, 

by the end of 1993 TWA’s employees were imploring the Committee 

to do something to get him out, and we finally did. We made him 

personally responsible for the retirement plan, and rather than do 

that he left TWA. 

But he took with him 10 years worth of frequent flier miles for 

himself, his family, for whomever else he chose to distribute those 

valuable assets to. That is the lesson that sticks in my mind as we 

begin this hearing, a bad taste in the mouth. 

The Children’s Investment Fund—I have had a visit, personally, 

with its founder—says there are long-term value-oriented investment fund. They would like CSX to take a number of steps that, 

personally, I find disconcerting. Diverting capital expenditure investment for stock buy-backs; freezing capital spending in what 

they call an uncertain regulatory environment, and I expect to 

have a lively discussion about that subject later on. 

Now, these private equity funds often have different priorities 

than the company whose assets they are acquiring, or have acquired, or have a significant stake in. And those priorities in this 

case may conflict with the long-term viability of a railroad. An investor often commits his or her money to a hedge fund for a period 

of time, one to five years, expects a reasonable return on that investment. That puts pressure on the Fund to provide a maximum 

return on the investment within that window of time. 

Now, fortunately, on the Surface Transportation Board, we have 

some skilled members who understand these issues, especially Mr. 

Mulvey, who has a Ph.D. in railroad economics and served on this 

issue for 25, 30 years. He knows the subject matter, and you are 

not going to hoodwink him. But there are a lot of people who do 

not have that kind of experience. That is why we have these hearings. 

So short-term gains against long-term view, the railroad has 

been around for 150 years, and the Federal Government, as we disVerDate Aug 31 2005 19:13 May 06, 2009 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 P:\DOCS\41210 JASON
8 

played in the hearing on the Rail Competition Bill, between 1851 

and 1871 gave the railroad 173 million acres of public land for the 

public use, convenience, and necessity, and gave the Railroad the 

rights to the minerals, the timber, and, as it turned out, oil and 

gas and coal, and the right to sell that property as their own, 

which, in many cases they did. 

The public has a great interest in the viability of the railroads. 

It knitted the Country together from east to west and from north 

to south, provided a new measure of mobility. Today they account 

for over 40 percent of freight ton miles. It is more than any other 

mode. They deliver nearly 70 percent of all coal; they deliver 70 

percent of the automobiles produced in this Country. There are lots 

of other factors, but I do not think that those hedge fund investors 

are looking at the long-term investment requirements of the railroads. 

And I remember just 15 years ago when Rob Krebs of BNSF was positioning his railroad to make $2 billion or $3 billion of investment in its roadbed and its rolling stock capital and was told by 

Wall Street, oh, no, no, you can’t do that. You have to return the 

money to shareholders. And had they made the investments then, 

they would be in a much stronger position than they are today, and 

that goes for the other railroads. 

So I think, Madam Chair, this is a very critical hearing that 

comes at a critical time when we have these—just as we had with 

aviation—investments that divert the energy and the focus and the 

purpose of transportation. Railroads are facing that issue today. 

Ms. BROWN OF FLORIDA. Thank you, Mr. Chairman. 

Mr. DeFazio will be our last speaker before we hear from the 

panel. 

Mr. DEFAZIO. Thank you, Madam Chair. Thank you for calling 

this extraordinarily important hearing. 

I think there might be one place for agreement in the room no 

matter which side of this issue you are on in terms of the investment, is that it would be hard to disagree with the fact that rail 

is the most efficient way to move freight throughout many routes 

which are incredibly congested in America; and it is an incredibly 

valuable asset that need to be optimally utilized, and I think if we 

start at that point. then we have to determine what these investments mean toward enhancing that capability. 

And I am particularly concerned and share a number of the concerns raised by the Chairman and others here today about the difference between a patient capital and, essentially, speculative 

short-term capital. We do not need speculative short-term capital 

to invest in the Nation’s critical infrastructure, including rail, but 

we do need patient capital. I think we do need better coordination 

and perhaps partnership in working with the Federal Government 

between existing railroads. We need to look at some of, and revisit 

some of the deregulation which is a historic artifact now because 

of the closure of a line in my district. 

I spent time reading of some of the procedures and rules and regulations regarding feeder line applications and the various forms of 

abandonment, and they were written in a different era with a different industry and really do not apply to today’s world, or should 

not apply, but they do. And we need to revisit those. 

9 

Certainly, I have heard complaints as recently as this morning 

from captive shippers, so there are a host of issues before this Committee that are extraordinarily important. The Chairwoman traveled with me recently in a Surface Subcommittee to Europe where 

we saw extraordinary variance in terms of investment. We saw in 

Britain where their first deregulation was disastrous, and then now 

they have put together a non-profit to manage their rail bed and 

do have a vibrant and competitive rail industry, more passenger 

than freight than we do, and with the private sector paying a fair 

rate of return for the use of that. 

We saw, elsewhere in Europe other very enhanced rail investments being made through, you know, public-private partnerships 

or public investment, and we need to come to terms with those 

issues here in United States. But I can say, unequivocally, the one 

thing we do not need and we perhaps need to consider fitness 

standards for anyone who acquires over a certain percentage of 

railroads assets, you know, something that we used to finally get 

Frank Lorenzo out of destroying airlines after it had gone 

through—how many did he go through? Three. Three before we got 

rid of him. We do not need those kind of characters involved in our 

rail system. It has enough problems. We want to make it better. 

Thank you, Madam Chair. 

Ms. BROWN OF FLORIDA. Thank you. And now I am very pleased 

to introduce and welcome our first panel of witnesses here this 

morning. 

Our first witness is Administrator Joseph Boardman of the Federal Railroad Administration. 

Our second witness is Mr. Charles D. ‘‘Chip’’ Nottingham, of the 

Surface Transportation Board. 

And the third witness is Mr. W. Douglas Buttrey, a board member of the Surface Transportation Board. 

And our final witness for this panel is Vice Chairman Francis P. 

Mulvey of the Surface Transportation Board. 

Let me remind the witnesses that under our Committee rules, 

oral statements must be limited to five minutes, but the entire 

statement will appear in the record. We also will allow the entire 

panel to testify before questioning of the witness. 

We are pleased to have all of you here today, and I recognize Administrator Boardman for his testimony. Welcome. 

TESTIMONY OF JOSEPH H. BOARDMAN, ADMINISTRATOR, FEDERAL RAILROAD ADMINISTRATION, U.S. DEPARTMENT OF 

TRANSPORTATION; CHARLES D. NOTTINGHAM, CHAIRMAN, 

SURFACE TRANSPORTATION BOARD; W. DOUGLAS BUTTREY, 

SURFACE TRANSPORTATION BOARD MEMBER; VICE CHAIRMAN FRANCIS P. MULVEY, SURFACE TRANSPORTATION 

BOARD 

Mr. BOARDMAN. Good morning. Thank you, Chairwoman Brown, 

Ranking Member Shuster, Full Committee Chair Oberstar and 

other Members. I am pleased to be here on behalf of Secretary of 

Transportation Mary Peters. 

There are those who would say that investment is not FRA’s 

business because safety can be maintained by making spot repairs, 

adjusting operating speeds, lowering bridge ratings, and catching 

10 

defective conditions just before they cause an accident. As applied 

to a single location at a given point in time, such an approach may 

be workable; however, common sense tells us and history confirms 

that at some point management of the railroad will lose the capacity to manage all those developing problems, and if it does not 

make minimal systematic investments, shippers, railroad employees and the public will pay the price. 

There have been two major reasons for under-investment in the 

basic infrastructure, the first caused by Government over-regulation and the second caused by short-sightedness on the part of rail 

executives often under pressure from the financial community to 

show short-term profit. Both are serious; neither can be ignored. 

The Staggers Rail Act of 1980 accomplished a dramatic reduction 

in the economic regulation of the rail industry. Railroads were able 

to rationalize their systems, set rates that permitted them to recover their cost and make a modest profit, modernize work practices to reduce employee personal injuries and plow back earnings 

into their facilities and operations so that they could be more efficient. 

FRA makes it a point to conference with the railroads on a regular basis seeking to understand their plans for investment and 

urging attention to areas that seem to need work, as judged by 

early indicators, FRA safety inspection activities, and actual safety 

results. FRA will never be satisfied until the entire industry makes 

additional progress across a broad front of safety issues, but when 

we talk with rail executives about these issues, they usually understand our concerns and, in general, they share our aspirations for 

improved safety through investment. 

Why would rail executives be willing to elevate safety to a firstrank goal? Certainly, they are interested in safeguarding their employees and the public, but there is something else at work here: 

safety is great for business, particularly in the era of significant demand and limited capacity. 

Department estimates of tonnage on the railroad system will increase by 88 percent through 2035. To meet this growth, the industry is ramping up investment. Up to now, it has been able to rely 

on significant productivity gains where the railroad industry has 

moved more freight over smaller networks with fewer employees. 

The railroads are now expanding capacity on their highest density 

routes by double or triple tracking and also looking at new cost-effective technological improvements that will also increase capacity. 

The new investments that will advance safety, service, and environmental stewardship and asset utilization over the coming years 

will include a transition to electronically-controlled pneumatic 

brakes and other technology that will help the locomotive engineer 

achieve fuel savings and limit in-train forces that can result in derailment. 

Under FRA waiver and encouragement, two railroads are presently trying out stand-alone ECP brakes, trains in coal service, and 

are gathering data to validate the business case for additional investments. In addition, positive train control technologies will play 

a significant role as well, but only when the practical issues have 

been wrung out through the kinds of demonstrations now underway. 

11 

These are transitions that will unfold over a decade or more, and 

it will take patience to see results. FRA has issued and enforces a 

wide range of safety regulations and has sponsored collaborative 

research with the railroad industry to introduce innovative technologies to improve railroad safety; however, it would be difficult 

for the industry to accomplish and achieve its positive safety record 

without the funds to improve and maintain the rail system. 

Many investors have come to view railroads as potentially attractive investments. Among the entities increasing investments in the 

railroad industry are a variety of financial institutions, individuals, 

and investment funds. These investors are risking their money in 

belief that the railroads will provide a competitive return on their 

investment by improving shareholder value. While the interest of 

these new investors in raising railroad deterrence has in some 

cases created tensions between them and railroad management, 

the pressure to improve returns through gains in efficiency is 

healthy. An efficient railroad is usually a safe railroad. 

Let me say it again: safety is great for business. Contemporary 

railroads will prosper as they provide very reliable service efficiently. A railroad that is capable of doing that year in and year 

out will make the necessary investments in infrastructure, rolling 

stock, employee training, and advanced technology, and with proper attention to a good safety culture, the safety record will follow. 

The Congress and the FRA help in this process along with laws 

and regulations that set specific expectations that everyone has to 

live up to, and we serve as a constant reminder that safety must 

be the first priority, but often as not, industry will lead the way 

with investments and innovations to make the railroad work better 

for all concerned. 

Thank you. 

Mr. NOTTINGHAM. Good morning, Chairwoman Brown, Ranking 

Member Shuster, Chairman Oberstar, and Members of the Subcommittee. I appreciate the opportunity to appear before this Subcommittee today to discuss investment in the rail industry, an 

issue that is vitally important to the freight railroads, their customers, employees, and the Nation’s transportation system as a 

whole. 

When Congress passed the Staggers Act in 1980, the Nation’s 

rail system was in desperate financial straits. It was burdened with 

excess capacity and unproductive assets, forced to provide unprofitable services and hampered by excessive Government regulation. It 

was not an industry into which many investors wanted to put their 

dollars. 

Since 1980, regulation has been reduced, carriers have been permitted to shed unprofitable lines, and the rail system has rationalized much of its excess capacity. Today the Nation’s rail system includes not only the seven major, or Class I, railroads but also more 

than 500 regional and short-line railroads. Those 500-plus railroads 

come in many shapes and sizes, from regional carriers that operate 

a thousand track miles or more and large publicly-traded holding 

companies that own and operate dozens of short-lines to small, privately held, individual railroads that operate over very short distances with as little as an employee or two. It is a diverse and dynamic industry. 

12 

In recent years, the U.S. economy has expanded, and the rail 

network, like other transportation sectors, has become capacityconstrained. Unlike some other transportation sectors—trucking 

companies, for example, which can buy new equipment or hire 

more drivers—railroads cannot respond as readily to capacity constraints by quickly building new track and other facilities. 

Railroads are increasing their capital investments, which are the 

dollars spent on track, right-of-way, and rolling stock that will directly help capacity constraints. Hopefully, this will lead to better 

service and fewer trucks on our already congested highways. Between 2004 and 2007, the market capitalization of the large railroads has increased by 24.1 percent annually in real terms which 

indicates that the market expects railroad earnings to continue to 

be stable or to grow. At the same time capital investment has increased annually by 21.6 percent, again in real terms. It appears 

that railroads are investing in their infrastructure to the extent 

that they believe that those investments will pay off in the market. 

Consistent with the growth in stock prices, railroads have recently attracted renewed interest from the financial community. 

Since late 2006 several investment funds, including Berkshire 

Hathaway, have acquired substantial positions in several Class I 

railroads. 

As you are aware, concerns with recent international investment 

in railroads remain, and new attention is turning to new investors 

who have not traditionally invested heavily in railroads such as 

hedge funds and certain large institutional investors, some of 

which are international. This latest interest in the rail industry 

carries with it the possibility of a railroad takeover by a non-railroad entity, and it has raised questions about what role the STB 

would play in that situation. 

When a non-carrier buys a controlling interest in the stock of a 

holding company that owns several unrelated rail carriers, it must 

obtain STB authority. For example, Fortress Investment Group 

sought and received Board approval when it obtained control of the 

Rail America family of small railroads in 2007. However, if a noncarrier were to acquire a controlling interest in the stock of a single 

railroad or a single integrated rail system, regulatory approval 

would not be required in advance under our statute. 

With that being said, however, I do not believe that the statute 

needs to be changed to give the Board more extensive review authority at this time. I understand the concern that an investor, any 

investor, with a very short-term focus could disrupt interstate commerce if a policy of diverting revenues, degrading service to shippers, and cutting back on capital spending were to be implemented. 

At this juncture, however, I believe that the Board’s existing tools 

are sufficient to ensure that carriers, regardless of their ownership 

status, carry out their common carrier obligation as railroads. 

The common carrier obligation is the statutory duty of railroads 

to provide transportation or service on reasonable request. A railroad may not refuse to provide service merely because to do so 

would be inconvenient or unprofitable. The common carrier obligation, however, is not absolute and service requests must be reasonable. 

13 

In recent years, the Board has seen an increasing number of 

questions arise regarding the extent of a railroad’s common carrier 

obligation. As a result, the Board is holding a hearing next month 

on April 24th to highlight the common carrier obligation, to provide 

a better understanding of it, and to assist us in monitoring carriers’ 

compliance with it. 

A railroad controlled by a large non-railroad investor would still 

be bound by the same obligations of all railroads. It still would 

have to fulfill the common carrier obligation, it still would have to 

maintain reasonable rates and practices and it still would have to 

file for abandonment or discontinuance authority if it were not 

going to provide service over a line. 

Under our statute, the Board can investigate and report on the 

management of rail carriers under our jurisdiction. If the Board 

were to look into the management of a carrier and find violations 

of its common carrier obligation, the Board or the Department of 

Justice could take enforcement action to compel the carrier to comply with the statute and with STB orders. The Board could also, 

on complaint, find that the carrier violated the statute and award 

damages. 

Given the Board’s ability to address potentially negative influences by activist investors, it is important that we not overreact 

and adopt new policies that might discourage positive investment 

in railroads. As chairman of the STB, I would like all types of investors, big or small, domestic or international, activist or passive, 

who abide by the law and who respect our Nation’s need for continued improvements in rail infrastructure and customer service to 

know that our Government welcomes and encourages their willingness to invest in our Nation’s privately-owned rail system. 

Freight railroads in the U.S. are in reasonably good financial 

shape and are attracting investors of all types and sizes. The rail 

industry’s ability in future years to continue this trend will largely 

determine whether the rail sector will have the resources needed 

to meet growing demand for rail service. 

At the same time, the Board will remain vigilant and proactive 

to ensure that interstate commerce is not harmed by a short-sighted effort to extract large profits at the expense of maintaining the 

infrastructure and providing reasonable service to rail customers. 

I appreciate the opportunity to discuss these issues today and 

look forward to any questions you might have. 

Thank you. 

Ms. BROWN OF FLORIDA. At this time, we have three votes, so we 

are going to stand on official recess, and we will be back right after 

the vote. We wanted to give you adequate time, we didn’t want to 

rush you, Dr. Mulvey. 

[Recess.] 

Ms. BROWN OF FLORIDA. Mr. Mulvey, you may begin. 

Mr. MULVEY. Well, thank you, Chairwoman Brown, and Ranking 

Member Shuster, who is not back yet, and Chairman Oberstar, 

thank you very much for giving me the opportunity to testify before 

you today on railroad investment issues. 

Capital spending on the part of the railroads has increased in recent years, as graph 1 which I have attached to my statement 

shows. However, when you examine it over a longer period and 

14 

when you put it in real dollar terms adjusting for inflation, the picture becomes a little less clear. As also shown in graph 1, real capital investment by the Nation’s railroads has been relatively unchanged since the Staggers Act and, in fact, in constant dollar 

terms it is even less today than it was in 1980. 

However, it is also true that the railroads have substantially 

rationalized their networks. The second graph traces the decline of 

route miles and track miles operated by the Nation’s Class I railroads. These trends toward a shrunken system represent a continuation of a policy of reducing the size of the railroad network that 

began after World War I, although the pace of abandonments certainly accelerated after Staggers. 

Graphs 3 and 4 show that, while there has been some fluctuation, capital investments on a per track mile and a per route mile 

basis have increased in recent years. 

We can make similar observations about locomotives and rolling 

stock. The railroads today operate far fewer locomotives, but they 

are dramatically more powerful, roughly 50 percent more powerful 

than those in 1980. 

Class I car fleets are only 40 percent of what they were in 1980, 

but today’s rail cars are bigger, travel longer distances, and in 

longer trains. Moreover, some of the decline in rail car fleets has 

been taken up by Class II and Class III railroads and even more 

so by shippers who now more often provide their own cars. 

The upshot is that, despite the smaller network, fewer cars and 

locomotives, and greatly reduced work force, the railroads are carrying twice as much traffic today as they did in 1980. They are 

truly doing more with less. 

Historically, the railroads were plagued with excess capacity, but 

system rationalization combined with substantial traffic growth 

has meant the railroads now experience capacity constraints, and 

when demand exceeds available supply, prices will rise, and rail industry profits are higher than they have been for decades. One 

would hope that some of these profits are reinvested to grow the 

system so the projected growth in rail traffic can be accommodated. 

Much of the railroads’ investment goes towards maintaining and 

replacing the capital stock as it wears out. Only about one fifth of 

rail capital investment goes towards expanding the infrastructure, 

although that share has been increasing recently. Still it is doubtful that investment by the Nation’s railroads will be sufficient to 

meet the investment need. 

And what is that need? A recent study estimated that the railroads will need $148 billion between now and 2035 to meet the 

forecast demand for service just to retain their relative share of the 

freight transportation market. The study’s authors estimated that 

revenue growth and productivity improvements by the Class I’s 

could cover part of the need, but still leave a shortfall of nearly $40 

billion. And that simply is to maintain their market share. 

If we want the Nation’s freight railroads to carry more truck 

traffic, take traffic off the highways and put it onto the railroads, 

and if we want the railroads to expand the infrastructure so that 

they can accommodate more inter-city passenger trains and commuter trains, the shortfall would be far greater than this. 

15 

The railroads will only invest as much as they feel is justified by 

current and reasonably foreseeable demand. Building on speculation that traffic will materialize is highly unlikely in an industry 

with a history of excess capacity and with capital assets that are 

very long lived. 

Questions about the future of the coal-fired power plants, 

changes in traffic flows through the Panama and Suez Canals, the 

development of alternative port facilities in Mexico and Canada, 

the long-term potential of ethanol and other biofuels, and other 

issues must be answered with much more certainty before the Nation’s privately-owned railroads can be expected to dramatically increase their investments. 

So where will the monies come from? There are a number of potential sources, all of which hold promise but also can present problems. Investment tax credits are favored by the railroads. Publicprivate partnerships are favored by the Administration, and a railroad trust fund is a possibility that was favored by a former Member of this Committee, Representative Lipinski. These are all potential sources of investment capital. 

However, another source of potential capital investment, hedge 

funds, has recently become of growing importance. This has attracted the interest of the railroad community, the Congress and 

other industry observers. The concerns appear to center around 

whether the relatively short-term strategy of most hedge funds 

squares with the needs of the railroads for long-term commitments 

of investment capital, as well as around the nationality of some of 

the hedge funds investors. 

With respect to the latter, I do not believe that the nationality 

of the investors should necessarily be a concern. After all, historically, America’s railroads were largely financed by European investors; still, national security must be a consideration in looking at 

who is investing in this key component of our infrastructure. Nor 

would I categorically rule out any particular type of investor or investment strategy as necessarily inappropriate for the U.S. railroad 

industry. 

Having said that, I am concerned about investors who might take 

over a railroad and proceed to scale back on investment and begin 

to effectively disinvest in the infrastructure. By the way, Mr. Oberstar, I would like to mention that you would be happy to hear that 

one of your favorite investors, Mr. Icahn, has recently announced 

he wants to invest between $400 million and $1.6 billion in CSX. 

Mr. OBERSTAR. Beware. 

Mr. MULVEY. Beware. As Chairman Nottingham has said, the 

Board’s authority over railroad capitalization is limited primarily 

to our review of merges and acquisitions, but we can step in and 

exercise our authority to ensure that railroads fulfill their common 

carrier obligations. Let me give you an example. 

Last year we required a railroad to sell its line to another carrier 

because the shipper demonstrated that the service that the railroad 

was providing was not adequate. We can respond when railroads 

behave in a way that causes them to not fulfill their common carrier obligations, and as the Chairman mentioned, we are holding 

a hearing on that next month. 

16 

But today we are facing a conundrum. We want the Nation’s railroads to be operating as efficient private sector enterprises, but we 

also want them to invest in anticipation of public and private demands for rail infrastructure. As a Nation, we need to decide what 

we want from our Nation’s railroads and how we will be able to finance it. 

That completes my remarks, and I will be happy to answer any 

questions. 

Ms. BROWN OF FLORIDA. Thank you. 

Mr. Buttrey. 

Mr. BUTTREY. Good afternoon, Chairman Oberstar, Chairwoman 

Brown, Ranking Member Shuster, and Members of the Subcommittee. My name is Douglas Buttrey. I have had the privilege 

to serve as a member of the Surface Transportation Board since 

May 28th, 2004. I appreciate the opportunity to appear before the 

Subcommittee today, as you conduct this hearing on investment in 

the rail industry. 

The Board’s chairman, Charles Nottingham, has submitted testimony which discusses the issues that are the subject of this hearing today. The chairman’s testimony covers everything that I would 

have said, so rather than duplicating coverage, in the interest of 

time, I will instead associate myself with his remarks and endorse 

the chairman’s formal filed testimony. And I would be happy to answer any questions that you might have. 

Thank you very much. 

Ms. BROWN OF FLORIDA. Thank you. 

Chairman Nottingham, in your testimony you made a distinction 

between traditional long-term investors such as Warren Buffett 

and a non-traditional investor such as the hedge fund. Why is this 

distinction important? And anyone else that would like to respond 

to this on the panel. 

Mr. NOTTINGHAM. Well, yes. Thank you for the question. It is important for several reasons. One is, up until several years ago, we 

really didn’t see a big influx or big presence of large, the degree 

and extent and types of large investors in the railroad industry as 

we are seeing today. It is probably, I would say, a good problem 

to have, generally speaking, because who would have thought 20 

or 30 years ago we would be here talking about possibly too much 

investment from too many people around the world and elsewhere? 

So it is in many respects a healthy challenge to have. 

It is something we need to be mindful of. Probably Mr. Buffett 

himself would not describe himself as a traditional railroad investor, because up until recent months and years, he really was not 

a big investor in the railroads as far as we know. And so whether 

it is individuals such as Bill Gates, who is a major investor in railroads, privately, or Warren Buffett or these hedge funds—and, of 

course, ‘‘hedge funds’’ is a label that, frankly, I was not real familiar with until a couple of years ago. I think we used to call them 

large investors or partnerships, and they come in all stripes and 

flavors and sizes, and some have outstanding reputations, some 

have reputations that are a little different than that; but it is 

worth noting that, generally speaking, across the economy we are 

seeing more influence throughout corporate America, by large institutional investors, including hedge funds but also large pension 

17 

funds and large university funds—for example, endowments—and 

those large investors often watch each other, of course, and will 

play off each other. 

Mr. Mulvey mentioned the recent interest of Mr. Icahn in the 

CSX, as well, that has been reported. We do not know his motivations right now, but it is something we are going to stay on top of. 

So that is just a quick overview in an effort to be responsive. 

Mr. MULVEY. One difference is that hedge funds often are more 

active, and there will be a testimony by Professor Greenwood later 

on, but they are more activist investors and they often target particular firms with a plan—with a strategy—to make changes. Most 

other investors tend to be more like Mr. Buffett, for example, and 

the pension funds, et cetera, traditional investors, they are more 

passive; they do not seek to make major changes in the railroad operations. That is one major difference. 

Another difference is the way hedge funds are structured. They 

tend to fly under the SEC rules because of restrictions on who can 

be part of the hedge fund, et cetera, and that has caused some people to be suspicious about hedge funds. Whether or not that is justified is another issue. 

Mr. NOTTINGHAM. And, Chairwoman Brown, if I could just follow 

up, I meant to make this point as well. As I speak with rail industry leaders and investors, and we get visited a lot by analysts from 

Wall Street and elsewhere and others, I have learned that the days 

when the investment pool was largely, or significantly, comprised 

of passive investors, people who are just parking their money into 

a corporation for many years and maybe checking on it at the end 

of each year, or periodically, those days are long gone. 

All the investors now are making changes on a daily basis to 

their portfolios. They move in real time, and whether it is electronic commerce or technology that helps with that, that is probably a factor. But what I hear from experts is that there is really 

no such thing as a large class of truly passive investors that just 

check on their investments periodically and do not typically make 

adjustments. 

Ms. BROWN OF FLORIDA. Mr. Boardman? 

Mr. BOARDMAN. I just wanted to make a general comment, Ms. 

Brown, and that is, based on my testimony and I think some others 

have mentioned this, is the necessity in this industry for patience. 

And whether it is the electronic controlled pneumatic brakes, 

whether it is a positive train control, whether it is an investment 

by investors that are private or whether it is by Government as 

identified even in our RRIF program, our Rail Rehabilitation Infrastructure Financing, the period of time necessary to make these 

major capital investments requires patience on all investors. Thank 

you. 

Ms. BROWN OF FLORIDA. Mr. Boardman, I have a follow-up for 

you. You mentioned that safety is good for business, but the only 

rail-related issue on the table is the positive train control. And for 

some reason rail has resisted this system. Can you explain why? 

Because studies show that PTC has a quick pay-back period. Why 

has the railroad resisted a full-fledged PTC system if they are so 

concerned about safety? 

18 

Mr. BOARDMAN. I think what we can see right now is that if you 

go on certain sections of the corridor, Northeast Corridor, you are 

going to see positive train control. I think we would like to see 

them move faster. NTSB, I think, has as one of their critical elements positive train control. 

But I think you are going to see the business case made for that 

in ECP as we go forward, which is again a requirement for patience in this process. We see people today that are making real 

progress in positive train control, and the railroads are involved in 

that. 

Ms. BROWN OF FLORIDA. Mr. Shuster, please. 

Mr. SHUSTER. Just a follow-up on PTC technologies. We are still 

not there quite yet, that is correct. 

I had thought the second reason was there is a big concern 

amongst labor that if you put PTC in place, the potential to have 

just one crew on the train, that is there, and that has some concern 

with labor that they are going to eliminate jobs. Is that also part 

of the concern with PTC? 

Mr. BOARDMAN. Well, certainly, Mr. Shuster, early on in the 

process of PRC, one of the elements that was being floated around 

was one-man crew. And that never got resolved because that did 

not move forward at that point in time, and that will still be an 

issue that will have to be dealt with on the labor side of things. 

But what we are seeing today with the ETMS system that is already being implemented, that there is success with it, that in we 

expect in the future that to grow. 

Mr. SHUSTER. And staying with safety, if a railroad or the industry were to freeze temporarily infrastructure investment, what is 

your estimate on how quickly we would see degradation in safety 

and efficiencies? Is it weeks? Months? A year? 

Mr. BOARDMAN. Tomorrow. 

Mr. SHUSTER. Tomorrow. 

Mr. BOARDMAN. Because I think what we see in the necessity, 

and I think a railroad up here would tell you that that cannot happen; you cannot freeze investment in the necessity for us to maintain safety and continue to have an operating railroad. 

Mr. SHUSTER. Right. With that in mind, the Board, Chairman 

Nottingham, you had said here that until somebody takes over a 

railroad, you do not have the authority to act until you see something going on in there. For instance, if there were a situation like 

that and Mr. Boardman said tomorrow it would happen, how quickly would you expect the STB to be able to respond to that, if you 

saw it happening? If somebody said, we are freezing today, and we 

are not in the court system. 

If you are in a court system you have to prove that, you have to 

have a train fall off a track, or you have to have something bad 

happen. But in light of the fact that we know how important it is 

to have investment to continue to flow, what would your response 

be to somebody coming in and saying, we are freezing, or, we are 

stopping or significantly reducing? 

Mr. NOTTINGHAM. That kind of worst case scenario, which by 

your hypothetical, Mr. Shuster, would flow out of a transaction 

where a non-rail carrier not needing our pre-approval were to buy 

a single railroad or gain control of a single railroad, it is correct 

19 

we would not have a statutory role in pre-approving that transaction. But as soon as that transaction is done, it is sort of, welcome to our world. You are now a railroad, and we have full oversight over you. We will act very quickly and very aggressively, including working with the Justice department. 

If anybody is violating the common carrier obligation, we can direct service over your line, meaning put your competitors on your 

line. We can talk about what Mr. Mulvey referenced as to what we 

did in the Lubbock, Texas area last year with a smaller railroad 

but we actually took the railroad away from the operator, who in 

that case was acting irresponsibly, and had a forced sale. 

And so we know one thing for sure: these investors do want to 

make money. And the idea of actually having their line taken from 

them, having their competitors put on the line by the STB or, worst 

case, us looking at their license to even do business as a railroad 

and possibly revoking that. These are pretty draconian steps that 

we have available to us that any profit-seeking enterprise would be 

wise to stay very, very clear of. 

Mr. SHUSTER. Next question, change to accounting using historic 

costs versus replacement costs. STB uses historic cost and, having 

somewhat of a business background, I am a little confused as to 

why the use historic versus replacement. Can you sort of walk me 

through that and why do you do that? 

Mr. NOTTINGHAM. Sure, I will try. It is a big issue that has come 

up in a number of public forums, including some of our hearings. 

It came up in our recent cost of capital inquiry where we updated 

and significantly changed the way we measure the railroad’s cost 

of capital. 

In the witness’s statement you will have before you in the next 

panel—from TCI—I noticed in their statement they have an extensive discussion of their position that we should look at and use 

more often the replacement costs. And there is, I think, some common sense strength behind that argument, which is, in other 

words, if you are a railroad or any business, or even a homeowner, 

and you have to look at your infrastructure, whether it is the roof 

on your garage or other infrastructure—you do not necessarily look 

at all these in the day-to-day practical, real world, what it cost you 

20 years ago to put that roof on your garage. If you have to replace 

it, what you are worried about is what it is going to cost you when 

you have to replace it. 

Mr. SHUSTER. Right. 

Mr. NOTTINGHAM. And when you look at thousands and hundreds of thousands of bridges and tunnels out there across the rail 

system, the replacement costs are just staggering. Now, I will say 

the accountants in corporate accounting have used historic costs for 

many decades. The Board and the ICC before us have used it. It 

is considered in the accounting profession a very mainstream accepted practice. The railroads have indicated at one of our hearings 

that they are probably going to come forward in the near future 

with a proposal for some type of new rulemaking or new policy, and 

we look forward to seeing that. 

Mr. SHUSTER. To use replacement costs instead of—— 

20 

Mr. NOTTINGHAM. I believe so. That is what they indicated at the 

hearing, and so we would put that out, of course, if we thought it 

had some merit, we would put it out for public comment. 

And that does, of course, have real implications, too, on how we 

measure the railroad’s financial health. 

Mr. SHUSTER. And I wonder if I could just get Mr. Mulvey to respond, if he has the same viewpoint on that. 

Mr. MULVEY. Basically, replacement cost makes more sense from 

an economic standpoint, what it costs actually, what the asset actually is worth today rather than what it was worth 100 years ago. 

And so replacement cost makes more sense. 

The reason why we use historic costs, however, is that getting a 

handle on what replacement cost would be, would be a very, very 

Herculean undertaking. 

Mr. SHUSTER. I did not hear that. 

Mr. MULVEY. A big undertaking. It is something that would take 

the railroads quite a while to do, but, obviously, we valued the railroads in the past; I believe they were valued back in 1920 when 

they were returned to the private sector after being nationalized 

during World War I. Valuation is possible. 

You also need to determine which of the assets need to be replaced. Historically, when you had all this excess capacity out 

there, a lot of those assets were redundant and did not need to be 

replaced. So you would not want to include those. Today, however, 

as we move more toward full capacity in the system, virtually all 

the assets need to be replaced and therefore should be valued. 

Now, as Mr. Nottingham said, the railroads, in their testimony 

a few months ago, indicated that they might be willing to try and 

find some way of getting a handle on what the replacement costs 

would be, and we are looking to see whether or not we want to 

open a hearing on that. 

Mr. SHUSTER. Thank you very much. 

Ms. BROWN OF FLORIDA. Mr. Oberstar? 

Mr. OBERSTAR. I want to thank the witnesses for their presentations. They were all very thoughtfully done and different aspects 

of the issue. 

Let me come back to Mr. Boardman and follow up on the question that Chairwoman Brown asked about positive train control. 

We have seen figures, cost figures, for the investment in PTC that 

runs from something I might call more realistic to billions of dollars. Do you have solid figures on what it would cost to install positive train control? 

Mr. BOARDMAN. I think we have good estimates, Mr. Chairman, 

that we could use, depending on the type of positive train control 

that goes in. We can provide those for you. I do not have them 

today. 

Mr. OBERSTAR. Well, it might be a different matter in the high 

speed, relatively high speed, Northeast Corridor. 

Mr. BOARDMAN. Yes, sir. 

Mr. OBERSTAR. And in a different matter in a corridor where you 

have only a few passenger trains on long-haul surface or commuter 

lines, is that the case? 

21 

Mr. BOARDMAN. Yes. I think, for example, down in Panama right 

now, Kansas City Southern runs a sort of a positive train control 

that is fairly simple back and forth across Panama. 

Mr. OBERSTAR. One of the impediments to expanding commuter 

passenger rail service, put a passenger rail service rather than 

commuter rail because it covers the whole range, is the implementation of positive train control. If you are going to have a really 

safe passenger system where we are mixing freight and passengers 

on the same lines, then you need these additional safety devices. 

Where in France, in Spain, Germany, Italy, Denmark, the freight 

trains do not run on the lines with passenger rail. 

Provide us those figures in different scenarios such as we have 

discussed, and expand upon that. 

Mr. BOARDMAN. We will do that, sir. 

Mr. OBERSTAR. And we will make that available to all Members 

on the Subcommittee. 

Mr. Mulvey, your testimony is very intriguing. You have some remarkable data, as you always have. But you discussed in your written submission the 1989 effort of Congress that was vetoed by 

Bush 41 to—as they call him affectionately in the family—the ICC 

authority to approve buy-outs by non-carrier investors. Would that 

be a useful tool for the STB, whether, and considering these in this 

scenario: one, authority to approve; two, authority simply to review 

and comment upon? 

Mr. MULVEY. I think it would. We have testified before that in 

the ICC Termination Act of 1995 our ability to initiate investigations on our own was limited. And we have said before that we do 

think that it is time to revisit some of the limitations that were put 

on the Board. It was an important process to begin to allow the 

railroads to become more efficient and more competitive, et cetera, 

and to cut back on regulatory activism. 

But times have changed, and I think it would be useful to give 

the Board more authority with respect to being able to launch investigations on its own. Today, we have to wait until somebody 

files a complaint before we can launch a rate case. We did, for example, launch our own investigation of the fuel surcharge issue. 

We did that under the guise of it being a practice rather than a 

rate. 

We do think that there should be some changes in the legislation 

now with regard to George Herbert Walker Bush’s veto. While that 

is not dispositive, certainly it is indicative of how we feel about our 

ability to do anything on this matter, and it may require that we 

get Congressional legislation again that would not be vetoed by 

whoever is in the White House when the legislation gets passed. 

Mr. OBERSTAR. We do not want to do anything in the legislative 

arena that is going to discourage investment capability. We want 

all modes of transportation to be able to attract investment capital 

that is going to enhance the ability of the various modes to grow, 

to meet the public demand. And they are common carriers, whether 

they are trucking, or bus, or interline, or railroads, or the waterways. 

But where there is a strong public interest quotient in these investment matters, and where investment could tip the balance 

22 

away from the common carrier purpose would be a matter of importance to the public interest, do you not think? 

Mr. MULVEY. I agree. I mean, the railroads do have a public interest component, and railroads, as I said in my testimony, are 

willing to invest up to where they see there is a private return on 

their private investment capital. And the railroads want the public 

sector to invest where there are public benefits above and beyond 

the private benefits. The problem has been how to get those public 

monies invested in the railroads and get the railroads to agree to 

accept public assistance, as well as whatever rules and regulations 

are going to go along with that public money. 

I think the railroads feel that if you take the money, well, what 

does that make you? And so they said, well, we eschew taking public funds. We would rather do it ourselves, and we are doing fine. 

But as a lot of these studies have shown, if you are looking for the 

railroads to greatly expand the amount of freight that they handle 

or even maintaining their market share, or have the capacity to 

handle more passenger service, the investment is going to have to 

be significantly greater than the railroads are capable of investing. 

Mr. OBERSTAR. Well, the comparison with the airlines is, I think, 

appropriate, though not exclusively or uniformly applicable 

throughout the mode. But they are both capital intensive sectors; 

they are both common carriers; they both serve the broad public interest; they are both vital to mobility of people and goods in our 

economy. And the concerns we had in the 1980s and early 1990s, 

when, subsequent to Mr. Meadows’ hearings, I held hearings on the 

subject, was, as you put it so well, not the source or identity of investors but the time frames and the goals for those investments. 

What are you going to do with these investments? 

Now, in the buy-out of R.J. Reynolds, cracker manufacturers 

could be a dime a dozen. Department stores come and go. But airlines are crown jewels in our transportation. Railroads are unique. 

We only have four big-class ones, and three sort of Class Is with 

an asterisk on them, and that is it. And they are responsible for 

the massive movement of bulk commodities in the economy. 

And so what criteria do you establish to evaluate goals for investments and time frames for investments? 

Mr. MULVEY. That is difficult. With your analogy to the airlines 

one of the big differences is that, while the airlines are capital-intensive, most of that capital is in the airports and in the airways’ 

navigation systems, and those are provided by the public sector. 

The railroads are the only—well, I should not say only, the pipelines, too, I suppose—but the railroads are the major common carrier that have to provide their own rights-of-way, their own infrastructure. And somebody who is going to take over a railroad needs 

to have the understanding that that infrastructure is critical to the 

Nation’s overall economic well-being, and to industries other than 

the railroads. 

Too often we look at the railroads, large railroads and shortline 

railroads working together as if they are the only players. But 

there is also the shipping public; there is also the economy at large 

which needs to be taken into account when we are evaluating these 

investments and investment strategies. 

23 

Mr. OBERSTAR. Thank you very much, Madam Chair. I appreciate it, and there are others Members who have questions. 

Ms. BROWN OF FLORIDA. Thank you. 

We are going to have additional rounds, but, you know, as I sit 

here I am thinking we are in the middle of a war, and we are talking about aviation. But the railroad is how we, through the military and the common carrier, move that equipment. And I want to 

know, do we have the tools in place to protect the traveling public—not the traveling, but the military—and making sure that we 

do not compromise the system? 

I am talking to you, Mr. Nottingham. 

Mr. NOTTINGHAM. Yes, Madam Chairwoman. We do have those 

tools and, first of all, we have not seen any problems in that regard, and if we were to, a complaint by anybody connected with the 

military would be treated by us as the highest priority. We would 

act on that with immediacy. 

And that could include even a licensing type issue of whether 

such a railroad is even fit to continue to be a player in our system. 

Anyone who would disrupt military supply or logistics, it is just unheard of, but it is a fair hypothetical to think about. We should be 

prepared, as we always try to be, for worst case scenarios. 

Ms. BROWN OF FLORIDA. Well, I am just thinking that this is 

something that we need to consider as we move forward. We talk 

about airline as a common carrier, but we don’t send military 

equipment on airlines but we do through the railroads. 

Mr. Boardman, do you want to respond to that? 

Mr. BOARDMAN. No, I agree. It is important that the railroads be 

in a position to handle the Nation’s military security needs. Some 

thing do go by air today, but still heavy equipment and tanks and 

all of that need to move by rail. 

But, as Mr. Nottingham has said, we have not had any complaints from the DOD or anybody else that the railroads are not 

fulfilling their obligations right now. 

Ms. BROWN OF FLORIDA. Mr. Brown. 

Mr. BROWN OF SOUTH CAROLINA. Thank you, Madam Chair, and 

thank you, panel, for being part of this discussion today. I represent Charleston, South Carolina, which is a port city, and we are 

certainly infected by transportation needs and the railroads being 

one. And that leads me to my question. 

The impact of expansion of the Panama Canal on the East Coast 

ports cannot be underestimated. Container traffic through Charleston alone is expected to grow by nearly 300 percent by the year 

2020 with other regional ports seeing similar increases. And this 

is my question: What strains will that place on rail infrastructure 

on the East Coast? And if there are any plans to prepare for it. 

Mr. NOTTINGHAM. Congressman Brown, it is an excellent question. Thank you. That trend, increasing and growing trend, even 

currently as the economy appears to be softening, continues to 

march forward. In other words, more freight needing to move coming into our ports. 

We had a hearing in April of last year where we invited, we had 

leaders from the port community who participated, and they forecast that we should be getting prepared for, basically, a doubling 

of port traffic over the next 15 to 20 years, and we do not have the 

24 

infrastructure in place in most of our port locations, if not all of 

them today, to handle a doubling of traffic and containers and 

trucks and rail. And rail will be, must be, a key to meeting that 

challenge. 

I had the pleasure and the privilege of walking and seeing and 

touring the port of Jacksonville with Chairwoman Brown last year, 

and they have some exciting plans and developments there, and I 

think that that is an example of a port that is well positioned with 

room to grow with the right kind of smart planning. Charleston is 

an incredibly dynamic port. I used to work for the Commonwealth 

of Virginia with the Port of Virginia, and Charleston was a very 

tough competitor to try to attract business when you had Charleston there. 

So we need to focus on—what is the big question—getting our infrastructure developed, making sure we have, and we are going to 

need, more investment which links back, of course, to this hearing. 

And just one of my messages today for the Committee is just be 

cautious about not sending too many signals to investors that they 

are not wanted because we have not seen any problems yet with 

any investors from a macro perspective. 

We have regional safety-related embargoes. We will hear about 

them, I am sure, later in the next panel. We have other problem 

spots, but we do not have a trend of a problem of investors trying 

to harm rail transportation. We need more investment from everywhere we can get it as long, as I said in my remarks, they respect 

our laws and have respect for our public interest and our transportation needs. 

Mr. BROWN OF SOUTH CAROLINA. Let me follow up on another 

question to Mr. Boardman. What is your position on the creation 

of a user fee supported rail infrastructure and trust fund? Would 

this idea help or hinder the projected freight rail capacity shortfall? 

And do you agree that it would inject politics into what should be 

business decisions, or would it invest in improved capacity? 

Mr. BOARDMAN. Mr. Congressman, I do not have a position on 

that. It is not something that FRA generally deals with. We can go 

back and look and look at a U.S. DOT position on that, but nor the 

FRA. 

Mr. BROWN OF SOUTH CAROLINA. Well, let me ask you one further question. Rail infrastructure lasts a long time, so there is always the temptation of a rail management to defer maintenance to 

help the company short-term financial position. But lack of regular 

maintenance would, ultimately, impact safety. Does FRA have any 

new technology in place which can detect deteriorating track conditions before they actually become a safety hazard? 

Mr. BOARDMAN. Absolutely, we do, Congressman. That is something we can talk about. We have, in particular, and most of the 

railroads today are recognizing a joint bar crack detection system, 

an automated joint bar crack detection system that was developed 

by the FRA and is being adopted by the industry. 

There is also other technology out there today that it is making 

improvement, and railroads are beginning to invest in it. One is 

what we call WILD, which is a roadside detector. It is a wheel-impact load detector. It tells the railroads whether there is too much 

25 

weight or if there is an outer-round wheel on the rail today that 

negatively impacts the ability for the rail to withstand the loads. 

There is also other roadside detection systems, whether it is 

acoustic bearing sensors or hot box detectors, which has been used 

for a long period of time. And there are many other technologies, 

and we would be happy to explain those to you and provide additional information in the future. 

Mr. BROWN OF SOUTH CAROLINA. Are the railroads pretty responsive once you make that determination? 

Mr. BOARDMAN. Yes. We are seeing them develop and make investment in that area. I am always anxious to see them invest faster than they are, and we encourage them in each one of the periodic meetings that we are in to use all of those tools and resources 

to reduce risk throughout their systems. 

Mr. BROWN OF SOUTH CAROLINA. Thank you. Thank you, Madam 

Chair. 

Ms. BROWN OF FLORIDA. Thank you. 

Mr. DeFazio? 

Mr. DEFAZIO. Thank you, Madam Chair. Chairman Nottingham, 

as I understand—and I am going to focus in on one merger because 

it has had particularly, or one acquisition detrimental impact in my 

district, which is the Fortress Acquisition of Rail America. 

From what I can tell in reviewing the documents submitted and 

the back and forth, it seems like the major focus and pretty much 

the entire focus, or the only focus of the Board in this matter, was 

whether or not they intended to try and create linkages in a monopoly as opposed to how they might operate or continue to operate 

or meet their common carrier obligations. 

Is that pretty much what your charge is, and that is what you 

did in this case? 

Mr. NOTTINGHAM. That is a significant part of it, sir. We look at 

transactions. We look at the impact on competition nationally and 

regionally. We look at whether any shippers will be left with only 

one rail carrier. 

Mr. DEFAZIO. Or none? 

Mr. NOTTINGHAM. Or none, or if they previously had one or more. 

Mr. DEFAZIO. Well, mine got left with none, so—okay. So, but yet 

you do not think you need—you mentioned earlier when you are 

talking about capital, you said, well, you are really looking at the 

MNA issues. But I mean once someone takes over a line, what is 

your scrutiny of their—what do you do on an annual basis to scrutinize their capital investment? 

Mr. NOTTINGHAM. We have arranged, we make a revenue adequacy determination on the Class I railroads. We keep and capture—— 

Mr. DEFAZIO. Revenue adequacy, but, I mean, do you track if the 

revenue would be adequate to make capital investment? Do you 

track it to the point of they made capital investment? They have 

a plan for capital investment? They have a long-term plan to operate the railroad and invest adequately to maintain the capital? 

That is not part of your charge, really, is it, and you do not do 

that? 

26 

Mr. NOTTINGHAM. It generally is. We generally do, but it is not 

a question, for example, if a small short-line decides for a year or 

two they are not going to make any significant capital on—— 

Mr. DEFAZIO. But that is 10 years. It is in the case of CORP, it 

was 10 years ownership by Rail America, 10 years of virtually on 

investment to the point of credible safety problems, which were 

amazingly and suddenly discovered by Fortress, who apparently 

didn’t do due diligence. It says here in their filing, they have no 

current plan to abandon any rail lines in connection with the proposed transaction. 

Now, how long would your board hold them to that? What do you 

consider to be current? Is it the day after they sign the papers, 

week, ten weeks? In their case it was 220 days to closure. Immediately, abrupt, non-notified closure. So you think they were acting 

in good faith here when they had no current plan to abandon, when 

they took over and you shouldn’t have any concerns about these 

sorts of things? 

Mr. NOTTINGHAM. I want to pick my words carefully. Because we 

are told we may well have an active complaint brought to us on 

that very situation soon. And the three board members here will 

be the three decision-makers on what to do with that complaint. So 

I will be careful not to characterize the facts on the ground there, 

but do want you to know we have been very actively engaged, and 

I have personally, in trying to make sure we get that service restored in Oregon. 

We know how important it is. We know it is a serious problem. 

As you point out, it is a problem that appears to have been developing well before Fortress was on the scene. As FRA has validated, 

it does appear to be based on some very real safety problems. 

Mr. DEFAZIO. I understand the problems. It seems to me there 

is a problem with the existing system of oversight, when a rail line 

is able to defer maintenance for more than ten years with no scrutiny, get sold and then 220 days later be shut down because they 

have problems that have been more than ten years in the making. 

I guess my major concern about your testimony is this sort of, 

all capital is alike, all capital is not alike. And I am not talking 

about passive investors, but I am talking about whether someone 

is a predatory investor, some want to strip assets, or someone who 

is a speculative investor and wants to optimize their current revenues and meanwhile sit on potential assets. In the case of this line, 

and again, perhaps you can’t respond because you are anticipating 

a complaint, but the point is there is some major potential in that 

line if we end up with a major container port in Coos Bay, which 

is being seriously looked at by Maersk. 

But in the interim, it is not particularly profitable to operate. So 

how long would we allow someone to not abandon something but 

to not operate it and to sit on it because they are betting that it 

might be worth something down the road but they don’t want to 

help the shippers today and meet their common carrier obligation. 

Mr. NOTTINGHAM. As I stated in my statement, the law is very 

clear on the common carrier obligation. No railroad can abandon or 

stop service on the line just because they are not making money 

on it or if it is inconvenient. I will defer to my colleague, Joe 

Boardman, on the safety—— 

27 

Mr. DEFAZIO. Well, I get that. I get that. But at a certain point, 

I have read through those statutes or the rules about abandonment 

and notification and feeder line. It all really seems based 30 years 

ago. I really can’t believe that you don’t think as current chairman 

that this stuff doesn’t refer to a system that doesn’t exist any more, 

which is a few massive, monopoly railroads in this Country with 

huge feather-bedding problems and other under-investment problems and neglect and all that stuff, shutting off their past interests 

to today’s world which is very different. I just think we do need 

some new tools, new scrutiny. Vice Chairman Mulvey, would you 

comment on any of this? 

Mr. MULVEY. I share your concern about what is happening in 

your district. As Chairman Nottingham has said, we have tried to 

monitor this. We sent people up there to help work with the ports 

and the shippers and the railroads to see what can be done. And 

there is a lot of disagreement over who is going to be responsible 

for, I believe it was $24 million in cost, whether the railroad was 

responsible or whether or not the shippers had to contribute a substantial amount. 

I think one of the problems is that the Board is relatively small. 

This problem may be one that is not unusual around the Country, 

where railroads have spun off their shorter line operations. The 

short-line operator has not made the investments in the infrastructure that they should. This is not brought to our attention. We 

don’t have a lot of ability to do oversight until someone brings it 

to our attention as a common carrier obligation issue. 

So by the time the shut-down occurs, you have safety problems, 

and we agree with Mr. Boardman that this railroad right now cannot be operated safely. The problem is manifest, and now we have 

to see what can be done about it. 

Mr. DEFAZIO. Thank you. Anybody else? Thank you, Madam 

Chair. 

Ms. BROWN OF FLORIDA. Mr. Westmoreland? 

Mr. WESTMORELAND. Thank you very much, Madam Chairman. 

Talking about the Oregon problem and the Coos Bay tunnel, could 

you explain exactly why, Mr. Boardman, could you explain exactly 

why the tunnel was closed? 

Mr. BOARDMAN. I can’t give you the technical answers to why the 

tunnel was closed, but it was no longer safe to conduct operations 

is the answer. In other words, our obligation really is, as I was sitting here thinking, as the Chairman was talking, is that we would 

be more likely tan anything else to err on the side of greater safety 

and want to shut down the tunnel if there was a safety concern 

with that. When we went out to take a look at it, sure enough, and 

we borrowed some expertise that we didn’t have at the time to 

evaluate the study that was done by the railroad, we agreed that 

what they were looking at was real, there was a real problem there 

and there was going to have to be major investment required here 

in order for this to continue to stay open. 

Mr. WESTMORELAND. Would you say that that line being privately owned made it more of a problem than if it had not been? 

Mr. BOARDMAN. If it wasn’t privately-owned, the alternative 

would be a public operation, is that what you mean, sir? 

Mr. WESTMORELAND. Yes. 

28 

Mr. BOARDMAN. I think that the difficulty today, whether you are 

on the private side or the public side, is finding the resources necessary for you to make the improvements in an area that you 

might like to improve but may not be able to pay back. That is part 

of the difficulty that we see in some of the loan applications that 

we see coming forward, even from the private sector, is they have 

to be able to pay back, they have to have it. 

I think, and I do understand what Congressman DeFazio is saying, that if a railroad or anybody buys the line on speculation for 

land development, so to speak, or a future opportunity for profit, 

then that is maddening for those who want to grow their economy 

in the communities that this operates in. And I don’t have a good 

answer to what to do about that. I think those are the tools that 

both Chairman Nottingham and Mr. Mulvey were trying to talk 

about, of how they dealt with that and how they would deal with 

that. We deal with it very differently, and it is much more clearcut for us in the sense of looking at it, is it safe, isn’t it safe, and 

if it isn’t safe, it should be shut. 

Mr. WESTMORELAND. Thank you. No further questions, Madam 

Chairman. 

Mr. DEFAZIO. Madam Chair, if I could just for a moment follow 

up on that. 

Ms. BROWN OF FLORIDA. Yes. 

Mr. DEFAZIO. My understanding is prior to the acquisition by 

Fortress, there was a pending application for a loan or that line to 

make safety improvements. I don’t know if you are familiar with 

that. 

Mr. BOARDMAN. I trust you, having investigated this, Congressman, that that is the case. 

Mr. DEFAZIO. A RRIF loan. 

Mr. BOARDMAN. Yes. I trust that it occurred, I don’t know about 

it. 

Mr. DEFAZIO. I was just wondering, because what you are saying 

is, in some cases you make a determination or the hard facts are 

someone can’t show they have the wherewithal to pay it back. In 

this case, I understand, it was just arbitrarily withdrawn. There 

was no finding that the revenue didn’t exist to pay back the loan 

just when the speculators, excuse me, the Fortress Group took over 

Rail America. They just withdrew the loan application. 

Mr. BOARDMAN. I understand. 

Ms. BROWN OF FLORIDA. Let me just say that Mr. Giles, CEO of 

Rail America, will be on the next panel. 

Mrs. Napolitano. 

Mrs. NAPOLITANO. Thank you, Madam Chair. There are many, 

many questions that I would like to put forth, but in the interest 

of time, I have the one to Mr. Mulvey. This is kind of a question 

piggy-backing with Congressman DeFazio’s question regarding 

CSX’s obligation to carry. They are suggesting, the TCI’s recommendation is that they double the rates over the next ten years. 

What impact would this have on their ability to fulfill, CSX, of the 

common carrier obligation. And either you or the Chairman, would 

you care to address that? 

Mr. MULVEY. Doubling the rates would probably cause an awful 

lot of rate cases to be brought before the Board. Certainly that trafVerDate Aug 31 2005 19:13 May 06, 2009 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 P:\DOCS\41210 JASON
29 

fic that was truck competitive or otherwise intermodally competitive might in fact leave the railroads and go onto our highways. 

That traffic that is captive and has no alternative would have no 

choice but to either pay the rates or bring a case before the Board 

as being an unfair and unreasonable rate, at which time the Board 

would launch a proceeding to examine whether the rate was reasonable. If we found it to be unreasonable, we would order the 

rates to be rolled back. 

So we can act if they try to raise the rates too much. 

Mrs. NAPOLITANO. How would you be able to then have oversight 

over whether or not it is reasonable? 

Mr. MULVEY. The way it stands right now, the shippers who are 

being charged these rates will have to bring the case before the 

Board. Now, the Board has recently undertaken some actions, 

which are making it easier and cheaper to bring a rate case before 

the Board. Some of these large rates cases were taking years to 

process and were costing millions of dollars. We have instituted a 

number of changes which we hope will speed the process up and 

lower its cost. 

Also, we just instituted a set of procedures for small rate cases 

which will allow shippers to bring cases before us for a $150 filing 

fee and to follow one or two procedures, depending upon the value 

of the case, to get relief from these excessive rates, if indeed a doubling was attempted. 

Mrs. NAPOLITANO. What kind of priority would you give those 

cases? 

Mr. MULVEY. As soon as we get them, we open up a proceeding 

and begin to process them. 

Mrs. NAPOLITANO. How are you running them? 

Mr. MULVEY. However we need to make sure we have the staff 

to do it. 

Mr. NOTTINGHAM. Those cases would get the highest priority. 

And those comments, I have seen some of the comments in the 

public domain about TCI believing perhaps that they could just 

come in and wholesale dramatically raise rates. I just have advice 

for folks looking at investing in railroads. It is one thing to do a 

textbook exercise and talk to some consultants about how you can 

squeeze more profits out of a going concern. 

But in the real world of really operating a railroad and regulated 

environment with this Committee watching closely, other Committees, our agency, it is not just a textbook clinical exercise. And anyone who thinks they can just come in and double rates and easily 

walk away with huge profits I think is kidding themselves and 

showing some naivete. We would expect significant rate complaints 

to us. As my colleagues has mentioned, we have made it much easier, cheaper and quicker to bring those cases. CSX actually is faced 

with the first two under our new reformed simplified standards 

currently under the current management. 

Mrs. NAPOLITANO. Great. I have more questions, and I am running out of time. As the railroad industry grows, the railroad companies are putting in investment. But is it sufficient for upgrading 

their infrastructure, for training employees, for investing in green 

locomotives? And of course, assisting communities with congestion 

mitigation and safety? 

30 

I can dovetail an accident in Riverside County day before yesterday, that the emergency crews were formulating an action plan but 

have stayed clear of the derailment because there were two rail 

cars that contained hydrochloric acid and some other substances, 

they had to evacuate the whole area. 

Are we scrimping in the infrastructure to provide safety mitigation for the communities? Is that part of what you may be looking 

at as they increase their rate? Are they going to put that back into 

the infrastructure? 

Mr. BOARDMAN. We would provide that information, Congressman, to STB or to anybody else looking at the investment in safety. 

That is why I jumped in here for the Chairman. I am somewhat 

familiar with the accident that occurred yesterday as well, and the 

difficulties that you have had in the past in some of those safety 

issues. I guess, and earlier on in your question, I would have to 

say, where would you draw the bar of what is satisfactory. To us, 

satisfaction is to get to almost a zero tolerance in those kinds of 

situations. So we need to make sure that there is continuing improvement and process in every one of those categories, whether it 

is in releases such as occurred yesterday or whether it is in more 

catastrophic releases or whether it is in just generally improving 

investment and safety infrastructure throughout California and all 

the other States across the Nation. 

Mrs. NAPOLITANO. Well, specifically because it is the Alameda 

Corridor, and it is going to be more than just California that is 

going to have to be addressed in terms of being able to upgrade 

that infrastructure for the safety of the communities that you are 

going to go through. So in essence, I don’t see any real meat in saying to the railroad companies, you ave had banner years, how much 

of that are you going to put back into your infrastructure for the 

safety of the communities where you are going through? 

Mr. BOARDMAN. That is exactly right, and it is one of the reasons 

we meet with them every year to talk about, what are they investing in this year, how are they making improvements. We are basing it on our inspection reports, the real safety data that comes out, 

and looking for a continuing improvement. 

Mrs. NAPOLITANO. But shouldn’t it be more than just once a 

year? People’s safety is worth more than that. 

Mr. BOARDMAN. I meet with them once a year, every one of them, 

I make sure that I do that. We have our regional folks meeting 

with them on a very much more frequent basis. 

Mrs. NAPOLITANO. Does that translate to meeting with the communities themselves to be able to assure them that they are taking 

steps? Because none of my communities have ever even said that 

they have any contact with anybody, whether State, local, Federal, 

coming in to talk to them about the safety of their back yard. 

Mr. BOARDMAN. I understand. Part of the way we do that is we 

work with the California Public Utility Commission. They are part 

of us and part of the agreement that we work with them on. And 

they have a much closer contact with a lot of those communities, 

so we do work with them. 

Mrs. NAPOLITANO. Which was my reason last year, last budget 

year, to be able to introduce the ability for them to have some oversight on those areas that you do not. That was my point. 

31 

Mr. BOARDMAN. I understand. I understand that issue. 

Mrs. NAPOLITANO. Thank you, Madam Chair. 

Ms. BROWN OF FLORIDA. Mr. LaTourette. 

Mr. LATOURETTE. Thank you very much, Madam Chairman, and 

I apologize for not being here for the questions. 

Administrator Boardman, it is nice to see you again. But if you 

have already answered this question, then I don’t have any questions. Have you been asked at all during the course of the rounds 

of questioning to opine on one of the proposals that the railroads 

have put forward in this Congress, and I think the bill has been 

introduced by Mr. Meeks of New York and Mr. Teaberry of Ohio, 

relative to infrastructure tax credit? 

Mr. BOARDMAN. Mr. Former Chair, Mr. Congressman, the Department has looked at the investment tax credit from the standpoint of we haven’t taken a position for or against that. At this 

point in time we understand it, we understand what the railroads 

are trying to accomplish here but have not taken a position. 

Mr. LATOURETTE. And Mr. Nottingham or any other members of 

the STB, is that something that you have one, looked at and two, 

believe that the STB has any dog in that fight? 

Mr. NOTTINGHAM. We have looked at it, and I will speak for myself, as the Chair of a decisionally-independent agency, it is a good 

idea. It is good for job creation, it would allow shippers, and I emphasize shippers, not just railroads, and railroads, big and small, 

to actually be incentivized to go out and build more rail infrastructure, which is good for safety, good for job creation, good for mobility, good for congestion relief. We need to get moving and ask ourselves every day, what are we doing today to get more rail infrastructure built. And the investment tax credit idea is an excellent 

idea in that regard. It is not going to solve every problem everywhere, but it will help. And it is something that the last time I 

checked had some bipartisan support. I am not lobbying for it, you 

asked ask the question, I think it is a very good idea. 

Mr. LATOURETTE. Dr. Mulvey or Mr. Buttrey, do either of you 

have a different opinion or the same opinion? Dr. Mulvey? 

Mr. MULVEY. Not too much different. It can help, obviously. I 

think one of the concerns that has been expressed is making sure 

that investments made under the investment tax credit just don’t 

simply substitute for investments the railroad would have made 

otherwise. So we do need to make sure that this increases net investment rather than simply substitutes tax credit investment that 

would have been made otherwise. But in terms of getting money 

into the system, anything would help. I suppose I am a little more 

skeptical about its chances right now, given the other demands on 

the budget, but we will see. 

Mr. LATOURETTE. Mr. Buttrey, any observation you want to 

make? 

Mr. BUTTREY. I would agree with my colleagues who have already spoken to the issue and I would have nothing substantive to 

add to what they said. I think it is a good idea as well. 

Mr. LATOURETTE. Thank you very much. Thank you, Madam 

Chair. 

Mr. SHUSTER. Madam Chair, could I just follow up real quickly 

on that question from Mr. LaTourette? I think it is pretty well 

32 

known in the Class Is that we need to invest in significant 

amounts of money. I have some knowledge, but can you address 

the situation in the short-lines? Is it a greater problem that we see 

in Mr. DeFazio’s case, where there is a tunnel that needs over $20 

million? What is the situation among short-lines with the need to 

invest in infrastructure for not only capacity but more importantly 

for safety? 

Mr. BOARDMAN. I can address it first and then perhaps my fellows can add to it, is that one of the definitions or reasons that we 

have so many short-lines, over 500 short-lines today, is as a result 

of the Staggers Act and the rationalization of the system that many 

of those properties were much less profitable or looked at with the 

fact that they didn’t make as much money as some of the main 

lines, as the Class Is rationalized them. 

So the answer, I believe, is that it is more difficult on the shortlines today to find the resources necessary to make an improvement on a bridge or to make line improvements to compete for the 

future. It was one of the reasons, again, that the RRIF program 

was established and worked forward. And I believe also another 

reason that Congress in the past has approved some tax incentives 

with the short-line railroads. 

Mr. NOTTINGHAM. I would just add to that, Mr. Shuster, that the 

short-line industry, by experience, has greatly benefitted from the 

investment tax credits they have received in the past. I have gotten 

that on good authority from a number of short-lines. And they very 

much fill that gap, they stand between having no service for many 

communities and actually having some service. They often are the 

outgrowth of the Class Is having fully rationalized their network 

and gotten rid of track that was not highly profitable, especially in 

a Class I slightly more regulated environment with some higher 

costs and more labor regulations. 

So the short-line role should never be forgotten. They make an 

incredible impact every day, they are filling a lot of gaps and 

needs. But you are right, within the short-line community, that is 

where we are seeing more of these situations of some difficult 

maintenance and infrastructure condition problems. A lot of them 

are longstanding, a lot of them go back to the reason the Class I 

shedded that line to begin with. 

Mr. MULVEY. I worked on the investment tax credit for the shortlines. We originally had a bill that was much larger. The study 

that preceded this was a study by Zeta-Tech, I believe. They identified, this was 10 years ago, about $7 billion in short-line railroad 

needs if they were going to be able to accommodate the 286,000 

pound cars. Now, the investment tax credit that finally passed, I 

believe, allowed for $1 billion over three years. I don’t believe all 

of those monies have yet been spent. 

Meanwhile, I think the need has probably grown over that time. 

Mr. Boardman mentioned the RRIF program. Unfortunately, that 

program has taken a long time to get started and has not exactly 

been spending money like a drunken sailor. There are great needs 

out there for the short-lines, and we are going to need to find ways 

of getting more money to them, if they are going to operate safely 

and continue to be a valuable part of our rail transportation system. 

33 

Ms. BROWN OF FLORIDA. Mrs. Napolitano. 

Mrs. NAPOLITANO. Thank you, Madam Chair. One more question 

to Mr. Mulvey. TCI recommends that CSX limit capital spending 

under certain circumstances, including efforts to fund a greater 

than normal stock buy-back. Your thoughts? 

Mr. MULVEY. The Children’s Investment Fund believes that the 

CSX’s capital structure is one that is not reflective of other industries of similar risk and wants them to buy back stock so that they 

have a debt equity ratio that is more similar to other industries. 

My wife is a financial analyst, and she would be better able to answer that question, but she is not here. So my best effort is, if you 

are looking for ways to spend money on the railroads, one would 

think that investing in the plant and equipment to handle, as I 

said, the future growth that is projected for the industry is a better 

spending of the money than buying back stock. But there I am 

speaking as a public policy analyst as opposed to an investor in the 

railroads. 

Mrs. NAPOLITANO. And the other two gentlemen? 

Mr. NOTTINGHAM. Just to point out that as I have learned over 

the last couple of years and in acclimating to this job, the tension 

between Wall Street, so to speak, investors and railroads on the 

very question you raise about the appropriate level of stock buybacks, this goes aback a long time. It predates the recent flurry we 

have sense of interest by the Warren Buffets and the Children’s Investment Funds and large hedge funds. It goes back to the anecdote that Chairman Oberstar mentioned about the former CEO of 

the Burlington Northern Santa Fe, Mr. Krebs, who launched a very 

controversial infrastructure improvement investment program 

against the vociferous criticism and opposition of most of Wall 

Street and the investment community. Years later, that was shown 

to be a brilliant tactical decision. That railroad was helped tremendously by those decisions. 

It just goes to show that this is an age-old tension about basically, return more money now to investors or invest more in the infrastructure. I think we will see that tension continue to play out 

in the years ahead. 

Mrs. NAPOLITANO. But are you in a position to make any recommendations to those boards of directors, if you will, of the different rail companies, to say to them, your investment now is going 

to pay off in the future, much like BNSF? 

Mr. NOTTINGHAM. I would just generally certainly encourage 

more investment by the railroads in their infrastructure. At the 

same time, I try to be wise to what I am not an expert in. Of 

course, the railroads have to keep their eyes on a couple of different balls. One of them is they have to make their business attractive to investors. If they lose too many investors, then they 

have no money for their capital infrastructure. So they are constantly calibrating that balance between possibly doing some stock 

buy-backs, possibly doing some things to make investors happy in 

the shorter run while also keeping their going concern well invested in. 

Mrs. NAPOLITANO. Then the flip side of that would be, how much 

are they losing in public opinion, because of the derailments and 

34 

because they are not upgrading the infrastructure and they are not 

addressing those issues that are vital to the taxpayer? 

Mr. NOTTINGHAM. And the way public opinion often plays out, of 

course, in publicly-traded corporate America is through activist 

shareholders. That is what we are partly here today to talk about 

and the next panel will be, I am sure, very much focused on. 

Through our shareholder rights we all have, whether you are involved, as many of us are, in the Federal thrift savings plan—— 

Mrs. NAPOLITANO. But I am talking specifically, when you have 

derailments, that costs the company, that costs the overall, how 

would I say, bright name of a rail company doing its job. They are 

there, but you don’t see them. You know they operate. But once you 

have an accident, then they are in the spotlight and they are not 

getting—they are getting adverse publicity, to be honest. 

Mr. NOTTINGHAM. Right, and it is costly. They are exposed to liability. 

Mrs. NAPOLITANO. Right, but how do you balance that? Does that 

play a part in how they are looking at investments in their infrastructure? 

Mr. NOTTINGHAM. I think it does. It has to. Railroads know, as 

Mr. Boardman pointed out, that safety is good for business and it 

is bad for business to have a reputation for having safety problems. 

Investors, whether they be in New York or Hong Kong or London, 

they look at the safety situation. They look at the reputations of 

the railroads. Because the exposure there is huge, the liability exposure, if you are a poorly-run railroad and you are prone to accidents, and they pay enormous insurance premiums. 

So railroads are very, for their self-interest, not for any charitable or community interest, those might exist, too, those self-interests. But for their self-interests and their profit motive, they want 

to be as safe as they can. Because nothing is worse for business 

than having a reputation as an unsafe railroad. 

Mrs. NAPOLITANO. And the money they lose in the suits and the 

attorney fees. Thank you. Thank you, Madam Chair. 

Ms. BROWN OF FLORIDA. Now, Mr. Lipinski. 

Mr. LIPINSKI. Thank you, Chairwoman. I want to follow along 

the lines of the questioning of Chairwoman Brown and Chairman 

Oberstar and also Chairman DeFazio, actually. The concern over 

what type of impact this type of investment may have on improvements in railroad infrastructure and rail service in the Country, I 

represent part of Chicago. And we all know it is the rail hub of the 

continent. Certainly, I have had experience with all the Class I 

railroads. CSX, in my experience, has generally been very positive 

in their public responsiveness. 

But in addition to that, as you are all familiar with, CREATE, 

the much-needed rail modernization program, not just for the Chicago region, but for the Nation or really for the continent. In the 

SAFETEA-LU bill, I was able to work with Chairman Oberstar to 

get $100 million for that. The Class I railroads have put in $100 

million, including CSX, has put that in and is currently moving forward. Hopefully working on that some more, certainly the need of 

more investment, and more investment in the next Highway Bill. 

But it is critical that there is this investment also by the railroads. It is a good example of a good public-private partnership. So 

35 

in light of, I am just interested in the Federal Government’s perspective, the FRA, STB, in light of what we talked about here, Rail 

America, what your thoughts are and what type of impact that this 

type of investment may have on improvements to rail infrastructure in the future. 

Let me throw this other part out there also, and leave it out 

there for comments. Chairman DeFazio raised this issue with Rail 

America, the rail line abandonment. What type of oversight do you 

have right now over such things as this, and do you think there 

is room for a greater oversight on those? Let me throw that out 

there and get your comments. 

Mr. NOTTINGHAM. Well, just real quick, because you touched on 

some very important issues, Congressman, thank you and thank 

you for personally showing me the great project when we were in 

your district over a year ago, with Mr. Mulvey as well. It is a 

project I have been working on since I was at the Federal Highway 

Administration on the highway aspect of it and the funding. It is 

a tremendously important project. It is at the top of the list of important things we could do to improve rail congestion and generally 

surface congestion. 

As most of us know, it takes longer to get across Chicago in a 

rail car than it does to get from the Port of L.A.-Long Beach to Chicago, in many cases. We can’t go forward in perpetuity with that 

kind of reality. But that is your question, on abandonments and 

our powers, we do have broad powers. In an abandonment situation 

or probably I might rephrase your question to an embargo situation, we often see what Mr. DeFazio was just talking about as an 

embargo situation based on safety grounds. 

Generally speaking, I won’t speak to any particular case, because 

we do have one or more coming to us, we believe, the rail carrier 

has an obligation to reopen the line as promptly as is reasonably 

possible or to abandon the line and to put up for sale, so another 

carrier can come in and operate that. Again, you cannot embargo 

a line or stop service on a line just because it is no longer convenient for you or profitable to operate that. You have to go through 

the processes and the regulations that we have on the books. So 

I would hope that answered at least most of your questions. 

Mr. LIPINSKI. Mr. Mulvey? 

Mr. MULVEY. With regard to the CREATE project, as you are 

aware, I have been a long-time supporter of it and I have been out 

there several times. I am glad to see the project is moving forward. 

It is a very good project, and it is critical to the efficiency of the 

Nation’s rail transportation system. As part of CREATE, there 

might be some new line construction or there will be some abandonments. One of the Board’s responsibilities is to conduct an environmental analysis of any new construction or any abandonments 

to make sure that they are done in a way that is environmentally 

sensitive. So we will be involved in any new construction that is 

associated with CREATE or other projects in the Chicago area. As 

you are aware, there are certainly other projects in the Chicago 

area right now that we are watching and monitoring very, very 

closely. 

36 

So any construction or abandonments that are associated with 

those projects, our Section of Environmental Analysis will undertake the appropriate study. 

Mr. LIPINSKI. Mr. Boardman, do you have anything to add? 

Mr. BOARDMAN. Only I guess insofar as, I am not sure you were 

here earlier, Congressman, that the thing I think that is particularly important is the necessity for patience by an investor to be 

involved in railroad investments because of the time that it takes 

to have a, not only a pay-back, but also a business case made for 

some of the technology that is out there and available today. 

In particular, just as an aside, as the CREATE project moves forward, there are other things that are occurring around it now 

which drive it as well. We are seeing some activity now in the private activity bonds, for example, some of the railroads around Chicago. Because as we have discussed in the past, and I have also 

been involved with this for a long period of time, there is an absolute necessity to fix this problem, and it is going to get fixed. 

Mr. LIPINSKI. Thank you. 

Ms. BROWN OF FLORIDA. I want to thank the panel, and in closing, I want to know what recommendations you have, and you can 

submit those to us later, and anything else you want to add, that 

will ensure that Congress does not endanger future railroad investment by the financial markets, taken in consideration common carrier, our stakeholders, whether it is the union, whether you say to 

the port, and we are bringing in those big ships. But it doesn’t 

work if we don’t have the rail in place and that investment in 

place, or else you are talking about 3,000 trucks a day, 365 days 

a year, which would destroy my entire community. 

So it is a delicate balance we have here. We want the investment, but we do not want, it is a balance. 

Mr. BOARDMAN. I will submit, as you offered, an opportunity in 

writing to you, Chairwoman. 

Ms. BROWN OF FLORIDA. Thank you, Mr. Boardman. 

Mr. NOTTINGHAM. I would like to do the same, and continue to 

work closely with you and your Committee and Subcommittee, 

Madam Chairwoman. You raised some critical issues. I think hearings like today’s are very helpful in that regard. This is a very dynamic and exciting time in the rail transportation world, especially 

here in the United States. A lot of good things are happening that 

weren’t happening 5, 10, 15, 20 years ago, that are largely good. 

We have some challenges and some things we need to be watchful 

for, too, to make sure we don’t have any sharp players getting involved looking for a quick opportunity at the public’s expense. But 

I think we have the tools to protect against that. And we look forward to working with you in the months and years ahead. 

Ms. BROWN OF FLORIDA. Thank you. I want to make sure that 

you have the tools that you need. 

Mr. Mulvey? 

Mr. MULVEY. I just wanted to join the Chairman in thanking 

you. If we have any suggestions for legislation or legislative 

changes that we think are necessary, we will provide those to you 

as well. Thank you. 

Ms. BROWN OF FLORIDA. Thank you. Mr. Buttrey? 

37 

Mr. BUTTREY. Thank you, Madam Chairman. I have nothing to 

add. 

Ms. BROWN OF FLORIDA. Thank you all very much. 

Second panel. 

Thank you very much. I would like to welcome and introduce our 

second panel. Our first witness is Mr. Snehal Amin, a Partner with 

the Children’s Investment Fund. Our second witness is Mr. Michael Ward, Chairman, President and CEO of CSX Corporation. 

And I want to do a disclaimer here, because I want everybody to 

clearly understand that CSX is in my district. I have been an elected official for 25 years, and I appreciate the support and the community involvement that CSX has given our community. It is the 

kind of partner I want all of the companies to be in my community. 

Thirdly, Mr. John E. Giles, CEO of Rail America. And our final 

panelist is Mr. Robin Greenwood, Assistant Professor at the Harvard Business School. 

Let me remind the witnesses that under Committee rules, oral 

statements must be limited to five minutes, but the entire statement will appear in the record. We will also allow the entire panel 

to testify before questioning the witness. We are very pleased to 

have all of you here this afternoon, and I would recognize Mr. 

Amin for his testimony. Welcome. 

TESTIMONY OF SNEHAL AMIN, PARTNER, THE CHILDREN’S INVESTMENT FUND; MICHAEL WARD, CHAIRMAN, PRESIDENT 

AND CEO, CSX CORPORATION; JOHN E. GILES, CHIEF EXECUTIVE OFFICER, RAIL AMERICA; ROBIN GREENWOOD, ASSISTANT PROFESSOR, HARVARD BUSINESS SCHOOL 

Mr. AMIN. Thank you, Madam Chairman, Ranking Member Shuster, Members of the Subcommittee. My name is Snehal Amin and 

I am a Partner at The Children’s Investment Fund Management, 

commonly known as TCI. 

I appreciate the opportunity to testify before you and hope to answer three questions for the Subcommittee. First, who is TCI? Second, what does TCI hope to accomplish in the railroad industry, 

and at CSX in particular? And third, how can we as a Nation avoid 

a freight transportation crisis? 

We founded TCI to invest with the philosophy we believe in, 

which is long-term, fundamental investing for the benefit of a cause 

we believe in, which is helping children in poverty. The majority 

of our investor base is U.S. institutions, largely prominent university endowments. We are based in London and regulated by the 

U.K. equivalent of the SEC. And true to our cause, the vast majority of TCI’s profits have gone to our charitable foundation, which 

is dedicated to eliminating disease and poverty amongst children in 

the developing world. 

What does TCI hope to accomplish in the railroad industry and 

at CSX in particular? The short answer is the full realization of potential. Railroads are the freight transportation answer. They are 

the cheapest, most efficient, most environmentally friendly form of 

land-based transportation, and they do not require taxpayer dollars. But as valuable as railroads are to America today, their potential, we believe, is far greater. 

38 

If there is one statistic I hope you will remember from my testimony, it is this: U.S. trains sit idle 80 to 90 percent of the time 

and when they move, they move at an average speed of 20 miles 

an hour. An idle train is an opportunity lost for shippers, for workers and for shareholders. We can do better. 

Smart yards work in Canada; onboard computers work in Brazil; 

ECP brakes work in South Africa. They should all work in America. American industry is usually at the forefront of technology and 

service. Why should we not hold our railroads up to the same 

standard? We at TCI do. 

We judge relative to potential, not the past. In CSX, we see the 

potential to be the best railroad in America. Instead today, it is average or below average on nearly every major metric of performance. Despite this, CSX top management looks to us to be the most 

highly compensated railroad management team in the world, having taken home $120 million over the past three years and entitled 

to a golden parachute payment worth a further $95 million. 

Industry best pay for lagging performance is a corporate governance failure and one which no truly long-term stakeholder should 

tolerate. CSX is too important to too many constituencies to let this 

under-performance persist. 

That is why we are nominating a minority slate of five directors 

out of a board of twelve for the board of CSX. TCI is not seeking 

and has never sought control of CSX. In fact, if we are successful, 

only one director on the board of twelve will be from TCI. The four 

other nominees are former CEOs and directors of some of the bestrun railroads in the world, as well as of iconic U.S. companies, such 

as Disney and Marriott. Together, they would add over 50 years of 

railroad experience to the CSX board, where today not a single director has any railroad operating experience, except for the Chairman, who is also the President, who is also the CEO. 

How can we as a Nation avoid a freight transportation crisis? We 

work together. We shed historical biases, we embrace change and 

we focus on constructing solutions instead of battle plans. The cost 

of not doing so is too great. AASHTO estimates that it could cost 

shippers and highway users an additional $1 trillion over the next 

20 years if the railroads do not increase their capacity. You can increase capacity in one of two ways, either through productivity or 

through investment. And we need to focus on both. 

If U.S. railroads ran as efficiently as Canadian National, we estimate that that would create 30 to 40 percent new capacity in the 

system, enough for up to 20 years of growth. There are always 

skeptics, but we believe what CN did is replicable. Our nominees 

believe it is replicable. And the CN management team believes it 

is replicable, and they should know, as they have done it. 

On investment, I want to make one thing very clear. We have 

never, and nor would we ever suggest that railroads cut any spending in maintenance or safety. The accusation that we have heard 

several times so far in this Committee that that has been the case 

is absolutely untrue. 

I would make one other comment with respect to railroad investment, which is, the investment capital market is highly competitive. Railroads early only 1 to 2 percent returns on replacement 

value, amongst the lowest returns of any industry anywhere in the 

39 

world. For the railroads to attract the hundreds of billions of dollars they need to privately maintain and grow their infrastructure, 

returns must rise, which is why we have expressed concern over 

the proposed legislation that we believe would actually have the opposite effect. 

In closing, let me reiterate that as a truly long-term and engaged 

investor, we want railroads that are even safer, that provide better 

service, that attract more customers and therefore earn higher returns. We are committed to doing our part to achieve this objective 

and we ask others to be as well. 

Thank you for your attention. I would be happy to take any questions. 

Ms. BROWN OF FLORIDA. Mr. Ward? 

Mr. WARD. Thank you, Madam Chairman, Ranking Member Shuster and Members of the Subcommittee. I do appreciate the opportunity to present CSX’s views on the important subject of investing 

in the railroad industry. I am here today as the Chairman and 

CEO of CSX, and as a railroader with more than 30 years of experience. 

I am committed to creating value for all of CSX’s shareholders, 

and that value arises when CSX meets its public service and common carrier obligation to our customers, our 35,000 employees, the 

communities where we do business and you, the policy-makers who 

make the laws that shape our operating environment. What is good 

for CSX shareholders is good for our customers and for our Country. 

As you are aware, North America’s Class I freight railroads and 

their outstanding employees are unequaled in performance and 

safety. They are truly the envy of the world. A well-run and wellmaintained national freight rail infrastructure helps strengthen 

our economy. Railroads take demand off the congested highways 

and railroads reduce fuel consumption and environmental impacts 

and create high-paying jobs. Rail transportation is one of the genuine competitive advantages that U.S. businesses have in the global economy. 

But that competitive advantage could be put at risk if railroads 

are pressured to stop investing for the future. Today, some activist 

hedge funds would have our Nation’s railroads stop building new 

capacity to prepare for future economic growth. That is simply a 

bad idea. 

At a time when we hear constant warning about the Nation’s 

crumbling transportation infrastructure, railroads are investing billions of dollars in private capital to help address those needs. As 

increasingly congested cities throughout the Country look for answers to passenger transportation needs, public-private partnerships with rail can be part of the solution. And as our military is 

deployed on missions around the globe, the Nation’s freight railroads serve as a critical link in the supply chain. 

In face of these important needs, I would urge Congress to carefully examine any attempt by hedge funds to exercise control over 

a U.S. railroad and compromise the future viability of freight rail 

transportation. As our Country grows, demand for rail use is growing sharply. U.S. freight volumes are expected to increase 90 percent over the next 30 years. In recent years, every single blue chip 

40 

policy study to look at the issue has called for dramatically increased investment in rail infrastructure. This is just not a CSX 

issue. Every expert agrees that the Nation’s freight rail infrastructure requires sharply increased investment to meet the country’s 

growing transportation needs. 

The CSX management and the board of directors have been executing a balanced plan that in the past three years has dramatically improved operations and safety while providing shareholders 

with a greater than 150 percent return. That is better than the rest 

of the North American rail industry, and better than 94 percent of 

the S&P 500 companies. We intend to keep those returns attractive 

for investors by continuing to deliver for our customers and living 

up to our public responsibilities. That means investing nearly $5 

billion of capital on our network between now and 2010 to meet 

growing demand. 

CSX hopes that those who invest see the promise of the industry 

and share our commitment to safe and efficient service. Wall Street 

investment in the railroad industry at this time is a truly exciting 

validation of the benefits rails can bring to today’s economy, the environment and the overwhelming traffic needs. But given the importance of railroads, we think Congress should have some very serious questions about what it means to this Country if hedge funds 

determine the business strategies for critical national infrastructure with core economic and public safety responsibilities. 

Let’s take TCI as an example. TCI wishes to determine, even 

control, central business strategies of CSX and other major railroads. Over the last 13 months, TCI has made public statements 

and private demands, calling for a number of short-sighted strategies, including freezing investments in infrastructure expansion, 

doubling customer rates over the next decade, doing a leveraged 

buy-out and more than doubling CSX’s debt to junk status. 

So let’s talk about some of these concepts. The demand that CSX 

freeze investment in infrastructure is just plain irresponsible. Anyone who understands the rail industry, indeed, the transportation 

network as a whole, knows we need to maintain and even increase 

our investments where possible to prepare for future demand. That 

is true any time, but especially at this critical moment when the 

Nation is outgrowing its infrastructure. 

The Government has designated CSX and the Nation’s rail networks as critical infrastructure vital to the Nation’s economic interests. We treat it as such and invest millions every year to identify, 

guard against and prevent threats from those who would do our 

Nation harm. CSX is also critical to the timely deployment of the 

United States armed forces, having moved over 10,000 carloads of 

munitions and vehicles in 2007 alone. 

So turning to some of the other ideas of TCI, when a hedge fund 

demands that an entire industry double its rate over 10 years, you 

have to question their understanding of the industry, its marketplace and the regulatory environment. When a hedge fund seeks to 

have a railroad more than double its debt to junk credit status on 

the eve of the worst credit crisis in a generation, you have to question its understanding of the industry and its capital intensity. 

Finally, there is another basic policy question for Congress’ consideration that is particularly apt in the context of railroads. It is 

41 

the obscurity of these organizations that wish to control strategy of 

the rail industry. When secretive hedge funds seek to direct strategy for major railroads, I respectfully urge Congress to learn more 

about who are they, what is their experience, what are their incentives, to whom are they accountable, and most important, what are 

their real objectives and plans? The decisions these funds wish to 

drive will affect the quality of business opportunity and life in the 

United States for decades. 

Madam Chairman, I want to express my appreciation to you and 

Members of the Subcommittee for highlighting this important issue 

and for your recognition that while increased investment in the 

railroad industry is a positive development, our company’s responsibility to these investors must be balanced with our commitment 

to our employees, our customers, the communities we serve and 

most certainly our role in helping the Country continue to achieve 

its promise. 

Thank you, Madam Chairman. 

Ms. BROWN OF FLORIDA. Thank you. 

Mr. Giles. 

Mr. GILES. Good afternoon, Chairwoman Brown, Ranking Member Shuster and Members of the Subcommittee. 

My name is John Giles, and I am the CEO of Rail America. I 

began working in this industry some 39 years ago as a fireman and 

locomotive engineer on the old Baltimore and Ohio Railroad Company, in Indianapolis, Indiana. I spent the first 12 years of my career in various operating positions for three different railroads and 

shortly after deregulation, progressed up the management ranks 

through marketing and eventually executive positions at CSX. 

As background to my involvement in Rail America, Fortress executives and I discussed investing in the rail industry for quite 

some time before seeking to acquire Rail America and taking the 

company private in February of 2007. Fortress has been active in 

other transportation and logistics businesses, owning a jet leasing 

company, a shipping company and other logistical enterprises. The 

rail industry was a natural extension of their existing 

stakeholdings in the transportation industry, with railroads being 

particularly well-positioned to benefit from international trade and 

expanding global markets. 

As we studied Rail America before our investment, we became 

unified behind the belief that we could operate these properties 

better and more efficiently. We believed we could engage with customers by more effectively addressing shippers’ transportation 

needs, and thereby creating value with customers, expanding our 

own business and thereby being successful. 

Rail America today is the leading operator of short-lines and regional railroads in North America. We operate in 27 States in the 

U.S. and 3 provinces in Canada. Most recently, in November of 

2007, Fortress also acquired the Florida East Coast Railway, and 

invited my management team to explore and consider synergies 

with our Rail America operations. 

We currently manage these independent properties as separate 

and independent companies, but with some common leadership and 

a goal toward sharing management and operating best practices. 

As background, almost of Rail America’s properties were at one 

42 

time or another part of the larger Class I railroad system. While 

in Class I ownership, these lines were operated as low density, relatively high cost branch lines that the Class Is either sold at auction or leased to companies like Rail America. These lines by definition had infrastructure needs and were susceptible to fragile economic conditions, generally being dependent upon business fortunes of one or sometimes only a few online customers and industries. 

By definition, Rail America’s rail lines are generally the exclusive 

route of ingress and egress available to shippers and receivers for 

accessing the larger Class I rail system. We are the only source of 

rail access to the broader regional and national rail networks for 

distribution of shippers, goods and products. Our services are frequently billed by our Class I affiliates through inter-line settlements as a segment in the longer Class I movement. 

Like all good owners, Fortress demands that we run a high quality, safe and profitable business operation, one that helps its existing customers to succeed and expand their business and further 

seeks to expand our rail services to new businesses. We strive for 

operational efficiency in order to provide Fortress with enhanced 

shareholder value and ultimately a fair return on its investment. 

I will briefly mention the core values that we have developed 

over time that we live and operate with at Rail America and FEC. 

And I won’t go into any detail, but integrity, respect, fact-based, 

heads in the game, hands on, and a demanding partner. 

Since February of 2007, our new management has taken over 

these core values and we are driving them through the organization. Early on, a tremendous effort was made toward safety and efficiency, as Rail America had been a laggard in the industry in 

both areas. Since we have arrived, human factor derailments are 

down 4 percent, FRA reportable train accidents are down 16 percent, and year to date in 2008 personal injuries are down 60 percent. 

Another area of management focus is on improving our capital 

infrastructure. One of the things that we found is that we needed 

to bring in more experts and skill sets that were not resident within Rail America. So we recently recruited a bridge and structure 

expert and we also added signals and communications to our own 

in-house expertise. 

To summarize, Fortress and my management team came to Rail 

America to create and develop a high-performance organization 

with the goal of running safe, efficient and profitable railroads. We 

have made significant strides toward achieving these goals and toward developing an organization that is capable of assuming a 

leadership role in the American Short-line and Regional Railroad 

Association, and engaging effectively and responsibly with the Federal Railroad Administration and the Surface Transportation 

Board. 

Our association with Fortress as an owner and shareholder is enabling us to achieve financial, infrastructure and safety improvements. Their ability to assemble and install a new management 

team with a longer term focus upon operational and safety performance is unburdened by shorter term objectives of public company boards of directors and shareholders. 

43 

Two, the reduced expense of operating as a private company as 

opposed to a public company. Three, access to financial expertise 

and resources necessary to reduce our cost of capital. And four, 

Fortress’ resources and expertise in identifying, evaluating and acquiring other synergistic opportunities in the rail industry, such as 

the acquisition of Florida East Coast. 

In summary, Rail America and Fortress are committed to the rail 

industry for the long term, and we will conduct our rial operations, 

improved safety performance and enhance our capital infrastructure with the long term view in mind. 

Are there any questions you would like to ask me? 

Ms. BROWN OF FLORIDA. At the proper time, sir, thank you. 

And now, Mr. Greenwood. 

Mr. GREENWOOD. Madam Chairman Brown and Members of the 

Subcommittee, it is a pleasure to appear before you today to discuss activist investing, with a particular focus on recent investment 

in the rail industry. 

My comments today draw on research that I have done on hedge 

fund activism, as well as summarize the contributions of other researchers working in this area. In my own research, I have collected data on every incident of hedge fund investor activism in the 

U.S. between 1994 and 2006, nearly 1,000 events in total. This 

large sample of research has been complemented by two case studies and a number of interviews and site visits with activist investors. One of those cases on Kerr McGee, which is an oil exploration 

and production company, is in many ways quite similar to the investment of TCI in CSX today. 

So I hope to provide you with a brief but broad overview touching 

on four main points. First, what is the proper role of activist investors? In a publicly-traded corporation, minority shareholders have 

little incentive to spend resources monitoring management, making 

sure that they take the steps required to maximize shareholder 

value. If a firm is being mis-managed, small shareholders vote with 

their feet and sell their shares. 

The larger shareholders have more to gain by voicing their complaints. These so-called activists build up large positions in the 

firm and engage in a dialogue with management, potentially 

friendly but occasionally hostile, about the best course of action. 

Most of us in this room, as passive shareholders, benefit directly 

from the actions of activists, yet importantly, these activists bear 

all of the costs themselves. 

Second, why is there so much more activism today than 10 years 

ago, and why are hedge funds doing it, as opposed to mutual funds 

or pension funds? The answer, in my view, lies in the enhanced incentives of hedge fund managers who are paid handsomely on all 

their gains, typically 20 percent. Compare this with mutual fund 

managers or pension fund managers who typically will receive a 

flat fee on assets under management. For them, activism is simply 

too expensive, both financially and reputationally. So it is not surprising that with the enormous growth of hedge fund capital over 

the past five to ten years, there has been a similar growth in activism. 

44 

Just to give you an idea, there were virtually no activism targets 

at all in the early 1990s. But in 2006, hedge funds were involved 

with more than 200 targets in the U.S. alone. 

Third, what sorts of firms do activists target and what do they 

ask management to do? Generalizing is of course difficult, but my 

research reveals a few common themes. Targets tend to have a 

high degree of industry concentration. Industries with valuable 

hard assets but sluggish returns on capital are popular. For example, oil and gas companies were popular targets in 2004 and 2005. 

A recurring theme is that firms are under-valued relative to the 

value of those assets. This is a theme that we see in railroads 

today. Within this broader theme, activists tend to choose targets 

that have under-performed relative to their peers. I believe that 

this is because the management in these under-performing firms is 

more compelled to listen, not necessarily that they are doing something wrong. What do they ask for? The most common things are 

spin-offs and asset sales, asking the company to put itself up for 

sale, asking for more debt, asking for board seats, asking for the 

removal of a poison pill and reductions in capital expenditures. 

But I am not sure, frankly, how much we learn from studying 

their requests alone. I think they make numerous demands and are 

quite often happy when companies comply with just one or two. 

Fourth, I think the final and most important questions are, what 

do activists accomplish in practice and how does this relate to 

shareholder value? The returns to activism have been incredibly 

high, no matter how you measure it. Around the announcement of 

activism, the stock price increases by about 5 percent on average, 

presumably reflecting the gains that investors expect these activists to bring. Following this initial announcement, the stock prices 

tended to drift up further. In other words, other shareholders are 

benefiting. 

But what are the activists getting rewarded for? This has been 

the main question in my research. What I found is that the most 

significant outcome is undoubtedly when activists push the company into a takeover. When this happens, the activist collects a 

takeover premium of 20 to 50 percent, thus exiting quickly with a 

handsome gain. Activists have a knack at making this happen. 

In most other cases however, activism is sort of a non-event, 

meaning that the stock price is roughly flat in the period after the 

activism, adjusted for the performance of the market during that 

time. 

Absent a takeover, I do find that firms who remain independent 

tend to cut capital expenditures, something that is asked for today, 

increase leverage, and do indeed become slightly more profitable. 

But to reiterate, I think what is interesting is that absent a takeover, the stock price is roughly flat around the time of the activism. 

In other words, activists have proven themselves to be pretty 

good at putting companies into play, but not that good at making 

operational or strategic change. While this may sound negative for 

so-called strategic activism, I should make it clear that there also 

isn’t any evidence that activism destroys value in those situations. 

A final point. I often hear the criticism that activists are shortterm investors, not interested in long-term value creation. I certainly agree that activists are short-term, and parts of my research 

45 

support that claim. At some level it is obvious in their desire to secure a takeover and get a quick exit. But I think this misses the 

point that in theory, the rest of the market has a somewhat longer 

horizon. They wouldn’t be willing to reward activism with this high 

stock price appreciation if they felt that they were destroying longterm value. 

Thus, to gauge whether the market believes activists can create 

value in the rail industry, I think one can learn something from 

the recent price appreciation. Naturally, you can always argue that 

the rest of the market has it wrong and management has it right. 

I think that is not giving investors much credit. Notwithstanding 

this, I think this is still an open issue in research and I expect future research to have more to say about this important issue. 

Thank you and I welcome any questions. 

Ms. BROWN OF FLORIDA. Thank you. 

The bell has just gone off, but I am going to go to Mr. Rahall. 

But let me just say, Mr. Amin, I have to tell you, in listening to 

you, I think I am going to go out and co-sponsor the Chairman’s 

re-regulation bill. Doubling the rates, and you indicated that you 

think that CSX and the railroad is just average, well, then, everybody tells me what a smart investor you are. If it is just average, 

why would you want to invest in it? 

Mr. Rahall. 

Mr. RAHALL. Wow, Madam Chair, you just hit a couple of questions I had. 

[Laughter.] 

Mr. RAHALL. I do want to thank you for recognizing me, and certainly for holding this hearing today. I commend you and Chairman Oberstar for the tremendous job of leadership you provided, 

and this hearing certainly highlights the very crucial issue to us 

in West Virginia. It is no secret that CSX is a valuable partner 

with our State of West Virginia in so much that we do. They provide jobs, not only in the rail industry, but at an infamous resort 

known as the Greenbrier, there are an additional 1,500 jobs provided by CSX at that resort as well. That, I might add, just reinforces the partnership between CSX and my State of West Virginia. 

I would like to ask Mr. Amin a few questions. And Madam Chair, 

I ask that my full statement be made part of the record. 

Ms. BROWN OF FLORIDA. Without objection, so ordered. 

Mr. RAHALL. What is your plan to spend on business with CSX? 

I have heard you, Madam Chair, mention that, say you want to 

double rates that the railroad charges, how do you expect that to 

go over with our shippers of coal in West Virginia, our coal people? 

We went through this some 10, 20 years ago after de-regulation in 

which they were facing exorbitant rates, and it was pretty contentious issues at that time, and debate between the coal and rail industries. So have you discussed this with the coal industry in any 

way? And not only what is their reaction, but what would the consumers’ reaction be if, by doubling the rates as you want to do, the 

price of electricity goes up, the price of power goes up? With the 

rising price of gas as it is today and other bills that our consumers 

are facing, the whole scenario just scares me. 

Ms. BROWN OF FLORIDA. Would you just yield for a second? 

Mr. RAHALL. Sure. 

46 

Ms. BROWN OF FLORIDA. My understanding is they have asked 

the Japanese to raise their rates on the consumer because they are 

not getting the kind of return they want. 

I yield back. 

Mr. AMIN. Thank you for the question. Just to clarify one point 

on Japan, before I get to your question, Congressman Rahall, we 

have definitely not asked Japan for any rate increases. It is not 

part of what we are trying to accomplish in J-Power. I am happy 

to go into detail, more detail if you would like on that situation. 

But Congressman Rahall, the question you asked is a very important question, which is, how does rail pricing affect the customer. We spent a lot of time trying to understand rail pricing and 

a lot of time with customers. We as investors cannot determine the 

pricing. Our view is the market will determine the pricing for 

freight rail. We would make one observation, which is, freight rail 

right now charges roughly 3 cents a ton mile, which is exactly what 

it charged when the industry was deregulated over 20 years ago. 

And in the meantime, over that same period of time, almost everything that the rails move has doubled in price, whether that be 

coal or agriculture or chemicals. So we have seen for a long time 

that rail rates were deflationary or flat. 

But back to the central point, which is what does TCI think on 

pricing, we are not in control of pricing. What we are trying to do 

is add experience to the board of CSX. We haven’t called for management change. The management will continue to work in the 

market environment for pricing. 

Mr. RAHALL. What would you do with the Greenbrier? 

Mr. AMIN. It is up to the board and—— 

Mr. RAHALL. Fifteen hundred employees work there. 

Mr. AMIN. I understand. And it is a national heritage site, and 

it is incredibly important. We don’t have a view, it is really a question for management and for the board of CSX to determine what 

to do with the Greenbrier. 

Mr. RAHALL. Do you have any plans to reduce jobs, cut jobs, not 

only to Greenbrier, but in other sectors of the industry? 

Mr. AMIN. Our plan is to improve the productivity. It is not our 

plan, I would say it is what our nominees believe is possible, is 

that you can really improve the productivity of the system. What 

does that mean? That means the ability to move more traffic with 

the same employee base and with the same asset base. That is 

really what we are striving for. 

As I mentioned in my opening remarks, we think if the U.S. railroads ran as efficiently and as productively as Canadian National, 

which in many ways, in many terms we see as the benchmark, that 

would create 30 to 40 percent additional capacity that you can 

move with the same number of rail cars, the same locomotives and 

the same employee base. That is what we are striving to do. There 

is no question that over time the freight demands on the railroad 

system are going to continue to grow. And productivity is one way 

of allowing the railroads to meet that need. 

Mr. RAHALL. You would not be subject to any SEC filings, is that 

right? 

47 

Mr. AMIN. That is not right. We have made an SEC filing. That 

discloses our position, our full position and our objectives. It is a 

13(d) filing. 

Mr. RAHALL. It is a what? 

Mr. AMIN. It is a 13(d) filing. 

Mr. RAHALL. So the plans that you would have for reducing levels of business investment, cutting of jobs, would that have to be 

filed at the time? 

Mr. AMIN. We don’t have plans to do that. The SEC filing—— 

Mr. RAHALL. And should your plans change? 

Mr. AMIN. I don’t know whether that would have to be filed with 

the SEC. 

Mr. RAHALL. Okay. 

Ms. BROWN OF FLORIDA. Excuse me, I will give you time when 

we return. We are going to break because we have a vote and we 

have about five minutes left. We are going to come back, we just 

have one vote, so we will have a small recess. 

Thank you. 

[Recess.] 

Ms. BROWN OF FLORIDA. Mr. Rahall, we are going to start over 

and give you your five minutes. 

Mr. RAHALL. Thank you, Madam Chair. I probably won’t take all 

of that. I appreciate your indulgence and kindness. 

Let me follow up with Mr. Amin on the question I asked you 

about the SEC filings. You said you had filed an SEC filing, Securities and Exchange Commission? 

Mr. AMIN. That is correct. 

Mr. RAHALL. Was that a voluntary filing or a requirement? 

Mr. AMIN. It is a required filing. 

Mr. RAHALL. And would you continue to file those if you were to 

take over CSX as a hedge fund, would you continue to file SEC? 

Mr. AMIN. Just to be clear, we have no intention of ever taking 

control of CSX. We are a minority shareholder, we only get 4 percent. And if we are successful, we will have one person on the 

board of twelve that is from CSX. The other directors that we are 

supporting are all directors that are completely independent from 

TCI, the vast majority of which are people that we didn’t even 

know longer than six months or a year ago. We don’t pay them, we 

have no real relationship with them. They have no obligation to 

support our views or not. 

So we are not taking control in any way of CSX. 

Mr. RAHALL. Would you be subject to Surface Transportation 

Board regulations? 

Mr. AMIN. There would be absolutely no change in the way that 

CSX is regulated. The STB would continue to regulate economically. The FRA would continue to regulate with respect to safety. 

There is absolutely no change. The only change that we are—— 

Mr. RAHALL. Well, what exactly are your plans, then? What 

would your plans be? 

Mr. AMIN. I think you would have to ask Michael Ward that. We 

are not trying to manage the railroad, we are not asking to manage 

the railroad. We are adding 50 years of railroad experience to a 

board that right now has no railroad experience. 

48 

Ms. BROWN OF FLORIDA. Excuse me, you said the board has no 

experience? 

Mr. AMIN. No railroad operating experience, with the exception 

of Mr. Ward. 

Ms. BROWN OF FLORIDA. Excuse me, would you yield for a second? The people that you are proposing for the board, do they have 

railroad experience? 

Mr. AMIN. Yes, ma’am, they do. Tim O’Toole was the former CEO 

of Conrail, spent 20 years of his career, his entire career in Conrail. 

Gil Lamphere was the chairman of Illinois Central and then the 

Director of Canadian National. Alex Behring ran the Brazilian railroad for nearly a decade, and in doing that reduced the accident 

rate by 86 percent and made it one of the most technologically advanced railroads in the world. So there is a combined 50 years of 

railroad experience amongst our nominees. 

Ms. BROWN OF FLORIDA. Let me just ask you another question. 

You have said it, and you said it to me, that you are not paying 

the board members. Have you had any contact with them? Where 

do these people come from? Did you see them out? 

Mr. AMIN. It is our view that the CSX board and stakeholders 

would be served by adding railroad experience to the board. So we 

hired Heidrick and Struggles, which is one of the world’s leading 

search firms, executive search firms, to help us in a process to find 

directors that we thought would add the relevant experience to the 

board. I could reiterate, these are not people that we have any 

long-term relationship with. We didn’t know them—— 

Ms. BROWN OF FLORIDA. I understand you don’t have a long-term 

relationship with them. Have you had any discussions with them? 

Mr. AMIN. Yes, we did have discussions with them. 

Ms. BROWN OF FLORIDA. And they are your slate that you are 

putting before the board? 

Mr. AMIN. They are nominees that we support for the board of 

CSX, correct. 

Ms. BROWN OF FLORIDA. I yield back. 

Mr. RAHALL. Thank you. In regard to your suggestion that I ask 

Mr. Ward that, I am going to give him a chance to respond, but 

I want to ask you one last question. And I don’t pretend to know 

the high finances of hedge funds, but I assume your goal is to make 

money for your shareholders. 

Mr. AMIN. Our goal is to create value for investors, that is correct. 

Mr. RAHALL. And that would involve buying back shares of CSX, 

I believe you suggested that to the current management of CSX, 

that they buy back shares? 

Mr. AMIN. There are a variety of reasons, a variety of ways you 

can create value for shareholders. Share buy-backs are one, investment in capital infrastructure that has a good return on capital is 

another. Improving productivity is a third. We have advocated all 

of those. 

Mr. RAHALL. Do a few of those involve increasing the debt of the 

company? 

Mr. AMIN. We have advocated that it would make sense, in our 

opinion, if you can borrow at 5 percent after tax and redeploy that 

49 

capital on an infrastructure project that earns 15 percent or stock 

which we think compounds at a higher rate than that. 

Mr. RAHALL. But at least in the bond rating created by a runup in debt, thereby decreasing the value, decrease the ability of 

CSX as a capital-intensive railroad, as a capital-intensive company, 

would that not decrease their ability to invest further? 

Mr. AMIN. We believe, and we have done a lot of work with investment banks, that CSX would continue to have access to capital, 

even if its bond rating was lowered. There is another major Class 

I railroad today, Kansas City Southern, which has a lower bond 

rating than CSX and has more than adequate access to capital. 

It is not in our interest as a long-term stakeholder to do anything 

that would harm the long-term health of CSX. And access to capital is certainly an important factor. It is a judgment of, how much 

debt you have is, we wouldn’t put so much debt on it that it would 

impair the long-term viability of the business and shut the business off for access to capital. If it did that, the stock would be 

worth zero. If you have debt that you need to refinance and you 

can’t get it refinanced, the company would go bankrupt and our 

stock would be worth zero. We have a $3 billion position in CSX. 

We can’t afford for that to happen. 

Mr. RAHALL. Mr. Ward, would you care to respond? 

Mr. WARD. Yes, I would like to respond to a couple of the comments. One, I think the issue around the railroad experience on the 

board is very much of a red herring. There is no other railroad in 

the Country that does have the railroad experience that Mr. Amin 

is suggesting for CSX on their board. And quite frankly, our slate 

has 60 years worth of railroad experience on it that we are running 

against the 50 he has. And we have 175 years worth of railroad 

management experience, within our management team. 

The second thing I would like to comment on is the issue Mr. 

Amin has brought up about the CN versus CSX. I think we are 

really talking about apples and oranges, sort of like comparing the 

Canadian Football League against the National Football League. 

They have very different operating characteristics in Canada, they 

have a different health and welfare system. I think the more apt 

comparison is U.S. railroads to U.S. railroads. And among the four 

major U.S. railroads, basically we are number two on most major 

comparisons. 

The final point I would like to make is, Mr. Amin keeps claiming 

that TCI is not seeking control of CSX. And just trying to use some 

common sense, when you are seeking 40 percent of the seats on the 

board, when you are trying to dictate how much money should be 

borrowed, when you are trying to dictate where it should be spent, 

and when you are trying to dictate how your customers should be 

charged, I don’t know what you would call that, but it sure starts 

to feel like there is much more than an investor interest in our 

company. 

Thank you, Mr. Rahall. 

Mr. RAHALL. Thank you, Madam Chair. 

Ms. BROWN OF FLORIDA. Mr. Westmoreland. 

Mr. WESTMORELAND. Thank you, Madam Chairman. And Mr. 

Amin, the name, the Children’s Investment Hedge Fund seems a 

peculiar name for a company going around buying railroads. I unVerDate Aug 31 2005 19:13 May 06, 2009 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 P:\DOCS\41210 JASON
50 

derstand that you all give it to some charity for children. How long 

did it take you all to come up with that name, just out of curiosity? 

Because you all seem like a lot of smart people that are on your 

board of directors. 

Mr. AMIN. It didn’t take us long. We have a true devotion to 

helping children in poverty. The name is not the important thing, 

the important thing is we really do donate the vast majority of 

profits that we make as partners that manage the TCI Fund, have 

been donated to the Foundation. The Foundation now has over a 

billion dollars that is destined to children in need, mostly in Africa 

and India. It works very closely with the Gates Foundation and the 

Clinton Foundation. 

Mr. WESTMORELAND. That is an admirable thing, but I don’t 

know how you would feel about CSX donating all of their profits 

or most of their profits to children or any other charitable organization from what I have seen and what I have read, and your testimony and other things about your hedge fund. 

Mr. AMIN. The one distinction I would make is, this is our 

money. For CSX to donate its money, it is not CSX’s money, it is 

the shareholders’ money. We as the shareholders of TCI are voluntarily donating all that money. 

Mr. WESTMORELAND. So that is for all the people that invest 

their money with you? 

Mr. AMIN. No, it is not. Let me be clear. Our investors get a return on the fund. We charge a fee to manage the capital. That fee 

is how we as the partners who manage the fund earn profits. And 

it is that fee, the vast majority of that fee that we charge to manage the fund—— 

Mr. WESTMORELAND. Interesting name for it, though, all the 

same. 

Let me tell you, I am really in kind of a quandary about this, 

because I want to see people invest in our railroads. I want to see 

those railroads get investments. Because we need it. Our infrastructure needs it. I am just not so sure that the way maybe this 

Children’s Investment Fund is going about it, dictating board members, talking about raising rates and other things, is really the 

right way to do it. But I am all for investment. 

Let me ask you a question. You made some comments, and let 

me assure you that I know David Radcliffe. He is no back-bencher, 

he is a very smart man, and I promise you, he takes his job on that 

board very seriously. So don’t underestimate him, because I don’t 

know about his railroad experience, but I do know that they use 

an awful lot of coal that comes off those railroad cars. I just wanted 

to make that point to you also. 

Talking about splitting the CEO and the chairman, and I am not 

that familiar with other railroads, but you do have other interests 

in other railroads, I guess, in the United States, is that true? 

Mr. AMIN. That is correct. We have a very large position, a very 

large investment in Union Pacific, well north of a billion dollars. 

Mr. WESTMORELAND. Have you written any of these other railroads a letter, asking them to split the chairman and CEO roles 

as you have CSX? Or talked to them about replacing some of their 

board members? 

51 

Mr. AMIN. We have not. And the reason we have not done so is 

because we have confidence in the management teams of the other 

railroad investments that we have. 

Mr. WESTMORELAND. So it is not really a matter of you wanting 

to separate them, it is just that you don’t have any confidence in 

the current chairman and CEO? Or do you think that it is just a 

different type of a management, depending on the entity? 

Mr. AMIN. One comment I would make is, we think generically 

across the board, across railroads, across any company in the U.S., 

it is good corporate governance practice to separate the chairman 

and CEO. It is difficult for you as chairman to evaluate your own 

deficiencies as a CEO. There is a reason that we have checks and 

balances in the U.S. Government, and it should be no different in 

corporate America. We pushed for it harder at CSX, because we 

think there are corporate governance failings at CSX, and would 

highlight a couple of things. One, industry leading pay—— 

Ms. BROWN OF FLORIDA. Would you repeat what you just said? 

You think what? I didn’t hear what you said. 

Mr. AMIN. Excuse me. I think we pushed harder for the changes 

at CSX, because we think there are corporate governance failings 

at CSX. I will give you a couple of examples of why we feel this 

way. One is, as I mentioned in the testimony, the management 

team is the most highly compensated railroad management team 

we think in the world, certainly in North America, for performance 

that is average or below average on almost every metric. 

Second, last year the shareholders voted in favor of more than 

two to one for a proposal to allow shareholders to call a special 

meeting, and management didn’t respond for almost a year, didn’t 

respond for nine months. And when they did respond, they responded in a way that was very disingenuous, that didn’t give 

shareholders that right. 

These are things that we view as the board not fulfilling its corporate governance obligation. That is why we are more focused on 

these corporate governance issues at CSX than at Union Pacific, 

where we do think the management team is doing a good job and 

we don’t find the same failings. 

Mr. WESTMORELAND. So do you have any plans of sending any 

of these letters out to any of the other railroads that you are involved in? 

Mr. AMIN. We have no intention to. 

Mr. WESTMORELAND. And let me ask you a question, I am a little 

slow when it comes to this investing, but why wouldn’t you pick another railroad? If you are looking out for your stockholders or whatever, and you think CSX is so bad, why wouldn’t you go into another railroad that was more profitable and buy into that to get a 

better return on what your investment was? 

Mr. AMIN. The simple answer is because we think there is a tremendous amount of value that can get created by taking a business 

that isn’t running as well as it could and getting it to its full potential. That difference between the way the business is running and 

the potential of the business is widest at CSX. 

Mr. WESTMORELAND. Well, I am sure that CSX is thankful for 

your caring so much. 

Mr. Ward, did you want to comment? 

52 

Mr. WARD. Yes, Mr. Westmoreland, I would like to clear up a few 

of these statements that in my view are very deceptive and not an 

appropriate representation of the facts. Where we talk about CSX 

has been an under-performer, when you are in the top 6 percent 

of the S&P 500 over the last three years in creating shareholder 

value, somehow that does not feel like an under-performer in my 

eyes. 

Secondly, on our terrible governance ratings, there is a group 

called Institutional Shareholder Services who rates the governance 

of various companies. Within the transportation industry, we are 

ranked in the top 2 percent and in the S&P 500, we are ranked 

in the top 7 percent. So that doesn’t feel to me like big corporate 

governance failing. 

So I just felt I needed to clarify a few of those distortions. Thank 

you, Mr. Westmoreland. 

Ms. BROWN OF FLORIDA. Mr. DeFazio. 

Mr. DEFAZIO. Thank you, Madam Chair. 

To shift to another railroad, Mr. Giles, I believe you had the benefit, perhaps of some of my earlier questioning, in particular referring to, well, first of all, let’s get it straight, you have extensive experience in rail, 39 years, I believe, that is admirable. You were 

working for Fortress and I assume were intimately involved in the 

analysis of Rail America and the acquisitions? 

Mr. GILES. That is correct. 

Mr. DEFAZIO. Okay. And the statement that I referenced earlier 

that Fortress had to have, it is out of context, ‘‘to have no current 

plans to abandon any rail lines in connection with the proposed 

transaction.’’ I guess the question is, since you abandoned abruptly 

with less than a day’s notice a rail line in my district, and proposing to abandon another, and you have a very extensive network, 

it may very well be that other people have received notice of a proposed abandonment or cessation of service, not technically abandonment, cessation of service, only 220 days after the acquisition. 

I guess the question is, do you think 220 days fits the assertion 

about no current plans? Or did you fail to do the due diligence? 

And if you failed to do the due diligence, it seems that there is a 

problem in the acquisition. 

I would further cite the fact that Rail America was in the process 

of applying for a RRIF loan for that line. So if they were applying 

for a RRIF loan, they had deferred maintenance for over 10 years, 

they had a substantial problem with the tunnels, how come you 

didn’t know about it? And how can have this assertion that you 

had no current plans to abandon it? 

Mr. GILES. I think the assertion made by Fortress is still accurate. We have—— 

Mr. DEFAZIO. Okay, no current, it just—okay, so we are going to 

rest on the abandon. You would like to not operate the line, sit on 

the asset, hope that Maersk goes in there at a future date, you 

have an incredibly valuable asset and then begin to operate it 

again. Unfortunately, we will have lost substantial number of local 

businesses and jobs in the interim. So I guess you aren’t proposing 

to abandon it, you want to sit on it and not operate it, is that correct? 

Mr. GILES. No, sir. 

53 

Mr. DEFAZIO. Okay, then, what are your plans to re-initiate operation of the line, other than the proposal you made in response to 

the Governor, which has been rejected by the State? 

Mr. GILES. Right. Let me clarify a couple of things for the benefit 

of the Committee. We didn’t just come down and close down the operation. We found and discovered some significant and serious—— 

Mr. DEFAZIO. Well, wait, wait, Let’s go back to your due diligence. You didn’t find that when you were examining this, that 

there’s 10 years of deferred maintenance, there’s a pending loan 

application to fix up the immediate safety problem and you didn’t 

know about any of that when you bought the line? 

Mr. GILES. I don’t believe I said that. 

Mr. DEFAZIO. Well, then you are kind of getting a little off the 

track here. You are saying one thing and another. 

Mr. GILES. I don’t think I have been allowed to say anything yet. 

Mr. DEFAZIO. Well, go right ahead. You can speak plainly, clearly 

and credibly. Otherwise, I will interrupt you. 

Mr. GILES. Thank you for that. I will take advantage of this airspace to correct a couple of things. The first one is, you said earlier 

that there was virtually no investment on the CORP over a 10 year 

period of time prior—— 

Mr. DEFAZIO. Obviously there was inadequate investment, because the tunnels were substantially deteriorated and they were 

applying for a loan to fix up the tunnels, which you canceled. Or 

you terminated the process. So you must have been at the point 

where you terminated the process, which was many months before 

you closed the line. You must have known there was a problem, is 

that correct? 

Mr. GILES. I was trying to make a statement. 

Mr. DEFAZIO. Well, I am just asking you, look, one day’s notice, 

you close the line. We got shippers who have stuff stranded. You 

could reopen it only to move your own cars out of there. And you 

are telling me you want to make a statement. I want some answers. If you did your due diligence, were you aware of the problems, the deterioration on that line? Why did you cancel or decide 

not to go forward with the loan to repair the line? Were you aware 

of that at the time of due diligence and acquisition? And you are 

smirking and smiling and that is fine. 

Mr. GILES. I am trying to respond. 

Mr. DEFAZIO. But look. We want to get this line open. As my 

Governor said, we are going to get it one way or another. You are 

going to rest on the word you didn’t abandon it, you just shut it. 

You don’t have any credible plans to reopen it, you just shut it. You 

want to sit on it and hope Maersk goes in there and you get a big 

bonus out of it. We are going to intervene in that process, the State 

of Oregon is going to intervene, the port is going to intervene, unless you have a credible plan to reopen that line in the near future. 

Now, can you tell me of a credible plan, since we are not getting 

a really accurate rendition of history here? 

Mr. GILES. I am doubtful whether I will be allowed to finish—— 

Mr. DEFAZIO. Well, because you are not saying anything that is 

credible. 

54 

Mr. GILES. Let me start again. I would like to address a statement you made earlier that said virtually no investment occurred 

on the CORP in—— 

Mr. DEFAZIO. It was inadequate investment, all right? Let’s leave 

it at the word inadequate and we will agree. Now, move forward 

from there. Did you know about the loans? 

Mr. GILES. I would like to clarify that we spent $40 million on 

the CORP over the last six years. 

Mr. DEFAZIO. You? You? Were you working for CORP? 

Mr. GILES. Rail America. Forty million dollars. 

Mr. DEFAZIO. Were you working for Rail America at the time? 

Mr. GILES. I was not. 

Mr. DEFAZIO. Okay, then, Rail America, prior to the acquisition, 

by the speculators at the Fortress Group invested some money, an 

inadequate amount of money, and they knew they needed to invest 

more, they were applying for a loan and you decided not to go forward with the loan. So let’s start with the tense where you evaluated it and where you took it over, not what they may have done 

before you people took it over and closed it down. 

Mr. GILES. Good. Thank you for letting me clarify your earlier 

statement. I appreciate that. 

The second point I would like to make is on the RRIF loan. Rail 

America, before we got there, apparently looked into the RRIF loan 

process, never filed a RRIF loan application. 

Mr. DEFAZIO. Oh, we understand it wasn’t filed. The State of Oregon told us they were told that they were in the process of putting 

together a proposal at the time of the takeover. 

Mr. GILES. It was months after we arrived on the scene and 

reading the local newspapers in Oregon that we learned about a 

RRIF loan in the first place. We did not withdraw any such loan, 

it was never progressed, it was never applied for. 

Mr. DEFAZIO. Okay. We understand it was not technically applied for. Were you aware of the deteriorated state of the line at 

the time you acquired it, in doing your due diligence for your stockholders? 

Mr. GILES. Yes. 

Mr. DEFAZIO. You were? Okay. So then how does this ‘‘no current 

plans’’ fit in? If you were aware of the deteriorated condition, and 

now you have closed it, are we resting on the word abandoned? 

Mr. GILES. No. 

Mr. DEFAZIO. You didn’t abandon it, you are just closing it? 

Mr. GILES. No. 

Mr. DEFAZIO. It doesn’t work, but it is not abandoned? 

Mr. GILES. That line would not have been shut down had it not 

been for the serious continuing deterioration of those tunnels. 

Mr. DEFAZIO. Right, but they didn’t deteriorate in 220 days. 

Mr. GILES. They got gravely worse in that period of time. 

Mr. DEFAZIO. Two hundred and twenty days? That is pretty extraordinary. So they were pretty good when you took it over, 220 

days later, wow, they were a mess. 

Mr. GILES. No, they couldn’t have been pretty good when we took 

them over. 

Mr. DEFAZIO. Okay, so then—— 

55 

Mr. GILES. In June of 2006, the old Rail America team set about 

the business of trying to improve one of the tunnels. Their plan 

was to spend a quarter of a million dollars shoring up a portion of 

the roof. As they began working on that portion of the roof, the unsettled conditions caused another section of the tunnel to cave in. 

And what was a $250,000 short-term fix became a $2 million problem for one tunnel alone. Service was terminated for about six to 

eight months on that line. This was in 2006. 

So we were aware there were problems and so were you. 

Mr. DEFAZIO. Yes, but I didn’t acquire it, and I didn’t close it. 

Nor did the State of Oregon, nor did the Port of Coos Bay. So what 

are your plans, other than your unacceptable plan where you asked 

to have your operations subsidized, where you asked to have other 

people contribute for most of the work to reopen the line? Other 

than the plan you put forward, which the Governor has soundly rejected, what plan do you have to reopen that line? Otherwise, is 

this a constructive abandonment? You have no plans to reopen it, 

do you have a plan? Can you tell me of a plan, other than what 

has been rejected by the State of Oregon, which will require extraordinary financial participation on their part with no ownership? 

Mr. GILES. Yes. We have another alternative we want to explore. 

But before I—— 

Mr. DEFAZIO. Okay, when we will hear about it? 

Mr. GILES. Before I get into that—— 

Mr. DEFAZIO. When will we hear about it, sir? 

Mr. GILES. Soon. 

Mr. DEFAZIO. Soon. Could you give me a time line? 

Mr. GILES. No, sir. 

Mr. DEFAZIO. Okay. So is that something that is going to help 

you skate through the STB where you are going to be contested, 

because they are going to go for a feeder line application because 

we have constructive abandonment and you are going to try to 

come up with something else that isn’t—or is this going to be a 

credible proposal and who are you going to make it to? 

Mr. GILES. I don’t know how to respond to all that. 

Mr. DEFAZIO. Yes, well, then I guess we will just leave it at that, 

because I am way over my time. Thank you, Madam Chair. 

Ms. BROWN OF FLORIDA. Mr. Giles, as we discussed earlier, there 

is a major problem. You can elaborate a little bit about when you 

all acquired the line. Did you not do the due diligence on the conditions of the property that you were buying, the needs and what 

kind of investment needed to take place? 

Mr. GILES. Right. We did some modest amount of diligence in advance of the acquisition. This was a situation where the company 

was being essentially auctioned. It was in a bid situation. We were 

able to go visit 8 of the 42 properties that comprised Rail America. 

And we were compelled to make our bid or choose not to bid based 

on what we learned from that review. 

We did look at the CORP, we looked at it and we knew we had 

tunnel problems. We didn’t understand how grave they were and 

how imminent they were. But we quickly learned. And so we did 

our diligence. Perhaps it wasn’t sufficient. But I think any acquirer 

56 

would have been in the same boat, because you can’t get to 42 

properties in a very short period of time. 

I do think it is a very unfortunate situation, and I agree with 

you, something should be done. We have marshaled proposal after 

proposal, we have gone to the State, the Governor, Oregon DOT, 

shippers, and Union Pacific, all stakeholders. And we have said to 

them, listen, we have thrown a couple million dollars at this thing 

many, many times. And it lasts for six to nine months and then 

you have the same cave-in problems again. 

And again, 99 year old tunnels, sandstone, not granite construction, they seek and leak and rain continuously and there is virtually no good drainage within them. There was a good reason why 

Southern Pacific short-lined this property. It was low profit and 

high capital. So that is the situation were inherited. 

Now, we have gone forward and said, listen, let’s get all the 

stakeholders together and let’s all figure out who wants this thing 

to succeed. 

Ms. BROWN OF FLORIDA. Just one second—— 

Mr. DEFAZIO. Madam Chair, if I could, we are getting a reconstruction of history here. They sprung a proposal in a public press 

conference which no one had reviewed, none of the stakeholders. 

They them came to a meeting with the Governor, the Governor 

made some requests. They got back to him two weeks later, basically reiterating their original proposal. 

So it is hard to say there was proposal after proposal and constructive engagement of all the stakeholders. It is the same proposal that they made originally, which is, subsidize our operations, 

pay for most of our repairs, let us continue to own the asset in case 

it becomes worth a lot of money some day, and we will operate it 

if you pay for it. 

Ms. BROWN OF FLORIDA. Thank you. 

Mr. GILES. Madam Chairman, may I answer one thing, please? 

Ms. BROWN OF FLORIDA. I am going to let you finish. But I think 

it is important to look at the history as we figure out how we are 

going to go forward. I do think it is important that we get all the 

stakeholders in the same room. Perhaps you could put together a 

proposal that could be possibly acceptable. Because one of the 

things that everybody needs to understand is that with this common carrier obligation, and you have some obligations to transport, 

whether or not it is profit-making, is not something that is to be 

considered. Correct me if I am wrong, Mr. Chairman. 

Mr. OBERSTAR. Yes, common carrier obligation. 

Ms. BROWN OF FLORIDA. Common carrier obligation. So therefore, 

we know that people are in this business to make money. But 

money is just one aspect of what you have to do to move the goods. 

This is a major problem, and I have talked with you about it. I 

hope that Mr. DeFazio and the other stakeholders, that we can 

work together to come up with a plan that will be acceptable to everyone. 

Mr. DeFazio, would you agree to work with the Chairman? 

Mr. DEFAZIO. Certainly, Madam Chair. I asked, in fact, the Governor to convene a meeting and Rail America was represented. The 

views expressed there by all the other stakeholders, other than 

Rail America, were quite similar to the views I am expressing here 

57 

today. They did, in response to the Governor, send back essentially 

their original proposal. But if they would like to engage in a constructive discussion that goes beyond their original proposal, I am 

certain the Governor would be happy to convene another meeting 

of all the stakeholders. 

Ms. BROWN OF FLORIDA. Thank you. You are on that same page, 

is that correct? 

Mr. GILES. I am on that page, and I welcome that. We have been 

endorsing it all along. 

I would like to make one comment, if I may. 

Ms. BROWN OF FLORIDA. Yes. 

Mr. GILES. I think Commissioner Mulvey said something this 

morning that is spot-on. He said railroads are more than willing 

to invest when they can anticipate a return on their investment. 

When the public benefits dwarf the private benefits, they tend to 

look toward public-private partnerships. 

That is the situation on the Coos Bay line. There is no economic 

return to me on that line and I am seeking a way to keep the community vibrant and alive and take care of the shippers. But I need 

help to do that. 

Ms. BROWN OF FLORIDA. I hear what you are saying. But one of 

the ways that, if you decide that you can’t do it, then you can abandon the line and then they could work for someone else to take 

over. But I am hoping that we can work through this. I am certainly willing to work with you and all the other stakeholders. 

Mr. LaTourette. 

Mr. LATOURETTE. Thank you, Madam Chairman. 

Mr. Giles, I don’t have any questions for you. 

[Laughter.] 

Mr. LATOURETTE. Mr. Ward, I do want to, just before I ask questions about the financing on railroads, thank you. As you know, we 

had a derailment in Painesville, within sight of my district office 

in Ohio recently. Your company came in, and because of the overtime that was incurred by the fire departments and police departments, handed out $600,000 in checks for the first responders. That 

made me very popular in Painesville for a day, so I thank you for 

that. 

[Laughter.] 

Mr. LATOURETTE. I also want to commend you for the fine work 

of your staff, particularly Anne Reinke, formerly known as Chettle. 

So thank you very much for what you did for our constituents. 

Mr. Greenwood, I wrote down when you were talking that the activist investors, that your studies show than when just the announcement of activism, that the Children’s Fund is going to become involved in investing in the UP or in the CSX, can cause a 

stock rise of up to 5 percent. Have you studied this particular instance and did that occur for the CSX stock? 

Mr. GREENWOOD. I haven’t looked at this particular incident. The 

incidents that I have looked at extend through the end of 2006. But 

I do believe that there was such an effect around the announcement here. But I am sure they can speak better to that. 

Mr. LATOURETTE. Thank you. 

Mr. Amin, first of all, thank you for coming in and talking to me 

a couple of times about the issues that we are going to talk about 

58 

here today. I think when we talked, you indicated that your fund 

owns a little over 4 percent of CSX shares, and the 3G group also 

owns something like 4.1, 4.3 percent. I saw a press release, though, 

the other day, that was in the materials, that indicates that you 

somehow have an additional 11.8 percent of economic interest in 

derivative securities. 

My question to you is, are you and 3G going to show up at the 

shareholders meeting in May and vote 8 percent? Are you going to 

show up and vote 20 percent? Are you going to show up and vote 

more than 20 percent? 

Mr. AMIN. Eight percent. 

Mr. LATOURETTE. So what is the detail with this other 11.8 percent? 

Mr. AMIN. The other 11.8 percent is what is known as a swap, 

which in simple terms is a contractual arrangement that you have 

with an investment bank, where if the stock goes up, the investment bank owes you money, if the stock goes down, you owe the 

investment bank money. It does not entitle you in any way to the 

stock itself. It is purely a contractual arrangement with an investment bank. We have no ability to vote. 

So the amount of stock that we will vote at the AGM will be our 

disclosed 8 percent. 

Mr. LATOURETTE. But then who does vote the 11.8 percent? 

Mr. AMIN. If it is voted at all, there may not be stock underlying 

that 11.8 percent. It is really up to the investment banks that we 

have the contract with whether they want to own the stock or not 

own the stock, whether they want to vote it or not vote it. 

Mr. LATOURETTE. In your testimony and also in conversations 

you and I have had, you talk about the fact that this twelve-member board and the proposal that you have made is that you are recommending a slate of five. One has a tie to your firm. You have 

also indicated that there are other people with railroad experience. 

Just by way of something I am familiar with, we used to have 

a company that manufactured steel in Cleveland called LTV Steel. 

They got in economic trouble and brought in a new CEO who had 

knowledge of the steel industry. But then when I looked at his 

background a little bit further, I found out he was also the same 

fellow that came to Cleveland and took Diamond Shamrock out of 

Cleveland down to Dallas, Texas. What he was good at was shutting things down. He wasn’t so good at running businesses. 

As I looked at two of the members of your proposed slate, one, 

Mr. Lamphere, who unless I am wrong was a director of both Illinois Central and Canadian National, and I think during his tenure 

Illinois Central was sold; and the other one, Mr. O’Toole, Timothy 

O’Toole, was the president and CEO of Conrail from 1998 to 2002. 

Being in the part of the Country where Conrail operated, I am 

aware, and this Committee did, I think, yeoman’s work to work 

with the Surface Transportation Board to cause the sale or the divestiture of Conrail between CSX and Norfolk Southern. 

So I guess my question to you is, because I have heard you say 

that you are interested in long-term investment in this railroad 

and other railroads, is there a pattern here, that the majority of 

the experience by at least two of these nominees is in selling railroads and not necessarily running railroads? 

59 

Mr. AMIN. I would make a couple of observations. First of all, we 

do not want a sale of CSX, and we have said publicly that we don’t 

want the company to be sold. 

With respect to the nominees, the two nominees that you are referring to in particular, the reason that we are supporting them is 

because between them they have decades of experience running 

railroads. The decision as to whether or not to sell the railroad is 

not a decision that Tim O’Toole made. In fact, Tim O’Toole became 

CEO after the decision to sell Conrail was already made. And Mr. 

Lamphere was actually one of the lead investors in acquiring Illinois Central. 

So I think you could look at it both ways. And Gary Wilson, who 

is a third nominee, was one of the lead investors in acquiring 

Northwest Airlines. So I think you could say our nominees have as 

much experience acquiring as they do divesting. 

But the core of their experience, the decades of experience they 

have, which is why we think they are valuable to the CSX board, 

is operating experience with respect to the railroads. 

The one other point I would mention is CSX, I think in the acknowledgement, that its board did need railroad board operating 

experience is nominating at this AGM a gentleman who was the 

CEO of Florida East Coast, which was also recently sold. We don’t 

think that deters in any way from his ability to serve as a valuable 

director at CSX. 

Mr. LATOURETTE. Madam Chairman, may I ask a couple more 

questions? 

Ms. BROWN OF FLORIDA. Yes. 

Mr. LATOURETTE. Thank you very much. 

This business about freeze. Has that been accurately portrayed, 

that it is your recommendation to the CSX board of directors that 

until this re-regulation issue gets sorted out in the United States 

Congress that they should freeze further capital investment? 

Mr. AMIN. I appreciate your asking the question, because it is a 

very important point. We believe all investment that is economically justifiable should be made—— 

Mr. LATOURETTE. Including new capital investment? 

Mr. AMIN. Including new capital investment. One of the things 

that would make capital investment not economically justifiable is 

if the returns on that capital investment are either not forecastable 

because the regulatory framework is not stable, or if there is 

proactive moves by Congress to potentially reduce those returns. 

We are concerned about some of the legislation that is being considered, and it is not only our view, but the view of other CEOs 

in the railroad industry and also the vast majority of Wall Street 

analysts and investors, that some of this proposed legislation would 

reduce the returns. 

The statement that we made was that in a situation where that 

risk is heightened, and we understand every year since Staggers, 

there has been a bill in one form or another that could potentially 

reduce the returns, it has never had as much momentum or perceived risk as it does currently. 

So our view, and the statement that we made was, in that 

heightened risk stage, it is prudent to freeze expansion cap-ex, not 

maintenance cap-ex, not cap-ex that is being spent on safety, but 

60 

as Dr. Mulvey stated before, roughly one fifth of the capital expenditures of these railroads is expansion cap-ex. That is the capex that we are talking about. 

Mr. LATOURETTE. Let me, because I have already exhausted my 

time, I just have one further observation. I think you have just said 

what I thought I asked you, and that is that you wouldn’t not do 

any maintenance, everything is for safety, but in this heightened 

concern, whether or not we are going to have re-regulation of 

American railroads, you would not, if you were successful in convincing CSX, no new capacity projects? 

Mr. AMIN. When the risk of re-regulation is at a heightened level. 

Mr. LATOURETTE. Okay. Two things, anther Wall Street analyst 

indicated that the railroads are one of the rare industries where 

under-spending on capital expenditures for even a year or two can 

ensure five or ten years of operating problems. I happen to agree 

with that. Second thing, the regulations, the re-regulation threat 

that appears to be causing so much angst, not only at your fund 

but other investors, is the baby of our Chairman, whom I happen 

to have the greatest fondness for and the greatest respect. But I 

will tell you, I will never, ever be supportive of the days before 

Staggers. On this, we are going to respectfully disagree. 

So from an investment standpoint, I think that if you are going 

to wait for the Cure Bill and the Cure Coalition to prevail, it is 

going to be a long time before CSX or any other railroad in this 

Country will build anything. 

Thank you very much for your patience. 

Ms. BROWN OF FLORIDA. I am going to yield to the Chairman, but 

Mr. Amin, I want you to know that you moved me toward signing 

onto the bill. 

Mr. Oberstar. 

Mr. OBERSTAR. Well, thank you. This has been a very interesting 

exchange this afternoon, a lively exchange of the kind that we have 

not had in a while, and a very productive one. 

Mr. Amin, let me just get right to the point. How do you draw 

a direct line from any provision or from the totality of the bill that 

I have introduced to stimulate competition in the rail sector to reduction of revenues? 

Mr. AMIN. There are certain provisions of the bill that we would 

point to in this regard. One, for example, is Section 32 of the bill. 

It is our understanding that that section mandates that rates be 

regulated on the basis of historic costs. And the risk with doing 

that, I will use an example that Jim Young, the CEO and Chairman of Union Pacific gives, which hopefully illustrates the potential danger of doing this. Union Pacific has a bridge that washed 

out in a storm. The bridge was on their books for $600,000. When 

they went to replace that bridge, it cost them $20 million to replace. 

If the rates that they were allowed to change on that bridge only 

reflected $600,000 of value, they would never have the money or 

the economic incentive to replace the bridge at a cost of $20 million. That is the concern that we see, the historic cost, the book values of these railroads have no reflection whatsoever to the true economic values of their assets. 

61 

Mr. OBERSTAR. Your interpretation is just exactly that, an interpretation. Those are not the words of the Act, and your inference 

that the bill will directly regulate rates is simply not accurate. I 

wrote the language, I know. 

The Staggers Act did not eliminate Government governance, regulation or oversight of railroads. It greatly reduced the economic 

regulation of railroads. It left open a medium for the shippers and 

consumers to appeal to a government entity in the event that they 

are being mistreated, subjected to unreasonable, unfair, confiscatory, whatever else you want to call them, rates, and an opportunity to appeal those rates and for this Surface Transportation 

Board to exercise some independent judgment on whether competition is being unfairly squeezed out. 

That is the purpose of my legislation, is to strengthen the access 

of shippers and consumers to the mediating role of the Surface 

Transportation Board. Do you think it is reasonable, do you think 

it is pro-competitive for a petitioner against an unfair rate to pay 

a quarter of a million dollars just to file a complaint? 

Mr. AMIN. I don’t have a particular view on the rate that people—— 

Mr. OBERSTAR. Well, you’re criticizing the whole bill, now, just 

tell me, give me an answer to that question. Is that fair or not? 

Mr. AMIN. Chairman Oberstar, I honestly don’t have a view. One 

thing I would add, which I think we agree on, and we have said 

this to the commissioners of the STB, we do believe that the rate 

case process right now is too long and too costly to shippers. We 

don’t understand why it takes three years and costs $5 million for 

a shipper to bring a rate case to the STB and—— 

Mr. OBERSTAR. That was my next question, is, what about the 

fairness of the process by which, so you are saying that that is unfair? 

Mr. AMIN. We completely agree and we have given suggestions 

to, we have met privately with Dr. Mulvey and given him suggestions for how we think the process might be expedited in a way 

that gives more access to shippers, in a way that is much more 

time efficient and much more cost efficient for the shippers. 

Mr. OBERSTAR. You have demonstrated yourself to have a considerable knowledge of the rail industry. What about the bottleneck 

rule, without having to on my part elaborate what it means? 

Mr. AMIN. We followed up with our counsel after the meeting 

that we had, and it is our determination based on that that a shipper today can break the bottleneck if they are able to contract on 

the non-captive part of the route. They can force a railroad to provide a rate for the captive part of that route. 

Mr. OBERSTAR. I think that will come as a surprise to a great 

many of the short-line railroads. 

Mr. AMIN. It may. We can—— 

Mr. OBERSTAR. Which is why they are asking for relief. 

Mr. AMIN. I can’t answer that on behalf of the short-lines. But 

I am happy to provide the legal analysis of our counsel to the Committee. 

Mr. OBERSTAR. Well, the Association of American Railroads has 

done that vigorously on behalf of the Class Is. I find their arguVerDate Aug 31 2005 19:13 May 06, 2009 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 P:\DOCS\41210 JASON
62 

ment unpersuasive, but I would be happy to receive your legal 

counsel’s opinion on the matter. 

You say that it is irresponsible to make long-term investments 

without knowing the long-term returns. That was in your letter to 

CSX of last fall. That is sound on itself. Long-term returns, you 

continue to say, are unknowable while the regulation risk persists 

at this heightened level. Kind of news to me that that is a heightened level of risk when you have a Republican in the White House 

who is not inclined to sign the bill if we succeed in getting it 

through both bodies. You are presuming some things that are not 

in the real world, although I am going to work as hard as I can 

to make sure that it does get to the President. 

Mr. AMIN. We would never underestimate your power, Mr. Chairman. To be fair, our advisors in this situation, one of our advisors 

had advised us that there was a 50-50 chance of the bill in its current form passing. That was a concern to us and that is the basis 

on which—it may be wrong. 

Mr. OBERSTAR. Those are better numbers than we had two years 

ago. 

Mr. AMIN. But that is the advice that we had gotten from one 

of our advisors in Washington, DC. 

Mr. OBERSTAR. All right, well. But there is uncertainty in all that 

you undertake in the marketplace. Why is this uncertainty such a 

big stumbling block for you? 

Mr. AMIN. Chairman Oberstar, that is absolutely right. Our job 

as investors is to assess uncertainty and ascribe a price to it. That 

is what we do as investors. Everything that we do, you are right, 

is uncertain. There are some risks that are greater than others. As 

we have discussed, there are some elements of this bill that, in our 

interpretation, and maybe our interpretation is wrong and needs to 

be corrected, but in our interpretation, posed a risk. I would say 

it is not only our interpretation, it is the interpretation of most of 

the management teams in the industry and most of Wall Street. It 

could be that we have all misinterpreted. 

But it is our job to evaluate risks and assign prices to those 

risks. That is what we do every day. 

Mr. OBERSTAR. Well, the particular provision of the bill is not a 

mandate upon the Surface Transportation Board, it is not a requirement. But in any event, we are at a stage, we have had a 

hearing on the subject matter, we are exploring options for the various provisions of this bill, we want to achieve fairness in rail service and fairness for competition in this business. We went from 60 

railroads in 1980 to 7, I usually say 4, but we will include the 3 

dwarfs and say, all right, so it is 7. 

But there are not a great many markets in which they compete 

head to head. And where competition is likely to surface in this 

business is from the short-lines, and they ought to at least have an 

opportunity to compete on a fair and equitable basis. 

There are the other impediments and obstacles to shippers in the 

marketplace that I think this legislation will open the door to overcome and reduce the stranglehold that the railroads have, frankly, 

on the shipping environment. Now, it is a delicate balance that we 

are trying to achieve here. We want to keep the railroads strong, 

successful, profitable. But we also want to be fair to shippers. And 

63 

I don’t think they have been consistently fair to shippers or to 

other competitors. And I think the legislation gives us an opportunity to engage in a constructive discussion with the railroads, 

with others like yourself who are investing in, and we will continue 

that dialogue. 

We are going to, my intention, my purpose is to move legislation 

to create a more fair, equitable rail competition environment that 

is beneficial to railroads, but also primarily to shippers and consumers. I look forward to working with you on that. 

Thank you, Madam Chair. 

Ms. BROWN OF FLORIDA. Thank you, Mr. Chairman. 

We have a series of four votes. I am going to go to Mr. Brown, 

then we are going to take a recess and come back. Mr. Brown? 

Mr. BROWN OF SOUTH CAROLINA. Thank you, Madam Chair. I 

will be brief. 

Thank you, gentlemen, for coming to continue this dialogue. 

Mr. Amin, the TCI has accused CSX of reckless spending on capital improvements. Can you give this Committee any examples of 

this reckless spending and where would you like to see CSX management cut back on capital spending? 

Mr. AMIN. Our concerns with respect to CSX were that their capital spending program has not been justified to shareholders. What 

I mean by that is, they have not disclosed to shareholders where 

the capital is being spent and what types of returns that capital 

is obtaining. We asked, we have asked publicly and we asked before the CRS investor day they had with all their shareholders that 

they use that opportunity to share with their shareholders where 

the capital was being spent. And they unfortunately did not. And 

there are a series, I think we included in our testimony quotes 

from other Wall Street analysts that were equally disappointed in 

the company’s unwillingness to discuss where that capital was 

being spent. 

Mr. BROWN OF SOUTH CAROLINA. Let me share with you, I am 

a tree farmer back in South Carolina. I know a little something 

about long-term investments. But as an investor, I sure like a 

quick return. I am wondering, for a firm that was just found in 

2004, has your track record after just a few years, how you expect 

anyone to believe you have a CSX interest above making a quick 

Euro? 

Mr. AMIN. We appreciate the question, because I think it is easy 

to paint all hedge funds or all investors with one brush. I will give 

you a couple of observations that will hopefully help in his. One of 

the things that we have been advocating very publicly is ECP 

brakes. ECP brakes only work if the entire fleet of rail cards are 

equipped with them. At the most aggressive estimate, it would take 

five years to equip the U.S. rolling stock with ECP brakes. So for 

the next five years, it is only a capital expenditure with no return. 

If we didn’t have the intention of being a long-term shareholder, it 

would be completely irrational for us to advocate spending on ECP 

brakes. 

Union Pacific is another example where we have, as we have disclosed, a very large position in Union Pacific. We own approximately 4 percent of Union Pacific, similar to our ownership stake 

in CSX. And we have been supportive of that management team. 

64 

The Union Pacific has a larger capital expenditure program than 

CSX does. The reason we are supportive is we have confidence in 

that management team. They have shared with us the strategic rationale for making that investment. That investment also, although 

it won’t earn a real return until after 2011, according to the UP 

management. So that is a long—you wouldn’t advocate, you 

wouldn’t support those types of investments if you didn’t plan to 

be around. 

I will give you just one other example which hopefully will be 

helpful. One of our largest investments over the history of the fund 

is the German stock exchange called Deutsche Borse. It was unfortunately another situation where we were activists. At the time, 

people said the same thing, our fund had only been in operation 

for a year, that we were going to be short-term. And the stock doubled—— 

Ms. BROWN OF FLORIDA. Sir, what was one of your largest investments? 

Mr. AMIN. It was Deutsche Borse. 

Ms. BROWN OF FLORIDA. That is the one that came into Jacksonville and cost us 500 jobs. Continue. 

Mr. AMIN. No, it is not. It is not. Deutsche Borse is not in Jacksonville. I think you are—— 

Ms. BROWN OF FLORIDA. It is not in Jacksonville, but it bought 

out a bank, and it cost us 500 jobs in Jacksonville, Florida. 

Mr. AMIN. No, I respectfully would like to correct that. I think 

you are referring to ABN Amro, which is a different investment. As 

I mentioned—— 

Ms. BROWN OF FLORIDA. Were you party to that investment? 

Mr. AMIN. It is a different investment. 

Ms. BROWN OF FLORIDA. The answer is yes or no, were you party 

to that investment that cost me 500 jobs in my city? 

Mr. AMIN. We were an investor in ABN Amro. 

Ms. BROWN OF FLORIDA. You can finish answering Mr. Brown’s 

question. 

Mr. AMIN. I would like to just correct something on the ABN 

Amro situation, which is, ABN Amro sold the bank that was located in Jacksonville to CitiGroup before we were active in ABN 

Amro. So I think there is no way that anyone could attribute what 

happened in Jacksonville to TCI’s involvement. It took place, the 

sale of that bank to CitiGroup took place before our involvement 

in ABN Amro. So it is a really a discussion that needs to be had 

with CitiGroup, in which we have never been a shareholder. 

But back to the point on Deutsche Borse, the stock doubled. Most 

of the people that thought we were going to be long-term sold. It 

tripled, it then quadrupled and it quintupled. And we are still 

there, we are still there today as a shareholder in Deutsche Borse, 

even thought we have made five times our money. And if all we 

wanted to do was a quick 50 percent, we would have sold out three 

and a half years ago. 

So I would encourage and I would ask that people look at our 

track record and what we have asked for publicly to evaluate 

whether we really are a long-term shareholder. 

65 

Mr. BROWN OF SOUTH CAROLINA. Madam Chairman, I am not 

sure how much time we have left before the votes, but thank you, 

gentlemen, for your participation. 

Ms. BROWN OF FLORIDA. Since I know most of us have not had 

lunch, we have four votes. We are going to recess and we will be 

back around 4:30. Thank you. 

[Recess.] 

Ms. BROWN OF FLORIDA. The Subcommittee will come to order. 

Let me just say that I hope that we can finish up in the next 

30 minutes. 

Mr. Amin, I didn’t ask, when we first came here, to have you 

sworn in. But I just want you to know that it is a criminal offense 

to lie to Congress. But I guess it is no criminal offense to try to 

mislead us. So I have a series of questions that I am going to ask 

after Mr. Shuster finishes. And I want you to try to be as truthful 

as you can with the answer. Okay? 

Mr. Shuster. 

Mr. SHUSTER. Thank you. 

I guess the one thing that has come out of today that, although, 

Mr. Amin and Mr. Ward don’t agree on a lot of things, the one 

thing they do agree on is the opposition to the re-reg bill, which 

I think that we can all, well, at least on this side of the aisle, many 

of us and the two of you, and I would say the three of you at the 

table, would agree that that is something we don’t want to see. Because it would be bad not just for the railroad industry, but investors, customers. 

Most importantly in my view is, it would be bad for the American 

taxpayer. Because I think that is a prescription to have the railroads come back here in five years, ten years, and say, we can’t afford the $20 billion, $60 billion, $100 billion, whatever it is, so the 

American taxpayer is going to have to do it. That being said, I at 

least find that common ground reassuring here today. 

Mr. Amin, I think it is pretty clear there is, in this Committee, 

and you have heard today that there is a great concern about longterm investment. And you said that the Children’s Fund is, you are 

long-term investors. Although some of your initial letters and statements, not necessarily from you but from Children’s Fund I think 

have a lot of us thinking we are not sure if that is, if you are just 

saying that to get in with the railroad, allow the Congress to put 

our guard down. 

But a couple of things you said, and you have addressed some 

of them today, I would just like to go over a few of them. You said 

freeze investment on capacity expansion. Because of the re-reg bill, 

there is uncertainty. But even in the 1990s, when the chairman of 

the board of BNSF saw a lot of uncertainty, and he still plowed in 

billions of dollars, and everybody said, he is crazy, and then lo and 

behold, six years later, five years, seven years later, what he did 

was what all the other railroads wish they had done. 

So you say long-term investor, you say freeze capital, everybody 

looks to BNSF and says what they did was the right thing. So it 

doesn’t add up to me. That is the first thing. 

Second thing is doubling the rates over 10 years. If you ever 

wanted to see a re-reg bill come to the House Floor, jack the rates 

up 7 percent every year, and you are going to have an avalanche 

66 

of customers come to Congress saying, you have to stop this. That 

is the second thing that you came out and said, that even though 

you are against the re-reg bill, once again, that is a prescription, 

to me, for Congress to do something to protect the shippers. 

The third thing, I will get them all out and then I will go back 

over them with you, in the leveraged buy-out. I don’t know where 

that came from, but I understand, and to me, a leveraged buy-out 

is you want to take the company private so that you can do what 

you want to do as a private firm, which gives you a lot more flexibility and ability to do those things that you want to do. 

And the fourth thing is to increase the debt level. I guess it was 

a year ago that you stated at Bear Sterns conference, increasing 

the buy-back of the stock to up to 20 percent to increase the debt 

by up to five times the earnings. I guess there are a couple of reasons you could do that, but the first thing that comes to my mind 

is you raise the debt, strip all the cash out, so you are not spending 

your cash, so you can take it and do what you want. 

So those four statements that I heard, some of them you refuted, 

some of them I don’t think you have convincingly refuted, give me 

great concern about what your long-term intentions really are. So 

if you want to go through, and if I missed one, I will make sure 

I bring you up to speed on it. 

Mr. AMIN. Thank you for the opportunity to clarify on these four 

statements. 

On the first, on freezing investment, it has always been our view 

as a long-term investor that you can only make investments so long 

as they are in an adequate return. We are not the only people who 

say that. I think all investors would say that. There are quotes 

from three railroad CEOs in our testimony that say exactly the 

same thing, the common theme being you can only make investments if you earn an adequate return. 

It is our view that H.R. 2125 would impede the railroad’s ability 

to do that. We acknowledge that there has been a bill in that form 

introduced in the House every single year since Staggers. It is not 

the existence of the bill in and of itself that causes us concern. 

What causes us concern is there is now a triumvirate of Congress 

in terms of Congressional power and Chairman’s Oberstar’s strong 

view that that bill needs to be passed, together with heightened 

frustration from shippers, together with labor. That is a triumvirate that is very, very powerful and very concerning to us as a 

shareholder. That is a new phenomenon. That we believe heightens 

the risk. 

Now, that risk has been somewhat diminished as labor has become neutral. But at the time that we were evaluating this and at 

the time we made the statement, it was the advice of our Washington counsel that there was a 50-50 chance that that bill in that 

form would pass. And that is a very, very significant risk to us as 

a shareholder. And it is in that context that we made that statement. 

Mr. SHUSTER. You took the position in the company, it was last 

spring, roughly? 

Mr. AMIN. That is correct. 

67 

Mr. SHUSTER. And right about that time is when I believe Chairman Oberstar initiated that. So my question would be, why did you 

make the investment if you thought that was a real possibility? 

Mr. AMIN. At the time that we made the investment, we didn’t 

feel like the risk was as high as it had developed to be over the 

course of the summer and the fall. Maybe that was us not being 

as attuned to the risk or the risk actually increasing. I don’t know 

which one of those two it was. But we became dramatically more 

concerned about it in the fall. 

The one other thing I would add to that is that we have spent 

a lot of time in Washington, D.C. trying to stay on top of this issue. 

We have offered to meet with every single Member of this Rail 

Subcommittee, we have met several times with the Surface Transportation Board, several times privately as well with the FRA, to 

make sure that we are fully aware of what is happening in Washington. It is very important to us as a shareholder. 

And you would only, frankly, invest the amount of time to do 

that if you had an intention of being here for a long period of time. 

It is personally damaging to our reputation if we invest all this 

time and then sell out. It is damaging for our reputation in the 

U.S. capital markets. Hopefully that addresses the freeze investment question. 

The one other thing I want to clarify on that is that we have 

never said, as we have been accused of, that we would cut any investment in maintenance and in safety. 

Mr. SHUSTER. I didn’t say that. 

Mr. AMIN. In terms of the rates, it is our view that as a shareholder, we don’t control the rates. The rates will be determined by 

management and the market. Mr. Ward and the management of 

CSX and all the other railroads will determine the rates. 

The one observation we make is that since deregulation, the 

rates that the railroads have charged are roughly the same. They 

are roughly the same as the rates they were charging in 1980. The 

value of almost every good that they move is up roughly 100 percent. So in real terms, the shippers are paying half the price that 

they paid in 1980. That is purely an observation that we make. 

Mr. SHUSTER. Isn’t that good? Because the railroads then have 

become so efficient that they can offer in real dollars a price that 

is lower than it was 20 years ago. Obviously they are making 

money. So that is an effect of efficiency and good management for 

the industry. Correct? 

Mr. AMIN. I completely agree. I think what has changed now 

from the past 20 years, or frankly, since the interstate highway 

system was built is we are no longer in a situation where there is 

tremendous excess capacity in the railroad network. So the railroads now have to earn adequate returns so that they can continue 

to invest and grow the network. 

That is a fundamental shift from the situation that we have been 

in for the past few decades, where there wasn’t that demand or 

there wasn’t that demand to grow the network. So it wasn’t imperative that the railroads earn an adequate return on replacement 

value. When you look at the returns on replacement value, they are 

1 to 2 percent. These are not the levels of returns that are going 

to attract the $150 billion or hundreds of billions of dollars, deVerDate Aug 31 2005 19:13 May 06, 2009 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 P:\DOCS\41210 JASON
68 

pending on different people’s investments, that the railroads are 

going to need to grow their infrastructure. 

Mr. SHUSTER. That gets back to, you said, the statement somewhere came out that I read that you wanted to increase the 7 percent a year. Once again, that is something that—that is a dramatic 

increase. That is what is going to draw the fire of Congress because 

you are going to have the agriculture community, the energy, 

chemical, all the people that are involved now coming to us even 

stronger. So once again, as the Chairwoman said, that is a formula 

for re-regulation. So it seems to me that it doesn’t quite add up. 

And I take you at your word that you have spent the last six 

months, I think, having an awakening that, oh, my goodness, 

Washington can affect us a hell of a lot more than we thought they 

could. 

Mr. AMIN. On the third point of the leveraged buy-out, we raised 

the idea of the leveraged buy-out with the management team, we 

asked them if they were interested in thinking about it and they 

were. They invited us to speak with their bankers about the opportunity to do that. It was not something that we forced upon the 

company. We actually, upon doing our own work, and we have now 

been studying the industry for a couple of years and have spent 

millions of dollars studying it, determined ourselves that it wasn’t 

the right conclusion, that a leveraged buy-out was not the right income. We stated publicly in a speech in May in front of a thousand 

railroad investors that we didn’t think a leveraged buy-out was the 

right solution. 

The reason that we raised it is, we think it is important for railroad management teams, and frankly for any management board 

of any company, to constantly evaluate ways of creating shareholder value. Raising ideas and bringing solutions or potential opportunities to create value isn’t necessarily an activist thing. There 

is nothing wrong with asking questions, is there a better way to 

do this, is there a better braking technology, why don’t we use ECP 

brakes. Can positive train control create value, why not run a precision scheduled railroad like they do in Canada? 

These are questions that we have for management that we wanted to engage with a constructive dialogue with management on. We 

have been able to do that in certain situations. I would again point 

to our relationship with Union Pacific, which I think is very constructive. We asked very similar questions and we got good answers. And as a result, we have confidence in the management 

team there. 

But merely asking the question of, is an LBO the right thing to 

do, we don’t think is wrong for us to do as a shareholder. It is when 

people don’t ask questions that you end up with the Enrons of the 

world. 

Mr. SHUSTER. I agree with that, I think as a shareholder you 

have every right to ask those questions. That is not something that 

I am concerned about here today. I think you should be asking 

those questions. Just the way you have gone about the whole operation, again, it leads me to some great questions that obviously we 

are asking here. 

Then the final thing, the debt level, increasing it substantially. 

69 

Mr. AMIN. The debt level, yes, sure. It is our view that all of the 

railroads, and this is not CSX-specific, all of the railroads have additional debt capacity that they could use to redeploy higher returns. Whether that is to buy back stock or to make capital investments, that would not in any way jeopardize the long-term health 

or the capital availability or the debt availability of these business. 

We have done a tremendous amount of work, we have worked 

with investment bankers, and we have come to our own views of 

how much debt capacity there is. But borrowing debt at a cost of 

5 percent after tax and redeploying it in capital investment projects 

or in your own stock at 15 percent is value accretive. If that debt 

is available—there is debt available for the railroads today. We are 

in one of the worst credit markets that we have been in probably 

since the early 1990s. And the railroads still have access to that 

debt. 

So that to us is an indication that there is another source of capital here in the context of the discussion that we are having here, 

which is how are we going to grow and meet the rising demands 

for infrastructure, it is productivity and it is capital. Well, that is 

a huge source of capital. It is not just equity capital that we control. It is a source of capital that we should actively evaluate to see 

whether it makes sense to use. 

But the one point I would make is, people say, well, what you 

are trying to do is strip out all the cash from the company and 

leave it dry. It is not in our interest as a long-term shareholder to 

do that. Putting a company in a situation where it could potentially 

be bankrupt means our $3 billion investment in CSX would be 

worth zero. 

Mr. SHUSTER. I guess that is the whole question here is, longterm, short-term, short-term it is in your interest to do it, longterm it is not. Again, there is great doubt about, and as I said earlier, we don’t paint everybody with that broad brush that hedge 

funds are all bad, because I think it is important that there is capital flowing into the railroads. And there are two sides of the coin, 

that is what we are trying to get at here today. 

I know I have gone way over my time, but I wonder if we could 

give Mr. Ward an opportunity. 

Ms. BROWN OF FLORIDA. Mr. Ward, I am going to give you adequate time to respond. We have a couple more Members and you 

can just jot down and I will give you an opportunity to close, if 

that’s okay. Is that okay? 

Mr. WARD. Yes. 

Mr. SHUSTER. Thank you. 

Ms. BROWN OF FLORIDA. I am going to Mr. DeFazio, but first, I 

want to ask Mr. Greenwood a question, since you are here. For 

years, I went to the Transportation Conference where we discussed 

railroads. And for years, the railroad industry was in the black, 

and now it is just beginning to operate—I mean, it was in the red. 

Red. Black is what you want. So now—— 

Mr. SHUSTER. She didn’t want to say that, because red means 

that is a Republican State. 

[Laughter.] 

Ms. BROWN OF FLORIDA. So now it is in the black. I heard Mr. 

Amin make the comment that it is okay for this debt, so that even 

70 

though the bond rating would go down, can you clarify that for us? 

And while you are talking, you made some analysis in your paper, 

which I thought was very good, about the food industry. But the 

difference is, we only have a limited number of railroads. 

And it is part of their mission, with the common carrier, is because, our military and the shippers and all of that, and the stakeholders and the union. So it is a little bit more complicated than 

the restaurant. Because if, for example, I don’t want to go to a certain restaurant, I can go to another one. That one can close, or 

some of you all can cook at home. I don’t know, my notes say somebody could cook at home, that is not me. 

So would you explain that? 

Mr. GREENWOOD. Yes. I think a good example of that was in Kerr 

McGee, that is a case that I have studied a lot. Kerr McGee was 

an oil exploration and production company. They were targeted by 

the activist investors JANA and Icahn about two years ago. One of 

the things that was asked for was pretty similar, which was, they 

asked for a reduction in capital expenditure, and they asked for repurchase of shares. Now, at the time, some of the analysts who 

were covering the stock warned about a possible credit downgrade. 

Now, having said that, I think that was a risk that was on the 

table. But having a credit downgrade doesn’t mean that the move 

is necessarily value-reducing. Just by definition, the more debt that 

you take on, the more risk you put on those debt holders. And so 

their debt is going to be more risky and you will face this possibility. 

But what you saw was when the repurchase took place, you saw 

this quite substantial increase in the stock price. I think it was 

probably 3 to 7 percent, something like that, on the day. It is hard 

to say unambiguously that a downgrade is a bad thing. 

Ms. BROWN OF FLORIDA. One last thing. There has been lots of 

discussion about raising the rates on shippers, I think it was said 

7 percent a year. In your analysis, do you think that this would 

cause Congress to immediately pass a re-regulation bill. 

Mr. GREENWOOD. I wouldn’t be able to speculate on that. 

Ms. BROWN OF FLORIDA. I would speculate on it. 

Mr. DeFazio. 

Mr. DEFAZIO. Madam Chair, just to follow up on that point, what 

alternative, since you are an economist, there is something known 

as monopoly pricing. And I don’t think you can say there is a viable 

trucking alternative to retail. Many of these shippers do not have 

access to another railroad. So as the Chair postulates, if you were 

looking at 7 percent a year for 10 years, basically doubling, using 

the rule of the sevens, how can we say this is somehow a marketbased system? It is not market-based in that there are no alternatives, according to a free market and Adam Smith and—I mean, 

I guess they have an alternative, they can just go out of business, 

not ship their product or whatever. But they don’t have a viable 

alternative. 

Mr. GREENWOOD. Sir, as an economist, I am absolutely aware of 

the anti-trust issues and the possibility of monopoly power being 

linked to the ability to raise prices in the future. I don’t know 

enough about the rail industry in particular to draw that concluVerDate Aug 31 2005 19:13 May 06, 2009 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 P:\DOCS\41210 JASON
71 

sion here. So I would note that of course it is theoretically possible, 

but I wouldn’t really be able to make further comment on that. 

Mr. DEFAZIO. And I was going to ask you about, again, but since 

you say you really don’t know that much about rail, but the point 

is, you have heard some discussion of the common carrier status. 

There is a public benefit here which needs to be protected. I do see 

some potential conflict between what we hear about value or return 

or whatever else and the possibility of these leveraged buy-outs or 

investors getting in who have a different agenda. And there was a 

proposal which was vetoed by Bush One to essentially have a fitness review if looking at it, even though you are not an expert on 

the industry, where we have to balance both some public benefit, 

common carrier status and the need to attract investment. Do you 

think that perhaps having some fitness review to determine whether or not we are attracting the Warren Buffets of the world, which 

I look at as much more patient, long-term capital, or other investors that I would suggest are not so long-term and not so patient? 

I say patient for us, but I am just putting it to you. 

Mr. GREENWOOD. I think you can enter into a very dangerous situation where you are trying to evaluate the motives of the investor 

rather than the outcome of what the investors do. One argument 

that I am fond of says that if investors were really short-term and 

made significant value destroying decisions, they would be penalized for that in the market by other investors. 

Mr. DEFAZIO. How is that? I mean, I come in, I raid something, 

I make them strip out a bunch of value, the stock goes up, I sell, 

I made a bunch of money. I could retire to my overseas tax haven 

and how do I get penalized? 

Mr. GREENWOOD. Because the overall pie has shrunk. So the remaining value of that equity would have shrunk if other market 

participants are sort of correctly evaluating—— 

Mr. DEFAZIO. It is all about timing, though. You could have done 

that, gotten out and you would have screwed the people who are 

still there. 

Mr. GREENWOOD. I think I would disagree with that in the sense 

that, it is assuming that the other investors don’t know what is 

going on. Otherwise, they would have penalized—— 

Mr. DEFAZIO. There could be a run, but maybe you are just first 

out the door. I mean, maybe, maybe not. 

I am not going to reopen a dialogue with Mr. Giles, but I thought 

you might want to correct something you said earlier, because I 

just was a bit impassioned carrying on about other things. But I 

am certain you know that the Coos Bay line was not closed for six 

months, it was the Siskew line which you are now proposing to 

abandon, because of a fire in a tunnel. There was never a prior closure on the Coos Bay line. So I just thought you might want to correct the record there. 

Mr. GILES. You are incorrect. 

Mr. DEFAZIO. Well, I have UP sitting behind you, they don’t 

agree, nor does my staff, nor does anybody else know. If you could 

provide me documentation of a six month closure of the Coos Bay 

line, an area which I have represented for 21 years in Congress, 

we would be shocked. 

Mr. GILES. Done. 

72 

Mr. DEFAZIO. Okay, great. 

Ms. BROWN OF FLORIDA. Mr. LaTourette. 

Mr. LATOURETTE. Thank you, Madam Chairman. 

I just have two quick areas that I want to take up with you, Mr. 

Amin. You will have to forgive me on the first one, because I am 

not in your business and I was asking about 8 percent versus 20 

percent. So if you have it some place in front of you, it is your press 

release of December 19th, 2007. The last sentence of the first paragraph, the members of the group also hold derivative securities 

providing economic exposure equivalent to an additional 11.8 percent of CSX’s outstanding shares. 

I thought what I heard you telling me was that you don’t own 

them, and if the stock goes up, you somehow have a deal with people that you get paid, you get a fee from the people who do own 

the shares. Is that how that works? 

Mr. AMIN. That is correct. 

Mr. LATOURETTE. Okay, I just didn’t understand. 

Thank you. The other question, when we were voting, I read a 

Wall Street Journal story. And I don’t know if it cost Ms. Brown 

500 jobs or not, but I am familiar with your company’s involvement 

on ABM Holdings and also there have been a couple of stories I 

have read about J-Power in Japan. 

My question has to do with whether or not it is coincidence that 

you, Atticus and 3G have all decided at the same time to make investments below the 5 percent threshold, which would require an 

additional SEC filing, at the same time, with the same Class I railroad. And if it is not coincidence, could you explain to the Committee the relationship that you and your fund have with Atticus, 

its managers and owners, Mr. Rothschild and Mr. Barakett, your 

relationship, if any, with 3G and its manager, Mr. Behrens? And 

again, if it is coincidence, that will be the answer, we are not going 

to get to B. But if B, you talk about the relationship, if you could 

discuss with us when, if ever, you discussed with them individually 

or together the idea of buying a United States railroad, particularly 

CSX. 

Mr. AMIN. The short answer is that it is coincidence. When we 

decided we thought the railroads were interesting, it was a private 

decision that TCI made. I actually don’t know when Atticus and 3G 

acquired stock. We have never had any agreement to work together 

until December, when we had agreed to work together with 3G, at 

which point we made the SEC filing. 

Mr. LATOURETTE. And that was the plan that you had to elect 

a non-majority? 

Mr. AMIN. Correct. 

Mr. LATOURETTE. But until that time, no discussions between 

your fund and these other two funds? 

Mr. AMIN. Until that time, no agreement to work together in 

CSX or in any other railroad. 

Mr. LATOURETTE. And I don’t want to be too careful with words, 

but I understand no agreement, I am asking you did you ever had 

any discussions. 

Mr. AMIN. We have had discussions with lots of other shareholders, including Atticus ad 3G Capital about the rail industry. 

All these discussions were after we found out that they were invesVerDate Aug 31 2005 19:13 May 06, 2009 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 P:\DOCS\41210 JASON
73 

tors in the industry, through public disclosure. Specifically now, we 

have discussion with as many rail shareholders as possible because, in order for us to be successful in this proxy contest with 

CSX, we need 10 shares for every share that TCI owns to vote in 

support of us. So we actively have dialogues. 

Mr. LATOURETTE. Do you know if Atticus or 3G have a similar 

ownership position in the UP that you have talked about, Union 

Pacific? 

Mr. AMIN. I am sorry, I didn’t hear the question. 

Mr. LATOURETTE. Do you know, just based upon your own knowledge, whether or not CSX is the only United States railroad that 

the three of you have made an investment in, or are you aware 

that 3G and/or Atticus have also made investments in the Union 

Pacific that you talked about? 

Mr. AMIN. Yes, I believe they have both publicly disclosed that 

they have investments in Union Pacific as well. 

One other point I would make is, we have seen just from the 

public disclosures that Atticus has been selling their stock in CSX. 

So if the insinuation is that we are working together as a group, 

I think the fact that they have sold the vast majority of their position, at least according to their public filings, would indicate that 

is not the case. 

Mr. LATOURETTE. Well, two things, I wasn’t making an insinuation, I was asking a question. And two, because words do matter, 

I have enjoyed the times that you have come in and chatted with 

me. I think you are a good guy and a good businessman. I happen 

to think Michael Ward is a good guy and a good businessman. 

There was a letter, after you sent your first letter, and then CSX 

responded, you send a second letter. And just because words do 

matter, and maybe where fights get taken to a different level, I 

would just commend your attention to page 2 of your second letter 

back where you expressed disappointment with CSX’s response to 

your suggestions. And in the second full paragraph after the quote 

by Mr. Young of Union Pacific, the sentence said ‘‘Michael Ward rejected the question outright by responding ignorantly.’’ Now, you 

may disagree with how he runs his railroad, and I think as a 

shareholder you have every right to ask questions. But a phrase 

like ‘‘responding ignorantly’’ I don’t think rises to the level of public 

discussion and discourse. 

So I would just, maybe ignorantly means something else to you 

than it means to me. But that is kind of a—— 

Mr. AMIN. It doesn’t, and I think it was a mistake on our part. 

Mr. LATOURETTE. I appreciate your saying that. 

Mr. AMIN. Sometimes in these situations, when you have $3 billion at stake you get a little carried away. 

Mr. LATOURETTE. I get that. Listen, I am just glad you are not 

closing a bridge in DeFazio’s district. 

[Laughter.] 

Mr. LATOURETTE. Thank you very much, Madam Chairman. 

Ms. BROWN OF FLORIDA. Okay. I have a couple of questions, 

there are a couple of things I want you to clear up. First of all, the 

Japanese situation. And the rate-raising and what you proposed to 

the Japanese government. 

74 

Mr. AMIN. In J-Power, which is a public utility in Japan, what 

we have proposed—— 

Ms. BROWN OF FLORIDA. Give us a one minute on what happened. Bring us up to date. 

Mr. AMIN. I will do my best. I will note that I am not responsible 

for that position, so my knowledge of it is somewhat limited. And 

we are happy to add details to the record. 

Ms. BROWN OF FLORIDA. I am just trying to get a pattern of how 

you operate. 

Mr. AMIN. Sure. What we have asked from J-Power was initially 

an increase of their dividend. They were paying a very low dividend, even by Japanese standards, to their shareholders. We 

thought they should increase that. We didn’t, our view, and it is 

similar in Deutsche Borse as it is in CSX, it wasn’t our demand 

that they do it because we asked for it. What we said is, let’s have 

the shareholders vote. If the shareholders decide that they don’t 

want to vote in favor of it, that that is fine. But ask the shareholders what they would like. 

We asked the same thing in Deutsche Borse when Deutsche 

Borse was attempting to acquire the London stock exchange, we 

just said, this is a transformational acquisition for you, you should 

ask the shareholders whether the shareholders think it is the right 

thing to do or not. And it is the same in CSX. We are not saying, 

we are just going to put our people on the board. As I mentioned, 

we need 10 shares, for every share that we own, we need another 

10 shares to win the favor of our nominees for us to be successful. 

But going back to J-Power, that was the first thing we asked for. 

The second thing that we have asked them for is targets, return 

on capital targets long term. The return on capital at J-Power has 

been deteriorating. And the management has had no plan or no 

public plan, at least, to fix that. And when you see the returns deteriorate without any solution or any evidence of a plan, that is 

very concerning as a shareholder. I think those are the two things 

that we have asked for. 

I can categorically say, I confirmed this yesterday with the partner that manages our Asia business, that we have never asked for 

a rate increase in Japan. 

Ms. BROWN OF FLORIDA. Okay. That is not exactly what I read, 

but if you say you didn’t. You didn’t ask for a rate increase, what 

did you ask them to do, then? 

Mr. AMIN. We asked for the things that I just mentioned. The 

one, this is what we asked of the company. We have asked of the 

government to allow us to increase our ownership in J-Power above 

10 percent, and that is a filing that in Japan, if you want to exceed 

10 percent, you have to go to the government and get their approval. So we have asked that of the government. 

Ms. BROWN OF FLORIDA. Okay. You noted that industry around 

the world is investing in new technology, we talked about the railroads, and our industry, particularly CSX, is falling behind. However, most observers think that U.S. freight railroad is the best in 

the world. 

My question to you is why you didn’t invest in some of those that 

you think are so far ahead of us? 

75 

Mr. AMIN. We agree that the U.S. freight railroad system is the 

best in the world. 

Ms. BROWN OF FLORIDA. Who do you think is the best in the 

world? 

Mr. AMIN. We agree that the U.S., the U.S. freight railroad system is the best in the world. 

Ms. BROWN OF FLORIDA. Would you say that again? 

[Laughter.] 

Mr. AMIN. We agree that the U.S. freight railroad system is the 

best in the world. 

Ms. BROWN OF FLORIDA. Okay. 

Mr. AMIN. That is not to say, though, that it can be better. That 

is what we are striving for. We are not saying that the Brazilian 

system is better or the Canadian system is better. What we are 

saying is, you can learn from people that do one thing better than 

you. So the entire Brazilian system may not be better, but they 

have onboard computers that cost $20,000, they developed it, they 

had the initiative, they developed it themselves, and they reduced 

fuel consumption by 20 percent. And they sell this technology. 

So it is not a debate of is Brazil a better railroad system than 

the U.S. The question for us is, does it make sense to implement 

a similar technology if it can save 20 percent of your fuel bill when 

oil is at $100. 

Ms. BROWN OF FLORIDA. You know, excuse me, but I have been 

going to these workshops, I haven’t been recently, because we 

haven’t had any recently, but wherein one gallon of gas will take 

a train from here, Washington, to New York. So we are investing 

in the new technology. I have seen the commercials on TV. I think 

that we are going green here. 

Mr. AMIN. We completely agree. The railroads are the most fuelefficient form of land-based freight transportation. There is no 

question. 

Ms. BROWN OF FLORIDA. That is right. And as we move forward, 

we know in this Congress that we have to invest in the infrastructure. We are looking at creative ways to do that. 

When I go around, and we have been going around to different 

areas talking to people who are really interested in investing in our 

railroad industry, whether we are talking about freight or passenger, because eventually we need to go to double-tracking, so 

that we can really get passenger rail running and freight rail and 

them not intersect together. It is an exciting time for us. 

But I am not interested in, well, it is not just me, you can tell 

from my colleagues that we have some real concerns about your intention. I think what was said earlier is that we need patience, 

long-term patience. And that is not what I am hearing from you. 

I know you have hired a lot of great people here and a lot of lawyers and a lot of lobbyists. But you are going to hire a lot more if 

you try to destroy our industry. Because it is a partnership between a lot of stakeholders, the unions, the shippers, the military, 

I mean, it is a lot of things that the railroad, and it is the fight 

between even the cities that don’t want certain things to go 

through their community. So it is a balancing act, as I told you before. 

76 

Mr. AMIN. We don’t disagree, Chairwoman Brown. I can only assure you that it is not our intention to do anything that harms CSX 

or the U.S. railroad industry. It is absolutely not our intention to 

do that, and it would be against our interests as a long-term shareholder. 

Ms. BROWN OF FLORIDA. I know you heard the Chairman say 

earlier, he sat up here 23 years ago and was listening to somebody’s word, and the word didn’t mean anything. Ronald Reagan 

said, trust but verify. I am going to make sure that we can verify 

whatever is happening to this industry. 

Mr. AMIN. I absolutely agree. That is all that we ask, is judge 

us by our actions. 

Ms. BROWN OF FLORIDA. Do you have anything else that anyone 

else wants to say? Because I am going to let Mr. Ward have the 

last word. Anything that you want to say? I hope you understand 

what we have said, we have said it over and over again about raising these rates on these shippers. 

Mr. AMIN. No. I understand. I think there is one comment I 

would like to close with, which is again, just to bring this back to 

what we are trying to accomplish here, is not TCI taking control. 

The most fundamental thing we are trying to do, which is a right 

of any shareholder in a capitalist system, is to seek shareholder 

representation on the board. If you don’t think the board is doing 

a good job, that is your most fundamental way to try to change 

that. And again, the nominees that we have put forth are not TCI 

nominees. We have no control over them. The reason that we put 

them—— 

Ms. BROWN OF FLORIDA. Now, that I don’t think is altogether 

true. You had a search committee to look for them and you have 

had dialogue with them. So the fact is, you are telling us that you 

are not paying them, you need to understand that we have some 

knowledge of what you are saying. And don’t lawyer talk me. 

Mr. AMIN. Madam Chairman—— 

Ms. BROWN OF FLORIDA. What I am saying is, I understand what 

you are doing. 

Mr. AMIN. I can assure you, Madam Chairman, that I have no 

control, if I go to Gil Lamphere, who has been a railroad investor 

for 20 years, probably one of the most successful railroad investors 

in our generation, and I have a view that he disagrees with, he is 

going to vote with what he thinks is right if he is on the board of 

CSX. Gary Wilson has been one of the leading businessmen in this 

Country for decades. He was the CFO of Marriott, he was the CFO 

of Disney, he is on the board of Yahoo, he was the chairman of 

Northwest Airlines for 15 years. I can express my view to Gary 

Wilson, and I hope he would listen. But he certainly is not going 

to vote on a board the way that I want him to vote. 

Ms. BROWN OF FLORIDA. I am not making that decision. But I 

just want you to know that the decisions you are making are going 

to have repercussions here and other places. You just need to understand that. 

Mr. AMIN. We understand that. 

Ms. BROWN OF FLORIDA. Okay. So you are going to be paying a 

lot more of those people behind you. 

Mr. AMIN. I am sure they are excited. 

77 

[Laughter.] 

Ms. BROWN OF FLORIDA. They are excited, I know. 

Mr. GILES. Before Mike speaks, may I just make one statement, 

Madam Chairman? 

Ms. BROWN OF FLORIDA. Yes. 

Mr. GILES. That is, I agree with the sentiments that we talked 

about earlier today, and I want to assure you that our company has 

been looking for a win-win out of this and will continue to do so. 

I wanted to pass along those assurances to you. 

Ms. BROWN OF FLORIDA. Thank you. And we are going to move 

forward on this, because you understand this is a very sensitive situation, and we have to work to see how we can get it resolved. I 

am willing to work with you on that. 

Mr. GILES. Thank you. 

Ms. BROWN OF FLORIDA. Mr. Ward. 

Mr. WARD. Thank you, Madam Chairman. I would like to thank 

the Committee today for calling this hearing, because I think at 

least for me it has been very enlightening. 

You can tell from our dialogue today that TCI is a group of very 

clever people and they are very good at choosing their words as to 

the way they talk about things. They are not always factually 

bound, but they are very clever. The 12 to 13 months they have 

been involved with our company, they have come up with four 

flawed ideas, all of which would have been a mistake to implement. 

They were short-sighted, not understanding the business or the environment in which we operate. 

As I best could tell, in answer to the questions that Mr. Shuster 

asked, I think they are largely disavowing those ideas, but I am 

not totally certain of that. I guess there is no way to really say if 

their slate of 40 percent of our directors, because it is their slate, 

does succeed, what ideas they may be pushing at that time is a little unclear, because their ideas change quite a bit based on circumstances as to what they think is important to do. 

What I can address for you, though, is what we will do at CSX, 

which we have been doing. Contrary to some of the remarks today, 

we do not have poor returns, nor do we have poor governance. Our 

returns are in the top 6 percent of the S&P 500 over the last three 

years. I don’t know how that can be categorized as poor results. 

Our governance ratings by ISS, which is the group that does that 

here in the United States, gives us very high ratings, 98 percent 

in transportation, 93 percent overall. That doesn’t sound like poor 

governance to me. 

The idea of splitting the chairman and CEO is much more of a 

European idea than it is an American idea. Here in America, the 

common practice in the S&P 500 is the chairman and CEO role are 

combined. If you want to talk about best practices, the chairman 

and CEO were split at both Enron and WorldCom. So I guess it 

is not necessarily the best governance model. 

In addition to the returns we have produced, we have given guidance to Wall Street that our earnings per share will be increasing 

15 to 17 percent over the next period through 2010. So clearly we 

have not only delivered for our shareholders, we continue to. 

But there are more constituents than just our shareholders. We 

are doing a much better job for our customers now. The ratings we 

78 

get from our customers say that the service they are receiving from 

us is very good, the best they have seen from us and one of the 

best within the industry. If we look at our employees, our safety 

numbers, we have improved our personal injuries by 50 percent. 

We are now ranked second in the United States, only behind the 

Norfolk Southern in personal injury prevention. We have improved 

our train accidents by 42 percent, we are again number two behind 

the Norfolk Southern in the U.S. railroads. So we are running a 

safer, better service railroad, and we continue to additionally improve that. 

The other thing we are going to do is we are not concerned about 

what the Congress may do. We think that they are wise and will 

make wise decisions around these issues, around deregulation. We 

intend to continue to invest in our business and we have said publicly we will be investing $5 billion through 2010. We will build the 

capacity to help the national infrastructure in this Nation. 

The only thing I can assure this group is you have a team that 

has been delivering, will continue to deliver, and we will fight any 

attempts that will knock us off the path of serving those four audiences. So I thank the Committee for its attention and interest. 

Mr. SHUSTER. May I, Madam Chairman? 

Ms. BROWN OF FLORIDA. Yes. 

Mr. SHUSTER. The first thing I would like to caution you on, Mr. 

Ward, don’t bet on Congress making wise decisions. 

[Laughter.] 

Mr. SHUSTER. And I am one of 435, and I know I am indicting 

myself. 

Ms. BROWN OF FLORIDA. You are excluding me, right? 

Mr. SHUSTER. I included myself. 

The Canadian National, whose operating ratios are the highest 

in the industry, they operate in a different system up there, for 

one, I know the track sharing agreements are very different up 

there. Let me make my three points and you can educate me on 

that. 

The second is that when the government privatized them, did 

they invest, I think I read they invested billions of dollars to try 

and get the track, their infrastructure up to speed, which I think 

would have an effect on their operating ratios. And third, their 

scheduled rail, is that the right terminology? How does that fit into 

CSX companies? 

Mr. WARD. Well, Mr. Shuster, as you well know, there are a lot 

of differences between railroads. The Canadian Railroad does have 

the best operating ratio in the North American railroads, there is 

no question about that. They have a very streamlined operation, a 

lot of their business is grain and coal. They do not run through 

many major urban centers. It is a very streamlined railroad. It is 

sort of a T, if you will. 

And quite frankly, it has a much lower operating ratio than any 

U.S. railroad, not just CSX. The railroads in the United States tend 

to have operating ratios between, say, 71 and 78. So the CN at 60 

is in an entirely different league, somewhat because of their simplicity, somewhat because of the health and welfare benefit systems in Canada. 

79 

So I think most people who really understand the industry would 

not draw a direct comparison between and American railroad and 

a Canadian railroad. As I said before, it is like comparing NFL 

football and CFL football. 

That being said, if you look at the progress, and there is no question our company was not running extremely well three years ago, 

and I think quite frankly, some of TCI’s criticisms three years ago 

would have been quite appropriate. We have improved the fastest 

in the last three years of all the major railroads in all the prime 

categories, and largely are in the number two position in most categories that are relevant, rather than hand-picked, cherry-picked 

measures as TCI likes to do. 

So we think we can improve. As far as our future guidance, we 

say we can get our operating ratio to the low to mid-70s, which is 

at this point best among the U.S. railroads. So we are certainly on 

a path that I think will be creating a lot of value for TCI and their 

investment in us. I think there is a little bit of an apples and oranges comparison there between the two, and you are quite right, 

the government did spend a lot of money to build a very good infrastructure for the Canadian National public. 

Mr. SHUSTER. What about the scheduled rail service? 

Mr. WARD. I think they were the pioneer in moving toward a 

scheduled rail network. I think you will actually find that most 

U.S. railroads have moved to some scheme similar to that. They 

may not call it a scheduled railroad. We have on our railroad what 

we call the One Plan, which is having strong discipline to taking 

and having the train leave when it is supposed to leave and be a 

much more disciplined operation. So I don’t think that the other 

rails in the United States might be quite as strict as the Canadian 

National is, but I think all of them have moved to a similar methodology for a lot of their movements. 

Mr. SHUSTER. How is the response from the customer? I was in 

business before, and if you run a schedule very disciplined, sometimes your customers go, wait a minute, that is not when I want 

to be there. If you are running something that scheduled, are the 

customers appreciative of it? How is the customer satisfaction? 

Mr. WARD. Actually, I will speculate on this, and this is secondhand, of course, my understanding is that customers whose needs 

are met well by the Canadian National are very, very happy with 

their service. Generally they are not too willing to tailor their services if a customer has a somewhat different need. Those customers 

might not be quite as delighted with what the CN produces. 

Mr. SHUSTER. Thank you. 

Ms. BROWN OF FLORIDA. Thank you. Any further comments? Yes, 

sir. 

Mr. AMIN. I just want to make a couple of comments related to 

Mr. Ward’s statement. The comparison of Canadian National, Mr. 

Shuster, is incredibly important. There are certainly significant differences between Canadian National and the U.S. railroads. 

That being said, Hunter Harrison, who is the CEO of Canadian 

National, grew up in the U.S. railroads, he grew up in Burlington 

Northern, a U.S. railroad, was then the CEO of Illinois Central. He 

is convinced that what they have accomplished in Canadian National can be replicated. There are a couple of differences, while 

80 

there are advantages that Canadian National has, there are a couple of disadvantages that they have. One is they have a less favorable regulatory system. Their ag rates are regulated. And there is 

more forced access. 

Mr. SHUSTER. What is regulated? 

Mr. AMIN. Their agriculture rates are regulated. And there is 

more forced access in Canada. 

Second, the weather conditions that the Canadian railroads have 

to deal with across the board are much, much worse in the winter 

than they are here, and weather can have an enormous effect. Avalanches on the Canadian National Railroad have a huge effect on 

the performance of that business. 

Third, unit trains, as I think we all know, are the most efficient 

form of running rail. And Canadian National has a lower percentage of unit trains than the U.S., which would indicate that they 

should run less efficiently and have a worse operating ratio than 

the U.S. railroads. We certainly acknowledge that there are differences. 

And again, I am not here to testify as an expert on the railroads. 

That is why we were supporting nominees that have that railroad 

experience, that share the view. Can you do everything that Canadian National has done? No. You can’t. Every business is different. 

All we are saying is we should hold ourselves up to a higher standard. They have shown that tremendous improvement can be made. 

Don’t forget, Canadian National was, in 1995, was the worst railroad in North America in almost every metric. At the time, the 

U.S. railroads were running at approximately an 80 percent operating ratio. Canadian National was running at a 97. And Wall 

Street thought Canadian National, for all the reasons I just mentioned, could never get to be as efficient as the U.S. Well, in that 

period, they have gone from a 3 percent earnings margin to a 40 

percent earnings margin. 

Now we are all saying, well, there are differences and the U.S. 

railroads can never get to Canada. We can always justify the status 

quo. But our only point is, there must be something we can learn 

from what they are doing to implement in the United States. 

Ms. BROWN OF FLORIDA. You know, I am just so confused, 

though, if you think they are doing such a good job, why you didn’t 

put your money with them. 

Mr. AMIN. Because as an investor, there are two things that are 

important. One is the quality of the business; the other is can you 

improve the business from where you are today to that potential. 

Ms. BROWN OF FLORIDA. But you think they are doing such a 

good job, that would be a good investment of your money. 

Mr. AMIN. I think Canadian National is doing a fantastic job. I 

think there is more value that can be created at CSX than there 

can be at Canadian National, because Canadian National is already doing these things. If we implement this at CSX—— 

Ms. BROWN OF FLORIDA. But some of the things that you are recommending would jeopardize CSX and jeopardize your investment. 

For example, what you said about freezing growth investment until 

the fate of the re-regulation bill is known. You have said several 

things here in your memo that will jeopardize your investment. If 

you think Canadian investment is such a good deal, I just don’t 

81 

know why you didn’t invest your money there? I don’t know anything about investments. But I am just wondering why you didn’t 

do that. 

Mr. AMIN. All I can reiterate is—— 

Ms. BROWN OF FLORIDA. Because I think that in the U.S., we 

have the best freight in the world. I am not saying we cannot improve. But I don’t want to duplicate what they are doing in Canada. They have health insurance. That is not something that our 

rail may necessarily have to deal with. 

So it is not apples and oranges, and I do understand football and 

the little league, what he is saying, so I do understand that. 

Mr. AMIN. I don’t know how to respond to that. 

[Laughter.] 

Mr. AMIN. All we are saying is, if there is someone that we can 

learn from, even though we are the best railroad system, the best 

freight railroad system in the world, we don’t question that to be 

the case, but we can always improve. 

Ms. BROWN OF FLORIDA. Absolutely. But I am very concerned 

about this hostile takeover that you are talking about here. 

Mr. AMIN. I can only reiterate, we are not taking control. It has 

never been our intention to take control. I can tell you right now, 

we have never sought it and we don’t seek control. It is not what 

TCI does. We have never, in the history of our fund, taken control 

of any business. Like we said, if we are successful, only one person, 

one voice out of twelve voices will be from TCI. 

Ms. BROWN OF FLORIDA. Okay. Mr. Ward, anything additional? 

Mr. WARD. We are getting very clever again. They have five 

members they have nominated, one is theirs. And yes, they may 

not be technically seeking control, but I will reiterate what I said 

earlier. When you are trying to control or nominate 40 percent of 

the board, telling you how much to borrow, how much to spend, 

where to spend it, what technologies you ought to be deploying and 

what you ought to be charging your customers, that may not be 

technically ‘‘control.’’ But in most people’s world, that would sure 

feel very, very close to it. 

Thank you, Madam Chairman. 

Ms. BROWN OF FLORIDA. I want to thank the witnesses for their 

testimony and the Members for their attendance and cooperation. 

This hearing is adjourned. 

[Whereupon, at 5:30 p.m., the Subcommittee was adjourned.] 

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